VOLUME 2 ISSUE 1 - AUTUMN 2012
â€˜Diner for allâ€™ or how to not compare apples and oranges: Some observations about (food) safety and security by Helene Albrecht An analysis of regulation governing hedge funds in the US and the EU from 2002 to 2010: A Preliminary Assessment by Eva Pakla The recent securities law litigation in the US Supreme Court by Sebastian Okinczyc You should never look a gift horse in the mouth: One-Size-Fits-All Compensation in Wrongful Conception by Jack Clayton Thompson
Foreword to Volume 2 Issue 1 of the Westminster Law Review Welcome to the second edition of the Westminster Law Review. Although previously the journal published only one edition per academic year, this edition marks the first of two official halves of the 2012/13 academic year – or more formally, Volume II. Whilst the athletes of the world have been stretching the boundaries of human sporting achievements and breaking records, the editors of the Westminster Law Review and authors of the articles have been spending their summer working, re-working and, yes, re-re-working the four articles that feature in this edition. Our lead article comes from Helene Albrecht, who discusses the food trade wars and food safety against the backdrop of the current economically and politically uncertain global climate. The global economic crisis is the broad theme of two of our other articles in this edition: Eva Pakla tackles the regulation of hedge funds on both sides of the Atlantic and Sebastian Okinczyc broaches the subject of Securities law litigation in the United States Supreme Court. Rounding off this edition is the ever-topical issue of wrongful conception, where Jack Thompson takes a fresh look at the conventional compensation in these situations. In all, this edition presents an eclectic but excellent selection of articles! We are honoured to be inviting some of the authors to speak on the subjects of their work at the Westminster Law Society conference to be held on November 21st at the University of Westminster. The theme of the conference is “To be or not to be: when law is not law - A conference on International Law and Policy”. If you are interested in attending, look out for details on this website or our Facebook and Twitter pages. Finally - a word about our exciting future projects. In addition to accepting submissions for our next edition, which will be published in January 2013, we are expanding the scope of the journal to now include articles, book reviews and comments. The Editorial team will also shortly be launching a monthly podcast where we discuss topical legal issues and interview selected authors of Westminster Law Review articles. We are also in the process of organising another conference for 2013, focusing on another facet of law. More details on all of these projects will follow shortly, but for now, I warmly invite you enjoy the current edition!
Sherif Elgebeily Editor-in-Chief, Westminster Law Review, 2012-2013
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Biographies of Executive Committee for 2012-2013 Faces behind Volume 2 Issue 1 of Westminster Law Review Sherif Elgebeily, Editor-in-Chief Sherif Elgebeily is a Doctoral Researcher in International Law at the University of Westminster, focusing on the United Nations Security Council and the global rule of law. Prior to this, he was awarded an MA in International Human Rights Law summa cum laude from the American University in Cairo and undertook several internships including the United Nations Department of Political Affairs in New York, the European Commission in Brussels and the Child Law Centre in Pretoria. He was one of the academic editors on the founding executive committee of 2011-2012. Shamima Chowdhury, Executive Director Shamima Chowdhury has recently graduated with a 2:1 in an LLB Law from the University of Westminster. She has completed numerous work experience and internships with major law firms, including Pinsent Masons LLP and 29 Bedford Row Chambers. She is continuing in the role of Executive Director for a second year as an alumnus. Joanna Economopoulos, Marketing Director Joanna Economopoulos is currently in her final year of the LLB programme at the University of Westminster. She was the Public Relations and Communications Officer for the Westminster Law Society in the 2011-2012 academic year. She remains an Executive member of the Society for 2012-2013, acting as Careers Officer and Representative for the Westminster Law Review. Joannaâ€™s experience ranges from operating a successful small business to providing international legal protection to refugees while working for the United Nations High Commissioner for Refugees (UNHCR) in Ethiopia. Pravin Jeyaraj, Academic Editor & Social Media Editor Pravin Jeyaraj is a Doctoral Researcher in Environmental Law at the University of Westminster and he is interested in the UK government's waste and recycling policy. He has previously worked in property law, corporate social responsibility and as a journalist and has been awarded an MA in Journalism from the University of Westminster. He is continuing in the role of academic editor for a second year and is also responsible for maintaining the journalâ€™s social media channels. Serhat Yilmaz, Academic Editor Serhat Yilmaz graduated from lstanbul University in Turkey with a law degree prior to moving to the UK. He pursued LLM International Law at SOAS (University of London). He obtained his Graduate Diploma in Law (GDL) and completed Legal Practice Course (LPC) at the College of Law (London). Serhat is currently a Doctoral Researcher at University of Westminster, London and the member of the Centre for Law, Society and Popular Culture. His research project is focusing on the creation of a better regulatory framework for the sport agents, particularly in football, within the European Union. Through considering the existing regulations, involvement of the institutions of EU as stakeholders and various alleged irregularities within the activities of agents, he aims to identify an alternative method of regulation. Non-executive committee members 2012-2013 Hassan Chowdhury, Web Designer Hassan Chowdhury is a graduate in Computer Science at Goldsmiths College, University of London.
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‘Diner for all’ or how to not compare apples and oranges: Some observations about (food) safety and security Helene Albrecht* Abstract Food is very much at the centre of our activities. On both sides of the Atlantic people rediscover traditional ways of growing, consuming and celebrating food, and after years of increasing concerns about food safety much appears to be restored to what it always used to be: we experience the rise of home growers, powerful NGO activities, the ‘buy local’ movement and a mushrooming of healthy and traditional food providers and taverns. However, in the current debate about growth and economic uncertainty, it is worthwhile to revisit recent trade wars around ‘food’ and the political climate they have poisoned over the last two decades. A lingering decrease of food related cultural values and nation’s sovereign powers in the course of progressive trade liberalisation in food and agricultural products has correlated with the increase of reciprocal political resentment in the face of global economic crisis. The article therefore seeks to identify to what extent in transparency and stringency of legal- economic agency in the realm of food have contributed to general political unease and powerlessness and where the law might provide escape routes from crisis. Table of Contents I.
Introduction .................................................................................................................................... 5
The desperate poultry walk around ................................................................................................ 6
III. Trade in agricultural products and its realisation through international economic law ................ 8 IV. ‘The Food Safety Fortress’-protection for an unsettled global economy? ................................... 12 V. ‘Some bones to pick’-or ‘The overall loss of (food) culture’ ......................................................... 16 VI. The nature of world trade law and lawyers’ responsibility in shaping relations ......................... 19 VII. Emergency exits from Satyricon.................................................................................................... 20 VIII.Conclusion ..................................................................................................................................... 22 IX. Biblography ................................................................................................................................... 23
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Food scandals have accompanied the last decade, including hormone treated meat and the mad cow disease1, contaminated baby milk powder2and an E coli outbreak3. It is not only risk to human but also to animal health and biodiversity which is imposed by these incidents, the latter being complained of by consumer and environmental groups alike. The extent to which policies for economic growth, investment and international trade relations are involved in these developments are not easily traceable for the civil society and find outlets rather in political recriminations than in a clear analysis of trade-environment dilemmas. This article approaches the lacuna by firstly looking at three recent poultry cases fought out between the US, China, Russia and the EU. The trade disputes shed light on working mechanisms, scope and inherent conflicts of food relevant agreements concluded in the Uruguay Round, up and foremost the Agreement on Sanitary and Phytosanitary Measures (SPS Agreement) and the Agreement on Agriculture. The next paragraph describes conflicts between citizens’ concerns and legal-economic organisation under the WTO that becomes obvious in case law such as Japan-Apples, EC-Hormones and EC-Biotech4; it also points to the fragmentation of international legal regimes and perceived limits of the law to mitigate political controversies.5 What is more, the resulting lacuna has translated into tensions within foreign relations which run the risk of blocking sight on substantial points of departure as evidenced in academic discourse. A positive, if not sustainable residue of the food safety dilemma is the world-wide call for transparency and restoration of traditional and more sustainable farming practices and food production.6 Accordingly in its final section the article refers to assistance the law currently provides in order to achieve appeasement and sustainability. It will be argued that if realised and organised with care, new processes in the production and organisation of food could be able to contribute to long-term political and economic stability reaching far beyond food supply and consumption.
*Helene Albrecht holds a LLB law degree from Westminster University, School of Law and a LLM specialist degree in ‘Environmental Law and Policy’ from University College London. Her focus is on energy law and agriculture, international relations and capacity building of local communities. A former career in music inspires to creative and constructive perspectives and applications of the law to sustainability and societal engagement. 1 Marsha A Echols, ‘Food Regulation in the European Union and the United States: Different Cultures, Different Laws’ (1998) 4 Colum. J. Eur. L 525, 525. 2 Peter Foster, ‘Tainted Chinese baby milk powder causes baby girls to grow breasts’, The Telegraph (London, 10 August 2010) <http://www.telegraph.co.uk/news/worldnews/asia/china/7936456/Tainted-Chinese-babymilk-powder-causes-baby-girls-to-grow-breasts>accessed 10 July 2012. 3 Derek Hargreaves, ‘Much ado about cucumbers’, The Guardian (London, 1 June 2011) <http://www.guardian.co.uk/commentisfree/2011/jun/01/cucumbers-e-coli-germany>accessed 10 July 2012. 4 (n 127). 5 Andrew Lang, ‘World Trade law after Neoliberalism’ (OUP 2011) 61-103. 6 ibid, 22-24.
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THE DESPERATE POULTRY WALK AROUND
In 2009 the US banned imports of Chinese poultry from their market by virtue of s 727 of the Omnibus Appropriations Act 20097.The preparation of an application of the health safety measure involved a complex scenario of domestic actors and activities: firstly, the US Department of Agriculture (USDA) and its subordinated agency, the Food Safety Inspection Service (FSIS)were instructed by the US Congress to restrict funds for poultry imports from China; secondly Committees of the USDA were urged to take action plans such as ‘the systematic audit of inspection systems [and] of all poultry and slaughter facilities that China would certify to export to the U.S.’8; finally, the FSIS was instructed to request information from the Chinese authorities in order ‘to understand the nature and implication of revisions in food safety laws, regulations, and inspection and control procedures’ that China had enacted since 2006.9In fact, the import ban dated back to a US moratorium from 2008 which denied China benefits accruing under the WTO. Since 2004both countries had sought to establish equivalence of their poultry slaughter inspection systems, whereby equivalence had been determined by the FSIS in 2006 following the revision of Chinese food regulations. Though, as the panel’s report unscrambles requirements subjecting China to further evaluation of its rule making process unfortunately coincided with the entering into force of the Consolidated Appropriations Act 2008.10 Following the trade restrictions China requested consultation with the US in April 2009 as it considered the trade ban to be inconsistent with Art I: I and Art XI of the GATT providing for the guarantee of any privileges and advantages to the ‘like products’ of all other contracting parties and the prohibition of trade restrictions respectively.11The unsuccessful consultation procedure was followed by a request to establish a panel in June 2009.China left it to the Dispute Settlement Body (DSB) whether the US measure would also violate obligations under the SPS Agreement. The panel as established in September 2009insisted on an extension of the usually six months long revision period ‘due to the technical complexity of the matter’12 The final report was circulated in September 2010 and indeed found violations of the SPS Agreement besides claims China had brought under the GATT13.According to the report the US had not based their safety measure on a proper risk assessment, its protective motivation was maintained without scientific evidence and finally, the legitimate ‘appropriate level of protection’ which gives WTO Members room for manoeuvre in health safety issues was applied in an arbitrary and discriminatory manner against China.14There was no 7
US - Certain Measures Affecting Imports of Poultry from China, WT/DS 392/R. ibid, 22-24. 9 ibid. 10 ibid, para 2.26- 2.32. 11 General Agreement on Tariffs and Trade (GATT 1947); see World Trade Organisation, ‘The Legal Texts-The th Results of Multilateral Trade Negotiations’ (18 reprint OUP 2011) 423. 12 Summary of the Final Report<http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds392_e.htm> accessed on 25 June 2012. 13 ‘The US measure satisfied the two conditions in Article 1 of the SPS Agreement [...]. First, Section 727 was enacted for the purpose of protecting human and animal life and health from the risk posed by the prospect of the importation of contaminated poultry products from China and was therefore a measure applied for the purpose set forth in Annex A(1)(b) of the SPS Agreement. Second, the panel concluded that Section 727 directly or indirectly affected international trade in poultry products.’ (n 6) 104-113. 14 The panel referred to Art 2.2, 5.1, 5.2, and 5.6 of the SPS Agreement respectively (n 5) 113-155. 8
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need to recommend that the US brought S 727 into conformity with its trade obligations as the provision had already expired. Nevertheless, the case had repercussions: already in 2009 China countered with anti-dumping and countervailing duties on chicken broiler products from the US, thereby causing losses about 90% to the export of poultry and directly hurting 300,000 farmers and workers.15 Under the Anti-Dumping rules and the Agreement on Subsidies and Countervailing Measures16 countries are permitted to impose duties on imports if these are subsidised in their home countries, sold below market price17 and therefore may cause economic injury to their own industry in the same market. The application of these remedies requires the observation of legal standards and transparency, which had been neglected by China according to US Trade Negotiator Ron Kirk who on these grounds justified the filing of a complaint by the US authorities.18Although tariffs against the US increased between 50% and 100% and presumably resulted in the loss of $1 billion at the time of writing China rejected the claim. It might be right to do so: consumer taste in China has recently swapped from chicken to pork which, res ipsa loquitor must interrupt the ‘steady, high-margin business [of] selling unwanted parts to China’ which the US enjoyed before ‘the battle over chicken erupted’.19 Since Russia has just joined the club of world traders20 it completes the round dance of poultry which, by the way, also includes a decade-long trade dispute between the EU and the US: since 1997 Europe has rejected US poultry treated with four anti-bacterial chemicals although the meat had been approved by the US Food and Drug Administration in the late 1990s.21Imports of poultry from the US to Russia which were initiated in the early 1990sby President Bush as economic aid shipments have now dropped by more than 50% and will potentially force Americans to eat previously despised 15
Office of the United State Trade Representative, United States files WTO Case Against China to Protect American Jobs’ (Press Release September 2011) <http://www.ustr.gov/about-us/press-office/pressreleases/2011/september/united-states-files-wto-case-against-china-prote>accessed 10 July 2012. 16 Agreement on Implementation of Art VI of the GATT 1994 (Anti-dumping); SCM Agreement respectively (n 10) 147 and 231. 17 In other words ‘normal value’; for a summary of the Anti-dumping Agreement see http://www.wto.org/english/docs_e/legal_e/ursum_e.htm#fAgreement accessed on 24 June 2012. 18
Office of the United States Trade Representative (n 14). ‘China rejects U.S. complaint again chicken tariffs ‘Los Angeles Times (LA, 21 September 2011) <http://latimesblogs.latimes.com/money_co/2011/09/china-rejects-us-complaint-against-chickentariffs.html> accessed on 24 June 2012; see also Michael Rundle, ‘Britain to export 1000 of pigs to China’ The Huffington Post’ (United States,17 May 2012) <http://www.ers.usda.gov/topics/crops/cotton-wool.aspx> accessed on 29 June 2012. 19
Russia’s membership to the WTO was approved by the Ministerial Conference on the 16 December 2012; on 7 June 2012 the ratification protocol was submitted to the Russian federation and will be completed on a fast track by 23 July 2012; <http://www.wto.org/english/news_e/news11_e/acc_rus_16dec11_e.htm><http://www.mondaq.com/x/181 432/International+Trade/The+Russian+Government+Finally+Submits+WTO+Accession+Protocol+To+Russian+P arliament> accessed on 30 June 2012. 21 Rory Harrington, ‘WTO to investigate EU ban on US poultry’ (Food Production Daily, <http://www.foodproductiondaily.com/Quality-Safety/WTO-to-investigate-EU-ban-on-US-poultry> accessed on 24 June 2012.
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dark poultry meat themselves instead of preferable white chicken breasts. Russia who disposes of vast natural resources tries in general ‘to wean the country from imported foods.’22However, only further research reveals the true extent of damaging competition to the US poultry market: the year 2002 marks the foundation of the European Poultry Club which runs partnerships with the Russian Poultry Union and the China Animal Agricultural Association; the ‘independent club’ which is registered in Frankfurt, Germany, and managed by the German Agricultural Society stretches also to Argentina, and expands towards ever more trading partnerships within the European Economic Area thereby up and foremost targeting potential new EU member states.23 In times of overall decreasing resources24 one might wonder what the economic rationale and benefit are behind such trade in poultry. The following sections attempt to find answers while looking at trade in agricultural products and food regulation under the WTO. III.
TRADE IN AGRICULTURAL PRODUCTS AND ITS REALISATION THROUGH INTERNATIONAL ECONOMIC LAW
Since the establishment of the World Trade Organisation under the Marrakesh Agreement25 several agreements affecting agriculture have been working towards progressive trade liberalisation in order to ‘establish a fair and market-orientated agricultural trading system’. 26In 1998 trade in agricultural products constituted shares in total merchandise trade only about 10,5 % worldwide; their share in primary product export was 52,4 %.27However, statements of agribusiness leaders are more telling about the significance of world trade in agricultural products: the latter functions as engines for many other economic branches.28The plantation of cotton involves the use of pesticides and herbicides in order to tackle side effects of monoculture; the use of modern machinery allows for large-scale economies and efficiency29, and new opportunities for the application of biotechnology include the creation of lucrative Intellectual Property Rights (IPRs)30.The cotton industry creates 200,000 jobs while accounting for $25 billion in products and services: the US is after China the second largest exporter of cotton even though it has grabbed the headlines for subsidising its cotton
Shruti Date Singh, ‘China and Russia are snubbing American Chicken’, (Bloomberg Businessweek Magazine, 28 July 2011 <http://www.businessweek.com/magazine/china-and-russia-are-snubbing-american-chicken07282011.html> accessed on 24 June 2012. 23 European Poultry Club <http://www.poultryclub.com/2736.html>; for a summary of business strategies and features see also a documentation presented to Ukrainian clients <http://www.poultryclub.com/uploads/media/kiev_wesjohann.pdf> accessed on 24 June 2012. 24 For the correlation between the oil price and agricultural products see Salvatore Carollo, ‘Understanding Oil Prices-A Guide to What drives the Price of Oil in Today’s Markets’ (2012) Chichester: John Wiley & Sons (LTD) 25 WTO, ‘The Legal Texts’ (n 10). 26 Agreement on Agriculture, preamble (n 10) p 33. 27 Statistics available at <http://www.wto.org/english/tratop_e/agric_e/agric_e.htm> accessed on 9 July 2012. 28 USA Poultry and Egg Council <http://www.usapeec.org/about_default.cfm> accessed on 30 June 2012. 29 NOW, ‘Facts and Figures: The Cotton Trade’, <http://www.pbs.org/now/shows/310/cotton-trade.html> accessed 9 July 2012. 30
Patricia Lucia Cantuária Marin, ‘Providing Protection for Plant Genetic Resources-Patents, Sui Generis Systems, and Biopartnerships’ (Kluwer International 2002).
