University of Michigan Legal Working Paper Series

The Past and Future of Deinstitutionalization Litigation

Samuel R. Bagenstos — Tue, 14 Feb 2012 08:20:49 PST

Two conflicting stories have consumed the academic debate regarding the impact of deinstitutionalization litigation. The first, which has risen almost to the level of conventional wisdom, is that deinstitutionalization was a disaster. The second story does not deny that the results of deinstitutionalization have in many cases been disappointing. But it challenges the suggestion that deinstitutionalization has uniformly been unsuccessful, as well as the causal link critics seek to draw with the growth of the homeless population. This dispute is not simply a matter of historical interest. The Supreme Court’s 1999 decision in Olmstead v. L.C., which held that unjustified institutionalization can violate the Americans with Disabilities Act, was followed by a wave of new lawsuits challenging institutionalization of people with psychiatric, developmental, and/or physical disabilities. And the Obama Administration’s Community Living Initiative has led the United S tates Department of Justice to move aggressively into this field as well. The question naturally arises whether this new round of deinstitutionalization litigation will end in the same place as the litigation of the 1970s and 1980s.

This article contends that things will be different this time—though not necessarily better. The outcomes of the first wave of deinstitutionalization litigation resulted from the interaction between the political dynamics into which advocates inserted themselves and the legal claims they employed. But, as this article shows, both the political dynamics and the legal claims have changed significantly. Precisely because the first wave of deinstitutionalization litigation was so successful in moving residents out of large state institutions for people with psychiatric and developmental disabilities, the efforts of deinstitutionalization advocates have turned to ensuring the availability of adequate services in the community. This has shifted the fiscal politics of the field in ways that destabilize old political alliances but create the potential for new ones. At the same time, deinstitutionalization advocates have moved from the due process theories on which they relied in the 1970s and 1980s to an antidiscrimination theory relying on the ADA and Olmstead. That theory focuses directly on state resource-allocation decisions and affords states a powerful incentive to create and fund adequate community services. All of which leaves the future of deinstitutionalization uncertain. Deinstitutionalization advocates are focused to a greater extent than ever on the goal of building up a robust community-based treatment system. And they are employing the most powerful legal tool they have ever possessed to achieve that goal. But the political partners who helped them achieve their great success in the first wave of deinstitutionalization will likely be the biggest obstacle to success in the next wave.

U.S. Treaty Anti-Avoidance Rules: An Overview and Assessment

Reuven S. Avi-Yonah et al. — Tue, 31 Jan 2012 08:46:24 PST

In this article, the authors provide a summary of the anti-avoidance rules in the United States that relate to bilateral tax treaties. Specifically, they focus on treaty-based anti-avoidance rules and discuss whether or not a General Anti-Avoidance Rule would be appropriate in this context.

Wisdom of the Ages or Dead-Hand Control? Patentable Subject Matter for Diagnostic Methods After In re Bilski

Rebecca Sue Eisenberg — Mon, 09 Jan 2012 07:43:16 PST

For a quarter century following the landmark 1980 decision of the Supreme Court in Diamond v. Chakrabarty, inventions and discoveries in biotechnology research appeared to be eligible for patent protection, assuming they meet the statutory standards for patent protection. The Supreme Court reopened the issue of patentable subject matter in 2005 when it granted certiorari in Laboratory Corporation v. Metabolite on the question of whether a method of diagnosing vitamin deficiency by observing a biomarker was unpatentable as a “basic scientific relationship.” Although the Court later dismissed the case without reaching a decision on the merits, since that time the Court of Appeals for the Federal Circuit has struggled to discern the limits of patentable subject matter for diagnostic methods in old Supreme Court decisions that had previously seemed destined to languish on library shelves. The Supreme Court reaffirmed the authority of these decisions without explanation in Bilski v. Kappos, thereby demanding formal adherence to stare decisis without following the discipline of common law reasoning. To make sense of these decisions as a guide to the subject matter boundaries of the patent system in the context of contemporary technologies, it is necessary to begin with an account of the functions of subject matter boundaries in patent law. In Mayo Collaborative Services v. Prometheus Laboratories, the Supreme Court has another opportunity not only to clarify the boundaries of patentable subject matter, but to explain what the doctrine of patentable subject matter is all about. This article reviews developments on the issue of patentable subject matter and considers alternative accounts of the work that patentable subject matter doctrine might do for the patent system in the hope of clarifying the application of that doctrine to new technologies with a focus on diagnostic method claims.

