Author: Lawrence Cunningham

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On National Ice Cream Day, Thanks Dairy Queen

DQIn honor of National Ice Cream Day (July 20), here is a brief celebration of Dairy Queen, an institution of American culture—entrepreneurial, legal, literary, and familial—that helped put this cold concoction on the national calendar. I developed these reflections when researching my upcoming book, Berkshire Beyond Buffett: The Enduring Value of Values (Columbia U. Press 2014), which provides deep looks at the corporate culture of Berkshire Hathaway’s fifty-plus subsidiaries, including Dairy Queen.

While full treatment must await publication of the book (which can be pre-ordered now), here are a few passages along with many outtakes—i.e., sections that did not make it into the final book because they are too technical, but may appeal to readers of this blog interested in the history of franchising businesses and intellectual property rights.

Dairy Queen’s roots date to 1927’s founding of Homemade Ice Cream Company by John F. (“Grandpa”) McCullough (1871‒1963) and his son Alex near the Iowa-Illinois border. Innovative ice cream makers, they experimented with temperatures and textures and eventually pioneered soft ice creams. One discovery: ice cream was frozen for the convenience of manufacturers and merchants, not for the delight of consumers.

At first, the McCulloughs were unable to interest any manufacturer in building the necessary freezers and dispensers to serve soft ice cream. Luckily, however, Grandpa happened to see a newspaper ad in the Chicago Tribune describing a newly-patented continuous freezer that could dispense soft ice cream. Grandpa answered the inventor/manufacturer, Harry M. Oltz, and the two made a deal in the summer of 1939.

The McCullough-Oltz agreement entitled Oltz to patent royalties equal to two cents per gallon of soft ice cream run through the freezer; the agreement also granted the McCulloughs patent licensing rights in the Western U.S., while Oltz retained them for the Eastern part of the country. The agreements that McCullough and Oltz made with licensees seemed to cover only the patent, rather than the DQ trademark, and contained few quality controls.

After World War II, DQ stores hit their stride, drawing lengthy lines of increasingly loyal customers enjoying the cooling effects of soft ice cream all sultry-summer long. The customer throngs at one store in Moline, Illinois caught the attention of Harry Axene. An entrepreneurial farm equipment salesman for Allis-Chalmers, Axene wanted to invest in the business. He contacted the McCulloughs and acquired both the rights to sell the ice cream in Illinois and Iowa as well as an interest in the McCullough’s ice cream manufacturing facility. Read More

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Truth, Candor, and Crisis at Yeshiva University

Among universities in trouble, the darkest cloud hangs over Yeshiva University, a venerable Jewish institution founded in New York in 1886. The University acknowledges huge economic losses and failed investment policies and is taking extraordinary steps to balance its books, including ceding control over its one-time crown jewel, Albert Einstein College of Medicine, which has close friends of its law school, Benjamin N. Cardozo School of Law, very concerned.  Critics, moreover, see a death spiral and question the leadership’s candor.

Amid calls for the resignation or dismissal of Yeshiva’s president, Mr. Richard M. Joel, he says the University will no longer engage with the media on fiscal questions. The Wall Street Journal reports that the University has hired the crisis-management communications firm, Kekst & Co., but any benefits from that hiring are not yet obvious.sunlight

In a familiar pattern facing other organizations in crisis, what both sides miss in this dangerous heightening of tensions is the importance of trust to any institution’s health. To resolve this crisis, as always, the institution’s leadership must regain trust by explaining how its current fiscal stewardship advances the institution’s mission. Critics must not rush to judgment and hear the leadership out on what it has learned from recent problems and plans for the future.

Like other investors, part of Yeshiva’s problems are due to the financial collapse of 2008, but its roots are a bit deeper and offer broader lessons. Since at least 1993, the board of trustees oversaw Yeshiva’s endowment and made investment decisions. University policy permitted trustees to invest endowment in funds the trustees managed, despite conflicts of interest, so long as they made full disclosure.

