Academic

I always learn a lot when I read Erin and Larry?s work, especially on choice of law.  Their recent book The Law Market is to be admired for its ambition and scope.  It aspires to a Theory of Everything.  Or at least as relates to regulatory competition and choice of law.  Starting in familiar territory like corporate law, the book ventures into less well-traveled regulatory competition climes as well, like marriage and real property laws.  At each doctrinal destination, they argue for broader enforcement of contractual choice of law clauses.  Parties generally know their interests best, and private choice allows for tailored rules, while public law can only offer suitable law on average.  Moreover, they sometimes bleed into a strong positive claim as well?that existing choice of law rules in each of these legal areas can be explained almost exclusively as the product of interest group politics.  Both in their positive explication and their normative approach,Erin and Larry exhibit a healthy skepticism of claims of market failure:  parties pretty much know what they?re doing, and if they don?t, the operation of existing markets?product markets, reputational markets?likely protects them.

Now, a Theory of Everything is typically not easy to pull off, as the fit may not be wrinkle-free in every corner and observers arise to highlight the wrinkles.  I will rise to this challenge here, focusing primarily on Erin and Larry?s positive claim.  I?ll focus on corporate law, where I?m already on paper with a somewhat different view of the dynamics of choice of law and regulatory competition.  Erin and Larry start their substantive doctrinal analysis with corporate law and the internal affairs doctrine (IAD), which is exactly where one should start with a law market Theory of Everything.  Corporate charter competition is of course the archetype, the blueprint for competition advocates, as a number of corporate scholars have argued with some force that corporate law competition has produced a race to (or at least toward) the top. 

The task for Erin and Larry here, of course, is to explain why the IAD and the corporate law market are not unique, but instead merely illustrate the operation and benefits of law markets generally.  The IAD departs from the standard choice of law rules, which impose a connection requirement with respect to contractually chosen law, and include a fundamental policy exception to enforcement.  The IAD by contrast is almost universally honored among US states without qualification.  While I don?t dispute the importance of interest group influences in the persistence of the IAD, I have elsewhere also argued for the importance of historical circumstance and ideology in the initial formulation of what has come to be the unqualified rule of party choice embodied in the IAD.

Erin and Larry instead argue that the IAD is really no different from conventional choice of law rules, insofar as limits to enforcement do exist.  For their money, the narrower is the gap between IAD and conventional choice of law rules, the stronger is their claim that the lessons of the corporate law market can be readily applied in other legal areas.  After all, corporations are just contracts.  While I?m not entirely persuaded by their arguments, which I discuss below, I should also state as a preliminary matter that I?m also less convinced than they are that they necessarily need to carry this argument to make their broader case.

Erin and Larry?s main argument is that IAD is really an ?optical illusion:? it only appears to require unqualified deference to the parties? choice of state of incorporation.  They offer two possible explanations.  First, it may be that no real political pressure exists in any state to protect local shareholders of foreign corporations, since shareholders can protect themselves through corporate voting, or shareholders are too dispersed to organize.  Alternatively, IAD really only applies to a few unimportant areas of corporate governance in which it can ?comfortably operate absolutely.?  All the important stuff circumvents the IAD either through enactments that come under other doctrinal headings?blue sky law, for example?or federal law?bankruptcy and securities regulation, for example.

These explanations are unsatisfying on a number of grounds.  As to the first story, an absence of political pressure, shareholder voting seems a weak remedy at best, especially for an oppressed minority.  In addition, even if local shareholders are poorly organized, local lawyers are not.  Why couldn?t (or doesn?t) the local trial bar do for local shareholders what it?s done for tort victims?  As to the evasion story, fiduciary duties seem a glaring counterexample to the argument that IAD only covers unimportant governance issues.  Moreover, bankruptcy and securities laws were not federalized in order to circumvent the IAD, and not primarily to preempt inconsistent state law.  Bankruptcy law was federalized in order to replace the cumbersome and corrupt equity receiverships that had evolved to centralize administration of the far flung assets of insolvent interstate firms.  Securities laws were federalized in order to standardize disclosure in a national securities market.  What seems noteworthy here is not an ?evasion? of IAD, but that IAD remains in place despite the wholesale federalization in these related areas.  Moreover, the evasion story to some extent begs the question.  Why is evasion of IAD even necessary?  If IAD is nothing special, why not just be explicit about grafting exceptions?  Related to this, even if either explanation were correct, it still does not explain why IAD does not include even a nominal obeisance to local policy in the form of a fundamental policy exception.   

Let me add just a few quibbles as to their later corporate law discussion.  Erin and Larry seem a bit too optimistic about the potential development of law markets for corporate law in Europe and securities law internationally, at least based on events thus far.  They cite Centros as to the former, acknowledging that competition in Europe is not really about law but simple out-of-pocket incorporation costs.  Yet, this is seen as holding some promise for future US-style corporate competition.  Similarly, they cite the phenomenon of cross-listing as perhaps a forerunner to private choice of securities law internationally.  But cross-listing is not a choice of law but a choice of additional law.  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.  Of course, the political economy of issuer choice is quite different from that of cross-listing.

More generally, as to Erin and Larry?s basic approach throughout the book, their political market pressure story says surprisingly little about judges? incentives.  Their positive account incorporates politics but is also in large measure a common law story?i.e., judging infused by precedent?with courts struggling to apply the basic Restatement choice of law principles in a number of doctrinal areas.  Why would judges care about interest groups and their druthers?  The book points out that most cases involving disputed contractual choice of law clauses are decided in federal court, a fact that might put some strain on their political Theory of Everything. 

Having aired my few quarrels above, let me reiterate that Erin and Larry have written an impressive and important book, ambitious in scope and thorough in the execution.  It is a must-read for anyone interested in regulatory competition, and it is sure to be widely cited in all future work in the area.