Threat Of Litigation Research Articles

Shareholder Litigation and Cost of Bank Loans -- Evidence from a Natural Experiment

I study how the threat of shareholder litigation affects the cost of bank loans using a natural experiment based on a ruling by the Ninth Circuit Court of Appeals. Using a difference-in-differences method, I find that increasing the difficulty of securities class action suits decreases loan spreads. The effect is stronger for firms with higher institutional ownership, which is consistent with the argument that class actions suits help shareholders extract wealth from creditors when the firm is in bankruptcy. Further analysis confirms that the effect is in fact stronger for firms closer to bankruptcy.

Comments: Argentina's Shale Play

Editor's column After months of speculation, development of one of the world’s most promising shale plays, Argentina’s Vaca Muerta field, is entering a new phase and attracting strong interest from supermajors. The Vaca Muerta formation in the Neuquén basin is a world-class source rock. The basin is located in west-central Argentina and is the leading producer of hydrocarbons in Argentina covering 137,000 km2. The recent compensation deal between Repsol and the Argentine government over the government’s 2012 expropriation of oil producer YPF eliminated a huge roadblock to international investment in the country’s most potentially prolific shale play. The compensation agreement offered USD 5 billion worth of government bonds in exchange for the Spanish company agreeing to drop its lawsuits against Argentina and YPF for the expropriation. Repsol had threatened to sue companies that struck shale deals with YPF. The investment uncertainty and threat of litigation kept most operators out of Argentina, despite the country’s promising shale prospects. The US Energy Information Administration lists Argentina as the fourth-largest holder of technically recoverable shale oil resources at 27 billion bbl. With this hurdle lifted, Argentina hopes that operators now will flock to the country, leading to a shale boom like the one that has occurred in North America. Last year, Chevron braved the waters, agreeing to invest USD 1.24 billion in a Vaca Muerta joint venture. In September, Dow Chemical signed a deal to invest up to USD 120 million to 16 shale gas wells with YPF. Last month, there were reports that Malaysian state oil company Petronas had signed a memorandum of understanding with YPF for a joint venture in the shale play, and there were further reports that ExxonMobil and Wintershall had expressed interest. Shell entered the Vaca Muerta play in 2011 and has been cautious about investment, but now says it will triple upstream spending to USD 500 million this year, compared with USD 170 million in 2013, given the changes taking place. Also attracting investors are Argentina’s attempts to liberalize oil and gas prices closer to international levels and expectations that the country might modify its existing hydrocarbons law. The existing law governed a local petroleum industry that was self-sufficient and a regional exporter, but the country now faces rising import costs and occasional shortages. The government has promised companies that invest more than USD 1 billion over 5 years that they will be exempt from some foreign-exchange rules and will be allowed to sell 20% of their production outside the country at international prices. YPF controls about one third of Vaca Muerta’s acreage and wants to drill hundreds of wells to produce at least 100,000 BOPD by the end of the decade. As with other countries outside North America, development of shale is anything but certain. In addition to the need to attract operator investment, the country lacks drilling equipment and technical labor and does not have a robust service sector. But outside North America, Argentina appears to be the most interesting global shale play this year and one that Argentina desperately needs to help turn around its energy sector. JPT

How Can Journals Respond to Threats of Libel Litigation?

Trudo Lemmens and colleagues discuss how the mere suggestion of litigation can bias the medical literature by affecting editorial decisions. They argue that journals and authors should publicly post threats of litigation, or cease and desist letters, for which there are some international legal precedents. Please see later in the article for the Editors' Summary

Sovereign Debt Restructuring under the Investor-State Dispute Regime

With the global economy recovering from the financial crisis of 2008, this article explores a traditional policy option available for countries facing a serious economic crisis - sovereign debt restructuring (SDR) a scheme, which restructures the debts' original terms and conditions, for example, to reduce the amount of debts - and analyses how it would fare under the investor-state dispute (ISD) regime if foreign holders of sovereign bonds challenge the scheme in an ICSID proceeding. This article first examines how safeguards (such as collective action clauses) traditionally employed by countries against threats of holdout litigation by minority creditors aimed at SDR may not be applicable under the ISD regime, and further analyses whether ICSID would have jurisdiction over sovereign debts including the issue of scope of definition of investment in light of the decision by the Abaclat tribunal. This article then examines some of the substantive standards that may be raised as key issues during ICSID proceedings, including national treatment, most favored nation (MNF) and fair and equitable treatment standards. This article finally takes a look at one of the primary defences that would be available for a host state - state of necessity - and analyses and evaluates the three positions that seem to be co-existing under the current ISD regime.

