2019- 2020 Advances in Research

FALL 2019

ADVANCES IN

RESEARCH

inside

balganesh

sarin

simmons

Copyright Law as a Shield

The Effectiveness of Post-Crisis Consumer Finance Reforms

Assessing International Progress on Women’s Rights

The faculty at Penn Law dedicate themselves to producing research and scholarship that illuminates the most pressing issues facing our society today.

From health care policy and immigration to consumer finance reform and the complex governance challenges facing startup companies, and more, our professors discover and share insights that push the legal academy forward and reshape real-world policy.

Our faculty members are transformative and interdisciplinary thinkers who bridge the gap between the law and myriad connected fields by collaborating extensively with scholars from institutions around the country and throughout the world. Their work exemplifies diverse methodologies and perspectives, revealing the wide range of modes of thought and areas of academic inquiry that thrive here at Penn Law. In this issue of Advances in Research, we offer a snapshot of some of the most noteworthy research conducted by our faculty over the past year. The featured faculty members include both longstanding experts in their fields and promising scholars at the beginning of their careers. Notably, this issue underscores the breadth of expertise we have added to our expanding faculty in the last few years, spotlighting work by two professors who are new to Penn Law — Presidential Assistant Professor of Law Shaun Ossei-Owusu and Professor of Law Elizabeth Pollman — among the eight standing faculty members who have joined the Law School’s community of scholars since 2016. We hope you enjoy this edition.

Sincerely, Ted Ruger Dean and Bernard G. Segal Professor of Law

2 SIMMONS

Assessing International Progress on Women’s Rights

4

6

BLACKHAWK Centering Indian Law in the Constitutional Canon

LEE The History of Agencies Interpreting the Constitution

8 CHANG

The Real Economic Impact of Immigration 10

OSSEI-OWUSU The Sixth Amendment Façade: The Racial Evolution of the Right to Counsel

12

FELDMAN

14

A. HOFFMAN

How Different Countries Regulate E-Cigarettes

Why Market-Based Solutions Haven’t Improved U.S. Health Care

16 GALBRAITH Presidential Power to Rejoin Treaties After Withdrawal

RESEARCH BY

18

SARIN The Effectiveness of Post-Crisis Consumer Finance Reforms

20 HOVENKAMP When Antitrust Law Should — and Should Not — Prevent Mergers

22

BALGANESH Copyright Law as a Shield

24 POLLMAN The Unique Challenges of Governing Startups 26

FISCH

28

D. HOFFMAN

30

KNOLL

Improving Transparency on Corporate Sustainability

Innovation in Digital Contracts

Refuting Conventional Wisdom on Incorporation and the 2017 Tax Law

Assessing International Progress on

Women’s Rights on research by

BETH SIMMONS Andrea Mitchell University Professor in Law, Political Science and Business Ethics

In a groundbreaking article, co-authors University of Pennsylvania Law School Professor Beth Simmons and University of Minnesota Assistant Professor Cosette D. Creamer marshal empirical evidence to demonstrate for the first time that self-reporting processes within international human rights treaty regimes actually generate positive domestic policy changes. The article, “The Dynamic Impact of Periodic Review on Women’s Rights,” appears in a recent issue of the Journal of Law and Contemporary Problems and challenges the conventional wisdom that the process of self-reporting on compliance with human rights treaties serves no useful purpose.

Simmons is the Andrea Mitchell University Professor in Law, Political Science and Business Ethics at Penn, and her research focuses on international affairs. Creamer’s research interests are at the intersection of international law and politics, and the empirical analysis of law.

In the article, Creamer and Simmons focus their study on the Convention on the Elimination of Discrimination against Women (CEDAW), a treaty that has been described as an international bill of rights for women. Core provisions call for nations to ensure women’s equality before the law, respect women’s rights to work and receive equal pay, prevent violence against women and sex trafficking,

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and more. Under CEDAW’s self-reporting regime, ratifying states “must submit reports every four years on the legislative, judicial, administrative, or other measures adopted to give effect to their women’s rights obligations.” The reports are submitted to the Committee on the Elimination of Discrimination Against Women (CmEDAW), which is “comprised of independent experts nominated and elected by states parties. CmEDAW then considers these reports in the presence of government representatives, acknowledges progress made, and identifies areas for improvement.”

Historically, several human rights treaties have called for selfreporting. However, “until the CEDAW, no treaty on women’s rights or issues contained an obligation for parties to self-report.” In terms of compliance with the self-reporting obligation, CEDAW has been relatively successful: “Of the 188 states parties to the CEDAW in 2016, only five countries had still not submitted their initial report,” Creamer and Simmons write.

As an initial step in their evaluation of the effects of selfreporting, Creamer and Simmons read all 621 reports submitted to the CmEDAW from 1982-2014 and coded them along four dimensions: implementation, compliance, and data — which relate to report quality — and responsiveness. “A report’s ‘quality score’

“[S]elf-reporting and dialogue between state representatives and international experts indeed generates new ideas, advice, and domestic pressure for change in practice [on women’s rights].”

BETH SIMMONS

(an index of the three quality measures) is based on the states party’s willingness to recognize shortcomings in implementation or compliance, and to provide gender-disaggregated data. A report’s ‘responsiveness score’ is based on how well the report engages with the Committee’s previous concluding observations.” In reviewing the reports, they found that “the richer and larger a polity, the more likely it is to report in a given year.” They also found “some evidence that reporting is, at least initially, correlated with strong buy-in to the human rights treaty system in general. The higher percentage of major human rights treaties a state has ratified, the more likely it is to turn in its CEDAW reports, though this relationship is substantively not large.”

After examining the degree to which parties comply with CEDAW’s reporting obligations, Creamer and Simmons went on to evaluate whether compliance yielded measurable impacts on women’s rights within the reporting countries.

As they explain, scholars and policymakers have been skeptical of the utility of self-reporting. “The system of self-reporting as a whole continues to be criticized as inadequate, ineffective and even ‘in crisis,’” the co-authors write. “Some observers point to the professional inadequacies of the ‘expert’ committees. Others note that states — even resource rich, democratic ones — ignore what they are told to do by the experts.”

Using data from Latin American countries that have ratified CEDAW, Creamer and Simmons’ study found that self-reporting “encourage[d] domestic actors to demand and implement change” on women’s rights issues through three mutually reinforcing mechanisms: “mobilization of domestic civil society around reporting in the form of shadow reports; discussion of the reporting process in local media; and evidence that legislators begin to take note and consider how to improve treaty implementation through legislation.”

Shadow reports are generated and submitted to the CmEDAW by non-governmental civil society organizations (CSOs) that work on women’s rights issues. “CEDAW ratification has had an influence on domestic politics by stimulating formation of women’s organizations, at least in some cases,” Creamer and Simmons write. “When governments turn in their self-rendered reports, women’s groups regularly spring into action to correct, supplement, and criticize the official account of implementation progress.”

Creamer and Simmons closely examined the shadow reports from Latin American countries, and found that “[f ]or the 182 state reports submitted between 2007 and 2014, CSOs provided

[CmEDAW] with a total of 1,026 shadow reports,” about a third of which came from domestic—rather than international—CSOs. Thus, the data indicate that “domestic civil society actors are willing to point out the shortcomings in the state reports and explain to the CmEDAW exactly how the government has fallen short” in implementing women’s rights obligations. As such, the shadow reports represent “authentic and critical domestic efforts to hold governments accountable for implementation of their obligations under CEDAW.”

Looking to press coverage of the reporting process, Creamer and Simmons “searched the major local press outlets of fifteen Latin American countries for awareness and discussion of the reportingand-review process.” While the findings varied from one country to another, in general they found that the reporting process was successfully generating public discussion of women’s rights issues.

Finally, since a number of CEDAW obligations — from criminalizing gender-based violence to prohibiting gender discrimination in public educational systems — depend on the implementation of legislation, Creamer and Simmons looked at evidence that countries’ legislative bodies took such obligations into account when drafting and passing laws. In Argentina, for example, following the country’s 2002 CEDAW review and 2004 follow-up, “the new government undertook a number of legislative reforms to further implement CEDAW obligations and to mitigate the effects of the economic crisis on women.” In the process, legislators frequently made reference to specific CEDAW provisions.

Legislative attention did not always correlate with improved conditions for women, however. In Mexico, they noted that although “Mexican legislators have referred to CEDAW obligations and Committee recommendations when legislating on women’s rights more frequently than others in the region… in the first twenty years after ratifying CEDAW, discrimination and violence against women remained a persistent problem.”

Ultimately, Creamer and Simmons conclude, although the reporting system has weaknesses, the evidence suggests “that selfreporting and dialogue between state representatives and international experts indeed generates new ideas, advice, and domestic pressure for change in practice” on issues related to women’s rights.

“Far from finding that no one pays attention to this process outside the halls of Geneva,” they write, “it turns out that in Latin America at least the review process literally piques the media’s, and potentially the public’s, interest.” __ 3

CENTERING

INDIAN LAW IN THE

CONSTITUTIONAL CANON on research by

M AG G I E B L AC K H AW K Assistant Professor of Law

In a groundbreaking article recently published in the Harvard Law Review, University of Pennsylvania Law School Professor Maggie Blackhawk (Fond du Lac Band of Lake Superior Ojibwe), argues for a paradigm shift in American constitutional law that would place Native Americans, federal Indian law, and American colonialism at the center of how lawyers and the public understand our constitutional framework. The article, “Federal Indian Law as Paradigm within Public Law,” marks the first time in nearly 15 years that the Harvard Law Review has published an article on federal Indian law.

Blackhawk, an Assistant Professor of Law, researches and teaches in the fields of constitutional law, federal Indian law, and legislation.

Her recent projects examine the ways that American democracy can and should empower minorities, especially outside of traditional rights and courts-based frameworks.

“At the heart of constitutional law is the question of how best to constitute, distribute, and limit government power,” writes Blackhawk.

“Although there is much to learn from this Nation’s tragic history with slavery and Jim Crow segregation, resting our public law on a single paradigm case that is defined by the black/white racial binary has led to incomplete models and theories. This Nation’s tragic history with colonialism and the violent dispossession of Native lands, resources, culture, and even children offers different, yet equally important, lessons about how to distribute and limit government power.”