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farmers contrary to the WTO rules31 and displacing other players, in particular African small farmers from the markets.32Similar connotations apply to meat producing industries: intensive livestock breeding depends on the use of hormones and chemicals in order to achieve faster growth and to protect animals from infections and diseases that frequently occur in the context of intensive stock rearing.33 A leading poultry producer such as ‘Wiesenhof’ in Germany processes 260 million chickens every year;34 the British pork industry is able to fatten ‘pigs up for a kill in just three months’ as opposed to China who needs one year for the same process; British pig farmers also produce twice as many piglets as the Chinese thank to Britain’s world leading position in pig genetics.35 With the Uruguay Round fresh stimulation has been conferred in particular to world trade in agricultural products and food through strengthening of former trade arrangements,36yet both sectors sensitively touch upon the interface between nations’ sovereign powers, cultural and traditional farming practices, geopolitical circumstances, consumer tastes and economic-political endeavour in the search for economic growth. While the Doha Round repeatedly has unfolded controversies and difficulties even resulting in failure of trade negotiations37 the underlying trade agreements continue to set clear instructions Member States must follow if they want to benefit from global trade both as exporting and importing nations. The Agreement on Agriculture, the Agreement on Technical Barriers to Trade (TBT Agreement), the Agreement on Sanitary and Phytosanitary Measures (SPS Agreement) and the Safeguard Agreement each regulate particular aspects of free trade in agricultural products and food. The Agreement on Agriculture strives for full market access especially for developing countries through regulation and restriction of domestic subsidies thereby tackling protectionism38. Member States make commitments to progressively and substantially reduce domestic support and export subsidies during an ongoing process39. The commitments must follow disciplines which are set out in Art 3-13 31
USDA <http://www.ers.usda.gov/topics/crops/cotton-wool.aspx> accessed on 29 June 2012. Glenys Kinnock, ‘America’s $24 bn subsidies damages developing world cotton farmers’, The Guardian (London, 24 May 2011) <http://www.guardian.co.uk/global-development/povertymatters/2011/may/24/american-cotton-subsidies-illegal-obama-must-act> accessed on 10 July 2012. 33 For the use of growth hormones see T-13/99 R Pfizer Animal Health SA/NV v Council of the European Union and T-70/99 R Alpharma v Council of the European Union; for some recent developments as regards animal treatment see US Food and Drug Administration, ‘Pfizer will voluntarily suspend sale of animal drug 3-Nitro’ <http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm258342.htm> accessed on 9 July 2012. 34 (n 21). 35 Michael Baxter ‘It’s time for investors to get into pigs’ <http://blog.share.com/2012/05/17/is-it-time-forinvestors-to-get-into-pigs/10964> accessed on 28 June 2012. 36 For general textbooks on the WTO see Michael J Trebilcock and Rob Howse, ’The Regulation of International rd rd Trade’, (3 edn, Routledge 2003; forthcoming 4 Edition due on 5 October 2012); DaniRodrik, ‘The Globalisation Paradox: Democracy and the Future of the World Economy’ (NY: W.W. Norton 2011); Andrew Lang (n 4). 37 For an account of the trade negotiations see <http://search.wto.org/search?q=Doha+Round&site=English_website&client=english_frontend&proxystyleshe et=english_frontend&output=xml_no_dtd&numgm=5&proxyreload=1&ie=ISO-8859-1&oe=ISO-8859-1> accessed on 26 August 2012. 38 Preamble (n 10) 33. 39 Art 20, ‘Continuation of the Reform Process’. 32
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of the Agreement; they involve complex assessments of domestic agricultural organisation, conditions and priorities. As countries’ trade relations often date back to colonialism or are anchored in preferential trade agreements40conflicts with the WTO are pre-programmed; they also often relate to deficiencies in human rights and environmental protection.41The Agreement on Agriculture co-acts with the SPS Agreement and provides for special and differential treatment of developing countries and least-developed countries.42Reform processes are pending since the DOHA Round in 200143 and negotiations so far did neither for developing nor for developed countries achieve unambiguous results.44 Commentators often refer to cultural differences between national farming practices and traditions as causes for disruptions in communication and harmonisation; other point to the political weight of domestic electorates.45There might be a general move towards environmentalism which does not sit well with the purposes of pristine multilateral trade negotiations: In Europe as well as in the US regionalism increasingly tends to support green agriculture and moves away from GM and the use of chemicals in agriculture.46 Some release for puzzles and resulting inconsistencies under the Agreement on Agriculture is provided by the TBT Agreement which balances Member’s regulatory autonomy with rights and benefits other contracting parties obtain under the GATT and the Marrakesh agreements.47The TBT Agreement is less restrictive than its counterpart, the SPS Agreement and allows for technical regulations that pursue legitimate objectives such as ‘national security requirements, the prevention of deceptive practices and the protection of human health and safety, animal or plant life or health, or the environment.’48Hence it has become practice to accommodate non-trade aims under the Agreement which may otherwise fall short within global trade organisation, up and foremost labour rights and high environmental standards. Through certification and licensing any international 40
The problem became obvious in EC-Export Subsidies on Sugar WT/DS265/AB/R where sugar imported from APC countries was subsidised as export sugar after blending with domestic production; for an illustration of trade relations with developing countries see L Bartels, ‘The trade and development policy of the European Union’(2007) 18 EJIL 4, 715-756. 41 Gillian Moon, ‘Fair in Form, But Discriminatory in Operation—WTO Law’s Discriminatory Effects on Human Rights in Developing Countries’ (2011) 14 JIEL (3) 553-592. 42 Art 14 and 15 respectively. 43 Kimberly A Elliott, ‘Agriculture and the Doha Round’ (2007 Institut for International Economics) <http://www.cgdev.org/files/12219_file_Doha_brief_final.pdf> ; Foreign Affairs and International Trade Canada <http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/wtoomc/nego.aspx?lang=eng&view=d>accessed 9 July 2012. 44 Michel Mc Mahon, ‘The Agreement on Agriculture’ in ‘The World Trade Organisation: Legal, Economic and Political Analysis’ (2005 Springer); 45 Fiona Scott, ‘Agriculture and the WTO-Towards a new Theory of International Agricultural TradeRegulation’ (Elgar International Economic Law Series 2009) 46 Green America <http://www.greenamerica.org/> ; Health and Environment Alliance <http://www.envhealth.org/news/latest-news/article/get-involved-in-building-a>; GogreenEurope<http://www.gogreeneurope.com /> accessed on 10 July 2012; see also Sarah Murray, ‘Small farmer have a critical role’, Financial Time (London, 13 October 2011). 47
Gabrielle Marceau and Joel Trachtman, ‘TBT, SPS, and GATT: A Map of the WTO Law of Domestic Regulation’,(2002) 36 Journal of World Trade 811. 48
Art 2.2 of the TBT Agreement.
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organisation may set labour or environmental standards which meet customers’ ethical expectations with the effect of widening markets for some while restricting access for others.49Though the TBT Agreement has not been able to work towards an international approximation of socio-economic rights or protective environmental regulation50; the recent Tuna-Dolphin decision rather suggests an engraving of the enduring trade-environment divide.51The TBT Agreement in case law occurs in the context of consumer welfare, and is invoked by WTO members in order to circumvent the inexorable science based requirements of the SPS Agreement.52 The SPS Agreement is equally concerned with the protection of human, animal or plant life through Member States’ measures against risks which must not arbitrarily and unjustified discriminate between them and must be based on scientific evidence. It is considered to be one of the most intrusive and controversial agreements53 and has soon entered the stage after the establishment of the WTO in major cases such as EC-Hormones I, the abovementioned poultry cases and most recently in the EC-Biotech case, the latter eventually raising profound questions as to interpretative methods and competences of the WTO panel and as regards the interactivity of different legal systems.54The Agreement itself derives its legitimacy from harmonisation of sanitary and phytosanitary measures under the auspices of international standard setting bodies55 and from reliance on scientific expertise in the assessment of risk which can be obtained at national or international level.56 Criticism has been stated against the working mechanisms of international authorities57, insensitivity towards different perceptions of risk and the ignorance of wider 49
M Joshi, ‘Are Eco-Labels consistent with World Trade Organisation Agreements?’ (2004) 38 Journal of World Trade 1, 62-92. 50 Alison Burrell, ‘‘Good agricultural practices’ in the agri-food supply chain?’ (2011) 13 Env. L. Rev. 4, 251-270. 51 United States-Measures concerning the Importation, Marketing and Sale of Tuna and Tuna Products WT/DS 381/R; the Appellate Body found that ‘the measure at issue is not even-handed in the manner in which it addresses the risks to dolphins arising from different fishing techniques in different areas of the ocean’ ; it furthermore discriminated against Mexico under Art 2.1 TBT although the trade restrictions were not more restrictive than necessary for the pursuance of a legitimate objective under Art 2.2 <http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds381_e.htm> accessed 10 July 2012. 52
Laura Nielsen, ‘The WTO, Animals and PPMs’ (Martin Nijhoff Publishers 2007).
Marsha A. Echols, ‘Food safety: Food Safety and the WTO: The Interplay of Culture, Science and Technology’, (Kluwer Law International 2001): ‘The SPS Agreement is a legal turning point. Its science-based rules displace centuries of food traditions and national attitudes towards food and food safety.’ 3. 54 EC Measures Concerning Meat and Meat Products (Hormones) WT/DS 26/R and European CommunitiesMeasures Affecting the Approval and marketing of Biotech Products WT/DS 291/R; WT/DS292/R; WT/DS/293/R; for an analysis of the latter see Margret A. Young, ‘The WTO’s use of relevant rules of international law: An analysis of the Biotech case’, 56 International and Comparative Law Quarterly 4, available on www.law.cam.ac.uk/faculty-resources/10004248.pdf accessed on 9 July 2012 55
The Codex Alimentarius Commission; The World Organisation on for Animal Health; The International Plant Protection Convention; see Lukasz Gruszczynski, ‘Regulating Health and Environmental Risks under WTO Law’ (OUP 2011) 75-104. 56
Michael A Livermore, ‘Authority and Legitimacy in Global Governance: Deliberation, Institutional Differentiation, and the Codex Alimentarius’, 81 NY Univ. L. Rev. 766-801. 57 Echols (n 50).
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contextual factors opposing unrestricted imports of hormone-treated meat, foreign fruits and vegetables and genetically modified organisms. Before plotting the evolution of case law under the SPS Agreement and approaching the complex cultural and political problematic of food production and regulation the article wanted to illustrate the Safeguard Agreement shall not be unmentioned. It enables states to apply safeguards in the case of serious injury or threats of serious injury to their domestic industry due to the unforeseen increase in imports. The components of the safeguard agreement have often been explored in agricultural disputes such as US-Lamb and US- Wheat Gluten58 whereby again it became clear that domestic dynamics and conditions, mostly unpredictable for a variety of reasons were not compatible with commitments under the international trade obligations of the GATT and the WTO.59 IV.
‘THE FOOD SAFETY FORTRESS’-PROTECTION FOR AN UNSETTLED GLOBAL ECONOMY?
Meanwhile citizens are used to address food concerns through media, in particular the internet. There are a multicity of NGOs involved in the fight against pesticides, food additives, genetically modified food and organisms, not to mention activist organisations such as Greenpeace, Friends of the Earth and World Wide Fund. Parallel to their activities there is the ‘hidden world’ of food regulating agencies, committees, international organisations.60Though established and provided for in legal provisions they are not easily accessible, the more as procedural rules involve timeconsuming processes and consultation. A view on European food regulation might illustrate some ramifications: the European Food Safety Agency (EFSA) as established under the Food Regulation61 evaluates and authorises products following scientific risk assessments. Food regulation similar to the regulation of chemicals falls under Art 114 TFEU (approximation of laws) which prescribes procedures Member States must follow if they wish to maintain their own regulatory regimes or to introduce new protective measures62; it is furthermore subject to Art 206 and 216 TFEU governing external competences of the EU in common commercial policy and in respect of international agreements. In addition measures under Art 114 TFEU are subject to the new Comitology procedure under Art 290 and 291 TFEU that confers new powers on the European Commission in the realm of implementing and delegated acts.63Accordingly trade conflicts involving food and agricultural products among EU member states and with third countries are not decided under Title XX ‘Environment’ Art 191-193 TFEU although their claims often address environmental concerns from
United States-Safeguard Measures on Imports of Fresh, Chilled or Frozen Lamb Meat from New Zealand and Australia WT/DS178/AB/R; United States-Definitive Safeguard Measures on Imports of Wheat Gluten from the European Communities’ WT/DS166/AB/R; both discussed in Alan O. Sykes, ‘The Persistent Puzzles of Safeguards: Lessons from the Steel Dispute’, (2003) 7 JIEL 3, 523-564. 59 Sykes (n 53) 524-37. 60 See Joanne Scott and Andrew Lang, ‘The Hidden World of WTO Governance’ (2009) 20 EJIL 3 (2009) 575-614; Richard H. Steinberg, ‘The Hidden World of WTO Governance: A Reply to Andrew Lang and Joanne Scott’ (2009) 20 EJIL 4, 1063-71. 61 Regulation 178/2002 laying down the General Principles and requirements on food law, establishing the European Safety Authority and laying down procedures in matters on food safety 62 Thomas Horsley, ‘Subsidiarity and the European Court of Justice: Missing Pieces in the Subsidiarity Jigsaw?’ (2011) JCMS 1-16. 63 Paul Craig, ‘Delegated acts, Implementing Acts and the new Comitology Procedure’(2011) 36 European Law Review p 671
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water pollution to soil contamination. The EU therefore mirrors to a certain extent a tradeenvironment divide which is familiar to world trade since times of the GATT 1949.64 When the EC Beef65dispute was decided in 1998 it pointed to the unfortunate clash of multiple occurrences. In Europe strong opposition against hormone treated meat had already evolved in the 1980s.66 Mothers in Italy had ascertained physical abnormalities in their children after the consumption of school meals containing DES charged beef67. Their alertness was dramatically enforced by the outbreak of the mad cow disease in the several European countries which was referred to the unconcerned feed of cattle with crunched parts of their own conspecifics.68European legislators reacted soon and in 1981 passed Council Directive 81/602 according to which ‘in the interest of the consumer, the administering to any animal of stilbenes and thyrostatic substances must be prohibited.’69 The ban concerned the method of production rather than the product characteristics of the meat, a distinction which would matter in the context of the later dispute. In 1985 the EU supplemented its ban through a further Directive after consultation with the Scientific Committee for Food and the European Parliament; the Directive, when becoming effective in 1989 affected US exports of beef offal in the value of $100.70 The US had already attempted to hold the ban off under principles of the Standards Code71 which in essence anticipated claims later tightened under the SPS Agreement: there was no scientific justification for the ban which created unnecessary and disguised barriers to trade. As the EU refused to bring the case before a panel, the US imposed 100 per cent duties on food imports from Europe to the US which were answered by European retaliations against US exports, all this happening in the course of the Uruguay negotiations. After the conclusion of the Marrakesh Agreement hormone containing products were considered to be safe by scientists during a conference in Brussels72and were followed by the filing of a complaint by Canada and the US against the still resistant EU in 1996. One year later the WTO found the EU in violation of Art 3:1, 3:3, 5:1 and 5:5 of the SPS Agreement and imposed 116 million Euros retaliation costs on the defending party. Among the most important outcomes of the case was the interpretation of the precautionary principle which was not accepted as self-standing
Daniel C. Esty, ‘Bridging the Trade and Environment Divide’ (2001) 15 Journal of Economic perspectives 3 113-130; see also Joanne Scott, ‘International Trade and Environmental Governance: Relating Rules (and Standards) in the EU and the WTO’ (2004) 15 EJIL 2 307-354. 65 Echols (n 50). 66 However, ‘from the 1960s through the mid 1980s, the regulation of health, safety and environmental risks was generally stricter in the United States than in Europe’; Diahanna Lynch and David Vogel, ‘The Regulation of GMOs in Europe and the United States: A Case-Study of Contemporary European Regulatory Politics’, (Council on Foreign Relation, Press Release 5 April 2001) <http://www.cfr.org/genetically-modifiedorganisms/regulation-gmos> accessed 9 June 2012. 67 US Foreign Agricultural Service for a chronology of the EC ban and further information to agricultural exports, <http://www.fas.usda.gov/> accessed on 30 June 2012. 68 Richard Lacey, ‘Mad Cow Disease: The History of BSE in Britain’ (Cypsela Pub.Ltd; Jersey, Channel Islands 1994). 69 Council Directive 81/602/EEC of 31 July 1981 Concerning the Prohibition of Certain Substances having a Hormonal Action and of any Substances having a Thyrostatic Action; see also Echols (n 48) 46. 70 Echols, 45-52. 71 The Standard Code had been concluded under the Tokyo Round in 1973; 72 The conference was sponsored by the EC and involved 90 scientists from several countries, supra 48, p 49.
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environmental principle but as an incorporation of the SPS Agreement73 and the steadfastness of the required science based risk assessment which will receive some extra consideration below.74 It is also noteworthy that the dispute did not end at this stage: the final decision in the EC-Hormones dispute was given by the Appellate Body in 2010 and reveals a remarkable paradigm as will also be highlighted below. In the meantime the insistence on the SPS Agreement would assist the birth of another aspiring export article, namely genetically modified organisms the commercialisation of which had been pursued in the US since the mid 1970s. The circumstances are illustrated in an analysis issued by the Council of Foreign Relations and anticipated later developments in Europe: in the mid 1970sUS research pioneers in the field of biotechnology called for a moratorium on grounds of a scientific challenge to the previously presupposed determinism of genes; the moratorium was supplemented by regulations on behalf of the National Health Institute. However, a US trade deficit in the 1970s, the oil shock from 1973 resulting declining competitiveness against the expanding European Community and Japan’s rise as technological super power probably played in favour of a strengthened interest in accelerated commercialisation and marketing of the biotechnology.75Against the precaution and criticism of American scientists the Congress in 1980 pushed through legislation in favour of GMs whereby the White House assigned primary responsibility for the regulation of biotechnology to the Cabinet Council on Economic Affairs rather than to the Environmental Protection Agency. Correspondingly the European Council adopted the first legislation on the Deliberate Release of GMOs in 1990.76 Consumers and scientists on both sides of the Atlantic remained equally opposed and concerned. Feeling confident with traditional plant breeding techniques, for example in the case of nectarines which are in fact modified peaches, the pace with which GMO crops were released on the US market was almost shocking: within 3 years ¼ of US cropland was cultivated with GM crops, turning 55% of soybeans and 35% of corn production into GM food and in addition making an overall profit of 16, 5 billion dollars from exports of GM wheat, maize and soybeans from the US to the EU in 1995.77 Questions of liability for damage sought to address the deepening rifts between international economic and environmental legislation.In Europe citizens’ concerns were politically responded by the establishment of a moratorium from 73
Translated into the ‘appropriate level of protection-ALOP’ Art 5.6. According to the SPS Agreement a member’s sanitary and phytosanitary measure must be ‘based on scientific principles and is not maintained without sufficient evidence [...]’ whereby this scientific evidence refers to the ‘assessment of risk and the determination of the appropriate level of sanitary or phytosanitary protection’ as defined in detail in Art 5; for a study of risk regulation under different legal regimes see M Lee, ‘Beyond safety? The broadening scope of risk regulation’, (2011) Current legal Problems, Research Paper of the University College of London, <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2088170> accessed on 9 July 2012; see also Elisabeth C. Fisher, ‘Opening Pandora’s Box: Contextualising the Precautionary Principle in the EU’, (2007)Oxford Legal Studies Research Paper No. 2/2007<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=956952> accessed on 10 July 2012. 75 Lang (n 4) 224-228. 76 Lynch and Vogel (n 56) 9-14. 74
A Bryan Endres, ‘“GMO”: Genetically Modified Organism or Gigantic Monetary Obligation? The Liability Schemes for GMO Damage in the United States and the European Union’ (2000) 22 LOY. L.A. Int’L&Comp.L.Rev.453.
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1998 which 2002 postponed further authorisation of GM crops before leading to the current framework for GMOs.78 The overall controversies culminated in the transatlantic dispute of EC-Biotech where the US, Canada and Argentina brought a claim for three categories of measures affecting their imports into the EU, among those the abovementioned moratorium. The complainants parties based their arguments on violations of the SPS Agreement, the TBT Agreement and the GATT whereas the EU sought to base its defence on three rules of international environmental law, namely the application of the precautionary principle, the Convention on Biodiversity and the Cartagena Protocol on Biosafety.79 The attraction of the panel’s decision lies in its different approach to both sets of laws. In the case of environmental provisions, in other words non-WTO sources it embarked on a restrictive attitude as the US as the only party had not ratified the multilateral environmental agreements80, whereas it admitted extrinsic material from international organisations, scientific experts and NGOs.81 The 1000 page long report raises profound issues to the fragmentation of international law, the interdependence and concept of ‘mutual supportiveness’ between the WTO and other institutions and the interpretation of international conventions82: for the panel’s decision-making process constructions under the VCLT83 were decisive for its ability to define the parties to non-WTO legislation and to consider non-WTO sources as informative according to ‘their ordinary meaning’.84 For Margret A Young the dispute became another inducement to highlight the lacking correspondence of international environmental conventions and international trade obligations, her analysis of global governance of fishing reserves points to the need for interactivity of different international legal systems.85The EU settled the Biotech case by admitting 10 GM plants on European markets thereby avoiding any retaliation costs which however, did not release form enduring internal and intergovernmental tensions. Many European countries have challenged further release and cultivation of GM plants on valid grounds86; there is a European ‘GM-free zones movement’87 78
Lynch and Vogel (no 56), 13-4. Entering into force in 1993 and 2000 respectively; see <http://www.cbd.int/doc/legal/cartagena-protocolen.pdf> accessed on 10 July 2012. 80 Young, (n 49), 2-4. 81 Ibid, 9-32. 82 As defined in the ‘Vienna Convention on the Law of Treaties (VCLT)’, Art 31(1) and (3) (c). 83 VCLT Art 31 (3)(c) provides for the taking into account of ‘relevant rules of international law applicable in the relations between parties’ which the panel construed as ‘the parties to the treaty’ instead of ‘the disputing parties; as membership was not identical to both the WTO and international law, the later, in this case the CBD and the Biosafety protocol were not applicable; in contrast Art 31 (1) allowed for the ‘drawing on non-WTO sources if they were informative of the ‘ordinary meaning ‘ of WTO treaty terms; (n 49) 31. 84 Ibid, 32-3. 85 Margret A Young, ‘Trading Fish, Saving Fish-The Interaction between Regimes in International Law’, Cambridge University Press 2011; see also C Roberts, ‘The Ocean of Life-The fate of Man and the Sea’ NY: Penguin 2012 for an actual account of the state of the oceans and their fish resources; Kati Kulovesi, ‘Fragmented Landscapes: WTO Dispute Settlement System, Legitimacy and Fragmentation’ in ‘The WTO Dispute Settlement System-Challenges of the Environment, Legitimacy and Fragmentation’ (Wolters Kluwer 2012) 153-175. 86 C-419/03 and C-121/07 Commission v France; C-492/03 Commission v Austria; C-165/08 Commission v Poland; C-256/04; C-82/05 Commission v Greece. 79
<http://www.gmo-free-regions.org/> accessed 10 July 2012.
