Volume 86, No. 2, Winter 2014

Articles

CASH OF THE TITANS: ARBITRATING CHALLENGES TO EXECUTIVE COMPENSATION

It is disturbing how brazenly corporate executives have grabbed ever-bigger compensation packages. The facts are stunning. Steve Jobs’s successor at Apple, Tim Cook, pulled in more compensation in 2011 than any other CEO in the United States. The figure came to a whopping $378 million, a price tag that must have eaten up the profits from quite a few iPad sales. Cook’s pay cut in 2012 to a mere $4.2 million probably did not alarm him since the value of his 2011 stock grants had rocketed to $510 million. Larry Ellison, CEO of Oracle, might have felt snubbed when his company paid him a paltry $77.6 million in 2011, but he must have recovered from his disappointment when Oracle’s board of directors raised his pay to $96.2 million in 2012. Lavish CEO pay is not limited to the technology sector. David E. Simon of Simon Property Group raked in $137.0 million in 2011, Leslie Moonves of CBS scored a $68.4 million paycheck the same year, and Brett Roberts of Credit Acceptance made a hefty $54.3 million in 2012. These astronomical numbers are not aberrations. The average pay in 2012 for the CEOs of the S&P 500 companies was $12.3 million.

Even more disconcerting, the upward march of CEO compensation has continued. CEO pay increased about 8% in 2012. In 2011, the average pay for CEOs of the top 500 U.S. companies rose 15%. That jump followed a 28% spike in 2010. The prosperity that top management enjoys would not be so distressing if the wages of ordinary workers kept pace. Unfortunately, this is not so. Adjusted for inflation, workers saw their wages fall 2% in 2011. Taking a broader view is even more sobering. From 1978–2011, the pay of workers rose a modest 5.7%, while the compensation of CEOs ballooned more than 725%. In 1978, CEOs on average earned a reasonable 26.5 times as much as ordinary workers. By 2012 this ratio had catapulted to 354 to 1.

The public’s uproar over excessive executive compensation is understandable. The system seems rigged against the average worker. To people who live from paycheck to paycheck, the scale of CEO pay is incomprehensible. People wonder how much value CEOs bring to companies, especially in the aftermath of the financial crisis when the reckless risk-taking of many of the most respected and highly paid CEOs brought their companies and the country to the brink of financial ruin.

The question is how to correct the inequities of corporate pay. Reformers have proposed numerous solutions ranging from tax policy aimed at incentivizing lower executive pay to mandatory say-on-pay proxy votes to enhanced proxy disclosures. None of these proposed solutions has worked.

Litigation is another approach for controlling excessive executive compensation. Faced with skyrocketing compensation packages for high-level managers, shareholders of both closely held and publicly traded companies have initiated derivative suits challenging the plundering of their corporations. This tactic has also failed. A web of substantive law and procedural rules that protect officers and directors dooms most shareholder derivative claims. The principal culprit is the business judgment rule. Directors are not liable for breach of fiduciary duty to a corporation unless gross negligence, bad faith, or self-dealing tainted their decisions, or the decision had no rational business purpose. If a plaintiff does not meet this burden, the business judgment rule will prevent a judge from even looking at the magnitude and justification for a manager’s compensation. Applying this rule, courts routinely reject challenges to outrageous compensation packages.

Arbitration is an efficient method of alternative dispute resolution that may provide an effective means for reversing this travesty. The parties to executive compensation disputes may select arbitrators who have the requisite expertise. In addition, arbitration is economical, dispensing with many of the costly and time-consuming procedural formalities of litigation. Perhaps most importantly, arbitrators are generally not bound by procedural or substantive law. They may rely on their own sense of justice, fashioning rules of decision based on fairness rather than formalism. The flexibility to diverge from rules of law means that, when confronted with a challenge to excessive executive compensation, arbitrators may ignore the burdensome business judgment rule and other similar laws that make judicial review of even the most outrageous compensation packages a virtual impossibility. Free of these constraints, arbitrators can evaluate challenges to outlandish compensation packages. Guided by their experience and their sense of justice, they might sustain challenges that judges would reject.

