Mississippi Man First to be Prosecuted and Sentenced Under Federal Hate-Crime Statute

Written by: Brianne Szopinski

On Monday, May 15, 2017, Joshua Vallum became the first individual to be prosecuted and sentenced for a federal hate crime after the murder of his ex-girlfriend, Mercedes Williamson. Vallum pled guilty to Williamson’s murder on December 21, 2015. In his plea, he stated that, despite earlier statements to the police indicating his unawareness of Williamson’s gender identity, he ultimately killed Williamson because she identified as transgender.

Typically, prosecutions for hate crimes are handled by individual states, as opposed to the federal government. However, the state of Mississippi, where the crime took place, does not have a statute protecting individuals from hate crimes based on their gender identity. Therefore, the government brought federal charges against Vallum under a federal hate crime statute: the Matthew Shepard and James Byrd Jr. Hate Crimes Prevention Act of 2009. Section (a)(2) of the statute criminalizes behavior in which an individual commits or attempts to commit violent acts against another when motivated by certain characteristics of the victim (i.e., actual or perceived religion, national origin, gender, sexual orientation, gender identity, or disability). Because Congress passed section (a)(2) of the Act under its Commerce Clause power, the government must establish that the alleged hate crime occurred in or affected interstate or foreign commerce.

Here, the government alleged that Vallum murdered Williamson based on her actual or perceived gender identity. Although previously in a relationship, Vallum and Williamson broke up in 2014. Prosecutors in the case alleged that Vallum knew that Williamson identified as a transgender female during the course of their relationship. On May 28, 2015, Vallum allegedly murdered Williamson after his friend discovered that Williamson identified as transgender. The government alleged that Vallum persuaded Williamson to enter his car at her home in Alabama, drove her to Mississippi, assaulted, and ultimately stabbed her. Prosecutors believe that, despite already knowing Williamson’s gender identity, Vallum murdered Williamson due to fear of retribution from other members of his gang, the Almighty Latin Kings and Queens Nation. Vallum allegedly believed that his own life was in danger because other gang members knew about his sexual relationship with a transgender individual.

Vallum was sentenced to 49 years in prison and a $20,000 fine in the Southern District of Mississippi. The charges against Vallum and the sentence imposed drew mixed reactions from various civil rights groups across the country. Some groups approved of the government’s commitment to protect individuals against discrimination based on gender identity. Others acknowledged the problems associated with enhanced-sentencing statutes, stating that these laws do not protect against or prevent hate crimes, as they only punish perpetrators after the crimes are committed. Nevertheless, as hate crimes continue to be committed across the country, it is likely that this will not be the last invocation of the Matthew Shepard and James Byrd Jr. Hate Crimes Prevention Act.

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Sources Cited

Emanuella Grinberg, Transgender Hate Crime Guilty Plea in Federal Court is a First, CNN (Dec. 23, 2016, 6:24 AM), http://www.cnn.com/2016/12/22/politics/mississippi-transgender-hate-crime/index.html.

Ralph Ellis, Emanuella Grinberg, & Janet DiGiacomo, Mississippi Man Sentenced for Hate Crime Killing of Transgender Woman, CNN (May 16, 2017, 6:39 AM), http://www.cnn.com/2017/05/15/us/transgender-hate-crime-murder-sentence-mississippi/.

Anti-Defamation League, Hate Crime Laws – The ADL Approach 4 (2012), https://www.adl.org/sites/default/files/documents/assets/pdf/combating-hate/Hate-Crimes-Law-The-ADL-Approach.pdf.

The Matthew Shepard and James Byrd Jr. Hate Crimes Prevention Act of 2009, U.S. Dep’t of Just., https://www.justice.gov/crt/matthew-shepard-and-james-byrd-jr-hate-crimes-prevention-act-2009-0 (last updated Aug. 6, 2015).

The Matthew Shepard and James Byrd Jr. Hate Crimes Prevention Act, 18 U.S.C. § 249 (2012).

Autumn Callan, Mississippi Man Sentenced in First US Transgender Hate Crime Conviction, Jurist (May 16, 2017, 3:38 PM), http://www.jurist.org/paperchase/2017/05/mississipi-man-sentenced-in-first-us-transgender-hate-crime-conviction.php.

Article: From Peoria to Peru: NLRB Doctrine in a Social Media World

The National Labor Relations Board’s (the “NLRB” or “Board”) interest in social media issues has surprised many practitioners.  Over a nine-month period spanning the end of 2011 and beginning of 2012, the Board’s Acting General Counsel (“AGC”) issued three reports, totaling eighty-three pages, analyzing dozens of potential cases involving social media matters.  Some of the cases involved sensational facts—for example, the ambulance company employee who called her supervisor a “scumbag” and compared him to a psychiatric patient on Facebook, or the auto dealership employee who lambasted his employer online over the “less than luxurious” food and drink offered to customers at a company event, or the bartender who complained on Facebook about the bar’s customers, calling them “rednecks” and hoping they choked on glass as they drove home drunk.  Other cases analyzed by the AGC dealt with more mundane matters, such as whether an employer’s social media policy was drafted in a manner that could potentially restrict an employee’s right to engage in protected concerted activity under the National Labor Relations Act (“NLRA” or the “Act”).

Given the dramatic rise in social media use in the United States, it is not surprising that the Board has expressed a strong interest in analyzing its use in light of established Board law.  By its nature, social media is the perfect vehicle both for “protected, concerted activity” and immeasurably idiotic and flippant statements.

The Board, like any adjudicative body, applies its established legal precedent to the facts at hand.  Nevertheless, law is a fluid principle.  This Article advances a theory that the Board’s application of its established “brick and mortar” case law in matters involving social media fails to appropriately acknowledge the very nature of social media.  Rather than merely apply old standards, the Board should make a creative effort to develop new standards that recognize an employer’s legitimate need to control employee outbursts in a digital age where “going viral” can dramatically alter public perception overnight.  Despite the Board’s attempt to fit these discussions into the traditional and comfortable box of “water cooler” discussions, the simple fact is that these are not “water cooler” discussions.  These are words and images that travel from Peoria to Peru in the proverbial nanosecond, capable of being stored and captured on a digital timeline forever.  The Board must respond to this reality or remain what former NLRB Chairwoman Wilma Liebman famously described as the “Rip Van Winkle” of administrative agencies.

Part I of the Article provides an overview of various social media platforms.  Part II outlines the traditional framework within which the Board has evaluated protected concerted activity, while Part III explains how the Board, Administrative Law Judges (“ALJs”), and the NLRB’s Division of Advice and AGC have attempted to apply these traditional tests to social media activity.  Part IV highlights the limitations of this approach and provides suggestions for a new applicable legal standard that properly acknowledges the risks associated with employee misuse of social media and distances itself from the ill-fitting “water cooler” analogy.

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Colin M. Leonard is a member and Tyler T. Hendry is an associate at Bond, Schoeneck & King, PLLC in the Firm’s Syracuse, New York office.  Both practice in the Firm’s Labor & Employment Law Department.

Article: Uncertainty Squared: The Right of Publicity and Social Media

The laws of probability tell us that the likelihood of a particular result goes down dramatically as the number of variables on which that result depends goes up.  So, for example, while the odds of rolling an even number on a six-sided die is ½, the odds of rolling two even numbers on two dice is ½ times ½, or only ¼.

Predicting the applicability of publicity rights law in the context of social media is a bit like that.  Each variable in the equation is itself the subject of greater-than-average uncertainty compared to other fields of law and technology.  The right of publicity, for example, is generally treated as a species of intellectual property (“IP”), yet it is a product of state (as opposed to federal) common law, and has only been acknowledged by barely more than half of the states.  It has as many sources of law as it does jurisdictions that recognize it—more, in fact—and many of its critical elements remain either disputed or undeveloped.  Likewise, social media—as we currently understand that term—has been in the public consciousness for not much longer than five years; yet it has already come to dominate the way that individuals and entire societies communicate worldwide.  At the same time, the technology behind, and precise expressions of social media remain incredibly fluid, with individual forums rising from obscurity to prominence and back again all within the space of a year.  The proper role of social media in civil society and the parameters of the law that governs it, therefore, are equally uncertain.

