Center for Law and Economic Studies | Columbia Law School
Working Papers 181-190
181. Toward Supranational Copyright Law? The WTO Panel Decision and the "Three-Step Test" for Copyright Exceptions (Ginsburg, Jane C.) October, 2000 Published in Revue Internationale du Droit d'Auteur, January 2001
A dispute resolution panel of the World Trade Organization in June 2000 held the United States in contravention of its obligation under art. 13 of the TRIPs accord to Aconfine limitations or exceptions to exclusive rights to certain special cases which do not conflict with a normal exploitation of the work and do not unreasonably prejudice the legitimate interests of the right holder.@ In the dispute resolution proceeding, initiated by the European Union at the behest of the Irish performing rights organization, the contested exception, enacted in the 1998 ADigital Millennium Copyright Act,@ exempted a broad range of retail and restaurant establishments from liability for the public performance of musical works by means of communication of radio and television transmissions.
The WTO panel decision marks the first time an international adjudicative body has interpreted either art. 13 of TRIPs, or art. 9.2 of the Berne Convention, the text TRIPs incorporates, and generalizes from the Berne Convention reproduction right to all TRIPs and Berne rights under copyright. Berne art. 9.2/TRIPs art. 13 impose the Athree-step test@ to evaluate the legitimacy of exceptions and limitations on copyright; the panel's decision extensively analyzes each of the steps. As other multilateral instruments, such as the 1996 WIPO Copyright Treaty (art. 10) and WIPO Performers and Phonograms Treaty (art. 16.2), as well as the pending European Union Information Society Directive (art. 5.4), increasingly adopt the Athree-step test,@ the WTO Panel decision may significantly advance the development of a truly supra national law of copyright.
This article will analyze the Panel's interpretation of the test's three steps, and their application to the U.S.-law exemption. The article will also compare the Panel's treatment of the three-step test with the prior analyses proposed by several Berne Convention commentators, in order to reflect on what the Panel's analysis might mean for copyright exceptions more broadly. It is important to recognize, however, that the decision's actual impact on international copyright law will also depend on other considerations that will not be addressed here, including: Member State compliance with Panel decisions; the precedential effect of one Panel decision on later dispute resolution panels; and the willingness of national courts to look to WTO Panel decisions for guidance in evaluating local exceptions. Working Paper No.181.pdf
182. THE RISE OF DISPERSED OWNERSHIP: The Role of Law in the Separation of Ownership and Control (Coffee, John C. Jr.) January 2001
Deep and liquid securities markets appear to be an exception to a worldwide pattern in which concentrated ownership dominates dispersed ownership. Recent commentary has argued that a dispersed shareholder base is unlikely to develop in civil law countries and transitional economies for a variety of reasons, including (1) the absence of adequate legal protections for minority shareholders, (2) the inability of dispersed shareholders to hold control or pay an equivalent control premium to that which a prospective controlling shareholder will pay, and (3) the political vulnerability of dispersed shareholder ownership in left-leaning "social democracies." Nonetheless, this article finds that significant movement in the direction of dispersed ownership has occurred and is accelerating across Europe.
But can this trend persist in the absence of strong legal protections for minority shareholders and in the presence of high private benefits of control? To understand how dispersed ownership might both arise and persist in the absence of the supposed legal and political preconditions, this article reconsiders the appearance of dispersed ownership in the late 19th and early 20th Centuries in the U.S. and the U.K. and contrasts their experience with those of France and Germany over the same period. During this era, the private benefits of control were high, and minority legal protections in the U.S. were notoriously lacking, as the famous Robber Barons of the age bribed judges and legislators and effectively employed regulatory arbitrage to escape even minimal anti-fraud regulation. Nonetheless, strong self-regulatory institutions (most notably, the New York Stock Exchange) and private bonding mechanisms by which leading underwriters pledged their reputational capital by placing directors on the board of sponsored firms enabled the equity market to expand and dispersed ownership to arise. In contrast, in the U.K., the London Stock Exchange for a variety of path-dependent reasons played a far more passive role and did not become an effective self-regulator until much later in the 20th Century. Yet, dispersed ownership also arose, although at a slower pace. The lesser role for private self-regulation in the U.K. may have been the consequence of its lesser need for self-regulation as a functional substitute for formal law, given both earlier legislation in the U.K. and lesser exposure to judicial corruption and regulatory arbitrage.
