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Category: Corporate Law

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Individuals & Teams, Carrots & Sticks

I promised Victor Fleisher to return to his reflections on team production. Vic raised the issue of team production and the challenge of monitoring individual performance. In Talent Wants to Be Free I discuss some of these challenges in the connection to my argument that much of what firms try to achieve through restrictive covenants could be achieved through positive incentives:

“Stock options, bonuses, and profit-sharing programs induce loyalty and identification with the company without the negative effects of over-surveillance or over-restriction. Performance-based rewards increase employees’ stake in the company and increase their commitment to the success of the firm. These rewards (and the employee’s personal investment in the firm that is generated by them) can also motivate workers to monitor their co-workers. We now have evidence that companies that use such bonus structures and pay employees stock options outperform comparable companies .”

 But I also warn:

 “[W]hile stock options and bonuses reward hard work, these pay structures also present challenges. Measuring employee performance in innovative settings is a difficult task. One of the risks is that compensation schemes may inadvertently emphasize observable over unobservable outputs. Another risk is that when collaborative efforts are crucial, differential pay based on individual contribution will be counterproductive and impede teamwork, as workers will want to shine individually. Individual compensation incentives might lead employees to hoard information, divert their efforts from the team, and reduce team output. In other words, performance-based pay in some settings risks creating perverse incentives, driving individuals to spend too much time on solo inventions and not enough time collaborating. Even more worrisome is the fear that employees competing for bonus awards will have incentives to actively sabotage one another’s efforts.

A related potential pitfall of providing bonuses for performance and innovative activities is the creation of jealousy and a perception of unfairness among employees. Employees, as all of us do in most aspects of our lives, tend to overestimate their own abilities and efforts. When a select few employees are rewarded unevenly in a large workplace setting, employers risk demoralizing others. Such unintended consequences will vary in corporate and industry cultures across time and place, but they may explain why many companies decide to operate under wage compression structures with relatively narrow variance between their employees’ paychecks. For all of these concerns, the highly innovative software company Atlassian recently replaced individual performance bonuses with higher salaries, an organizational bonus, and stock options, believing that too much of a focus on immediate individual rewards depleted team effort.

Still, despite these risks, for many businesses the carrots of performance-based pay and profit sharing schemes have effectively replaced the sticks of controls. But there is a catch! Cleverly, sticks can be disguised as carrots. The infamous “golden handcuffs”- stock options and deferred compensation with punitive early exit trigger – can operate as de facto restrictive contracts….”

 All this is in line with what Vic is saying about the advantages of organizational forms that encourage longer term attachment. But the fundamental point is that stickiness (or what Vic refers to as soft control) is already quite strong through the firm form itself, along with status quo biases, risk aversion, and search lags. The stickiness has benefits but it also has heavy costs when it is compounded and infused with legal threats.

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A Time for Action: The Double Gain of Freer Regions and the Double Speak about Talent Droughts

As Catherine Fisk and Danielle Citron point out in their thoughtful reviews here and here, the wisdom of freeing talent must go beyond private firm level decisions; beyond the message to corporations about what the benefits of talent mobility, beyond what Frank Pasquale’s smartly spun as “reversing Machiavelli’s famous prescription, Lobel advises the Princes of modern business that it is better to be loved than feared.” To get to an optimal equilibrium of knowledge exchanges and mobility, smart policy is needed and policymakers must to pay attention to research. Both Fisk and Citron raise questions about the likelihood that we will see reforms anytime soon. As Fisk points out — and as her important historical work has skillfully shown, and more recently, as we witness developments in several states including Michigan, Texas and Georgia as well as (again as Fisk and Citron point out) in certain aspects of the pending Restatement of Employment — the movement of law and policy has actually been toward more human capital controls rather than less. This is perhaps unsurprising to many of us. Like with the copyright extension act which was the product of heavyweight lobbying, these shifts were supported by strong interest groups. What is perhaps different with the talent wars is the robust evidence that suggests that everyone, corporations large and small, new and old, can gain from loosening controls. Citron points to an irony that I too have been quite troubled by: the current buzz is about the intense need for talent, the talent drought, the shortage in STEM graduates. As Citron describes, the art and science of recruitment is all the rage. But while we debate reforms in schooling and reforms in immigration policies, we largely neglect to consider a reality of much deadweight loss of through talent controls.