During the early 2000s, the trustees increasingly allocated endowment to their own hedge funds, which were heavily weighted in risky securities. By 2008, the endowment, valued at more than $1 billion, held riskier investments than those of peer institutions. The financial upheaval of 2008 thus hit Yeshiva even harder than most peers, shrinking its endowment by more than $300 million, including $100 million due to the Ponzi scheme of Bernie Madoff, whose top victims also included a Yeshiva trustee.

While it appears that the trustees and the administration acted in good faith, even if no laws were broken, poor judgment abounded. The loose conflict-of-interest policy certainly was a mistake, as a trustee’s personal involvement skews his judgment. Reputable and durable institutions scrupulously avoid the remotest appearance of impropriety. For stalwarts like Yeshiva, this principle of integrity, coupled with an ethic of prudence, should govern investment decisions.

The University learned its lesson from this calamity and has adopted new policies that may serve as a model for other endowments. It created a professional investment office to set strategy, updated oversight protocols, and established a rigorous conflicts policy. While thus implicitly recognizing earlier weaknesses, the University has not offered a mea culpa nor has it identified particular past faults—whether sins of omission or commission, of process or substance, or whether the product of mere haplessness or of actual chicanery. That reticence allows unimpressed critics to overlook the significance of these reforms.

It is hard to measure objectively the exact economic costs of Yeshiva’s policies or market onslaughts from which it has suffered. One result of this difficulty is wildly different numbers being reported by the University and critics—ranging from $300 million to a staggering $1.3 billion. However, it is less important to achieve consensus on financial figures than to find common ground on productive next steps.

At stake is advancing the institution’s core mission, which is not to maximize endowment or earn a profit but to promote knowledge and teach students. The fiscal drama becomes a superficial distraction from fundamental academic judgments about the relation among current and future pedagogical, scholarly, scientific, cultural and religious needs and resources.

Constituents would rightly like to know more about Yeshiva’s finances as well as the academic thinking behind decisions concerning building or closing facilities and forming or ending joint ventures and programs. For example, when Yeshiva recently ceded managerial control over Einstein College of Medicine to another institution to cut costs, it did not publicly detail the educational rationale. Critics jumped on the move, assuming and asserting that it was a sign of distress rather than a shrewd maneuver that promotes the University’s goals.

When institutions are imperiled in this way, the best course of action is to make certain that the operative facts are publicly known, to identify lessons learned, and to act on them. In that spirit, the University might do well to form an independent task force with unlimited access to University information charged to report a public assessment of where things stand and where they are going. Lifting the cloud over this 128-year old bastion of Judaism, such a look would enable Yeshiva University to move forward with its important business of education.

Lawrence A. Cunningham, a graduate and former faculty member of Yeshiva University’s law school (Cardozo), is a professor at George Washington University and the author of the forthcoming book, Berkshire Beyond Buffett: The Enduring Value of Values.

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The Babe Ruth of Good Business Today

baberuthOne hundred years ago this week, on July 11, 1914, George Herman (“Babe”) Ruth made his major league debut, for the Boston Red Sox at two-year old Fenway Park. Over the course of his baseball career, The Great Bambino set many records, including leading the league in home runs for twelve seasons; most total bases in a season (457); and highest slugging percentage for a season (.847). In all, he hit 714 home runs, a record that stood until 1974, when Hank Aaron of the Atlanta Braves claimed the title. But that is not why the Babe is immortal.

Other home run kings have achieved nothing like Ruth’s iconic status. Many decade-leading hitters—such as Harry Davis, Gavy Cravath, or Jimmie Foxx—are barely known. Even falling short of Ruth’s stature are the two players who passed him in home runs, Aaron and Barry Bonds (Pittsburgh Pirates and San Francisco Giants), who took the top spot in 2007. Nor is Ruth’s immortality due entirely to the fact that he also excelled as a pitcher: for forty-three years he held the record for consecutive scoreless innings pitched in World Series play and his overall win-loss ratio (.671) remains the seventh best of all time.

