Tom Bowden — VOICES for REASON

If you’ve seen “The Social Network,” the movie about Facebook, you remember the Winklevoss twins. These Harvard students sued Facebook’s founding genius, Mark Zuckerberg, alleging he stole the idea for Facebook from them.

Here’s what happened in real life. When the suit was dismissed on technical grounds, the parties went to a mediator. After a day of negotiations, they signed a handwritten “Term Sheet & Settlement Agreement,” which provided for the twins to drop their claims in exchange for cash and part-ownership in Facebook.

Later, the parties couldn’t agree on a formal contract to carry out the settlement. The twins said the deal was off, but Zuckerberg disagreed. Last week, a federal appeals court in California determined the ensuing litigation in Zuckerberg’s favor. The written decision, authored by Chief Judge Alex Kozinski, concludes with these words:

The Winklevosses are not the first parties bested by a competitor who then seek to gain through litigation what they were unable to achieve in the marketplace. And the courts might have obliged, had the Winklevosses not settled their dispute and signed a release of all claims against Facebook. With the help of a team of lawyers and a financial advisor, they made a deal that appears quite favorable in light of recent market activity.  See [a Wall Street Journal article] (reporting that investors valued Facebook at $50 billion . . . 3.33 times the value the Winklevosses claim they thought Facebook’s shares were worth at the mediation). For whatever reason, they now want to back out. Like the district court, we see no basis for allowing them to do so. At some point, litigation must come to an end. That point has now been reached.

Decisions like this are rendered by the hundreds every day in America’s courts. They reaffirm the certainty that parties need when they enter into contracts. Yes, there can be legitimate disputes, and I’m not saying the Winklevoss position was frivolous. But it’s important to know that, despite widespread infringements on contractual freedom, courts have not lost sight of the need for contracts to be enforceable.

Image: Wikimedia Commons

A recent article in the Washington Post attracted my interest by going behind the scenes in the sale of an independent D.C. bookstore called Politics and Prose. Not an earthshaking event, you might say, but it beautifully illustrates how a company’s founders can keep alive their original vision long after they cease to own the business.

As you read this excerpt, think about the power inherent in a property owner’s right to set his own terms of sale. This article is written in the first person, by the two individuals who recently purchased the store:

Our evolution from P&P fans to P&P proprietors began almost accidentally. Over the summer, friends urged Brad, who has spent his career in journalism, to think about bidding for the store. We talked about it, and in October, he submitted a lengthy questionnaire required of all prospective buyers that asked about everything from his favorite books to his vision for the store’s future.

The questionnaire was one of many examples of the seriousness and care with which the store’s owners, Barbara Meade and David Cohen, were going about the sale. David’s wife, Carla, conceived of Politics and Prose in 1984, and Barbara became a partner soon afterward. They were a formidable book-selling pair whose vision, passion and hard work built Politics and Prose into a Washington landmark.

But Carla’s cancer diagnosis in 2009, and her passing last October, left Barbara and David with the sad duty of having to sell their community treasure. . . .

What was evident to us throughout the sale process was that Barbara and David were not selling just a business. They were selling a cultural institution that was part discussion forum, part neighborhood meeting ground, part event stage. And they were determined that Politics and Prose not only survive and thrive, but continue to reflect Barbara and Carla’s legacy.

Barbara also made clear that it was important to have a female presence at Politics and Prose, since women had founded and run the store. This point hit home especially with Lissa, who was already warming to the idea of a husband-and-wife team managing P&P. So what started as a solo enterprise for Brad quickly became a partnership.

The questionnaire, the earnest conversations and interviews, the strict standards that buyers had to meet—here were bookstore owners using the power of contract to express and achieve their deepest personal values. Transactions like this one illustrate how important it is for a legal system to protect freedom of contract.

What if that freedom had been infringed? What if zoning authorities insisted that the building now be used for a senior center instead of a bookstore? What if equal opportunity bureaucrats had deemed the sellers’ desire for a “female presence” to be illegal discrimination? What if political pressure had been exerted in favor of purchasers with right-wing credentials, on grounds that the store’s existing liberal agenda should be abandoned on “equal time” grounds? What if sale of the company’s stock could not meet Securities and Exchange Commission requirements? What if the new owners had to be licensed and couldn’t qualify without undergoing an expensive college-level certification?