In contrast to the New York and London Exchanges, the Paris Bourse over this same period made little, if any, effort to develop a self-regulatory structure or to upgrade listing or disclosure standards. Why not? The answer seems closely associated with the fact that it operated as a state-administered monopoly whose stockbrokers were formally considered civil servants and who were legally denied the ability to trade as principals for their own account. Facing no competition and composed of members having little incentive to promote or enhance its reputational capital, the Paris Bourse did not innovate and fell behind the London Stock Exchange. The intrusive role of state regulation, which discouraged private self-regulatory initiatives, appears to have a factor in its competitive decline. In Germany, the state strongly supported the growth of large private banks but imposed a high stamp tax on securities transactions that quickly chilled the then growing securities market. In addition, because the German central bank offered very liberal rediscounting terms to the principal private banks, German banks were in effect subsidized in their role as providers of capital to German heavy industry, while the securities market was correspondingly denied the ability to extend credit by punitive legislation enacted in 1896. In this respect, concentrated ownership seems less to have evolved naturally than to have been subsidized by the state.
What then are the preconditions for the separation of ownership and control? The U.S. and European experiences in the late 19th Century suggest that the first step is the separation of the market from politics. When, as in late 19th Century France, the government administers the market, the market suffers. Although proponents of the "law matters" hypothesis argue that liquid securities markets cannot develop in the absence of a legal system that protects shareholder rights, the U.S. and U.K. experience are to the contrary and suggest that functional substitutes for close governmental regulation can be developed. This conclusion does not require rejection of the "law matters" hypothesis, because the principal historic advantage that common legal systems gave the embryonic securities markets of the late 19th Century was a decentralized state, in which self-regulation was the norm and close state control the exception. In contrast, in civil law systems of the same era, the state monopolized all law-making initiatives.
The critical achievement of self-regulation in the United States was the development of mechanisms by which control could be held in the public market, rather than simply in the hands of controlling shareholders. During the late 19th Century, this meant protection from predatory raiders who sought to assemble controlling blocks without paying a control premium. In both the U.S. and the U.K., these protections were first developed through private (or semi-private) ordering and then formalized in legislation. For the future, private ordering may similarly be able to close much of the gap between "advanced" Western legal systems and those of transitional economies, even in the absence of desirable reforms in mandatory law. By no means does this article argue that state regulation of securities markets is undesirable or unnecessary. Market manipulations have characterized all unregulated securities markets and have ultimately elicited regulation. Its more modest claims are that (i) intelligent self regulation by securities exchanges and professional associations in transitional economies can close much of the gap between "advanced" Western markets and those of transitional economies, and (ii) the first necessary step towards dispersed ownership is to enable control to be held in the market by legal rules and/or private ordering mechanisms that protect the public shareholder from stealth acquisitions of control. Working Paper No.182.pdf
183. Do Norms Matter?: A Cross-Country Examination of the Private Benefits of Control (Coffee, John C. Jr.) January, 2001
Recent empirical work has found that the private benefits of control differ significantly depending upon the underlying legal system in which the firm is incorporated. In particular, common law systems appear to outperform French civil law systems, but are trumped in turn by Scandinavian civil law systems. This evidence could be read to support the "law matters" thesis first advanced by Professors LaPorta, Lopez-de-Silanes, Shleifer and Vishny, which finds that "common law" legal systems incorporate superior legal protections for minority shareholders and therefore have deeper capital markets and more dispersed ownership. But the apparent superiority of Scandinavian legal systems complicates, and possibly subverts, this analysis, both because Scandinavian legal systems are more "like" other civil legal systems than they are "like" common law legal systems and because Scandinavian law does not encourage private enforcement of law through class actions and similar devices. Hence, an alternative hypothesis suggests itself: social norms in Scandinavia may discourage predatory behavior by those in control of the firm. This paper explores the competing merits of these two rival hypothesis - - law versus norms as instruments of social control - - by comparing the private benefits of control in various countries to other benchmarks, such as rates of criminal victimization. Although it finds no universal pattern, some strong congruences are discernible within particular legal systems (i.e., Scandinavian crime rates are very low, as are the private benefits of control that controlling shareholders expropriate from Scandinavian firms). A revised hypothesis is thus suggested: crime rates and the private benefits of control are the lowest in countries having the highest level of social cohesion and the lowest level of recent social and political disruption. This explanation works well for countries with crime and high private benefits of control (e.g., Russia, Mexico, and Brazil), but less well for many common law countries (such as the U.S.) in which the private benefits are low, but crime is high.
