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June 24, 2006

Comments

Aaron

I recall many bright students in law school who, while enamored with "law and economics" would simultaneously assert that one of the things which pushed them toward law school was their dislike for math. Is there a credible economics program, let alone a graduate program, which doesn't require calculus? It's pretty easy to find a law student or lawyer, and probably not that difficult to find a law professor, who will wax poetic about "law and economics" but be unfamiliar with the concept of a logarithmic curve. I won't argue that economics can't valuable in forming legal policy - it can - but the label of "law and economics" is often claimed by those who to wish to put a scholarly spin on their political agenda.

S. COTUS

Aaron, I was going to say that but since I am trying to be restrained, I question it. But, you are right: they can’t handle the math.

The answer is: no. Even programs concentrating on economic history require that people take “mathematics for economists” or something like that, which is pretty heavy on the math. Though I imagine that a law student who spent a semester studying math (e.g. before law school) could get through with an MA program. Whatever the case, I don’t see too many JD/MA students graduating with both degrees and writhing such political screeds.

The strange thing about Mr. Frank’s ire (at me) is that my idea is hardly original: Judge Posner (Mr. Law and Economics, himself) said it: there just are not many legal scholars with a real economics background. But, I can't find his comments this morning.

Ted Frank

Your claim was not "Most lawyers can't do economics." Your claim was "Tort reformers' analysis is wrong because they don't Ph.D.s and are not 'in the real of academic economists [sic].'" (Never mind Kip Viscusi or Alex Tabarrok or Jonathan Klick or Martin Grace, I suppose.) And you have yet to support your claim that the problem with tort reform is lack of economic training because you have yet to identify a single concrete example of a reformer misusing economics.

Posner most certainly did not say that economics should not be applied to law because too few lawyers have an economics background, so don't try to pawn your claim off on Posner.

This whole math thing is a red herring. I guess Steve Levitt isn't an economist, either because he admits he's bad at math. Please, do go on and tell us who else you're kicking out of the set of people eligible to perform economic analysis of legal rules.

AM

An economic analysis of the law needs to start by looking at the cash flow.

(1) How much money went into the court system?
(2) What did we get for it?
(3) Can we get that result more cheaply?

Today, for example, it can cost $400k to figure out whether an individual's right has been violated, when the damages for that violation are only $300k.

I'm a 1L who hopes to write about this one day, and my reform proposal is that

(1) This sort of cash flow analysis be a fundamental part of each judge's decision. So if a judge is deciding motions on a case where the maximum damages are only $300k, he should monitor attorneys fees and court costs along the way, and make decisions in a way which keeps these costs to a reasonable proportion of the damages.

(2) Congress and the courts study these numbers for every law they create. Call it the "cost of figuring out whether this law has been violated." If they see that it costs too much money to see when a law has been violated, then they need to re-write that law to lower this cost. Perhaps make the law more objective and predictable.

Amazingly, the court system has avoided such financial scrutiny, but it needs to start answering these questions.

S. COTUS

AM, See, this is the problem. 1Ls in law school without advanced degrees in economics are defining this field of “economics and the law.” Indeed, just as people keep insisting that questions of causation are falling prey to “junk science” it seems that law and economics is falling prey to people who don’t put the time in to fully understand the two disciplines. Until there is a critical mass of people who have terminal degrees in both fields, I think we are going to have more of the same.

But, to answer your specific objections to procedural determinations, you don’t seem to realize that courts provide many other kinds of relief than monetary damages. For example, they provide equitable relief. By its very nature, equitable relief is what is available when legal damages are not available. Likewise, in criminal matters, people who are accused stand to lose their freedom. Perhaps you are advocating that criminals go free if the prosecutor proposes to present too much evidence, or that innocent people be jailed (or executed) because the defense proposes to assert too many legal arguments, challenge the sufficiency of the indictment using complicated legal arguments, or put on a defense. In most cases defendants don’t stand to make much money in their lives anyway (let’s face it, this is why they are defendants in the first place), so, we can just go home after we determine that criminal defendants are worthless bums.

You also appear to be making a judgment that 42 USC § 1983 is wrong because it is economically inefficient. Perhaps it is. After all § 1983 allows people who have worthless lifes to tie up the precious time of at least four judges, many of who could have make $150k or so a year prosecuting people, or a million or so as a law partner. (And I am not counting the rest of the costs of running a court.) Whatever the case, Congress, and perhaps the framers seemed to think that everyone was entitled to at least some access to the courts.

I don’t take a position on whether “tort reformers” positions are right are wrong unless they are introduced in the context of proposed legislation or a refinement of the common law. Comments on cases regarding how they are “frivolous” or “anti-business” are pretty much useless.

The problem is that many “tort reformers” are nothing more than thinly disguised shills for losing parties in litigation. Then, they dress up their advocacy with intellectual-sounding rhetoric, which often borrows terms from economic literature. No matter whether they understand how those terms are used. No matter whether they are actually capable of understanding the literature in this field on a PhD-level. No matter whether their proposed models could be taken seriously in the actual discipline of economics.