Keeping these caveats in mind, however, it is nevertheless both possible and fruitful to explore how the right of publicity—that is, the right of an individual to control the commercial exploitation of his or her identity—will manifest itself in social media.  This is actually quite an important inquiry, since the very thing that makes social media special is that it enables individuals to create and deepen interpersonal relationships with specific people—often, people they already know through other means.  The identities of our online “friends” and “followers,” therefore, are a crucial component of our social media experience.

The companies that provide these experiences realized this long ago.  Indeed, since social media users generally do not pay for the privilege of using the service, the service providers have based their entire business models on exploiting their unique access to our interpersonal relationships.  The initial, easiest, and still-predominant way that they profit from our use of their services is by selling advertisers access to our eyeballs.  But as social media services have become more sophisticated and the pressure to monetize the services has increased, service providers have dug deeper into the granular detail of our interactions in order to target their ads even more effectively.  In many cases, they are relying on the credibility of our friends to sell us goods and services.  As discussed below, that practice has given rise to legal action by social media users who argue that this amounts to a commercial exploitation of their identities in violation of the right of publicity.

At the same time, social media’s focus on interpersonal relationships naturally results in a lot more data about individuals being shared in digital form than had previously been done.  That, in turn, naturally increases the probability that some of that data will be exploited by commercial means—again implicating the right of publicity.

For several decades before the advent of the social internet and related forms of digital publishing, the right of publicity was a curious blend of privacy, IP, and First Amendment law that was litigated only infrequently and barely registered in the public consciousness.  Courts went so far as to explicitly hold that only “celebrities” could even possess the right, and the realities of pre-internet media imposed severe limits on the ability of any given person to achieve enough celebrity to make their identities worth exploiting commercially.  Social media—along with reality TV, self-publishing, and the internet in general—changed all that.  Perhaps, therefore, the example of rolling two dice is not as apt of an analogy as it may first seem because those two variables are completely independent of each other.  The development of publicity rights case law and social media, by contrast, may well depend in large part on each other.

The discussion below begins with a brief summary of the right of publicity, including its elements, development, and remaining areas of uncertainty.  It then examines several of the most likely ways that this body of law will influence, and be influenced by social media including:  the manner of measuring the “commercial value” in an individual’s identity; the proper amount of damages for misappropriations of that identity; the availability of defenses based on the First Amendment, the Copyright Act, and other related legal rights; and the role social media plays in fueling publicity rights violations.

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Brian D. Wassom: Partner and Chair of the Social, Mobile and Emerging Media Practice Group at Honigman Miller Schwartz and Cohn, LLP (Bloomfield Hills, MI); Instructor of Social Media Law and Ethics at Central Michigan University; law clerk to the Hon. Alice M. Batchelder, United States Court of Appeals for the Sixth Circuit (1999-2000); J.D. magna cum laude, Case Western Reserve University School of Law (1999).

Article: Why We Can’t Be Friends: Preserving Public Confidence in the Judiciary Through Limited Use of Social Networking

Judges occupy a special place in American society.  Their actions, both inside and outside the courthouse, play an integral role in the public’s respect for, and confidence in, the legal system.  The existence of an independent, fair, and impartial judiciary is the hallmark of the American legal system.  By necessity, judges are held to a higher standard of professional conduct than other members of the legal profession, and their personal and professional activities are subject to heightened scrutiny by members of the profession and the public.  Although judges are members of the larger community, they hold an elevated position as symbols of the law and justice.  As a result, a judge’s actions and behaviors have ramifications far beyond how members of the public view the judge as an individual.  What a judge does or says reflects directly on the integrity of the judicial system.

When a member of the judiciary utilizes social media to communicate with colleagues, friends, and family members, a legitimate risk exists that his or her actions or statements may undermine the public’s confidence in, and respect for, the judiciary.  In some ways, the use of social media is no different than direct communication because certain acts or statements would be construed as clearly improper regardless of the medium.  In either forum, a judge may actually say or do something that undermines the public’s confidence in the judicial system, such as divulge confidential information, comment on a pending case, or use the prestige of the bench for personal gain.  In clear cases, the method by which the message is delivered is irrelevant.  However, there is a more subtle but equally dangerous risk associated with the use of social networking.  Unlike direct person-to-person communication, online communication does not offer the benefit of context, emotion, or in many cases visual aids that provide clarity to the meaning and purpose behind a particular communication.  Rather, most online communication is static and heavily dependent on the recipient of the communication to discern the meaning, purpose, or intent behind the words used.  Thus, when individuals, including judges, post comments online there is a greater risk that those who read the comment will misunderstand the message and form erroneous and unfounded opinions.  Whether a judge’s words or actions are clearly improper or merely misconstrued, the impact can be substantial and serve to undermine judicial canons employed to promote public confidence in the judiciary.

Members of the legal profession, including judges, continue to embrace social networking in both their personal and professional lives.[1]  In one recent survey, 40% of responding judges reported that they engage in social media, such as Facebook.[2]  That number is expected to increase.[3]  Such use can promote the efficient and effective administration of services, but it can also present unique challenges for those individuals seeking to comply with professional rules of conduct.  Although the federal judiciary has not issued an ethics opinion on the use of social media by judges, the Committee on Codes of Conduct within the Judicial Conference of the United States has recognized the potential hazards and drafted proposed guidelines on the use of social media by judicial employees.[4]  The Committee acknowledged that the use of social media “raises ethical, security, and privacy concerns for courts and court employees.”[5]  It noted that the limited ability to effectively control or retrieve communication once released poses unique problems for courts.[6]  The inability to ever completely erase or delete comments, coupled with the ability to preserve and replicate posted messages exacerbates the potential risks.[7]  The Committee also noted that due to a perceived sense of anonymity, individuals may engage in conduct online that they might refrain from engaging in in person.[8]  These issues are problematic for judges who must carefully balance their role as members of the community with their elevated status as a symbol of the judicial system.

Technology plays a significant role in the provision of legal services, but its uses are not without risk.  As the use and influence of social media continues to grow, it is essential for the legal profession to understand how its members use and share content on these sites.  It is equally important to consider how society’s evolving perspective on privacy and online communication should apply to judges.  In 2011, the American Bar Association (“ABA”) Commission on Ethics 20/20 examined the use of new technologies in the practice of law and found that with some additional clarification the current rules governing attorney conduct are sufficient to address the use of that technology, including online communications.[9]  While these rules offer guidance on appropriate judicial behaviors, alone they are insufficient to address the unique challenges posed by social networking.

This Article considers the rapid rise in the use of social media and its use by members of the judiciary, and asserts that judicial canons drafted prior to the advent of social media outlets are inadequate to address the risk posed through the use of social media.  Part I provides a brief overview of the rapid emergence of social media as a primary mode of communication and the unique risks it poses for users.  Part II provides a brief summary of codes of judicial conduct that are relevant to a judge’s use of social media.  Part III evaluates recent state judicial ethics opinions addressing the use of social media.  Part IV argues that a restrictive approach to the use of social media, which has been adopted by several states, is necessary to protect the integrity of the judicial system.  Part V offers recommendations to balance the competing interests of protecting the judiciary and allowing judges to participate in the communities they serve.

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Helia Garrido Hull: Associate Professor of Law and Coordinator of Student Professionalism Enhancement Program, Barry University Dwayne O. Andreas School of Law; B.A. Providence College, J.D. Stetson University College of Law.



[1].  Nicole Black, A Look at Lawyers’ Use of Technology in 2011, Sui Generis (Oct. 4, 2011), http://nylawblog.typepad.com/suigeneris/2011/10/a-look-at-lawyers-use-of-technology-in-2011.html.

[2].  Conference of Court Pub. Info. Officers, Report of the New Media Comm. of the Conference of Court Pub. Info. Officers 19th Annual Meeting, New Media and the Courts:  The Current Status and a Look at the Future 7, 9 (released Aug. 26, 2010) [hereinafter CCPIO], available at http://ccpio.org/wp-content/uploads/2012/02/2010-ccpio-report-summary.pdf.