THE AMERICAN LIBERTY LEAGUE AND THE RISE OF CONSTITUTIONAL NATIONALISM

This Article launches a project to identify constitutional nationalism—the conviction that the nation’s fundamental values are embodied in the Constitution—as a recurring phenomenon in American public life that has profoundly affected both popular and elite understanding of the Constitution. It does so by examining the nearly lost story of the American Liberty League and its failed campaign to defeat the New Deal as an un-American and unconstitutional aberration. Like today’s Tea Party movement, the American Liberty League of the mid-1930s generated massive media coverage by vilifying the President as a radical socialist who sought to foist un-American policies of “collectivism” on an unwilling public. In 1936, the Roosevelt reelection campaign made the strategic choice to focus the campaign on the American Liberty League because it made the perfect foil for Roosevelt to present the New Deal constitutional philosophy. Neglected in the large body of scholarship on the New Deal constitutional revolution, the fight between the Liberty League and Roosevelt should be recognized as a central episode of popular constitutionalism, in which the American people were asked to choose between competing constitutional philosophies, both of which were asserted to embody the nation’s true values.

The Liberty League utterly failed to topple the New Deal—in fact, it may have helped to generate a consensus in favor of the New Deal constitutional philosophy. Yet the Liberty League crystallized the rhetoric and philosophy of constitutional nationalism that has been at the core of a long line of political movements that have challenged the modern state as fundamentally contrary to American values. The American Liberty League is the prototype of later constitutional nationalist movements, from the John Birch Society of the 1950s, Barry Goldwater Republicanism of the 1960s, the Posse Comitatus movement of the 1970s and 1980s, the militia movement of the 1990s, and the Tea Party movement today, all of which have proclaimed as their central goal the return to what each particular movement identifies as the nation’s true constitutional values and to reject all other values as dangerously foreign.

TOO MUCH PROCESS, NOT ENOUGH SERVICE: INTERNATIONAL SERVICE OF PROCESS UNDER THE HAGUE SERVICE CONVENTION

Service of process under the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (Hague Service Convention or Convention) is too costly, time consuming, and unreliable. The Hague Service Convention’s defining feature—the Central Authority system—adds unwarranted expense and delay to the already expensive and protracted process of civil litigation. Worse, however, is the fact that the Central Authority completely fails to effect service on a foreign party in a significant percentage of cases. For decades, courts and commentators have argued over whether the Hague Service Convention actually permits litigants to sidestep the Central Authority and serve process simply, reliably, and directly—by mail. Regrettably, the divide among the circuit courts as to whether the Convention actually permits service by mail seems irreconcilable. This Article does not attempt to resolve the service-by-mail controversy. Rather, this Article proposes a different resolution: federal legislation establishing a domestic agent for service of process on foreign defendants that are subject to personal jurisdiction in the United States. While imperfect and most useful against foreign defendants likely to have domestically available resources subject to enforcement of any resulting judgment, this legislation reduces the expense, burden, and uncertainty of service under the Convention, while remaining consistent with federalism, comity, due process of law, and the Hague Service Convention itself.

Comments

FINANCIAL BUSINESS METHOD PATENTS: THE TREND TOWARD INVALIDITY UNDER SECTION 101

This Comment examines the patentability of business methods in the financial industry under 35 U.S.C. § 101. Prior to 1998, the financial industry was largely inexperienced in patent law, but that changed drastically when the Federal Circuit handed down its decision in State Street Bank & Trust Co. v. Signature Financial Group, Inc. The decision led to an explosion of business method patents in the industry that continued until the Supreme Court pulled back the reins in its seminal 2010 decision Bilski v. Kappos. Since Bilski, courts have been very uneven in their analyses of patentable processes under § 101 but have consistently reached the same conclusion: the financial business method at issue constitutes a patent-ineligible abstract idea. The legislature has also weighed in on the issue and enacted a new program under the Leahy-Smith America Invents Act of 2011 designed to systematically eliminate low-quality financial business method patents.