I merely said that Posner questioned whether people that claim to be doing “law and economics” actually have academic credentials in the field, and if I recall correctly he questioned whether the field of “law and economics” is not filled with people with a serious command of the both topics.

As for me, I am going to apply my own gatekeeping function to any article on the field. If it isn’t written by a PhD, it isn’t for me. This isn’t a personal insult against anyone, and I am not going to write posts declaring any law and economics article penned by a non-JD/PhD to be “junk science.” I simply feel that it is far too easy to sneak in political judgments (e.g. regarding § 1983) using economic terms when one hasn’t spent some serious time studying them and demonstrated to the field that they are actual scholars.

AM

First of all, thank you for your response, I'm using these forums to sort of market research my thesis before I fine tune and publish it. Your feedback is helpful. Moving on:

1. Why would you assume things about my background? Such assumptions can easily lead to an incorrect results.

2. Your comments re: equitable relief and criminal proceedings. We can easily deal with them by
(1) Simply applying my analysis only to civil cases resolved for money (which I suspect are the vast majority of civil cases.)
(2) Analyzing the other cases by asking critically whether they could have been resolved for less money.
Furthermore, the public still has a right to know how much the court system charged in the equitable relief and criminal cases, this includes the cost for plaintiff's and defendant's attorneys. By getting access to this information, legislators could re-write laws to make them easier to apply.

3. Re 1983, 1983 is a perfect example. It is so vague and ambiguous that you won't even know if someone's right has been violated unless you're willing to spend hundreds of thousands of dollars in litigation. The only winners in most 1983 cases are the lawyers. 1983 and it's associated laws needs to be re-written to be made objective and predictable enough to reduce the cost of their application. It shouldn't cost hundreds of thousands of dollars to see if your 1983 rights have been violated.

4. Let me try to explain what you are looking for with your PhD test, because it relates to the issue. You are looking for an objective guidepost. This is the fundamental problem with the law today, and it is a key reason why cases cost so much. The law isn't very objective anymore. It's based too much on argumentation and subjective discretion, and too little on objective rules. Compare it to a field like
- the hard sciences (where you don't prove theories by arguing them endlessly, you prove them with objective experiments), or
- business (where you don't argue which company is most profitable, you look at the profit, which is an objectively determined value.)

Unfortunately there is little incentive to make the law more objective. My analysis would provide the pressure to make the law more objective.

What is wrong with requiring that after every case, we record these three values?
(1) The total amount paid to plaintiff's lawyers.
(2) The total amount paid to defendant's lawyers.
(3) The law or right being enforced.

AM

P.S. As is probably given away by my writing style, I am from a quantitative background.

S. COTUS

AM, For most people, there is nothing vague about § 1983. It refers simply to the constitution, which, although hard to interpret, is considered the most important document. Sure, if I was representing a state entity, and you were representing a plaintiff, I would claim that the constitution (and its interpretation) are so vague that despite your client’s injuries, there was no way the cop could have know what he was doing was unconstitutional. Believe me, I can claim that anything is too vague to be interpreted. Because I am a good lawyer, people will believe me on at least the point that the issue is complicated, thereby, in your world, denying justice to everyone who seeks it. (More on this later.)

On the other hand, since § 1983 essentially refers directly to (and incorporates) the constitution, you seem to be saying that the any litigation based on the constitution is simply inefficient, and the constitution is only enforceable in the context of a criminal proceeding. (Maybe 5th amendment takings proceedings don’t require § 1983, as well as habeas, but pretty much everything else does.)

It seems a little strange that you limit your analysis to civil matters. This would seem to give the government an incredible advantage, as they can invoke your doctrine of economic inefficiency to avoid civil liability, but individuals can’t invoke it to avoid criminal sanctions. (And, if you want to talk dollars and sense, the cost of prisons, I am told, is quite high, but few (if any) of the law and economics types talk about, say, eliminating not just drug crimes, but violent crimes to save money.)

I don’t know how you figure that the “only” winners in § 1983 cases are “the lawyers.” This is a nice soundbite for non-lawyers, but every non-frivolous § 1983 case involves someone who claims that their constitutional rights have been violated. (And, as a practical matter, no lawyer will bring a frivolous case because of the threat of R. 11 sanctions.) As you know, constitutional rights are pretty much the gold standard of rights. If someone seeks equitable relief (which is usually a part of a complaint in many § 1983 cases) then they are likely seeking some prospective relief, and asking the court to determine the scope of their constitutional right. In the context of prospective equitable relief, I don’t think vagueness matters at all, and for this reason, qualified immunity doesn’t apply. But you propose to direct courts not to decide what the constitution means if one side can assert that it is too expensive to consider the monetary damages issue. Or would you also deny the equitable relief to the parties.

In reality, all cases are resolved by both parties by someone asking whether it can be resolved for less money. Settlement negotiations, ADR, and everything else are pretty much standard. The judge’s salary really doesn’t factor into it too much, since most civil matters will be resolved without a trial.