[3].  Id. at 10.

[4].  See generally Comm. on Codes of Conduct, Judicial Conference of the U.S., Resource Packet for Developing Guidelines on Use of Social Media by Judicial Employees (Apr. 2010), available at http://www.uscourts.gov/uscourts/RulesAndPolicies/conduct/SocialMediaLayout.pdf.

[5].  Id. at 5.

[6].  Id.

[7].  Id. at 6.

[8].  See generally CCPIO, supra note 3.

[9].  Am. Bar Ass’n Comm’n on Ethics 20/20, Initial Draft Proposals—Technology and Confidentiality, http://www.americanbar.org/content/dam/aba/administrative/professional_responsibility/20110502_technology.authcheckdam.pdf (last modified May 2, 2011).

Article: Humanitarian Aid is Never a Crime? The Politics of Immigration Enforcement and the Provision of Sanctuary

In September 2010, the United States Court of Appeals for the Ninth Circuit reversed the federal criminal conviction of humanitarian Daniel Millis for placing water for migrants crossing the United States-Mexico border in the Buenos Aires National Wildlife Refuge.[1]  In 2008 Mr. Millis, an activist with the Sierra Club and the Tucson faith-based organization No More Deaths/No Mas Muertes,[2]  had been found guilty of “Disposal of Waste” pursuant to 50 C.F.R. § 27.94(a), in the United States District Court for the District of Arizona.[3]  No More Deaths, along with other faith-based organizations in Southern Arizona,[4]  have adopted the slogan “Humanitarian Aid is Never a Crime” in support of their mission to leave water for migrants crossing the desert near the United States-Mexico border.[5]  Although the district court rejected Mr. Millis’ defense that “leaving full jugs of life-sustaining water for human consumption does not constitute littering,[6]  two judges on the three-judge panel of the Ninth Circuit that heard Mr. Millis’ case found that the term “garbage” in the regulation under which Mr. Millis was prosecuted is ambiguous, and vacated his conviction on those grounds.[7]

The Ninth Circuit’s ruling in United States v. Millis was lauded by immigrants’ rights groups, border activists, humanitarian and faith groups as a victory for Good Samaritans and peaceful protestors of federal immigration policy.[8]  Supporters of Mr. Millis and sympathetic observers were buoyed by what they believed to be the implication of the Court’s decision—that “we do not want to be a country that puts humanitarians in prison for giving water to people dying of thirst.”[9]  However, nowhere in the Court’s opinion is there any indication—implicit or otherwise—that the Court’s rejection of the Government’s prosecution of Mr. Millis under 50 C.F.R. section 27.94(a) is a commentary on federal immigration policy generally.  The Ninth Circuit overturned Mr. Millis’ conviction because it determined that the regulation governing his conviction is ambiguous; it did not explicitly address his humanitarian defense in its holding, and did nothing to signal either its approval or disapproval of the provision of humanitarian aid to those seeking refuge within our borders.[10]

The Ninth Circuit’s silence regarding Mr. Millis’ motivation for leaving water in the desert—the desire to protect and sustain human life—belies the role that Congress, the Department of Justice, the Department of Homeland Security, and the federal courts play in creating and sustaining an immigration policy that causes hundreds of people to die in the desert on the United States-Mexico border each year, and countless more migrants to live in the shadows once their journey to the United States is complete due to our government’s “enforcement only” immigration policies.  Contributing to the climate of fear are recent attempts to criminalize the provision of humanitarian aid to undocumented immigrants by federal, state, and local governments,[11] which present a new and troubling challenge for people of faith and conscience who feel compelled to “welcome the stranger,”[12] even in the face of potential prosecution.

This Article argues that the unprecedented increase in the enforcement of immigration law—on both the border and the interior—and the politics surrounding comprehensive immigration reform has given rise to a renewed need for the provision of sanctuary for undocumented immigrants, and surveys the different forms of action that can constitute sanctuary.[13]  Part I discusses Mr. Millis’ case in order to examine in further detail his legal defense—and personal belief—that “humanitarian aid is never a crime,” and the Court’s discussion of whether water left in the desert for humanitarian purposes is “garbage,” “litter,” or something else entirely.  Part II discusses the current effort by legislatures in states such as Alabama, Arizona, Georgia, Indiana, Oklahoma, South Carolina, and Utah to further criminalize and prosecute individuals who provide humanitarian aid for “harboring” or “transporting” undocumented immigrants at the state level, including those who provide food, shelter, and medical treatment.  Part III examines previous federal prosecutions of providers of humanitarian aid to migrants, particularly those affiliated with the faith-based Sanctuary Movement of the 1980s, while also looking at the various forms of action sanctuary for undocumented immigrants can take.  In doing so, this section discusses the missions of several organizations involved in the contemporary New Sanctuary Movement that has arisen in response to the immigration enforcement policies of the G.W. Bush and Obama administrations, as well as the non-cooperation policies and affirmative benefits for undocumented immigrants provided by so-called modern “sanctuary cities.”[14]  The Article concludes with Part IV, which discusses how the provision of sanctuary to undocumented immigrants has been linked to the unpopular political term “amnesty,” how this negative framing of the issue has hindered reasonable proposals for immigration reform such as the DREAM Act,[15] and offers suggestions for how we can move toward crafting comprehensive immigration reform that puts the sanctity of human life on par with national security.

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Kristina M. Campbell: Assistant Professor of Law and Director, Immigration and Human Rights Clinic, University of the District of Columbia David A. Clarke School of Law.



[1].  See generally United States v. Millis, 621 F.3d 914 (9th Cir. 2010).

[2].  No More Deaths/No Mas Muertes was formed in 2004, and became affiliated with the Unitarian Universalist Church of Tucson as an official church ministry in Summer 2008.  See Unitarian Universalist Church of Tucson, No More Deaths, No Más Muertes: Humanitarian Aid is Never a Crime, http://www.uuctucson.org/index.php/social-action/no-more-deaths-no-mas-muertes.html (last visited Sept. 10, 2012).

[3].  United States v. Millis, No. CR 08-1211, 2009 WL 806731, at *6 (D. Ariz. Mar. 20, 2009).  Mr. Millis was the driver of a vehicle containing four individuals (including himself) affiliated with No More Deaths for the purpose of placing water in the desert for migrants.  Id. at *1.

[4].  No More Deaths works closely with two other groups in Southern Arizona that provide humanitarian aid on the U.S.-Mexico border, Humane Borders and the Tucson Samaritans.  See Millis, 2009 WL 806731, at *6.

[5].  See, e.g., Unitarian Universalist Church of Tucson, Numbing Numbers, http://www.nomoredeaths.org/Volunteer-Reflections/numbing-numbers.html (last visited Sept. 19, 2012) (“No More Deaths adheres to the principle that Humanitarian Aid is Never a Crime.”).  This stance is part of a larger international movement that asserts that the provision of humanitarian aid should not be criminalized in any situation, including armed conflict.  See generally Joakim Dungel, A Right to Humanitarian Assistance in Internal Armed Conflicts Respecting Sovereignty, Neutrality and Legitimacy: Practical Proposals to Practical Problems, J. Humanitarian Assistance (May 15, 2004), http://sites.tufts.edu/jha/archives/838.

[6].  See Millis, 2009 WL 806731, at *4.  In her opinion, United States District Judge Cindy K. Jorgenson stated that

Millis’ argument that his conviction cannot stand because the water jugs were of value and would have provided life-sustaining water for human consumption fails to recognize that if every person was permitted to subjectively determine if something placed on the ground is of value, no discarded item could be the basis of a littering conviction.

Id. at *5.

[7].  See Millis, 621 F.3d at 918.  In vacating Mr. Millis’ conviction due to the ambiguity of the statute, the court determined that the rule of lenity applied in this case.

