A Mission Statement for Mutual Funds in Shareholder Litigation
Sean J. Griffith - T.J. Maloney Chair and Professor of Law, Fordham Law School.
Dorothy S. Lund - Assistant Professor of Law, University of Southern California, Gould School of Law.
This Article analyzes the conduct of mutual funds in shareholder litigation. We begin by reviewing the basic forms of shareholder litigation and the benefits such claims might offer mutual fund investors. We then investigate, through an in-depth docket review, whether and how the ten largest mutual funds participate in shareholder litigation. We find that although shareholder suits offer potential benefits, the largest mutual funds have essentially forfeited their use of litigation. This finding is particularly striking given that index funds and other long-term oriented mutual funds generally cannot sell their shares when they are dissatisfied with company performance, leaving them with only two levers in corporate governance—voting and suing. Mutual funds vote, but they do not sue.
We analyze potential explanations for the failure of mutual funds to litigate on behalf of their investors. Collective action problems and conflicts of interest raise significant obstacles to mutual fund participation in shareholder litigation. Yet, we argue, there are situations in which shareholder litigation could create value for mutual fund investors. We therefore turn to the normative question: How should mutual funds litigate on behalf of their investors? Answering this question allows us to articulate a mission statement for mutual funds in shareholder litigation.
Our mission statement is grounded on the perspective of the broadly diversified “market investor.” The repeat-play incentives and broad diversification of many mutual funds, index funds in particular, suggests that they could create value by focusing principally on deterrence objectives. Mutual funds should bring shareholder suits against portfolio companies when doing so would meaningfully enhance deterrence. They should also scrutinize the litigation brought by other shareholders, objecting to outcomes that fail to promote meaningful deterrence. At the same time, mutual funds should focus on compensatory goals in litigation against nonportfolio defendants because extraportfolio claims do not raise circularity concerns. In addition, mutual funds should consider whether litigation can be used to implement corporate governance reforms. Finally, in all cases, mutual funds should closely monitor litigation agency costs. We close by suggesting ways in which the incentives of mutual funds might be restructured to bring about these changes.
The First Amendment's Real Lochner Problem
Genevieve Lakier - Assistant Professor of Law and Herbert and Marjorie Fried Teaching Scholar, The University of Chicago Law School.
One of the most common criticisms of contemporary free speech law is that it is too Lochnerian. What critics usually mean by this is that First Amendment doctrine, by extending significant constitutional protection to advertising and other kinds of commercially oriented speech, makes the same mistake as the Supreme Court made in Lochner v New York and other late nineteenth- and early twentieth-century Due Process Clause cases: namely, it grants judges too much power to second-guess the economic policy decisions of democratically elected legislatures.
This Article challenges that argument—not to reject the idea that contemporary free speech law resurrects Lochner, but instead to reconceive what that means. It argues that contemporary free speech law is not Lochner-like in failing to defer to the legislature’s economic policy decisions. Instead, it repeats the errors of the Lochner Court by relying upon an almost wholly negative notion of freedom of speech and by assuming that the only relevant constitutional interest at stake in free speech cases is the autonomy interest of the speaker. The result is a body of law that, not just in its commercial and corporate speech cases, but in many other cases as well, replicates Lochner-era due process jurisprudence in both its doctrinal structure and its political economic effects.
What this means is that the First Amendment’s Lochner problem will not be solved—as the conventional critiques suggest—by simply denying commercial and corporate speech constitutional protection or by weakening the strength of the protection the First Amendment provides to speech of this kind. It will only be solved by reconceiving freedom of speech as a positive rather than a negative right and one that guarantees, to listeners as well as speakers, the right to participate in a public sphere that is diverse along both racial and class lines. Rethinking the First Amendment in this manner, this Article argues, will raise many difficult questions and make what are currently easy free speech cases much harder to resolve. But there is ultimately no other way to vindicate the democratic values the First Amendment is intended to protect.
Does the Tax Code Believe Women?: Reexamining 26 USC § 104(a)(2) in the #MeToo Era
Simon de Carvalho - AB 2014, Harvard University; JD Candidate 2021, The University of Chicago Law School.
