Volume 164, Issue 2 
January 2016

Do the Merits Matter? Empirical Evidence on Shareholder Suits from Options Backdating Litigation

Quinn Curtis & Minor Myers

This Article examines a basic question in corporate law: Do the legal merits matter in stockholder litigation? A connection between engaging in wrongful behavior and liability in a shareholder lawsuit is essential if lawsuits are to play a role in deterring wrongful behavior. Yet skeptics of shareholder litigation have raised doubts about the degree to which such suits track actual malfeasance. The challenge is that managerial wrongdoing is almost never observable. While researchers can identify claims and—to some degree—evaluate their merits, such studies are limited to examining instances of wrongdoing that are actually litigated. We develop a novel approach to overcome this limitation in the context of one of the most notable corporate scandals of the twenty‐first century: stock options backdating. Options backdating involves falsifying incentive option grant dates in order to increase the value of the options to executives. The manipulation of grant dates leaves a measurable statistical fingerprint, which we used to estimate the likelihood of backdating among not only companies sued for the practice, but across a sample of thousands of firms that used option compensation. We compare the likelihood that firms backdated with the incidence and disposition of shareholder derivative and securities class action lawsuits. We find that many firms that likely engaged in backdating were never sued and that even firms publicly named as backdaters in the press were not universally sued. Instead, plaintiffs' attorneys were selective in targeting firms with more egregious patterns of backdating. We also examine the motion to dismiss, settlements, and the use of special litigation committees, and we find that the probability of backdating is important for the latter two. These results are an important contribution to the shareholder litigation literature and are particularly timely and important for the unfolding debate over fee‐shifting bylaws.

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“Ideology” or “Situation Sense”? An Experimental Investigation of Motivated Reasoning and Professional Judgment

Dan M. Kahan, David Hoffman, Danieli Evans, Neal Devins, Eugene Lucci, and Katherine Cheng

This Article reports the results of a study on whether political predispositions influence judicial decisionmaking. The study was designed to overcome the two principal limitations on existing empirical studies that purport to find such an influence: the use of nonexperimental methods to assess the decisions of actual judges; and the failure to use actual judges in ideologically‐biased‐reasoning experiments. The study involved a sample of sitting judges (n = 253), who, like members of a general public sample (n = 800), were culturally polarized on climate change, marijuana legalization and other contested issues. When the study subjects were assigned to analyze statutory interpretation problems, however, only the responses of the general‐public subjects and not those of the judges varied in patterns that reflected the subjects' cultural values. The responses of a sample of lawyers (n = 217) were also uninfluenced by their cultural values; the responses of a sample of law students (n = 284), in contrast, displayed a level of cultural bias only modestly less pronounced than that observed in the general‐public sample. Among the competing hypotheses tested in the study, the results most supported the position that professional judgment imparted by legal training and experience confers resistance to identity‐protective cognition—a dynamic associated with politically biased information processing generally—but only for decisions that involve legal reasoning. The scholarly and practical implications of the findings are discussed.

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Adapting Copyright for the Mashup Generation

Peter S. Menell

Growing out of the rap and hip hop genres as well as advances in digital editing tools, music mashups have emerged as a defining genre for post‐Napster generations. Yet the uncertain contours of copyright liability as well as prohibitive transaction costs have pushed this genre underground, stunting its development, limiting remix artists' commercial channels, depriving sampled artists of fair compensation, and further alienating netizens and new artists from the copyright system. In the real world of transaction costs, subjective legal standards, and market power, no solution to the mashup problem will achieve perfection across all dimensions. The appropriate inquiry is whether an allocation mechanism achieves the best overall resolution of the trade‐offs among authors' rights, cumulative creativity, freedom of expression, and overall functioning of the copyright system. By adapting the long‐standing cover license for the mashup genre, Congress can support a charismatic new genre while affording fairer compensation to owners of sampled works, engaging the next generations, and channeling disaffected music fans into authorized markets.

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Discriminatory Discretion: PTO Procedures and Viewpoint Discrimination under Section 2(a) of the Lanham Act

Emily M. Kustina

The current standards for denying and cancelling trademarks under section 2(a) of the Lanham Act are insufficiently clear to prevent trademark examiners and administrative judges from employing viewpoint‐based discrimination against owners of marks that are perceived to be immoral, scandalous, or disparaging. Since trademark protection is a grant of speech rights to mark owners, the U.S. Patent and Trademark Office's (PTO) discretionary decisions to deny or cancel the registration of marks that represent particular viewpoints under section 2(a) are at odds with the First Amendment protections afforded to both commercial and expressive speech. This Comment proposes that to protect the First Amendment rights of mark owners, the PTO should employ a policy that all allegedly immoral, scandalous, or disparaging marks are presumptively valid and can be denied registration or cancelled only upon a showing that the proposed marks are within the specific categories of speech deemed to be outside the realm of First Amendment protection. Stricter standards for denying and cancelling trademarks under section 2(a) will allow the commercial marketplace and the marketplace of ideas to determine the fate of these so‐called “undesirable” trademarks.

Part I introduces Lanham Act section 2(a), the statute authorizing the denial of registration for trademarks that are immoral, scandalous, or disparaging. I discuss the PTO's procedures for granting and denying trademarks, and compare the PTO's purported procedures with how the office actually makes decisions. I then argue that this process is infused with discretionary decisionmaking that allows examiners to incorporate their own opinions on the propriety of marks into the section 2(a) analysis. In Part II, I analyze the PTO's rates of granting and denying registration to allegedly scandalous and disparaging trademarks under section 2(a) and the evidence used to support such decisions. In Part III, I assess the effects of trademark denial and cancellation on mark owners. In Part IV, I discuss the First Amendment doctrine of viewpoint discrimination, its interaction with the doctrines of commercial speech and administrative discretion, and how it applies to trademark registration and the PTO. I conclude that section 2(a) is a restriction on viewpoint in violation of the First Amendment. In Part V, I analyze how the discretionary procedures in the PTO lead to viewpoint discrimination. Finally, in Part VI, I propose changes to the section 2(a) regime to limit discrimination on the basis of viewpoint. I argue that the PTO should adopt the presumption that potentially scandalous and disparaging trademarks are valid absent section 2(a) challenges from third parties in opposition or cancellation proceedings. I also propose that section 2(a) denials should be limited to traditionally unprotected categories of speech, allowing the marketplaces of commerce and ideas to limit the propagation of trademarks that are seen as scandalous or disparaging.

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Investor Participation in Initial Public Offerings

Kyle J. Schwartz

During an initial public offering (IPO), shares of a company are sold to the public for the first time. To facilitate a typical IPO in the United States, a group of investment banks gauges demand for the IPO, determines the initial offer price for the shares, and allocates the shares among interested investors. Empirical studies have shown that in the moments after IPO shares begin trading, the market price of the newly public shares often, but not always, climbs above the initial offer price. This phenomenon suggests that many IPOs are “underpriced.” In the typical IPO, however, the only investors who receive shares at the initial offer price are large institutions or well‐connected individual investors. Because these select investors are able to sell the shares they acquire in underpriced IPOs for a quick profit, often at the expense of average individual investors, many commentators have criticized the process as being unfair. This Comment explores various explanations for IPO underpricing, reviews existing legislation regulating IPOs, and proposes that a small percentage of the shares of every IPO be set aside for impartial distribution among interested individual (or retail) investors. This Comment acknowledges that institutions deserve the majority of IPO shares, but suggests that providing retail investors, as a class, with broader access to IPO shares would increase perceptions of fairness in the market without upsetting the existing IPO framework.

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