The good news is that not only in Massachusetts, where the governor has just expressed his support in reforming state law to narrow the use of  non-competes, but also in other state legislatures , courts and agencies, we see a greater willingness to think seriously about positive reforms. At the state level, the jurisdictional variations points to the double gain of regions that void or at least strongly narrow the use of non-competes. California for example gains twice: first by encouraging more human capital flow intra-regionally and second, by its willingness to give refuge to employees who have signed non-competes elsewhere. In other words, the positive effects stem not only from having the right policies of setting talent free but also from its comparative advantage vis-à-vis more controlling states. This brain gain effect has been shown empirically: areas that enforce strong post-employment controls have higher rates of departure of inventors to other regions. States that weakly enforce non-competes are on the receiving side of the cream of the crop. One can only hope that legislature and business leaders will take these findings very seriously.

At the federal level, in a novel approach to antitrust the federal government recently took up the investigation of anti-competitive practices between high-tech giants that had agreed not to poach one another’s employee. This in fact relates to Shubha Gosh’s questions about defining competition and the meaning of free and open labor markets. And it is a good moment to pause about the extent to which we encourage secrecy in both private and public organizations. It is a moment in which the spiraling scandals of economic espionage by governments coupled with leaks and demand for more transparency require us to think hard. In this context, Citron is right to raise the question of government 2.0 – for individuals to be committed and motivated to contribute to innovation, they need some assurances that their contributions will not be entirely appropriated by concentrated interests.

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Talent Wants to Be In Control

Many thanks to Deven and Orly for organizing this online symposium and for letting me join in.  Talent Wants to Be Free is a real tour de force: original and engaging, thoughtful and thought-provoking.  Orly is likely the only person who could have written this book, as it deftly combines research from a variety of academic literatures to make novel observations while at the same time remaining understandable and even approachable.  As other participants have mentioned, I do hope it gets read by policymakers and thought leaders who are contemplating how to bring more innovation to their city, state, or country.  Given the burgeoning interest in entrepreneurship (see, e.g., this program on St. Louis), the book should find a place on many bookshelves.

Since I’m starting in the midst of an already heady discussion, I wanted to build on what Shuba and Vic mentioned about the theory of the firm, as well as Orly’s response.  I argue in a forthcoming paper that our notion of “employment” is completely connected to our idea of the economic firm: you can’t have employees without an employer, and the employer is a firm.  Why do we have these mechanisms for joint production?  The short answer, I think, is that we need firms to facilitate joint production.  There’s only so much we can do on our own, and once we start working together we need legal and economic structures to manage that collaboration.  Shuba and Vic both discuss how the theory of the firm literature might provide an antithesis to Orly’s thesis in terms of the benefits of organized team structures that, to some extent, constrain individual workers. Orly’s response agrees that firms play a useful role, but she argues that much of the existing theory-of-the-firm literature depends on the “orthodox” model of employer protectionism.  However, I think both sides are missing an important aspect of the issue: namely, the governance of firms.

In both academic and popular literature, employers/firms/corporations are characterized as large, faceless institutions that act autonomously in their own self-interest.  But firms are just collections of individuals with various economic and legal relationships who are acting together in the context of a legal entity.  In other words, employers are people too — not individual persons, but groups of people.  Do some of the restrictions we are talking about look less onerous if we think of employers as groups of people?  Let’s take, for example, the work-for-hire doctrine.  Does that doctrine look less punitive if five people create a firm to work together on a collection of projects, and they jointly agree to share their intellectual property rights with one another?  If one of the five breaks the deal and takes off with the rights to a key component of the research, the work-for-hire doctrine looks like it’s pro-employee — at least, for the four other employees involved.  Although Orly’s Evan Brown example (pp. 141-44) looks like blatant opportunism by a large corporation, in other instances employees as a whole may end up better off if one of their number can’t defect to the detriment of the joint enterprise.

