Academic

Ribstein Response to Professor Tung (The Law Market)

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

Here is Larry Ribstein's response to my review:

Thanks to Fred for his thoughtful comments , and another hearty thanks for organizing this forum for discussing our work.  The following is my response.  Erin may add her own comments later.

To start out, I should point out that Fred makes the same curious mistake about the book as Joel and Paul.  He says, ?[a]t each doctrinal destination, they argue for broader enforcement of contractual choice of law clauses.?  As I said in response to the other comments, the book is fundamentally positive rather than normative.  We describe the law market and suggest a way to improve its efficiency ? an approach that fully recognizes the need to recognize state regulatory sovereignty.  We do, as Fred says, ?exhibit a healthy skepticism of claims of market failure,? but that skepticism is based on the interest group politics underlying the claims rather than unrealistic assumptions about the power of markets. We take the political system as it is, and therefore our skepticism tries to be no more than ?healthy.?

Not surprisingly Fred focuses on our corporate law market chapter, an area where he has done significant and valuable work.  I should note that we have a fuller response to Fred?s work in our article, Corporations and the Market for Law, 2008 Illinois Law Review 661.  That paper and the book owe a significant debt to Fred?s exhaustive research.  Also, both we and Fred discuss how the internal affairs doctrine (IAD) came about, rather than, like most corporate scholars, simply analyzing the corporate competition starting from the IAD.

Fred?s criticism focuses on our disagreement on the basic issue of whether corporations are exceptional with respect to choice of law.  Fred sees the development of the IAD as uniquely based on the origins and characteristics of corporate law.  We argue (pp. 109-113) that the forces that gave rise to the IAD in the first place are similar to those operating in other areas. 

We also disagree with Fred about whether the apparently absolute nature of the IAD?s application of incorporating state law supports corporate exceptionalism with regard to choice of law.  We argue that this rule can be squared with the courts? generally more qualified enforcement of choice of law contracts subject to fundamental state policies.  We show that the parties? choice of law in both situations is overridden by regulation supported by strong interest groups.  The main difference is that in the case of the IAD, the result is accomplished by narrowing the scope of the rule to relatively unimportant corporate internal governance matters rather than through a fundamental policy exception.

Fred thinks that we mischaracterize the IAD in several ways.  He argues that we have an unduly constrained rule of the rule itself ? that it does cover important matters such as fiduciary duties.  That being the case, we cannot explain why the rule does not offer more protection to shareholders. Fred dismisses our story about covering contentious issues with bankruptcy, securities and other laws by saying these laws were not passed ?in order to circumvent the IAD.?  Finally, Fred says it is not clear why these matters were not simply deemed to be exceptions to the IAD rather than taken outside the rule. Overall, in Fred?s view, the IAD looks more exceptional than we take it to be.

My general response to these arguments is to acknowledge that the IAD does look different from other rules on contractual choice of law.  However, our general point in the book is not that the rules for contractual choice of law in various areas are all the same, but that they are all subject to similar forces.  Specifically, they result from the interaction of pro and anti-regulatory interest groups with ?exit-affected? interest groups injured by firms? physical avoidance of states, and the federal government?s potential override of state regulation that either imposes excessive costs on multistate firms or inadequately protects consumers or others.

We argue that these considerations explain the superficially ?exceptional? choice of law rules for corporations. The fact that some matters have been dealt with outside the IAD rather than as exceptions, or that some issues covered by the IAD might be deemed important, does not undercut the basic point that the IAD is not powerful enough to override all regulation of internal governance pushed by strong pro-regulatory interest groups, just as with other legal areas.  (As an aside, I would add that neither fiduciary duties nor other shareholder rights are as important as Fred suggests. See, e.g., my Uncorporating the Large Firm, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1138092). In general, we think that exposing the underlying forces generally driving the law market adds value despite the sort of differences Fred focuses on.

Fred raises issues about a couple of the extensions of the basic corporate choice story we discuss regarding European corporate law and U.S. securities regulation.  He notes the uncertainty whether Europe will eventually follow the U.S. path, which we acknowledge.  We do not purport to be able to predict how all law market competitions will come out, or to be able to assign to each competition a precise spot in our story.  All we can do is to try to show the common elements that run through the various stories we discuss.

With respect to securities regulation, we use cross-listing to show how competition is possible even in the face of strong territorial rules.  Fred notes that cross-listing differs from the corporate competition because ?the issuer isn?t getting out of anything by cross-listing, but is instead opting in to additional regulation in order to improve the marketability of its shares.?  That?s certainly true.  But we also note on p. 123 how this could cause host countries to respond the same way that they do in a full-fledged competition ? by changing their laws.  I have a fuller discussion of the public choice implications of the cross-listing competition in my article, Cross-Listing and Regulatory Competition, Review of Law & Economics: Vol. 1: No. 1, Article 7, http://www.bepress.com/rle/vol1/iss1/art7 (2005).

Finally, Fred notes that we say ?surprisingly little about judges? incentives,? particularly given that we tell a mainly ?common law story? about judges determining the applicable law. We do discuss this on p. 69 in noting why federal courts are likely to reach different results even under the same choice of law rules:  because unlike state courts they are not subject to legislative pressure to limit avoidance of state regulation.  This also responds to Fred?s point that the fact that federal courts decide most contractual choice of law cases ?might put some strain on their political Theory of Everything.?  Actually, as we discuss on p. 69, federal judges? different incentives are an important part of our story: federal courts provide an exit option that helps drive the ?buyer? side of the law market. 

In general, Fred?s criticisms show the difficulty of trying to fit a Theory of Everything into less than 300 pages.  Obviously, a lot of stuff has to be condensed.  But it?s all there.  Really!

Full post as published by Conglomerate on March 18, 2009 (boomark / email).