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and a legislative stalemate which struggles between deference of more sovereign powers to member states and the broader consideration of economic aspects.88 Worth mentioning is the recent decision in EC-Hormones II89: making up for the previous deficit in scientific evidence as determining factor in the 1998 panel decision the EU gathered evidence from 35 scientists for carcinogen effects of hormones it sought to ban and initiated change of course: in future WTO panels will have to review SPS measures ‘in light of the Member’s regulatory objectives and risk assessment approach’ that must only conform to a ‘minimum scientific validity requirement’; diverging scientific opinions will be included and ‘insufficient scientific evidence must be evaluated in the light of the WTO Members’ chosen level of protection and new scientific evidence’.90 The trend to a ‘de novo’ standard of review became already apparent in the previous case Australia-Apples91where the AB admitted two visions of risk: one being a ‘holistic-risk logic’, the other a ‘quantitative risk logic’.92 This opens the scope for inclusion of other values into food related trade disputes with, according to Jacqueline Peel ‘considerable potential [...] to provide a useful model for environmental dispute resolution in international adjudicatory for beyond the realm of the WTO’.93 Even though EC-Hormones might herald a new phase in trade in agricultural products and food regulation, injuries and ill-feeling are likely to remain if not processed; overall problems agriculture faces on a global scale and their impact on global economic recession might worsen perplexities.94The following sections attempt to trace backgrounds of actor’s diverging perspectives and potential overlapping points. V.
‘SOME BONES TO PICK’-OR ‘THE OVERALL LOSS OF (FOOD) CULTURE’
Looking at the culture of food profound differences become obvious. The word ‘diner’ stems from the Gallo-Romance verb ‘desjunare’ (to break one’s fast) and in the 13th century evolved into French and English ‘disner’-‘dîne’ and ‘dinner. From there onwards it referred to a variety of cult and custom according to the social class who adapted it for its purposes.95 In contrast, the word ‘diner’ means a ‘restaurant in the shape of a railroad car’ in American tradition which firstly was created by Walter Scott in 1872 when converting a horse-drawn wagon in order to protect workers from foul 88
Martin Sieker (Rapporteur) ‘Opinion of the European Economic and Social Committee on ‘GMOs in the EU’’ European Union Preparatory Acts (additional opinion), OJ C 68; LudivinePetetin, ‘The EU Proposal on GM Crop Cultivation: a Real Opportunity for Consumer Preferences?’ Research Paper of UACES, the academic association for contemporary European studies’ <http://events.uaces.org/events/conferences/passau/abstract.php?paper_id=477> accessed 10 July 2012. 89
United States-Continued suspension of obligations in the EC-Hormones Dispute WT/DS320?AB/R Michael M. Du, ‘Standard of review under the SP Agreement after EC-Hormones II’ (2010) 59 International Law Quarterly 441-459 91 Australia-Measures Affecting the Importation of Apples from new Zealand WT/DS367/AB/R 92 Jacqueline Peel, ‘Of apples and oranges (and Hormones in beef): science and the standard of review in WTO disputes under the SPS Agreement’ (2012) 61 I.C.L.Q. 2 439. 93 Ibid 458. 94 See for instance Vince Heaney, ‘US drought renews food speculation concerns’ Financial Times 19 August 2012; Louise Lucas, ‘Farmers battle to bring home the battle’ Financial Times 22 August 2012 95 For a history of the ‘dinner’ see Sherrie McMillan, ’What time is Dinner?’ 90
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weather to whom he offered sandwiches.96Marsha A. Echols sets ‘food’ in the context of culture, commerce, science and analyses historical developments of food regulation from the Old Testament and Koran up to effects of an industrialised agriculture, eventually resulting in science-based risk assessments.97 The anthropologist Madeleine Leininger has identified nine ‘fundamental universal functions of food’ reaching from body energy, biological survival, social cohesion, religion, taboo, status symbol, psychological needs and security to medicine.98According to Kwang-Chih Chang’ few other cultures are as food orientated as the Chinese: the nature of food is directly linked to human nature and preserves good health as diet and medicine.99The profound meaning of culture again has been recognised by human right representatives and the UN bodies: Amartya Sen states that ‘our culture must have influence on everything else we do’100 while a definition by UNESCO describes culture ‘as the set of distinctive spiritual, material, intellectual and emotional features of a society or a social group social group’101.Thereby the ‘designation of cultural diversity’ is understood as ‘the common heritage of humanity.’102 However, cases under the SPS Agreement do not reveal the full extent of violations of countries’ sensitive relationship with food. When Japan was accused for having failed to provide an ‘adequate risk assessment’ for each of the agricultural imports that were potentially able to spread the ‘blight moths disease’ WTO panellists did not consider features of Japan’s unique food cultivation: due to strictly confined cultivable land and favourable watering conditions fruits are precious goods, often presented as gifts and consumed with thoughtfulness. The panel required that Japan brought its measures in conformity with the obligations under the SPS.103Likewise the commercialisation of GMOs has offended cultural, social and sentiments of European countries: Polish commentators describe the cultivation of GMOs as contrary to their religious belief and humanitarian values, whereas Greece unsuccessfully tried to invoke socialeconomic concerns in a GM dispute.104 On the background of genuine health and environmental concerns growing political frictions between the EU and the US may be ascertained in a different light. In a draft paper from 2011 Any Bradford from the Chicago School of Law expresses her resentment with the regulatory force of Europe: though ‘on the world stage, the European Union is thought to be waning into irrelevance
<http://www.americandinermuseum.org/site/> accessed 10 July 2012. Echols (n 50) 98 Madeleine M. Leininger, ‘Some cross-cultural universal and non-universal functions, beliefs and practices of food’, (1994) Dimensions of Nuitrion, Boulder: Colorado Associated University Press, 154-164. 99 Quoted in Echols, (n 50) 28. 100 ‘Democracy as a Universal Value’,(1999) 10.3 Journal of Democracy 10-17; http://www.unicef.org/socialpolicy/files/Democracy_as_a_Universal_Value.pdf accessed 10 July 2012 101 UNESCO Universal Declaration on Cultural Diversity adopted in 2001. 102 Ibid, quoted in ‘Cultural and development: A response to the challenges of the future?’ Symposium th organised within the framework of the 35 session of the General Conference of UNESCO Paris 10 October 2009, <http://unesdoc.unesco.org/images/0018/001876/187629e.pdf> accessed on 29 June 2012, 6. 103 Japan-Agricultural Products II, WT/DS76/AB/R; see also Roland Buerk,’ Japan’s obsession with perfect fruit’ BBC News (London, 15 March 2012) <http://www.bbc.co.uk/news/world-radio-and-tv-17352173> accessed 11 July 2012. 104 (n 79) 97
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due to its inability to speak with one voice’105[...] EU regulations have a tangible impact on the everyday lives of citizens around the world’106 dictating cosmetics, software, GMOs, chemicals and other products. Referring to the phenomenon as the ‘Brussels effect’ she complaints the resulting unilateral as opposed to political globalisation through the migration of laws which unhinges stated economic principles. A ‘race to the bottom’ which normally attracts business and corporations through relaxed regulations107recently experiences the opposite effect through incentives for companies to apply stricter standards to their production.108 Bradford does not believe in a ‘conscious choice to engage in regulatory imperialism’ by the EU. The combined de facto and de jure effect is neither the result of cooperation nor coercion; it is rather produced through the ‘go-it-alone power’ by a dominant regulator.’109Bradford calls her paper ‘descriptive’ without wishing to decide whether the regulating powers of the EU are socially desirable or not; she is mainly interested to provide ‘an account for why and how trade liberalisation can lead to stringent standards, why this follows a process of unilateral regulatory globalisation and why these standards are predominantly set by the EU.110While her discourse mentions cultural differences in the understanding of ‘risk’ and ‘precaution’ between the US and EU, the intended descriptive approach turns into evaluating statements: in the attempt to identify the EU’s internal and external motivations for its regulatory conduct she quotes ‘economic interests [and] driven primarily by its concern for competitiveness’ and an ‘accidental byproduct of its internal motivations’.111 Remaining in the economic vocabulary of ‘advantages’, ‘market conditions’ and ‘power plays’ substantial problems such as climate change and pollution of various types which unilateral advances seek to address must take a back seat; the author misses the dimension of genuine health and environmental concerns not only of European citizens the latter eventually having contributed to the shaping of European legislation.112 Bradford’s reluctance to attribute any altruistic or benevolent motivation behind the EU’s cautious and regulatory position is also reflected in Falkner’s article about Europe’s ‘leadership in international biotechnology regulation.’113 As Bradford he questions a deep-rooted normative orientation conferring ‘green normative power’ but rather seeks to explain the EU’s position as ‘a result of often protracted domestic battles over the future of biotechnology and the right balance between competing normative principles’114 The detection that ‘a policy of regulatory export follows
Paper is with the author; <http://news.uchicago.edu/multimedia/brussels-effect-rise-regulatorysuperstate-europe, accessed on 2 July 2012. The author further elaborates on the ‘seemingly declining power status and inability to get its way alone’ which makes Europe a ‘power of the past’, 1. 106 Ibid. 107 This is also described as the ‘Delaware effect’ under which states achieve a favourable competitive position through deregulation (n 89) 2. 108 In the US this has occurred as the ‘California Effect’, ibid. 109 ibid, 5. 110 ibid, 6. 111 ibid, 27. 112 For the likeness of American and European citizens in their fight against chemical pollution see Joanne Scott, ‘From Brussels with Love:The Transatlantic Travels of European Law and the Chemistry of Regulatory Attraction, (2009) 57 AM. J. COMP. L. 897. 113 Robert Falkner, ‘The European Union as a ‘Green Normative Power’? EU Leadership in international biotechnology Regulation’ (2006) Center for European Studies Working Paper Series 140 114 ibid, 15.
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a domestic political –economical logic’ 115may defeat any claim that ‘power serves global interests and universal values’, the more as ‘EU negotiators were keen to ensure that international treaty obligations would not go beyond domestic regulations and would not extend to the less controversial applications of genetic engineering in the medical realm’. For Falkner ‘EU biosafety leadership was [thus] closely circumscribed by the calculus of economic interest.’116 Any remembrance of the strong environmentalist commitment of the US in the 1960s as illustrated by Keleman and Vogel117 fades away when reading Wirth’s comment on ‘the EU’s new impact on US environmental regulation’. While regulating chemicals in the sense of ‘negative harmonisation’ the EU’s conduct ‘has serious long term implications for the process of crafting US public policy’.118While ‘advocates for more vigorous regulatory interventions in areas such as the environment, consumer protection, and public health might see this development as helpful’, EU legislative dynamics forces US administrative into compliance with potentially troubling long-range implications which as a model are ‘wholly inadequate to address twenty-first century realities.’119In the course of Wirth’s analysis the reader learns that the disputed European chemical regulation has been drafted under the influence by the US government which ‘undertook a concerted effort to block or weaken the [EU] proposal after the release of the EU’s white paper in 2001.120 This might explain the dissatisfactory result of REACH in the eyes of environmentalist who consider the directive to be the result of ‘a highly controversial lobbying debate.’121 VI.
THE NATURE OF WORLD TRADE LAW AND LAWYERS’ RESPONSIBILITY RELATIONS
To complete the current puzzle of food safety regulations a final view on the broader involvement of the legal profession is essential. In a conference paper of the Global Studies Research Program (GSRP)’ a research group of American lawyers identifies some characteristics of a new type of global economic law.122 Accordingly, lawyers participate in the construction of transnational and supranational regimes and these actions affect the power and legitimacy of national states and their
ibid, 13. ibid, 14. 117 R Daniel Keleman and David Vogel, ‘Trading places: The US and EU in International Environmental Policies’, (2010) 43 Comparative Political Studies, 427-456. 118 David A Wirth, ‘The EU’s New Impact on U.S. Environmental Regulation’, Boston College Law (2007) School Research Paper 144, <http://ssm.com/abstract=1028733>; the author refers to the Regulation on the Registration, Evaluation and Authorisation of Chemicals (REACH) EC 1907/2006. 119 Ibid, 106. 120 ‘These activities are documented in communications from various departments and agencies, including the Department of State and Commerce, the U.S. Trade Representative, and the EPA [...as] collected in reports of the U.S House of Representatives and the FreieUniversität Berlin, documenting that the executive branch in effect adopted as U.S. government policy the position of the American chemical industry on REACH.’105. 121 Dieter Pesendorfer, ‘EU environmental policy under pressure: Chemicals policy change between antagonistic goals?’ (2006) 15 Environmental Politics 1; see also <http://ec.europa.eu/environment/chemicals/reach/reach_intro.htm> accessed 10 July 2012. 122 David M. Trubek, Yves Dezalay, Ruth Buchanan, John R. Davis, ‘Global Restructuring and the Law: Studies of the Internationalisation of Legal Fields and the Creation of Transnational Arenas’, (1993-5) 44 Case W. Res. L. Rev. 407-498. 116
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legal fields.’123 ‘The ‘global’ and the ‘national’ are interpenetrated and interrelated’; a newly created ‘global factory’ is meant to contribute to the ‘emergence of a new international division of labour.’124The time of writing is the era of Thatcher and Reagan administrations and of the ‘Washington consensus’125that ‘under the aegis of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD or World Bank) spread a neo-liberal vision ‘throughout the developing world’ and [which] affects continental and Eastern Europe, the former Soviet Union and also China.’126The vision comprehends creditable aims: the promotion of democratisation, advocacy for the disadvantaged and the protection of environmental and social interests.127For the realisation of re-structured global production an ‘American mode of production of law’128has intruded into legal fields in Europe. The question arises as to the legitimacy of an autonomous legal field in a certain type of society where no group occupies a permanently dominant position, so called ‘liberal societies’. These are ‘made up of differentiated and stratified social groups and classes; as ‘these divisions and hierarchical orderings cannot be fully justified by any shared social vision or widely accepted ideology[...], the idea of a neutral sphere of law provides legitimating for what would otherwise be seen as the unjustifiable exercise of power by dominant groups in society.’129 Interestingly, the paper refers to the work by Max Weber as pioneer in analysing the ‘political economy of legal change’130.The fundamental differences in interpreting Weber’s methodological antipositivism across cultures, for instance between neoliberal legaleconomic thinking and social democratic understanding may form the sweeping subject of future socio-legal scholarship. VII.
EMERGENCY EXITS FROM SATYRICON131
Consider you invite guests for dinner. They might be close friends, they might be remote neighbours; in any event you want them to keep you in good memories and will strive for dishing up the very best food you can find. This custom can be traced in all cultures; in our open society we enjoy every opportunity to celebrate these values.132Where then do we draw the line when it comes to food quality and safety in exporting food and negotiating trade deals? Whom do we want to eat genetically modified food when most of Europeans do not want to consume it and US citizens do not
Ibid, 408. Ibid. 125 Named after the international financial institutions based in the American capital; (n 109) 409. 126 Ibid, 410. 127 Ibid, 410; These aims are also listed in the preamble of the WTO Agreement (n 10) 128 Ibid, 420. 129 Ibid. 130 Ibid, 497. 131 The title goes back to the roman novel by Gaius Petronius who reconstructed the life of lower classes during the early Roman Empire. Later it became title of a movie by Federico Fellini whose aim was ‘to eliminate the borderline between dream and imagination: to invent everything and then to objectify the fantasy; to get some distance from it in order to explore it as something all of a piece and unknowable’; Federico Fellini, ‘Comments on Film’, (Ed. G. Grazzini (trans. Joseph Henry). California State University at Fresno 1988). 132 Carlo Petrini, ‘Indigenous Cultures and Food Sovereignty’, Guest Speaker at the UN Permanent Forum on Indigenous Issues May 2012, <http://www.slowfood.com/international/food-for-thought/slowtalk/132993/indigenous-cultures-and-food-sovereignty-/> accessed 10 July 2012. 124
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want, neither133; whom do we expect to atomise pesticides when countries as soon as they reach certain prosperity levels aim to become pesticide-free134 and who finally will eat hormone-treated meat from the US, China and Europe which up-and foremost serves the growth of the pharmaceutical industry? This year’s World Summit’s slogan ‘Re-thinking growth’135sought to provide a starting point. It confirms the findings of a discussion paper published by Oxfam according to which mankind has overstepped planetary boundaries in 3 of 9 dimensions of ‘environmental ceilings’.136Based on human rights advocacy the paper presents a framework which links social with planetary boundaries and pledges for redistributive practices in four areas of insights.137 Human rights may also become the crucial guide for ‘world trade law after neoliberalism’ according to Andrew Lang.138 After a historically explainable post war division between economic liberalism and human rights advocacy the author suggests that ‘the critical and reformative energies of international lawyers should be focused on opening imaginative space for the politics of collective purpose within international legal regimes’.139 An alternative vision for world trade law had to avoid intrusion into ‘the substantive regulatory prerogatives of States’ by relying on principles of deference and proceduralization. These recent jurisdictional tools emerged up and foremost in the abovementioned food disputes140 and entail the revision of the standard of review which however, is in its infancy and ‘must be informed and guided by a genuine sense of collective public purpose [...] accompanied by debate and discussion about the substantive norms, values and goals which the international trade regime ought to equip itself.’141 According to Lang the shaping of a new global economic order in the 1980s and 1990s has been pursued ‘in the absence of a legitimate and legitimating purpose, and without clear sense of responsibility for the full range of outcomes produced ‘and can only be followed by the ‘re-moralisation’ of international trade law.
Endres, (n 70); Lynch and Lynch-Vogel (n 56) Pesticide Action Network North America<http://www.panna.org/issues/food-agriculture/pesticides-onfood>; Pesticide Action Network Europe <http://www.pan-europe.info/>; Pesticide Action Network Asia and the Pacific <http://www.pan-international.org/panint/?q=asia> accessed 10 July 2012. 135 Rio+20 United Nations Conference on Sustainable Development, <http://www.un.org/en/> accessed 10 July 2012. 136 K Raworth, ‘A Safe and Just Space for humanity’ (Oxfam Discussion Paper, February 2012) <https://www.oxfam.org/sites/www.oxfam.org/files/dp-a-safe-and-just-space-for-humanity-130212-en.pdf> accessed 10 July 2012; the areas of concern are chemical pollution, atmospheric aerosol loading and nitrogen and phosphorus cycles. 137 Ibid, 20. These insights are poverty eradication, excessive consumption, aspirations of raising middle classes and inequalities of resource use. 138 Lang (n 4) 139 Ibid, 11. 140 Lang refers inter alia to Australia-Measures Affecting Importation of Salmon WT/DS/18/R; Japan-Measures Affecting Agricultural Products (Japan-Agricultural Products II) WT/DS76/AB/R; Canada/United StatesContinued Suspension, WT/DS/320/Rand WT/DS/321/AB/R; see also Alessandra Arcuri, ‘Food safety at the WTO after ‘Continued Suspension’: A Paradigm Shift?’ Rotterdam Institute of Law and Economics (RILE) Working Paper Series No. 2010/04, <www.rile.nl> accessed 10 July 2012. 141 Lang, (n 121) 347-8. 134
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Not only on the European level the legislation and administration operates in a range of ways to promote and advance sustainable practices which even can ‘double food production in 10 years’.142Worth mentioning is the work of the Economic and Social Committee and the Committee of the Region which in past years have successfully operated in the shadow of the European ‘canonical institutions’.143Its priorities aim for transparent and coordinated policies and development from municipalities to departments and monitors employment, environmental and social protection as coherent and interdependent societal goods. Intergovernmental framework programmes such as the European Cooperation in Science and Technology, EU COST144provide information and facilitates cooperation in and across nine key domains. In the domain of food and agriculture environmental aspects of agriculture are embraced and foster the understanding of human nutrition and the food chain, biological function of organism and agriculture as human activity. The support of fundamental science of biology, animals, veterinary studies, soil and genetics and breeding and strives towards a ‘more holistic approach for instance in the form of new farming systems for producing quality systems’.145 VIII.