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Input Knowledge, Output Information, and the Irony of Under the Radar Expansion of IP

Peter Lee’s thoughtful review of Talent Wants to Be Free goes straight to the heart of the issues. Peter describes a “central irony about information” – so many aspects of our knowledge cannot lend themselves to traditional monopolization through patents and copyright that their appropriation is done under the radar,  through the more dispersed and covert regimes of talent wars rather than the more visible IP wars. We’ve always understood intellectual property law as a bargain: through patents and copyright, we allow monopolization of information for a limited time as a means to the end of encouraging progress in science and art. We understand the costs however and we strive as a society to draw the scope of these exclusive rights very carefully. and deliberately. We have heated public debates about the optimal delineation of patents, and we are witnessing new legislative reforms and significant numbers of recent SCOTUS cases addressing these tradeoffs. But patents are only a sliver of all the information that is needed to sustain innovative industries and creative ventures. Without much debate, the monopolization of knowledge has expanded far beyond the bargain struck in Article I, Section 8 of the Constitution.  Through contractual and regulatory law, human capital – people themselves - their skills and tacit knowledge, their social connections and professional ties, and their creative capacities and inventive potential are all the subject to market attempts, aided by public enforcement, of monopolization. Peter refers to these as tacit versus codified knowledge; I think about inputs, human inventive powers versus outputs – the more tangible iterations of intangible assets – the traditional core IP, which qualifies patentability to items reduced to practice (rather than abstraction) and copyrightable art to expressions (rather than ideas). Cognitive property versus intellectual property, if you will.

Lee is absolutely correct that university tech transfer and its challenges and often discontent is highly revealing in this context of drawing fences around ideas and knowledge. Lee writes “in subtle ways, Orly’s work thus offers a cogent exposition of the limits of patent law and formal technology transfer.” Lee’s recent work on tech transfer Transcending the Tacit Dimension: Patents, Relationships, and Organizational Integration in Technology Transfer, California Law Review 2012 is a must read. Lee shows that “effective technology transfer often involves long-term personal relationships rather than discrete market exchanges. In particular, it explores the significant role of tacit, uncodified knowledge in effectively exploiting patented academic inventions. Markets, patents, and licenses are ill-suited to transferring such tacit knowledge, leading licensees to seek direct relationships with academic inventors themselves.” And Lee’s article also uses the lens of the theory of the firm, the subject of the exchanges here, to illuminate the role of organizational integration in transferring university technologies to the private sector. I think that in both of our works, trade secrets are an elephant in the room. And I hope we continue to think more about how can trade secrets, which have been called the step child of intellectual property, be better analyzed and defined.

Management Wants Precarity: A California Ideology for Employment Law

LaborShareThe reader of Talent Wants to be Free effectively gets two books for the price of one. As one of the top legal scholars on the intersection of employment and intellectual property law, Prof. Lobel skillfully describes key concepts and disputes in both areas. Lobel has distilled years of rigorous, careful legal analysis into a series of narratives, theories, and key concepts. Lobel brings legal ideas to life, dramatizing the workplace tensions between loyalty and commitment, control and creativity, better than any work I’ve encountered over the past decade. Her enthusiasm for the subject matter animates the work throughout, making the book a joy to read. Most of the other participants in this symposium have already commented on how successful this aspect of the book is, so I won’t belabor their points.

Talent Want to Be Free also functions as a second kind of book: a management guide. The ending of the first chapter sets up this project, proposing to advise corporate leaders on how to “meet the challenge” of keeping the best performers from leaving, and how “to react when, inevitably, some of these most talented people become competitors” (26). This is a work not only destined for law schools, but also for business schools: for captains of industry eager for new strategies to deploy in the great game of luring and keeping “talent.” Reversing Machiavelli’s famous prescription, Lobel advises the Princes of modern business that it is better to be loved than feared. They should celebrate mobile workers, and should not seek to bind their top employees with burdensome noncompete clauses. Drawing on the work of social scientists like AnnaLee Saxenian (68), Lobel argues that an ecology of innovation depends on workers’ ability to freely move to where their talents are best appreciated.