As you know, § 1988 provides for attorneys fees for a victorious plaintiff’s lawyers. Therefore, there is every incentive for a defendant that thinks he is in the wrong to early. You seem to think that a defendant that looks like he is losing, can snatch victory from the jaws of defeat by simply filing a longer motion for summary judgment and asserting that the constitution is “vague.”

Next, it is nice to claim that the “hard” sciences are objective. However, as most people who deal with scientists (as expert witnesses or clients) know, they are hardly “objective.” And, to reduce lots of philosophy of science dialogue to a few words, the hard sciences use a method, which itself is subject to certain assumptions. Even with “objective” experiments, theories are argued endlessly. Indeed, right now there are several “theories” which people claim are being attacked or supported for purely political reasons, by people who make the same “objectivity” claims that you do.

Pretty much the same is true with “business.” Businesses claim to be “objective” but since they are made of people, what is considered a viable practice is often just a product of certain politics. (It would be nice to imagine a world where most college graduates were not obsessed with speaking correctly and dressing to impress employers – and secretaries didn’t have affairs with bosses to get ahead.) So, if you want to reform “business” I say: have at it.

The reason that I want people to have PhDs before making bold pronouncements on law and economics, is I want to make sure that they understand the subject thoroughly. Quite frankly, anyone can make efficiency arguments. Anyone can read a few economic terms and throw them around. But not everyone has spent several years looking at the weaknesses of theories and testing them. Not everyone has, at the minimum, done what they had to do (e.g. passing a comprehensive exam) to get into a PhD program, or made an actual contribution to the literature.

Now, don’t get me wrong. I sort of like your mission. (Even though you are a 1L, with a “quantitative” background – that is no PhD). But, I think that you would need to do a lot more to even begin to address this issue than just write a law review note. (I have not even gotten to the issue of how to obtain data points.) However, depending on what school you go to, nobody will tell you this, and you will write a note that might as well be something written on one of the tort reform sites, and won’t be taken seriously in either the economics or legal literature.

Aaron

I believe the quote was, "I gave up a long time ago pretending that I knew stuff I didn't know. I mean, I just - I just don't know very much about the field of economics. I'm not good at math, I don't know a lot of econometrics, and I also don't know how to do theory." I read that as self-deprecating humor, by a guy whose Ph.D. from MIT suggest that he in fact knows quite a bit about math, statistics, and calculus. Why not pull "I just don't know very much about the field of economics" out of context also, and assert that Levitt doesn't claim to be an economist?

AM

Interesting comments. Here are a couple of thoughts based on my personal experiences regarding scientists and business.

Regarding scientists, you should know that expert witness work is considered to be among the lowest things a scientist can do. At least among the scientists I know. Please don't define the sciences by expert witnesses. Real scientific work isn't conducted in courts.

Also, regarding business. Obviously we need a way to know which businesses are better, to know which ones to invest in etc. The question is how do we decide this. We could have done it by arguing in a court like setting and having a judge or jury decide based on un-objective rules which could be twisted to go either way, but that's not how they do it. Business success is defined by objective numbers, like profit. Business people often complain about this, about the inhumanity and inflexibility caused by having to decide everything based on the bottom line, but that's the way it is.

Also, my method isn't a doctrine or political. It doesn't value any political viewpoint. I didn't really explain what I was trying to do. Here's how it would work, mechanically.

To make things simple, imagine we live in a society with only three rights. Right A, right B and right C. So there are only three laws.

Every time someone sues under one of these laws, the case will eventually have to be resolved, either through settlement or judgment.

Once it's resolved, the judge would collect the following information from the parties, and record it in a master database.
1. The law being enforced.
2. The amount paid to plaintiff's lawyers.
3. The amount paid to defendant's lawyers.
4. Other court costs.
5. The amount of money awarded to plaintiff.
You could add other numbers also. The point is that this wouldn't require a lot of effort.

So eventually you would have this huge database of values. That's the goal, to get this database. Then economists and mathematicians could do incredible analysis with this information.

First you could analyze the efficiency of the law. Here's one way you could do that. You add up costs (attorney's costs plus other court costs) for each law. Then you divide by the number of cases for that law. Say this shows you that
1. the average law A lawsuit took $300k to resolve and resulted in a $200k award to plaintiff, where as
2. the average law B lawsuit took only $50k to resolve and resulted in a $200k award to plaintiff.
Based on this, legislators would know they need to re-write law A to lower it's "cost of figuring out whether A has been violated." I think you accomplish this by making law A more predictable.

There are tons of other things you can do if you had access to these numbers. You would have entire new field of economics. Maybe you would do a study and discover that criminal defendant's likelihood of being found not guilty is correlated with defense attorney fees.

This gets back to 1983. A person doesn't know whether his 1983 rights have been violated until he sues, and hears the judge's verdict. Same for the alleged violator of the 1983 right. But to get this verdict the parties are going to need to pay hundreds of thousands of dollars. So just think about it, the government gave us a right, but to see if that right has been violated we need to spend hundreds of thousands of dollars. In a way, our 1983 rights might as well not even exist! Congress needs to sit down, and re-write 1983 to make it easier to apply.