Unlike the law of slavery and segregation, Blackhawk argues, American colonialism has not been overruled, meaning the federal government can use as justification the same doctrines it used to detain and dispossess Native people. For example, the last three presidential administrations have used the Indian Wars as precedent to justify action in the War on Terror. More recently, this doctrine, which underlay the government’s actions in forcing Natives onto reservations and taking Native children from their parents to place __ 4

MAGGIE BLACKHAWK

“We cannot truly understand how to achieve good governance unless we look at all of our collective failures — including colonialism — alongside slavery.” them in boarding schools run by the federal government, has been used to uphold President Trump’s Muslim travel ban. The same “plenary power” doctrine underlies much of American immigration law — including family separations and immigration detention centers. While prevailing understanding of U.S. constitutional law has been centered around slavery and Jim Crow segregation, Blackhawk advocates for a more inclusive paradigm that recognizes the lessons that can be drawn from the United States’ history with Native people and the violent dispossession of lands, resources, cultures, and children that comprise much of that story.

“We cannot truly understand how to achieve good governance unless we look at all of our collective failures – including colonialism – alongside slavery,” said Blackhawk. “My hope is this article will not just shed light on 200 years of American history, but will also open the conversation for the first time that the U.S. government is still legally able to treat people the same way the federal government treated Native people. This is a recurring problem that must be addressed.”

Blackhawk’s article goes on to highlight the ways incorporating federal Indian law into the canon and anti-canon of constitutional law would yield different and more nuanced understandings of the best way to protect minorities. In particular, she writes, while existing constitutional theory “presumes that minorities are best protected with national [federal] oversight” and is suspicious of “states’ rights” or local control, an examination of Indian law shows how the

national government and national rights have actually been used to hurt Native people and further American colonialism, while localism and the empowerment of Native nations through the recognition of inherent tribal sovereignty has had more positive effects.

Blackhawk also argues that the paradigm case of federal Indian law challenges the prevailing assumption that the judiciary is the branch of government best suited to protect minorities. While this may have been true in cases involving Jim Crow, she writes, “throughout the twentieth century, it has often been Congress and the Executive… rather than the courts, that have provided sanctuary” for Native people in the United States. With the federal judiciary currently being transformed — moved sharply to the right by Republican-supported nominees — Blackhawk’s paradigm shift offers alternative pathways for preventing government abuse of minorities.

“Across a range of substantive areas, the constitutional law, development, and history of the United States has been shaped by its interaction with Native Nations and Native peoples,” writes Blackhawk. “This is not an easy history to face, but there are lessons in its failures and there is more to celebrate than we now recognize….

Moving beyond the binary paradigm and centering federal Indian law within public law could not only add greater context and accuracy to a wide range of substantive areas, it could fundamentally reshape many of the general presuppositions and principles upon which public law rests.” __ 5

THE HISTORY OF AGENCIES

INTERPRETING THE CONSTITUTION on research by

SOPHIA Z. LEE Professor of Law and History

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Many conservative legal scholars and jurists contend that the expansive authority of modern administrative bodies like the Environmental Protection Agency and the Federal Trade Commission — and judicial deference to that authority — violates the traditional American constitutional order. However, in “Our Administered Constitution: Constitutionalism from the Founding to the Present,” forthcoming in the University of Pennsylvania Law Review, University of Pennsylvania Law School Professor Sophia Z. Lee illuminates the long history of agencies exercising an important but overlooked power: interpreting the Constitution with little oversight from the courts, Congress, or the President.

Lee is a legal historian whose scholarship synthesizes constitutional and administrative law. She has written about administrative agencies’ role in shaping constitutional law; civil rights and labor advocates’ challenges to workplace discrimination during the early Cold War; and conservative legal movements in the postNew Deal era.

In the present day, administrative agencies like the EPA, FTC, and others exercise significant regulatory authority and enjoy considerable judicial deference to their actions and interpretations of constitutional and statutory law. Lee illuminates the history of constitutional interpretation by agency administrators, offering a corrective to the arguments of legal scholars and jurists who seek to rein in the powers of the modern administrative state by pointing to the 19th Century as a period of time when courts exercised an appropriately high level of oversight.

“At a general level, critics who argue for a return to 19th-century administrative law emphasize several features said to characterize the period. First, they argue that Congress legislated with far greater specificity, granting agency actors little to no discretion to adopt regulations that bound the public[,]” writes Lee. “Second, they contend that Congress tasked courts, not agencies, with enforcement of the most coercive policies. Third, they argue that, other than during the mid-nineteenth century, federal courts reviewed agency action for its comportment with the law. Fourth, in conducting that review, courts gave weight to executive branch interpretations if they

SOPHIA Z. LEE

“[F]or much of the United States’ history, agencies had a relatively free hand in implementing constitutionally sensitive policies, resolving structural constitutional questions, and determining what the Constitution’s rights-bearing provisions meant in practice[.]” were longstanding or contemporaneous to the law’s enactment, but, they contend, ‘there was… no general rule… requiring ‘deference’ to executive interpretation qua executive interpretation.’”

However, Lee’s review of the history of agency action from the founding of the country to the present suggests that “agencies, not the courts, took the lead in interpreting the Constitution during the 19th Century,” and that in fact, “courts hardly reviewed the constitutionality of agency action at all[.]”

Before the Civil War, the Supreme Court rarely if ever reviewed the constitutionality of agency action and only considered that of federal laws in 62 cases, most decided after 1830. Congress also debated the constitutionality of particular laws, such as the Sedition Act. But the instances in which agencies confronted constitutional questions exceeded those faced by the courts or Congress. As a result, Lee argues, the norm tended to be that “ordinary administrators, from Secretaries of State down to local customs collectors… decided what the Constitution meant in practice.”

“Congress and the courts, when they weighed in on constitutional questions during this period, often codified answers worked out in the first instance by administrators,” writes Lee. “For example, the 1790 Indian Trade and Intercourse Act, the act that left the executive branch with such broad discretion to determine federal control of Indian affairs, was itself drafted by the administration and enacted by Congress with little debate.”

Through Reconstruction and the Gilded Age, the administrative state enlarged with the advent of institutions like the Bureau of Refugees, Freedmen, and Abandoned Lands (Freedmen’s Bureau) and the departments of agriculture, labor, justice, and education, and the Interstate Commerce Commission. Judicial review of the constitutionality of agency action was rare during this period.

“Agencies, meanwhile, seem to have been actively engaged with the Constitution,” as a search of agency decisions showed that agencies heard and decided a range of constitutional structure and rights issues during the course of their adjudications.

During the Progressive Era, from 1900 to 1933, the administrative state continued to grow with the creation of agencies like the FTC and the granting of new responsibilities to existing agencies, as when the Department of Agriculture was tasked with regulating food and drugs. In this period, “courts stepped up their review of administration, particularly regarding the constitutional limits on agency action.” There remained, however, “pronounced limits on this newly robust judicial oversight, leaving agencies striking discretion regarding the scope of constitutional protections.”

Only after World War II did administrative constitutionalism become “more legalistic and more deferential to judicial doctrine. At the same time, while congressional and presidential oversight of the phenomenon remains relatively weak, courts have expanded their constitutional review of agencies and heightened their skepticism toward administrative constitutionalism.”

“Based on what is known thus far, it seems that for much of the United States’ history, agencies had a relatively free hand in implementing constitutionally sensitive policies, resolving structural constitutional questions, and determining what the Constitution’s rights-bearing provisions meant in practice,” writes Lee. Thus, while “[t]here may be good reasons for courts to more closely scrutinize and conclusively determine the constitutionality of agency action[,] those reasons will have to be grounded in changed circumstances or independent normative and theoretical principles. Reinstating the 19th-century constitutional order will if anything take us further from that goal.”

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THE REAL ECONOMIC IMPACT OF

IMMIGRATION on research by

H OWA R D F. C H A N G Earle Hepburn Professor of Law

“Studies of the effects of immigration in U.S. labor markets have shown little evidence of any significant effects on native wages or employment, even for the least skilled native workers.”

In an article published in a recent issue of the UC Davis Law Review, University of Pennsylvania Law School professor Howard Chang marshals economic theory and empirical evidence to show the wisdom of liberalizing United States immigration laws rather than imposing the severe restrictions endorsed by the Trump

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Administration. In “The Economics of Immigration Reform,” Chang evaluates both the Reforming American Immigration for a Strong Economy (“RAISE”) Act proposed by Congressional Republicans in 2017 and a comprehensive bipartisan immigration bill passed by the Senate in 2013.

HOWARD CHANG

Chang, the Earle Hepburn Professor of Law, is an expert on immigration policy, international trade, and environmental protection.

He has served on the Board of Directors of the American Law and Economics Association, and his interests include a broad range of topics in the economic analysis of law.

“If enacted, the RAISE Act would slash legal immigration drastically, cutting immigration in half within a decade,” Chang explains. The Act would achieve that aim by removing options for family members of U.S. citizens and permanent residents to apply for immigration visas, capping refugee admissions, reducing the number of green cards granted, and ending the visa diversity lottery.

Because advocates of the RAISE Act “discount the interests of prospective immigrants when… weigh[ing] the costs and benefits of immigration reform,” Chang’s analysis within the article focuses “narrowly on the effects of our current flow of immigrants on the economic welfare of natives, that is, those born in the United States.”

He begins by reviewing existing empirical evidence on the question of whether immigrants confer a fiscal benefit on natives or impose a fiscal burden. Chang examines two studies: a 1997 study conducted by the National Research Council (“NRC”), which took “into account the contributions made to tax revenues and the costs imposed on the public treasury not only by… immigrants themselves but also by their descendants,” and a 2017 update of the NRC’s findings by the National Academies of Sciences, Engineering, and Medicine, which “account[ed] for changes in circumstances over the intervening two decades” and “generate[d] a range of estimates of the total fiscal impact of immigration in the United States.”

Chang notes the NRC’s observation that “a larger population helps to bear the costs of so-called public goods — those that provide services to all in the population at a cost that does not rise with the size of the population.” As a result, “more immigrants would allow natives to consume a larger stream of benefits from pure public goods while maintaining the same cost per capita for those goods,” he writes.