Ruth’s immorality, rather, is due to how, through such extraordinary feats, he changed the game of baseball. He brought power to the sport at a time when typical strategy was to move players around the bases one small hit at a time. While baseball was thriving as an American pastime before he played, the Babe’s bold style, vast generosity, and utter unpretentiousness won the public’s adulation. His deep sense of ethics helped to rescue baseball from the damage done by the miscreant players who threw the 1919 World Series.  His strength and optimism gave hope to millions during the Great Depression. Ruth made baseball a richer sport with a wider and enduring following, which is why we all recognize his name a century after his rookie year. And people venerate the Babe despite his many bad personal habits, such as gluttony, promiscuity, and pugnaciousness.

In American business, we have likewise enshrined transformative figures like Ruth despite faults. Andrew Carnegie, John D. Rockefeller, and Cornelius Vanderbilt built the nation’s infrastructure while J. P. Morgan and Henry Ford forged its business structures and methods. We condemn the cheaters to memory’s hell—from Charles Ponzi to Bernie Madoff—or at least purgatory, as with Michael Milken. We remain ambivalent about the likes of Jay Gould and others still derided as robber barons. Read More

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Happy 4th to The Persons of the Divided States of America

shredded flag“Person means a natural person, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated business association, joint venture, governmental entity, or other organization.”

That is from the definitions section of a commercial agreement I happened to be reading today for a consulting assignment.  That type of definition appears in millions of commercial contracts–purchase agreements, merger agreements, loan agreements, leases, licenses, you name it.

In the commercial world, among business lawyers and clients, it is commonly assumed that whenever we reference persons we mean to include every form of organization people have created.   That familiar usage might make the holdings in cases such as Holly Hobby or Citizens United seem natural, with corporations having many of the same rights and duties as people have.

On the other hand, we use the term this way in the business context where the issues being addressed concern commercial obligations and powers, liabilities and indemnities and purchases and sales–not free speech or free exercise of religion.  Moreover, the presence of such definitions in these agreements, despite ubiquity, underscores that it is more natural for persons to be seen only as natural persons, not organizations.

Hard liners on both sides of debates about corporate rights and duties show stupidity, arrogance, or mendacity when declaring either, on the right, “of course corporations are persons” or, on the left, “of course corporations are not persons.” In fact, organizations are not natural persons.  But for some purposes, they should be treated as natural persons are and for others they should not.  (See here for some additional thoughts on Hobby Lobby drawing on the example of Berkshire Hathaway.)

Context is key and hard liners tend to forget context.  In the talk these days about these two SCOTUS cases, it looks as if the Divided States of America is increasingly peopled by hard liners. Alas, that’s not something to celebrate this Fourth of July.

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What Berkshire Hathaway Teaches About Hobby Lobby

Eleven years ago tomorrow, the abortion issue led Berkshire Hathaway, the huge conglomerate Warren Buffett built and now owned by one million different shareholders, to end its shareholder-directed charitable contribution program. Under the program, Berkshire’s board earmarked an amount for charitable giving and then let the company’s class A shareholders designate the charities to which their share went. In twenty-two years, the program distributed $197 million to thousands of different charities.

Berkshire terminated the program on July 3, 2003 because activists boycotted products of one of its subsidiaries to protest giving to organizations they opposed on religious grounds: some designated Planned Parenthood, which facilitates a woman’s choice to abort an unwanted pregnancy, while others gave to Catholic Social Services, which opposes abortions.

Berkshire stood for neither position, of course, because it is a business organization whose mission is to increase its intrinsic economic value, which has nothing to do with religion. Berkshire’s board chose to terminate the program because the boycotts hurt Berkshire’s business and its personnel while offering shareholders only a slight convenience and tax advantage.

The scenario speaks to the debate that erupted this week between foes in the abortion debate thanks to the Supreme Court’s decision in the Hobby Lobby case. The issue in that case, narrower and more technical than accompanying rhetoric suggests, was whether the word persons in a federal statute about religious freedom includes corporations owned by a small number of people with a specific set of religious beliefs. If so, then regulations implementing Obamacare cannot require them to fund birth control devices in conflcit with their religious beliefs.