Shareholder Litigation and Ownership Structure: Evidence from a Natural Experiment

We use a natural experiment to identify a causal effect of the threat of shareholder litigation on ownership structure, governance, and firm performance. We find that when it becomes harder for small shareholders to litigate, ownership becomes more concentrated and shifts from individuals to institutions. Director and officer governance protections drop among these firms, and operating performance drops among firms whose ownership structure does not change. These results suggest that the ability of shareholders to coordinate and litigate against management is important for governance. This paper was accepted by Lauren Cohen, finance.

A Lesson from Cape Wind: Implementation of Offshore Wind Energy in the Great Lakes Should Occur through Multi-State Cooperation

The aftermath of the April 2010 explosion of the Deepwater Horizon oil-drilling rig in the Gulf of Mexico has caused the United States to reevaluate its energy production. In the wake of the tragic oil spill, now known to be the worst environmental disaster in the nation’s history, a new source of energy has gained momentum; offshore wind technology is taking hold. On October 6, 2010, the U.S. Secretary of the Interior issued the first offshore renewable energy lease in United States history to Cape Wind Associates, signaling the beginning of a new era in domestic electricity production. While this first lease has sparked a race among states to be the first to implement offshore wind technology, the legal framework that enabled the issuance of the lease remains problematic in one key respect: it applies only to federal bottomlands and therefore fails to provide prospective offshore wind farm developers with access to bottomlands under state control. While this may prove to be only a minor speed bump in an otherwise streamlined process for states on the coasts, it leaves states in the Great Lakes region at a severe disadvantage. Because all land within the Great Lakes is controlled by the surrounding states, the leasing process that allows offshore wind development on the coasts does not apply within the Great Lakes, leaving a gray area in the law. While the Great Lakes region is home to enormous wind resources and political drive for renewable energy, the implementation of offshore wind technology in the region will likely be hampered or significantly delayed due to the regulatory confusion that remains in the absence of an established permitting process.In light of this shortcoming in the federal statute, this Comment analyzes the potential for successful implementation of offshore wind farms in the Great Lakes given the current state-level regulatory framework, and proposes that the Great Lakes states join in multi-state action to establish a streamlined permitting process and attract offshore wind development to the region. In order to provide adequate perspective on the matter, Part II provides a broad overview of the state and federal regulatory incentives established to encourage development of renewable energy and examines the legal claims that have operated as disincentives to the implementation of offshore wind technology. Part III then discusses the federal procedures for issuing offshore renewable energy leases, and describes the geographic and regulatory limitations that confine these procedures to the coasts. Next, Part IV uses Illinois as an example to analyze the extent and causes of the regulatory uncertainty that remains at the state level, and specifically in the Great Lakes region, concluding that, when faced with the threat of costly and time-consuming litigation, prospective developers will avoid siting projects in the Great Lakes. Finally, Part V proposes that the states in the Great Lakes region join together in multi-state action to remedy the shortcoming in the federal law by establishing a permitting process applicable to the state-controlled bottomlands in the Great Lakes.

Predatory Patent Litigation

Despite their expertise in patent law, the most litigious patent assertion entities (PAEs) frequently file dubious infringement claims on which they are ostensibly very unlikely to turn a profit. Thus one might conjecture that these PAEs are mistaken to follow through on their litigation threats when their chances of coming out ahead are so scant. To the contrary, this paper demonstrates that this is in fact a calculated strategy of predatory patent litigation: by following through on its threats of seemingly irrational litigation, the PAE develops a litigious reputation that convinces other producers that these threats are credible, leading them to accept licensing offers they would ordinarily rebuff. This allows the PAE to garner substantial licensing revenues using low quality patents that would otherwise be difficult or impossible to monetize. This paper develops a stylized dynamic model of patent assertion and reputation building by a PAE with low quality patents. The model has a unique equilibrium that involves predatory patent litigation, and in which the PAE intermittently forfeits and rebuilds its litigious reputation over time. Predatory patent litigation generates substantial social costs, and creates a perverse incentive for patent applicants to seek coverage of technologies so obvious or non-novel that they are likely to be widely unintentionally infringed by unsuspecting producers. Importantly, fee shifting will not solve the problem. Rather, it will lead predatory PAEs to focus their ire on small, vulnerable targets, such as technology startups, for whom litigation may be crippling even if attorney’s fees are ultimately recouped. Potential defendants could better deter predatory PAEs by entering a litigation cost-sharing agreement in which members jointly pay one another’s litigation costs and litigate all meritless claims to judgment. If properly limited in scope, such an arrangement is lawful and will not materially undermine meritorious infringement actions.

