Jiminy Cricket for the Corporation: Understanding the Corporate “Conscience”

If we turn the question to what causes corporations to engage in conduct that benefits society, we understand that some external force or forces must direct the corporation. This Article seeks to analyze the external forces that curb or drive corporate behavior as they relate to activities that benefit society in the context of having a “conscience.” Part II of this Article examines the corporation from a historical perspective, tracking its evolution from a small number of specially chartered organizations with a limited, publicly oriented purpose, to the modern, highly regulated profit-making organizations of today. Part III examines whether the modern corporation can have a conscience and what that term means with regard to such an artificial entity. Part IV identifies three driving forces behind what will be termed corporate behavior that is beneficial to society: behavior driven by legal compliance; behavior that also benefits the corporation; and, behavior that is seemingly driven by altruistic (or semi-altruistic) motives. Part V reflects upon how these categories can be used to evaluate corporate behavior

Corporate Investigations, Attorney-Client Privilege, and Selective Waiver: Is a Half-Privilege Worth Having at All?

As the title suggests, this article is an analysis of the selective waiver doctrine, which allows a party to disclose materials protected by the attorney-client and work product privileges to the government during investigations without waiving the privilege as to third-party litigants. Specifically, the article analyzes the development of the selective waiver doctrine and why recent policies adopted by governmental agencies, specifically the Department of Justice and SEC, have made this doctrine a forefront of conversation amongst litigators, legislators and academics. But is a blanket adoption of the selective waiver doctrine wise? Courts have taken a variety of approaches to the selective waiver doctrine. The doctrine was first introduced in 1978 by the Eighth Circuit in Diversified Industries, Inc. v. Meredith as a means of encouraging corporations to conduct internal investigations. Since Meredith, circuit courts have largely rejected the doctrine as inconsistent with the bedrock principle of confidentiality inherent in the attorney-client privilege. However, in 1999, the DOJ adopted a policy, articulated in what has become known as the Holder Memo, that set out factors a prosecutor should consider in whether to charge a corporation with a crime. This policy was rearticulated in 2003 through the Thompson Memo and the SEC has adopted a similar policy. One of the considerations involves whether a corporation has cooperated and has evolved into a policy which essentially requires corporations to waive the attorney-client and work-product protections to be deemed as cooperating. This has created what many have dubbed a culture of waiver in corporate America. Obviously, this has serious implications on the sanctity of the attorney-client privilege as well as practical concerns as, once the privilege has been waived, it is waived to all future parties including third-party litigants. In reaction to the waiver implications, some commentators and judges have found that selective waiver is a sound solution. This article chronicles the negative impacts a culture of waiver has, and in turn evaluates the adequacy of selective waiver in light of these policy concerns. Ultimately, the article concludes that selective waiver is a poor solution and that a change in the underlying governmental policies is a more desirable solution

Total Return Meltdown: The Case for Treating Total Return Swaps as Disguised Secured Transactions

Archegos Capital Management, at its height, had $35 billion in assets. But in the spring of 2021, in part through its use of total return swaps, Archegos sparked a$30 billion dollar sell-off that left many of the world’s largest banks footing the bill. Mitsubishi UFJ Group estimated a loss of $300 million; UBS, Switzerland’s biggest bank, lost$861 million; Morgan Stanley lost $911 million; Japan’s Nomura lost$2.85 billion; but the biggest hit came to Credit Suisse Group AG which lost $5.5 billion. Archegos, itself lost$20 billion over two days. The unique characteristics of total return swaps and Archegos’s formation as a family office made these losses possible, permitting Archegos to skirt trading regulations and reporting requirements. Archegos essentially purchased beneficial ownership in large amounts of stock, particularly ViacomCBS Inc. and Discovery Inc., on credit. Under Regulation T of the Federal Reserve Board, up to 50% of the purchase price of securities can be borrowed on margin. However, to avoid these rules, Archegos instead entered into total return swaps with the banks whereby the bank was the actual owner of the stock, but Archegos would bear the risk of loss if the price of the stock was to fall and reap the benefits if the stock was to go up or make a distribution. Archegos would still pay the transaction fees, but the device permitted Archegos to buy massive amounts of stock without having the initial margin requirements, thus making Archegos heavily leveraged. This Article argues that the total return swap contracts are analogous to and should be recharacterized as what they really are—disguised secured transactions. Essentially, the banks are lending money to enable the Archegoses of the world to buy stocks and are simply retaining a security interest in the stocks. Such a recharacterization should place these transactions back into Regulation T and the margin limits. But recharacterization also offers another contract law approach that is more draconian. If the structure of the contract violates a regulation, then total return swaps could be declared void as against public policy. This raises the specter that a court could apply the doctrine of in pari delicto and leave the parties where they found them in any subsequent suits to recover outstanding debts