These are just some of the types of infringement that Americans take for granted. We need to start thinking more about these encroachments’ devastating power to destroy dreams.
Image: Wikimedia Commons

The world’s economy functions by means of intricate, extended supply chains: raw materials are shipped to parts makers, then parts are shipped to factories, then finished products to shippers, truckloads to wholesalers, then retailers. But when the massive earthquake and tsunami rocked Japan, this supply chain was interrupted.

All of a sudden, uncertainty gripped producers around the world. But amidst the inevitable chaos was an underlying layer of certainty provided by contracts. Businesses typically plan for disaster by inserting so-called force majeure clauses in their contracts. Through such clauses, customers agree to excuse performance when a disaster like the 3/11 quake makes performance impossible. This places hardships on each customer, but it gives the company hit by disaster a chance to survive and regroup. Without such clauses, hard-hit companies could be immediately sued by customers and bankrupted.

Companies also have an option of purchasing business interruption insurance, which can reimburse profits lost when a disaster destroys company assets, and contingent business income insurance, which kicks in when a company’s supplier can’t deliver because of a disaster at its place of business. (Another beautiful aspect of global capitalism is that companies unaffected by disaster can leap into action, offering contracts aimed at picking up the slack left by temporarily incapacitated producers.)

None of these contractual devices is a cure-all. Disaster damage is still damage, not “economic stimulus,” and it must be repaired by intense effort, diverted from other tasks. But careful contracting can maximize certainty in the most uncertain of times.

Image: Wikimedia Commons

As soon as I spied the headline in the Wall Street Journal, I knew it was only half the story. “AT&T to Buy Rival in $39 Billion Deal,” it said, followed by a story describing an agreement between AT&T and T-Mobile, the second- and fourth-largest wireless carriers in the country.

I paged through the paper, waiting for the other shoe to drop. And there it was, on Page B1: “T-Mobile Deal Faces Antitrust Barriers.” Turns out the two companies need permission to merge from at least three government agencies: the Federal Communications Commission, the Justice Department, and the Federal Trade Commission.

So, the “deal” wasn’t really a deal. It was more like a very complicated, very expensive petition for Uncle Sam’s permission to do a deal. What that means is that AT&T and T-Mobile don’t have freedom of contract. They don’t have the right to make the final decision on whether to merge.

It’s not just big companies that lack freedom of contract. Think about it: how many contracts in your own business or profession require prior permission from a bureaucrat? How many deals require the parties to be licensed? How many projects require a special permit, or certificate of need? How many exports must satisfy a quota? How many deals have to be crafted so as not to draw government attention? And perhaps most important of all: How many deals don’t make it past the back-of-a-napkin stage because permission would be too hard to get?

I think of it this way: the number of government permissions needed for private parties to go about their business is one measure of how far our legal system has moved away from freedom of contract. We wouldn’t tolerate such interference with our freedom of speech. Why do we so often tolerate it when it comes to voluntary contracts?

Thinking about buying some wood flooring, for a home remodeling project, perhaps? The price you pay will be higher—perhaps much higher, if American flooring manufacturers get their way—because of U.S. tariff regulations.

According to this Wall Street Journal article, Chinese flooring imports are already subjected to an 8 percent duty. Now, the Commerce Department is considering a petition by eight U.S. makers of flooring to increase the duty. But wait: that petition is being opposed by a group of American importers who make profits selling Chinese flooring.

What do the pressure groups and lobbyists in a battle like this take for granted? That everyone’s freedom of contract is putty in their (and their politicians’) hands—that your supplier’s ability to buy from an overseas manufacturer at a mutually agreeable price is not a right but a privilege, revocable by regulatory decree when political pressures demand it.