Antibiotic Resistance

Jessica Litman — Thu, 08 Dec 2011 12:29:03 PST

In this essay, written for the 30th Anniversary of Cardozo’s Arts and Entertainment Law Journal, I revisit the ruinous litigation strategy copyright owners pursued after Napster to secure control of the market for personal uses of copyrighted works, which I wrote about ten years ago in War Stories, 20 Cardozo Arts & Ent. L.J. 337 (2002). The litigation campaign had effects that copyright owners now have reason to regret. Medical experts tell us that powerful antibiotics are highly effective in killing off both good and bad bacteria, but at a significant risk. Bugs that survive the treatment grow bigger, stronger, and resistant to antibiotics. They become much more dangerous because they are harder to kill. Copyright owners’ indiscriminate litigation against new entrants into the entertainment and information marketplace killed off a broad swath of potential competitors and partners. The ones who were left faced a less crowded field because old media had helpfully cleared it for them. The scorched-earth litigation strategy temporarily cleared the field, and made room both for tepid, content-industry-controlled efforts to distribute music, books, and video online, and for new entrants with the stamina and resources to survive copyright infringement suits. Apple, Amazon, and Google took advantage of that environment to grow into dominant distributors who are obligatory partners for any serious online content distribution plan, and who insist on calling the shots on price, format, and other matters that content owners believe should rightfully be under their own control.

The Effective Tax Rate of the Largest US and EU Multinationals

Reuven S. Avi-Yonah et al. — Fri, 18 Nov 2011 13:00:53 PST

This paper compares the effective tax rates of the 100 largest US multinationals to the 100 largest EU multinationals for the period 2001-2010, based on financial disclosures. The paper finds that despite the higher US statutory rate the effective tax rates are comparable and that EU multinationals tend to have a higher effective tax rate. The likely explanation is that EU corporate taxes have a broader base. The paper concludes that current US tax law does not subject US based multinationals to a competitive disadvantage against their EU based competitors.

Search Neutrality as an Antitrust Principle

Daniel A. Crane — Fri, 18 Nov 2011 12:57:47 PST

Google's perceived dominance in Internet search, and the perception that Google exploits this dominance to favor its own websites and service, has led to call for a mandatory legal requirement of "search neutrality." This essay argues that a general principle of search neutrality ignores the realities of Internet search and would stymie search innovation.

The Unaffordable Health Act – A Response to Professors Bagley and Horwitz

Douglas A. Kahn et al. — Tue, 06 Sep 2011 12:10:59 PDT

The Patient Protection and Affordable Care Act of 2010 has stirred considerable controversy. In the public debate over the program, many of its proponents defended it by focusing on what is sometimes called the “free-rider” problem. In a prior article, we contended that the free-rider problem has been greatly exaggerated and was not likely to have been a significant factor in the congressional decision to adopt the Act. We maintained that the free-rider issue is a red herring that was advanced to trigger an emotional attraction for the Act and distract attention from the actual issues that favor and disfavor its adoption.

In a recently published article, Professors Nicholas Bagley and Jill Horwitz responded to our article. For convenience, we will sometimes refer to the two professors collectively as “the professors.” In addition to addressing the free-rider issue, they also made a number of points in defense of the Act. We will concentrate on responding to those items that were discussed in our prior article and deal with only some of their other points.

Exclusion from Income of Compensation for Services and Pooling of Labor Occurring in a Noncommercial Setting

Douglas A. Kahn — Tue, 12 Jul 2011 09:48:24 PDT

Compensation for services, regardless of the form, constitutes income to the recipient. Consequently, the exchange of services by two individuals is treated as income to each. However, there are numerous examples of an exchange of services that the IRS has never sought to tax. The most common example is an exchange of services by a married couple who divide the household chores between them. The focus of this article is to propose a principled reason for not taxing those exchanges and to explore the limits of that exclusion. The author contends that the income tax operates exclusively on commercial transactions, and so income derived from a noncommercial activity is not taxable. The article explores what types of activities can be classified as noncommercial for this purpose.