Chang also examines the data on the national debt, finding that on balance, “the estimated economic and fiscal impacts of immigration militate in favor of higher levels of immigration, not lower levels.”

Importantly, Chang writes, “the studies conducted by the NRC and the National Academies found that age at the time of admission is an important factor determining the total fiscal impact of an immigrant. In general, the younger the immigrant at the time of

arrival, the more years the immigrant can spend working in the United States, the more tax revenues the immigrant will contribute to public coffers prior to retirement, and the more positive the immigrant’s total fiscal impact.” Thus, restrictive immigration policies that create longer backlogs of prospective immigrants waiting for visas not only harm those migrants but also natives. “Long waiting periods mean that immigrants enter later in life, limiting the years during which they can contribute to our economic welfare by providing labor as workers and by paying taxes to the public treasury.”

As Chang explains, the RAISE Act purports to “exclude categories of immigrants likely to impose a fiscal burden,” and in particular would “cut family-sponsored immigration by eliminating visas for siblings and adult children of U.S. citizens.” In doing so, however, the RAISE Act would exclude many immigrants who would have a positive fiscal impact on natives.

Supporters of the RAISE Act also contend that it would “protect native workers from foreign competition and thereby raise their wages.” However, “[s]tudies of the effects of immigration in U.S. labor markets have shown little evidence of any significant effects on native wages or employment, even for the least skilled native workers,” Chang writes. “To the extent economists do find any evidence of a negative impact, it seems largely confined to natives with less than a high-school education.” Thus, the effect of immigration restrictions would be to confer benefits on a subset of native workers by inflicting a larger cost on other natives, effecting a wealth transfer that could instead be achieved with less harmful effects through the tax system.

In any event, Chang notes, “the flow of unauthorized immigrants into the United States has slowed to a trickle during the past decade,” meaning that the “the RAISE Act, President Trump’s proposed ‘border wall,’ and other costly and draconian proposals to increase border security are misguided reactions to a perceived unskilled influx that largely no longer exists.”

In contrast, “[t]he comprehensive immigration reform bill passed by the Senate in 2013 would have liberalized our immigration laws in various respects” by taking steps to address the backlogs in the current immigration system, expanding access to visas, and legalizing many unauthorized immigrants already present in the United States.

Ultimately, he concludes, “economic analysis militates in favor of liberalizing our immigration restrictions… instead of imposing the drastic new restrictions proposed in the RAISE Act.”

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RACE

AND THE

RIGHT TO COUNSEL on research by

S H AU N O S S E I - OW U S U Presidential Assistant Professor of Law

A new article by University of Pennsylvania Law School professor Shaun Ossei-Owusu reveals the critical role of race in the development of a staple of the American criminal justice system: the constitutional guarantee of an attorney for defendants too poor to afford one. “The Sixth Amendment Façade: The Racial Evolution of the Right to Counsel,” forthcoming in the University of Pennsylvania Law Review, marshals “archival documents, primary sources, oral histories, case law, and secondary literature” to trace the history of indigent defense and the Sixth Amendment right to counsel from the early twentieth century to the present, revealing how racial politics influenced the right’s creation, development, and later curtailment.

“The deluge of wrongful convictions due to deficient lawyering are telling; they offer a glimpse of who bore the consequences of a right to counsel jurisprudence that enabled ineffectiveness.”

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SHAUN OSSEI-OWUSU

Shaun Ossei-Owusu is an interdisciplinary legal scholar with expertise in legal history, criminal law and procedure, civil rights, and the legal profession. His work sits at the intersection of law, history, and sociology, with a focus on how governments meet their legal obligations to provide services and benefits to poor people and racial minorities. “[C]urrent scholarship overlooks the instrumental role race played in the development of right to counsel jurisprudence,” writes Ossei-Owusu. “History demonstrates that indigent defense is not a part of the criminal justice system that simply produces racially disparate outcomes. Instead, the politics of race fundamentally shaped indigent defense jurisprudence and policy. Inattention to this fact limits understandings of the right to counsel and ultimately of the criminal justice system itself.”

Ossei-Owusu begins the history in the period from 1890 to 1931, before the Supreme Court first suggested the existence of a right to counsel in Powell v. Alabama. “The absence of an affirmative right to counsel did not mean the absence of administrative structures that provided counsel to indigents,” he writes. “Before an affirmative right to counsel was enshrined by courts, it was fulfilled by legal aid societies that provided assistance in criminal cases as well as municipally funded public defender offices that were modeled in part after legal aid societies.” Race — which during this period was also understood akin to nationality — played a significant role in the expansion of both kinds of legal assistance to the poor. As legal aid societies proliferated, part of the justification for their existence was to protect “poor, uneducated, ethnic white immigrants” from exploitation by unscrupulous “shyster” lawyers, who were stereotypically depicted as “not fully white” southern and eastern Europeans.

Because many legal aid societies paid insufficient attention to nonwhites, racial minorities including African-Americans, Chinese Americans, and Mexican Americans “developed their own legal aid schemes that also hinged on race,” and created “multipurpose organizations that provided civil and criminal legal aid as well as a host of other social services.”

The Supreme Court decided Powell against this backdrop, “carv[ing] out a limited right to counsel [which] was infected by racial politics.” The case saw nine African-American teenagers accused and then convicted of raping two white women, all without having adequate access to legal counsel. In reversing the convictions, the Supreme

Court’s decision “created a template for future right to counsel cases that emphasized the race, indigence, and illiteracy of defendants.”

Indeed, in the three decades after Powell, the Court’s decisions on the right to counsel “required courts to examine the appointment of counsel on a case-by-case nature” and used a “special circumstances” test that depended heavily on race. Such cases “invariably involved indigent black defendants who were young, poor, illiterate, or some combination of the three.”

“The 1960s ushered in a new era of right to counsel expansion that coincided with racial progress,” writes Ossei-Owusu, and it was during this period that the Court decided Gideon v. Wainwright (1963), which famously extended the federal right to counsel to the states. While Gideon is “typically understood as race-neutral, [the case] was actually influenced by racial considerations,” Ossei-Owusu explains. Oral histories from the lead counsel in Gideon reveal that “[t]he Court purposefully selected Gideon as its vehicle to expand the right to counsel in an attempt to move far away from a decidedly racialized special circumstance test.” Clarence Earl Gideon was a poor white man, and in the public response to the case, was seen a “sympathetic figure” who had been “denied justice.”

After Gideon, the Supreme Court continued to expand the right to counsel, extending it to misdemeanor cases in 1972’s Argersinger v. Hamlin. However, Ossei-Owusu explains, the latter decades of the twentieth century witnessed the rise of racialized “law and order” politics, which were expressed “attempts to close perceived legal loopholes that exonerated defendants,” and helped usher in the current era of mass incarceration. Thus, Supreme Court cases on the right to counsel since the 1980s have rendered ineffective assistance of counsel claims much more difficult to prove. “The deluge of wrongful convictions due to deficient lawyering are telling; they offer a glimpse of who bore the consequences of a right to counsel jurisprudence that enabled ineffectiveness,” writes Ossei-Owusu.

In unearthing the centrality of race to the evolution of the right to counsel, Ossei-Owusu “encourages reformers to consider indigent defense shortcomings as an issue with racial ramifications” and urges racial justice advocates to “figure indigent defense more prominently in their reform efforts.” In doing so, “reformers, along with scholars and indigent defense providers, can reexamine how the right to counsel came to be as well as the limits and possibilities for administrative change.”

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HOW DIFFERENT COUNTRIES REGULATE

E-C GARETTES on research by

ERIC A. FELDMAN Deputy Dean for International Programs; Heimbold Professor of International Law; Professor of Health Policy and Medical Ethics; Co-Director, Center for Asian Law

As the popularity of electronic cigarettes rises in the United States and globally, countries have taken vastly different approaches to regulation: some have effectively banned e-cigarettes, while others hardly regulate them. In a new volume, The Legal Process and the Promise of Justice: Studies Inspired by the Work of Malcolm Feeley, published by Cambridge University Press, University of Pennsylvania Law School Professor Eric Feldman has authored a chapter analyzing the reasons for the significant policy divergence on e-cigarettes.

Feldman holds the Heimbold Chair in International Law and is also a Penn Professor of Medical Ethics & Health Policy and Penn Law’s Deputy Dean for International Programs. He is an expert on Japanese law, comparative public health law, torts, and law and society, and his scholarship explores the comparative dimensions of rights, dispute resolution, and legal culture in the context of urgent policy issues.

In the chapter, “Regulating E-Cigarettes: Why Policies Diverge,” Feldman examines the global landscape of e-cigarette policy through the lens of three countries that have starkly different approaches to regulating them: the United States, Japan, and China.

The three countries have a number of commonalities, Feldman explains: “Each… has a robust tobacco industry, government agencies entrusted with protecting public health, an active and sophisticated scientific and medical community, and a regulatory structure for managing new pharmaceutical, tobacco, and consumer products. All three are signatories of the World Health Organization’s (WHO) Framework Convention on Tobacco Control (United Nations 2003),

all are signatories of the Agreement on Trade-Related Aspects of Intellectual Property Rights, and all are members of the World Trade Organization.”

Nevertheless, their regulatory paths have diverged, with the United States regulating e-cigarettes as tobacco products, Japan regulating them as pharmaceutical products, and China treating them as ordinary consumer products. Feldman identifies three key factors that have contributed to the differences in e-cigarette policy in these three countries: first, a lack of scientific consensus on the potential harms versus benefits of e-cigarettes; second, distinct national economic and political interests that drive policy outcomes; and third, the roles of litigation and judicial decisions in shaping the regulatory landscape.

At their core, “all e-cigarettes are based on a common technology,” writes Feldman. “They include a rechargeable battery, a liquid (or in a few cases a chamber that can be filled with leaf ) that generally contains nicotine, an atomizer that converts liquid into vapor, an LED light to simulate a burning cigarette, and a computer chip that senses inhalation and triggers the atomizer.” As the technology and aesthetics have continued to evolve, e-cigarettes have grown in popularity. In the United States, for example, the Centers for Disease Control and Prevention (CDC) reported that in 2016, “15.4 percent of adults aged eighteen years of age or older had tried e-cigarettes, and 11.3 percent of high school students had used e-cigarettes in the past thirty days.” By 2018, that number had increased to 20.8% of high school students.

