Volume 87.4 (June 2020) 883-1148

Articles

The Spectrum of Procedural Flexibility
Ronen Avraham - Professor of Law, Tel Aviv University Faculty of Law; Lecturer, University of Texas at Austin School of Law.
William H.J. Hubbard - Professor of Law, The University of Chicago Law School.

Sometimes the rules let you change the rules. In civil procedure, many rules are famously rigid—for example, neither the parties nor the judge can stipulate to subject matter jurisdiction—but closer inspection yields many ways that judges or parties (individually or by agreement) can change procedural defaults, such as the number of depositions, trial by judge or jury, or sometimes even jurisdiction. Whether the judge or parties have “flexibility” to change the rules of the game is an important, but understudied, aspect of procedure.

This Article is the first to document the full spectrum of procedural flexibility—the varied and sometimes surprising range of ways in which judges and parties can modify procedure in their cases. We show that procedural flexibility spans a broad spectrum from rigid inflexibility, to contracts that modify procedure, to unilateral control over procedure, and beyond, to a new frontier of innovations—buying and selling of procedures between parties in different cases, and markets or auctions for everything from depositions to jury trials. Some of these possibilities seem radical, but we show that, contrary to conventional wisdom, current civil practice already permits similarly radical flexing of procedure.

As a normative matter, we argue that even radical forms of flexibility (like markets in procedure) cannot be ruled out based on familiar normative criteria such as efficient dispute resolution, norm creation, distributive justice, or facilitation of democratic participation in the legal system. To the contrary, such forms of procedural flexibility may offer unexpected avenues for addressing inequities of the current status quo.

The Case for Noncompetes
Jonathan M. Barnett - Torrey H. Webb Professor, University of Southern California, Gould School of Law.
Ted Sichelman - Professor of Law, University of San Diego School of Law.

Scholars and other commentators widely assert that enforcement of contractual and other limitations on labor mobility deters innovation. Based on this view, federal and state legislators have taken, and continue to consider, actions to limit the enforcement of covenants not to compete in employment agreements. These actions would discard the centuries-old reasonableness standard that governs the enforcement of these provisions, often termed “noncompetes,” in all but four states (notably, California). We argue that this zero-enforcement position lacks a sound basis in theory or empirics. As a matter of theory, it overlooks the complex effects of contractual limitations on labor mobility in innovation markets. While it is frequently asserted that noncompetes may impede knowledge spillovers that foster innovation, it is frequently overlooked that noncompetes may encourage firms to invest in cultivating intellectual and human capital. As a matter of empirics, we show that two commonly referenced bodies of evidence fail to support zero enforcement. First, we revisit the conventional account of the rise of Silicon Valley and the purported fall of the Boston area as innovation centers, showing that this divergence cannot suitably be explained by differences in state law regarding noncompetes. Second, we show that widely cited empirical studies fail to support a causal relationship between noncompetes, reduced labor mobility, and reduced innovation. Given these theoretical and empirical complexities, we propose an error-cost approach that provides an economic rationale for the common law’s reasonableness approach toward contractual constraints on the circulation of human capital.

Comments

The Executive Judgment Rule: A New Standard of Dismissal for Qui Tam Suits Under the False Claims Act
Nathan T. Tschepik - BA 2018, Georgetown University; JD Candidate 2021, The University of Chicago Law School.

Under the 1986 amendments to the False Claims Act, whistleblowing has become big business. The Act’s qui tam provision empowers private parties, called relators, to bring suit on behalf of the government for frauds committed against it—and to receive substantial portions of that recovery. Relying on the award-sharing provision to draw out relators with inside knowledge of complex and well-hidden frauds, the government uses these qui tam suits as a critical part of its regulatory policy. The recent history of the Act shows that it has done this to great effect: the government recovers billions of dollars annually from fraudulent contractors through relators’ suits.

However, the Act has become something of a victim of its own success. The promise of big rewards for relators has led to a dramatic increase in the number of suits overall and, especially, in the number of dubious claims costing valuable prosecutorial resources. In response to the increase in meritless suits, the government has resolved to more aggressively seek dismissal to sort the wheat from the chaff.

The circuit courts of appeals have split over the proper dismissal standard. The first approach, created in United States ex rel Sequoia Orange Co v Baird-Neece Packing Corp, requires the executive branch to explain why dismissal is justified by cost-benefit analysis. The second approach, created in Swift v United States, offers near plenary dismissal power to the government. Sequoia, in permitting relators to probe the government’s reasoning, encourages meritless and strategic suits, while stunting the government’s ability to respond to this increase. Swift, in denying relators a meaningful opportunity to object, discourages meritorious relators from bringing suit. Beyond their suboptimal incentive structures, neither approach fully comports with the text and legislative history of the 1986 amendments, and both raise serious constitutional concerns. As such, this Comment offers a new standard of dismissal that resolves the incentive, interpretive, and constitutional issues.

To address these issues, this Comment turns to an area in which courts and legislatures have long worked to create a standard that draws out only the meritorious claims: shareholder derivative lawsuits. Analogizing the executive to a Special Litigation Committee, this Comment adapts the business judgment rule to the qui tam context. Because government attorneys lack the independence and bias concerns traditionally associated with actual board members, this Comment argues that New York’s deferential application of the business judgment rule to SLC decisions can be transposed with great success to the qui tam context. Such an “Executive Judgment Rule” would guarantee that the government’s review of the relator’s claim meets its statutory duty of “diligent investigation,” but would deny more probing judicial review without good cause. This approach not only remedies the interpretive and constitutional shortcomings of both current approaches, but also strikes the optimal incentives balance by assuring serious relators that their claims will be fully investigated without encouraging frivolous suits.

The Golden Share: Attaching Fiduciary Duties to Bankruptcy Veto Rights
Yiming Sun - BA 2018, University of California, Los Angeles; JD Candidate 2021, The University of Chicago Law School.

Under bankruptcy law, a debtor cannot enter into a binding agreement with a creditor to not file for bankruptcy in the future. However, creditors can in effect prevent a corporate debtor from filing for bankruptcy by obtaining a special “golden share” in the debtor and exercising the right to veto its bankruptcy concomitant with such a share. Currently, courts decide whether to invalidate a golden share veto right based on whether the right is equivalent to a bankruptcy waiver. However, the current rule may lead to either underdeterrence of bad faith vetoes or discouragement of good faith corporate decision-making.

This Comment advances a novel approach that draws on the fiduciary duty doctrine in corporate law. It argues that golden shareholders should be viewed as controlling shareholders of the debtor company and therefore bear fiduciary duties with respect to the debtor’s decision to file for bankruptcy. This way, any golden shareholder who vetoes bankruptcy to advance its interests as a creditor risks being punished for a duty of loyalty violation, while shareholders who veto bankruptcy in good faith are protected.