In closing, since you're a tax expert, I want to note that the IRS is fantastic about writing their rules in a way which makes them relatively predictable and easy to apply. For most tax issues, the answer is out there and it's a black and white objective answer. Not much room to argue. I know this isn't 100% true, but as a tax expert would you agree that the tax laws are, in total, a lot more objective and predictable than 1983 laws?


S. COTUS

Aaron, I am pretty sure that Posner said it. But, he was speaking of legal academe.

AM, Whatever the case, all sorts of “scientists” appear as expert witnesses. Sometimes they are paid. Sometimes they are not. Sometimes it is part of their job. Since scientists routinely testify to matters that they did not personally witness, and scientific organizations have participated as amici in evidentiary decisions, the “Scientific community” is very much interested in the work of courts.

While I sometimes pass for a tax “expert” (not my wording), I should note that a good chunk of tax law is not black and white. Sure, accountants think it is, but us lawyers know that it is not. Indeed, if everything was black and white we wouldn’t need to even bother litigate issues, and the IRS wouldn’t even need to issue interpretive regulations (or Rev. Rul. or Rev. Procs.) As everyone would know what the “truth” is. Want a good example: try and find the tax difference between “debt” and “equity” as for tax purposes in the IRC. Because I am nice, I will let you use non-interpretative Treas. Regs. (You can’t use court opinions, however. And even if you did, you would get nothing but mushy language.)

The point is that just as the margins of tax law might be unclear, so are the margins of constitutional law. That is why there is litigation.

Whether “profit” is objective or not is an interesting topic. Very often “profit” is a matter of perception (or selection of a specific period of time). Indeed, it is fairly easy to manipulate (often illegally) a stated profit. Whether people believe such a statement of profit is up to them, and usually false statements are only uncovered after considerable time has passed, and some contingencies the liar depended on did not happen. Indeed, most (if not all) financial statements include many, many assumptions about the future, which, while perhaps conservative in nature (that is, they don’t assume that an asset will double in value for no apparent reason), and a liability will somehow become invalid, they are based on assumptions. So, what counts as the “bottom line” is really what people are willing to agree upon as being the nature of reality.

Although I don’t recommend it, many lawyers end up working for accounting firms, figuring out how to stretch the meaning of so-called “objective” terms.

As to your idea for tracking data-points, I am not sure if you are aware of this or not, but in most contexts, parties probably burn the most legal hours during fact-intensive discovery.

By the time things get to your casebook (or are reported on this blog) many, many, hundreds of hours have been expended not determining what a right is, or how it was enforced, but “who did what and when.” If you are unlucky in law school, you will become a “contract attorney” and do “real” attorneys document review, looking for categorizing documents and looking for needles in haystacks, which may, after other layers of review, be presented to a judge (and maybe a jury.) The jury and judge will spend minutes on it, as compared to how the parties spend hundreds of hours finding and understanding the significance of a document. So, in some ways, our adversarial system is quite efficient: the fact-finders time is conserved.

Whether economists can do “incredible” analysis is questionable. Maybe statisticians could do something, but there is an inherently political question of what value you want to attach to something. For instance, in a document-intensive 1983 action (such as class actions involving racial profiling), where a plaintiff wins nominal damages (but attorneys fees under 1988), the amount of damages would pale in comparison as to the clarification as the right that the plaintiff sought to enforce.

If legislatures want to make things more efficient, they could simply direct potential defendants not to do what they are sure that plaintiffs will sue over. They can write presumptions into the law that will eliminate the need for discovery. (E.g. providing state remedies for racial profiling where the plaintiff can avail himself of the presumption that a car search is pretexual where it does not result in tangible evidence.) They can actually try and prevent rights from being violated. (Such as requiring all police officers to obtain written consent before searching cars where they lack probable cause.)

Anyway, judges don’t render verdicts. Juries do. Probably about 80% of reported 1983 cases don’t involve questions of whether a person’s rights are violated, but rather whether the police officer reasonable knew that he would be violating someone’s rights. (But, this defense of qualified immunity is not available when a plaintiff seeks prospective relief.)

Finally, you seem to have a view of court decisions as resolving only a single dispute between parties. In many litigation (even at the trial level) this simply is not true: the ultimate result of the proceedings may provide guidance to future parties, the instant case combined by others may be appealed, providing guidance to others. So, for example, while a 1983 case may appear to render only small damages, a state entity (I am not using “actor” for shorthand reasons) will know in the future what they can or cannot do, even if this actor suffered only small compensable damages.

AM

I understand what you're saying about ambiguities in tax law. Any economist knows that transactions, which have the same non-tax economic result, are taxed differently depending on how they're structured (the actual financial instruments used to conduct the transaction), and this can cause inconsistencies.