Trade disputes around food reflect essential elements of current economic crisis: by no coincidence actors are those parties who inform headlines of various seats of fire: Europe, China, the US and Russia. While developing countries heavily depend on export opportunities and enhancement of their agricultural sectors, several facts are most disquieting: investment in agribusiness has driven a large part of our global economy by not only boosting large scale yields of products of disputable quality but also by bundling a multitude of further economic activities around simple natural goods such as poultry, corn, tomatoes and apples. Large parts of immense developments in transport, engineering, intellectual property and chemicals rank around natural resources which partially can be organised and managed on smaller but more sustainable scales, for instance in people’s backyard.146Subsequently potatoes may become political and eating an apple may turn into a risky business.147The vicarious cycle of unemployment and poverty tends to naturally push people back
See Olivier de Schutter, ‘Agro-Ecology and the Right to Food’ , Report presented at the 16th Session of the UN HRC [A/HRC/16/49] <http://www.srfood.org/index.php/en/component/content/article/1174-reportagroecology-and-the-right-to-food> accessed on 26 August 2012; see also, ‘Eco-Farming could double foodoutput of poor countries’ The Guardian 8 March 2011 <http://www.guardian.co.uk/environment/2011/mar/08/eco-farming-double-food-output> accessed on 26 August 2012. 143 th Paul Craig, Grainne de Burca, ‘EU Law-Text, Cases, and Materials’ (5 edn, OUP 2011) 31-71. 144
<http://www.cost.eu.fa> accessed on 6 July 2012. Ibid; the organisation cooperates for instance with the UK Research Centre ‘Elms Farm’, information available on <http://www.organicresearchcentre.com/> accessed on 6 July 2012. 145
For the growing movement of urban farming and home growing see this year’s summer school of the ‘Club of Rome’, ‘Eating Tomorrow: Re-thinking the World Food System’, <http://www.clubofrome.org/?cat=93> accessed on 6 July 2012. 147 Jurek Martin, ’Political hot potatoes’, Financial Times (London 21 April 2012); the author reports about Michelle Obama’s ‘healthy food campaign’ including an organic vegetable patch in the White House garden in
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into habitual traditions and customs not to mention preferences for organic food of those who can afford it: a return to investment in agribusiness as usual inevitably bears substantial risks aggravated by increasing effects of climate change. Though deepened understanding of coherency and interdependency of different economic branches including food supply and their anchorage in international economic law has the potential to resiliently and circumspectly channel current stagnation and recession; it may also instigate to rethink values and priority settings in economic planning. Last but not least it may include empathy148 and environmental considerations as unavoidable parameters into legal-economic foundations of a new and balanced period of worldwide prosperity. The purposive force of the law could thereby play a decisive role. BIBLOGRAPHY
Books and Articles
Arcuri A, ‘Food safety at the WTO after ‘Continued Suspension’: A Paradigm Shift?’ Rotterdam Institute of Law and Economics (RILE) Working Paper Series No. 2010/04 Baxter M ‘It’s time for investors to get into pigs’ <http://blog.share.com/2012/05/17/is-ittime-for-investors-to-get-into-pigs/10964> accessed on 28 June 2012 Bradford A 'The Brussels Effect' <http://news.uchicago.edu/multimedia/brussels-effect-riseregulatory-superstate-europe, accessed on 2 July 2012 Buerk R,’ Japan’s obsession with perfect fruit’ BBC News (London, 15 March 2012) <http://www.bbc.co.uk/news/world-radio-and-tv-17352173> accessed 11 July 2012 Burrell A, ‘‘Good agricultural practices’ in the agri-food supply chain?’ (2011) 13 Env. L. Rev. 4 Craig P and de Burca G, ‘EU Law-Text, Cases, and Materials’ (5th edn, OUP 2011) Craig P, ‘Delegated acts, Implementing Acts and the new Comitology Procedure’(2011) 36 European Law Review p 671 Darwall S, ’Sympathetic Liberalism: Recent Work on Adam Smith’, (1997) 28 Philosophy and Public Affairs 2 139-164 Du M M, ‘Standard of review under the SP Agreement after EC-Hormones II’ (2010) 59 International Law Quarterly 441-459 Echols M A, ‘Food Regulation in the European Union and the United States: Different Cultures, Different Laws’ (1998) 4 Colum. J. Eur. L 525, 525 Echols M A, ‘Food Safety: Food Safety and the WTO: The Interplay of Culture, Science and Technology’, (Kluwer Law International 2001) Elliott K A, ‘Agriculture and the Doha Round’ (2007 Institute for International Economics) <http://www.cgdev.org/files/12219_file_Doha_brief_final.pdf> Endres A B, ‘“GMO”: Genetically Modified Organism or Gigantic Monetary Obligation? The Liability Schemes for GMO Damage in the United States and the European Union’ (2000) 22 LOY. L.A. Int’L&Comp.L.Rev.453
the footsteps of Eleanor Roosevelt; http://www.ft.com/cms/s/2/cc9c0f3e-88e7-11e1-9b8d00144feab49a.html#axzz1zpdKxZDk accessed on 6 July 2012. 148 Stephen Darwall, ’Sympathetic Liberalism: Recent Work on Adam Smith’, (1997) 28 Philosophy and Public Affairs 2 139-164; Kulovesi (n 78); Trebilcock and Howse (n 34).
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Esty D C, ‘Bridging the Trade and Environment Divide’ (2001) 15 Journal of Economic perspectives 3 113-130 Fisher E C, ‘Opening Pandora’s Box: Contextualising the Precautionary Principle in the EU’, (2007)Oxford Legal Studies Research Paper No. 2/2007 <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=956952> accessed on 10 July 2012 Foster P, 'Tainted Chinese baby milk powder causes baby girls to grow breasts', The Telegraph, (London 10 August 2010) available on <http://www.telegraph.co.uk/news/worldnews/asia/china/7936456/Tainted-Chinese-babymilk-powder-causes-baby-girls-to-grow-breasts> accessed on 10 July 2012 Gruszczynski L, ‘Regulating Health and Environmental Risks under WTO Law’ (OUP 2011) 75104 Heaney V, ‘US drought renews food speculation concerns’ Financial Times 19 August 2012 Hargraeves D, '‘Much ado about cucumbers’, The Guardian (London, 1 June 2011) <http://www.guardian.co.uk/commentisfree/2011/jun/01/cucumbers-e-coligermany>accessed 10 July 2012 Harrington R, ‘WTO to investigate EU ban on US poultry’ (Food Production Daily, <http://www.foodproductiondaily.com/Quality-Safety/WTO-to-investigate-EU-ban-on-USpoultry> accessed on 24 June 2012 Horsley T, ‘Subsidiarity and the European Court of Justice: Missing Pieces in the Subsidiarity Jigsaw?’ (2011) JCMS 1-16 Joshi M, ‘Are Eco-Labels consistent with World Trade Organisation Agreements?’ (2004) 38 Journal of World Trade Keleman R D and Vogel D, ‘Trading places: The US and EU in International Environmental Policies’, (2010) 43 Comparative Political Studies, 427-456 Kinnock G, ‘America’s $24 bn subsidies damages developing world cotton farmers’, The Guardian (London, 24 May 2011) < http://www.guardian.co.uk/globaldevelopment/poverty-matters/2011/may/24/american-cotton-subsidies-illegal-obamamust-act> accessed on 10 July 2012 Kulovesi K, ‘The WTO Dispute Settlement System-Challenges of the Environment, Legitimacy and Fragmentation’ (Wolters Kluwer 2012) - ‘Fragmented Landscapes: WTO Dispute Settlement System, Legitimacy and Fragmentation Leininger M M, ‘Some cross-cultural universal and non-universal functions, beliefs and practices of food’, (1994) Dimensions of Nuitrion, Boulder: Colorado Associated University Press, 154-164 Lucas L, ‘Farmers battle to bring home the battle’ Financial Times 22 August 2012 Livermore M A, ‘Authority and Legitimacy in Global Governance: Deliberation, Institutional Differentiation, and the Codex Alimentarius’, 81 NY Univ. L. Rev. 766-801 Lynch D and Vogel D, ‘The Regulation of GMOs in Europe and the United States: A CaseStudy of Contemporary European Regulatory Politics’, (Council on Foreign Relation, Press Release 5 April 2001 Marceau G and Trachtman J , ‘TBT, SPS, and GATT: A Map of the WTO Law of Domestic Regulation’, (2002) 36 Journal of World Trade 811 Martin J, ’Political hot potatoes’, Financial Times Magazine (London 21 April 2012)
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Mc Mahon M, ‘The Agreement on Agriculture’ in ‘The World Trade Organisation: Legal, Economic and Political Analysis’ (Springer 2005) Marin P L C, ‘Providing Protection for Plant Genetic Resources-Patents, Sui Generis Systems, and Biopartnerships’ (Kluwer International 2002) Moon G, ‘Fair in Form, But Discriminatory in Operation—WTO Law’s Discriminatory Effects on Human Rights in Developing Countries’ (2011) 14 JIEL 3 Murray S, ‘Small farmer have a critical role’, Financial Time (London, 13 October 2011) Nielson L, ‘The WTO, Animals and PPMs’ (Martin Nijhoff Publishers 2009) Lacey R, ‘Mad Cow Disease: The History of BSE in Britain’ (Cypsela Pub.Ltd; Jersey, Channel Islands 1994) Lang A, ‘World Trade Law after Neoliberalism’ (OUP 2011) Lee M, ‘Beyond safety? The broadening scope of risk regulation’, (2011) Current legal Problems, Research Paper of the University College of London, <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2088170> accessed on 9 July 2012 Peel J, ‘Of apples and oranges (and Hormones in beef): science and the standard of review in WTO disputes under the SPS Agreement’ (2012) 61 I.C.L.Q. 2 43 Pesendorfer D, ‘EU environmental policy under pressure: Chemicals policy change between antagonistic goals?’ (2006) 15 Environmental Politics 1 Petetin L, ‘The EU Proposal on GM Crop Cultivation: a Real Opportunity for Consumer Preferences?’ Research Paper of UACES, the academic association for contemporary European studies Dieter Pesendorfer, ‘EU environmental policy under pressure: Chemicals policy change between antagonistic goals?’ (2006) 15 Environmental Politics 1; see also <http://ec.europa.eu/environment/chemicals/reach/reach_intro.htm> accessed 10 July 2012 Petrini C, ‘Indigenous Cultures and Food Sovereignty’, Guest Speaker at the UN Permanent Forum on Indigenous Issues May 2012, < http://www.slowfood.com/international/food-forthought/slow-talk/132993/indigenous-cultures-and-food-sovereignty-/ > accessed 10 July 2012 Raworth K, ‘A Safe and Just Space for humanity’ (Oxfam Discussion Paper, February 2012) <https://www.oxfam.org/sites/www.oxfam.org/files/dp-a-safe-and-just-space-forhumanity-130212-en.pdf > accessed 10 July 2012 Roberts C, ‘The Ocean of Life-The fate of Man and the Sea’ NY: Penguin 2012 Rodrik D, ‘The Globalisation Paradox: Democracy and the Future of the World Economy’ (NY: W.W. Norton 2011) De Schutter O, ‘Agro-Ecology and the Right to Food’ , Report presented at the 16th Session of the UN HRC [A/HRC/16/49] <http://www.srfood.org/index.php/en/component/content/article/1174-reportagroecology-and-the-right-to-food> accessed on 26 August 2012 Scott F, ‘Agriculture and the WTO-Towards a new Theory of International Agricultural Trade Regulation’ (Elgar International Economic Law Series 2009) Scott J, ‘International Trade and Environmental Governance: Relating Rules (and Standards) in the EU and the WTO’ (2004) 15 EJIL 2 307-354 Scott J and Lang A, ‘The Hidden World of WTO Governance’ (2009) 20 EJIL 3 (2009) 575-614 2 WminLawRev 1 25
SenA,‘Democracy as a Universal Value’,(1999) 10.3 Journal of Democracy 10-17; http://www.unicef.org/socialpolicy/files/Democracy_as_a_Universal_Value.pdf accessed 10 July 2012 Sieker M (Rapporteur) ‘Opinion of the European Economic and Social Committee on ‘GMOs in the EU’’ European Union Preparatory Acts (additional opinion), OJ C 68 Singh S D, ‘China and Russia are snubbing American Chicken’, (Bloomberg Businessweek Magazine, 28 July 2011 <http://www.businessweek.com/magazine/china-and-russia-aresnubbing-american-chicken-07282011.html> accessed on 24 June 2012 Steinberg R H, ‘The Hidden World of WTO Governance: A Reply to Andrew Lang and Joanne Scott’ (2009) 20 EJIL 4, 1063-71 Sykes A O, ‘The Persistent Puzzles of Safeguards: Lessons from the Steel Dispute’, (2003) 7 JIEL 3, 523-564 Trebilcock M J and Howse R, ’The Regulation of International Trade’, (3rd edn, Routledge 2003; forthcoming 4rd Edition due on 5 October 2012) Trubek D M , Dezalay Y, Buchanan R and Davis J R, ‘Global Restructuring and the Law: Studies of the Internationalization of Legal Fields and the Creation of Transnational Arenas’, (1993-5) 44 Case W. Res. L. Rev. 407-498 Young M A, ‘The WTO’s use of relevant rules of international law: An analysis of the Biotech case’, 56 International and Comparative Law Quarterly 4 Young M A, ‘Trading Fish, Saving Fish-The Interaction between Regimes in International Law’, Cambridge University Press 201 Wirth D A, ‘The EU’s New Impact on U.S. Environmental Regulation’, Boston College Law (2007) School Research Paper 144, < http://ssm.com/abstract=1028733 >
Australia-Measures Affecting the Importation of Apples from New Zealand WT/DS367/AB/R Australia-Measures Affecting Importation of Salmon WT/DS/18/R Canada/United States-Continued Suspension, WT/DS/320/R and WT/DS/321/AB/R European Communities-Measures Affecting the Approval and marketing of Biotech Products WT/DS 291/R; WT/DS292/R; WT/DS/293/R European Community - Measures Concerning Meat and Meat Products (Hormones) WT/DS 26/R UNESCO Universal Declaration on Cultural Diversity adopted in 2001 Japan-Measures Affecting Agricultural Products (Japan-Agricultural Products II) WT/DS76/AB/R United States-Continued suspension of obligations in the EC-Hormones Dispute WT/DS320?AB/R United States-Safeguard Measures on Imports of Fresh, Chilled or Frozen Lamb Meat from New Zealand and Australia WT/DS178/AB/R; United States-Definitive Safeguard Measures on Imports of Wheat Gluten from the European Communities’ WT/DS166/AB/R United States - Certain Measures Affecting Imports of Poultry from China, WT/DS 392/R United States-Measures Concerning the Importation, Marketing and Sale of Tuna and Tuna Products WT/DS 381/R 2 WminLawRev 1 26
C-492/03 Commission v Austria C-419/03 and C-121/07 Commission v France C-82/05 Commission v Greece C-165/08 Commission v Poland C-256/04 T-70/99 Alpharma v Council of the European Union T-13/99 Pfizer Animal Health SA/NV v Council of the European Union
Convention on Biological Diversity <http://www.cbd.int/> Cartagena Protocol on Biodiversity <http://www.cbd.int/doc/legal/cartagena-protocolen.pdf> accessed on 10 July 2012 Council Directive 81/602/EEC of 31 July 1981 Concerning the Prohibition of Certain Substances having a Hormonal Action and of any Substances having a Thyrostatic Action Regulation 178/2002 laying down the General Principles and requirements on food law, establishing the European Safety Authority and laying down procedures in matters on food safety Regulation on the Registration, Evaluation and Authorisation of Chemicals (REACH) EC 1907/2006 Vienna Convention on the Law of Treaties (VCLT) -Art 31(1) and (3) (c) WTO : The Legal Texts-The Results of Multilateral Trade Negotiations' (18th reprint CUP 2011) -Agreement on Agriculture -Agreement on Implementation of Art VI of the GATT 1994 (Anti-dumping) -GATT 1947 -SCM Agreement(Agreement on Subsidies and Countervailing Measures) -SPS Agreement Art 1; 2.2; 5.1; 5.2; 5.6; Annex A (1) (b)(Agreement on Sanitary and Phytosanitary Measures)
Codex Alimentarius Commission <http://www.fda.gov/InternationalPrograms/HarmonizationInitiatives/ucm114632.htm>acc essed 20 September 2012 Club of Rome’, ‘Eating Tomorrow: Re-thinking the World Food System’, <http://www.clubofrome.org/?cat=93> accessed on 6 July 2012 European Poultry Club <http://www.poultryclub.com/2736.html>accessed on 24 June 2012 Foreign Affairs and International Trade Canada < http://www.international.gc.ca/tradeagreements-accords-commerciaux/agr-acc/wto-omc/nego.aspx?lang=eng&view=d >accessed 9 July 2012 Green America < http://www.greenamerica.org/ > accessed 10 July 2012 GogreenEurope<http://www.gogreeneurope.com /> accessed on 10 July 2012 2 WminLawRev 1 27
Health and Environment Alliance <http://www.env-health.org/news/latest-news/article/getinvolved-in-building-a > accessed 10 July 2012 International Plant Protection Convention <https://www.ippc.int/> accessed 20 September 2012 Los Angeles Times, ‘China rejects U.S. complaint again chicken tariffs ‘ (LA, 21 September 2011) <http://latimesblogs.latimes.com/money_co/2011/09/china-rejects-us-complaintagainst-chicken-tariffs.html> accessed on 24 June 2012 NOW, ‘Facts and Figures: The Cotton Trade’, < http://www.pbs.org/now/shows/310/cottontrade.html> accessed 9 July 2012 Office of the United State Trade Representative, 'United States files WTO Case Against China to Protect American Jobs’ (Press Release September 2011) <http://www.ustr.gov/aboutus/press-office/press-releases/2011/september/united-states-files-wto-case-against-chinaprote>accessed 10 July 2012 Pesticide Action Network Asia and the Pacific < http://www.paninternational.org/panint/?q=asia> accessed 10 July 2012 Pesticide Action Network Europe < http://www.pan-europe.info/> accessed 10 July 2012 Pesticide Action Network North America<http://www.panna.org/issues/foodagriculture/pesticides-on-food>accessed 10 July 2012 UK Research Centre ‘Elms Farm’, information available on <http://www.organicresearchcentre.com/> accessed on 6 July 2012 USDS Department fro Agriculture USDA <http://www.ers.usda.gov/topics/crops/cottonwool.aspx> accessed on 29 June 2012 US Food and Drug Administration, ‘Pfizer will voluntarily suspend sale of animal drug 3-Nitro’ <http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm258342.htm> accessed on 9 July 2012 US Foreign Agricultural Service for a chronology of the EC ban and further information to agricultural exports, < http://www.fas.usda.gov/> accessed on 30 June 2012 USA Poultry and Egg Council < http://www.usapeec.org/about_default.cfm> accessed on 30 June 2012 The World Organisation on for Animal Health <http://www.oie.int/>accessed 20 September 2012 World Trade Organization, <http://www.wto.org/english/docs_e/legal_e/ursum_e.htm#fAgreement> accessed 24 June 2012
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An Analysis of regulation governing hedge funds in the US and the EU from 2002 to July 2010: A Preliminary Assessment
Abstract This paper in primarily presents a historical overview of the regulation of hedge funds in the EU, with a particular focus on the UK, as this country hosts 80 per cent of hedge funds in the EU, and on the US. Subsequently, it assesses whether the instances of regulation implemented after the 2008 financial crisis, and in particular the 2009 EUâ€™s Alternative Investment Fund Managers Directive (AIFMD) and the 2010 US Dodd-Frank Act, would lead to an improvement or to a deterioration of the hedge funds markets in the US and the EU and finally the question whether the so much feared hedge fund exodus from the UK and from the EU is to be expected due to the new regulation. Can overregulation be attested in the hedge fund markets at present and does this constitute an advantage if compared with the previous regime of exemptions conceded to hedge funds?
Table of Contents
Background on hedge funds....................................................................................................31
III Historical overview of the EU regulations of hedge funds.......................................................35 IV Historical overview on the regulation governing hedge funds in the US................................42 V
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The 2008 financial crisis brought about a frenzy of financial regulation that has not passed over the hedge fund sector. This article assesses whether the instances of regulation implemented after the 2008 financial crisis, and in particular the 2009 European Union(EU)’s Alternative Investment Fund Managers Directive (AIFMD) and the 2010 United States (US) Dodd-Frank Act, could lead to an improvement or to a deterioration of hedge funds markets in the EU and the US. In order to do so, it analyses the new regulation in the light of history of the regulation of hedge funds in the EU, with a particular focus on the United Kingdom as this country hosts 80 per cent of hedge funds in the EU, and the US.149
Hedge funds, arguably, were originally designed to circumvent regulation. In the first decade of the 21st century hedge funds have taken steps towards regulating themselves. In the UK and the US (where over 80 per cent of global hedge fund activity takes place) serious self-regulatory proposals were developed by the US President’s Working Group and the UK Hedge Fund Working Group in the UK in 2008.150 Were the regulations to expect any efficiency gains or any other benefits – such as international scope and flexibility? The objectives of the regulations vary: they are aimed at investor protection, systemic risk prevention and corporate governance. In effect, both of the American and the EU regulation are now based on the results of the 2009 London G20 Summit, where the parties agreed on the need to focus on regulation of hedge funds in four main areas, namely: disclosure, diversification, redemption and fund fee structures.151 This article shall analyse the regulation in the EU and in the US before the financial crisis and the legislative changes in both jurisdictions in each of the four areas after the crisis. Alleged disadvantages such as the probability of hedge fund managers avoiding the UK and/or the EU market for the reason of new laws governing them and possible advantages of the new legislation shall be discussed. Through my research I will argue that no exodus of hedge funds from UK and Europe is to be expected for reasons I discussin the following.