There Oughta Be a Law: What Corporate Social Responsibility Can Trach Us about Consumer Contract Formation

The Restatement of Consumer Contracts has been a controversial project since its inception. Some have argued that the project is unnecessary as there is no separate law of consumer contracts. Others have argued that the project is more appropriate for a Principles of Law project than for a Restatement. Substantively, the project has also drawn criticism from both consumer and business advocates. Consumer advocates have argued that some of the sections, in particular section 2 which addresses standard terms, favor businesses and subject consumers to terms and conditions that they never truly assented to.9 Business advocates have argued, among other things, that the draft Restatement favors consumers once litigation commences by strengthening claims of unconscionability and permitting the introduction of normally inadmissible parol evidence. Basically, the Restatement of Consumer Contracts has something for everyone to hate and has presented a rare instance where consumer and business advocates are in agreement over their objection to the project (though for different reasons). Rather than assail the entire project, this article focuses primarily on Section Two of the draft Restatement and its treatment of standard terms. This is not to say that other sections are unobjectionable, but the purpose this article is to demonstrate that certain corporate behaviors are better addressed through legislation than left to the markets

Piercing the Fiduciary Veil

Limited partnerships (LPs) and limited liability companies (LLCs) permit formation with a unique management structure in that these entities may be managed by another limited liability entity, such as a corporation. Thus, the true managers are those individuals who manage the manager. It is well settled that the managing entity, such as a corporate general partner, owes default fiduciary duties, but what of these second-tier managers? Technically, it is the managing entity that owes the duties, not the managing entity’s owners, officers, and directors, yet courts have struggled with strict adherence to this separation when it would seem inequitable to do so. Unfortunately, courts and commentators have failed, thus far, to articulate a clear rule as to when fiduciary duties should attach to second-tier managers that also makes allowances for countervailing concerns regarding the scope of such a duty. This article offers an approach aimed at resolving this problem by simply re-examining what it is that courts are doing when they attach liability. In the process of doing so, this article makes three major contributions to the existing scholarship. First, it is the only article describing the three main approaches courts have adopted to address the problem. Second, the article explains why alternate equitable theories, as currently applied, are inadequate to address this issue. Finally, this article offers a unique solution as to when fiduciary duties should attach to second-tier managers. Specifically, this article posits that liability should attach under a form of piercing the corporate veil. Unlike traditional piercing, which focuses on the abuse of the corporate form, this limited form of piercing, which I dub “piercing the fiduciary veil,” should focus on the abuse of the control exercised by second-tier managers

The Limits of Limiting Liability in the Battle of the Forms: U.C.C. Section 2-207 and the “Material Alteration” Inquiry

The “surprise or hardship” approach to UCC section 2-207 is the approach courts should use to determine the applicability of liability clauses in the battle of the forms. However, courts use varying approaches to decide whether clauses limiting liability materially alter the contract under UCC section 2-207. Courts have adopted three different approaches: (1) the per se material alternation approach; (2) the per se not material alternation approach; and (3) the “surprise or hardship” approach. The per se material alteration approach focuses on the surprise or hardship factors found in comment 4 of section 2-207; however, that approach is flawed because it ignores the realities under which the parties may be operating. As well, comment 5 to section 2-207 indicates that limiting a remedy in a reasonable manner is permissible. The per se not material approach ignores the surprise or hardship language, but permits clauses to the contract which may not have been truly contemplated by both parties. The surprise or hardship approach rejects both per se approaches, and requires the party opposing the limitation to bear the burden of proving either surprise or hardship, but the broad definition of hardship can be problematic. In 1990, the Permanent Editorial Board released a report describing the need to redraft section 2-207 because it is controversial, complex, and frequently litigated. The surprise or hardship approach, and the factors it takes into account, will aid courts in determining whether a term, such as one limiting liability, has been expressly agreed to or whether such terms materially vary from the original agreement—issues courts will consider under the revised section. As such, the surprise or hardship model should remain a practical way of determining the applicability of limitation of liability clauses in a battle of the forms context