One implication of this comparison is that the impact of norms may be greatest when law is the weakest. This possibility may explain best why behavior within Scandinavian firms is different from that in French civil law firms, when both share relatively weak legal rights. Working Paper No.183.PDF
184. Rents and their Corporate Consequences (Roe, Mark J.) Stanford Law Review, Vol. 53, 2001
Product markets are weaker in some nations than they are in others.. Weaker product markets have more monopolies and more monopoly profits, both of which affect politics and corporate governance structures. They affect corporate governance structures directly by increasing managerial agency costs to shareholders, which shareholders then seek to reduce. One would expect corporate governance structures, laws, and practices to differ in nations with monopoly-induced high agency costs from those prevailing in nations with more competition, fewer monopolies, and lower agency costs. The monopoly profits also affect corporate governance structures indirectly by setting up a fertile field for conflict inside the firm as the corporate players—shareholders, managers, and employees—seek to grab those monopoly profits for themselves. And we might speculate that these rents when large enough affect democratic politics and law-making: directly by making monopolists political targets (and political forces); and indirectly as the players inside the firm seek to capture those monopoly profits through political action, with political parties and ideologies (and, in time, laws and standards) that parallel the players' places inside the firm. Data from the industrial organization, finance economics, and political science literature is consistent. Working Paper No.184.pdf
185. Racheting Labor Standards: Regulation for Continuous Improvement in the Global Workplace (Sabel, Charles F., Dara O'Rourke & Archon Fung) May 2, 2000
It is a brute fact of contemporary globalizationóunmistakable as activists and journalists catalog scandal after scandalóthat the very transformations making possible higher quality, cheaper products often lead to unacceptable conditions of work: brutal use of child labor, dangerous environments, punishingly long days, starvation wages, discrimination, suppression of expression and association. In all quarters, the question is not whether to address these conditions, but how. That question, however, admits no easy answers. Globalization itself has freed capital from many of its former constraintsónational workplace standards, collective bargaining, and supervisory state agencies and courtsódesigned to humanize working conditions. A natural response, best expressed in the ILO's core labor standards, has been to attempt to build global versions of national institutions by establishing universal minimum standards of work and international inspectorates and courts to monitor and enforce them. But the machinery to compel global producers to adopt those standards does not exist and will be quite difficult to build. Alternatively, some multinational corporations and non-governmental organizations have struck out on their own, agreeing voluntarily to adopt various codes of conduct and allowing outsiders to verify compliance with these codes. In some cases these efforts have yielded impressive gains. But their piecemeal character highlights the difficulties of generalizing independent monitoring into an encompassing labor regulation regime. In this paper, we develop a third approach that attempts to harness some of the drivers and methods of contemporary globalization to the goal of improving international labor practices. An on-going globalization of information flows and advocacy campaigns around labor and human rights issues has successfully pressured a number of firms to significantly alter their production practices and labor conditions. Leading firms in the world economy, who have mastered the disciplines that foster excellence and innovation among their own workers and suppliers globally, are being motivated to turn these practices to social concerns. The impressive gains that have been achieved in product quality, diversity, price, and innovation in global markets, can, we assert, be extended to focus these disciplines on the improvement of labor and environmental conditions, and social performance more generally. We offer "Ratcheting Labor Standards" (RLS) as a regulatory strategy that does just this; rather than devising institutions that attempt to constrain the rapidly changing forces and processes of globalization, RLS attempts to redirect some of these energies toward the advancement of social ends. Working Paper No.185.pdf
186. Corporate Law's Limits (Roe, Mark J.) January 16, 2002