* LLM (University of Westminster, London) and PhD candidate at the University of Vienna 149
Lucia Quaglia, ‘The ‘old’ and ‘new’ political economy of hedge funds regulation in the EU’  <http://www.uaces.org/pdf/papers/0901/quaglia.pdf> 25, accessed 15.11.2010 150
John Horsfield-Bradbury, ‘Hedge Funds self regulation in the US and the UK’ (2008) <http://www.law.harvard.edu/programs/olin_center/corporate_governance/papers/Brudney2008_HorsfieldBradbury.pdf> 1, accessed on 23.10.2010 151
Jerome Herbert, ‘Legislative Comment Draft of an EC Directive on alternative investment fund managers’(2010) IBLJ 102
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At the EU level, the AIFMD152 is intended to fulfil the commitmentsmade by the EU at the 2009 London G20 summit.153 The Directive is aimed at establishing a harmonised framework for monitoring and supervising the risks that alternative fund managers pose to their investors, to other market participants and to the stability of the financial system. According to the AIFMD, alternative funds manager shall be allowed to provide services and market funds throughout the EU single market, subject to compliance with strict requirements.154The procedure of passing the recent regulation in Europe however has been very controversial. Whilst three big EU countries were in favour of stricter rules for hedge funds, the UK and the fund industry were mostly opposed to the proposed solution.155 Furthermore, the draft directive when approved by the EU Council of Ministers has been criticised by the media and by hedge funds lobbyists. According to some opinions the new regulations would spur hedge funds to move from the EU to non EU countries such as Switzerland.156
Based on the provisions of the draft directive, this article explores whether these critics and prognostics have legal and factual fundaments, and whether the new regulations could lead the deterioration of the EU hedge funds market. Similar questions are asked relating to the allegations of overregulation in the US. In order to do so, this article will first provide an overview of the essence of hedge funds, illustrating their possible beneficial and adverse effects on the financial and economic systems and thereby highlighting the need for investor protection. Next, it will critically examine the history and latest developments of the hedge fund regulation in the EU – with a focus on the UK – and the US.
II BACKGROUND ON HEDGE FUNDS
In the European context the term hedge fund does not always identify homogenous financial institutions. In some legal systems, it is used to identify investment vehicles in which the managers are allowed to operate “without limits”. Such systems counter-balance this freedom by a ban on 152
Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 153
Herbert (n 3) 102
Council of the European Union, ‘Hedge funds: Council sets out its position with a view to concluding negotiations with the Parliament’ (19.10.2010) < http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/117197.pdf> accessed 24.10.2010 155
Quaglia (n 1) 9
Exodus der Hedge-Fondsaus London, Engl. Exodus of the Hedge Funds from London (FAZ online, 23.10.2010) <http://www.faz.net/s/Rub0D783DBE76F14A5FA4D02D23792623D9/Doc~E1CFB1F759014452FBB5A511078F 21999~ATpl~Ecommon~SMed.html> accessed on 23rd October 2010)
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offering to the public. In other systems the term hedge fund refers to a set of investment instruments which can be offered to the public. In those cases, the manager’s freedom to determine the content of the investment is very limited.
Hedge funds are defined as ’collective investment undertakings’ and they, therefore, clearly differ from other types of financial investments.157 They can be set up both as single hedge funds and funds of hedge funds. The structural options of hedge funds in Europe are given by the Undertakings for Collective Investments in Transferable Securities(UCITS)Directive.158The so called open-ended funds as opposed to closed-end funds allow the investors to liquidate shares on demand.159Not all legal systems within the EU allow hedge funds to act both in open-ended and closed-ended form.160It is commonly recognised in all EU Member States that hedge funds allow the use of sophisticated management techniques such as short selling, leverage and derivatives contracts (swaps, forwards, options, futures, etc.).161
US commentators define hedge funds broadly as professionally managed pools of assets which are used to invest and trade in equity securities, fixed-income securities, derivatives, futures and other financial instruments.162 Some commentators generally suggest defining hedge funds by common traits, such as that most of them do not show versatility or by distinction from other institutional investors. Further common characteristics are:
- Short selling: Hedge funds take long and short positions in stocks in order to mitigate market risk, allowing absolute returns independently from the market moves. In effect, Alfred Winslow Jones - who attributes to himself the invention of hedge funds- created the novel idea which consists in taking as many short positions as long positions. This allows the fund to make money in any case, as long as it has chosen the correct stocks.163
Efama/Assogestioni, ‘Hedge Funds Regulation in Europe, a comparative survey’ (2005) <http://www.efama.org/index2.php?option=com_docman&task=doc_view&gid=176&Itemid=35>accessed December 2010
Council Directive (EEC) 85/611 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities  OJ 375/3 159
Jeremy C. Stein, ‘Why Are Most Funds Open-End? Competition and the Limits of Arbitrage’ (2003) <http://www.law.harvard.edu/programs/corp_gov/papers/03.Stein.arbitrage.pdf> (1) 160
Efama (n 9) 5
D L Hammer [et al.], U.S. Regulation of Hedge Funds (American Bar Association 2005) 1
Horsfield-Bradbury (n 2) 3
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- Leverage: Hedge funds often buy securities using borrowed money or purchase derivatives in which not the full economic position, but only the margin is supported. - Activity level: Hedge funds show a higher level of activity than other funds.164They are typically short term investors. For many funds, a “long-term” investment is keeping securities for a whole day.165 - Fee structure: most hedge funds compensate their portfolio managers by periodic fees calculated as a percentage of assets managed and by performance or incentive fees or allocations. The asset-based fee is calculated at an annual rate of one to two percent of the assets managed. The performance or incentive fee or allocation is usually calculated as 20 percent of profits above a high water mark.166
In the past decades various bodies identified advantageous effects of hedge funds on the economies. The former UK Economic Secretary to the Treasury, Ed Balls, mentioned the following beneficial effects of hedge funds: providing liquidity to companies and markets, helping markets to price assets more accurately and driving financial innovation.167 In the opinion of the former Chairman of the Federal Reserve, Alan Greenspan,168 the beneficial effect of providing liquidity by the hedge funds could be negatively influenced by the over-regulation of hedge funds. This would have a large negative effect on the markets.169
Surveys conducted at EU level have demonstrated that private equity firms, such as hedge funds, invested billions of Euros in renewable energy projects across the continent in the second half of the first decade of the 21st century, helping in this way the EU to meet its environmental targets. In 2008 alone, private equity firms in the EU invested €51 billion in European companies providing so liquidity to the markets. In 2009 the private equity industry was estimated to hold worldwide over US$1trillion of not invested capital. Such figures constitute a huge potential to provide companies with the capital they need (especially since the credit crunch).170 164
M Kahan and E Rock, ‘Hedge Funds in Corporate Governance and Corporate Control’ (2007) 155 PennLRev 1021; Horsfield-Bradbury (n 2) 3 166
Hammer (n 14) 2
Horsfield-Bradbury (n 2) 7;
Allan Greenspan served in the USA as the Chairman of the Federal Reserve until 2006
Horsfield-Bradbury (n 2) 7; A Greenspan, ‘Hearing before the Committee on Banking Housing and Urban Affairs’ (2004) (26) <http://frwebgate.access.gpo.gov/cgibin/getdoc.cgi?dbname=108_senate_hearings&docid=f:22918.pdf >, accessed 30.10.2010 170
M Persson, ‘The EU’s AIFM Directive: Likely impact and best way forward  (3) < http://www.openeurope.org.uk/research/aifmd.pdf> accessed 20 November 2010
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The US and UK regulations require the investors to be in some way sophisticated.171It's both a legal term and a commonly used description, both of which are subject to interpretation. A sophisticated investor is one of several categories of investors the Securities and Exchange Commission established to limit access to certain harder-to-understand products in the US. The equivalent terms created by the UK regulator FSA are eligible counterparties or professional clients,172 the latter defined as ’individuals with financial expertise, and high net worth’.173Sophisticated investors, according the SEC's definition, have enough understanding and experience in business matters to evaluate the risks and merits of an investment. The SEC exempts small companies from notifying of sales of certain securities to these investors. Some investment vehicles, including certain types of hedge funds, require investors to meet a still higher threshold for the SEC investor category of qualified purchasers. According to SEC rules, this category includes individuals who own investments valued at US$5 million or more.174The expectation is that a sophisticated investor can afford the high fees that must be paid and is able to understand the riskiness and complexity of his investment. The recently increased retailization of hedge funds makes the notion of a sophisticated investor less clear. Regulators are concerned about the increasing cases of individual unsophisticated investors to be exposed to investors in hedge funds, sometimes without their knowledge. Thus, pension funds which invest in the hedge funds are not unsophisticated but their beneficiaries are likely to be unsophisticated.175 The US legislation also applies the definition of an accredited investor.176Under the Securities Exchange Act 1933 investors whose net worth was bigger than US$1 million or whose income exceeds US$200,000 qualify as accredited investors. The new US Non-admitted and Reinsurance Reform Act 2010177 upholds these limits but prohibits including a primary residence in net worth
K McNamara, The Wall Street Journal Market Watch, ‘Definition of "sophisticated investor" varies’, (2010) <http://www.marketwatch.com/story/definition-of-sophisticated-investor-varies-2010-04-26> accessed 23 November 2010 172
FSA, New Conduct of Business <http://fsahandbook.info/FSA/html/handbook/COBS/4/12> 173
FSA (n 24) 3.5.3
Horsfield-Bradbury (n 2) 6; Financial Services Authority ‘Hedge Funds. A discussion of risk and regulatory engagement (2005) 27 < http://www.fsa.gov.uk/pubs/discussion/dp05_04.pdf> accessed 15.11.2010; McNamara (n 23) 176
US Securities Exchange Commission, Accredited Investor, <http://www.sec.gov/answers/accred.htm> accessed on 20.05.2011 177
Section V, Subtitle B of the Dodd-Frank Act
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calculations.178The definition is not linked to inflation, and has not been adjusted since 1982. This means that millions of individuals could now qualify as an accredited investor.179
One of the objectives of hedge fund regulation is, therefore, investor protection.180 That might have gained importance because the proportion of investments by institutional investors has increased substantially. Between 1996 and 2004 pension funds increased their share of capital in hedge funds from 5% to 15%. In 2006 the San Diego Country Employees Retirement Association hadUS$175 million of its US$7.7 billion of assets invested in the hedge fund Amaranth,181which collapsed causing a loss of a billion of dollars.182The San Diego pension fund then brought a suit against Amaranth, claiming that it incurred unexpected ’excessive and unbridled speculation in natural gas futures’.183Up to 2008 the hedge funds in the US and in the UK developed proposals for self regulatory measures.
III HISTORICAL OVERVIEW OF THE EU REGULATIONS OF HEDGE FUNDS
In the past a fragmented regulatory panorama of hedge funds was the casein Europe as hedge fund legislation was made by the Member States at the national level. In the pre-crisis period, however, various institutions and organisations launched various non-binding documents aiming to regulate hedge funds:
the European Parliament’s Purvis Report184 the post-FSAP185Report on Asset Management186
Naoangleinvestor, ‘Amendments to new US accredited investor regulations voted in’ (2010) <http://naoangelinvestor.wordpress.com/2010/05/21/amendments-to-new-us-accredited-investorregulations-voted-in/> accessed 1 December 2010 179
Horsfield-Bradbury (n 2) 9
ibid 7; C Karmin, ‘Pension Managers Rethink Their Love of Hedge Funds’, Walls Street Journal (2007) < http://online.wsj.com/article/SB123094085873450333.html> accessed 14.11.2010 182
H Till, ‘The Amaranth Collapse. What Happened and What We Learned Thus Far?’ (2007) <www. professoral. edhec.com> 183
Horsfield-Bradbury (n 2) 12
P Astleford, ‘The Prospects for EU and UK Hedge Fund Regulation’ < http://www.dechert.com/library/041002%20-%20The%20Hedgefund%20Journal%20%20The%20Prospects%20for%20EU%20and%20UK%20Hedge%20Fund%20Regulation1.pdf> accessed 15.11.2010
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the CESR187’s mandate for the Asset Management Experts Group188 the IOSCO report on ’Issues Arising from the Participation of Retail Investors in Hedge Funds’189 Article 2 of Directive 2001/108/EC (amending the UCITS directive 85/611 on investments) requires the European Commission to prepare a report aimed, inter alia, at ’review(ing) the scope of the Directive in terms of how it applies to different types of products’, including hedge funds.
Indeed, a survey published in 2005 revealed a certain level of a ’de facto harmonisation’ between various EU states.190 Remaining inconsistencies detected at that stage were: a minimum level of underwriting for purchasing shares in the hedge fund was not always specified; the maximum number of participants in the fund was not always set, some countries allowed hedge funds to deal directly with the retail sector, other prohibited distribution amongst the general public.191Some of the activities of hedge funds were subject to EU legislation, notably to the Markets in Financial Instruments Directive (MiFID), the Transparency directive and to the Market Abuse Directive. Besides, according to the Regulation ECB/2007/8 of 27 July 2007 concerning statistics on the assets and liabilities of investment funds, the European Central Bank (ECB) was entitled to collect some prudential reporting from fund supervisors.192The Regulation set out that all investment funds in the EU, including hedge funds, had to notify certain information to national central banks.193In some Member States hedge fund managers as such were subject to regulation.194Other member states, 185
EU Commission, Financial Services Action Plan of the EU, <http://europa.eu/legislation_summaries/internal_market/single_market_services/financial_services_general _framework/l24210_en.htm> accessed 2nd December 2010 186
EU Commission, ‘Report of the Alternative Investment Expert Group’ (2006) <http://ec.europa.eu/internal_market/investment/docs/other_docs/reports/hedgefunds_en.pdf> accessed 3rd December 2010 187
The Comittee of European Securities Regulators
CESR, CESR/04-160 (2004) ‘Mandate for the Expert Group on Investment <http://www.esma.europa.eu/system/files/04_160.pdf> accessed 3rd December 2010
IOSCO, ‘Regulatory and Investor Protection Issues Arising from the Participation by Retail Investors in (Funds-of-) Hedge Funds’ (2003) < http://www.iosco.org/library/pubdocs/pdf/IOSCOPD142.pdf> accessed 16.11.2010 190
Efama/Assogestioni (n 9) 3
Efama/Assogestioni (n 9) 3
EC, ‘Regulation EC of the European Central Bank of 27 July 2007 concerning statistics on the assets and liabilities of investment funds’ (2007) (ECB/2007/8) <http://www.ecb.europa.eu/ecb/legal/pdf/l_21120070811en00080029.pdf> accessed on 4.12.2010 193
Quaglia (n 1) 18
IOSCO, Hedge Funds Oversight < http://www.iosco.org/library/pubdocs/pdf/IOSCOPD288.pdf>
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such as France, Italy, Spain and Germany, regulated the fund itself as an onshore vehicle, even though it was domiciled in a third country.195 The private equity sector and the hedge fund industry contributed around €9 billion in tax revenues to the EU economy in 2008.196After the credit crunch, at the G20 summit in London on April 2, 2009, the Heads of State and Government affirmed their commitment to strengthen the regulation and transparency of the financial sector, as well as the accountability of the players that compose it. The High-Level Group on EU Financial Supervision launched the the Larosière Report which attributed the systemic failure to the lack of regulation.197 The Heads of State and Government announced that all financial institutions, products and markets of systemic importance shall be subject to an appropriate level of supervision and regulation. The first measures to meet this objective were developed by the end of 2009.198 The EU Commission, inter alia, launched proposals for the regulation of hedge funds.199 On April 28 2009 the European Commission published the draft of a Directive on ’alternative’ fund managers (Alternative Investment Fund Managers, or AIFM). The draft reflected the Commission’s wish to implement a device for regulating and supervising the activities of these funds.
The Commission proposed to regulate managers rather than funds, although the Directive would have an impact on both. The draft directive provided for only AIFMs established in the EU being able to provide their services and sell their funds to investors within the EU. Accordingly, it would be irrelevant whether the fund is established in the EU or not. Hedge funds managers would have to be authorised by the regulatory body of the EU country where they are based. Once a manager would be authorised by his home regulator, he could trade his funds in all EU countries (‘passporting provision’). Managers established outside the EU would be prohibited from selling their funds throughout the EU. Managers who are established in the EU, but run funds based outside the EU would be subject to additional restrictions. The Directive would be mandatory only for AIFMs whose funds hold €100 million or above. AIFMs whose funds hold less than this threshold can still voluntarily ‘opt in’ and become subject to the Directive. This means that they could take advantage of the passporting provision but at the same time be subject to all the other rules of the Directive.
Quaglia, (n 1) 18
Persson (n 22) 3
The High-Level Group on Financial Supervision in the EU, Report (2009) <http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf> accessed 28.10.2010 198
Herbert (n 3) 102
European Commission, Proposal for a Directive on Alternative Investmet Fund Managers, April 30, 2009, Brussels, COM (2009) 207 final; Phoebus Athanassiou, ‘The role of regulation and supervision in crisis prevention and management: a critique of recent European reflections’ (2009) 24 (10) JIBLR 501.
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The draft set out that managers will be required to provide more detailed information about their activities and their organisation to both investors and regulators. A range of rules also set out how AIFMs should operate and be organised. In particular it provided for all funds marketed in Europe to deposit their cash and assets with an EU based bank; for an obligation of the manager to hold a permanent capital reserve; and, as another example, for limitations for the managers outsourcing certain responsibilities to other companies. It also proposed to regulate certain investment strategies and techniques that managers employ. Furthermore, the European Commission would be allowed to dictate limits on how much fund managers would be allowed to borrow.
In its final version, the AIFMD empowers the Member States to set out and ensure leverage limits on each AIF managed under its jurisdiction.200For corporate governance activities of hedge fund managers, such as buying up companies, a series of disclosure and reporting requirements would apply.201 The final version of the EU AIFMD was published on 1 July 2011. The AIFMD particularly provides for a harmonised regime for the authorisation of EU AIFM.202The scope of the Directive is broad; it captures the management of alternative investment funds orAIF, ie most vehicles that would be regarded as funds, as well as vehiclesthat would usually not be described as a fund.203 The Directive, further, sets out common transparency requirements to regulators and investors– commonoperational requirements (delegation, valuation and custody of fund assets) and a new marketing regime for EU and non-EU AIF, whether marketed by EU AIFM or non EU AIFM.204 Non-EU AIFM shall obtain an appropriate authorisation and nominate a representative in the Member State of reference205.
Exemptions from the authorisation cover: holding companies, securitisation special purpose vehicles (SPVs), supranational organisations, public bodies and employee participation schemes. Partial exemptions exist under the Directive for AIFMs who manage AIF with assets of €100 million or less, or with assets of €500 million or less, where AIF are not leveraged and no redemption rights exist within first five years following first investment in the AIF. Investment firms and banks are not required to seek additional authorisations to manage AIF. The Directive sets out capital requirements: external AIFM need an initial capital of at least €125,000; internally appointed AIFM would need an initial capital of at least €300,000. Where assets managed by the AIFM exceed €250 200
Linklatters, AIFMD, Leverage’ <http://www.linklaters.com/Publications/20100218/Pages/13_Leverage.aspx> accessed 10.07.2011
Persson (n 22) 2
S Crown and M Yates, Clifford Chance, ‘Alternative Investment Fund Directive’ (2010)
Linklatters, ‘AIFM Directive Overview’ <http://www.linklaters.com/Publications/20100218/Pages/Index.aspx> accessed 11.07.2011 204
Crown and Yates (n 53) 3
Art 37 and 39 of the AIMFD
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million, the capital requirement is €125,000 plus 0.02% of assets under management (AUM) in excess of €250 million.206 The capital requirement cannot exceed €10 million in total.207Another area covered by the AIFMD is the AIFM conduct of business. The Directive prohibits a preferential treatment of investors, unless it is disclosed.208
The remuneration policy of an AIF is required to be consistent with the effective risk management. Its assessment of performance must be linked to life-cycle of the AIF in question. Guaranteed bonuses are only permitted for new staff and only for one year period. Furthermore, an appropriate balance between fixed and variable remuneration is required: at least 50% of variable remuneration must consist in shares in the AIF in question and at least 40% of the variable remuneration must be deferred for an appropriate period.209 The risk management functions must be functionally separate from other activities. The risk monitoring process is required to be documented. The Directive also provides for a documented due diligence process when investing on behalf of the AIF and an AIFM is required to set a maximum leverage per AIF managed.210 The Directive sets out requirementsof consistent investment strategy, liquidity profile and redemption policy. Procedure requirements are introduced to enable monitoring of the liquidity risk per each AIF managed.211
The AIFMD has been criticised under several points of view. To begin with, in order to accomplish the provisions of the Directive AIFMs will have to face high costs. This might cause a decrease of investment in European firms and make Europe less attractive place for investors and talent from around the world and so reduce EU’s competitiveness.Furthermore, investors would no longer be able to select freely the best performing funds and managers around the world. The above mentioned survey from 2009 has shown that more than 84 percent of all hedge fund managed by EU-based managers are domiciled outside the EU. Furthermore, 80 per cent of hedge fund managers worldwide are based in non-EU countries. Those were alleged to be banned by the new Directive from the European market by the draft directive’s provisions.212 The final version of the Directive, nevertheless, allows non EU managers to trade EU and non EU funds within the EU under certain requirements. The Funds’ activism under the AIFMD lacks any kind of surprise effect, necessary for the funds effectiveness, due to the disclosure requirements. This is likely to protect the companies but also to deteriorate the aspect of fund activism in the EU. The role of depositories, intended to
Art 9 (2) and (3) AIMFD
Crown and Yates (n 53) 5
Persson (n 22) 4
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protect investors, is likely to make hedge fund services more expensive, as they will pay fees to the depositaries for their services.