Malpractice Litigation and Nursing Home Quality of Care

To assess the potential deterrent effect of nursing home litigation threat on nursing home quality. We use a panel dataset of litigation claims and Nursing Home Online Survey Certification and Reporting (OSCAR) data from 1995 to 2005 in six states: Florida, Illinois, Wisconsin, New Jersey, Missouri, and Delaware, for a total of 2,245 facilities. Claims data are from Westlaw's Adverse Filings database, a proprietary legal database, on all malpractice, negligence, and personal injury/wrongful death claims filed against nursing facilities. A lagged 2-year moving average of the county-level number of malpractice claims is used to represent the threat of litigation. We use facility fixed-effects models to examine the relationship between the threat of litigation and nursing home quality. We find significant increases in registered nurse-to-total staffing ratios in response to rising malpractice threat, and a reduction in pressure sores among highly staffed facilities. However, the magnitude of the deterrence effect is small. Deterrence in response to the threat of malpractice litigation is unlikely to lead to widespread improvements in nursing home quality. This should be weighed against other benefits and costs of litigation to assess the net benefit of tort reform.

Threat of Litigation and Patent Value: What Technology Managers Should Know

OVERVIEW:Patent dealers have achieved exceptional growth in scale and scope of operations; today, their approaches to patent value affect intellectual property strategies for companies in many industries, even beyond the high-technology sector. To clarify the strategy patent dealers use, we studied a set of 392 U.S. patents sold to a patent dealer by a global consumer electronics firm; the dealer then sold the patents during 2010 and 2011. The analysis shows that under the strategy employed by patent dealers, patent value is driven by the threat of litigation—the higher the threat of litigation, the greater the monetary value of the patent. The evidence suggests that broadly drafted, older patents that cover mainstream technology and for which evidence of infringement may be ambiguous present a greater threat of litigation, and therefore carry a higher value.

National Association of Medical Examiners Position Paper: Medical Examiner, Coroner, and Forensic Pathologist Independence

Objective Forensic pathologists play a vital role in the justice system in matters concerning questions of death. Science as applied in the justice system should be objective and neutral. Since the goals of medical examiners and coroners are to determine the cause and manner of death for certification and public health functions (goals different and distinct from the missions of law enforcement agencies), it is important that medicolegal death investigation be independent. Accurate investigation, examination, reporting, and testimony by forensic pathologists are important to determine the cause and manner of death of individuals who die under sudden, unexpected, or violent circumstances. These cases can become the focus of political or legal pressure by individuals or offices seeking to influence the pathologist's findings. This pressure, even if seemingly unsuccessful in an individual case, can introduce error, bias, and corruption into the medicolegal investigation process. This paper reinforces the principle that medical examiners, coroners and forensic pathologists should be allowed to perform medicolegal investigations free of these influences. Participants The ad hoc Committee on Medical Examiner Independence of the National Association of Medical Examiners (NAME), a self-selected volunteer committee, developed this position paper. The findings are based on surveys of the NAME membership regarding members’ experience with, and reaction to, outside influence. Evidence Surveys of NAME members revealed that medical examiner independence was important to most members. Over 70% of survey respondents had been subjected to pressures to influence their findings, and many had suffered negative consequences for resisting those influences. In a separate study, over 30% of respondents indicated that fear of litigation affected their diagnostic decision-making. In 2009, the National Research Council of the National Academies published recommendations to strengthen the forensic sciences; they specifically recommended that medical examiner and coroner offices should be independent from law enforcement agencies and prosecutors’ offices. Consensus Process This position paper represents the consensus of the ad hoc Committee on Medical Examiner Independence, submitted to the Executive Committee and Board of Directors of NAME, and subject to comment and review by the membership. Conclusions It is the position of NAME that forensic pathologists working in or for medical examiner or coroner offices or as private consultants should be permitted to objectively pursue and report the facts and their opinions of those cases which they are investigating independent of political influences from other agencies within their respective jurisdictions and independent of the threat of litigation.