It’s fairly to easy to see how the consumer suffers from this kind of interference: it’s in the form of higher prices. But it’s not as if importers can just pass along all the costs to consumers. Consider their plight:

Importers would be in a tough spot if duties were imposed, said William Perry, a lawyer representing some of them. That’s because such levies can be adjusted by the federal government annually, and new duty rates are applied retroactively. As a result, importers don’t know how much they would have to pay when they agree to bring in Chinese products.

Did you catch that? Let’s say a consumer orders a thousand square feet of flooring. The order makes its way up to an importer, whose wholesale price must be based on a mere guess about the level of tariff duties in the future. Then, months later, the U.S. government can decide that the duties should be higher than the importer guessed.

Our economy is a battlefield populated by thousands of such pressure groups. Such a state of affairs can arise only when government does not recognize liberty of contract as a basic legal principle.

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In a post last August, I commented on the Supreme Court case of Snyder v. Phelps. Now the Court has decided that case, in a way that highlights the importance of the point I was making.

First, here’s a passage from the majority opinion, which upheld the First Amendment rights of obnoxious picketers at a military funeral:

On the day of the memorial service, the Westboro congregation members picketed on public land adjacent to public streets near the Maryland State House, the United States Naval Academy, and Matthew Snyder’s funeral. The Westboro picketers  carried signs that were largely the same at all three locations. They stated, for instance: “God Hates the USA/Thank God for 9/11,” “America is doomed,” “Don’t Pray  for the USA,” “Thank God for IEDs,” “Thank God for Dead Soldiers,” “Pope in Hell,” “Priests Rape Boys,” “God Hates Fags,” “You’re Going to Hell,” and “God Hates You.”

The italics in that quotation are mine. I wanted to highlight the undisputed fact that the protestors were able to get close to the funeral only by using public land. Here’s what I said in last year’s post on this issue:

We take it for granted that streets and sidewalks are, and must be, publicly owned. But look where that leads: Any taxpayer can claim a right to use them as an owner. So, the Westboro Church picketers can self-righteously proclaim to the Supreme Court that they were just exercising their First Amendment rights to speak on public property. If it happened to destroy the solemnity of a funeral, that’s the family’s tough luck.

Now consider how this kind of situation could be completely avoided in a society where all property is privately owned—the fully capitalist society envisioned by Ayn Rand and most closely approximated in nineteenth century America. In such an ideal society, there would be no public streets or sidewalks. I know, it sounds impossible. But in fact, private property is practical, in streets and sidewalks no less than cars and houses, and it’s been proven so whenever it’s been tried.

But even if you’re not fully convinced, stay with me on the Westboro Church case. In a society of private property, no church or funeral home would have to be bordered by land on which creatures such as the Westboro Church demonstrators had a legal right of access. Instead, every such church or funeral home would be surrounded by private property (including private streets and sidewalks), whose owners would have full legal rights to exclude such obnoxious displays as the ones at issue here. Through contracts arrived at voluntarily, a church and its surrounding property owners could agree to forbid any such interference as happened to the Snyder family.

In a private property regime, the Westboro Church demonstrators could be rendered powerless to spoil anyone’s funeral. If such demonstrators showed up on private property, the police could be called to arrest them for trespass and haul them away to jail. And that, in a case like this, would be sweet justice.

Of course, there’s no guarantee that a funeral home in a fully privatized society could obtain the necessary contractual agreements from surrounding landowners. And that might figure into any given funeral home’s success or failure. A home that caters, say, to Hollywood funerals for celebrities had better have good contractual arrangements for privacy if it wants to make an appealing pitch for business. But another home might expect customers to take the risk of disruption from adjacent land, which risk could exert a downward pressure on price. The bottom line is that in a free society, obnoxious picketers such as the Westboro clan would have to obtain the voluntary agreement of private landowners in order to inflict their particular brand of emotional distress upon others.

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This is a post about a contract. The parties are two companies: Maersk, the world’s largest container-shipping line, and Daewoo, a South Korean shipbuilder. According to an article in the Wall Street Journal, excerpted below, Maersk has ordered ten new container ships from Daewoo—ships that will be the biggest ever built.