(The narrow question we consider today is whether the term ‘garbage’ within the context of the regulation was sufficiently ambiguous that the rule of lenity would apply in this case. Here, given the common meaning of the term ‘garbage,’ coupled with the regulatory structure, we conclude that [50 C.F.R.] § 27.94(a) is sufficiently ambiguous in this context that the rule of lenity should apply . . . .  The only question is whether the rule of lenity should be applied to the offense charged.  We conclude that it does apply, and we reverse the judgment of the district court.).

[8].  See, e.g., Unitarian Universalist Church of Tucson, Humanitarian Action Triumphs Over Legal Action,  http://www.uuctucson.org/index.php/social-action/humanitarian-action-triumphs-over-legal-action.html (last visited Sep. 10, 2012)

(Attorney Bill Walker, who represented Walt Staton, Dan Millis and 13 other humanitarians on citations they got for ‘littering’ while doing humanitarian aid work on the Buenos Aires National Wildlife Refuge has notified us that ‘the government has abandoned their appeal in the Millis case and has asked that the Staton case be remanded to the trial court for dismissal.  This is a great double victory for us.  We are now three for three against the government in Humanitarian aid cases!!!’).

[9].  See Adam Cohen, The Crime of Giving Water to Thirsty People, Time Mag., Sept. 8, 2010, http://www.time.com/time/nation/article/0,8599,2016513,00.html.

[10].  In fact, the Court pointed out that had Mr. Millis simply been charged with violating a different federal statute, it is possible that a conviction for leaving water in the desert without a permit could have been sustained on appeal.  See Millis, 621 F.3d at 918 (“Millis likely could have been charged under a different regulatory section, such as abandonment of property or failure to obtain a special use permit. However, that is not the question presented here.”).

[11].  See infra Part II.

[12].  See Matthew 25:31- 46 (Self-Pronouncing ed., Meridian 1962).

[13].  As others have noted, the term “sanctuary” has Biblical roots, and been applied  in many social and legal contexts outside the provision of humanitarian aid to undocumented immigrants, including the American anti-slavery movement and the protection of Jews and other persecuted minorities in the World War II Holocaust.  Additionally, Professor Rose Cuison Villazor has suggested that in relation to sanctuary for undocumented immigrants, sanctuary can take two primary forms of action – those that occur in the “private sphere” (the provision of food, water, and shelter) and  those that occur in the “public sphere” (the policies enacted by “sanctuary cities”)

([A]cknowledging the public/private dichotomy of sanctuaries is useful in analyzing and critiquing current federal government policies and practices that have ignored the boundaries between public places, where federal immigration law enforcement employees typically enjoy great regulatory and enforcement powers, and private spaces, particularly one’s home, where the power of the federal government to implement immigration laws should be balanced against other concerns such as the right to property and right to privacy.).

See Rose Cuison Villazor, What is a “Sanctuary?”, 61 SMU L. Rev. 133, 150, n.109 (2008).

[14].  See infra Part III.D.1.

[15].  The Development, Relief, and Education for Alien Minors Act of 2010 (“DREAM Act of 2010”), S. 3992, 111th Cong. (2010), available at http://thomas.loc.gov/cgi-bin/bdquery/z?d111:SN03992:@@@X.

Article: Congressional Oversight of the “Marketplace of Ideas”: Defectors as Sources of War Rhetoric

Congressional oversight is “one of the most important responsibilities of the United States Congress,” particularly when oversight can enhance the likelihood that executive policies will reflect the public interest, augment the efficiency and efficacy of government operations, and deter “capricious behavior, abuse, waste, dishonesty, and fraud.”[1]  Legislative scrutiny of the executive has arguably been weak,[2] but was markedly deficient during the Bush administration.[3]  In 2006, when only 20% of Americans approved of Congress’s performance, Ralph Nader, Norman Ornstein and Thomas Mann published a book which referred to Congress as the “broken branch.”[4]

Long-term trends of growth in the administrative state,[5] the president’s role as head of state during periods of proliferating international relations, and the Commander in Chief authority during war and crises have the prospect of augmenting presidential power relative to congressional assertions of prerogative.  However, the existing composition of Congress in particular can aggravate the separation of powers balance and impede effective legislative oversight.  The majority party in Congress may be polarized, exploit the centralization of power within party leadership, obstruct the minority party,[6] initiate a preferred legislative agenda,[7] and avert or omit contentious issues from the congressional agenda, particularly when those issues could frustrate the president.[8]  The majority party in Congress has the foremost opportunity to challenge the president,[9] which means that scrutiny is apt to dwindle under unified government.[10]  During the mid-1990s, Republicans, particularly House Speakers Gingrich and Hastert and Senate Majority Leaders Dole and Lott, endeavored to drive an ideological agenda, but they were unable to overcome President Clinton’s veto.[11]  After Bush was inaugurated, Republicans controlled the presidency and Congress from 2001 to 2006.[12]

The White House can also lead the congressional agenda.  The President has a privileged institutional capability to communicate with audiences to champion chosen issues and dominate public discourse.[13]  While controversial, the President could intensify command over political agendas with advocacy programs that Congress unwittingly funds.[14]  This is particularly unsettling if government expends taxpayer funds to disseminate/propagandize a preferred message anonymously.[15]  The Constitution and legislation provide that no public funds may be dispensed without congressional approval.[16]  As for the substantive message, the marketplace model generally posits that government does not regulate information or prohibit speech,[17] and the First Amendment “does not affirmatively entitle anyone to subsidies for their speech.”[18]  If government funds one position and excludes others, the latter may be disadvantaged.

This Article examines how the congressional spending power and wanting oversight can abet operations that market war policies.  These considerations forged a vital issue preceding the Iraq War.  In its five-year investigation of the pre-war intelligence estimates, the Senate Select Committee on Intelligence (“SSCI”) devoted a 208-page report to the Iraqi National Congress (“INC”), a group of defectors who sourced the media and U.S. intelligence services with allegations that Iraq possessed weapons of mass destruction (“WMDs”) and collaborated with al-Qaeda.[19]  INC publicity activities were funded by the U.S. government.[20]

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Robert Bejesky: M.A. Political Science (Michigan), M.A. Applied Economics (Michigan), LL.M. International Law (Georgetown).  The author has taught international law courses for Cooley Law School and the Department of Political Science at the University of Michigan, American Government and Constitutional Law courses for Alma College, and business law courses at Central Michigan University and the University of Miami.



[1].  Louise M. Slaughter, H.R. Comm. on Rules Majority Office: The Gen. Principles of Cong. Oversight (1999), available at http://democrats.rules.house.gov/archives/comm_gp_cong_oversight.htm.

[2].  Douglas Kriner, Can Enhanced Oversight Repair “The Broken Branch”?, 89 B.U.L. Rev. 765, 773 (2009).  Senator Alan Simpson remarked that “when people say, ‘Where is Congress?’  They are there.  It’s just that you don’t see them there.”  Sherman J. Bellwood Lecture: National Security and the Constitution: A Dialogue with Senators Gary Hart and Alan Simpson, 43 Idaho L. Rev. 7, 21 (2006).

[3].  Thomas Mann & Norman Ornstein, The Broken Branch: How Congress is Failing America and How to Get it Back on Track 156-57 (2006).

[4].  Kriner, supra note 2, at 765-66 (citing  Mann & Ornstein, supra note 3); Presidential Powers: Articles and Poetry: A Forum on Presidential Authority, 6 Seattle J. Soc. Just. 23, 43 (2007) (20% of Americans had confidence in Congress at the same time the President had approval ratings of about 30%).

[5].  Kriner, supra note 2, at 769 (Congressional delegation of responsibilities to the executive during periods of administrative state expansion).  Executive power has been encroaching on Congressional authority for several decades.  Daryl J. Levinson & Richard H. Pildes, Separation of Parties, Not Powers, 119 Harv. L. Rev. 2311, 2315 (2006); Cynthia R. Farina, Statutory Interpretation and the Balance of Power in the Administrative State, 89 Colum. L. Rev. 452, 508 (1989).  The administrative agency facilitates the legislative mission and promotes efficiency.  Cynthia R. Farina, False Comfort and Impossible Promises: Uncertainty, Information Overload, and the Unitary Executive, 12 U. Pa. J. Const. L. 357, 361-62, 399-403 (2010) (expansive and complex rule-making procedures in the executive branch to address changing society).  The agency’s prerogative grows in that new jurisdictional arena.  Legislative vetoes can restrict later congressional action.  See generally Immigration Naturalization Serv. v. Chadha, 462 U.S. 919 (1983).