But relative to 1983, the tax rules are much more predictable. The vast majority of people can apply tax laws without litigation. When controversies do arise, the IRS is pretty good about quickly providing objective, across the board, rules to deal with them. Regarding your debt / equity question, we couldn't answer that without getting the specific structure of the transaction but for most structures there is an answer out there. Any way, my point is that the IRS is, in my opinion, trying to reduce the amount of chaos in the law and create order and objectivity. I applaud them for this.

Compare this to 1983. In all honestly, in my opinion, there are few 1983 case which can be decided without expensive litigation. 1983 and its associated laws are well intentioned, but ultimately inaccessible.

Unfortunately we don't have the numbers to prove it. The database would provide this information. That's just one benefit of this database. It can track "the cost of figuring out when a right has been violated" and to spotlight rights which cost so much to enforce that in a way, they might as well not exist.

The far more interesting question is how do we re-write 1983 to accomplish it's intentions and make it more predictable. That's where the real work comes in. Once people make these changes to 1983, you would evaluate your success by again tracking the numbers. See, it turns into a business of sorts. You make the best decisions you can and measure your success by objective numbers. Imagine, congress sees that 1983 rights cost far too much to enforce. They make changes. 5 years later they look at the numbers and see that cost of enforcement went down 80%!

Finally, with all due respect, I am going to have to flat out disagree with you regarding the objectivity of profit. Profit ultimately is just cash flow, a physical quantity which no accountant can manipulate. Even accrual rules and valuation methods are guarded pretty tightly. Accountants who have tried to manipulate profit have seen themselves and their firms severely punished. Business people do live in a very objective world. If profit could have been manipulated, it would have been, but it really can't be. There is objective truth in the world, and it survives no matter how hard some people try to create chaos.

Any way, thanks again for your feedback. I will certainly consider all of your points and I appreciate you taking the time to write them out.

S. COTUS

While the IRS is sometimes helpful in providing advise regarding planned transactions, the advise isn’t necessarily 1) what you want it to be; and 2) applicable “across the board.” The process of obtaining a Private Letter Ruling (which I assume you are referring to) is not only time-consuming, but resembles litigation in a very real way. The correspondence resembles briefs to courts. (There are some positives, in that you can invite the IRS out to your client’s place of business, and show them what you are talking about.) In many cases, practitioners will withdraw a request for a PLR when it the IRS indicates that it won’t go their way (leaving other people with absolutely no guidance.) In some (rare) cases, people can appeal a PLR to a District Court, and the litigation process starts again, except that the District Court will not hold a trial. Whatever the case, the proceedings are quite similar to a 1983 case (on summary judgment) except that the District Court judge is probably clueless about the issues. This isn’t a dig on District Court judges, in fact it might mean that they have a much more open mind than someone who deals with them all the time. Also, this isn’t a dig on IRS employees. They work hard and they are sympathetic to the needs of clients for guidance, but they are in a difficult position when they must reconcile various positions taken by Congress, the service, the courts, and their superiors on issues. Sure, they are “trying” to reduce the amount of “chaos” in the law, so is everyone. The problem is that once one ties up one loose end, another opens up. Indeed, if a loose end is tied up against the interest of someone, they have every incentive to rip something open.

But, I challenge you again: give me an operative definition of debt, and an operative definition of equity. This should be simple. You can say: Under 26 U.S.C. Sec. ___, I know that I have equity when ______ and ___ are true, and under 26 U.S.C. Sec. ___, I know I have equity when ___ and ___ are true.

(I assume that you understand that the IRS only can exercise rule-making authority as provided for by Congress, and that the IRC, itself, is written by Congress.)

The 1983 cases that you see on appeal are the ones where there are actual disputed issues regarding constitutional law. With every day (or year) more and more issues of constitutional law are settled, and either 1) government entities train their people not to violate those issues; and 2) people don’t bring lawsuits for violations of unrecognized rights. The problem is just like businessmen find new and creative ways to structure transactions, government entities might seek to find new ways to structure behavior violate peoples’ constitutional rights, but avoid damages under 1983.

What I am curious about is why you want to rewrite 42 USC 1983? Do you want to make certain violations of the constitution to be simply be unenforceable in court, because the constitution is too much of a grey area, and judges might have to read all the constitutional law on a subject before summary judgment? Of course, most judges are probably familiar with, say, the 1st, 4th, 5th, and 8th amendment, so maybe these things could stay. (Indeed, since a good hunk of the law on at least the last three of these amendments comes from criminal law, there is a lot of guidance, which I assume is a good thing – but you might say it is a bad things if you think it will take a judge a long time to read it.) On the other hand, judges are probably not too familiar with, the magazine clause and that provision of the constitution which allows issuance of letters of marque and reprisal. So, I assume that you would want any rights that emanate from these provisions to be unenforceable, since they are just too complicated. (I can’t think of any time an individual has asserted rights under these clauses, but I didn’t do a search.)