Financial distress, earnings management and market pricing of accruals during the global financial crisis

PurposeThe aim of this paper is to examine empirically the managerial earnings management practices of financially distressed firms, and to consider whether these practices changed during the recent global financial crisis. Although corporate distress has been a topic of research interest for many years, earnings manipulation by distressed firms has received relatively little attention.Design/methodology/approachThe paper uses three measures of distress, and discretionary accruals, a popular proxy for earnings management, to investigate the impact of distress on earnings management.FindingsThe paper finds that managers of distressed firms engage more in income‐decreasing earnings management practices compared to their healthy firm counterparts. The paper also finds some evidence of the effect of the global financial crisis on the association between financial distress and earnings management. Finally, the paper shows some evidence of positive market pricing of discretionary accruals in the non‐crisis period, but a substantial reduction in pricing coefficients during the global financial crisis period.Practical implicationsFinancial distress experienced by firms provides incentives to managers for earnings manipulation. However, the direction of the earnings management could be income‐increasing or income‐decreasing. The findings from this study will allow investors to make better investment decisions for firms that are experiencing financial difficulties.Originality/valueThis paper is the first in New Zealand to investigate the association between firm distress and managerial earnings management decisions. Recently, New Zealand experienced a spate of finance company collapses that somewhat contributes, indirectly, to financial distress experienced by firms. The New Zealand reporting environment is characterized by concentrated ownership, relaxed monitoring by regulatory authorities, and a very low litigation threat that provides an interesting setting to examine the research question. This paper is also the first to test the market pricing of earnings components in New Zealand.

To Bully or not to Bully: Understanding the Role of Uncertainty in Trademark Enforcement Decisions

Companies like Starbucks and Chick-fil-A are routinely labeled trademark bullies. The term “trademark bully” is typically used to describe a large company that uses aggressive intimidation tactics and threats of prolonged trademark infringement litigation to stop small businesses and individuals from using their own trademarks where the stated claims of infringement are likely spurious or non-existent. Trademark bullying harms competition and chills the free speech interests of those seeking to use trademarks for criticism and parody as permitted by the fair use doctrine. This Article identifies two fundamental causes that interact to encourage the aggressive tactics used by trademark bullies. First, trademark law imposes a vague duty on trademark owners to “police” third party trademark use for potential infringement. This uncertain duty renders trademark owners unable to accurately predict the risk of harm that third parties pose to their trademarks. Secondly, inherent cognitive biases affecting evaluations of such risk lead to systematic judgment errors and overestimation of the risk involved, thereby encouraging aggressive trademark enforcement. This Article uses prospect theory, an empirical social science approach to understanding human decision making, to characterize the psychological phenomena, including loss aversion and overestimation of risk, that motivate trademark bullies. Prospect theory explains apparently irrational decision making by trademark bullies. Recently proposed solutions for trademark bullying mistakenly assume that the trademark bully conducts a rational cost-benefit analysis prior to acting. Better solutions require an understanding of the actual psychological processes that underlie these aggressive tactics.

A new generation of trade policy: potential risks to diet-related health from the trans pacific partnership agreement

Trade poses risks and opportunities to public health nutrition. This paper discusses the potential food-related public health risks of a radical new kind of trade agreement: the Trans Pacific Partnership agreement (TPP). Under negotiation since 2010, the TPP involves Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the USA, and Vietnam. Here, we review the international evidence on the relationships between trade agreements and diet-related health and, where available, documents and leaked text from the TPP negotiations. Similar to other recent bilateral or regional trade agreements, we find that the TPP would propose tariffs reductions, foreign investment liberalisation and intellectual property protection that extend beyond provisions in the multilateral World Trade Organization agreements. The TPP is also likely to include strong investor protections, introducing major changes to domestic regulatory regimes to enable greater industry involvement in policy making and new avenues for appeal. Transnational food corporations would be able to sue governments if they try to introduce health policies that food companies claim violate their privileges in the TPP; even the potential threat of litigation could greatly curb governments’ ability to protect public health. Hence, we find that the TPP, emblematic of a new generation of 21st century trade policy, could potentially yield greater risks to health than prior trade agreements. Because the text of the TPP is secret until the countries involved commit to the agreement, it is essential for public health concerns to be articulated during the negotiation process. Unless the potential health consequences of each part of the text are fully examined and taken into account, and binding language is incorporated in the TPP to safeguard regulatory policy space for health, the TPP could be detrimental to public health nutrition. Health advocates and health-related policymakers must be proactive in their engagement with the trade negotiations.

Patent Trolls and Technology Diffusion

Patent assertion entities, sometimes known as 'patent trolls,' do not manufacture goods themselves but profit from licensing agreements that they often enforce via the threat of litigation. This paper explores empirically how litigation by one such patent troll affected the sales of medical imaging technology. It finds evidence that relative to similar products, made by the same firm, but not covered by the patent, imaging software sales declined by one-third. This was not due to a suppression in demand by hospitals but instead is linked to a lack of incremental product innovation during the period of litigation.