[6].  Kriner, supra note 2, at 766; Mark Tushnet, The New Constitutional Order 18-19 (2003).  Michael Doran, The Closed Rule, 59 Emory L.J. 1363, 1367-71, 1384, 1389 (2010) (“Although they too had used the closed rule regularly throughout their twelve years in the majority, the Republicans renewed their own attacks on the closed rule – calling it ‘offensive to the spirit of representative democracy’ – once the Democrats regained control of the House in 2007.”).  Id. at 1370-71, 1429-30 (discussing the significant power of hierarchical party leadership).

[7].  See generally Gerald B.H. Solomon & Donald R. Wolfensberger, The Decline of Deliberative Democracy in the House and Proposals for Reform, 31 Harv. J. on Legis. 321 (1994).

[8].  See generally Gregory J. Wawro & Eric Schickler, Filibuster: Obstruction and Lawmaking in the U.S. Senate (2006).

[9].  Levinson & Pildes, supra note 5, at 2312, 2333-37 (the president can exercise party discipline to ensure loyalty).

[10].  Sudha Setty, The President’s Question Time: Power, Information, and the Executive Credibility Gap, 17 Cornell J.L. & Pub. Pol’y 247, 259-60 (2008).

[11].  Charles Tiefer, Congress’s Transformative ‘Republican Revolution’ in 2001-2006 and the Future of One-Party Rule, 23 J. L. & Pol. 233, 240 (2007).

[12].  Id. at 234 (“in 2001-2006, a ‘Republican Revolution’ transformed the law of Congressional rules and procedures to allow that party to implement an ideological agenda”); Doran, supra note 6, at 1367-68.

[13].  The only clear recourse is at the polls every four years.  Bd. of Regents of Univ. of Wis. Sys. v. Southworth, 529 U.S. 217, 235 (2000) (“When the government speaks, for instance to promote its own policies or to advance a particular idea, it is, in the end, accountable to the electorate and the political process for its advocacy.  If the citizenry objects, newly elected officials later could espouse some different or contrary position.”).  In Youngstown Sheet & Tube Co. v. Sawyer, Justice Jackson wrote about the President’s political power:

[n]o other personality in public life can begin to compete with him in access to the public mind through modern methods of communication.  By his prestige as head of state and his influence upon public opinion he exerts a leverage upon those who are supposed to check and balance his power which often cancels their effectiveness.

343 U.S. 579, 653-54 (1952) (Jackson, J., concurring); Branzburg v. Hayes, 408 U.S. 665, 729 (1972) (Stewart, J., dissenting) (the media should challenge government and not be a “captive mouthpiece of ‘newsmakers”).

       [14].  While discussed in greater detail elsewhere, there were other executive branch operations, other than the one discussed in this Article, that sought to craft public opinion, including the Pentagon’s embedded reporter program and military analysts, the Bush administration’s Video News Releases, and Pentagon operations that controlled Iraqi media.  See generally Robert Bejesky, Public Diplomacy or Propaganda?  Targeted Messages and Tardy Corrections to Unverified Reporting, 40 Cap. U. L. Rev. 967 (2012) [hereinafter “Bejesky, Public Diplomacy”].  Government investigations and Congress people criticized each of these programs post facto, but the common denominator with these and the Iraqi National Congress was that taxpayer funding was allocated to concerted efforts to promote a pro-war agenda.  Id.

[15].  Gia B. Lee, Persuasion, Transparency, and Government Speech, 56 Hastings L.J. 983, 1023-24 (2005).

       [16].  U.S. Const. art. I, § 9, cl. 7.  The President must submit certain information to Congress, particularly for budget appropriations.  Setty, supra note 10, at 291-92.  The Antideficiency Act states that “an officer or employee of the United States Government . . . may not . . . make or authorize an expenditure or obligation exceeding an amount available in an appropriation.”  31 U.S.C. § 1341(a)(1)(A) (1982).

       [17].  Derek E. Bambauer, Shopping Badly: Cognitive Biases, Communications, and the Fallacy of the Marketplace of Ideas, 77 U. Colo. L. Rev. 649, 653 (2006); David Cole, Beyond Unconstitutional Conditions: Charting Spheres of Neutrality in Government-Funded Speech, 67 N.Y.U. L. Rev. 675, 680-81 (1992) (if the government “seeks to prohibit speech directly, the first amendment demands that it maintain neutrality toward content, viewpoint, and speaker identity” in order to “curb government action that threatens to skew the market-place of ideas or to indoctrinate the citizenry”); Young v. Am. Mini Theatres, Inc., 427 U.S. 50, 67 (1976) (Stevens. J., plurality opinion); Bd. of Regents of Univ. of Wis. Sys., 529 U.S. at 220-21 (1976); R.A.V. v. City of St. Paul, Minn, 505 U.S. 377, 382 (1992); see, e.g., United States v. Eichman, 496 U.S. 310, 317-18 (1990); Laurence H. Tribe, American Constitutional Law § 12-36 (2d ed. 1988) (also when the government delays publication of important stories, it deprives the stories of their timely news value).

[18].  Cole, supra note 17, at 676-78, 681 (the Court has permitted government to have some degree of influence on the content of the private speech that it is funding).

[19].  See generally S. Select Comm. on Intelligence, The Use by the Intelligence Cmty. of Info.  Provided by the Iraqi Nat’l Cong., Sept. 8, 2006, available at http://intelligence.senate.gov/phaseiiinc.pdf [hereinafter “SSCI/INC”].

[20].  See infra Part I.C.

Article: State and Local Government Funding of Health and Retirement Benefits for Employees: Current Problems and Possible Solutions with California Health Benefts as an Example

Government employee health and retirement benefits have come under a likely unprecedented critique, some may say attack, during the difficult economic times, particularly for state and local governments, during the beginning of the second decade of the twenty-first century.  Some suggested changes are more incremental than others.  The City of San Diego is putting a measure before voters to offer new city employees 401(k)’s rather than defined benefit pensions.[1]  The voters in the City of Carlsbad, a San Diego suburb, have already approved an initiative requiring future city employees’ benefits to be approved by voters.  Carlsbad had already implemented a two-tiered pension system in which new employees receive significantly lower retirement benefits.[2]  The University of California Board of Regents (“UC Regents”) has recently voted to increase employee and employer contributions to the retirement plan as well as to raise the retirement age for future university employees and to require those employees to pay more for their health care benefits.[3]  The UC Regents also has been resisting an effort to raise the limit on compensation upon which pensions are calculated.[4]  Other efforts have been to restrict the ability of employees to add to their pensions, for example, by buying additional years to add to the pension formula (normally, for example, years of services times final salary year or three year compensation times 1.2% to 3%).[5]

Some attempts at curtailing public employees’ retirement and health benefits are likely more radical.  The California Little Hoover Commission, an independent group including five governor-appointed citizens, four legislature-appointed citizens, two state senators, and two state representatives,[6] recently recommended “freez[ing] pension benefits for current state and local government workers” and moving to a “hybrid model” that would include a 401(k).[7]  The Commission also recommended a two-tiered system with lesser benefits for new employees, increasing contributions from government workers, preventing workers from increasing pay in final year of service, capping annual salary for calculating pension benefits, and increasing minimum retirement age, among other suggestions.[8]  The State of Wisconsin passed legislation to deny collective bargaining to government employees for benefits.[9]  Finally, the City of San Diego successfully litigated against the city police union to be able to renegotiate future health benefits of retirees.[10]

This article will first examine the various estimated costs for future retirement and health benefits of state and local government employees.  Secondly, the article will evaluate some of the suggested reductions in retiree health benefits and the limitations on such reductions, particularly in the context of the laws of California as an example.  Finally, the article will examine the health and retirement benefits of state and local government employees within the larger context of the societal stake in such benefits.