“Divergence, not convergence, describes the landscape of e-cigarette regulation.” __ 12

Scientists studying e-cigarettes are conflicted about their potential harms and benefits. “If e-cigarettes are capturing the interest of youth, for example, who first vape and then turn to combustible cigarettes, long-running declines in tobacco consumption could level off or be reversed,” writes Feldman. “On the other hand, e-cigarettes might be helping current smokers quit, keeping youth from initiating smoking, and playing a key role in reducing tobacco-related morbidity and mortality.” The absence of a scientific consensus has left the door open to a range of interpretations and regulatory approaches, Feldman argues.

Differences in existing tobacco policy in the United States, Japan, and China have also contributed to policy divergence on e-cigarettes. In the United States, “the tobacco industry consists of a number of private companies, some of which have grown into the world’s most robust multinational corporations.” While these companies have worked to avoid regulation for decades, in 2009 the passage of the Family Smoking Prevention and Tobacco Control Act permitted the FDA to begin regulating certain enumerated tobacco products. In order to regulate e-cigarettes, the FDA had to ‘deem’ them tobacco products within the meaning of the statute — a process that took a number of years.

In contrast, the government of Japan has long held a monopoly on the cultivation, manufacture, and sale of tobacco products, and continues to own one third of Japan’s only tobacco company.

Participants in the traditional tobacco industry did not welcome competition from e-cigarettes, and “the political and economic interests of the key players leaned clearly against a liberal regulatory posture” for such products. Thus, e-cigarettes were determined not to be tobacco products and are instead regulated as pharmaceuticals, which has effectively resulted in a ban on nicotine-containing e-cigarettes in Japan. In China, tobacco is an enormous industry that generates significant revenue: “With 300 million smokers (25 percent of all smokers globally) who consume 40 percent of the world’s cigarettes,” the political and economic impact of tobacco in China is enormous.” As a result, tobacco control policy is minimal and thus far the government has taken no action to regulate e-cigarettes.

Finally, Feldman notes, “there is only one jurisdiction in which the courts have powerfully influenced e-cigarette policy — the United States. In neither Japan nor China have the courts played even a minor role. In the United States, Smoking Everywhere v. U.S. Food and Drug Administration resulted in a decision holding that the FDA can only regulate e-cigarettes as tobacco products, and not as pharmaceuticals, sharply limiting the range of policy choices available to would-be regulators.

As Feldman’s comparative analysis explains, “[d]ivergence, not convergence, describes the landscape of e-cigarette regulation” for the three key reasons he identifies. “Although this [chapter] underscores the particular importance of these reasons, one can easily identify other possible explanations,” which additional research and observation might reveal. __ 13

MARKET-BASED SOLUTIONS WHY

HAVEN’T IMPROVED

U.S.

HEALTHCARE on research by

ALLISON HOFFMAN Professor of Law

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In a new article, University of Pennsylvania Law School Professor Allison Hoffman elucidates a fundamental problem afflicting health care in the United States: policymakers’ stubborn reliance on market-based theories and increased consumer choice to resolve the high spending and relatively poor health outcomes that have become endemic to the system.

In “Health Care’s Market Bureaucracy,” forthcoming in the UCLA Law Review, Hoffman closely examines the economic theories underlying market-based health care policies, the empirical evidence demonstrating how such policies have failed in practice, and the regulatory infrastructure that has grown in an attempt to mitigate those failures. Ultimately, “rather than helping people get what they want,” Hoffman finds, “marketbased policies produce a maze of obligations and decisions that confuse people and burden them when they are sick.”

Hoffman is an expert on health care law and policy.

Her research aims to bring greater descriptive and analytical clarity to the purposes of health regulation and to deepen our understanding of how health insurance design and regulation both reflects and shapes social consciousness around risk.

Since the 1980s, advocates of market-based health care policies have contended they offer two advantages: increased efficiency and decreased bureaucracy by way of limited government interference. Such policies “are held up as the singular way to honor autonomy and choice,” which “has emerged as a sacred value in health care decisionmaking.”

Indeed, “promises of market choice now pervade all corners of health care,” writes Hoffman. “You can choose your own insurance plan. You can choose your own doctor. You can choose your hospital, imaging center, pharmacy, urgent care facility, lab, and outpatient surgical center. You can choose your own procedures, drugs, and course of treatment. You can get your care at CVS, or in India.”

However, Hoffman explains, the unique challenges of health care make it particularly ill-suited for approaches that rely upon patients’ consumer choices to achieve the best outcomes at a reasonable cost. Several factors contribute to this mismatch. “First, basic assumptions of neoclassic economics, like well-ordered preferences, evade patients,” she writes.

ALLISON HOFFMAN

“It is time to let go of the false hope that market-based solutions will solve U.S. health care woes.”

“Second, patient consumers experience a range of problems of cognitive biases — from information overload to anchoring to deference — that have proven tough to correct. Finally, even if consumers were perfectly rational beings, the health care markets themselves are also flawed and difficult to mend, so that even when consumers signal clearly and accurately, markets often will not respond in turn.”

Even when provided with more information, studies have shown that consumers lack the health and financial literacy skills and numeracy to process it. In particular, average consumers “do not understand the technical terms that describe their health insurance policy, how much it costs, and what benefits are covered,” which impedes their ability to select the right plan.

Accounting for these issues, Hoffman examines how economic theories have translated into three prominent types of market-based policies that have been widely implemented in the United States to improve health care quality or reduce spending: “relying on consumers to choose well among insurance plan options with the hopes that their choices will put pressure on insurers to negotiate better prices and offer better plans,” as the Affordable Care Act health plan exchanges do; “looking to consumers to ration medical care at the point of sale to reduce spending… by putting more of their own spending dollars at stake” through high-deductible health care plans and the use of Health Savings Accounts; and “looking to the tools of antitrust regulation to improve dynamics in larger market competition to drive value.”

Each of these policies “relies on the theory that markets will achieve the best solution if we can just get the regulation (or deregulation) right,” writes Hoffman. However, “they have all failed to do so, despite tremendous investment of regulatory effort and intellectual capital.”

Empirical evidence shows that people do not choose wisely among health plans, and that increased cost-sharing

through high-deductible plans and HSAs leads patients to “reduce ‘good’ care as much as wasteful care,” eliminating preventive care and even medications that could produce improved health outcomes. Antitrust law fares no better: “After four decades of enforcement of antitrust law in the health care industry, the provider market is more consolidated than ever, sending prices on a steep upward trajectory without notable increases in quality,” writes Hoffman.

Market-based policies also have not resulted in reduced bureaucracy — to the contrary, “[e]fforts to fix flailing competition-based policies have required armies of health regulators, reams of regulation, and seemingly endless evaluation and adjustment by technocratic experts—to no avail,” she writes.

Nevertheless, market-based policies persist, both because of the elevation of the idea of individual choice by economic theory (and its narrow definition in terms of actions in a market), and because such policies allow policymakers and regulators to “avoid dealing with hard normative tradeoffs around how much care we use, who uses it, and how much we pay for it,” Hoffman writes. “Policymakers thus punt decisions that could directly harm the bottom line of the healthcare industry, leaving the dirty work to consumers.”

Based upon the evidence, “[i]t is time to let go of the false hope that market-based solutions will solve U.S. health care woes,” argues Hoffman. “[W]e must take on political challenges and uncomfortable conversations to make real progress on the most intractable health policy problems. But so long as we continue painstakingly to build health care’s market bureaucracy, we are too distracted and too tired to have these conversations… [W]e must put down the technocratic tools and to turn our collective efforts to building more productive intellectual foundations for the next era of health policy, law, and regulation.” __ 15

PRESIDENTIAL POWER TO REJOIN TREATIES AFTER WITHDRAWAL on research by

J E A N GA L B R A I T H Professor of Law

As President Donald J. Trump continues to exercise his authority to unilaterally withdraw the United States from international agreements, a vital new article by University of Pennsylvania Law School Professor of Law Jean Galbraith illuminates how and why future presidents can use their power to reenter the same agreements without returning to Congress for renewed advice and consent. “Rejoining Treaties,” forthcoming in the Virginia Law Review, addresses an underexplored question of separation of powers and international law that has become increasingly urgent in the current polarized political climate: “Does the original Senate resolution of advice and consent to a treaty remain effective even after a President has withdrawn the United States from [that] treaty?”

Delving deep into the constitutional and theoretical underpinnings of presidential and Congressional authority relating to treaties, the article answers that question in the affirmative, providing a valuable framework that has the potential to increase stability in the international order.

Jean Galbraith is a scholar of U.S. foreign relations law and public international law.

Her work focuses on the allocation of legal authority among U.S. governmental actors and, at the international level, between domestic actors and international regimes.

“The Trump administration has yet to run its course, but it seems clear that there will be rebuilding on many fronts at the end of it.

With respect to treaties, we do not yet know how many will be undone before the end of President Trump’s term[.]”

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JEAN GALBRAITH

“Since coming to office, President Trump has pursued a policy of international disengagement on many fronts,” Galbraith writes, not only rolling back international commitments made by President Barack Obama through executive or other authority, but also signaling an interest in terminating treaties — “legal instruments that received the advice and consent of two-thirds of the Senate and thus commanded, at least at one point in history, strong bipartisan support.”

Indeed, “[i]n October 2018, the Trump administration announced the immediate or planned U.S. withdrawal from three treaties: the Optional Protocol to the Vienna Convention on Diplomatic Relations; the Treaty of Amity, Economic Relations, and Consular Rights with Iran; and the IntermediateRange Nuclear Forces Treaty with Russia.” President Trump has also repeatedly signaled an interest in withdrawing from the North Atlantic Treaty, which underlies NATO.

To the extent that one president can lawfully withdraw the United States from such treaties without input from Congress, a future president may unilaterally rejoin them, Galbraith argues.

The argument rests on two propositions: “The first is that, as a constitutional matter, an initial resolution of advice and consent could serve as advice and consent for rejoining after a unilateral presidential withdrawal. The second is that, as a matter of their interpretation, existing Senate resolutions of advice and consent do in fact serve as such.”