If you want to believe that profit is “objective” go ahead. I think, however, what you mean to say is that there is widespread agreement on under what circumstances people should agree on what a financial statement should be accepted by someone else. For years, inflated profits were accepted, because, well, people wanted to accept them. These same people would prattle on and on about how their businesses were “objectively” the best. (People from Enron were notorious for this.) Then, when things started going wrong, suddenly statements of “objectivity” became lies. If you want a good example of this, you need only look as far as the case in http://appellate.typepad.com/appellate/2006/06/ca1_unclean_cor.html . The court ends up holding that the RPII can’t sue an auditor when both it and its client both were drinking the kool-aid regarding inflating "objective" earnings. But while they were believing this crap, everyone waved the banner of “objectivity.” (KPMG doesn't seem to be taking any punishment for its action here.)

Of course, this isn’t any better than a jury verdict being accepted as the “truth” and deferred to, despite the fact that many people might disagree with it.

Whatever the case, we do live in a world of chaos.

AM

First I need to restate what I'm asking for. I'm not asking for anything more than the creation of this database. Regarding your earlier objections, we can have a code in the database for class actions, another for injunctive relief. Yes the analysis would measure the value of a right based on the damages awarded, not some subjective value judgment.

This is all I'm asking for. Just this database. I just want to see these numbers. So first of all, do you have any objections to the creation of this database?

Moving on to your other points, which again aren't really things which I'm debating, because at this point all I want is the database and nothing more.

On the equity/debt question. I need to know how you structured the transaction. What financial instruments did you use and what did you do with them? For most structures, there is an answer out there, and you don't need a PLR. You do agree with this don't you?

Let me say this another way. For most tax transactions (I would roughly estimate 95%+ of them) there is a way to calculate the tax. It is a black and white and objective answer which leaves no room for argument (a.k.a. litigation.) Of course there are controversial areas of tax law, but these are a relatively small proportion and the IRS is very good about (as quickly as possible) providing objective guidance to deal with them. Sure these rules benefit certain transactions, but they're objective and predictable.

This is not true for 1983 issues. At this very moment, there are lots and lots of 1983 "transactions" going on. Lots of people who suspect that their 1983 rights have been violated, but they would have no way of knowing unless they spend hundreds of thousands of dollars in litigation. 1983 isn't very objective and predictable, no where near as predictable as tax law. There is no 1983 revenue ruling, or section of the 1983 code, which you can show an alleged violator to settle the issue. See what I'm saying regarding the difference?

Besides, predictability is just one attribute you can measure with the database.

It is an objective fact that the court system costs money. I'm just trying to create a tool by which people can monitor the cash flow into the court system. Perhaps standard business analysis like what are we getting for this money and can we get it more cheaply?

S. COTUS

You might want to start by looking at the AO’s website, as they actually have a staff of people that produce reports like this. I don’t know if they track amounts paid out, however, because they are more concerned workload of judges and the clerks’ offices, than they are with who pays what, but it is a start.

Believe it or not the AO actually employs business analysts and MBA-types who are tasked with making sure that, at the very least, the administrative functions of the courts perform smoothly and use good “practices.” (Of course, the courts are not business. Federal judges can’t be fired for doing crappy work. The AO has limited power to require people do to things, and most of what it does it write reports, and try and service judges’ needs.)

I think you don’t understand that just because something isn’t a class action under FRCP 23 (or an analogous state rule) doesn’t mean that it fails to define rights for many others. The effect of precedent is wide and far-reaching. For instance, it is likely that this week the Supreme Court will decide Hamdan v. Rumsfeld. He is but one plaintiff. The government has put a lot of energy into defending this case. The petitioner has also put a lot of energy (or rather his lawyers – at least one of which works for the government, too, ironically, has). Many amici have put energy into it as well. (Heck, many British members of parliament filed an amicus brief: not that I think it made a difference.) His case is not a class action. But what the Supreme Court decides will set the tone for, at a minimum the 400 or so people detained at Gitmo, and arguably the way the executive treats foreigners detained on the battlefield for years. Conservatively, I would estimate that about $3,000,000 worth of lawyer-hours have gone into litigating this (though most of the people working it are already on the staffs of law schools, government agencies, or law firms.) This might seem inefficient, but once the executive is told how the Geneva Convention applies to the habeas act (and what Congress can do about it), there will be much more clarity of the law. (Hamdan, since it is a habeas petition is a civil action. He is seeking actually to have at least part of the proceedings against him tried under the UCMJ (which he claims is required by GC3)).

