Liability Standards Research Articles

Protecting Reputation: Defamation and Negligence

The present article concerns itself with the relationship between defamation and negligence in the protection of the interest in reputation. The bijection between defamation and reputation is typically thought of as perfect: defamation only protects reputation, while reputation is only protected by defamation. This article shows, however, that neither limb of the proposition is true; furthermore, there is no principled ground why they should be. In particular, there is no reason why the tort of negligence could not prima facie extend the scope of its protection to reputation. It might seem that the fact that negligence, as a tort, requires by construction culpa, whereas defamation appears to rely on either more or less than that as a standard of liability, would prove an insuperable stumbling-block in the way of this suggestion. The hurdle, however, is not nearly as formidable as it might appear at first, because, as this article documents, negligence has for more than a century been acting as a magnet on the law of defamation, surreptitiously bringing its standard of liability increasingly close to negligence-culpa.

Soft Negligence Standards and the Strategic Choice of Firm Size

AbstractIn risky activities the extrinsic incentives for care are driven mainly by liability rules and by the asset levels of potential injurers. When the level of assets of the potential injurer is endogenous, we show that softer standards outperform the traditional standards based on first-best behavior, as well as strict liability: firms have incentives to choose to be larger, the lower the standards are. We also show that liability standards should increase in the costs of reducing assets and liability exposure. This means, counterintuitively, that when other instruments that restrict firms’ size are relaxed, the optimal response is to relax, and not to tighten, liability standards. Also, in a regulatory competition setting we find that a country lowering its regulatory standards will not attract worse firms in terms of size. On the contrary, the best firms in terms of assets and care will be those benefiting from regulatory competition.

The Ethics of Business in Wartime

The orthodox account of the morality of war holds that the responsibility for resorting to war rests on the state’s political authorities and the responsibility for how the war is waged rests only on the state’s army and, thus, business firms have no special obligations in wartime. The purpose of this article is to reconsider the ethical responsibilities of business firms in wartime. I defend the claim that a plausible standard of liability in war must integrate the degree of the agent’s contributions to posing an unjust threat, the nature of agent's behavior, and his/her intentions. If these premises are correct, it follows that the moral obligations of civilians and business corporations are fundamentally altered by war. Taking into consideration their relative contributions to the war effort, a taxonomy of business firms is developed.

Authenticate This: Revamping Secondary Trademark Liability Standards to Address a Worldwide Web of Counterfeits

For years, eBay has described itself as an online sales platform that links buyers and sellers. In recent years, however, eBay has not only become the world’s largest online marketplace but also “the center of a new universe of counterfeit products.” Although eBay did not create the counterfeiting problem, its success as a forum for sales of counterfeit products has made it a target for luxury brand owners. Premier jeweler Tiffany & Co. (“Tiffany”) first filed suit against eBay in New York district court, claiming that eBay facilitated and allowed the sale of thousands of pieces of fake Tiffany products and, in the process, devalued the 150-year-old Tiffany brand. On appeal, the Second Circuit affirmed the district court’s conclusion that eBay was not contributorily liable for trademark infringement. Specifically, the court found that eBay’s prompt responses to notices of potentially infringing listings prevented it from possessing the specific knowledge of infringement necessary for a finding of contributory liability. This Note addresses the problem of trademark infringement of luxury brands on eBay. By examining the Second Circuit’s decision in Tiffany v. eBay, the efficacy of eBay’s current anti-fraud systems, and the conflicting interests at stake, this Note proposes a balancing framework that will likely promote the integrity of the online marketplace while allowing room for the public to engage in legitimate secondary market activity. Although counterfeiting is not limited to premium goods, luxury brands – especially coveted names like Tiffany, Louis Vuitton, and Gucci – are among the fastest-growing targets for counterfeits on the Internet. This Note explains how the Second Circuit’s approach to eBay’s secondary liability fails to lay a reasonable template for addressing misaligned interests and complex issues of technological change. Shielding eBay from liability where it lacks specific knowledge of infringement largely eliminates worthwhile incentives to develop more effective solutions. As there is evidence that eBay’s efforts at combating infringement have not been effective, a balancing framework will likely encourage eBay to adopt more effective alternative anti-counterfeiting mechanisms as they become available. Importantly, by putting pressure on eBay and Tiffany to work together, a balancing framework can promote a legitimate secondary marketplace without restricting technological innovation.