Importantly, she points out, Senate resolutions of advice and consent to treaties “are already understood to remain operative well after the end of the Senate session in which they are passed, as the executive branch often does not ratify treaties until years after the Senate’s advice and consent has been given.” In the absence of any deadline imposed on such resolutions’ effectiveness, an argument against relying upon the original resolution of advice and consent to rejoin a treaty would effectively give a withdrawing President the power to “unmake a ‘supreme law of the land’ that was made initially not just with presidential authority but also with a bipartisan super-majority of the Senate.” However, [t]he concept of checks and balances lies at the heart of our constitutional system,” Galbraith writes.

“To hold that, as a constitutional matter, the Senate may not authorize rejoining [in its initial resolution] would be to enhance

the reach of this unchecked power of withdrawal. By contrast, if the Senate can authorize rejoining, then it has available to it a tool that can blunt the long-term impact of the unilateral presidential power of withdrawal.”

Further, she argues, “[t]he Senate presumably advises and consents to treaties because it wants the United States to become a party to these treaties. Interpreting a Senate resolution of advice and consent to authorize the rejoining of a treaty advances this underlying purpose.”

Although constitutionally and interpretively, future Presidents should be understood to have the power to rejoin treaties based on the original Congressional resolution, Galbraith acknowledges that such power may have a few legal and practical limitations. Among them are cases in which “either Congress or two-thirds of the Senate has expressly or impliedly repealed the Senate’s original advice and consent,” instances where “the President is unable as a matter of international relations or international law to rejoin the treaty, or at least unable to rejoin it in a manner consistent with the Senate’s original resolution of advice and consent,” and finally those situations when “intervening changes in U.S. law may limit the implementation of the treaty, which in turn can affect whether and when the United States rejoins it.”

Apart from those scenarios, however, Galbraith’s article demonstrates that presidential authority to unilaterally rejoin treaties is “textually supported, well-grounded in cognate practice, and structurally sound.”

“The Trump administration has yet to run its course, but it seems clear that there will be rebuilding on many fronts at the end of it. With respect to treaties, we do not yet know how many will be undone before the end of President Trump’s term,” Galbraith writes. “Should [the next] President deem certain treaty withdrawals by President Trump or his predecessors to be unwise, then, subject to the limitations discussed earlier, he or she may promptly rejoin the United States to these treaties without the need for a second round of advice and consent from the Senate… If President Trump has the unilateral power to withdraw, then his successor does and should have the unilateral power to rejoin.” __ 17

THE EFFECTIVENESS of

POST-CRISIS CONSUMER FINANCE REFORMS on research by

N ATA S H A SA R I N Assistant Professor of Law

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In an important new article, University of Pennsylvania Law School Professor Natasha Sarin deploys original empirical research to examine the impact of key consumer finance reforms implemented in the wake of The Great Recession. “Making Consumer Finance Work,” forthcoming in the Columbia Law Review, details her findings about the successes and failures of reforms aimed at debit and credit cards and overdraft fees, and offers crucial insights to guide policymakers in future regulatory efforts.

Sarin is an Assistant Professor of Law with a secondary appointment in the Finance Department at the Wharton School. Her teaching and research interests are at the intersection of law and finance, with her recent research focusing on financial regulation.

“The Great Recession was the worst economic downturn in the United States since the Depression,” writes Sarin. “More Americans lost their jobs than at any time since World War II.1 Over two million businesses closed their doors because they could not make payroll. Nearly eight million families lost their homes. The average American household lost one-third of its net worth.”

In response to the crisis, President Barack Obama created the Consumer Finance Protection Bureau and tasked the agency with better regulating the financial markets to protect consumers. Sarin analyzes three of the most significant reforms to emerge from this period: The Durbin Amendment, which capped debit card interchange fees; the Credit Card Accountability Responsibility and Disclosure (“CARD”) Act, which reduced

“Being too beholden to how we believe banks will respond to regulation — rather than following the data to understand how banks actually respond to regulation — leads to an overly pessimistic view of regulatory efficacy.”

NATASHA SARIN

banks’ ability to charge hidden credit card fees; and the default rule requiring bank customers to affirmatively opt into overdraft protection.

To conduct a data-driven analysis of the impact of these reforms, Sarin assembled and relied upon a “unique dataset… of effective interchange rates for 120 industries in 40,000 zip codes in the United States (totaling more than ten million observations), branch-level data on checking account fees reported weekly for 58,000 bank branches in the United States, and financial regulatory data reported quarterly by each of the 4,800 bank holding companies in the country.” Based on the data, Sarin concludes that while the CARD Act and overdraft fee reforms succeeded in increasing consumer welfare, the Durbin Amendment did not.

Before the Durbin Amendment was passed, when a consumer used a debit card to make a purchase, a merchant would pay the bank 2 percent of the value of the transaction to cover the cost of processing.

The Amendment capped these “interchange” fees at 22 cents, with the objective that merchants would pass the savings on to consumers through lower retail prices. Instead, however, Sarin’s data shows that “(1) banks increased consumer account fees to recover all lost interchange revenue, and (2) merchants failed to fully pass through their cost savings to consumers.” Indeed, she writes, “[p]rices set by supermarkets and convenience stores whose costs fell significantly because of Durbin are virtually indistinguishable from those set by merchants with low (or no) interchange savings,” and gas prices fell by only $.004 on average even as gas retailers received more than 15 percent of the total savings from the passage of the Amendment. At the same time, banks sought to recoup the fees by hiding them elsewhere, for example by reducing the availability of free checking accounts.

In contrast, the CARD Act successfully helped to decrease the cost of credit cards for consumers by curtailing banks’ freedom to advertise attractive percent initial interest rates and then charge high back-end fees such as penalty fees, interest rate increases, and overlimit fees. By requiring more fulsome disclosures of fees up front, thus reducing banks’ ability to hide them from customers, “estimates suggest the CARD Act reduced overall credit card fees by nearly $25 per account annually, resulting in total cost savings for credit card users of nearly $12 billion per year,” writes Sarin.

Customers saw similar savings from changes to the structure of overdraft protection. “Prior to recent changes, bank customers were automatically opted in to overdraft protection,” Sarin explains. As a result, “[c]onsumers could effectively pay $40 for their morning coffee (coffee plus $35 overdraft fee) by using their debit cards without sufficient funds in their checking accounts.” Following implementations of the new rule, which bans automatic enrollment and requires customers to opt in, the share of bank customers opted in to overdraft protection dropped from 100 percent to just 16 percent.

Sarin identifies three key lessons from the successes and failures of regulation post-Recession: First, she notes, if left unchecked, “banks exploit consumers’ behavioral limitations — like over-optimism (e.g., consumers’ mistaken beliefs that they will never be delinquent in paying credit card bills) and inattention (e.g., consumers’ failure to read checking account contracts, which explicitly detail the significant costs of overdrafting),” thus allowing them to charge high hidden fees. “As such, policymakers must bring discipline to these markets by restricting shrouded pricing.” Second, “low-income consumers tend to pay higher prices than their high-income counterparts” for banking products, and regulators ought to pursue reforms that reduce such inequality.

Finally, she writes, “regulators should follow what banks do — not what they say. Every time regulators act, banks caution that consumers will be hurt, because affected institutions will have no choice but to pass costs through to consumers.” However, as demonstrated by the success of overdraft reform and the CARD Act, “in many instances, impacted institutions eat the losses from regulation, rather than passing them through to their customers.” Thus, “[b]eing too beholden to how we believe banks will respond to regulation — rather than following the data to understand how banks actually respond to regulation — leads to an overly pessimistic view of regulatory efficacy.”

In the decade since the crisis, new risks have begun to emerge in the consumer finance markets, among them student loan balances and the subprime auto loan bubble. To address these new issues, “the success of the reform agenda relies on heeding the lessons learned from the triumphs and failures of past regulatory interventions,” writes Sarin. “Only then can we successfully course-correct, where necessary, to best serve consumer interests.” __ 19

WHEN

ANTITRUST LAW

SHOULD — AND SHOULD NOT —

PREVENT MERGERS on research by

H E R B E R T H OV E N K A M P James G. Dinan University Professor

In a recent issue of the Hastings Law Journal, University of Pennsylvania Law School professor Herbert Hovenkamp discussed the use of “incipiency tests” in antitrust law, which may be employed to bar companies’ proposed mergers which have anticompetitive effects that may not readily be remedied after the merger has occurred. In “Prophylactic Merger Policy,” Hovenkamp offers a taxonomy of the limited situations where the government’s proactive prevention of mergers is most appropriate.

Hovenkamp is the James G. Dinan University Professor and holds a joint appointment between Penn Law and the Wharton School of Business. He is a widely recognized expert in antitrust law and American legal history.

“An important purpose of antitrust merger law is to arrest certain practices in their ‘incipiency,’ by preventing business firm acquisitions that are likely to facilitate them.”

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HERBERT HOVENKAMP

“An important purpose of antitrust merger law is to arrest certain practices in their ‘incipiency,’ by preventing business firm acquisitions that are likely to facilitate them,” writes Hovenkamp. “Today, most mergers are challenged before they occur,” and so courts must rely upon “evidence of predicted rather than actual effects” in an attempt to foresee whether anticompetitive conduct that violates antitrust laws — such as collusion between market competitors, price discrimination, or the creation of a monopoly — will actually result. In the absence of evidence of actual effects, Hovenkamp argues, “it is important to place some limits on merger law’s prophylactic reach.”

The Clayton Act is the primary source of merger law in the United States. Section 7 of the Clayton Act uses broad language, preventing “mergers whose effect ‘may be substantially to lessen competition, or to tend to create a monopoly.’” The Sherman Act also prohibits anticompetitive behavior, condemning companies who enter into agreements to collude on conduct such as raising or lowering prices for their products.

In the article, Hovenkamp analyzes several scenarios where preventing a merger on the basis of an incipiency test would be appropriate. For example, he notes that some “horizontal mergers” between competitors would reduce the number of firms in a given market and might facilitate problematic “coordinated action” between companies. While such conduct could potentially rise to the level of anticompetitive collusion, it might be difficult to challenge under the Sherman Act in the absence of an actual agreement, Hovenkamp notes.