A strong theory has emerged in recent years that the quality of corporate law determines whether securities markets will arise, whether ownership will separate from control, and whether the modern corporation will prosper. The theory has been used convincingly to explain why we see weak corporate structures in transition and developing nations, less convincingly to explain why concentrated ownership persists in continental Europe, and probably incorrectly to explain why ownership separated from control in the United States. Surely, when an economically-weak society lacks regularity?a gap that may be manifested by weak or poorly enforced corporate law?that lack of regularity and that lack of economic strength precludes complex institutions like securities markets and diffusely-owned public firms. But in several nations in the wealthy west legal structures are quite good and, by measurement, shareholders are well-protected, but ownership has still not yet separated from control. Something else has impeded separation. We can hypothesize what that something is by examining the calculus of owners and investors when the decision is being made as to whether to diffuse ownership. Ownership cannot readily separate from control when managerial agency costs are especially high. And missing from current theory, empirical work, and discourse is the basic concept that even American corporate law? usually seen as high quality nowadays? does not burrow into the firm to root out those managerial agency costs that arise from mediocre business decisions. Judicial doctrine and legal inquiry attack self-dealing, not bad business judgment. The business judgment rule, under which judges do not second-guess managerial mistake, puts the full panoply of agency costs?such as over-expansion, over-investment, and reluctance to take on profitable but job-threatening risks?beyond any direct legal inquiry. (This limit from the business judgment rule is not a "defect" in corporate law: aggressive judicial attack on managerial error would replicate the costs of government management of business. Something other than direct legal attack has to control basic managerial agency costs, because judicial action here is far too costly.) The consequence is that even if corporate law as usually conceived is "perfect," it eliminates self-dealing, not managerial mistake. But managers can lose for shareholders as much, or more, than they can steal from them, and law controls only the second cost not the first. If the risk of managerial error varies widely from nation-to-nation, or from firm-to-firm, ownership structure should vary equally widely, even if conventional corporate law tightly protects shareholders. There is also good reason, and data, consistent with this analysis: by measurement several nations have fine enough corporate law; distant stockholders are well-protected from controlling stockholder and managerial thievery, but ownership in those nations still has not separated from control. As it happens, legally uncontrolled agency costs though seem to be especially high in those very nations. Working Paper No.186.pdf
187. Frictions as a Constraint on Tax Planning (Schizer, David M.) February, 2001
In recent years, the government has enacted a series of narrow tax reforms targeting specific planning strategies. Sometimes these reforms stop the targeted planning, but sometimes they merely prompt a new, more wasteful variation. The difference often lies in so-called frictions, which are constraints on tax planning other than the tax law, such as fees, accounting or regulatory treatment, credit risk, and the like. While frictions are important, reformers often lack key information, and legal academics should help provide it. This Article offers general observations about frictions that deter end runs. Most promising are strong "discontinuous" frictions that impose significant costs when taxpayers depart, even in subtle ways, from the transaction covered by the reform. Costs of relying on frictions are also considered, including information costs and distributional effects. Two case studies also are offered involving tax-motivated use of derivative financial securities. These reforms use essentially the same statutory language, but taxpayers have responded differently - and frictions explain this difference. The first reform, the "constructive sale" rule of Section 1259, targets use of derivatives in effect to sell an appreciated asset without paying tax. The second, the "constructive ownership" rule of Section 1260, targets use of derivatives in effect to invest in a hedge fund (or other pass-through entity) without the usual adverse tax consequences (i.e., less deferral and a higher tax rate). Theoretically, taxpayers can avoid either rule through relatively modest changes in the derivative's economic return. This strategy is commonly used to avoid Section 1259, a reality that was understood by government and taxpayers alike when the measure was enacted. In contrast, this strategy is not commonly used to avoid Section 1260. The difference, which was not well understood by Section 1260's drafters, is that securities dealers cannot supply the derivative that theoretically avoids the rule. Working Paper No.187.pdf
188. Tax Constraints on Indexed Options (Schizer, David M.) February, 2001