As to debt and equity, outside of routine transactions, there is not an easily found statutory mechanism for determining which is which. The regulations provide some guidance. Anyway, my question was a bit of a trick question, because at one point the IRS attempted to once and for all, adopt a regulation that would define debt and equity. The followed the APA, they mulled it over. Then, after several years of good-faith effort, they gave up, and conceded that it was a matter of “facts and circumstances.” For an internal IRS “Field Service Advice” memo which, I think, accurately states the law, see here: http://www.irs.gov/pub/irs-wd/0205031.pdf . It writes, in relevant part: “In determining whether the transaction constitutes debt or equity, the particular facts and circumstances must be examined. No single uniform approach has been adopted by the courts in analyzing this particular issue. The Tax Court looks to whether there was a “genuine intention to create a debt, with a reasonable expectation of repayment, and ... [whether] that intention comport[s] with the economic reality of creating a debtor-creditor relationship.” Nestle Holdings, Inc. v. Commissioner, T.C. Memo. 1995-441, 70 T.C.M. (CCH) 682, 700 (1995), vacated and remanded on another issue, 152 F.3d 83 (2d Cir. 1998), quoting Litton Business Systems, Inc. v. Commissioner, 61 T.C. 367, 377 (1973). In addition to intent, the courts have enumerated several other factors to consider in resolving a debt-equity issue. While no single factor is determinative, John Kelley Co. v. Commissioner, 362 U.S. 521 (1946), and the following list is not exclusive, the
courts generally look to…” (and then a bunch of factors.)

On this key issue, this is the absolute best that the service can do.

As to 1983 actions, remember that there are two questions that must be answered to obtain money damages: 1) whether an underlying constitutional right was violated; and 2) whether the defense of qualified immunity is available (though the second one doesn’t can be waived and doesn’t apply to prospective relief.) If you give me a scenario, I will pretty much know the answer to #1 and probably #2 off the top of my head. I am not even the biggest 1983-jock, but in terms of the major constitutional rights, I can assess the status of things rather easily. Anything that more difficult, a WL search will take care of.

Sure, applying business analysis to something is great. However, what I am afraid you are going to say is that rights are not important if they require too much intellectual effort to vindicate. So, for example, someone who has had their religious freedom violated, in your world, would have no relief, if the discovery who violated his religious freedom and why, would require too much discovery or a trial that lasts more than a day or so (since it is darn near impossible to put a value on one’s religious freedom.)

AM

Thank you again for your comments.

I still don't see any objection to the creation of the database. Again, at this point I just want to see the numbers. So as long as you’re OK with creating it then I don’t think we disagree on anything.

I understand that you have objections to some of the analysis which might be conducted on information in the database, but that shouldn’t stop the creation of the database should it?

On your other comments.

AO website
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I'll check the AO website, but it seems that a key problem with their analysis is that they don't track attorney's fees. Judge's salaries and court administration costs are probably very small relative to the attorney’s fees for a given case, which is a testament to the AO's management.

The ability of judges to make the law more predictable
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Yes judges can, by writing opinions which clarify the law, make the law more predictable. So yes, if the supreme court says that the Geneva Convention applies to habeas corpus petitions, that could be helpful in reducing the "cost of figuring out whether your habeas corpus rights have been violated."

Here's where the value of the database comes in. If it actually is helpful, then you should see this in the numbers. You would see lots of money spent on habeas corpus litigation before this ruling, much less money afterwards.

However, do you think the court is going to provide such a predictable and elegant rule? They're probably not. There just isn't enough pressure on the legal system to create objective rules. Judges don't seem to think enough about predictability and administration costs when they create common law. You rarely see them write about this. Commentators don't think enough about these costs when analyzing and criticizing decisions. I’ve read your case notes and I haven’t seen you comment on the predictability of the common law created by the judge.

This database and it's associated studies would put pressure on judges to create predictable laws, and it would provide an objective tool with which to monitor their predictability.

Debt/Equity
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Regarding tax law and debt/equity. The problem is that economically debt and equity are both just streams of cash flow with associated risks and returns on investment. These streams are taxed differently, based essentially on their associated risks and returns. Good news is that for the vast majority of transactions, it's very clear whether the IRS will call it debt or equity because people are using financial instruments which the IRS has previously categorized. However, a finance expert can always create a new instrument, one which the IRS will not know how to categorize.

Now lets say the database shows excessive costs litigating the issue of debt and equity, well then the IRS and congress will need to re-write that law to make it more predictable. The IRS’s attempt to distinguish between debt and equity may be a distinction too arbitrary to be worth putting into law.

The predictability of 42 USC 1983
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Regarding your claim on 1983. Do you feel able to accurately predict the outcome of most 1983 "transactions," with the same accuracy with which you could predict the outcome of tax transactions? I'm not a 1983 expert either but I would be impressed because I can see most 1983 cases going either way.
I would still be interested in seeing the numbers. How much does it cost to litigate the average 1983 case, how many cases do you have on average each year and so on. I think you can gain insightful information from these numbers.

KPMG fraud case
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I read your story on the KPMG case. I had a completely different perspective on it. The first thing I noticed was the massive number of large firm lawyers, who I imagine earned an enormous amount of money on this case. I wish these amounts had been reported.

The second thing I thought was, why did the trustee and KPMG have to pay (likely 7 figures) just to figure out if the trustee’s rights under the Massachusetts fraud law had been violated? Why is that law so unpredictable?

Regarding the religious freedom case
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All I care about is how much will the attorneys fees and other court costs be for such cases, and how can we lower this cost?

Thanks again for all of your comments.