Evaluation of Legal Liability for Technological Risks in View of Requirements for Peaceful Coexistence and Progress

Legal liability for risk-generating technological activities is evaluated in view of requirements that are necessary for peaceful human coexistence and progress in order to show possibilities for improvement. The requirements imply, given that political decision making about the activities proceeds on the basis of majority rule, that legal liability should be unconditional (absolute, strict) and unlimited (full). We analyze actual liability in international law for various risk-generating technological activities, to conclude that nowhere is the standard of unconditional and unlimited liability fully met. Apart from that there are enormous differences. Although significant international liability legislation is in place for some risk-generating technological activities, legislation is virtually absent for others. We discuss fundamental possibilities and limitations of liability and private insurance to secure credible and ethically sound risk assessment and risk management practices. The limitations stem from problems of establishing a causal link between an activity and a harm; compensating irreparable harm; financial warranty; moral hazard in insurance and in organizations; and discounting future damage to present value. As our requirements call for prior agreement among all who are subjected to the risks of an activity about the settlement of these difficult problems, precautionary ex ante regulation of risk-generating activities may be a more attractive option, either combined with liability stipulations or not. However, if ex ante regulation is not based on the consent of all subjected to the risks, it remains that the basis of liability in the law should be unconditional and unlimited liability.

Principles of Prevailing Dutch Company Law

Dutch company law is undergoing tumultuous times. Much is changing in the legislation. For example, a major revision of private limited company law is imminent. The courts are constantly presented with more and more difficult issues. Precisely in such times, there is a need for guiding ideas. The author went searching for them. In this paper, the author has relied on the American theory of pragmatism to help find a method to trace principles of law (Part I). The author then presents nine principles of Dutch company law (Part II). He finally enlists the aid of principles to solve a problem of present Dutch company law (Part III). Based on principles, the author wants to consider taking a fresh look at Dutch company law. While searching, he came to the conclusion that as a result of the increasing importance of ‘duties of care’, it is becoming less important who does and who does not belong to the company. To ensure that courts review the acts of corporate executives with restraint, he considers it important to make a distinction between standards of conduct and standards of liability. This paper is an adapted and updated version of the text of the oratio the author gave at Erasmus University Rotterdam on 19 December 2008.

Mandatory Versus Voluntary Disclosure of Product Risks

We analyze a model in which firms are able to acquire information about product risks and may or may not be required to disclose this information. We initially study the effect of disclosure rules assuming that firms are not liable for the harm caused by their products. Mandatory disclosure is obviously superior to voluntary disclosure given the information about product risks that firms possess, since such information has value to consumers. But firms acquire more information about product risks under voluntary disclosure because they can keep silent if the information is unfavorable. This effect could lead to higher social welfare under voluntary disclosure. The same result holds if firms are liable for harm under the negligence standard of liability. Under strict liability, however, mandatory and voluntary disclosure rules are equivalent because information concerning product risks is irrelevant to consumers (JEL D18, D62, D82, H23, K13, L15).