For Lobel, many restrictions on the free flow of human capital are becoming just as much of a threat to economic prosperity as excess copyright, patent, and trademark protection. Both sets of laws waste resources combating the free flow of information. A firm that trains its workers may want to require them to stay for several years, to recoup its investment (28-29). But Lobel exposes the costs of such a strategy: human capital controls “restrict careers and connections that are born between people” (32). They can also hurt the development of a local talent pool that could, in all likelihood, redound to the benefit of the would-be controlling firm. Trapped in their firms by rigid Massachusetts’ custom and law, Route 128′s talent tended to stagnate. California refused to enforce noncompete clauses, encouraging its knowledge workers to find the firms best able to use their skills.

I have little doubt that Lobel’s book will be assigned in B-schools from Stanford to Wharton. She tells a consistently positive, upbeat story about management techniques to fraternize the incompatibles of personal fulfillment, profit maximization, and regional advantage. But for every normative term that animates her analysis (labor mobility, freedom of contract, innovation, creative or constructive destruction) there is a shadow term (precarity, exploitation, disruption, waste) that goes unexplored. I want to surface a few of these terms, and explore the degree to which they limit the scope or force of Lobel’s message. My worry is that managers will be receptive to the book not because they want talent to be free in the sense of “free speech,” but rather, in the sense of “free beer:” interchangeable cog(nitive unit)s desperately pitching themselves on MTurk and TaskRabbit.
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Human Capital Law and Innovation Policy

This is a thrilling week for Talent Wants to Be Free. I am incredibly honored and grateful to all the participants of the symposium and especially to Deven Desai for putting it all together. It’s only Monday morning, the first official day of the symposium, and there are already a half a dozen fantastic posts up, all of which offer so much food for thought and so much to respond to. Wow! Before posting responses to the various themes and comments raised in the reviews, I wanted to write a more general introductory post to describe the path, motivation, and goals of writing the book.

Talent Wants to Be Free: Why We Should Learn to Love Leaks, Raids and Free Riding comes at a moment in time in which important developments in markets and research have coincided, pushing us to rethink innovation policy and our approaches to human capital. First, the talent wars are fiercer than ever and the mindset of talent control is rising. The stats about the rise of restrictions over human capital across industries and professions are dramatic.  Talent poaching is global, acquisition marathons increasingly focus on the people and their skills and potential for innovation as much as they look at the existing intellectual property of the company. And corporate espionage is the subject of heated international debates. Second, as a result of critical mass of new empirical studies coming out of business schools, law, psychology, economics, geography, we know so much more today compared to just a few years ago about what supports and what hinders innovation. The theories and insights I develop in the book attempt to bring together my behavioral research and economic analysis of employment law, including my experimental studies about the effects of non-competes on motivation, my theoretical and collaborative experimental studies about employee loyalty and institutional incentives, and my scholarship about the changing world of work, along with theories about endogenous growth and agglomeration economies by leading economists, such as Paul Romer and Michael Porter, and new empieircal field studies by management scholars such as Mark Garmaise, Olav Sorenson, Sampsa Samila, Matt Marx, and Lee Fleming. Third, as several of the posts point out, these are exciting times because legislatures and courts are actually interested in thinking seriously about innovation policy and have become more receptive to new evidence about the potential for better reforms.

As someone who teaches and writes in the fields of employment law, I wrote the book in the hopes that we can move beyond what I viewed as a stale conversation that framed these issues of non-competes, worker mobility, trade secrets and ownership over ideas  as labor versus business; protectionism versus free markets (as is often the case with other key areas of my research such as whistleblowing and discrimination). A primary goal was to shift the debate to include questions about how human capital law affects competitiveness and growth more generally. Writing about work policy, my first and foremost goal is to understand the nature of work in its many evolving iterations. Often in these debates we get sidetracked. While we have an active ongoing debate about the right scope of intellectual property, under the radar human capital controls have been expanding, largely without serious public conversation. My hope has been to encourage broad and sophisticated exchanges between legal scholars, policymakers, business leaders, investors, and innovators.

