TOWARDS A THEORY OF MARKET POWER
This paper analyzes the question of market power. Longstanding definitions and analytical tools are inadequate because they conflate conditions under which a firm has unbeneficial control over its markets (market power) with situations where firms are successful because they are superior in how they serve customers (expanding consumer welfare). Furthermore today’s fast-changing markets make current antitrust approaches invalid because the information decays as circumstances rapidly change. This paper develops a more rigorous definition of market power and proposes new tests. The proposed definition seeks to isolate damaging market control and the tests examine the extent to which investors, actual rivals, and potential rivals act as if market power is present.
A SLEIGHT OF HAND: WHY NON-TRADED REAL ESTATE INVESTMENT TRUSTS ARE BECOMING AN INCREASINGLY FREQUENT SUBJECT OF SECURITIES LITIGATION AND ARBITRATION
Grant H. Frazier & Sarah K. Deutsch
The sharp housing market decline leading up to the 2008 Great Recession highlighted the significant risks associated with subprime debt instruments. What began in 2006 as a disruption in the mortgage-backed security (“MBS”) and collateralized debt obligation (“CDO”) markets quickly developed into the worst global financial crisis since the Great Depression. The questionable practices employed by many financial institutions to create, market, and sell the risk-laden MBS and CDO investment instruments to purchasers aggressively seeking greater returns led to a wave of regulatory inquiries, securities litigation, and legislative and regulatory action by federal and state authorities.
Despite efforts to mitigate the risks posed by these sub-prime investments, similarly marketed and utilized investment vehicles now pose comparable risks for investors on an individual level and for the U.S. financial system in the aggregate. The most notable of these risky investments are non-exchange traded real estate investment trusts (“Non-Traded REITs”). With many financial experts predicting an economic downturn in 2020, the exposure created by high-risk, illiquid Non-Traded REITs and other similar investments are likely to be realized in the form of significant financial losses.
This article explains the nature of Non-Traded REITs; the risk characteristics of Non-Traded REITs that increase the likelihood of losses and securities litigation; the likely targets of Non-Traded REIT-related securities actions; and the claims for relief most likely to be asserted.
ARTIFICIAL INTELLIGENCE: IS IT A GOOD UNDER THE UCC OR A SERVICE UNDER THE COMMON LAW OR IS THERE A NEED FOR A NEW CATEGORY?
David E. Missirian
In today’s society, computers are everywhere. They are embedded in just about everything we use. They are a twentieth century marvel improving functionality in almost every phase of our lives. Yet, they draw no more attention than someone eating a piece of fruit does. Like fruit, they come in many types, sizes, and flavors. We also, much like fruit, take for granted that they are all, regardless of where they come from or how they are created, good for us. We choose them based on brand loyalty or personal appeal but very few of us think about what is in them or how they were made.
What exactly is in a computer, smart watch, or Fitbit and what makes it function? At a basic level, these mechanical marvels are a combination of hardware and the accompanying software. Think of the hardware as the shell or structure of the machine and the software as the brain, which make the structure function as a cohesive unit. How this happens is a mystery to most of us who really do not care about these details. I think most people care more about if their cell phone can take a picture or send a text than they do about how it accomplishes these tasks.
This paper will ask the following questions: what is Artificial Intelligence (“AI”)? Is it a good or service? Is it personal property or is it something entirely new? Where should AI fit in our legal system?
TAXPAYER-OWNED UTILITIES: RESTORING THE APPROPRIATE BALANCE BETWEEN RISK AND REWARD WITH RESPECT TO INVESTOR-OWNED UTILITY COMPANIES
The concept of a public utility company is certainly nothing new. Because of the importance and unique costs associated with developing and maintaining a utility company, there have been several policy judgments made over time with respect to the regulation of the industry. One of the largest, most unique benefits that utility companies enjoy is the ability to operate in a monopolistic form. Over time, it was realized that the economically advantageous features of a utility company made them great vehicles for investors seeking reliable, competitive dividends and modest growth targets. Now, utility company stocks trade on the major exchanges and, as with most publicly traded companies, are managed with an eye toward short term profits.
These investor-owned utility companies (“IOUs”) focus on paying higher dividends, maintaining their stock price, and attracting institutional money. One unfortunate side effect of these goals is that governance decisions became riskier, leverage ratios grow, and otherwise free cash ends up being funneled to investors. The consequence for some of these IOUs is being forced to file for bankruptcy.
The results of IOU bankruptcy proceedings have been mixed. Sometimes the reorganization process, rather than fixing the underlying problems, simply serves to shift the debt and liability incurred by the IOUs onto their local communities, rate payers, and taxpayers. Subsidization for unpaid liabilities for wildfire damage, emergency bond issuances, and government bailouts only addressed the short-term problem. More importantly, the protections of Chapter 11 were specifically intended to revive the companies that had played too fast and loose and, in the case of IOUs, potentially set them up to do it again.