As a corollary to the proposed noncommercial rule, the article contends that the income tax does not apply to individuals who pool their labor to obtain a common goal. The resulting exchange of services are not taxable. The article considers the question of how broadly a common goal can be defined for this purpose. The article examines several specific activities in which services are exchanged and which should not be taxable. Specifically, among others the article examines: baby sitting barter clubs, cooperative nursery schools, and home schooling.

Real Time Audit – It is the Time to Act?

Reuven S. Avi-Yonah et al. — Tue, 12 Jul 2011 09:44:42 PDT

The U.S. is facing one of its hardest economic crises. Its economy has not recovered from the 2008 downturn, and the light at the end of the tunnel is far, far away. The government and the Internal Revenue Service (“IRS”) are seeking revenue sources in order to reduce its budget deficit. However, raising the income tax rates is politically difficult and may lead to further loss of jobs. In this political situation, it is important to try to find ways to raise more revenue without raising tax rates. One possibility of doing so is “real time audit”: Auditing transactions when they occur, rather than months or years later.

Scandal Enforcement at the SEC: Salience and the Arc of the Option Backdating Investigations

Stephen Choi et al. — Fri, 08 Jul 2011 06:52:40 PDT

We study the impact of scandal-driven media scrutiny on the SEC’s allocation of enforcement resources. We focus on the SEC’s investigations of option backdating in the wake of numerous media articles on the practice of backdating. We find that as the level of media scrutiny of option backdating increased, the SEC shifted its mix of investigations significantly toward backdating investigations and away from investigations involving other accounting issues. We test the hypothesis that SEC pursued more marginal investigations into backdating as the media frenzy surrounding the practice persisted at the expense of pursuing more egregious accounting issues that did not involve backdating. Our event study of stock market reactions to the initial disclosure of backdating investigations shows that those reactions declined over our sample period. We also find that later backdating investigations are less likely to target individuals and less likely to accompanied by a parallel criminal investigation. Looking at the consequences of the SEC’s backdating investigations, later investigations were more likely to be terminated or produce no monetary penalties. We find that the magnitude of the option backdating accounting errors diminished over time relative to other accounting errors that attracted SEC investigations.

Money on the Table: Why the U.S. Should Tax Inbound Capital Gains

Reuven S. Avi-Yonah — Wed, 22 Jun 2011 11:16:44 PDT

In 1992, Chairman Rostenkowski introduced legislation that imposed US capital gains tax on foreign sellers of large blocks of shares (10 percent or more) in US corporations. The legislation was not a treaty override, although it added an anti-treaty shopping provision similar to those adopted for the branch profit tax in 1986. It also had anti-abuse provisions that addressed holding company structures. Today, the US faces a large budget deficit and seeks to impose higher burdens on its own multinationals. While that is also justified, there is no reason to let foreigners off the hook, especially since there is much more inbound FDI now than there was in 1992. Congress should adopt the Rostenkowski legislation now.

Preferences for Banking and Payment Services among Low- and Moderate-Income Households

Michael S. Barr et al. — Thu, 02 Jun 2011 12:56:00 PDT

This paper characterizes the features of an account-based payment card – including bank debit cards, prepaid debit cards, and payroll cards – that elicit a high take-rate among low- and moderate-income (LMI) households, particularly those without bank accounts. We apply marketing research techniques, specifically choice modeling, to identify the design of a specific financial services product for LMI households, who often face difficulties maintaining standard bank accounts but need banking services. After monthly cost, we find that, on average, non-monetary features of a payment card, such as the availability of federal protection and the type of card, are factors LMI consumers weigh most heavily when choosing among differently designed payment cards. We estimate a high take rate for a well-designed payment card that is decreasing in its cost. The sensitivity of the take-rate with respect to cost varies by income and bank account ownership. These results can guide private and public sector initiatives to expand the range of financial services available to LMI households.