Fiduciary Duties and the Business Judgment Rule (with the Emphasis on the Citigroup Case)

The purpose of this paper is to examine the exact contents of the fiduciary duties of directors and managers, principally in the US. The main issue is whether current policy on applying the business judgment rule and enforcing fiduciary duties is too lenient, in the sense that it offers too much deference to the business judgment of corporate decision makers. Notably, the courts seem very reluctant to review directors’ and managers’ conduct unless there is evidence of conflict of interest. Does this abstention policy by the courts threaten to reduce the entirety of the fiduciary duties merely to an obligation not to self-deal? Arguably, this notion is enforced by the manager friendly legislation. The paper tries to determine whether the balance between authority and discretion of managers in running the company on one side, and their accountability to their principals on the other, has been shifted in favor of the former. The paper identifies key features of the laws governing fiduciary duties and the business judgment rule such as the duty of good faith, procedural due care and the duty of oversight. Consequently, it analyses all of them thoroughly, primarily focusing on the recent Citigroup case, and the approach of the Court on all of the relevant issues that was expressed in its decision. Finally, a discussion will follow concerning an optimal standard of care and liability, which would be effective in catching some dangerous forms of mismanagement currently unsanctioned by Delaware courts, and yet high enough not to allow judicial scrutiny of business decisions to become a routine practice.

Choosing Among Antitrust Liability Standards Under Incomplete Information: Assessments of and Aversions to the Risk of Being Wrong

This essay analyzes the three papers presented on a panel I organized as chair of the AALS Antitrust Section entitled Evolving Antitrust Treatment of Dominant Firms for the 2005 Annual Meetings. Steve Salop’s and Doug Melamed’s papers recommend standards for government intervention while David McGowan argues why the government should not.I create a framework within which to understand the three papers’ relationship to each other, by building on McGowan’s characterization of courts’ antitrust decisions. Since antitrust decisions are based on inherently incomplete real world information, they are subject to “error costs”: Courts are at risk of “false positives” (finding a violation when the behavior is not anticompetitive) and “false negatives” (finding no violation when the behavior is anticompetitive.) In light of these error costs, McGowan acknowledges that whether the court chooses to intervene or not depends on its ideology. He, himself, advocates that courts avoid false positives by not intervening and allow the marketplace to correct antitrust problems. This “market corrections approach” also alleviates concerns for false negatives.Taking a more interventionist view, Melamed recommends a “profit sacrifice test” to determine whether the exit of rivals is essential to exclusionary conduct’s profitability, thereby capturing more of the “false negatives” with little increase in “false positives.” Salop, taking an interventionist view as well, recommends a more comprehensive evaluation to determine the conduct’s impact on consumer welfare – thereby expanding greatly the capture of false negatives.I believe, however, that differences in viewpoints are affected not only by which correction tool a scholar or court finds more effective (the market or the government), but also by the differences in their evaluation of the consequences of the false positives versus the false negatives in the specific instance under consideration. Inherent in any real-world antitrust decision are not just error costs but also a trade-off between the risk of a false positive and the risk of a false negative. Differences in valuation of those consequences may lead scholars and courts to differ in their reluctance to undertake particular outcomes when they choose to guard against one error as opposed to the other in a particular case. Therefore, I suggest that one's antitrust position is not only informed by one's belief in the ability of the marketplace relative to the government to correct anticompetitive problems, but also to the degree, in any particular circumstance, one is more risk-averse to the consequences of one error cost over the other. As a result, we can see a continuum of antitrust approaches rather than a stark categorization into two camps. This allows for a distinction between Melamed's and Salop's interventionist papers. Thus, I would place McGowan's market-place reliance toward one end; Salop's broad and more fine-tuned government evaluation of conduct, toward the other; and Melamed's perspective of specific finite criteria somewhere in the middle.

The Ethics of Business in Wartime

The orthodox account of the morality of war holds that the responsibility for resorting to war rests on the state’s political authorities and the responsibility for how the war is waged rests only on the state’s army and, thus, business firms have no special obligations in wartime. The purpose of this paper is to reconsider the ethical responsibilities of business firms in wartime. I defend the claim that a plausible standard of liability in war must integrate the degree of the agent’s contributions to posing an unjust threat, the nature of her behavior, and her intentions. If these premises are correct, it follows that the moral obligations of civilians and business corporations are fundamentally altered by war. Taking into consideration their relative contributions to the war effort, a taxonomy of business firms is developed.