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John R. Dorocak, Honors A.B., Xavier University, J.D., Case Western Reserve University, LL.M. (Tax), University of  Florida, C.P.A., California and Ohio, is a Professor of Accounting at California State University, San Bernardino.  James Estes, B.A., M.B.A., California State University, Fullerton, Ph.D, California Coast University, CFP, CPCU, ChFC, CLU, is a Professor of Finance at California State University San Bernardino.  The Authors thank Lloyd E. Peake, B.A., University of Southern California, J.D., Southwestern University, Professor Emeritus in the Department of Management at California State University, San Bernardino, for his insightful comments.



[1]. Craig Gustafson, Public Safety Pensions Could Be On The Line Decision On Pensions May Go To Voters, San Diego Union-Trib., Feb. 26, 2011, at A1.

[2].See Aaron Burgin, Carlsbad Pension Reform Initiative Wins, SignOnSanDiego.Com (Nov. 2, 2010, 8:19 PM), http://www.signonsandiego.com/news/2010/nov/02/carlsbad-pension-reform-initiative-leading-in-early.

[3]. See Terence Chea, UC Regents Vote to Raise Pension Contributions, SignOnSanDiego.Com (Sep. 16, 2010, 11:44 AM), http://web.signonsandiego.com/news/2010/sep/16/uc-regents-vote-to-raise-pension-contributions; Terence Chea, UC Raises Retirement Age for University Employees, SignOnSanDiego.Com (Dec. 13, 2010, 4:39 PM), http://web.signonsandiego.com/news/2010/dec/13/uc-raises-retirement-age-for-university-employees.

[4]. The Associated Press, Top Univ. of Calif. Execs. Seek Big Pension Boost, SignOnSanDiego.com (Dec. 29, 2010, 12:22 PM), http://web.signonsandiego.com/news/2010/dec/29/top-univ-of-calif-execs-seek-big-pension-boost.

[5]. See Anthony York & Jack Dolan, California State Employees Take Advantage of Pension Perk, L.A. Times, Feb. 16, 2011, available at http://articles.latimes.com/2011/feb/16/local/la-me-pensions-airtime-20110216.

[6].Commissioners, Little Hoover Commission, http://www.lhc.ca.gov/about/commis.html (last visited Feb. 13, 2012).

[7]. Judy Lin, Commission: Freeze Pensions for Calif. Workers, SignOnSanDiego.com (Feb. 24, 2011, 4:35 PM), http://www.signonsandeigo.com/news/2011/feb/24/commission-freeze-pensions-for-calif-workers; see also Marisa Lagos, Commission Urges Major Overhaul of State Pensions, The S.F. Chron., Feb. 25, 2011, at C8.

[8]. Lin, supra note 7.

[9]. Mark Trumbull, Did Wisconsin Senate Choose Nuclear Option in Collective-Bargaining Fight?, The Christian Sci. Monitor (Mar. 9, 2011), http://www.csmonitor.com/USA/Politics/2011/0309/Did-Wisconsin-Senate-choose-nuclear-option-in-collective-bargaining-fight.

[10]. San Diego Police Officers Ass’n v. San Diego City Emps. Ret. Sys., 568 F.3d 725, 740 (9th Cir. 2009).

Article: Ebbing the Tide of Local Bank Concentration: Granting Sole Authority to the Department of Justice to Review the Competitive Effects of Bank Mergers

Take a trip back: the year is 1991, and First Hawaiian, Inc., Honolulu, Hawaii (“Applicant”) has applied for Federal Reserve Board (“Fed”) approval to acquire First Interstate of Hawaii, Inc., Honolulu, Hawaii, (“FIH”) which owns a bank as one of its subsidiaries.[1]  The Fed, instructed by statute to determine whether a particular transaction is likely to lessen competition, notes first that the Applicant is the second largest commercial banking organization in Hawaii, and that FIH is the fourth largest commercial banking organization in Hawaii.[2]  Further, after consummation of the transaction, the Applicant would control 37.3% of the total deposits in commercial banking organizations in Hawaii.[3]  Upon first blush, one would assume that the Fed would be hesitant to approve the transaction, given that the Applicant would occupy an even more dominant position in the Hawaiian commercial banking market.  But the Fed, much to the chagrin of the United States Department of Justice’s Antitrust Division (“DOJ”), approves the transaction, concluding that the proposed acquisition would not have “a substantially anticompetitive effect in any relevant market.”[4]

Now flash forward to the present day.  The United States has suffered through an economic collapse that required multiple bank bailouts, including $700 billion under the Troubled Assets Relief Program (TARP).[5]  All told, the Fed lent $2 trillion to shore up banks,[6] with much of the money going towards bailing out America’s largest banks, such as Bank of America[7] and Citigroup.[8]  Although the causes of the crisis are numerous,[9] there is no denying that regulators “pumped tens of billions of dollars into the nation’s leading financial institutions because the banks were so big that officials feared their failure would ruin the entire financial system.”[10]  After the financial collapse, the public and policymakers alike heaped much scorn upon banks that had become “too big to fail.”  But another pressing concern rose from the ashes of the fallout of the financial crisis: increasing levels of bank concentration in small, local markets and the dangers such concentration presents.

Banks in localized, small markets have sought out consolidation with equal vigor as the titans of the industry, and for good reason.  Empirical analysis demonstrates that as concentration among local markets increases, the banks operating in those markets have increased profit rates, can pay lower interest rates on deposits, and can charge higher interest rates on loans.[11]  This has a particularly potent effect on small businesses that rely primarily on local banks for their credit needs.[12] Yet under the current banking regulators’ antitrust analysis, lending to small- and medium-sized businesses as a distinct submarket is ignored, which presents opportunities for local banks, such as those involved in First Hawaiian, to exploit their increased market power, or, at the very minimum, to continue to seek consolidation in hopes of obtaining a monopoly over local markets.

This Article argues that the DOJ, rather than the banking regulators, such as the Fed, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC), should be given the sole power to review the competitive effects of bank mergers to minimize the dangers of continued local bank concentration.  Although we will never know the extent to which bank consolidation could have been prevented, it is clear that mergers such as First Hawaiian Inc., Honolulu, Hawaii would have come out differently under DOJ review.  Section I of this Article explores America’s long storied fear—shared by the public and policymakers alike—of concentration among industries, particularly that of the banking industry.  Section II describes the laws governing bank mergers that grew out of this fear of concentration, and details the reemergence of concentration in the banking industry.  Section III begins with a look at how the bank merger process works and then proceeds to explain why the DOJ should be the agency responsible for reviewing the competitive effects of bank mergers.  Finally, Section IV contemplates and responds to potential counterarguments.

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Aaron Stine: J.D., The George Washington University Law School.  B.A., International Relations, Mandarin Chinese, Michigan State University.

Eric Gorman: J.D., The John Marshall Law School.  B.S., Mechanical Engineering, Michigan State University.  eric.d.gorman@gmail.com.



[1]. See First Hawaiian, Inc., Honolulu, Hawaii, 77 Fed. Res. Bull. 52, 52 (1991).

[2]. Id. at 54.

[3]. Id.

[4]. Id. at 57.

[5]. See Alex Johnson, Bush Signs $700 Billion Financial Bailout Bill, MSNBC.com (Oct. 3, 2008), http://www.msnbc.msn.com/id/26987291/.

[6]. See Alan Feuer, Battle Over the Bailout, N.Y. Times,  Feb. 14, 2010, at MB1.

[7]. Bank of America received a $20 billion bailout and a government guarantee for almost $100 billion of potential losses on toxic assets through an individual rescue plan, in addition to the $25 billion it received under TARP.  See Patrick Rucker & Jonathan Stempel, Bank of America Gets Big Government Bailouts, Reuters.com (Jan. 16, 2009), http://www.reuters.com/article/idUSTRE50F1Q720090116.

[8]. Citigroup received guarantees on losses of its pool of approximately $306 billion in troubled assets, along with $45 billion in capital.  See David Enrich et al., U.S. Agrees to Rescue Struggling Citigroup, Wall Street J., Nov. 24, 2008, at A1.