With the ambiguous case law and massive patent system overhaul as a backdrop, Part III.A identifies the policy concerns underlying the issue of financial business method patentability, determining that the forward-looking argument that innovation has been stifled—not inspired—by patentability carries the most weight. Part III.B entertains the idea of taking a page out of Europe’s book, which categorically excludes business method patents per se. Part III.C then moves through the critical analysis of courts’ tendency to invalidate financial business method patents, albeit without ever articulating a concrete standard for doing so. Finally, Part III.D examines the implications of the Leahy-Smith America Invents Act of 2011, agreeing with the gentle approach of targeting and eliminating these low-quality patents in an inexpensive and efficient forum, before concluding, simply, that financial business method patents are invalid under § 101.

KEEPING THEM HONEST: PROACTIVELY PREVENTING FRAUD IN PENNSYLVANIA’S CYBER CHARTER SCHOOLS

Pennsylvania Auditor General Jack Wagner characterized the Pennsylvania Cyber Charter School’s (PA Cyber) financial numbers as “out of whack.” His choice of words was not unwarranted: an audit of the 2009–10 school year showed that the school somehow commanded a $13.8 million surplus. PA Cyber, like all charter schools in Pennsylvania, is a privately operated institution that depends on taxpayer dollars to function. Society expects taxpayer funding to be used responsibly and for the ends to which it was intended. Accordingly, accountability is a key policy concern in the exercise of oversight of cyber charter schools. Accountability becomes difficult, however, when nonprofit corporations can garner huge surpluses, oversight is a tangled web of state and local bureaucracies, and money can be shifted through complicated networks of corporations—corporations that serve distinct but related purposes and are formed by the same incorporators. This is the legal landscape surrounding Pennsylvania’s cyber charter schools, and it needs to change.
This Comment argues that the temptations to commit fraud are strong for cyber charter school leaders. The legal system as it currently exists perpetuates these temptations. It follows that reforms involving steps to proactively prevent fraud are worth considering. Given the steady expansion of cyber charter schools over the past decade and the continued push to privatize public education, the issue is pressing. This Comment proposes statutory reforms whereby cyber charter school executives would be motivated to use taxpayer dollars responsibly.

BARGAIN FOR JUSTICE OR FACE THE PRISON OF PRIVILEGES? THE ETHICAL DILEMMA IN PLEA BARGAIN WAIVERS OF COLLATERAL RELIEF

It is common for federal defendants to prospectively waive a broad swath of appellate rights when agreeing to the terms of a plea bargain, including any claims of ineffective assistance that may arise from their attorneys’ conduct at a future sentencing hearing. However, the argument has developed in recent years that such an agreement may present a defense attorney with an impermissible conflict of interest, which in turn prevents the attorney from providing reliable counsel to the client with regard to the agreement’s terms in violation of the client’s Sixth Amendment rights. In essence, this attorney is being asked to counsel the client as to the quality of his own future conduct. As such, many state ethics boards have concluded that these prospective waivers violate one or more rules of professional conduct designed to preserve a defendant’s right to reliable and unconflicted advice. In contrast, all federal circuits continue to enforce the validity of these waivers, as virtually any right may be knowingly and voluntarily foregone in a criminal prosecution. However, no federal circuit court has fully considered what effect this alleged conflict of interest may have on the agreement’s enforceability. This Comment asserts that federal courts must thoroughly assess the alleged conflict under the existing framework of conflict-of-interest law in the criminal context and ensure that these waivers are executed in an ethical and professional manner so that defendants’ Sixth Amendment rights are upheld in all instances.