Week Nine: Ideas, Inheritances, Ethics & (time permitting) Bankruptcy


Chapter 7: Intellectual Property (cont'd)

Patents (review)

Copyrights (review) Grokster case

Business Identity, Reputation and Know-How

Counterfeit Goods

Common law tort of representing false origin for goods. Fake Rolexes and fake designer clothing.

Issue is whether the real goods have acquired a secondary identification with their source. Fake Rolex vs. real watch that happens to look like a Rolex. (The "Romex")

Trade Libel

Publication of false statement about competitor's goods, etc. with malicious intent to injure.

Lanham Act (US Trademark law) allows injunction and damages against false comparative advertising

Misappropriation of Trade Secrets

A process, formula, know-how, customer list etc. that is *treated* as a secret by a business

Legal protection only against *illegal* acquisition -- reverse engineering and independent invention are OK

Note role of corporate confidentiality agreements

1996 Federal "Economic Espionage Act"

Made misappropriation of such secrets a Federal crime. Question the real, as opposed to symbolic, effectiveness of criminalization

Trademarks

A statutory extension of the tort of "unfair competition", deceiving the public as to origin of goods or services. Federal law applies if goods were sold in interstate commerce,

Indefinite (10 yr renewal) protection for trade/service marks which are associated with a particular maker of the goods

Need a unique "distinctive" name/mark, or at least an ordinary word which has acquired a 2ndary meaning indicating particular source of the goods

Problem: if used too commonly/broadly, becomes generic, like "aspirin" (originally, the Bayer brand of acetylsalicylic acid)

TM filing: if used in interstate commerce. Purpose of filing: notify world that the mark belongs to someone


Chapter 52: Wills and Inheritances

Control over who gets what after owner dies

Basic Issues:

The role of the "will"

Very long history: source in Rome @ 300 BC, which had evolved a truly awful intestate default system

Estate administration generally required in US/English systems

"Intestacy" (no will -- state determined pattern)

California rules are in Probate Code Sec. 6400 ff.

What's a "Will"? It's like a letter to a judge

"Probate": the testing of the will and the supervision of administration

Alternatives: documents of title contain the transfer provisions

Popular use of Joint Tenancy, Pay on Death accounts, etc.

Trusts: the legal fiction for separating ownership and control. Again, the old English law/equity distinction


Chapter 28: Bankruptcy

2 basic patterns: liquidation and reorganization, both handled by a specialized Federal court system. May be started by debtor, or by creditors of one who is not paying debts as they fall due. This material was extensively revised in Cheeseman's 6th edition, due to year 2005 enactment by Congress of a set of amendments to the Bankruptcy Code. The result is not politically stable or technically consistent, so we can expect further changes in the near future

History of treatment of debtors who cannot pay creditors

  • Early Rome: The body of the debtor torn apart by creditors
  • Rome of the Tribunate: Slavery for debt
  • Medieval Italy: the broken bench of the moneychanger
  • Regency England: imprisonment of the debtor for "hiding" the creditor's money. Note that English bankrupts are still stigmatized

Liquidating bankruptcy: ("Chapter 7")

Like "financial death" and rebirth. Assets are taken over by a trustee, sold and the proceeds divided up among creditors. The Debtor gets a fresh start: financial rebirth with debts discharged

The details are a lot messier. Various debtor protection exemptions to prevent pauperism, so people structure assets prefiling to keep as much as they can. Result was the 2005 amendments that greatly limited Chapter 7 relief for many individuals

Automatic stay on bankruptcy filing

So bankruptcy also a device to buy time: eg. Texaco

Not all debts are dischargeable

willful torts, taxes w/in last 3 years, employment tax penalties, many student loans, etc. The year 2005 amendments significantly limited the dischargeability of many consumer debts, particularly credit card charges and automobiles.

Trustee may have to contend with secured creditors

Secureds may move court for relief from the stay. They may seek to take back collateral or have it sold. On sale: any surplus goes to trustee, deficit makes Cr unsecured as to shortfall

Trustee may have to track down assets

Voidable preferential transfers and liens w/in 90 days of bk'cy

System of priorities as to payment:

Usually little or nothing for unsecured creditors

Fraudulent transfers

Transfer of assets by the financially troubled to friendly hands

Elements:

  • Actual intent to hinder creditors
  • Transfer without equivalent value
  • Debtor is insolvent or unable to meet debts as mature, or small assets relative to business at hand

Six year statute of limitations

Reorganizing bankruptcy: Chapter 11

Chapter 11 is commonly availed of by financially troubled business entities. There is also a Chapter 13 for individuals [tho this was also restricted by the recent amendments] letting wage earners stretchout and scaledown debt payments.

