Current Print Issue

Vol. 165, Issue 6

  June 2017


Featured Article

Independent Directors and Controlling Shareholders

By
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

By
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: June 18, 2017


Essay

The One‐In, Two‐Out Executive Order Is a Zero

By
Caroline Cecot & Michael A. Livermore
166 U. Pa. L. Rev. Online 1 (2017)

On January 30, 2017, President Donald J. Trump signed Executive Order 13,771, which directs each agency to repeal at least two existing regulations before issuing a new regulation (referred to as the “one‐in‐two‐out” requirement) and imposes a regulatory budget that sets a cap on total incremental regulatory costs (set at zero for fiscal year 2017). The regulatory budget concept has been kicked around for decades, while the one‐in‐two‐out requirement is more recent and has been implemented in Canada, the United Kingdom, and Australia to various extents. Legal scholars and commentators have been quick to opine on the Order, with some pointing out ways in which it is irrational or impractical and others defending aspects of the Order such as the imposition of a regulatory budget.

In this Essay, we take a somewhat different approach by evaluating how well the Order is likely to achieve its purpose of helping agencies “be prudent and financially responsible in the expenditure of funds.” Although vaguely laudable, this purpose is illaudably vague. We will therefore ground our analysis by defining the goal (or goals) of the Order according to priorities that have been adopted by prior administrations or promoted by scholars, commentators, or interest groups. For purposes of this analysis, we take no normative position on whether these end goals are desirable.

The three potential goals that we evaluate the Order against are: (1) increasing the net benefits of regulations, (2) decreasing regulatory burdens, and (3) increasing presidential control over agencies. We then compare the Order against regulatory reform efforts in other countries. We conclude that the Order is unlikely to sensibly (much less prudently or responsibly) achieve any of these goals without significant changes.


Response

How the U.S. Sentencing Commission Considers Retroactivity

By
Kathleen Cooper Grilli
165 U. Pa. L. Rev. Online 113 (2017)

In a recent Essay, Professor Litman and Mr. Beasley provide a detailed discussion of how they believe the U.S. Sentencing Commission’s data and recent actions relating to the career offender Guideline do and do not matter to the Supreme Court’s consideration of the issues set forth in Beckles v. United States. First, in support of retroactive application, the authors argue that lower court decisions invalidating the Guideline’s residual clause have “uniformly” resulted in “less severe sentences.” Second, the authors contend that the Supreme Court should give little weight to the Commission’s decision not to make retroactive its removal of the “residual clause” from the career offender Guideline. The authors support this contention with their misconception that the “Sentencing Commission opted not to investigate the possibility of making is amendment retroactive at all . . . .”

This Response does not wade into the legal issues raised in the various briefs in Beckles, or respond to the authors’ arguments regarding the import of a small number of resentencings; it instead seeks to provide greater clarity on the Commission’s process for deciding whether to make amendment guidelines retroactive.


Case Note

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

By
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.