And still, there is so much more to do! The participants of the symposium are pushing me forward with next steps. The exchanges this week will certainly help crystalize a lot of the questions that were beyond the scope of the single book and several new projects are already underway. I will mention in closing a couple of other colleagues who have written about the book elsewhere and hope they too will join in the conversation. These include a thoughtful review by Raizel Liebler on The Learned FanGirl, a Q&A with CO’s Dan Solove, and other advance reviews here. Once again, let me say how grateful and appreciative I am to all the participants. Nothing is more rewarding.

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Corporate Personhood is not the Enemy

The recent Citizens United decision has spawned a wave of really awful political critique, mostly from progressive writers and activists. A news story from earlier this year highlights one of the wackier critiques, in which a man drove in the carpool lane along with a copy of Articles of Incorporation. When pulled over, he turned it into a media event:

Your honor, according to the vehicle code definition and legal sources, I did have a ‘person’ in my car.But Officer ‘so-and-so’ believes I did NOT have another person in my car. If you rule in his favor, you are saying that corporations are not persons.

The carpool-lane stunt is probably the most over-the-top of responses, but many other critics have weighed in. For instance, the Occupy movement passed a resolution against corporate personhood, while an internet petition to “end corporate personhood” has garnered hundreds of thousands of signatures. Clearly, many people are deeply upset about the idea of corporate personhood.

They’re also, as a general matter, deeply misguided. Read More

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The Responsibility of Autonomy: More on Berkshire and Benjamin Moore

Autonomy does not mean carte blanche; its operational companion, hands-off management, does not mean abdication.  The concepts entail complex relations between power and responsibility. Autonomy is an act of trust whose disappointment  prompts its revocation.  The saga of Benjamin Moore, about which my recent blog drew two thoughtful comments,  illustrates.

Beginning in 1883, the company’s paint was sold solely through a network of small distributors operating with extraordinary autonomy, as owners of their own businesses.  In 2000, when Berkshire Hathaway acquired the company, its famously hands-off chairman, Warren Buffett, assured distributors of continuation of that tradition.

As the grip of the Great Recession in 2008 stunted sales growth, however, a new CEO at Benjamin Moore (Denis Abrams) began displacing the distributorship tradition through new arrangements with chain stores (including big-box retailers).  Abrams altered the distributor relationship to respond to competitive changes, including dictating tougher terms on financing inventory and charging for advertising. Distributors complained about this to Buffett, but Berkshire’s practice of vesting autonomy in its CEOs prevented direct or immediate intervention.

Ultimately, however, Abrams’s repudiation of distributor autonomy prompted Buffett to make an exception to the autonomy Berkshire usually gives Berkshire CEOs, and fired Abrams.  To replace him, Buffett delegated much of the task to a new Berkshire employee, Tracy Britt Cool, a recent business school graduate he had just named chairman of Benjamin Moore.  Her choice, Bob Merritt, began correcting the errors that Buffett believed Abrams had made, especially restoring distributorship autonomy.

Last month, however, Merritt was fired too.  Who fired him (Buffett or Britt) is unclear and the exact reasons have not been disclosed. It may be a replay, a business disagreement about distribution or involve (per press gossip) issues of gender bias and locker room humor among company management.  Merrit’s replacement, meanwhile, was chosen jointly by Britt and Buffett. 

So there are several marks on the long winding story of autonomy in the Benjamin Moore saga.  The distributors had autonomy, which Berkshire promised they would keep, yet Abrams impaired; distributor complaints to Berkshire first met resistance in the name of CEO autonomy until Berkshire lifted its usual deference to that practice; Buffett gave Britt considerable autonomy to choose Merritt, who ran with it until he didn’t have it anymore; and, most recently, she enjoyed far less autonomy in the case of selecting his successor.  