S. COTUS

Sure, go ahead. Collect whatever data you want. You might want to start with fee-shifting provisions (e.g. EAJA or 26 U.S.C. § 7430) as such figures probably are kept in one place.

As to Hamdan, yes, the Court is going to provide a predictable rule. More than likely, it will conclude that initial screening for eligibility for protections under the GC require the UCMJ to be followed. This isn’t necessarily elegant, but it will likely reduce the number of habeas petitions. Indeed, the president has hinted that the government will likely charge people criminally (essentially giving up on the entire “military commissions” idea, which would be completely outside your statistical universe.

Most run-of-the-mill habeas petitions (that is, ones covered by AEDPA) are quickly dealt with. It is only recently that we have seen an administration cause people to file habeas petitions that are not covered by other statutes, and essentially dare the courts into making rules on the subject.

Rules are “objective.” Even in a “balancing test” there is some underlying rule that future courts must follow. The problem is that they are applied to varying situations which might not be covered by the rule.

As to debt v. equity, in the vast majority of ALL transactions, (tax, criminal, contract, tort, etc.) it is pretty “clear” how they will be treated by the government. The only questions come in on the borderlines between debt and equity (or “constitutional” and “unconstitutional.”) Indeed, it is human ingenuity (or creative lawyers) that push these limits.

The cases you see on appeal are the close ones. My guess are that there are 100s of people who call the “Crime and Federalism” guy for every case he takes, and of every case he takes, probably only about 1 in 10 results in a reported opinion. You might want to ask him yourself. Indeed, it is fair to say that I can accurately predict the outcome of about 99% of cases that would be brought by people who think they have a claim. Of course, since I a lawyer, I wouldn’t bring most of them, and I would only bring ones I was at least 85% sure of winning.

The same deal with debt and equity. Every day there are millions (perhaps billions) of transactions in the US. Most of them are easily accounted for. It is only when people wish to push boundaries between capital gains and ordinary income, or debt and equity (or one of many other big-name dichotomies in the tax code) that there are disputes. For the most part, most transactions are pretty easy for me to opine on their tax treatment. (And I am not a transactional lawyer.) But there are others which require extensive research, and, as I said above, advocacy before the service or the IRS.

There is a massive number of law firms in the KPMG case because there is a massive number of creditors. However, not all of them were party to this appeal. This is the nature of bankruptcy proceedings. Their fees are actually available, and if you get a PACER account you can find out most fees in bankruptcy cases.

My guess is that KPMG probably paid about $30k or so to litigate this issue on appeal to the First Circuit. The trustee gets paid no matter what. Ironically, the court held that since both parties were probably at fault, to some degree or other (assuming the truth of the allegations), they wouldn’t be collecting. By the way, the trustee could have “abandoned” (which is a term of art) the claim against KPMG if it wanted to, but the trustee thought it best to pursue it.

If you want to lower the costs for religious freedom cases here is my idea: potential defendants should ensure that peoples’ rights are not violated, and seriously consider conceding claims that are brought rather than fight for the sake of fighting. This way, the few remaining people who think that their rights have been violated will likely lose. It is a strange thing, but there is hardly any need for lawyers when people don’t get into disputes.

AM

I would bet KPMG paid well over $30k to litigate this case from start to finish. In total the lawyers fees for all parties are probably around seven figures. In my opinion, when the parties have to pay seven figures to see if the law has been violated, then that's not a very predictable and objective law. How upset must they be that they had to spend all this money just to learn the law?

"Potential defendants should ensure that peoples’ rights are not violated, and seriously consider conceding claims that are brought rather than fight for the sake of fighting" In my opinoin this test does not to make the law more objective and predictable. It would be a fascinating excercize to devise a set of rules which both (1) guarantee religious freedom and (2) can be applied in a predictable and objective manner. In my opinion this is what lawyers should be doing, creating order, not chaos.

Also, I guess I define objective as predictable. As in, the more objective a rule is, the more certain you can be regarding it's outcome. I think a good way to pressure the courts to make more predictable laws is to show them the cost of unpredictability. In my opinion, the (likely) 7 figures paid to litigate the KPMG case could have been better spent elsewhere.

Any way, these are all just seminal thoughts after a year of law school. Thank you for your criticism and for helping me refine them.

S. COTUS

My point is that KPMG paid $30k or so to litigate the appeal, itself. I think it is worth noting that in bankruptcy, disputes between debtors, and disputes between the validity of the debt may be litigated (and appealed) before the BK Court, the District Court, or state courts, and the massive amount of lawyers you see will likely be listed on the captions, but really don’t represent clients with an interest in the given proceedings. Indeed, “adversary proceedings” was considered by many to increase efficiency, as it consolidates many issues before (likely) one court. There are very few actual trials on the merits in these cases since, because of the lack of money, it simply isn’t worth fighting over it. Indeed, and you might be interested in this, it is fairly obvious what the “amount” of the right at stake is, and in bankruptcy it is fairly easy to determine how much a given firm has been paid since fees are generally subject to court approval.

If you want to do serious research into this, set aside a couple C-notes and get a PACER account.

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