Part I of this article provides some background information on investor-owned utilities and concepts underlying the risks and rewards of stock ownership. Part II discusses some of the issues arising in the world of investor-owned utility bankruptcies and seeks to understand some of their potential causes. Part III examines PG&E’s general governance prior to their most recent bankruptcy filing and draws parallels between the theoretical issues in Part II and the reality of PG&E’s current situation. Part IV proposes a solution, imposing a consequence for failing utility companies that would otherwise be bailed out. When an investor-owned utility becomes insolvent, there should be a forced sale of the business to the state so that it can resume operation as a “taxpayer-owned utility.”
A JUDICIAL TEACHING POINT: THE LESSON OF THE LATE JUSTICE JOHN PAUL STEVENS IN SONY V. UNIVERSAL CITY STUDIOS AS A RESPONSE TO CIVIL LAWFARE
Mark W. Smith
Gun-control proponents, unable to enact their favored gun control measures via democratic means, often engage in lawfare against gun manufacturers and distributors—i.e., warfare by means of litigation and other legal processes, designed to penalize financially such businesses with a view toward putting them out of business altogether. Courts presiding over these cases should take a lesson from the late Supreme Court Justice John Paul Stevens.
Justice Stevens authored the 1984 decision in Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417 ( the “Betamax” case), in which movie production companies tried to use the courts—and not the legislature—to outlaw the selling of video cassette records, or VCRs, on the grounds that they could be used by criminals to infringe upon the studios’ copyrights. The Supreme Court’s ruling in that case, which refused to hold makers of VCRs liable for the harms caused by third-party misuse of the product, is equally applicable to manufacturers of firearms that some seek to ban. Just as VCRs were widely and predominantly used for legitimate, unobjectionable purposes in the 1980s and 1990s, the same can be said for firearms today.
Justice Stevens, who decades later advocated for the repeal of the Second Amendment, sat in the same seat as today’s judges before whom legal warfare against the gun industry is currently being waged. But when the movie studios sought to accomplish through the courts what they could not accomplish through the legislature (the imposition of financially devastating legal liability arising from the conduct of unaffiliated third parties), Justice Stevens and our highest court raised their collective hands and said, “No.”
In 2005, Congress passed the Protection of Lawful Commerce in Arms Act (“PLCAA”), which was inspired by the same sentiment implicit in Justice Stevens’s Betamax ruling, i.e., the desire to stem the tide of liability suits against gunmakers and sellers for the criminal misuse of guns by individuals over whom the gun manufacturers had no control or relationship. Recently, litigants have tried (with some success) to exploit loopholes in the PLCAA. Such lawsuits are not necessarily meant to win in court. They are often motivated partially, if not entirely, by political desires to rid American society of gun manufacturers by intentionally and effectively driving them out of business due to the onerous cost of civil lawfare. If successful, the gun control lobby will have succeeded in accomplishing through the courts something that they were unable to accomplish in the legislative or political sphere: eliminating the manufacture and sale of firearms in the United States.
The Betamax decision represents an important—but, until now, mostly overlooked—judicial teaching moment. Justice Stevens’ reasoning and the language and purpose of the PLCAA should be considered by today’s courts when deciding lawsuits against the gun industry for harms caused by criminal third parties.
ELIZABETH WARREN WANTS TO BREAK UP BIG TECH. CAN SHE?
Senator Elizabeth Warren’s plan to “Break Up Big Tech” has two parts: first, to designate any platform with annual global revenue in excess of $25 billion as “Platform Utilities” and thus prevent those companies from owning any participant on the platform and second, to designate regulators to unwind mergers deemed to be illegal and anti-competitive. The purpose of her plan is to protect consumers and small businesses from the wrath of technology conglomerates, preventing the big companies from controlling swaths of the American economy and eliminating competitive options for many consumers seeking various goods and services.
First, the purpose of the Sherman Act is not to guarantee fair success to all participants in any given marketplace. The Sherman Act was enacted to protect the public from a market failure, and to prevent one company or multiple companies from engaging in activities that will cause market failures. Additionally, the anticompetitive acts prohibited in the Sherman Act are those that cause actual monopolization by one firm, not acts that seem unfair or predatory. So, the acts of acquiring competitors in the online retail marketplace, while they may seem predatory, do not rise to the level of anticompetitive required by the Act. Also, another issue Senator Warren has with Amazon’s tactics is that they copy retail products and sell their own brand for less money on the market. But, isn’t this good? As a consumer, one would assume that a cheaper version of a product similar in quality would be the best.
Over the past few decades, the technology industry, referred to as “Big Tech” or “Silicon Valley” has grown tremendously, with Apple, Microsoft, Alphabet and Amazon currently holding the four largest market caps in the United States. Senator Warren claims that three companies in particular — Amazon, Google, and Facebook — have achieved their market power illegally and seeks to correct these problems. This note discusses the viability of her assertions, and potential solutions to these companies she deems problematic.