Ability to Pay

John A. E. Pottow — Tue, 17 May 2011 08:51:01 PDT

The landmark Dodd-Frank Act of 2010 transforms the landscape of consumer credit in the United States. Many of the changes have been high-profile and accordingly attracted considerable media and scholarly attention, most notably the establishment of the Consumer Financial Protection Bureau (CFPB). But when the dust settled, one profoundly transformative innovation that did not garner the same outrage as CFPA did get into the law: imposing upon lenders a duty to assure borrowers’ ability to repay. Ensuring a borrower’s ability to repay is not an entirely unprecedented legal concept, to be sure, but its wholesale embrace by Dodd-Frank represents a sea change in U.S. consumer credit market regulation. This article does three things regarding this new duty to assess a consumer’s ability to pay mortgage loans. First, it tracks the multifaceted pedigree of this requirement, looking at fledgling strands in U.S. consumer law as well as other areas such as securities law; it compares too its more robust embrace in foreign systems. Second, it offers conjecture regarding just how this broadly stated principle might be put into practice by the federal regulators. Finally, it provides a brief normative comment, siding with the supporters of this new obligation on lenders.

Free Rider – A Justification for Mandatory Medical Insurance under Health Care Reform?

Douglas A. Kahn et al. — Fri, 22 Apr 2011 12:56:34 PDT

Section 1501 of the Patient Protection and Affordable Care Act added section 5000A to the Internal Revenue Code to require most individuals in the United States to purchase a minimum level of medical insurance. This requirement, which is enforced by a penalty imposed on those who fail to comply, is sometimes referred to as the “individual mandate.” A frequently stated defense of the individual mandate is that there are a vast number of persons who do not purchase medical insurance and then obtain free medical care when the need arises, and the individual mandate will require those persons (often referred to as “free-riders”) to pay their share. It is the significance of this free-rider justification that we question. We conclude that the free-rider problem, if it existed at all, likely was of minor significance and can hardly be said to justify the adoption of the new health care program. The actual congressional reason for adopting the program seems to rest on an entirely different purpose, and the debate over the desirability of the program should focus on the merits of that other purpose.

Toward Transatlantic Convergence in Financial Regulation

Hwa-Jin Kim — Mon, 18 Apr 2011 09:08:22 PDT

This Article reviews the historical background of the Glass-Steagall Act of 1933 along with the developments in the markets that led to the Gramm-Leach-Bliley Act of 1999. It analyzes the discussions on the Volcker Rule in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 from a comparative perspective. It shows how the reform in the United States may impact financial institutions and markets in other jurisdictions. Germany and Switzerland, where universal banking is the hallmark of the financial services industry, are the primary jurisdictions of interest. After taking a historical and political look at the regulation of financial institutions in the United States and Europe, this Article touches on the issues of global regulatory reform to see if the global solution might fit into the structural issues of financial institutions and systems. Building on the discussions on convergence in bank corporate governance, it predicts Transatlantic convergence in the financial system and structure of banking business preceded by convergence in the practices and strategies of financial institutions in the United States and Europe.

Rethinking Merger Efficiencies

Daniel A. Crane — Fri, 04 Mar 2011 08:39:39 PST

The two leading merger systems—those of the United States and the European Union—treat the potential benefits and risks of mergers asymmetrically. Both systems require considerably greater proof of efficiencies than they do of potential harms if the efficiencies are to offset concerns over the accumulation or exercise of market power. The implicit asymmetry principle has important systemic effects for merger control. Not only does it stand in the way of some socially desirable mergers, but it may indirectly facilitate the clearance of some socially undesirable mergers. Neither system explicitly justifies this asymmetry and none of the plausible justifications is normatively supportable. The most likely positive explanations for the asymmetry stem from institutional frictions between the lawyer and economist classes in the antitrust agencies, self-preservationist biases by antitrust regulators, and misplaced ideological opposition to industrial concentration. In principle, the probability-adjusted net present value of merger risks should be treated symmetrically with the probability-adjusted net present value of merger efficiencies.