A majority of the Court concluded that closely-held corporations are persons for the purpose of the statute because they are readily seen as merely a convenient legal form through which individuals do business. The dissent complained that only individuals can have religious beliefs and therefore corporations, whether closely held or otherwise, aren’t persons for purposes of the federal law.

The Berkshire example is instructive on both opinions. Buffett has always boasted that Berkshire, though using the corporate form, adopts a partnership attitude. The shareholder charitable contribution program epitomized this attitude. It gave the decision to the owners, as is done in partnerships and closely held corporations, not the board, the practice in public corporations. Those owners, moreover, were the class A shareholders, a subset of Berkshire’s shareholder body made up of people with larger and older stakes—including hundreds who really were Buffett’s original partners.

Berkshire shareholders, class A and class B, readily agree on a wide variety of business and ownership topics. For example, in a vote earlier this year on the company’s dividend policy, 98 percent ratified the existing—and unusual—no-dividend practice. But put a question about hot-button religious or political  issues of the day such as abortion and expect deep divisions.

Berkshire’s shareholders may be able to act like partners or closely-held shareholders on business issues while the charitable giving program proved they were unable to do so on others. For the Court in Holly Lobby, this perspective supports the majority’s holding about the nature of close corporations while validating the dissent’s appetite for a sharp boundary between them and the typical business organization.

Lawrence A. Cunningham is the author of the upcoming Berkshire Beyond Buffett: The Enduring Value of Values and editor of The Essays of Warren Buffett: Lessons for Corporate America. He teaches business-related courses at George Washington University Law School.

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Trashing, Defending, and Deferring to Yeshiva University

University bashing is in fashion, from the broad-gauged film Ivory Tower to particular attacks on given schools. Some critiques usefully expose problems that need correcting with constructive solutions on offer.  But others seem to trash the academy for other reasons, as with a recent diatribe against Yeshiva University, which seems more calculated to exacerbate the school’s problems than help it find solutions.

In an  expose-style that seems to blow the school’s financial challenges out of proportion, Steven Weiss, who acknowledges having been expelled from Yeshiva in 2002, portrays Yeshiva’s leadership since that year variously as gullible, myopic, conflicted, or greedy.  This piece stung because I am a graduate and former faculty member of Yeshiva’s law school (Cardozo) and I know and have worked with some of the people vilified in the story.  While I am not familiar with all of the factual background of the University’s recent experience, Weiss’s story seems awfully one-sided and therefore the story, as much as the facts about Yeshiva, causes concern.

I share Weiss’s praise for Yeshiva’s former president, Rabbi Norman Lamm, whom I knew, worked with, and admired.  Lamm, and later his VP for business affairs, Sheldon Socol, led Yeshiva from the brink of bankruptcy in 1975 to fiscal soundness and renewed its status for academic excellence and cultural distinction.  (Rabbi Lamm told me how, when he was about to declare bankruptcy, his hand shook so intensely that he could not sign the papers.)

But Weiss then makes a foil out of Lamm,  painting a golden era that ended after 2002 when he passed the baton to Richard Joel, the current president, who has faced a different set of challenges that entices Weiss’s wrath.  In Weiss’s telling, after Lamm’s retirement and Joel’s succession, it’s been all downhill for Yeshiva and its students.  Joel, whom I knew as an able administrator and gentleman when he served as Dean of Business Affairs at Cardozo, certainly has a different style than the rabbi-scholars such as Lamm who preceded him.  But Weiss exaggerates in inexplicably inflammatory tones how this style difference has played out, in a story misleadingly headlined “How to Lose $1 Billion: Yeshiva University Blows Its Future on Loser Hedge Funds.” Read More

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Maya Angelou’s Multi-Million Dollar Bout with Butch Lewis

Maya cardThe number one best-selling book on in this week’s New York Times best seller list is one first published in 1969: “I Know Why the Caged Bird Sings,” by Maya Angelou, the renowned poet and professor at Wake Forest University who passed away three weeks ago. Since she published that autobiography, Angelou’s acclaimed poetry has been published widely by Random House and initially reached a distinguished, though small, audience.