People claiming that Buffett is a hands-off manager or gives his CEOs extraordinary autonomy are right, so long as they appreciate how that entails a strangely awesome burden.  People who are trusted, and who are trustworthy, often excel and avoid problems precisely because autonomy is a huge responsibility.

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Benjamin Moore and Berkshire: Centuries of Repute

Sometimes the up-to-the-minute nature of contemporary life obscures ancient principles. A case in point is the news surrounding last week’s and last year’s firings by Berkshire Hathaway of the CEOs of its subsidiary, Benjamin Moore & Co. But the values that Benjamin Moore has embraced for more than a century and those Berkshire has embraced for nearly half a century speak louder than the gossipy whispers associated with these two sad episodes (hat drop to New York Post).

In 1883 Brooklyn, twenty-seven-year-old Benjamin Moore, along with his forty-three-year-old brother Robert, created the paint company that remains in business today. He articulated several business principles to guide his company:

  1. A fair deal for everyone.
  2. The giving of value received without any graft or chicanery.
  3. Recognition of the value of truth in the representation of our products and an effort at all times to keep the standard of our goods up to the highest mark.
  4. The practice of strict economy without the spirit of parsimony, and the exercise of intelligent industry in the spirit of integrity.

Moore’s motto was “quality, start to finish.” It charged a premium price for it, even when that sacrificed market share. To reinforce its investment in quality, the Moore brothers began the practice of selling paint through independent distributors. Other paint makers might sell in hardware stores, or as private-label products of customer retailers, or in their own retail stores. Benjamin Moore & Co. always strictly adhered to the model of distributing exclusively through certified dealers. Those distributors, in turn, have invested considerable effort in building their businesses to keep their end of the bargain. Read More

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UCLA Law Review Volume 60 Symposium: Volume 60, Issue 6 (September 2013) and Discourse

UCLA Law Review, Volume 60 Symposium

Twenty-First Century Litigation: Pathologies and Possibilities

A Symposium in Honor of Stephen Yeazell

 

Volume 60, Issue 6 (September 2013)
Articles

Complexity, the Generation of Legal Knowledge, and the Future of Litigation Ronald J. Allen 1384
Regulation by Liability Insurance: From Auto to Lawyers Professional Liability Tom Baker & Rick Swedloff 1412
When Courts Determine Fees in a System With a Loser Pays Norm: Fee Award Denials to Winning Plaintiffs and Defendants Theodore Eisenberg, Talia Fisher, and Issi Rosen-Zvi 1452
Symmetry and Class Action Litigation Alexandra D. Lahav 1494
Atomism, Holism, and the Judicial Assessment of Evidence Jennifer L. Mnookin 1524
Altering Attention in Adjudication Jeffrey J. Rachlinski, Andrew J. Wistrich, and Chris Guthrie 1586
Wolves and Sheep, Predators and Scavengers, or Why I Left Civil Procedure (Not With a Bang, but a Whimper) D. Michael Risinger 1620
Gateways and Pathways in Civil Procedure Joanna C. Schwartz 1652
Pleading and Access to Civil Justice: A Response to Twiqbal Apologists A. Benjamin Spencer 1710
Teaching Twombly and Iqbal: Elements Analysis and the Ghost of Charles Clark Clyde Spillenger 1740
Unspoken Truths and Misaligned Interests: Political Parties and the Two Cultures of Civil Litigation Stephen C. Yeazell 1752

 

 

Volume 61, Discourse

Discourse

Re-Re-Financing Civil Litigation: How Lawyer Lending Might Remake the American Litigation Landscape, Again Nora Freeman Engstrom 110
Of Groups, Class Actions, and Social Change: Reflections on From Medieval Group Litigation to the Modern Class Action Deborah R. Hensler 126
Procedure and Society: An Essay for Steve Yeazell William B. Rubenstein 136
What Evidence Scholars Can Learn From the Work of Stephen Yeazell: History, Rulemaking, and the Lawyer’s Fundamental Conflict David Alan Sklansky 150
Procedure, Substance, and Power: Collective Litigation and Arbitration Under the Labor Law Katherine V. W. Stone 164