[9]. For an overview of the causes of the financial crisis, see generally Kenneth E. Scott, The Financial Crisis: Causes and Lessons, 22 J. Applied Corp. Fin. 8 (Dec. 10, 2009), available at http://ssrn.com/abstract=1521610; see also Sheila C. Bair, Chairman, FDIC, Causes and Current State of the Financial Crisis Before the Financial Crisis Inquiry Commission (Jan. 14, 2010), available at http://www.fdic.gov/news/news/speeches/spjan1410.html.

[10]. See David Cho, Banks ‘Too Big to Fail’ Have Grown Even Bigger, Wash. Post, Aug. 28, 2009, at A01.

[11]. See generally R. Alton Gilbert & Adam M. Zaretsky, The Federal Reserve Bank of St. Louis, Banking Antitrust: Are the Assumptions Still Valid? (2003), available at http://research.stlouisfed.org/publications/review/03/11/gilbert.pdf.

[12]. See generally Robert DeYoung et al., Youth, Adolescence, and Maturity of Banks: Credit Availability to Small Business in an Era of Banking Consolidation, 23 J. Banking & Fin. 463 (1999), available at http:// research.stlouisfed.org/publications/review/03/11/gilbert.pdf.

Article: Sacrificing Functionality for Transparency? The Regulation of Swap Agreements in the Wake of the Financial Crisis

Once the sole province of chief executive officers and hedge fund managers, swap agreements (or “swaps”), most notably credit default swaps,[1] came to the forefront of politicians’ and regulators’ minds with the near-collapse of the U.S. financial system in 2008.  Having operated largely in the shadows of the lightly regulated over-the-counter (OTC) derivatives market, companies went unimpeded when they sold credit default swaps to cover trillions of dollars in securities and bonds.[2] Credit default swaps written by American International Group, Inc. (AIG), for instance, covered more than $440 billion in bonds.[3] Unable to cover the contracts’ costs when they became due at the onset of the financial crisis, the U.S. government, arguably to save the larger financial system,[4] bailed out AIG and some of the largest financial institutions in the world.[5]

In response, and in an effort to gain control over the opaque OTC derivatives market, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in 2010, which, in part, provided authorization to both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to regulate swap agreements.[6]  Acting on its congressional mandate, the SEC in early 2011 released for public comment Regulation SB SEF,[7] which purports to remove many swap agreements from the OTC market and put them on exchanges or swap execution facilities, and thereby inject greater transparency into the OTC derivatives market.

This Article argues that Regulation SB SEF does not adequately consider the fundamental differences between securities and swap agreements that render swap agreements less amenable to securities-like exchanges.  Part I of this Article defines what a swap agreement is and describes the SEC’s attempt to regulate them.  Part II dissects the case for regulating swap agreements and analyzes their fundamentals in order to better understand how to regulate them.  Part III suggests an alternative regulatory structure that will better allow the swaps market to function.

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Reed Schuster: Associate, Faegre Baker Daniels LLP; J.D. 2011, University of Minnesota Law School.



[1]. For a more in-depth discussion of credit-default swaps, see infra Part I.A.1.b.

[2]. See Marco Avellaneda & Rama Cont, Int’l Swaps & Derivatives Ass’n, Transparency in Credit Default Swap Markets 8 (July 2010), available at http://www.isda.org/c_and_a/pdf/CDSMarketTransparency.pdf (“In 1997, the notional open interest in [credit default swaps] was on the order of 200 billion dollars; by 2007 it had grown to approximately USD 60 trillion.”).

[3]. Adam Davidson, How AIG Fell Apart, Reuters (Sept. 18, 2008), http://www.reuters.com/assets/print?aid=USMAR85972720080918.

[4]. Cf. Henry M. Paulson Jr., On the Brink: Inside the Race to Stop the Collapse of the Global Financial System 99 (2010) (“A Bear Stearns failure wouldn’t just hurt the owners of its shares and its bonds.  Bear had hundreds, maybe thousands, of counterparties—firms that lent it money or with which it traded stocks, bonds, mortgages, and other securities.  These firms . . . all in turn had myriad counterparties of their own.  If Bear fell, all these counterparties would be scrambling to collect their loans and collateral. . . .  That was how bank runs started these days.”).

[5]. See, e.g., Steven M. Davidoff, Uncomfortable Embrace: Federal Corporate Ownership in the Midst of the Financial Crisis, 95 Minn. L. Rev. 1733, 1737-44, 1754-55 (2011) (discussing the U.S. government’s assistance to AIG, Citigroup, and Bank of America); Matthew Karnitschnig et al., U.S. to Take Over AIG in $85 Billion Bailout; Central Banks Inject Cash as Credit Dries Up, Wall Street J. Online (Sept. 16, 2008), http://online.wsj.com/article/SB122156561931242905.html (reporting on the U.S. government’s bailout of AIG).

[6]. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 762, 124 Stat. 1376, 1759 (2010).  Interestingly, save for section 10(b) of the Securities Exchange Act of 1934, see Commodity Futures Modernization Act, Pub. L. 106-554, § 303(d), 114 Stat. 2763, 2763A-454 (2000) (providing for the regulation of swap agreements under section 10(b)); see also Caiola v. Citibank, 295 F.3d 312, 327 (2d Cir. 2002) (“Sections 302 and 303 of the [Commodity Futures Modernization Act] define ‘swap agreements’ and then expressly exclude them from the definition of ‘securities,’ but amend section 10(b) to reach swap agreements.”).  Swap agreements were expressly exempted from regulation in the Securities Exchange Act of 1934.  15 U.S.C. § 78c-1(a)-(b) (2006).

[7].Registration and Regulation of Security-Based Swap Execution Facilities, 76 Fed. Reg. 10,948 (proposed Feb. 28, 2011) (to be codified at 17 C.F.R. pts. 240, 242, 249).

Article: Financing Innovation: Branding, Monitoring, and Uncertainty

A recent breakthrough in contract theory identified the practice of braiding, in which parties weave informal and formal elements of contract together to overcome uncertainty.  These contracts are especially prevalent in the context of collaboration for technological innovation, but they also appear in other contexts with significant uncertainty, such as preliminary agreements in mergers and acquisitions.  Thus far, the literature has focused solely on the core contractual relationship—the crystallized instance of the initial agreement between two companies, such as a research collaboration between a large pharmaceutical company and a small biotechnology company.

This article builds on braiding theory in several ways.  It provides new empirical information by analyzing actual contracts, modifications, and financing arrangements.  It expands braiding theory’s initial inquiry and seeks to understand how modifications to such original agreements affect braiding and how secured lenders finance such uncertain collaborations and monitor debtors.

Modifications reveal how parties gradually resolve uncertainty and how they respond to newly arising uncertainty.  First, modifications have shifted power within the “contract referee mechanism,” suggesting that braiding also works well as a mechanism to deal with ex ante uncertainty of bargaining power, revelation of information throughout the relationship, and ex post reallocation of that power.[1]  Second, modifications have formalized certain switching costs in termination provisions, and have adjusted those costs over time.[2]  This formalization suggests that crowding out of informal elements (here, switching costs) is not a necessary result even when there is a high-powered formal element.  Third, modifications reveal innovative nested option structures[3] that are developed in stages as nested uncertainty is revealed.[4]  Low-powered formal mechanisms[5] appear to be essential in developing an option-based response to these unforeseen uncertainties.

The secured lender’s behavior in these contracts is initially puzzling: neither the braiding solution nor the traditional secured credit solution is present to resolve uncertainty or even manage the risk of routine opportunism.[6]  The secured credit theory predicts that the lender will take one of two measures to police opportunism: monitor the debtor’s behavior or accept a bonding gesture by the debtor.[7]  Here, neither of those occur in any significant way.  The lender cedes control over the primary assets of the small collaborator, the intellectual property (IP), and allows the big collaborator an exclusive license.  The lender also does minimal monitoring: it might receive financial statements, but it does not actively monitor debtor behavior, the collaborative process, or the collateral.  Instead, the lender’s primary strategy is to take a security interest in the small company’s payment rights from any IP that emerges from the collaboration.