How that audience grew to a multi-million dollar phenomenon, and how her book is again number one, includes a fascinating story of entrepreneurship and law of general interest and especially for those interested in contract law. As a tribute to the distinguished author for literary, commercial and spiritual success, herewith an account of that saga, from my book, Contracts in the Real World: Stories of Popular Contracts and Why They Matter.

In 1994, Butch Lewis, the former prize fighter and promoter of famous boxers such as Muhammad Ali and Joe Frazier, conceived the idea of popularizing Angelou’s poetry by including it in Hallmark greeting cards and similar media. Lewis first met Angelou in early 1994 when the scrappy fighter asked the elegant poet to take a trip to Indiana with him to visit his boxing client, Mike Tyson, in prison. During the trip, Angelou and Lewis discussed how she might expand her readership by publishing her works in greeting cards. After negotiations, the two signed an informal letter agreement on November 22, 1994.

Angelou promised to contribute poetry exclusively to Lewis and he promised to promote its publication in greeting cards. The exclusivity feature was important, since it meant Angelou could not market her poetry without Lewis and Lewis need not fear that his efforts would be undercut by a last-minute switch to a competing promoter.  Aside from exclusivity, the letter recited only basic terms, such as how they would later agree on what poetry to include, that Lewis would fund promotion, and how revenues would be shared—first to reimburse Lewis’ investment and expenses, then to split the rest equally. The letter said it would be binding until the two drew up a formal contract. Though Lewis prepared one in March 1997, it was never signed.

Lewis began marketing efforts immediately, though it took until March 1997 for Lewis and Hallmark to finalize terms—a three-year deal, covering any new poem Angelou produced during that time. In exchange, Hallmark would pay Angelou and Lewis a $50,000 advance against royalties, which would be paid at a flat 9% rate of total sales, with a guaranteed minimum of $100,000. Angelou’s greeting cards would be administered through Hallmark’s Ethnic Business Center, targeted to an African-American audience.

Lewis sent Angelou the proposed Hallmark agreement. By then, however, Angelou’s views of Lewis had curdled. For the Hallmark pitch, Lewis prepared sample cards and brought these for Angelou’s approval. Angelou found the display of caricatures of African-Americans distasteful and unreflective of her poetry’s meaning. Her impression of Lewis worsened when the two crossed paths in Las Vegas in 1997, where Angelou was appalled by Lewis’s behavior, which included punctuating his conversations by “grabbing his crotch.” Read More

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Happy Father’s Day (Kids)!

My wife and daughters brought me the paper and breakfast in bed this morning! What a treat. And today we are doing something I love: windsurfing with the whole family!

For me, though, the idea of Father’s Day is to celebrate my daughters, and my wife, not me, as they are sources of endless joy.

Every best wish to all Dads out there, and their families, for a special day of celebration.

 

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The Impossible Donald Trump Puts Big Name on Chicago Tower

Chicago’s skyline is now polluted by the letters T R U M P adorning a showy luxury building the egomaniacal scion put up during the financial crisis.   While locals led by Mayor Rahm Emanuel recoil at the Donald’s bad taste in design, lawyers and citizens alike should recall some of the poor judgment, tone deafness, and ignorance of the law he displayed during the long construction process.  As told in my book aimed at new or aspiring law students, Contracts in the Real World: Stories of Popular Contracts and Why They Matter, Donald Trump thought the so-called “Great Recession” of 2008-09 so calamitous to count as an “Act of God.” He was in the midst of building what would be one of Chicago’s tallest skyscrapers, rivaling the old Sears (now Willis) Tower, a combination luxury hotel and condominiums.

To finance the project, Trump borrowed $640 million from lenders led by Deutsche Bank in February 2005. By the end of 2008, Trump had only sold condos netting him $204 million along with others under contract that would yield another $353 million. That left him facing a shortfall of nearly $100 million when he was obligated to repay his lenders $40 million per month. Trump cited the Great Recession as an excuse to delay making monthly payments. The banks refused to accept the excuse from timely payment, so Trump, a prolific litigant, went to court.