Basic idea behind reorganization is that a business entity has going concern value, so if each creditor gives a little, everyone can get more than they would in a forced liquidation. Different countries appear to emphasize protection of different stakeholders: tendency in US to favor the debtor's managers, in France to favor employees, in UK to favor creditors.

"Debtor in possession" continues the business

New creditors now more secure: 2nd priority

Debtor (later, creditors) can file a plan of reorganization

Divide creditors's claims and equity interests into classes and rank the classes. Then the fun begins: negotiation over a confirmable plan. Next week we will demonstrate by playing "The Bankruptcy Game"

Confirmation of plan of reorganization by court

Voting by each class of creditor, and by "interest" of equityholder

Plan must be "in best interest" of each class:

Either a unanimous vote, or showing that class gets more than it would in a liquidation

Plan must be Feasible
At least one class must "vote to accept" (1/2 the # and 2/3rd the $$)
Each class/interest must be "nonimpaired"
  • Rights unaltered or
  • Bought out or
  • Class votes to accept

Alternate to vote: the "Cramdown" method

Allows a court to override objections iff:
Secured Creditors at least:
  • retain existing lien on collateral, or
  • get lien on proceeds from sale of collateral, or
  • get the "indubitable equavalent": eg. other collateral
Unsecured Creditors

Get $ and property = to present value of claim, or at least no class below it gets anything

Equity Holders: get greater of
  • liquidation or redemption preference, or
  • discounted present value of equity
  • OR: no class below gets anything

An Ethical Interlude

The College of Business at San Francisco State has proclaimed October 27 - 31 as "Business Ethics Week". Here's the site.

Consider: is the typical business person more or less ethical than the typical person in politics? Than the typical person in academic administration?

"Law without ethics is tyranny. Ethics without law is bullshit."

So what are the legal standards for business conduct, and how do they relate to business ethics?

We've looked briefly at criminal law and tort law in relation to business activity, and in particular at the concept of "white collar crime".

Chapter 42: Ethics and Social Responsibility

Cheeseman Text describes a few theories of "right conduct"

These echo the theories of jurisprudence that were described in Chapter 1

Ethical fundmentalism - like "natural law"

But in the absence of a state religion doesn't morality become a matter of individual experience and upbringing -- a matter of personal taste?

"Conscience -- the inner voice that warns us that someone may be watching."

Utilitarianism - "the greatest good for the greatest number"

Akin to the Law & Economics approach. Problem: inability to make interpersonal utility comparisons leads to the "Pareto standoff" in cases where Y and Z can only be made happier at the expense of X. In practice, this tends just to validate the status quo -- the pre-existing distribution of wealth and power. In effect, "whatever is, is right".

Kantian Ethics - like the analytic approach to law

Treats the Golden Rule like an axiom of geometry, from which one derives theorems of conduct.

Rawles' provides a modernized version resting on the "social contract" fiction, as though souls in Heaven awaiting birth were negotiating the conditions of their existence from behind a cloud of ignorance

Ethical Relativism

Caricatured as "if it feels right, do it".

And some theories of social responsibility of business.

Object: Profit Maximization

Text refers to the reactionary dicta in Dodge v. Ford. (We'll look at this case later.) Who are the real owners who benefit from profit maximization? Stereotypes of "the rich", or anonymous "finance capital"? Are corporate operations destroying the world environment in order to feed pension funds?

Object: Moral Minimum

Make all the profit you can w/o hurting others. (... too much...) "How much can I get away with?"

Object: Stakeholder Interests

Balance interests of capital, labor, community, etc. Can be so diffuse that managers can always justify doing whatever they want.

Object: Corporate Citizenship

Is the goal to *be* good? Or to *appear* to be good? A moral compass or a moral weathervane? Doesn't this degenerate into procedural ethics -- the sort of thing that besmirched HP a few years ago where the Board Chair was spying on the other directors in the name of corporate harmony?