Strictly Wrong as a Tax Policy: The Strict Liability Penalty Standard in Noneconomic Substance Transactions

This Note analyzes the propriety of using a strict liability standard to assess tax penalties for transactions lacking economic substance. Non-economic substance transactions lack legitimate business objectives and exist only to produce tax benefits. Under current law, the Internal Revenue Service can disallow the tax benefit claimed by the taxpayer and then assess a penalty for the taxpayer’s understatement of tax liability. In response, the taxpayer can assert a reasonable cause exception, which can serve as a defense to the penalty should the taxpayer demonstrate that he had reasonable basis for his tax position. In the last decade, numerous legislative proposals sought to eliminate the reasonable cause exception and replace it with a strict liability standard. This Note examines the conflict created by this potential change in the tax law. This Note begins by defining the economic substance doctrine, as used in the U.S. courts of appeals, to determine whether a transaction lacks economic substance. This Note then explains the accuracy-related penalty assessed for non-economic substance transactions, as well as the reasonable cause exception to the penalty. Two cases illustrate the interaction of the economic substance analysis, the tax penalty, and the reasonable cause exception. Next, this Note summarizes legislative proposals spanning from 1999 to 2009, which would codify the economic substance doctrine and adopt a strict liability penalty standard. The strict liability standard is then analyzed at length, as this Note discusses the arguments for and against it. Ultimately, this Note concludes that on balance, the strict liability standard should not be adopted, but regardless of whether the current penalty regime is retained or alternative solutions are developed, the reasonable cause exception should remain a feature of the standard by which to penalize non-economic substance transactions.

When Does a Unilateral Unconditional Refusal to License or to Provide Information Become an Antitrust Concern? A United States and European Comparison

There is still a huge debate about the legal approach towards the intersection of antitrust and intellectual property law around the globe. In an Industry Age, which is more and more relying on intellectual properties, it is necessary to define legal standards of antitrust liability in cases where an intellectual property holder refuses to license his or her exclusive right. Clearly, the jurisprudence has been developing to stricter standards if compulsory licensing is involved. The question is, however, whether stronger standards towards intangible properties than towards tangible properties are necessary and justified. The right standard is critical because at risk are not only the always used incentive to innovate but also the development of related markets and potential future technologies if the intellectual property holder’s exclusive rights play the key roll.This paper will compare the different avenues taken by the U.S. and E.U. in solving this issue adequately. It puts some light on two different situations. Such where the intellectual property holder refused to deal his exclusive right where he has never dealt it to the antitrust plaintiff and situations where he has licensed his right but stopped continuing to deal it. The article explores that the E.U. is seemingly a step ahead by using the modified essential facility doctrine which combines an economic and inherent intellectual property policy approach.

Pull Too Hard and the Rope May Break: On the Secondary Liability of Technology Providers for Copyright Infringement

This article focuses on the standard of secondary liability of technology providers under copyright law. It shows that contrary to conventional understanding of the law as granting a safe harbor for technologies, courts have created a de facto open-ended liability standard in an attempt to enhance copyright enforcement. With the law becoming increasingly unpredictable, the market has developed a dual, polarized reaction. One path, which this article terms “the risk-minimizing channel”, has typically been taken by rather established and “deep pocket” companies, and is epitomized by over-protectiveness of copyrights, often at the expense of users’ interests. The second course, termed in this paper “the legal escapism route”, has been prevalent among peer-to-peer network and is best characterized as continuing the unauthorized transmission of copyrighted works while employing various measures to avoid the legal consequences which may stem from this behavior. The implications of this dichotomous market behavior on the effectiveness of secondary liability are critical. Ironically, not only has the open-ended standard been prominently ineffective in enhancing copyright enforcement, it has also fueled the processes which have led to the copyright enforcement crisis. Instead of effective enforcement, the law has resulted in market substitution, in which infringement simply shifted from one platform to another, becoming more sophisticated and evasive. The article concludes that in the face of enforcement challenges, copyright law must set a clear, predictable standard in order to effectively direct market behavior in an era of rapid technological change.