Circumstances had changed, he observed, and law has long recognized excuse from contract for some kinds of surprising supervening events loosely called forces majeure, from the French meaning “superior forces,” or Acts of God.   If you rent a banquet hall for your wedding, and it burns down with no one at fault, you and the hall are both excused from the agreement; when Hurricane Katrina destroyed New Orleans in September 2005, contracts to buy or sell homes and businesses there were excused.   Recognized forces majeure include fire, flood, lightening, famine, and deep freezes that destroy the subject matter of a contract. Death excuses promises made to render personal service to others. People are not held to deals when it becomes objectively impossible to perform them, at least so long as they did not have reason to foresee the risk and did not address it in their contract.

Trump would stress that man-made calamities can also excuse bargains when, though something is possible to perform, it would be idle to perform it given a deal’s purpose. A rental agreement for a hotel room to watch a parade can be excused if the parade is cancelled, though the room could be occupied, under the aptly-named doctrine “frustration of purpose”—unless, of course, the contract states otherwise.  [See Comments this post below.] Read More

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Lawsuit: Resentful Daughter versus Dad for Law School Tuition

If a father tells his daughter he will pay her law school tuition, and she accordingly matriculates and completes her studies, and the father then repudiates, saying he lied, does the daughter have legal recourse against the father? That is the supposed real-life situation reported over at Above the Law, commenting on the anonymous daughter’s query to Slate’s Dear Prudence. The latter, in turn, says she consulted Prof. Randy Barnett of Georgetown, who reportedly opined that the daughter would have no claim.  I am not so sure.

The case reminded me of Zimmerman v. Zimmerman,* where a daughter sued her father to recover college tuition incurred (to attend Adelphi University) and future law school tuition to be incurred.  A New York state appellate court suggested four alternative routes for a daughter to recover tuition bills already incurred (though rejecting all claims for future tuition): contract, promissory estoppel, maintenance & support, or fraudulent representation.

The contract claim failed in Zimmerman, however, as the promised performance would extend beyond one year, putting it within the statute of frauds. In New York, as in most states, that requires such a promise to be in writing. Prudence reports that this was the same conclusion Prof. Barnett reached, as this father’s promise was not memorialized in writing either.

But the Zimmerman court upheld the daughter’s claim under promissory estoppel, which took the case out of the statute of frauds.  A writing was required if the daughter had also contractually committed to complete college.  But the jury found that the father made his promise without any return promise from the daughter.  So the father had the right to terminate his obligations upon reasonable notice. Under that view of the case, which is by no means inevitable in promissory estoppel cases, his promise was capable of performance within one year and therefore no writing was required.

A concurring judge in Zimmerman, not eager to embrace those two rationales, supposed that the father’s promise to cover his daughter’s college tuition might have reflected his acceptance of his duty to provide her maintenance and support (citing Matter of Roe v. Doe, 29 N.Y.2d 188). If so, the daughter’s obligation to Adelphi was his obligation to Adelphi.  Even if college tuition is part of such parental obligations, however, the Dear Prudence case concerns law school, almost certainly outside that ambit.

But perhaps the most compelling theory of recovery is one the dissent in Zimmerman picked up on as an alternative to contract, which is the tort of fraudulent misrepresentation.  If the Dear Prudence father is to be believed today that his promise was a lie, then this theory is a strong one, though the dissent in Zimmerman rejected both this tort route to recovery as well as the other grounds.

Prof. Barnett reportedly told Dear Prudence that the daughter might threaten suit to induce a settlement. I would not give that advice if I also concluded that the suit would be frivolous. But based on Zimmerman, I think there is a credible basis for suit.  Were I a litigator rather than a deal lawyer, I might even take the case on a contingency basis.

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* 86 A.D. 525, 447 N.Y.S.2d 675 (1st Dept. 1982).