In the UK the primary regulatory body for hedge funds is the Financial Services Authority (FSA). It was found in 1997 resulting from a merger of various previously independent regulatory groups. The FSA moved from a very positive stance towards hedge funds to a precautious position.In some occasions it has, nevertheless, stressed the benefits that hedge funds bring to the UK economy.213The hedge fund products are classified in the UK as unregulated collective investment schemes. It means that they may not be marketed to the general public and that they can be traded to private customers in certain restricted circumstances. Hedge funds may only trade with persons that are classified by the FSA as eligible counterparties or professionalclients,214 the latterdefined as ’individuals with financial expertise, and high net worth’.215
The FSA also acts as a regulatory body for UK-based hedge fund managers themselves. According to the Financial Services and Markets Act 2000, UK based hedge fund managers activities are’regulated activities’ and must see authorisation to do so. The FSA admits that it is not territorially able to regulate the ‘systems and controls of the underlying hedge funds’ and that it rather intends to direct its regulation at the managers of hedge funds. It therefore focuses on the resources and competence to manage the assets of funds in line with its mandates from the operators of the underlying fund.That requires adequate interfaces with the Prime Broker and Administrator of the fund for reconciliation purposes, and appropriate information systems for pricing and other market information. A hedge fund also needs an adequate internal accounting system to ensure ongoing compliance with its financial resources requirement.216
In its 2002 publication with the title ‘FSA and the Hedge Funds’ FSA recognised that the low regulatory burden, coupled with the fact that so many ’wholesale investors’ are based in London, attracted managers to be based in the UK, and that their presence contributed to the strength of the UK markets.217 FSA at that stage classified hedge funds as ’low impact’ actors in its risk-based approach to regulation.218Even though the FSA noted at that occasion that apart from regular monitoring there was no need of regulation, it for the first time admitted the need of a global 213
FSA, ‘Hedge Funds. A discussion of risk http://www.fsa.gov.uk/pubs/discussion/fs06_02.pdf> 214
FSA (n 24) 3.5.3
Horsfield-Bradbury (n 2) 41
FSA, ‘Hedge Funds and the FSA’ (2002) 4 <http://www.fsa.gov.uk/pubs/discussion/dp16.pdf> accessed on 16 November 2010> 218
FSA (n 64) 4
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“industry-led…Code of Conduct”.219Every entity regulated by the FSA must follow its Principles for Business. In 2006 the application of the Principles to hedge fund managers was discussed for the first time.220 Since 2006 the FSA has supported the International Organisation of Securities Commissions (IOSCO) in developing Principles for the Valuation of Hedge Fund Portfolios.
In 2007 the FSA visiteda number of hedge fund managers to review the control measures they implemented to mitigate the risk of market abuse.221It also launched a ’formal assessment of the systems hedge fund managers use to prevent market abuse after being disappointed by the quality of controls at some firms it visited.222 In the same year, furthermore, it also initiated a consultation entitled Disclosure of Contracts for Difference.223 A contract for difference is a ’derivative product that gives the holder an economic exposure…to the change in price of a specific share’.224These kinds of contract enable hedge funds to gain large economic exposure to the price of stock without having to disclose their interest. The disclosure laws in the UK are related to the voting interests, but hedge funds have proven to be able to exert power over investee companies without such voting interests.225
When the credit crunch hit the global financial markets in 2007, the FSA did not see hedge funds as a part of the problem. As the former FSA’s Chief Executive Hector Santsstated, hedge funds were not ’the catalyst or the drivers’ of the credit crunch events.226As a continuation of its development of self-regulation policies for hedge funds and, independently from the ongoing crisis, in July 2007 a group of 14 UK-based hedge funds named the Hedge Fund Working Group (HFWG) committed itself to establish a set of best practice standards for the hedge fund industry.227In 2007, the HFWG published a Consultation Document seeking input from the industry. Based on the comments to the Consultation Document, the Final Report of the HFWG was published in January 2008. It established the Hedge Fund Standards Board (HFSB). The Board wasmeant to be responsible for maintaining and 219
Horsfield-Bradbury (n 2) 41; FSA (n 64) 20
Horsfield-Bradbury (n 2) 41;
ibid 41; FSA, ‘Markets Division: Newsletter on Market Conduct and Transaction Reporting (2007) 2 <http://www.fsa.gov.uk/pubs/newsletters/mw_newsletter24.pdf> accessed 28.10.2010 222
Horsfield-Bradbury (n 2) 42
FSA, ‘Disclosure of Contracts for Difference’ (2007) <http://www.fsa.gov.uk/pubs/cp/cp07_20.pdf> accessed 27.10.2010 224
FSA (n 74) 2.2 FSA (n 74)1.10
FSA, ’Lessons from the Recent market turmoil, a supervisor’s perspective’ (2007) http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2007/1120_hs.shtml> accessed 27.11.2010 227
Horsfield-Bradbury (n 2) 44
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updating the standards as well as enabling hedge funds to sign up to the standards. The final report recognised the growing importance of hedge funds and the necessity, them to assume responsibilities consistent with their standing.228
The FSA Principles apply to the 21 per centof global hedge fund managers who are located in the UK. The FSA principles comprise 11 very general points. They are not specifically designed for hedge funds, but rather for any entity regulated by the FSA. The Final Report contains 28 Standards which cover different areas of hedge fund regulation. The HFWG Standards are the best-practice standards for hedge fund managers. Hedge fund managers can sign-up and become signatories to the Standards. If they do so, they must adopt a ’comply or explain approach’.229 None of the Standards is mandatory for any of the signatories. The Standards are intended to encourage disclosure and theexplain option does not discourage from disclosure, even if the manager cannot follow the particular Standard precisely. The explain option allows firms to adapt without needing constantly to change the Standards.230 The same option also enables managers to enjoy the prestigious status of a signatory (a voluntary self-regulatory organisation (SRO), while not having to follow all or indeed any of the Standards in their totality.231 HFWG states that managers would be incentivized to conform as all the ’Standards are based on enlightened self-interest’.232 Conformity by the managers would, therefore, add value to them and cause the potential investors to have more confidence in them and in the hedge funds as a whole. The market would at the same time put pressure on those managers who have not yet become SROs to sign the HFWG Standards.Full compliance with the Standards does not guarantee the FSA would find no violation of its Principles. The FSA Principles can be seen as ‘minimum standards’ and the HFWG Standards are best-practice policies.233 As mentioned above, the new AIFMD should be implemented in UK by 2013.
IV HISTORICAL OVERVIEW ON THE REGULATION GOVERNING HEDGE FUNDS IN THE US Prior to the introduction of the Dodd-Frank Act, there were four key pieces of legislation which might have been applicable to hedge funds.234 The requirements of the pieces of legislation were 228
HFWG, ‘HEDGE FUND STANDARDS: CONSULTATION PAPER’ (2007) <http://www.exchangehandbook.co.uk/pdf/HFWG%20Consultation%20Paper%20Part%20II.pdf> accessed on 17.11.2010 229
Hedge Fund Working Group, Hedge Fund Standards: <http://www.cipperman.com/uploads/HFWG-FINAL-REPORT.pdf > 25
HFWG (n 79) 11
Horsfield-Bradbury (n 2) 46
Hedge Fund Working Group, Hedge Fund Standards: <http://www.cipperman.com/uploads/HFWG-FINAL-REPORT.pdf > 26 233
HFWG (n 79) 7
Horsfield-Bradbury (n 2) 22
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overlapping. They primarily covered the number of investors, the type of investors, and the way investors are solicited.235 Thus, under the previous legislation, hedge funds in many cases fell into various exceptions. Hedge funds also intentionally used specific structures to avoid the more stringent regulation under each piece of legislation.236 The relevant pieces of legislation are listed as follows:
Securities Act of 1933 The objectives of the regulation under the 1933 Act are to ensure that investors receive material information concerning securities that are available for public sale, and to avoid fraud and deceit in the sale of securities.237 Hedge funds are structured to fall within section 4(2) of the Act. This section exempts the highly detailed disclosure requirements for ’transactions by an issuer not involving any public offering’.238 Rule 506 of Regulation D defines the safe harbour requirements to fall within this exemption for transactions not involving any public offering. Hedge funds must not sell to more than 35 investors who are not accredited.239 Hedge funds also must not advertise or solicit the purchase of interests in the fund and must take reasonable steps to ensure that their investors do not plan to sell their interests.240
Securities Exchange Act of 1934 The 1934 Act provides for strict registration and disclosure requirements for dealers in securities.241 Hedge fund managers sought, therefore, to avoid being registered as brokerdealers under Section 15 of the Act. Their objective was to be deemed to trade securities for their own account (not as part of a business) and this way to fall within the trader exception. In order to avoid regulation under Section 15 hedge funds had to ensure they have less than 500 interest holders or less than US$10 million of assets.
Investment Company Act of 1940
On the definition of accredited investor see above Section ‘Background on hedge funds’
Securities Exchange Act 1934
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The Investment Company Act requires entities which fall within the scope of its regulation to register with the Securities and Exchange Commission (SEC) and comply with the regulatory and its disclosure requirements. Two exceptions were previously applicable with hedge funds. Under section 3(c) of the Act, an entity is exempt from the rule if it either has less than 100 private investors or the investments are owned by qualified purchasers. A qualified purchaser is an individual person with more than US$5 million of investments.
Investment Advisers Act of 1940 Under this Act, the SEC may conduct unannounced searches with investment advisers acceding their books and records, limits on the performance fees that may be charged and further filings and disclosure. Hedge fund managers fall within the broad scope of the Act, due to the fact that they advise clients regarding investment opportunities. However, the Act provides for a private advisor exemption.242 Hedge fund managers did not fall into its regulation if they ’had fewer than fifteen clients’ in the proceeding 12 months, did ’not hold themselves out generally to the public as an investment adviser’ and did not act as an ’investment adviser to any registered investment company’.243 For purposes of this act, the clients of the investment manager were deemed to be the individual hedge funds. The funds were organized as a limited partnership, with each investor investing as limited partners, and the fund manager serving as the general partner.244
The Dodd-Frank Act 2010 has generated the greatest impact within the recent developments related to hedge funds in the US.245 To begin with the Act changes the registration policies of the hedge funds. The registered advisors are also subject to a strict disclosure and reporting regime. Both strategies and portfolios are required to be disclosed to the government. The Act confers on the Federal Reserve and the Financial Stability Oversight Council (FSOC)the power to regulate systematically financial institutions which could also be hedge funds.246 The new regulation eliminates the above-mentioned fewer than 15 clients exemption.247 The Act introduces a definition of a private fund, a term that is meant to include hedge fund. At the same time the Act distinguishes between the investment advisors and the fund they manage. Such arbitrary use of the terminology
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
Cadwalder, ‘Hedge Fund Regulation Under the Dodd-Frank Street Reform and Wall
Consumer Protection Act’(2010) 2 <www.cadwalader.com/assets/client_friend/072010_DF5.pdf> 247
See above in chapter ‘Historical overview on the regulation governing hedge funds in the US’
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needs to be clarified.248According to the Dodd-Frank Act, investment advisers are required to register as investment advisers with the SEC. Larger fund managers, previously not required to register, will now have to register and smaller fund managers that are registered may need to deregister (subjecting them in most instances to a patchwork of state investment adviser regulation).249
The new regime also provides for periodic reporting on proprietary information requirements to the government. The Act also confers broad powers upon the Federal Reserve and FSOC to regulate ’significant financial firms’, a term that could include certain large hedge funds. The powers include the ability to impose capital requirements and even to intercede in the actual business affairs. Hedge funds that enter into a significant volume of swaps may be required to register with either or both – the SEC and the CFTC250 as ’major swap participants (Swaps)’. Furthermore the Dodd-Frank Act’s treatment of many Swaps as futures will cause many funds to be considered commodity pools, and thus they may be required to register with the CFTC as ’commodity pool operators’ or ’commodity trading advisors’.251
The present period is apparently an age of overregulation. Legislators prefer to have overlapping and unclear rules (as it might be in the US) than no rules at all. At the same time it is the age of complexity. Such comments could tend to give a simplified view of the situation.The race to the bottom – i.e. to the US standards – which was feared by the UK during the negotiations on the AIFMD was unwarranted. In fact, by passing the 2010 Dodd-frank Act the US hasalso introduced stringent measures to regulate hedge funds.
In Europe, it is arguable that the AIFM Directive could make life easier to non-EU funds in future. If ESMA252reports favourably on the functioning of this passporting system (the report is expected during 2015), it may be extended to non-EU fund managers to passport their non-EU AIFs throughout the European Union.253 The extension of the passporting system on the non-EU AIFM 248
Cadwalder (n 98) 4
Cadwalder, (n 98) 1
The US Commodity Futures Trading Commission
Cadwalder, (n 98) 1
European Securities and Markets Authority
Nortonrose, AIFM Directive (2012) 5 <http://www.nortonrose.com/files/aifm-directive-the-impact-on-noneu-fund-managers-of-non-eu-funds-60540.pdf>
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would mean that they would have to seek approval only once to market to European investors, rather than from each different country. In view of the improvements mentioned above such as the reinforced disclosure to investors and to the regulators in both core markets of the hedge funds the EU (and UK) and the US and possible future advantages to non-EU hedge funds, it is argued that no exodus of non EU funds managers is to be expected in Europe. As long as Europe remains an interesting market it is to be expected that hedge funds will continue to trade within Europe regardless of the new regulation. The cost of the implementation of new laws would of course throw its shadow on the attractiveness of the European market. Further overregulation, therefore might effectively endanger the liquidity supply by the hedge funds to the European markets. While the hedge fund industry has not yet been destroyed by the new rush of regulation, the balance which once was believed to be created by the markets themselves (or by Adam Smith’s invisible hand) is today believed to be secured by normative regulation254
DIRECTIVE 2011/61/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 Proposal for a Directive of the European Parliament and of the Council on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC European Commission, Proposal for a Directive on Alternative Investment Fund Managers, April 30, 2009, Brussels, COM(2009) 207 final Council Directive (EEC) 85/611 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities  OJ 375/3 Directive 2003/6 (EC) ofEuropean Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse)  OJ L 96/16 Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC  OJ L 145 of 30.4.2004.(MiFID) Directive 2004/109 (EC) of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC  OJ L390 of 31.12.2004
R Bell, The Invisible Hand (of the U.S. Government) in Financial Markets, Realty Reality - Global Real Estate Markets Forum (2005)<http://www.financialsensearchive.com/editorials/reality/2005/0403.html>
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EC, ‘Regulation EC of the European Central Bank of 27 July 2007 concerning statistics on the assets and liabilities of investment funds’ (2007) (ECB/2007/8) <http://www.ecb.europa.eu/ecb/legal/pdf/l_21120070811en00080029.pdf> US; Investment Company Act of 1940 US, Securities Exchange Act 1933 US; Securities Exchange Act of 1934 US, Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
US Securities Exchange Commission, ‘Accredited Investor’, http://www.sec.gov/answers/accred.htm Nortonrose, AIFM Directive (2012) <http://www.nortonrose.com/files/aifm-directive-theimpact-on-non-eu-fund-managers-of-non-eu-funds-60540.pdf> Linklatters, ‘AIFM Directive Overview’ (2011) <http://www.linklaters.com/Publications/20100218/Pages/Index.aspx> Linklatters, ‘AIFMD, Leverage’ (2011) <http://www.linklaters.com/Publications/20100218/Pages/13_Leverage.aspx> Crown S and Yates M, Clifford Chance, ‘Alternative Investment Fund Directive’ (2010) Kristen McNamara, ‘Definition of "sophisticated investor" varies’ The Wall Street Journal Market Watch (2010) <http://www.marketwatch.com/story/definition-of-sophisticatedinvestor-varies-2010-04-26> FSA, ‘Disclosure of Contracts for Difference’ (2007) <http://www.fsa.gov.uk/pubs/cp/cp07_20.pdf> Frankfurter AllgemeineZeitung online, Exodus der Hedge-Fondsaus London (2010) <http://www.faz.net/s/Rub0D783DBE76F14A5FA4D02D23792623D9/Doc~E1CFB1F7590144 52FBB5A511078F21999~ATpl~Ecommon~SMed.html> EU Commission, Financial Services Action Plan of the EU, <http://europa.eu/legislation_summaries/internal_market/single_market_services/financial _services_general_framework/l24210_en.htm> Greenspan A, ‘Hearing before the Committee on Banking Housing and Urban Affairs’ (2004) (26) http://frwebgate.access.gpo.gov/cgibin/getdoc.cgi?dbname=108_senate_hearings&docid=f:22918.pdf > accessed on 30.10.2010 Financial Service Authority, ‘Hedge Funds and the FSA’ (2002) <http://www.fsa.gov.uk/pubs/discussion/dp16.pdf> Kahan M and Rock E ‘Hedge Funds in Corporate Governance and Corporate Control’ (2007) 155 PennLRev IOSCO 2009, Hedge Funds Oversight <http://www.iosco.org/library/pubdocs/pdf/IOSCOPD288.pdf> Efama/Assogestioni, ‘Hedge Funds Regulation in Europe, a comparative survey’ (2005) <http://www.efama.org/index2.php?option=com_docman&task=doc_view&gid=176&Itemi d=35> Cadwalder, ‘Hedge Fund Regulation Under the Dodd-Frank Street Reform and Wall
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Consumer Protection Act’ (2010) <www.cadwalader.com/assets/client_friend/072010_DF5.pdf> Horsfield-Bradbury J, ‘Hedge funds self regulation in the US and the UK’ (2008) <http://www.law.harvard.edu/programs/olin_center/corporate_governance/papers/Brudne y2008_Horsfield-Bradbury.pdf> HFWG, ‘HEDGE FUND STANDARDS: CONSULTATION PAPER’ (2007) <http://www.exchangehandbook.co.uk/pdf/HFWG%20Consultation%20Paper%20Part%20II.pdf> Hedge Fund Working Group, Hedge Fund Standards: Final Report 13 (2008) <http://www.cipperman.com/uploads/HFWG-FINAL-REPORT.pdf > Financial Services Authority ‘Hedge Funds. A discussion of Risk and Regulatory Engagement (2005) < http://www.fsa.gov.uk/pubs/discussion/dp05_04.pdf> Financial Services Authority ‘Hedge Funds. A discussion of risk and regulatory engagement (2006) < http://www.fsa.gov.uk/pubs/discussion/fs06_02.pdf> Herbert J, ‘Legislative Comment, Draft of an EC Directive on alternative investment fund managers’ (2010) International Business Law Journal FSA, ’Lessons from the Recent market turmoil, a supervisor’s perspective’ (2007) http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2007/1120_hs.shtml CESR, CESR/04-160 (2004) ‘Mandate for the Expert Group on Investment Management’ <http://www.esma.europa.eu/system/files/04_160.pdf> FSA, ‘Markets Division: Newsletter on Market Conduct and Transaction Reporting  (2) <http://www.fsa.gov.uk/pubs/newsletters/mw_newsletter24.pdf> FSA, ‘New Conduct of Business Sourcebook’ (2010) <http://fsahandbook.info/FSA/html/handbook/COBS/4/12> Karmin C, ‘Pension Managers Rethink Their Love of Hedge Funds’, Walls Street Journal (2007) < http://online.wsj.com/article/SB123094085873450333.html> IOSCO, ‘Regulatory and Investor Protection Issues Araising from the Participation by Retail Investors in (Funds-of-) Hedge Funds’ (2003) < http://www.iosco.org/library/pubdocs/pdf/IOSCOPD142.pdf> Press Release, 3038th Council meeting, Economic and Financial Affairs, Luxemburg, 19 October 2010, http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ecofin/117209.pdf EU Commission, ‘Report of the Alternative Investment Expert Group’ (2006) <http://ec.europa.eu/internal_market/investment/docs/other_docs/reports/hedgefunds_e n.pdf> FSA, ‘Results of the Initial Consultation on ‘Hedge Funds: A Discussion of Risk and Regulatory Engagement’ (2005) http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2005/1115_rj.shtml Till H, ‘The Amaranth Collapse. What Happened and What We Learned Thus Far?’ (2007) <www. professoral. edhec.com> Persson M, ‘The EU’s AIFM Directive: Likely impact and best way forward’ (2009) <http://www.openeurope.org.uk/research/aifmd.pdf> accessed on 20 November 2010 Robert Bell, ‘The Invisible Hand (of the U.S. Government) in Financial Markets’ (2005) Reality Global Real Estate Markets Forum <http://www.financialsensearchive.com/editorials/reality/2005/0403.html> 2 WminLawRev 1 48
EU Commission, The High-Level Group on Financial Supervision in the EU, Report, February 2009, Brussels <http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf> Lucia Quaglia, ‘The ‘old’ and ‘new’ political economy of hedge funds regulation in the EU’ (2009) < http://www.uaces.org/pdf/papers/0901/quaglia.pdf> Astleford P., `The Prospects for EU and UK Hedge Fund Regulation’ <http://www.dechert.com/library/041002%20-%20The%20Hedgefund%20Journal%20%20The%20Prospects%20for%20EU%20and%20UK%20Hedge%20Fund%20Regulation1.pdf> Anthanassiou P, The role of regulation and supervision in crisis prevention and management: a critique of recent European reflections, Journal of International Banking Law and Regulation, (2009) Stein J C, ‘Why Are Most Funds Open-End? Competition and the Limits of Arbitrage’ (2003) <http://www.law.harvard.edu/programs/corp_gov/papers/03.Stein.arbitrage.pdf
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The Recent Securities Law Litigation in the US Supreme Court* Sebastian Okinczyc
The purpose of this case-law study is to introduce the reader to some of the most significant recent developments in US Supreme Court litigation related to securities law in the context of the recent credit crisis. Using critical legal analysis, with the help of scholarly writings, the following US Supreme Court cases will be examined one-by-one in turn:
· Morrison et al. v. National Australia Bank Ltd et al. (Morrison); · Merck & Co., Inc., et. al. v. Reynolds et. al. (Merck); · SEC v. Edwards.