As you read, think about how important this contract is to all the people involved: stockholders, managers, employees, suppliers, and related companies. Then imagine the contract’s complexity—the number of different clauses required to spell out all parties’ obligations, expectations, remedies upon failure to perform, and so forth—and the depth of legal expertise needed to draft and negotiate it. Then contemplate how many thousands or millions of new shipping contracts will be made possible by the construction of these ten ships—as the article says, “to transport cargo ranging from iPhones to powdered milk between Asia and the ports of Rotterdam, the Netherlands, Felixstowe, England and Bremerhaven, Germany.”

Now think about how the world’s economy functions through millions of such contracts—most not nearly as large as this $1.9 billion deal, but all of them important to the parties. Finally, think about what a remarkable political achievement it is for companies to have the freedom of contract necessary to conceive and carry out a transaction on this scale.

It’s staggering to think about how much of modern life depends on contracts like this one.

The order “changes the whole landscape in the container-ship market,” said Nam Sang-tae, chief executive of Daewoo Shipbuilding & Marine Engineering Co., the South Korean company that agreed to deliver the 10 ships by 2014.

The deal, which the two companies said was the biggest in shipbuilding history, includes options for 20 more of the $190 million vessels.

The new ships will be 1,312 feet long, 193.5 feet wide and 239.5 feet high, longer than a modern aircraft carrier and bulkier than an oil tanker. They will be able to carry 18,000 20-foot containers, 2,500 [more] than the largest class of container ships now in service, which are also in Maersk’s fleet.

Maersk will use the ships to transport cargo ranging from iPhones to powdered milk between Asia and the ports of Rotterdam, the Netherlands, Felixstowe, England and Bremerhaven, Germany, among the few Western ports big and deep enough to accommodate them. U.S. ports are too small to handle such large ships. . . .

The economies of scale afforded by the current generation of large container ships already has led shippers to start moving new categories of goods—commodities like wheat and corn, and bulky objects like trucks—inside containers, instead of aboard other kinds of ships

Maersk’s new order, which was signed in London, could reshape competition in the highly fragmented industry. . . .

Industry experts said the new ships are approaching maximum size. Already, if all the containers on the new Triple-E ships were laid end to end, they would stretch for 68.8 miles. In theory, bigger ships could be built, but there would have to be ports big and deep enough to handle them.

Image: WikiMedia Commons

Despite obvious similarities between the scandal now enveloping TV star Charlie Sheen and the one that brought down Tiger Woods a couple of years ago, there’s a difference worth noticing. Reports indicated that Woods’s various contracts with sponsors included “morals clauses” permitting quick and quiet termination of business relationships when it became apparent that Woods was an adulterous philanderer.

Sheen, by contrast, is engaged in an extended, boisterous war of words with CBS and Warner Bros. Television, which have shut down production on “Two and a Half Men.” Sheen contends that he is both able and contractually entitled to work, and he’s threatening to sue. One reason he can take such an aggressive stand despite widely noted scandals is that, by all indications, there is no “morals clause” in his contract. According to one report:

A morals clause allows a buyer—in this case, a TV studio—to bail on a contract if a star’s conduct is “detrimental to the buyer’s interests,” according to a 2005 Columbia Journal of Law & the Arts article by Noah B. Kressler.

But lawyers and studio insiders say that while morals clauses remain a fixture in the popular imagination, they are seldom used anymore in deals for entertainment talent.

“In terms of my own practice, I haven’t seen a lot of them,” said Doug Mirell, a partner and entertainment litigator at Century City law firm Loeb & Loeb.

The clauses, however, are still widely used in sports contracts and product-endorsement deals. When golfer Tiger Woods was caught up in a heavily publicized cheating scandal that led to his divorce, a number of companies quickly dropped or downgraded their sponsorships. Kellogg dumped swimmer Michael Phelps after video surfaced of the gold medalist smoking marijuana. And Sheen himself was nixed as a spokesman for underwear purveyor Hanes after the actor was accused of threatening his wife in 2009.