Medicolegal Issues with Regard to Melanoma and Pigmented Lesions in Dermatopathology

Understanding malpractice risk and practicing risk management strategies results in better care and a less stressful environment of practice. Errors in diagnosis are most commonly related to melanoma and neoplasms of the skin. To offset the threat of malpractice litigation, malpractice data can be used to focus safety efforts on common diagnostic errors. Recognition of sources of error in the analysis of pigmented lesions by dermatopathologists, and the development of new immunohistochemical or genotypic techniques for the recognition and distinction of malignant disease from benign pigmented lesions, will also provide important improvements in care and diagnosis in the future.

Hazardous Waste Contamination: Implications for Commercial/Industrial Land Transactions in Silicon Valley

More than 400 hazardous waste contamination sites exist in California's Silicon Valley. Zealous enforcement of deanup laws and the threat of litigation have meant that toxic con­ tamination can drastically affect market values of property. Uability insurance to cover cleanup costs is virtually unavail­ able. However, Silicon Valley's competitive commerdal/ industrial real estate market has forced buyers and sellers to allocate the risks posed by contaminated properties instead of immediately terminating transactions. Nine case studies in this article illustrate that many contaminated properties in Silicon Valley continue to sell at near-market prices. Such land transfers are now routinely subject to an array of mech­ anisms designed to internalize the costs of cleanup, includ­ ing in-depth environmental risk assessments, detailed pur­ chase agreements, and long escrow periods during which cleanup can begin.

Stigma Damages and Diminution of Property Claims in Environmental Class Actions

One of the less documented effects of the 2008 U.S. housing collapse has been the rise in lawsuits seeking to recover damages for diminution of value and stigma to property. Many of these suits involve properties with little to no actual “diminished” value and simply look to collect on homes that are “underwater” or less valuable due to the depressed market, unrelated to perceived, alleged environmental conditions. While some of these claims have come in the form of condemnation, lost rent, and lost rental opportunity actions, this article focuses on a particularly dangerous variety: local and regional class actions based on actual or threatened environmental contamination. The article notes that these mass attacks pose an especially high threat of costly litigation and unjust outcomes for defendants and recommends strategies for effectively defending them in precertification discovery. The article also undertakes an elemental analysis of federal class certification requirements and explores the recoverability of environmental stigma damages.

Ethical issues, dilemmas and controversies in 'cosmetic' or aesthetic dentistry. A personal opinion

Stephen Hancocks' elegant editorial of 11 December 2011 raises interesting questions which deserve discussion. Most experienced dentists would agree that the less that is done to teeth for cosmetic reasons, the lesser are the risks of disappointment, failure of expectation, or threat of litigation. Yet there is an increasing number of cases where aesthetics are the primary concern for dentists and patients alike and some patients are consenting to treatment without being properly informed of the destructive nature of the procedures to their sound tooth tissue and structures to achieve the desired 'cosmetic' outcome. This raises ethical issues, as much of this overtreatment is unnecessarily destructive and goes against the healing and caring principles of the dental profession.

Managerial reporting, overoptimism, and litigation risk

We examine how the threat of litigation affects an entrepreneur's reporting behavior when the entrepreneur (i) can misrepresent his privately observed information, (ii) pays legal damages out of his own pocket, and (iii) is optimistic about the firm's prospects relative to investors. We find higher expected legal penalties imposed on the culpable entrepreneur do not always cause the entrepreneur to be more cautious but instead can increase misreporting. We highlight how this relation depends crucially on the extent of entrepreneurial overoptimism, legal frictions, and the internal control environment.

Determining the Frequency of Asbestos Use in Automotive Brakes from a Fleet of On-Road California Vehicles

Asbestos is a known human carcinogen, and recent regulation in California limits asbestiform fibers in brakes to trace levels beginning in 2014, although there is no corresponding federal requirement. In order to gauge the current prevalence of asbestos use in automotive brake applications, the California Air Resources Board tested brake linings from 137 light- and medium-duty vehicles and 54 heavy-duty vehicles. Only about 3% of the light- and medium-duty vehicle brake linings contained chrysotile asbestos. All of those brake linings were drum-type shoes, which are generally being phased out. No asbestos was found in low mileage vehicles presumed to have their original stock linings from the vehicle manufacturer. Additionally, no asbestos was found in the heavy-duty vehicle brake shoe linings sampled. Given the small percentage of vehicle brake linings with asbestos observed, it appears that the prior federal ban that was subsequently overturned, in combination with a threat of litigation, has reduced asbestos use in brake linings. However, our study was limited in scope and without a national ban, the current and future prevalence of asbestos in brakes is uncertain, suggesting the need for continued monitoring of materials released as toxic air contaminants in normal braking operations.