This article solves the puzzle with two steps that refine foundational assumptions in secured credit theory and the theory of transacting around uncertainty.  First, it is not the secured lender who monitors the debtor, but the big collaborator.  The big collaborator’s monitoring acts as a substitute for the secured lender’s expected monitoring.  Secured credit theory typically describes the secured lender as a “cop on the beat,” which allows other unsecured creditors to provide credit without worrying about monitoring.  Here, the big collaborator is the “cop on the beat,” and it is the secured lender who is benefitting from that diligence.  This particular monitoring arrangement is also normatively optimal as the secured creditor does not have the usual combination of countervailing effects—focused monitoring and security’s disincentivizing insulated recovery.[8]

Second, Knightian uncertainty is relative.[9]  The underlying uncertainty problem that braiding contracts attempt to solve is not an absolute attribute of a particular event or series of events as economics literature has typically suggested.  Instead, one’s economic position with regard to specific uncertainties can transform an uncertain event into a risky event.  This result can be seen in the secured lender’s strategy.  The big and small collaborators effectively solve the uncertainty problem in their technological innovation contract, but the uncertainty is not automatically solved for other parties.  Unlike the elimination of risk by monitoring, the uncertainty is still present and will not dissipate until the necessary information is revealed (or created).  The secured lender, however, cares nothing of this uncertainty and instead makes a bet on the exogenous probability of the success of the venture.  The uncertainty endogenous to the collaborative relationship determines that outcome, but need not be a part of the secured lender’s risk calculus.[10]  For example, any collaboration may have a ten percent chance of success, but the direction of each individual collaboration may be radically uncertain.  By having a position outside of that relationship, the secured lender has a different relative position and can avoid the uncertainty problem inherent in braiding contracts.  Portfolio theory provides a more rigorous explanation of this phenomenon by describing how specific uncertainty may be diversified away, a fact previously undeveloped in economic and legal academic literature.

Part II describes the theoretical background for this discussion.  It describes the phenomenon of braiding contracts and how they solve problems of technological and partnership uncertainty.[11]  It also considers alternative theories that seek to explain how the uncertainty problem has been solved, such as modularity theory and relational contracting theory.  It also examines prior empirical literature on collaborative alliances and questions its underlying assumptions about contracts underlying this literature.

Part III examines a new example of a prototypical braiding relationship and its contractual modifications as that relationship developed over time.  Specifically, it examines how modifications affect the contract referee mechanism, switching costs, and the nested options structure.  The modifications of these features reveal that braiding also deals with uncertainty of bargaining power[12] and unforeseen uncertainties which only emerge once the relationship has developed.  The formalization of switching costs through high-powered mechanisms also further undermines the explanatory power of the crowding-out phenomenon in the economics literature, but perhaps only where the formal and informal elements of the contract are tied to different information streams.

Part IV examines the third-party loan agreement with the small collaborator in that relationship.  The actual structure of this loan agreement undermines the standard predictions one would make under current theories of secured credit and policing debtor opportunism.  This analysis discerns a new pattern of monitoring, helps to refine existing secured credit theories and adds a new tool for solving puzzles in explaining the pattern of secured credit.

Part V considers the loan agreement’s approach to the collaboration’s uncertainty, finding that the only plausible explanation is that Knightian uncertainty is positionally relative.[13]  The secured lender is actually operating under a risk-based scenario despite the uncertainty inherent in the collaboration that it is lending into.  After describing intuitive analogies for this argument, this Part adds a first cut at using portfolio theory to establish a rigorous basis for the relativity of uncertainty.  The Part concludes by considering what the relativity of uncertainty means for the role of business lawyers in such transactions.

Part VI concludes.

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Nicholas J. Houpt: Associate, Akin Gump Strauss Hauer & Feld LLP.  J.D., Columbia Law School; B.A. University of Notre Dame.



[1]. Ronald J. Gilson et. al., Braiding: The Interaction of Formal and Informal Contracting in Theory, Practice, and Doctrine, 110 Colum. L. Rev. 1377, 1403 (2010) [hereinafter Gilson, Braiding].  A “contract referee mechanism” is a dispute resolution mechanism used in braiding contracts.  Id.  The mechanism typically requires (near) unanimous consent for certain key decisions in the collaborative relationship.  Id.  Lower-level employees are typically the ones deciding at first, with any unresolved disputes going to higher-level employees.  Id.

[2].Id.  Switching costs are the costs of finding another partner with whom to collaborate.  Gilson, Braiding, supra note 1, at 1403.  These costs include the learning curve that the new partner would have to undergo to catch up to the current partner, and would include a discount for reliability and trust that has not yet been established.

[3]. See id. at 1407-09.  Nested options are a mechanism used to solve potential hold-up problems that may arise once uncertainty is dissipated.  For example, once a technological innovation is developed, the next stage is commercialization.  One can predict these stages beforehand and use an option structure at each stage to prevent opportunism.  One collaborator may have an option of first refusal on the commercialization of any product that is developed, and if that collaborator cannot reach a commercialization agreement with the other, the other has an option to purchase the product and commercialize it through other means.  Without these options, the parties might try to hide their successes from each other and act opportunistically.

[4]. In this article, I challenge the effectiveness of nested options by pointing to evidence of nested uncertainty.  As one type of uncertainty is resolved and a predictable stage is entered, another type of uncertainty may develop that presents its own opportunism problems.  This unpredictable uncertainty can only be dealt with once it arises.

[5]. Low-powered formal mechanisms are soft commitments, like an obligation to negotiate in good faith.  High-powered formal mechanisms are much harder commitments, such as the obligation to perform a certain task at a certain time.  In the context of braiding contracts, low-powered formal mechanisms are used because hard terms, like price, quantity, and typical covenants, do not fit well with uncertain processes.  The options that are typically used are options to negotiate about a particular term or to terminate the agreement.

[6]. I explain other standard theories of secured credit not discussed in the Introduction, such as relational contracting and contextualist theory in Part IV.

[7]. See Saul Levmore, Monitors and Freeriders in Commercial and Corporate Settings, 92 Yale L.J. 49, 50-59 (1982) (describing monitoring and bonding as the two methods secured lenders use to manage agency costs).  See infra Part III.A for a more thorough discussion of the many different theories of secured credit.

[8]. See infra Part IV.C (discussing Richard Squire’s theory of symmetry in creditor’s rights).

[9]. Knightian uncertainty and risk are categories of risk proposed by the economist Frank Knight.  See generally Frank H. Knight, Risk, Uncertainty and Profit 197-232 (1921).  Risk is quantifiable and can be probabilistically allocated, whereas uncertainty is so radically unquantifiable that any allocation of risk would be arbitrary.

 

[10]. A familiar analogy might be the way that venture capitalists fund start-up firms.  The venture capitalist does not care that the entrepreneur wanted to invent a war-time anesthetic for soldiers and ended up with Novocain, a product that was successful in a different market; the venture capitalist looks for an innovative product with a chance of success.  Once found, the venture capitalist typically provides funds in exchange for equity, and the venture capitalist sells off a large portion of that equity once the product has succeeded.

[11]. Partnership uncertainty is the uncertainty involved in finding a collaborator whom one can trust, who will fit well with one’s working style, and who has the skills and know-how to make a successful collaboration.  Each of these things is difficult to signal before the collaboration begins, leaving these qualities uncertain ex ante.  As the collaboration proceeds, one can establish informational mechanisms to observe these qualities in the partner.

 

[12]. Uncertainty of bargaining power refers to the parties’ inability ex ante to determine which party is least likely to defect when given an ex post decision right.  In other words, it is not clear which party has the most to gain or most to lose in any future state of the world.

[13]. Positionally relative might mean several things and this article is only a first cut at clarifying the concept.  Uncertainty can be relative to one’s economic position, which would differentiate between the lender and the big collaborator, who each have very different economic transactions with the small collaborator and hence each have different concerns about uncertainty.  The other possibility is that uncertainty is relative to legal position.  The legal structure of the loan can be asset-based or cash-flow based and this structure might change how much uncertainty matters to the lender.