In particular, the Sherman Act does not protect against “conscious parallelism,” where one competitor company might take the lead in raising or lowering prices to a particular level and other companies take note and follow suit without ever meeting the requirements for an actual conspiracy. Because antitrust laws would not reach that conduct, the more prudent course might be to prevent a merger from being completed in the first place.

Hovenkamp also discusses the risks associated with some “vertical mergers” in which one company purchases another. Pointing to AT&T’s proposed acquisition of Time Warner — which the U.S. government unsuccessfully challenged — Hovenkamp details how, for example, “a broadband internet provider that acquires substantial

programming assets may be in a position to deny that programming to distributors on rival internet providers, or else charge them a higher price.” Indeed, in its suit challenging the merger, the government alleged that allowing AT&T — which owns internet provider DirecTV — to acquire program content-provider Time Warner (“TW”) “would enable the post-merger firm to force rival distributors of TW programming to pay a higher price than TW’s current position would permit” and would “slow the development of ‘disruptive,’ procompetitive innovations such as direct online video distribution.”

Hovenkamp argues that “[a] coherent approach to vertical merger policy is… to condemn vertical mergers that are reasonably likely to facilitate an anticompetitive refusal to deal, price discrimination, or price increases that would be lawful if undertaken subsequently by a single firm.”

Indeed, “[o]ne of the most important justifications for prophylactic merger policy occurs when the feared anticompetitive conduct is that of a single firm[,]” as antitrust law often will not reach unilateral conduct undertaken by a newly-merged single company (rather than coordinated conduct by separate companies). Horizontal mergers that would create monopolies or otherwise facilitate unilateral anticompetitive behavior are therefore appropriate targets for prophylactic application of merger law.

Hovenkamp also explores the justification for incipiency tests to prevent mergers in instances of intellectual property acquisitions that might facilitate exclusionary patent enforcement, and in cases where large firms acquires small and innovative competitor startups in order to maintain market dominance. Again, in those scenarios, prophylactic action would be appropriate.

“Government equity suits against mergers seem to require the courts to peer into a crystal ball,” writes Hovenkamp. “The need to predict the future would not be particularly important if every practice that a merger threatens could readily be detected and condemned should it occur later… But too many anticompetitive practices do not fall into that category.” Where “antitrust law has inadequate tools for dealing with [anti-competitive post-merger conduct] directly,” prophylactic merger policy provides a solution. __ 21

COPYRIGHT LAW AS A SHIELD on research by

S H YA M BA LGA N E S H Professor of Law

In a forthcoming article in the Vanderbilt Law Review, University of Pennsylvania Law School Professor of Law Shyam Balganesh confronts the critics of “censorial copyright claims,” claims where the creators of personal and often unpublished works — such as diaries, intimate photos and videos, personal letters, or even selfies — use copyright law to sue those who publish and distribute those materials without permission.

While many scholars have argued that the interests addressed by such claims are better protected through privacy tort law, in “Censorial Copyright,” Balganesh offers a theoretical framework for understanding and analyzing them. He argues that the push to eliminate censorial claims from copyright law rests upon a fundamental misunderstanding of copyright’s history and purpose.

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Balganesh is a Professor of Law and Co-Director of the Center for Technology, Innovation & Competition (CTIC) at the Law School. His scholarship focuses on understanding how intellectual property and innovation policy can benefit from the use of ideas, concepts and structures from different areas of the common law, especially private law.

“U.S. copyright law is today justified in exclusively utilitarian terms,” writes Balganesh. The theory of “creator incentives” states that copyright law drives the production of original works of expression by promising creators and authors “limited market exclusivity[.]” Thus, “copyright’s very raison d’être is therefore seen to lie in its role as a market-based incentive for creative production.” However, he explains, there

SHYAM BALGANESH

There are non-economic factors “that motivate an individual’s decision of whether, when, and how to embrace the identity and title of ‘author.’” are also non-economic factors “that motivate an individual’s decision of whether, when, and how to embrace the identity and title of ‘author.’” Among those factors are a creators’ concern for how their works are imbued with their personalities and the way they might reflect upon the creator’s reputation. Because the prevailing understanding of copyright law is focused on the commercial value of the works at issue, many scholars and courts consider creators’ non-economic interests to be wholly separate and best protected by other legal doctrines rather than censorial copyright claims.

Expressive work that is subject to copyright claims aimed at censoring its publication or dissemination commonly consists of “content that its author does not want revealed publicly, which on its face also discloses the author’s identity,” writes Balganesh.

For example, a victim of revenge pornography recently brought a successful copyright infringement lawsuit regarding self-taken intimate photos, which were then published and disseminated without their consent. Indeed, under current law, unpublished works like those photos may be the subject of both distribution and display right claims under the copyright statute.

Balganesh notes that recognition of the validity of censorial copyright claims is not a new phenomenon. Tracing the history of censorial claims within Anglo-American copyright law from 1710 through the present day, Balganesh asserts that in fact, “[c]ensorial copyright claims… pre-date copyright’s utilitarian turn, and thus are as legitimate in the copyright landscape as are other economically driven claims.” Nevertheless, he notes, at least since Samuel Warren and Louis Brandeis authored an

essay advocating the creation of an independent set of privacy torts within American common law, the existence of claims such as defamation, false light, and public disclosure of private facts creates some skepticism as to whether creators need to use copyright law to protect their non-economic interests. However, he notes, “[e]ven if Warren and Brandeis are seen to have made a compelling argument for the development of independent privacy torts and the existence of a ‘right to privacy,’ nowhere does their analysis recommend eliminating the personal claims that they identify from the ambit of copyright law.”

In the concluding section of the article, Balganesh offers a mechanism by which courts might adjudicate censorial copyright claims while accounting for free speech concerns and issues of newsworthiness, as well as how best to remedy the non-economic harms imposed by unauthorized publication and distribution. In particular, he explains how the existing fair use doctrine can be employed to avoid the risk of undue censorship that has contributed to much of the concern about censorial claims. Such claims ought to be allowed to proceed, he argues, even if they fall outside the exclusively economic focus of modern copyright law as envisioned by the theory of creator incentives.

“Copyright has always been an institution that has affirmed a plurality of normative values, and the persistence of censorial copyright claims confirms this reality,” writes Balganesh. “Courts and scholars might find this messy, complex, and theoretically inelegant; yet it represents the story of copyright’s evolution, which is hard to ignore or erase.” __ 23

THE UNIQUE CHALLENGES of GOVERNING STARTUPS on research by

ELIZABETH POLLMAN Visiting Professor of Law

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As venture-backed startup companies comprise an increasingly important segment of the American business landscape, an article by University of Pennsylvania Law School Professor Elizabeth Pollman closely examines the unique challenges involved in governing such companies within the framework of existing corporate law. The article, “Startup Governance,” forthcoming in the University of Pennsylvania Law Review, provides an in-depth analysis of the governance problems in venture-backed startups throughout the companies’ life cycles, brought about by the tensions between and among shareholders, founders, investors, executives, and employees who commonly play overlapping roles.

Pollman is a Professor of Law whose work is focused on business law. Her teaching and scholarship have addressed issues of corporate personhood, the constitutional rights of corporations, law and entrepreneurship, corporate governance, and startup companies.

“All five of the world’s largest companies by market capitalization — Apple, Alphabet, Microsoft, Amazon, and Facebook — began as venture-backed startups[,]” writes Pollman. “They defied existing theory by growing to significant size with ownership shared between founders, investors, executives, and employees. In the years since these trailblazing startups crossed over into public company status, record-breaking amounts of capital have flowed into new private companies.”

“All five of the world’s largest companies by market capitalization — Apple, Alphabet, Microsoft, Amazon, and Facebook — began as venture-backed startups.”

ELIZABETH POLLMAN

Even as startups proliferate, no legal definition of a startup company currently exists, and corporate law does not supply special rules for their governance. For the purposes of the article, Pollman defines startups loosely as companies “typically started by entrepreneurs and backed by outside investment with the goal of developing an innovative product or service, creating high growth, and exiting.” She notes that startups differ from traditional closely-held corporations in that their goals are usually either to go public or be acquired by another corporation rather than continue indefinitely in their initial form.

Among the challenges of governing a startup is the wide range of investors, each with different and sometimes competing sets of interests. As startups grow and pursue different types of funding, Pollman explains, their capital structure becomes increasingly complex as a result. In the first instance, the company’s founders “usually split the entire ownership pie by issuing the initial common equity to themselves as founders’ stock.” At the next stage of funding, angel investors — wealthy people who invest their own money into early-stage companies — provide the initial source of outside funding. As they pursue more significant growth, “many startups next seek additional financing from venture capital investors,” writes Pollman. “VCs are professional investors — general partners of funds organized as limited partnerships — who put other people’s money to work.” VCs also commonly provide oversight and mentorship to the companies they invest in as a method of protecting their investments. Finally, some late-stage startups also pursue funding from other types of investors such as mutual funds and sovereign wealth funds.

In seeking funding from these varied groups, “the typical pattern is for a startup to engage in sequential rounds of issuing convertible preferred stock with various protective terms and designated board seats,” writes Pollman. “In contrast to public companies, which generally have a single class of common equity, startups usually issue a new class of equity every 12-24 months in order to raise money to grow the company.” The result over time is “an increasingly complex capital structure” that includes “not only founders and employees, but also a variety of shareholders with different associated valuations, cash flow, and control rights.”

Pollman illuminates the conflicts that can arise between the many groups involved in funding and running startup companies.

For example, she notes, “[venture capital investors] and founders often diverge with respect to risk level, liquidity needs, and

private benefits, which are often implicated in critical boardlevel decisions on financings, strategic direction,” and whether and when to sell the company or take it public. Diverging interests can also arise between shareholders, even those with the same type of equity, whether common or preferred stock.

In venture-backed startups, these tensions tend to multiply over time because each round of financing increases the number of participants with varied interests and claims.

Pollman’s observation regarding increasing governance complexity in startups helps to shed light on several debates.