Since 1918, the tax code has included 26 USC § 104(a)(2), an exclusion from gross income for civil lawsuit damages for “personal injuries or sickness.” In 1996, by adding one word—“physical”—to the provision (twice), Congress narrowed the exclusion’s scope dramatically. Now, damages compensating for a broken arm (a “personal physical injury”) are tax-free, but those arising out of claims for, say, sexual harassment or race discrimination are fully taxable. Such injuries, the statute says, are insufficiently “physical” to merit exclusion from income.
Using the recent #MeToo movement as a jumping-off point and borrowing the language and methodologies of feminist legal theory, this Comment scrutinizes the ways in which § 104(a)(2) systematically disadvantages the people most likely to bring such harassment and discrimination claims—female and minority taxpayers. By analyzing every § 104(a)(2) Tax Court case in the past decade, I first find quantitative support for the proposition that female and minority taxpayers are indeed disproportionately impacted by § 104(a)(2). With this on-the-ground impact in mind, I then critically analyze the doctrines courts use to apply § 104(a)(2), highlighting inconsistencies in the provision’s application that impose an additional layer of costs on these same disadvantaged taxpayers. In an effort to resolve these inconsistencies, I propose two classes of solutions. First, I suggest a number of tactical and interpretive strategies that lawyers and judges can employ to ensure the provision is applied more equitably. And second, I recommend an amendment to § 104(a)(2) that would equalize its disparate impacts and align it more closely with Congress’s stated purposes for enacting it. These solutions would help bring the policy expressed by § 104(a)(2) more closely in line with the priorities of the society that must abide by it.
Penalty Default Rules for Digital Searches: Why Courts Should Spur Legislative Action via Second-Order Regulation
Meghan Holloway - AB 2016, Brown University; JD Candidate 2021, The University of Chicago Law School.
We live in a data-rich age. But Fourth Amendment doctrines have failed to adapt to our current reality. Legal principles that evolved to cabin the scope of physical searches seldom constrain searches of digital devices. As a result, a warrant to search a digital device gives police officers unfettered access to all of our information. While many scholars have argued that courts should address this problem by adopting rules that directly limit the scope of digital searches, this Comment argues that some courts have already eschewed this approach in favor of rules that encourage legislatures to regulate digital searches. Legislative regulation of digital searches is preferable because the legislative branch is better equipped to deal with a rapidly evolving technological landscape. Unfortunately, however, courts have not gone about incentivizing legislative action effectively. This Article posits that if courts want to encourage legislatures to act, they should adopt a penalty default rule that disadvantages the police. Specifically, courts should temporarily ban the plain view doctrine during searches of digital devices until legislatures limit the scope of digital searches.
Available, Granted, Revoked: A New Framework for Assessing Unauthorized Access Under the Computer Fraud and Abuse Act
Samuel Kane - BSFS 2013, Georgetown University; JD Candidate 2021, The University of Chicago Law School.
The Computer Fraud and Abuse Act (CFAA) criminalizes a broad range of conduct related to the compromise of computer systems. Specifically, the CFAA prohibits unauthorized access to computer systems, defining such access as that which occurs “without authorization” or in a manner that “exceeds authorized access.” Courts interpreting the meaning of unauthorized access under the CFAA have diverged into two camps. On one side, proponents of the broad approach argue that the CFAA unauthorized access inquiry should focus on access purpose, assessing whether a given access was conducted for a purpose authorized by the computer owner. On the other side, proponents of the narrow approach argue that the relevant inquiry should instead be permission focused, looking only at whether the computer owner had granted the accesser permission to access the computer (without regard for why the computer was accessed).
This Comment proposes a three-step framework for assessing CFAA unauthorized access that will resolve the present circuit split. Leveraging concepts from CFAA case law and offering applicability across a wide range of factual and technological contexts, this Comment’s Available-Granted-Revoked (AGR) Framework sequentially evaluates (1) whether the computer in question is publicly available or private; (2) whether the computer’s owner had, at any point, granted the accesser permission to access the computer; and (3) whether the computer owner had affirmatively revoked the accesser’s permission, if any, prior to the purportedly unauthorized access. By adopting the Available-Granted-Revoked Framework, courts will be able to effectively advance the interests underlying both sides of the current circuit split and bring clarity to a persistent legal ambiguity.