A deep and thorough analysis of the cases allows one to draw a general conclusion as to the ideas usually present in the securities’ law cases brought before the US Supreme Court. The ever present and evident concept uniting the three cases is that of information asymmetry as identified and analysed by George Akerlof. The article concludes with a general discussion of information asymmetry being an ever-present issue in securities litigation in front of the US Supreme Court.
This article is largely based on a paper written to fulfill the coursework requirement of the author’s International Corporate Governance: Managing Global Risks, Ethics and Cultures module, University of Westminster, from where he graduated in the LLM Corporate Finance Law (with Distinction) in November 2011. LLM, Vilnius University, Lithuania; LLM, University of Westminster, UK.Associate, bnt attorneys-at-law, Vilnius, Lithuania; Visiting fellow in Theory of Law, KazimierasSimonavicius University, Vilnius, Lithuania; email:, email@example.com, firstname.lastname@example.org. The author would like to thank Prof. Joseph Tanega and RezarteVukatana for their constructive and supportive comments, special thanks to Prof. Gerard H. Kelly, CandemirBaltali and PravinJeyaraj for their helpful insights and assistance.
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Table of Contents
Introduction .................................................................................................................................. 52
Morrison et al. v. National Australia Bank Ltd et al. ..................................................................... 53 Facts summary ........................................................................................................................... 53 Judgment of the court ............................................................................................................... 54 Morrison overturned by Dodd-Frank? ....................................................................................... 58
Merck & Co., Inc., et. al. v. Reynolds et. al. ................................................................................... 59 Facts summary ........................................................................................................................... 59 Judgment of the court ............................................................................................................... 60 Implications of the judgment ..................................................................................................... 62
Securities and Exchange Commission v. Edwards ......................................................................... 63 Facts summary ........................................................................................................................... 63 Judgment of the court ............................................................................................................... 63
Critical analysis .............................................................................................................................. 65 Evidence of the information asymmetry theory in the analysed cases..................................... 65 Are securities – lemons in the US Supreme Court? ................................................................... 67 Information asymmetry in securities’ law cases in the US Supreme Court ............................... 68
Conclusion ..................................................................................................................................... 68
VII Bibliography .................................................................................................................................. 69
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Financial engineers build dreams. When those dreams turn out to be nightmares, other people pay for it. Andrew Sheng255
No other nation ever constituted so powerful a judiciary as the Americans. Alexis de Tocqueville256
In the aftermath of the credit crisis, largely caused by the failures within the financial system, the numerous legal disputes arising therefrom will sooner or later land in courts. Therefore, eventually, the number of US Supreme Court cases relating to securities law is likely to increase, regardless of the fact that many major securities law cases are settled outside of court. The figures257 show the obvious – expert knowledge leads to a greater chance of success in the Supreme Court. Consequently, there is a growing demand for lawyers specializing in US Supreme Court litigation258. Therefore, the relevance of the topic is of no dispute.
This article will examine three landmark cases in reverse chronological order and how the judgments depend on the information asymmetry between the parties to the cases. One feels that a brief justification as to the reasons for selecting the particular cases is necessary. Firstly, the Morrison et al. v. National Australia Bank Ltd et al. (Morrison)259 case has been chosen as the most recent case relating to securities law in the US Supreme Court. It is also relevant if we observe any impact coming from the recent regulatory changes – the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) as commentators/analysts claim it might be overturning the
Chief advisor to China Banking Regulatory Commission, Board Member of the Qatar Financial Centre Regulatory Authority, adjunct Professor at the Graduate School of Economics and Management, Tsinghua University, Beijing and the University of Malaya, Kuala Lumpur. This particular quote has been taken from an interview with Andrew Sheng in Charles Ferguson’s 2010 award-winning documentary on the financial crisis ‘The Inside Job’. 256 Alexis de Tocqueville, Democracy in America (George Lawrence tr, J.P. Mayer ed, Garden City, N.Y.: Doubleday 1969), p. 149. 257Richard J. Lazarus, Jeffrey L. Fisher, ‘Specializing in the Supreme Court’ (The New York Times, 10 October 2010) <http://www.nytimes.com/imagepages/2010/10/10/us/politics/10lawyers-graphic.html?ref=us> accessed 11 December 2010. 258 Adam Liptak, ‘Specialists’ Help fat Court Can Come With a Catch’ The New York Times (New York, 9 October 2010) <http://www.nytimes.com/2010/10/10/us/10lawyers.html?_r=1&sudsredirect=true> accessed 11 December 2010. 259Morrison et al. v. National Australia Bank Ltd., 561 U. S. (2010).
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decision of the court260. Secondly, the Merck & Co., Inc., et. al. v. Reynolds et. al. (Merck)261 case has been selected because of how great an impact it might have on the market – the possible claimants are given time to make up their minds and file a suit only if the situation in the market does not satisfy them. Finally, the SEC v. Edwards262 case has been chosen inter alia in order to note the role of the United States Securities and Exchange Commission (SEC) in securities’ litigation.
Afterwards, a brief discussion on what might link these three cases would follow. It will concentrate on the information asymmetry problem and its relation to investor protection in light of the three cases. Sparing the reader an exhaustive explanation of the theory itself already here, a brief and simplified outline of what information asymmetry is will be provided in the relevant part of the paper below. Also, a role of US Supreme Court in investor protection will be emphasized. The article will show that the notion of information asymmetry is ever-present in securities litigation before the US Supreme Court.
II MORRISON ET AL. V. NATIONAL AUSTRALIA BANK LTD ET AL.
Morrison was decided on June 24, 2010 by a unanimous 8-0 vote. It involved an issue of securities fraud, but the most important question in the case deals with the jurisdiction of the court. The decision of the Supreme Court is regarded as ground breaking as it rejected a number of years of federal jurisprudence involving extraterritorial application of US securities fraud legislation263. In most general terms the Morrison decision limits claims that can be made in the US against companies not listed on a US stock exchange.264
In 1998, National Australia Bank (NAB) – the respondent in the case – a big foreign bank whose shares were traded on securities exchanges in Australia, London, Tokyo and New Zealand, but not on any exchange in US, acquired the shares of HomeSide Lending, a company headquartered in Florida involved in the business of servicing mortgages. In 2001, National Australia Bank was forced to write 260 Luke Green, ‘Morrison Overturned? What Dodd Act Means For Securities Class Actions’ (RiskMetrics Group, 26 July 2010)<http://blog.riskmetrics.com/slw/2010/07/morrison-overturned-what-dodd-actmeans-for-securities-class-actions.html> accessed 11 December 2010. 261Merck & Co., Inc., et. al. v. Reynolds et. al.,559 U. S. (2010). 262 SEC v. Edwards, 540 U.S. (2004) 263 Luke Green, ‘Morrison v. National Australia Bank – The Dawn of a New Age?’ (RiskMetrics Group, 25 July 2010) <http://blog.riskmetrics.com/slw/2010/06/morrison-v-national-australia-bank---the-dawn-of-a-newage.html> accessed 11 December 2010. 264Jordan Milev, Robert Patton, Stephanie Plancich, and Svetlana Starykh,‘Trends 2010 Mid-Year Study: Filings Decline as the Wave of Credit Crisis Cases Subsides, Median Settlement at Record High’ (NERA Economic Consulting, July 2010), p. 4. <http://www.nera.com/nera-files/PUB_Mid_Year_Trends_0710b.pdf> accessed 11 December 2010.
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down the value of HomeSide’s assets, causing NAB’s share prices to fall. Australian citizens, having purchased NAB’s shares before the write-downs, brought a class action against respondents – NAB, HomeSide, and officers of both companies – in the US and Australia in a securities class action in the Federal District Court for violation of §§10(b) and 20(a) of the Securities and Exchange Act of 1934 265 and SEC Rule 10b–5266. The claimants held that HomeSide and its officers were involved in manipulating financial models to make the company’s mortgage-servicing rights appear more valuable than they actually were. They also claimed that NAB and its chief executive officer were fully aware of this situation. The line of defence chosen by respondents was to claim lack of subject matter jurisdiction under the relevant provisions of the Federal Rule of Civil Procedure267. The District Court found no jurisdiction because the US domestic acts were, at most, a link in a securities fraud that took place abroad268. The Second Circuit269 affirmed the judgment of the District Court.270
JUDGMENT OF THE COURT
The US Supreme Court in its opinion written by Justice Scalia affirmed the position of the Second Circuit court. The Supreme Court’s opinion relied on the ’longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.’271This principle is based on the understanding that US Congress passes legislation with respect to domestic matters, not foreign ones.272The Supreme Court relied
265 Securities Exchange Act of 1934, 15 U.S.C. § 78a., as amended, <
http://www.sec.gov/about/laws/sea34.pdf> accessed 11
266SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, as amended, <http://frwebgate.access.gpo.gov/cgi-bin/multidb.cgi> accessed 11 December 2010. The rule prohibits any act or omission that results in fraud in connection with any kind of securities trading. 267 Federal Rules of Civil Procedure (FRCP) – govern civil procedure in the US. <http://www.law.cornell.edu/rules/frcp/> accessed 11 December 2010. 268District Court judgment in Morrison case - In re National Australia Bank Securities Litigation, No. 03 Civ. 6537 (BSJ), 2006 WL 3844465, *8 (SDNY, Oct. 25, 2006). 269 For a matter of additional clarity, a word on US court system is necessary. District courts are courts of first instance, Circuit courts – appellate courts and Supreme Court is the highest court. 270Morrison et al. v. National Australia Bank Ltd., No. 08-1991, 2010 WL 2518523 (U.S. June 24, 2010), p.1 See also ‘United States Supreme Court to Hear Case Concerning the Extraterritorial Application of U.S. Securities Laws—Morrison v. National Australia Bank’ (Davis Polk Client Memorandum, 2 December 2009)<http://www.davispolk.com/files/Publication/786361f7-2961-4ff2-9a762022f9251003/Presentation/PublicationAttachment/f2943a11-3a7c-487e-94a5209abdcb2f42/120109_morrison.pdf> accessed 11 December 2010. 271EEOC v. Arabian American Oil Co., 499 U.S. (1991). 272Smith v. United States, 507 U.S. (1993).
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also on its 1991 decision in EEOC v. Arabian American Oil Co. (Aramco)273, where extraterritorial application of Title VII of the Civil Rights Act of 1964 had been rejected on such grounds.274
The Supreme Court’s opinion seems to have put an end to the so-called “foreign-cubed” cases – that is, claims brought in US courts under US securities laws by foreign claimants who acquired their shares in foreign companies on foreign stock exchanges. Indeed, the opinion came as a great disappointment to the potential foreign claimants who bought their shares on foreign exchanges to seek protection under the US securities laws in the US courts.275
In other words, the decision made it more difficult to bring a successful action under US securities laws in connection with purchases of securities made outside the US. One source of uncertainty about the effect of the decision relates to whether it will ultimately be reversed by legislation. The Dodd-Frank Act includes provisions that open the door to potentially expanding the extraterritorial reach of US securities class action litigation, which would restore certain investors’ ability to bring claims that may seem to have been excluded by the Morrison decision.276
A look at recent filings against foreign companies highlights some characteristics of the kind of cases the Morrison decision may affect looking forward. From January 1, 2007 through June 30, 2010, there were 98 federal securities class actions filed against companies with their headquarters outside the US, about 13% of the total filings during this period. In more than half of these cases, investors who purchased or sold securities on a foreign (non-US) market were explicitly or implicitly included in the class definition set out in the complaint. The Morrison decision may limit such investors’ ability to bring a claim under US securities laws.277 One might wish to venture here as far as claiming whole class action is struck out, where the class includes investors who bought securities on foreign exchanges. However, to be definitely sure that in fact is the case, an additional analysis 273EEOC v. Arabian American Oil Co., 499 U.S. (1991). 274 ‘U.S. Supreme Court Significantly Limits Jurisdictional Reach of Antifraud Provisions of U.S. Securities Laws’ (Bingham, 28 June 2010) <http://www.bingham.com/Media.aspx?MediaID=10955> accessed 11 December 2010. 275 Kevin M. LaCroix, ‘Supreme Court Limits Foreign Investors’ Access to U.S. Courts’ (D&O Diary, 24 June 2010) <http://www.dandodiary.com/2010/06/articles/securities-litigation/supreme-court-limits-foreigninvestors-access-to-us-courts/> accessed 11 December 2010. 276 Jordan Milev, Robert Patton, Stephanie Plancich, and Svetlana Starykh,‘Trends 2010 Mid-Year Study: Filings Decline as the Wave of Credit Crisis Cases Subsides, Median Settlement at Record High’ (NERA Economic Consulting, July 2010) <http://www.nera.com/nera-files/PUB_Mid_Year_Trends_0710b.pdf> accessed 11 December 2010, p. 12 277 Kevin M. LaCroix ‘More Thoughts About Morrison v. National Australia Bank’ (D&O Diary, 28 June 2010) <http://www.dandodiary.com/2010/06/articles/securitieslitigation/more-thoughts-about-morrison-v-national-australia-bank/> accessed 11 December 2010. See also
Jordan Milev, Robert Patton, Stephanie Plancich, and Svetlana Starykh,‘Trends 2010 Mid-Year Study: Filings Decline as the Wave of Credit Crisis Cases Subsides, Median Settlement at Record High’ (NERA Economic Consulting, July 2010) <http://www.nera.com/nera-files/PUB_Mid_Year_Trends_0710b.pdf> accessed 11 December 2010, p.12
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that is beyond this paper would be necessary also in relation to examining the effect of the DoddFrank Act on the Morrison decision.
The critique delivered by Justice Scalia in the judgment can be easily applied to many of the previous authorities on extraterritoriality in other securities law precedents. Ever since deciding the Blue Chip Stamps v. Manor Drug Stores278 case, the Supreme Court has been consistent in limiting the scope of Section 10(b)279 and rejecting expansive interpretation of the provision supported by private plaintiffs as well as the SEC. While it is unlikely to ever reverse its decision to imply a private cause of action pursuant to Section 10(b), the Morrison decisioncontinues the Court’s conservative approach to extra-territorial liability under Section 10(b) and confirms the Court’s intentions for it to remain within the current limits.280
The Court discarded the “conduct” test (an analysis whether there was sufficient conduct in the US to support the application of the US securities law to a foreign company) and stated that the securities law rather required a "transaction" test, and effectively held that the US securities law does not apply to transactions that take place outside of the US.281
The decision was an outright loss for the SEC. In the amicus brief282 submitted by the solicitor general, SEC argued in favour of the “conduct” test.283 The SEC argued that Section 10(b) applied to this conduct and, therefore, the SEC had the right to investigate and bring enforcement proceedings even if foreign investors might not be able to recover the losses they suffer as a result of this fraud. The Court unconditionally rejected this argument, as there was no support to it either in the statute or in precedent. Although it is likely that other rules of the Securities Exchange Act could apply to such fraudulent activities in which respect SEC may still have jurisdiction, at least to some extent, the
278 Blue Chip Stamps v. Manor Drug Stores 421 U.S. (1975) 279 S http://www.sec.gov/about/laws/sea34.pdf> ecurities Exchange Act of 1934, Section 10(b), 15 U.S.C. § 78a., as amended, < accessed 11 December 2010. 280 ‘Supreme Court Protects Foreign Issuers from Securities Class Actions’ (Securities Litigation Alert; Akin Gump Strauss Hauer& Feld LLP, 28 June 2010) <http://www.akingump.com/files/Publication/e3168ce9-ba3a-4710-a83b-0213d3583700/Presentation/PublicationAttachment/39c8eae5-6ee6-4341-b7e6fd52a3f84355/100628_Supreme_Court_Protects_Foreign_Issuers_from_Securities_Class_Actions.pdf> accessed 11 December 2010, p. 2
281 ‘What to Watch Now in the World of D&O’ (Oakbridge InSightsVol. V Issue Three October/November 2010), <http://www.oakbridgeins.com/newsletters/InSights%20Vol%20V%20Issue%203%20What%20to%20Watc h%20Now%20in%20the%20World%20of%20DO.pdf> accessed 11 December 2010, p. 7 282 Amicus brief is an opinion submitted to the court by a volunteer, not a party to a case, to offer information to assist a court in deciding a matter before it. The decision on whether to admit the brief lies at the discretion of the court. 283 Brief for the United States as Amicus Curiae Supporting Respondents in Morrison et al. v. National Australia BankLtd.No. 08-1991, February 2010, <http://www.sec.gov/litigation/briefs/2010/morrison0210.pdf> accessed 11 December 2010, p.31
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inapplicability of Section 10(b), the principal antifraud provision of the Act, is a considerable loss to the SEC with regard to international fraud.284
The beneficiaries of the case are the foreign issuers, especially those who have recently faced securities litigation in the United States and/or suffered adverse verdicts, such as Vivendi Universal S.A.285, Fairfax Financial Holdings Limited286, Fortis N.V.287, Royal Dutch/Shell Transportation288, Bayer AG289, and Siemens AG290.291
RiskMetrics Group as well as Kevin M. LaCroix – both prominent commentators of securities laws developments in the US, are concerned that the opinion of the court could lead foreign companies to decide not to list their shares on US exchanges, or to delist their shares, as a way to avoid the burden
‘Supreme Court Protects Foreign Issuers from Securities Class Actions’ (Securities Litigation Alert; Akin Gump Strauss Hauer& Feld LLP, 28 June 2010)
<http://www.akingump.com/files/Publication/e3168ce9-ba3a-4710-a83b-0213d3583700/Presentation/PublicationAttachment/39c8eae5-6ee6-4341-b7e6fd52a3f84355/100628_Supreme_Court_Protects_Foreign_Issuers_from_Securities_Class_Actions.pdf> accessed 11 December 2010, p. 2
285In re Vivendi Universal, S.A. Sec. Litigation, 02 Civ. 5571 (RJH/HBP)(S.D.N.Y.) See also ‘Vivendi Universal, S.A; Plaintiffs Win Jury Verdict in Securities Fraud Class Action Against Vivendi’ (Abbey Spanier Rodd & Abrams, LLP, January 2010) <http://www.abbeyspanier.com/about-us/achievements/216vivendi> accessed 11 December 2010. See also ‘Vivendi Universal Securities Class Action’ <http://www.vivendiclassaction.com/us/home.php3> accessed 11 December 2010. 286Parks v. Fairfax Financial Holdings, Ltd., et al., 06 Civ. 2820 (S.D.N.Y.) See also ‘Fairfax Financial Holdings Limited: Settled and/or Concluded Case’ (Class Action World, April 2010) <http://classactionworld.com/Fairfax+Financial+Holdings+Limited/saaoc/10335.html> accessed 11 December 2010.
287Copeland v. Fortis, et al., 08 Civ. 09060 (S.D.N.Y.) See also Kevin M. LaCroix, ‘Global Bailouts, U.S. Lawsuits?’ (D&O Diary, 22 October 2008) <http://www.dandodiary.com/2008/10/articles/subprime-litigation/global-bailouts-us-lawsuits/> accessed 11 December 2010. 288In re Royal Dutch/Shell Transport Securities Litigation, No. 04-374 (D.N.J.) See also ‘Bernstein Liebhard LLP Announces Final Approval of Royal Dutch Shell Securities Class Action Settlement’ (Bernstein Liebhard LLP, 10 October 2008) <http://www.bernlieb.com/featured-cases/royal-dutch-shellsettlement/index.html> accessed 11 December 2010. 289In re Bayer AG Securities Litigation, No. 03-1546 (S.D.N.Y.) 290U.S. v. Siemens Aktiengesellschaft, No. 08-367 (D.D.C. Filed Dec. 15, 2008) See also SEC v. Siemens Aktiengesellschaft, No. 1:08-cv-02167 (D.D.C. Filed Dec. 15, 2008) 291AmbreenDelawalla, ‘Supreme Court Narrows Possible Securities Fraud Claims Against Foreign Issuers’ (Securities Litigation blog; Alston Bird LLP, 14 July 2010) <http://securities.litigation.alston.com> accessed 11 December 2010.
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and expense of US-based litigation exposure.292 Finally, considering how significant a percentage of overall US-based securities class action filings the lawsuits against foreign companies have recently become, the reduction in these filings could mean a substantial decline in the total number of securities class action filings.293 MORRISON OVERTURNED BY DODD-FRANK?294
Advisen, another prominent commentator of securities law developments in the US, suggests that certain provisions in the Dodd-Frank act were drafted in reaction to the Supreme Court decision.Title 9 of the Act is devoted to investor protection. It addresses, among other things, several key issues with respect to securities class actions.295 The Dodd-Frank Act provides federal court jurisdiction in certain actions brought by the SEC relating to fraud sections of the Securities Acts of both, 1933 and 1934, but also the Investment Companies Act 1940.296 The alleged fraud may involve conduct within 292 I.e. a company may wish not to list on a US exchange for the sole reason of being exposed to the US-based litigation and rather decide to list elsewhere, also because of how developed is the private enforcement of securities regulations through litigation in the US. Please also see Kevin M. LaCroix, ‘Supreme Court Limits Foreign Investors’ Access to U.S. Courts’ (D&O Diary, 24 June 2010) <http://www.dandodiary.com/2010/06/articles/securities-litigation/supreme-court-limits-foreigninvestors-access-to-us-courts/> accessed 11 December 2010. See also, by the same author ‘More Thoughts About Morrison v. National Australia Bank’ (D&O Diary, 28 June 2010) <http://www.dandodiary.com/2010/06/articles/securities-litigation/morethoughts-about-morrison-v-national-australia-bank/> accessed 11 December 2010.