Contract Lore as Heuristic Starting Points

What Professor Hillman labels as lore are better thought of as a series of heuristic starting points. I do not label them heuristics in and of themselves as they do not represent shortcuts to the ultimate answer. But, as I explain, all of the areas that Professor Hillman identifies as lore are actually quite nuanced, sometimes filled with exceptions; other times, they simply represent the first step in a long inquiry. Heuristics as a teaching device has been recognized in law and other disciplines as an effective tool in not only conveying information, but also prodding the student to conduct further inquiry. Thus, the persistence of lore may reflect nothing more than he need to have a starting point for a legal analysis, be it by a student, lawyer, or judge

There Oughta Be a Law: What Corporate Social Responsibility Can Trach Us about Consumer Contract Formation

The Restatement of Consumer Contracts has been a controversial project since its inception. Some have argued that the project is unnecessary as there is no separate law of consumer contracts. Others have argued that the project is more appropriate for a Principles of Law project than for a Restatement. Substantively, the project has also drawn criticism from both consumer and business advocates. Consumer advocates have argued that some of the sections, in particular section 2 which addresses standard terms, favor businesses and subject consumers to terms and conditions that they never truly assented to.9 Business advocates have argued, among other things, that the draft Restatement favors consumers once litigation commences by strengthening claims of unconscionability and permitting the introduction of normally inadmissible parol evidence. Basically, the Restatement of Consumer Contracts has something for everyone to hate and has presented a rare instance where consumer and business advocates are in agreement over their objection to the project (though for different reasons). Rather than assail the entire project, this article focuses primarily on Section Two of the draft Restatement and its treatment of standard terms. This is not to say that other sections are unobjectionable, but the purpose this article is to demonstrate that certain corporate behaviors are better addressed through legislation than left to the markets

Not What, but When is an Offer — Rehabilitating the Rolling Contract

To what degree are rolling, or layered, contracts binding? A number of courts, starting with the now infamous case of ProCD, Inc. v. Zeidenberg, have held that, rather than a contract for the sale of a good, such as a computer, being completed in-store, the contract is formed when deferred terms found inside the package are reviewed by the buyer and accepted by some act -- usually use of the good (or declining to return it). This approach, which has been called the rolling contract, has been widely criticized by commentators as an abomination of contract law that ignores a true application of the Uniform Commercial Code (“UCC”) as well as the spirit of that code. The approach is not without its allure, however, as it permits contracts to be formed in an efficient manner that may very well appeal to consumers and merchants alike. However, too strict of an adherence to the approach threatens to impose terms upon parties that they never expected or agreed upon. But the opposite is also true -- too strict of an adherence to traditional roles of offer and acceptance threatens to displace terms that were contemplated and not objectionable to the consumer. Thus, rather than relegating the rolling contract approach to a dark corner of contract law in favor of a more traditional approach, this article proposes that the rolling contract should be rehabilitated. Existing contract law does a good job of defining contract offers. However, what is the trickier issue, particularly when a transaction involves an initial oral component, is identifying when the offer is actually made. In other words, when is it fair to say that an offer is made in-store by the buyer, and when is it fair to say that the in-store interaction is nothing more than a preliminary event to the actual offer, which comes later when the buyer gets home and opens the product? Legal realism, which was a foundational principle driving the drafting of the Restatement (Second) of Contracts, as well as the UCC, may offer some insights into how to approach the rolling contract theory. But so may a more recent approach to contract law -- the relational contract approach. Relational contract theory, which essentially treats contracts not as isolated events but ongoing relationships, provides a useful way of making this determination. Relational contract theory has its roots in the writings of Ian Macneil who believed most contracts were rarely, if ever, fully thought-out and expressed representations of the parties’ obligations. It would therefore seem to be a logical extension of both legal realism and relational contract theory that certain situations exist where the parties expect that a contract has not been fully formed in the store, but rather further terms, i.e., the formal “offer,” will come later. If parties to a contract know that there is more to the contract than simply the price and the good, then it should come as no surprise that more terms are to come, or that a more detailed offer will be forthcoming. Thus, in some scenarios, it is perfectly reasonable to assume that the contract has not been formed in-store, but rather a deferred offer will come later. Thus rolling contract theory can be explained under a legal realism approach, as influenced by a relational approach; however, this is not to say that all contracts are now subject to the rolling contract approach. As this article explains, some contracts really are formed at the point of contact under a relational contract approach. The challenge to the courts is to determine which will be which. This article describes how legal realism and the relational contract theory can be used to explain the rolling contract approach and makes suggestions for how this relational contract theory can be used to aid courts in determining which contracts involve a rolling or deferred offer