The Quest for Appropriate Remedies in the Microsoft Antitrust EU Cases: A Comparative Appraisal

The Microsoft cases in the United States and in Europe have been influential in determining the contours of the substantive liability standards for dominant firms in US antitrust law and in EC Competition law. The competition law remedies that were adopted, following the finding of liability, seem, however, to constitute the main measure for the “success” of the case(s). An important disagreement exists between those arguing that the remedies put in place failed to address the roots of the competition law violation identified in the liability decision and others who advance the view that the remedies were far-reaching and that their alleged failure demonstrates the weakness of the liability claim. This study evaluates these claims by examining the variety of remedies that were finally imposed in the European Microsoft cases, from a comparative perspective. The study begins with a discussion of the roots of the Microsoft issues in Europe and the consequent choice of a remedial approach by the Commission and the Court. It then explores the effectiveness of the remedies in achieving the aims that were set. The non-consideration of the structural remedy in the European case and the pros and cons of developing such a remedy in the future are briefly discussed before more emphasis is put on alternative remedies (competition and non-competition law ones) that have been suggested in the literature. The study concludes by discussing the fit between the remedy and the theory of consumer harm that led to the finding of liability and questions a total dissociation between the two. We believe that it is important to think seriously about potential remedies before litigation begins. However, we do not require an ex ante identification of an appropriate remedy by the plaintiffs, since this could lead to underenforcement or overenforcement.

Real Knowledge is to Know the Extent of One's Own Ignorance: On the Consumer Harm Approach in Innovation-Related Competition Cases

Modern economics advocates an assessment of competition law cases in light of the effects of firm conduct on the relevant market. In many instances, law enforcers and also firms that have to assess the legality of their business models in advance will often have to predict the “likely” effects in the future. This obviously creates a problem of uncertainty. This article reviews this problem for the assessment of competition law cases in innovation-related markets. Thereby, three specific sets of cases are discussed: (1.) the GlaxoSmithKline cases in Europe, where the question was whether R&D intensive pharmaceutical companies should be allowed to restrain parallel trade between Member States in order to enhance their ability to invest in innovation, (2.) the European Microsoft case, and (3.) “pay-for-delay” settlements of patent litigation proceedings that involve a so-called “reverse payment” by the patent holder to the generic drugs producer for delaying the market entry of the generic drug. Thereby, the article aims to identify the most appropriate standard of liability against the background of the problem of uncertainty. It rejects the consumer harm standard which is accepted by the courts in the U.S. and traditionally rejected by the EU courts in favor of a concept of protecting the process of dynamic competition which focuses on the elements of rivalry, openness of the market, and consumer choice.

The Impact of Medical Liability Standards on Regional Variations in Physician Behavior: Evidence from the Adoption of National-Standard Rules

I explore the association between regional variations in physician behavior and the geographical scope of malpractice standards of care. I estimate a 30–50 percent reduction in the gap between state and national utilization rates of various treatments and diagnostic procedures following the adoption of a rule requiring physicians to follow national, as opposed to local, standards. These findings suggest that standardization in malpractice law may lead to greater standardization in practices and, more generally, that physicians may indeed adhere to specific liability standards. In connection with the estimated convergence in practices, I observe no associated changes in patient health. (JEL I11, I18, J44, K13)

Civil liability in the context of the Cartagena Protocol: to be or not to be (binding)?

As with most multilateral environmental negotiations, the on going negotiations for a liability and redress regime in the context of the Cartagena Protocol have proved difficult. While content issues, such as the standard of liability, the scope of the instrument, the nature of the damage and the burden of proof have dominated discussions, the question relating to the nature of the instrument has lurked quietly, but ominously, in the background. This issue came to a head at COP/MOP4 in Bonn - where the instrument was due to be adopted. This paper traces the development of the discussions on the nature of the instrument to be adopted. In particular it considers the slow rise to prominence of the administrative approach to liability at the expense of the civil liability system. This slow rise to prominence of the administrative approach leads to the adoption of a dual approach, meaning a binding instrument on the administrative approach and a nonbinding instrument on civil liability. The paper argues that the positions adopted by the various delegations on the nature of instrument illuminate the complexities of modern international environmental law making and may dispell some closely held beliefs about environmental law making, particularly as it relates to the role of the South.