Indexed stock option grants reward executives for outperforming a benchmark, such as the market as a whole or competitors in the same industry. These options offer superior incentives by diminishing the influence of factors beyond an executive's control, such as general market and industry conditions. Yet indexed options are almost never used. Professor Levmore seeks to explain this puzzle with norms. The main point of this comment on his Article is that tax plays a larger role in this puzzle than Professor Levmore acknowledges, although tax is not a complete explanation. The tax appeal of traditional options is that they offer value that is not really performance-based (i.e., a bet on the market as a whole), but nevertheless is treated as Aperformance based@ under Section 162(m) -- and thus is deductible without limitation. Accounting and Professor Levmore's norms-based account are then briefly considered. Working Paper No.188.pdf
189. Publication Rules in the Rulemaking Spectrum: Assuring Proper Respect for an Essential Element (Strauss, Peter L.) March 7, 2001
The American rulemaking spectrum ranges from one Constitution, through hundreds of congressional statutes, thousands of administrative regulations, and tens of thousands of important guidance documents to innumerable more casual agency documents such as press releases or letters of advice. Our legal system treats constitutions, statutes and regulations, if valid, as binding text, subject only to the requirements that they be authorized by the superior authority and appropriately adopted following designated procedures; if valid, each of them has legislative effect on government and citizen alike, until displaced by another text validly adopted at the same or a higher level. The innumerable casual items at the base of this pyramid, while often in fact influential on private conduct, are denied any formal jural effect. It is at the level of important guidance documents that one finds confusion; confusion whether they are legitimate instruments of agency policy or a ruse to evade the higher procedural obligations associated with adopting regulations; confusion whether an agency may give them any jural effect and, if so, to what degree; and confusion whether and to what extent they must be respected by the courts. Since the frequency with which these documents are prepared suggests their importance, this confusion is regrettable.
Generally ignored provisions of the American Administrative Procedure Act, 5 U.S.C. 552(a)(1,2), appear to recognize that these documents may be treated as if they were precedents (not legislative documents) if they have been appropriately published. Hence, they may be described as "publication rules," to distinguish them from the more formal regulations that are adopted following notice and comment procedures and that enjoy, if valid, legislative effect. The paper builds on these provisions to critique recent judicial decisions and to suggest a general approach to publication rules following the model of precedent. Working Paper No.185.pdf
190. Creative Norm Destruction: The Evolution of Nonlegal Rules in Japanese Corporate Governance (Milhaupt, Curtis J.) Pennsylvania Law Review, Vol. 149, Issue No. 6, 2001
This paper analyzes the origins, persistence, and current evolution of a series of non-legal rules (or "norms") that have played an important role in Japanese corporate governance. The four central features of the governance environment examined here include: 1) the main bank system, in which banks voluntarily restructure loans to some distressed borrowers, 2) a social distaste for hostile takeovers, 3) implicit promises of employment stability, and 4) belief systems about the proper role and structure of the board of directors. I show that, despite virtually ubiquitous claims to the contrary, these norms do not enjoy a long history of practice in Japan, but rather emerged only in the immediate postwar period. I hypothesize that they emerged for two reasons: First, they served as a low-cost substitute for a troubled formal institutional environment beset by the "transplant effect" that imperils legal reform in transition economies today. Second, they provided private benefits to the small number of interest groups that emerged intact from World War II. The flow of private benefits to norm adherents explains the persistence of the norms despite clear evidence of their inefficiency over the past decade.
I demonstrate that current models of norm reform, which emphasize the role of exogenous shocks, the workings of norm entrepreneurs, and increased information, explain why the norms of Japanese corporate governance are currently evolving.
Finally, extrapolating from Japan's experience, I suggest how norm analysis can contribute to the two most pressing questions in comparative corporate governance today: whether law matters to corporate governance, and whether diverse systems of corporate governance are converging toward the Anglo-American model. As to both questions, I suggest that closer attention to norms reveals shortcomings in the existing literature. Working Paper No.190.pdf