Notably, although VCs are theorized to be strong monitors, recent years have witnessed a number of high-profile oversight failures in startups. Pollman explains that the overlapping role that VCs commonly play as both investors and directors may weaken monitoring as they seek to protect their relationships with company founders. Furthermore, rather than investing in compliance or internal controls, startup boards have incentives to prioritize growth in order to fuel the company’s valuation and eventually reach an exit that generates returns for all participants without putting them at odds with each other. In addition, the article’s detailed account of increasing governance costs and liquidity pressure also provides a new explanation for why some companies might chose to go public — a particularly timely insight in an era of “unicorn” IPOs and direct listings.

Finally, Pollman argues that, as currently structured, traditional corporate law doctrine is ill-equipped to address many of the governance challenges that arise from startups’ unique structures. Examining In re Trados, Delaware’s most notable fiduciary duty case involving a startup, Pollman shows how courts may overlook the needs of “heterogeneous shareholders to resolve complex governance issues by contract and a board with constituency directors that is re-negotiated over time.” Her discussion of traditional doctrine offers a path forward for courts to “adapt their application of longstanding corporate law principles to fit startups and ensure the continued viability of the corporate form for innovative business” based on a more nuanced understanding of their issues.

“As large numbers of startups increasingly pursue growth and transformational technology while remaining private, they have come to represent an essential part of the economy and have a significant impact on employees, communities, and other stakeholders,” Pollman writes. “It is time that far greater attention be devoted to understanding their internal dynamics and the recurring problems they face.”

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IMPROVING TRANSPARENCY ON

CORPORATE SUSTAINABILITY on research by

JILL FISCH Saul A. Fox Distinguished Professor of Business Law; Co-Director, Institute for Law and Economics

JILL FISCH

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Corporate shareholders are increasingly interested in learning more about the societal impact of the companies in which they invest. Companies have addressed this interest by increasing their sustainability disclosures, but most such disclosures are voluntary and vary substantially among companies. Responding to the rise in attention to sustainability issues, a new article by University of Pennsylvania Law School professor Jill Fisch proposes an alternative way that companies can inform shareholders about their corporate sustainability practices within the framework of required Securities and Exchange Commission (SEC) disclosures. “Making Sustainability Disclosures Sustainable,” recently published in the Georgetown Law Journal, argues that the SEC should require companies subject to its jurisdiction to include a “sustainability discussion and analysis” (SD&A) in their annual reports.

Fisch is the Saul A. Fox Distinguished Professor of Business Law and Co-Director of the Institute for Law and Economics. She is a widely cited and internationally-known scholar whose work focuses on the intersection of business and law.

“Currently, there is no consensus on a precise definition of ‘sustainability[,]’” writes Fisch. “Use of the term is often traced to a 1987 United Nations report defining sustainability as ‘[actions that]… meet the needs and aspirations of the present without compromising the ability to meet those of the future.’” For example, sustainability might refer to the impact of corporate practices on the environment, or a company’s practices relating to executive compensation or board diversity — generally, issues that implicate a larger societal impact.

“Being able to assess an issuer’s sustainability practices is critical to evaluating the effect of sustainability practices on economic value.”

As investors have grown more focused on sustainability, the SEC has begun to consider “whether it should require increased sustainability disclosure as part of its ‘Disclosure Effectiveness Initiative.’” With limited exceptions, federal securities law does not require companies to “disclose specific categories of sustainability information[,]” Fisch explains. “Instead, the SEC has taken the position that such information needs to be disclosed only to the extent it relates to an existing disclosure requirement or is necessary to prevent a required disclosure from being misleading.” Commentators and regulators typically characterize reports on sustainability as “nonfinancial” reporting. Thus, apart from the few piecemeal requirements imposed by federal environmental law, consumer law, employment law, and some state law, any reporting on sustainability issues is undertaken voluntarily by companies that are so inclined.

As a result, sustainability reports are non-standardized and difficult to compare. In addition, “sustainability reporting varies widely in quality, and its accuracy is rarely audited or monitored, reducing its effectiveness as a tool for improving accountability.”

Indeed, investors have repeatedly expressed dissatisfaction with the current state of affairs.

Fisch’s proposal would work toward resolving the problems of the existing regime. The annual sustainability discussion and analysis (SD&A) that Fisch envisions would require companies subject to SEC jurisdiction “to disclose, at a minimum, the three sustainability issues that are most significant for the firm’s operations, to explain the basis for that selection, and to explain the impact of those issues on firm performance[,]” she writes.

“[This approach] would subject sustainability disclosure to the same regulatory framework that applies to other securities disclosures,” meaning that “[t]he SEC staff would review and comment on issuers’

SD&A disclosures as part of its review of securities filings and would have the authority to bring enforcement actions against issuers and individual directors for failure to comply.”

In addition, shareholders would be able to sue companies that include fraudulent misrepresentations or omissions within SD&As, just as they can with other financial disclosures required by the SEC.

Importantly, SD&A disclosures “will be prepared by disclosure attorneys rather than marketing personnel and subjected to the same verification requirements as traditional financial disclosures,” which would reduce the risk that companies would report only positive information and omit less flattering facts.

Sustainability disclosures would thus become more reliable and more useful to investors.

Requiring and standardizing sustainability disclosures as Fisch suggests would allow investors to better understand the social, political, and ethical considerations associated with their investment decisions.

Further, Fisch notes, “[b]eing able to assess an issuer’s sustainability practices is critical to evaluating the effect of sustainability practices on economic value.”

“In light of the worldwide debate over sustainability practices and investor claims regarding the necessity of quality sustainability disclosures for an adequate evaluation of issuer operations, it is necessary for the SEC to reverse its position that sustainability disclosure is not properly included within financial reporting,” writes Fisch. “SD&A disclosure represents a valuable first step that would enable investors and researchers to weigh those questions with minimal burden on corporate issuers.” __ 27

INNOVATION IN

DIGITAL CONTRACTS on research by

DAV I D H O F F M A N Professor of Law

DAVID HOFFMAN

In an article in a recent issue of the University of Chicago Law Review, University of Pennsylvania Law School professor Dave Hoffman challenges widely-held notions about the purpose and function of digital fine print — like the iTunes Software License Agreement and social media privacy policies — by closely examining the work of companies that have decided to make their fine print into something consumers can actually understand. The conventional wisdom holds that while consumers may hurriedly click “Agree” on digital terms and conditions while on their way to using the products and websites, no one actually reads them. Why then do companies bother deploying them at all?

As Hoffman explains, the traditional answer has been that this digital fine print operates as an “option” for the firms using it: while it may not do much to police consumers’ behavior on the front end, businesses can use the fine print to enforce norms of conduct by punishing the most egregious consumer misconduct. However, Hoffman argues, the “option” theory of fine print is incomplete.

Several well-known sharing-economy digital firms, including Tumblr, Kickstarter, Etsy, Airbnb, and Bumble, have in recent years revised their fine print in ways designed to make it more easilyunderstood and accessible for non-lawyers, and thus more likely to be read and — potentially — complied with. Interviewing lawyers at these innovative firms, Hoffman discovered what motivated them to reconceive what is typically boilerplate contractual language, and what, if anything, has resulted from the revisions.

In the article, “Relational Contracts of Adhesion,” Hoffman proceeds through a series of case studies based upon those interviews. Those case studies yield insights into a previously-underexamined category of fine print, which firms not only use to influence consumer behavior but also to define the parameters of the relationship with consumers. In some cases, firms also sought to use the fine print to signal what kind of companies they want to be: transparent, socially-conscious, or perhaps even light-hearted.

Both Tumblr and Kickstarter “created simple, easy-to-read summaries of each section of [their] terms of use,” and provided these translations to clarify what might otherwise have been impenetrable legal jargon. Etsy transformed its previously-generic terms of use into a more colloquial set of “house rules” that feature “a distinctive look and feel” with “[s]ection and paragraph headers … in plain and clear English: ‘Be honest with us,’ ‘Let’s be clear about our relationship,’ ‘Rights you grant Etsy,’ and ‘Don’t steal our stuff.’” In addition, Hoffman writes, “Etsy explains why it needs the rights it does, particularly the intellectual property rights it takes.”

“[Some digital contracts] might be changing user behavior by drawing on practices (of reciprocity, informality, and trust) traditionally sourced to __ 28

individualized, negotiated, off-line deals.”

Airbnb took a different approach, Hoffman explains, as the revision of the company’s non-discrimination policy arose from a public relations crisis when “three researchers [showed] that guest applications with distinctly African-American names were less likely to be accepted by hosts and they argued that the platform’s design facilitated that outcome.” The revised policy is “straightforward and written in a clear and accessible style,” Hoffman notes, but unlike several of the other firms’ new terms, “there are no visual cues or callouts.”

Finally, for the dating app Bumble, Hoffman notes the process of creating its terms of service prior to launching the app was intended in part to “distinguish itself from Tinder.” The terms sought to combine formal, exculpatory language required

by Bumble’s lawyers with “a set of terms that felt ‘young’ and ‘cool.’”

Thus, the case studies “provide examples of commercially important platform economy firms that appear to be using massmarket contracts in novel ways,” Hoffman writes.

“At the very least, those contracts are functioning as extensions of the firm’s trade dress: they are more likely to (in Etsy’s words) ‘look and feel and reflect who we believe we are as a company.’”

However, such innovative contracts are not without risks.

“Apart from Bumble, and perhaps Airbnb, each of our case study firms increased its legal exposure to suits by making it harder (on the margins) to exercise defensive clauses.” For example, many firms declined to add exculpatory clauses. Instead, “each explicitly worked to avoid legalese and focus on simple, declarative sentences. All except Airbnb also presented the terms with some playful humor and informality, as well as some visual cues and displays.”

Hoffman goes on to explain how these unique consumer contracts contain attributes of both traditional contracts — which are “fully negotiated … between two equally situated individuals” and are actually “intended to be read and govern behavior”— and consumer contracts of adhesion, which are the classic terms and conditions presented to consumers on a “takeit-or-leave-it basis” and which indeed serve as options to be exercised later to discipline consumers, or their lawyers.

By creating mass-market contracts that fall in between these two traditional categories, “Etsy, Tumblr, and Kickstarter (and to a lesser extent Airbnb) may illustrate a genuinely novel contracting form,” Hoffman argues. “Their end-user contracting framework is designed to build on an existing relationship and generate trust by the users toward the firm and toward each other. But it does so on a massive scale through terms of use that are embedded into the firm’s existing trade dress.” While users may be invited to participate in the terms’ creation, the terms are ultimately nonnegotiable.