Are we to act ethically because "Ethics is Good Business", and the value of a corporate reputation is capitalized in the stock price? What happens when right conduct proves to be unprofitable?

Who gets to define what's "good"? Will donations to the symphony, opera and ballet suffice as proof of character? Is this really moral virtue, or just "Swinopolis" -- the City of Pigs?

Critical thinking on the relation of ethics to law

"In ethics there are no good answers."

What is your moral genealogy?

Are ethical standards simply matters of taste and upbringing, as to which reason and logic are helpless? How would one seek to change the views of a sincere Nazi -- a person who believes that: "Life is a struggle among groups of people, where only the fittest deserve to survive".

Alternately, to the extent such standards are widespread in cultures that are far apart geographically, might they be the product of the million-year evolution of humans as social animals? Note the debates among sociobiologists as to how evolution/natural selection could give rise to a sense of altruism. Are ethics simply a matter of normal brain function?

Which comes first: food or morals?

"Necessitas legem non habet." - Necessity knows no law. Consider Regina v. Dudley & Stephens -- 4 sailors adrift for weeks in a lifeboat 1000 miles from land. Are murder and cannibalism wrong if necessary for survival? Are they legal?

A businesss must survive before it can be concerned with "social responsibilities. Can a hungry man afford a conscience? "Erst kommt das Fressen, dann kommt die Moral."

Does law only furnish a moral minimum?

Is the law simply as a limit on the "bad man", who will do anything that is not expressly prohibited and punished? Like Fa in a common-law context.

My view: this is a false distinction. "Ethics" often fail to guide conduct, while legal decisions are infused with ethics under the mask of Justice. What sorts of unethical conduct does the law permit, and why? Loopholes? Ambiguous acts? Injuries for which no worthwhile remedy can be devised?

Consider Prof. Bankman's economic analysis of tax evasion, with an economy divided into compliant and non-compliant sectors. Since after-tax returns are what matter to participants, labor and capital flow from the compliant to the non-compliant sector, driving down returns and (possibly) shifting the benefits of evasion to consumers in the form of lower prices (tho at the expense of economic efficiency overall). Are there, perhaps, "unethical" economic sectors? And do the dishonest retain the profits from their dishonesty?

Ethical Temptations in Corporate Business

Our sense of what's ethical may be rooted in the evolution of human behavior, but those patterns reflected a hunter-gatherer existence, not a world of corporate offices. What DeGaulle said of nations applies to corporations as well -- they are "amoral monsters". Could corporations be like the cuckoo birds that parasitize the nesting instincts of other species?

We humans appear to have a natural facility for agency -- for playing roles. In the course of playing our parts as economic actors -- as partners, employees, officers or officials -- we may be able to benefit the organizations within which we act by inflicting injury on others. As agents we may find ourselves behaving in ways that we, as free individuals, would utterly reject. Since corporate business is conducted entirely through agents, those who work in corporate [or corporate-like] enterprises need to be sensitive to the temptations of role.

The temptation to obey orders

Experiments in authority and obedience find:

"With numbing regularity good people were seen to knuckle under the demands of authority and perform actions that were callous and severe. Men who are in everyday life responsible and decent were seduced by the trappings of authority, by the control of their perceptions, and by the uncritical acceptance of the experimenter's definition of the situation, into performing harsh acts. .A substantial proportion of people do what they are told to do, irrespective of the content of the act and without limitations of conscience, so long as they perceive that the command comes from a legitimate authority." (1965)

White Collar crime

The landmark description of the sociology of criminal behavior of business corporations and high-status executives is Edwin Sutherland's work "White Collar Crime" (Yale Press, 1983 ed. orig. pub. 1949) His key point -- one often missed -- is that white collar crime is not the result of individual "bad apples", but is a normal consequence of the rationalistic, amoral and non-sentimental behavior of the corporate form of business, organized as a pure economic entity. Position, not personality, is what matters.

So what do you *do* when the boss tells you to do something you think is wrong?

The temptation to cover up bad news

The temptation of pride in successful technique

The temptation to avoid seeing the consequences of our actions.

Consider Albert Speer, the "good" Nazi , whose organizational genius kept Hitler's World War Two going for an extra year or so. When Speer was asked if he did not know of the crimes of the regime or of the Holocaust, his answer was: "I did not want to know." <Update>


notes and format (c) 2001-08 Robert H. Daniels