Indirect Copyright Liability and Technological Innovation

Over the past decade, numerous scholars and commentators have asserted that the indirect copyright liability standards applied in the Napster, Aimster, and Grokster decisions, among others, significantly chill technological innovation. This article examines this critical conjecture and offers both a broader framework for assessing the relationship between indirect copyright liability and technological innovation and some suggestive empirical results. The conceptual analysis demonstrates that the question of whether indirect copyright liability chills technological innovation inherently requires consideration of a broader range of social balances, market mechanisms, and roles for mediating institutions. Several countervailing forces, such as the relatively modest capital requirements associated with the technology at issue, the nature of the many established research environments, the philosophical and cultural orientation of many digital technology researchers, various liability-insulating institutions, the ability of investors and technology companies to manage risk, and the importance of technological advance in fields unaffected by copyright liability, suggest that the effects of indirect copyright liability on innovation in replication and distribution technologies will be less dire and more complex than the conjecture suggests. Moreover, the Chilled Innovation conjecture downplays the beneficial effects of indirect copyright liability on the development of balanced technologies (those that tend to balance incentives to create copyrighted works with advances in information dissemination) while ignoring the adverse effects of broad immunity, which fosters deployment of parasitic technologies that tend to drive out balanced technologies. To the extent that the Chilled Innovation conjecture has force, it is not at the basic research and development stages of the innovation pipeline, but rather at the commercialization stage – which is where in the innovation process such effects are most appropriately focused. This limits the effects of choking innovation in its infancy. The article also offers a partial test of the chilled innovation conjecture by examining academic research and patent data. The findings indicate that the Napster-Aimster-Grokster trilogy does not appear to have derailed technological innovation in the peer-to-peer field.

The Curious Case of Directors' and Officers' Liability for Supervision and Management: Exploring the Intersection of Corporate and Tort Law

Directors’ and officers’ liability under corporate and securities laws continues to be a hotly debated subject. Yet, their liability toward non-shareholder third parties under common tort law and statutory provisions has generated relatively modest scholarly interest. Thus, it has gone mostly unnoticed that corporate directors and officers can be held personally liable in tort to non-shareholder third parties based on failures in exercising their core corporate duties - supervision and management.However, as this article explains, the current liability regime in this area is in need of repair. It fails to distinguish between the corporation’s duties and the duties of directors and officers, neglects the separate corporate personality of the corporation, unduly shifts the risk of doing business to directors and officers, and undermines the heightened liability protections provided to directors and officers by corporate laws. Consequently, a new approach is required. This article proposes a novel model for corporate liability that is centered around the nature of directors’ and officers’ duties and focuses on the individual’s state of mind. At its core, the proposed model is based on the belief that in order to preserve the corporate shield, liability standards in tort law should not conflate the standards imposed on individuals with those imposed on directors and officers.

Public and private enforcement of securities laws: Resource-based evidence

Ascertaining which enforcement mechanisms work to protect investors has been both a focus of recent work in academic finance and an issue for policy-making at international development agencies. According to recent academic work, private enforcement of investor protection via both disclosure and private liability rules goes hand in hand with financial market development, but public enforcement fails to correlate with financial development and, hence, is unlikely to facilitate it. Our results confirm the disclosure result but reverse the results on both liability standards and public enforcement. We use securities regulators’ resources to proxy for regulatory intensity of the securities regulator. When we do, financial depth regularly, significantly, and robustly correlates with stronger public enforcement. In horse races between these resource-based measures of public enforcement intensity and the most common measures of private enforcement, public enforcement is overall as important as disclosure in explaining financial market outcomes around the world and more important than private liability rules. Hence, policymakers who reject public enforcement as useful for financial market development are ignoring the best currently available evidence.