Thus, Hoffman writes, “The case study contracts aren’t just accomplishing the ordinary goals of conveying information and setting up rules. They are doing that, but they are also marketing materials, demonstrating values that the firms think are useful — that is, we’re progressive, non-conformist, funny, hip, young, and above all, not evil.”

Ultimately, Hoffman concludes, mass-market contracts need not — and do not — all function similarly. Rather, “[s] ome might be changing user behavior by drawing on practices (of reciprocity, informality, and trust) traditionally sourced to individualized, negotiated, off-line deals,” he writes.

“The challenge going forward is to understand better what role the law and legal institutions play in creating innovation around such relational contracts of adhesion.”

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Refuting Conventional Wisdom on Incorporation and the 2017 Tax Law on research by

MICHAEL KNOLL Theodore K. Warner Professor of Law & Professor of Real Estate; Co-Director, Center for Tax Law and Policy; Deputy Dean

MICHAEL KNOLL

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Despite the emerging consensus among economists and commentators that the passage of the 2017 Tax Cuts and Jobs Act (“TCJA”) will lead to mass conversions of certain kinds of small businesses into corporations to take advantage of tax benefits, University of Pennsylvania Law School Professor Michael Knoll argues in a recent report that such predictions are overstated. In his two-part article “The TCJA and the Questionable Incentive to Incorporate,” published in Tax Notes, Knoll “questions the claim that there will be a mass conversion of passthrough entities into C corporations” as a result of the tax reform law, and “also questions the specific claim that C corporations will be widely used as investment vehicles to hold portfolio investments.”

Knoll is the Theodore K. Warner Professor of Law & Professor of Real Estate and Co-Director of Center for Tax Law and Policy at Penn Law. He frequently writes and comments on how income tax laws affect business and investment decisions, offering creative proposals of how those laws might be redesigned. His research includes writings on sovereign wealth funds, private equity, international tax arbitrage, and the impact of state taxes on interstate commerce.

“The TCJA’s tax rates were the result of substantial negotiation, debate, tinkering, and compromise,” writes Knoll. “The bill’s authors were determined to lower personal and corporate tax rates as much as they could within their budgetary constraints.” Among the many reforms within the TCJA, the law imposes a “relatively low corporate tax rate (21 percent) as compared with the maximum personal tax rate on ordinary income (37 percent) and the deferral of individual-level tax.”

Critics of the law argue that those tax rates will drive the wealthiest business owners to incorporate their businesses, converting them from passthrough entities, which allocate income taxes among the owners of the business rather than paying at the corporate level. Indeed, “[t]he economists at the Penn Wharton Budget Model (PWBM) predict a ‘mass conversion’ of passthrough entities into C corporations,” estimating that “’235,780 individual business owners — especially higher income business owners or service providers — will switch from owners of pass-through entities to C-corporations[,]’” resulting in an annual revenue loss of $11 billion, or roughly 17.5 percent of the ordinary business income earned through passthroughs before passage of the TCJA.

However, Knoll argues, closer analysis of the provisions of the TCJA reveals that whatever the authors’ intentions, “the top statutory individual and corporate tax rates create very close to a level playing field between passthrough and corporate entities[,]” at least for individuals in the top tax bracket who cannot take advantage of a special deduction for passthroughs that reduces the marginal tax rate by 7.4 percent. The rough equivalence between the top tax rates for passthrough and corporate entities arises because although the corporate tax rate is a flat 21 percent and the top individual ordinary income tax rate that would be paid by passthrough entity owners is 37 percent, the top long-term capital gains tax rate is 20 percent. The result is that even after being saved and invested for several years, any tax-deferred corporate income would still ultimately be “subject to a top rate of 36.8 percent (the sum of the 21 percent corporate tax rate and 15.8 percent, which is the product of the 20 percent individual tax rate and the 79 percent of pretax earnings left in the corporation after payment of the corporate tax),” Knoll explains. Furthermore, although the individual level tax can be deferred by investing through a corporation, the benefit of such deferral is offset by imposing a second level of tax — the corporate

“[T]he sharp uptick in incorporations that some commentators are predicting seems unlikely to occur — especially if business owners understand and consider the full range of likely current and future tax consequences.”

tax — on earnings invested through the corporation. Thus, Knoll concludes, “for taxpayers in the top individual tax bracket, the total tax burden on corporate earns and passthrough earning is now almost equal” whether income is paid out as earned or retained and invested in portfolio assets.

The second part of the article assesses “the possibility that other tax provisions [beyond the basic rate structure] could still make the corporate form more tax efficient when business owners are looking to invest substantial proceeds in portfolio investments.” Knoll analyzes four provisions in turn: the lower tax rate on interest income, the Medicare tax, the step-up in basis for corporate stock held until a taxpayer’s death and then passed to heirs and beneficiaries, and the qualified small business stock (“QSBS”) exclusion, “which allows individual taxpayers to exclude from federal tax 100 percent of their gain on the sale of qualified corporation’s shares.” In each case, Knoll finds that the provision offers only modest benefits, if any, to corporations over passthrough entities, and in any event — at least for the QSBS exclusion — those benefits predated the passage of the TCJA.

Knoll notes that incorporating might bring some advantages post-TCJA if the business owners’ intent is to reinvest earnings in

the business rather than in portfolio investments, but even those potential tax reductions do not make a particularly strong case for converting from a passthrough entity. In particular, because current law permits large businesses to claim a tax deduction by taking 100 percent bonus depreciation, there is at least for now no tax advantage to using a corporation to reinvest profits in the business. Further, Knoll writes, incorporation brings the risk that payment of deferred salary may not be tax deductible while it would be for a passthrough entity and “it is more difficult and more expensive to take assets out of corporate solution than to put them into corporate solution.” Thus, Knoll concludes that “it is understandable for passthrough owners to wait and keep their options open even if there appears to be a current benefit from incorporation.”

Ultimately, careful analysis suggests that “it is not clear that many passthrough businesses would substantially reduce their tax burdens by incorporating,” Knoll writes. “Accordingly, the sharp uptick in incorporations that some commentators are predicting seems unlikely to occur — especially if business owners understand and consider the full range of likely current and future tax consequences. And even if there are massive conversions by wealthy business owners, their tax savings would likely be modest.”

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FEATURED SCHOLARS

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SHYAMKRISHNA BALGANESH is a Professor of Law whose scholarship focuses on understanding how intellectual property law and innovation policy can benefit from the use of ideas, concepts, and structures from different areas of the common law, especially private law. His most recent work examines the intellectual history of U.S. copyright law, showing how it evolved from a private law regime to a public law based system.

MAGGIE (MCKINLEY) BLACKHAWK (FOND DU LAC BAND OF LAKE SUPERIOR OJIBWE) is an Assistant Professor of Law. She researches and teaches in the fields of constitutional law, federal Indian law, and legislation.

HOWARD CHANG is the Earle Hepburn Professor of Law. He writes on a wide variety of subjects, including immigration policy, international trade, and environmental protection. His scholarship has appeared in the Yale Law Journal, University of Pennsylvania Law Review, Southern California Law Review, the Georgetown Law Journal, the Journal of Political Economy, the American Economic Review, and the RAND Journal of Economics.

ERIC FELDMAN holds the Heimbold Chair in International Law and is a Professor of Medical Ethics & Health Policy and Penn Law’s Deputy Dean for International Programs. His work explores the comparative dimensions of rights, dispute resolution, and legal culture, often in the context of urgent policy issues, including the regulation of smoking, electronic cigarettes, HIV/AIDS, and natural and nuclear disasters.

JILL FISCH is the Saul A. Fox Distinguished Professor of Business Law and Co-Director of the Institute for Law and Economics. She is an internationally-known scholar whose work focuses on the intersection of business and law, including the role of regulation and litigation in addressing limitations in the disciplinary power of the capital markets.

JEAN GALBRAITH is a Professor of Law. Her research focuses on the structure of international legal institutions, especially treaty regimes, and the connections between these institutions and U.S. domestic law.

ALLISON HOFFMAN, Professor of Law, is an expert on health care law and policy. Her work examines some of the most important legal and social issues of our time, including health insurance regulation, the Affordable Care Act, Medicare and retiree healthcare expenses, and long-term care.

DAVID HOFFMAN is a Professor of Law. His recent papers have investigated whether millennials have developed a distinctive set of views about promising which relate to their experiences with online commercial transactions, and how firms use form contracts as brands to better engage users with digital platforms.

HERBERT HOVENKAMP, the James G. Dinan University Professor, is a widely cited expert on antitrust law. He is also a Fellow of the American Academy of Arts and Sciences, and in 2008 won the Justice Department’s John Sherman Award for his lifetime contributions to antitrust law.

MICHAEL KNOLL is the Theodore K. Warner Professor of Law & Professor of Real Estate and a Co-Director of the Center for Tax Law and Policy. He is an insightful commentator on how income tax laws affect business and investment decisions and a creative proponent of how those laws could be redesigned.

SOPHIA Z. LEE is a Professor of Law and History. Her scholarship synthesizes constitutional and administrative law. She has written about administrative agencies’ role in shaping constitutional law; civil rights and labor advocates’ challenges to workplace discrimination during the early Cold War; and conservative legal movements in the post-New Deal era.

SHAUN OSSEI-OWUSU, Presidential Assistant Professor of Law, is an interdisciplinary legal scholar with expertise in legal history, criminal law and procedure, civil rights, and the legal profession. His work sits at the intersection of law, history, and sociology.

ELIZABETH POLLMAN is a Professor of Law specializing in corporate law and governance. She has written extensively about corporate personhood and the constitutional rights of corporations, as well as startups, entrepreneurship, and law and technology. She joins the faculty in January 2020.

NATASHA SARIN is an Assistant Professor of Law with teaching and scholarship at the intersection of law and finance.

Her current research focuses on financial regulation, with papers on both consumer finance and macroprudential risk management.

BETH SIMMONS is the Andrea Mitchell University Professor in Law, Political Science and Business Ethics. She is best known for her research on international political economy during the interwar years, policy diffusion globally, and her work demonstrating the influence that international law has on human rights outcomes around the world. __ 33

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