Déjà Vu All Over Again? Reflections on Auerbach's 'Modern Corporate Tax'

Reuven S. Avi-Yonah — Fri, 14 Jan 2011 12:09:49 PST

This paper comments on Alan Auerbach's "A Modern Corporate Tax" (Hamilton Project/CAP, December 2010) and argues that it is not a significant improvement over previous proposals to replace the corporate tax with a cash flow tax.

Formulary Apportionment – Myths and Prospects

Reuven S. Avi-Yonah et al. — Fri, 12 Nov 2010 08:24:44 PST

This paper seeks to re-examine the formulary alternative to transfer pricing by inquiring whether partial integration of formulary concepts into current practices would offer a reasonable alternative to transfer pricing rules. We believe that the key to achieving an equitable and efficient allocation of MNE income is to solve the problem of the residual, i.e., how to allocate income generated from mobile assets and activities whose risks are born collectively by the entire MNE group. These assets and activities generate most of the current transfer pricing compliance and administrative costs, as well as tax avoidance opportunities. A limited formulary tax regime that allocates only the residual portion of MNE income may therefore offer significant advantages. Furthermore, such a regime would not require significant deviations from current practices, or substantial modifications of the international tax regime.

The Case for Dividend Deduction

Reuven S. Avi-Yonah et al. — Fri, 12 Nov 2010 08:20:43 PST

There have been various proposals made in the past two decades to integrate the corporate and shareholder tax, including dividend exemption, imputation, and the Comprehensive Business Income Tax (CBIT). In our view, the problem with all of these proposals is that they omit to ask the crucial question of why we should tax business entities in the first place. Taxes, the economists tell us, are always borne by human beings, not by legal entities. Why should legal entities, be they corporations or other forms of business entity, be subject to tax at all? Would it not be easier to just tax people? It turns out that there are two good reasons to tax some business entities under some circumstances. Specifically, we believe that publicly traded corporations should be subject to tax (a) because it is hard to tax them on a pass-though basis, and if they are not taxed they become vehicles for tax deferral, and (b) because they are economically important and taxing them is a means to regulate the behavior of the people who run them. However, if those are the reasons for taxing business entities, then we believe that the right form of achieving corporate integration is not CBIT or its progeny, or dividend exemption, or imputation (giving shareholders a credit for the corporate tax). The right form of integration, we would argue, is dividend deduction. Dividend deduction is frequently mentioned in the literature on integration, but rarely analyzed. In what follows, we will try to explain why it is a superior form of integration, and resolve some of the hard questions it raises.

Harry Potter and the Trouble with Tort Theory

Scott Hershovitz — Thu, 11 Nov 2010 07:26:37 PST

Economists argue that tort law promotes an efficient allocation of resources to safety, while philosophers contend that it dispenses corrective justice. Despite the divide, the leading tort theories share something in common: They are grounded in an unduly narrow view of tort. Both economists and philosophers confuse the institution of tort law with the rules that are distinctive of it. They offer theories of tort’s substantive rules, but for the most part ignore the procedures by which those rules are implemented. As a consequence, both miss and misconstrue much about tort law.

The problem is particularly acute for economists. They analyze the impact of tort’s substantive rules on accident and accident avoidance costs. Yet, the institution of tort law generates many other costs and benefits for society, and those costs and benefits affect the optimal arrangement of tort’s rules. The fact that economists have not factored these additional costs and benefits into their analyses calls into question their descriptive and normative claims about tort.

Corrective justice theory is not in as much trouble as the economic approach, but it is troubled still. Philosophers’ neglect of the procedural dimension of tort has caused them to overlook ways that tort does justice between wrongdoers and victims. And it has led them to make misleading claims about the nature of both corrective justice and tort law.

This article draws out the trouble with tort theory through a thought experiment, starring Harry Potter. Potter’s magic helps to highlight the features of tort that the leading theories overlook. Once they are in view, the article considers the ways in which the omissions cast doubt on the claims those theories make, investigates ways they might improved, and offers several observations about the choice between them.