To see what they’re talking about, here’s a sample morals clause, typical of those found in professional athletes’ contracts:

“The employee agrees to conduct himself with due regard to public conventions and morals, and agrees that he will not do or commit any act or thing that will tend to degrade him in society or bring him into public hatred, contempt, scorn or ridicule, or that will tend to shock, insult or offend the community or ridicule public morals or decency, or prejudice the producer or the motion picture, theatrical or radio industry in general.”

Of course, there are many considerations that figure into inclusion of a morals clause in a contract. After all, it has to be agreeable to both parties. (Plus, I should note that not all relevant details about either the Woods or Sheen situations have been, or perhaps ever will, be made public.) Nonetheless, one of the values of contract law is that it offers a method for companies like CBS and Warner Bros. Television to arrange in advance a way of disentangling themselves from embarrassing relationships when a star starts misbehaving.

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In a fascinating article, the Wall Street Journal reports that the percentage of workers who need a state license to do their jobs is growing steadily. That percentage was 5% in the 1950s. In 2008, it was 23%.

Think about it: one of every four workers is not permitted to work without begging permission from a bureaucrat. While I don’t agree with the article’s assumption that licensure is an acceptable government activity, and I don’t find the quoted experts’ analyses particularly deep, I recommend the article for its catalog of occupations on which licensing requirements have been and are being imposed. A sample:

Florida for years required anyone marketing their services as “interior design” to get a license that called for six years of education and apprenticeship and a two-day exam. That requirement stunned Barbara Vanderkolk Gardner, a mostly self-taught designer who worked on luxury homes in New Jersey—no license required—and wanted to open a practice in Florida. If clients wanted to hire her to pick out pillows, paints and furnishings, Ms. Gardner says, she couldn’t understand why the state would object: “I view myself as an artist, and I don’t think art needs to be licensed.”

Ms. Gardner worked with the Institute for Justice, a nonprofit libertarian law firm, to sue the Florida regulatory body in charge of interior design in U.S. District Court in Tallahassee, claiming the law violated their First Amendment rights to call themselves interior designers. A federal judge last year struck down the licensing law for residential designers. But the court upheld a requirement for commercial interior design, holding that the state had a rational basis for protecting the public from inept design, which could create safety hazards.

Ms. Gardner says her residential business is now flourishing in Sarasota, Fla., but she remains frustrated that she has to turn down jobs designing offices.

In Ohio, dieticians, athletic trainers and boxing promoters are among the professions that require licenses. If Kimberly Raisanen has anything to say about it, cat groomers might one day make it onto the list, too. Ms. Raisanen, a groomer in Fairview Park, Ohio, helped found the Professional Cat Groomers Association of America in 2008 to establish better education standards for the animal specialists who trim, clip, style and fluff felines.

Do readers have their own stories of licensure’s effects on people’s ability to practice their occupations? I’d like to hear them through the comment function at the bottom of this post.

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Over at the Huffington Post, PBS’s Ray Suarez blogged about a panel discussion in which I recently participated. Suarez is host of Destination Casa Blanca, a Latino-oriented current events program, and I was one of four panelists on the January 20, 2011, show. Here’s a passage from his post:

One of our guests, Tom Bowden of the Ayn Rand Institute, wanted a small federal government, but didn’t believe the newly empowered Republican caucuses on Capitol Hill were going to give him one. Israel Ortega of the conservative think tank The Heritage Foundation stressed his organization’s support for low taxes, lower government spending, and fewer federal duties. Bowden and Ortega agreed that emphasizing local management and local innovation would improve education more effectively than federal government oversight.

The hour-long discussion was wide-ranging, but since this post mentions education, I’ll just point out that my comments called into question the idea that government has any role in education. (You can see an edited video of that segment here.) So, my viewpoint was distinct from that of the Heritage expert—I don’t think “local management and local innovation” can address the fundamental problems with public schooling. If you’re interested in exploring the issue, here are links to a short video and a web page on privatizing the market for education.

Meanwhile, thanks to the folks at Destination Casa Blanca for welcoming an unabashedly pro-capitalist viewpoint into a variety of continuing debates that are elsewhere limited to the familiar opinions of liberals and conservatives.

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