See also Luke Green, ‘Morrison v. National Australia Bank – The Dawn of a New Age?’ (RiskMetrics Group, 25 July 2010) <http://blog.riskmetrics.com/slw/2010/06/morrison-v-national-australia-bank---the-dawn-of-a-newage.html> accessed 11 December 2010. ‘More Thoughts About Morrison v. National Australia Bank’ (D&O Diary, 28 June 2010) 293Kevin M. LaCroix, <http://www.dandodiary.com/2010/06/articles/securities-litigation/more-thoughts-about-morrison-v-national-australia-bank/> accessed 11 December 2010.
See also ‘Securities Litigation Remains Escalated; An Advisen Quarterly Report – Q3 2010’ (Advisen, October 2010) <https://www.advisen.com/downloads/sec_lit_Q32010.pdf> accessed 11 December 2010, p. 11 294‘Update: U.S. Supreme Court Limits Extraterritorial Application of U.S. Securities Laws—Morrison v. National Australia Bank’ (Davis Polk; Client Newsflash, 28 June 2010)<http://www.davispolk.com/files/Publication/b8410ed8-13e1-40b0-8f12033b6ea69c83/Presentation/PublicationAttachment/450c2bc3-1d4e-4440-9cd5a3eff5e1dd2e/062510_morrison_v_nab.html> accessed 11 December 2010. 295 Luke Green, ‘Morrison Overturned? What Dodd Act Means For Securities Class Actions’ (RiskMetrics Group, 26 July 2010)<http://blog.riskmetrics.com/slw/2010/07/morrison-overturned-what-dodd-actmeans-for-securities-class-actions.html> accessed 11 December 2010. 296Dodd-Frank Wall Street Reform and Consumer Protection Act.H. R. 4173, especially Title IX – Investor Protections and Improvements to the Regulation of Securities, Subtitle B—Increasing Regulatory Enforcement and Remedies. For example, Section 929P(b) authorizes an action brought by the SEC based on a statutorily defined conduct and effects test. Section 929Y directs the Commission to study whether private rights of action should be allowed on the same basis as authorized for the Commission in 929P(b).
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the US that forms “significant steps” in a violation, even if the transaction itself occurred outside the US and involves only foreign traders.297
The limitation on US securities fraud laws to domestic exchanges could mean as much as a 10% reduction in cases filed in US annually in addition to a reduction in size of numerous US class actions. Furthermore, collective remedies in various jurisdictions remain complicated and in certain cases, non-existent. However, RiskMetrics Group believes that such a scenario could very likely be only a short-term result. They believe there exists a high possibility that, considering the worldwide economic downturn, the claimants will more actively and effectively pursue a uniform collective action regulation within the EU and comparable remedies in other jurisdictions. Nevertheless, the Dodd-Frank Act gave a significant blow to the Morrison decision. The SEC’s authority to pursue market fraud all over the world on behalf of US investors is now uncontested. In addition, the possibility of civil penalties against aides and abettors under a much less stringent burden of proof will mean more significant and further reaching SEC enforcement actions on behalf of the aggrieved investors.298
III MERCK & CO., INC., ET. AL. V. REYNOLDS ET. AL.
In early November 2003, investors filed a securities fraud action under Section 10(b) of the Securities Exchange Act of 1934, claiming that Merck & Co. ’knowingly misrepresented’ and therefore misled investors as to the hazardous side effects associated with its drug Vioxx. The statute of limitations regarding the securities fraud complaints provides, that it is made in time if filed not later than ’2 years after the discovery of the facts constituting the violation’ or 5 years after such violation has occurred.299 The claim was initially dismissed by the District Court as untimely because the plaintiffs should have been aware of the possibility of Merck‘s misrepresentations before November 2001, over 2 years before filing the lawsuit, and they did not initiate a ’diligent investigation’ at the time. There was a study conducted in March 2000 that compared Vioxx with the painkiller naproxen that had shown adverse cardiovascular results for Vioxx, which, according to Merck, were due to the so-
297 ‘Securities Litigation Remains Escalated; An Advisen Quarterly Report – Q3 2010’ (Advisen, October 2010) <https://www.advisen.com/downloads/sec_lit_Q32010.pdf> accessed 11 December 2010, p. 10 298 Luke Green, ‘Morrison Overturned? What Dodd Act Means For Securities Class Actions’ (RiskMetrics Group, 26 July 2010)<http://blog.riskmetrics.com/slw/2010/07/morrison-overturned-what-dodd-actmeans-for-securities-class-actions.html> accessed 11 December 2010 299 U.S. Code Title 28 - Judiciary and Judicial Procedure, 28 U. S. C. §1658(b) provides “a private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws, as defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 78c (a)(47)), may be brought not later than the earlier of— 2 years after the discovery of the facts constituting the violation; or 5 years after such violation.”
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called ’naproxen hypothesis’300. Secondly, FDA301 issued a warning letter that was released to the public in September 2001 indicating that Merck‘s advertising campaign of Vioxx was ’false, lacking in fair balance, or otherwise misleading’302 with regards to the cardiovascular results. Thirdly, a number of pleadings filed in relation to products liability in September and October 2001 alleged that Merck had concealed the data they possessed about Vioxx and downplayed its risks on purpose. On appeal the Third Circuit reversed the decision by holding that the events prior to November 2001 did not suggest that Merck acted with scienter303, being an element of Section 10(b) violation304, and consequently the statute of limitation period did not begin to run.305
JUDGMENT OF THE COURT
The Supreme Court’s unanimous 9-0 decision settled a dispute the circuit courts could not agree upon – as to the application of the statute of limitations for claims under Section 10(b) of the Securities Exchange Act of 1934. As lawyers at Milbank, Tweed, Hadley &McCloy indicate, one possible effect of this decision is to force defendants arguing for dismissal of Section 10(b) claims to choose either claiming that a plaintiff has not adequately pleaded scienter or arguing that the claims are untimely.306
300 The naproxen hypothesis implied that the results of the study were caused by the absence of a benefit conferred by naproxen rather than a harm caused by Vioxx. Merck & Co. v. Reynolds, No. 08-905, p. 7 301 FDA – Food and Drug Administration, an authority of the USA Department of Health and Human Services, responsible for protecting and promoting public health by regulation and supervision of food safety, tabacco, drugs, etc. 302 FDA warning letter – a correspondence open to the public, that notifies the industry of violations that FDA has discovered during inspection. 303 Scienter – legal term that referring to intent or knowledge of wrongdoing. 304 In the United States, in order to prevail in a securities fraud claim under Section 10(b) of the Securities Exchange Act of 1934, a plaintiff must prove that the defendant acted with scienter. The meaning of scienter under this law has been highly controversial since the enactment of the Private Securities Litigation Reform Act of 1995. In 2007, the United States Supreme Court issued a decision in which it clarified what was to be understood as a "strong inference". In Tellabs, Inc. v. Makor Issues & Rights, LTD (21 June 2007), by an 8-1 ruling, the Court defined the standard that the plaintiff should meet in order to proceed with a securities fraud litigation: a complaint must show "cogent and compelling evidence" of scienter. Thomas O. Gorman, ‘Tellabs, Inc. v. Makor Issues & Rights, LTD; Pleading a Strong Inference of a Scienter’ (2007) Securities Litigation & Enforcement Institute <http://www.secactions.com/articles/scien/Article1.pdf> accessed 11 December 2010, p. 24 See also ‘Split Widens on Scienter Pleading Standard Under the PSLRA’ (Cadwalader, Wickersham & Taft LLP, September 1999) <http://library.findlaw.com/1999/Sep/1/127316.html> accessed 11 December 2010. 305Merck & Co. v. Reynolds, No. 08-905, p. 23 306 ‘Securities Litigation Update — Supreme Court Resolves Circuit Split Regarding Section 10(b) Statute of Limitations and Second Circuit Addresses Who Can Be Liable Under Section 10(b)’ (Milbank, Tweed, Hadley &McCloy LLP; Litigation Client Alert, 3 May 2010)
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In its judgment the Supreme Court expressly rejected decisions from several circuits307 that had regarded the two-year limitations period (’after the discovery of the facts constituting the violation’) as beginning to run on the day when the plaintiff received ’storm warnings’, sufficient to put one on ’inquiry notice’308 to investigate whether he had been defrauded. According to the Supreme Court’s reasoning, material to the running of the statute of limitations is the ’discovery of the facts’ and not the inquiry notices or storm warnings that may have taken place prior to the actual discovery and could have led to the discovery. The Supreme Court implicitly rejected Merck’s argument that, at least in situations where the plaintiff made no effort to investigate his claim, the limitations period should start to run from the point of inquiry notice. Another argument rejected by the Supreme Court was that of inquiry notice as the preferable triggering event because courts would find it complicated to decide ’when a hypothetical reasonably diligent plaintiff would have discovered the necessary facts’, additionally noting that at least five circuit courts have already applied the approach without material difficulties.309
Justice Scalia in his opinion concurring in part and concurring in the judgement, whereby Justice Thomas joined him, expressed a point worth of additional mentioning. He argued that, regardless of the contrary views of the parties and the Solicitor General, the actual wording of Section 1658(b)(1) permitted only a single reason for the limitations period – actual discovery of the facts constituting the violation. By comparing the above mentioned provision with the limitations period included in Section 13 of the Securities Act of 1933, explicitly referring to both actual discovery as well as to when the discovery should have been made by the exercise of reasonable diligence, Justice Scalia found no reason to read Section’s 1658(b)(1) reference to ’discovery’ as including both alternatives and raised objections with the other members of the court that the broader understanding had been
<http://www.milbank.com/NR/rdonlyres/DDC28128-1568-45F4-861169B79760F9C7/0/050310_Merck_v_Reynolds.pdf> accessed 11 December 2010, p. 1 307I.e. Franze v. Equitable Assurance, 296 F.3d 1250 (11th Cir. 2002); Theoharous v. Fong, 256 F.3d 1219 (11th Cir 2001); Fujisawa Pharmaceutical Co. v. Kapoor, 115 F.3d 1332 (7th Cir. 1997); Great Rivers Cooperative of Southeastern Iowa v. Farmland Industries, Inc., 120 F.3d 893 (8th Cir. 1997); Dodds v. Cigna Securities, Inc., 12 F.3d 346 (2d Cir. 1993), all cited in Merck. 308 Merck & Co. v. Reynolds, No. 08-905, 309‘Securities Litigation Update — Supreme Court Resolves Circuit Split Regarding Section 10(b) Statute of Limitations and Second Circuit Addresses Who Can Be Liable Under Section 10(b)’ (Milbank, Tweed, Hadley &McCloy LLP; Litigation Client Alert, 3 May 2010)<http://www.milbank.com/NR/rdonlyres/DDC281281568-45F4-8611-69B79760F9C7/0/050310_Merck_v_Reynolds.pdf> accessed 11 December 2010, p. 2 See also Sheppard Mullin, ‘United States Supreme Court Clarifies Statute Of Limitations For Private Securities Actions’ (Corporate And Securities Law Blog, 7 May 2010) <http://www.corporatesecuritieslawblog.com/securities-litigation-united-states-supreme-court-clarifiesstatute-of-limitations-for-private-securities-fraud-actions.html> accessed 11 December 2010.
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uniformly adopted by the circuit courts regarding limitations provisions of the Securities Exchange Act that similarly referred only to ’discovery’.310
IMPLICATIONS OF THE JUDGMENT
Following the US Supreme Court’s clarification in this case as to the effect of the ’inquiry notice’ and ’storm warnings’ on the beginning of the limitations period, defendants in securities fraud cases have a high threshold to achieve in order to indicate plaintiffs failure to bring their claims within the two-year period set in Section 1658(b). Defendants are now obliged to show that the plaintiffs actually discovered or a reasonably acting plaintiff should have discovered the facts constituting the actual violation, including scienter. Pleading the application of scienter will require more than simply alleging facts that might show a materially false, misleading statement or omission.311
Shortly after the decision was announced, Washington Legal Foundation, a public interest law and policy centre, who filed an amicus brief in the Merck case, expressed its disappointment with the ruling. According to the Foundation’s Chief Counsel Richard Samp, it invites manipulation by investors. Instead of encouraging investors to sue promptly, the judgment provides them with the option to delay the lawsuit and take notice of the events happening in the market. One can be safe to state, that if during the delay, there is a rise in stock prices, the investor is delighted about his profits, but if the price drops, he is able to sue and recover his damages. Consequently investors are granted an opportunity to manipulate federal securities law to minimize their market risk.312
The fact that there have since been relatively few new filings reflecting the potential longer limitations period so far does not indicate that there is no possibility for a rise in belated filings. The challenge this presents for both directors and officers insurance underwriters as well as companies is
310‘Securities Litigation Update — Supreme Court Resolves Circuit Split Regarding Section 10(b) Statute of Limitations and Second Circuit Addresses Who Can Be Liable Under Section 10(b)’ (Milbank, Tweed, Hadley &McCloy LLP; Litigation Client Alert, 3 May 2010) <http://www.milbank.com/NR/rdonlyres/DDC281281568-45F4-8611-69B79760F9C7/0/050310_Merck_v_Reynolds.pdf> accessed 11 December 2010, p. 3 311 ’Merck & Co. v. Reynolds: Supreme Court Clarifies Statute of Limitations in Securities Fraud Cases’ (StradleyRonon Securities Litigation Alert, May 2010) <http://www.stradley.com/newsletters.php?action=view&id=555> accessed 11 December 2010. 312 ‘Court Adopts Relaxed Time Limits On Securities Fraud Lawsuits (Merck & Co. v. Reynolds, No. 08-905)’ (Washington Legal Foundation Litigation Update, 27 April 2010) <http://www.wlf.org/Upload/litigation/litigationupdate/042710Merk.pdf> accessed 11 December 2010, p. 1
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that it is more difficult now to be certain when a company which has adverse developments in the past may be ’out of the woods’ with regards to the possible securities lawsuits.313
IV SECURITIES AND EXCHANGE COMMISSION V. EDWARDS
Charles Edwards established a company that sold pay telephones and then leased them back from the buyers for a fixed monthly fee. When Mr. Edwards filed for bankruptcy, the SEC sued him for selling securities without proper registration and disclosure, as it considered the telephones to be investments and therefore securities, violating the registration and anti-fraud provisions of the federal securities laws. In a preliminary injunction, the federal district court froze Edwards’ assets. This decision was overruled by the 11th Circuit Court of Appeals for lack of jurisdiction. In the court’s reasoning, the SEC failed to show that the selling of the telephones could be qualified as an ’investment contract’ under federal securities laws. While defining the ’investment contract’, the court used the Supreme Court’s ruling in SEC v Howey314 from 1946, indicating that a financial interest is an ’investment contract’ if it involves the following three conditions: firstly, it is an investment of money; secondly, it is invested in a common enterprise, and finally, that the investment is made with the expectation of profits to be derived solely from the efforts of others. According to the 11 th Circuit’s ruling, SEC could not have argued that the final third test’s part was met, because the acquirers received a fixed fee indicated in the contract rather than a variable fee the amount of which is dependent on Edwards’ success.315
JUDGMENT OF THE COURT
In a unanimous 9-0 judgment delivered by Justice O’Connor in January 2004, the US Supreme Court held that an investment scheme with a fixed rate of return, can be an ’investment contract’ and therefore, a security subject to federal securities law. The test applied by the court in this case was ’whether the scheme involves an investment of money in a common enterprise with profits to come solely from the effort of others'. Because the test does not include a distinction between promises of 313 ‘What to Watch Now in the World of D&O’ (Oakbridge InSightsVol. V Issue Three October/November 2010) <http://www.oakbridgeins.com/newsletters/InSights%20Vol%20V%20Issue%203%20What%20to%20Watc h%20Now%20in%20the%20World%20of%20DO.pdf> accessed 11 December 2010, p. 8 314 SEC v. Howey Co., 328 U.S. (1946) 315SEC v. Edwards, 540 U.S. 389. See also ‘The Oyez Project, SEC v. Edwards ,540 U.S. 389 (2004)’ <http://oyez.org/cases/2000-2009/2003/2003_02_1196> accessed 11 December 2010.
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fixed and variable returns, the scheme at issue in this case, can be defined as an ’investment contract’.316
For a number of years, securities law has long covered a wide list of investment schemes similar to the pay telephones scheme of this case. One may argue that securities law should not be involved when only a sophisticated case of consumer fraud is at issue, but this has long ago been rejected.317
In general, the Supreme Court simply applied the conventional investment contract analysis to the facts of the case. The Court did not even hold that the investment scheme in the case was actually a security, it merely stated that the lower court made a mistake and should have applied the traditional analysis. As no cases were overruled, there is an opinion expressed that no extensive implications should be drawn.318
Nevertheless, the judgment voices alternative insights from both business and theory perspectives that are worth mentioning. Preventing fraud is at the core of federal securities regulation. However, the investment contract analysis ignores promoter’s material motivations as to the legitimacy of the transaction. Consequently as federal securities law is applied, one might argue it eventually raises questions as to the principles of federalism.319
The Court’s support for a flexible and broad definition of securities and, therefore, covering more investors with the SEC protection may reflect that many new traders are entering the securities market. A lot of them are inexperienced, looking for additional retirement income when social security looks to be less secure. The general idea of protecting vulnerable investors from dishonest traders brings to mind the US Congress’ initial intention in the 1930s in creating the Securities Laws.
316SEC v. Edwards, 540 U.S. 389. See also ‘The Oyez Project, SEC v. Edwards, 540 U.S. 389 (2004)’ <http://oyez.org/cases/2000-2009/2003/2003_02_1196> accessed 11 December 2010. 317 The example to be mentioned is Smith v. Gross, 604 F.2d 639 (9th Cir. 1979), in which an investment in a worm farm was deemed to be an investment contract. See ‘SEC v. Edwards: Supreme Court on Investment Contracts’ (ProfessorBainbridge.com, 13 January 2004) <http://www.professorbainbridge.com/professorbainbridgecom/2004/01/sec-v-edwards-supreme-courton-investment-contracts.html> accessed 11 December 2010. 318 Louis J. Rogers, ‘SEC v. Edwards: Traditional Investment Contract Analysis Applied By Supreme Court To Payphones Sold And Leased Back With A Fixed Return’ (2004 TIC Real Estate Symposium; Regulation D Securities Workshop, 3 March 2004) <http://www.reisa.org/pdf/SECarticle.pdf> accessed 12 December 2010, p. 3 319 ‘SEC v. Edwards: An Opportunity to Knock On the Viability of the Howey Test as the Gatekeeper for the Federal Securities Laws’ (2 November 2005) Oklahoma City University Law Review, Forthcoming. <http://ssrn.com/abstract=830204> accessed 12 December 2010.
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It may seem that history is repeating itself by reference to the American experience from the early 1900s, where the securities fraud was a serious issue in light of the unregulated market and at a time where the states responded with ’blue sky’ laws320.321
V CRITICAL ANALYSIS
This section will concentrate on the critical analysis of the US Supreme Court judgements that were presented in the previous sections, with regards to the US Supreme Court’s participation in investor/consumer protection, its attempts to impose the duty of honesty and various other notions that could all be in general encompassed by a broad understanding of the information asymmetry theory. As well explained by George Akerlof, this theory deals with decisions in transactions where one party (the seller) has better information than the other (the buyer).322 Before we engage into identifying traces of information asymmetry in the cases analysed above, a few further words on the very theory would be of use. As already indicated above, information asymmetry covers various issues involved in the situations where one party to a deal has more (or better) information than the other. This creates an imbalance of powers that may lead to a market failure. Examples of this problem are adverse selection, moral hazard and others. One has to resist the temptation of venturing further into theoretical discussions of the matter here and such a naïve and simplified outline must suffice, since, firstly, the theory itself is not the topic of this paper, secondly, much has already been said in this area323, and, finally, the reader is yet to be convinced information asymmetry is indeed present at all in the three cases analysed above.324
EVIDENCE OF THE INFORMATION ASYMMETRY THEORY IN THE ANALYSED CASES
In order to clarify, where, in each of the three cases, the ideas of information asymmetry theory are present, a brief additional explanation is provided:
Blue sky law – state law in the US regulating the offering and sale of securities to protect the public from fraud. 321 Darlene S. Wood, ‘Lease-back Arrangements are Investment Contracts and Therefore Securities Under the Securities Acts: SEC v. Edwards’ (Spring 2005) 7 Duquesne Business Law Journal, 135-150, p. 139. 322 George A. Akerlof, 'The Market for “Lemons”: Quality Uncertainty and the Market Mechanism', (1970) 84/3 Quarterly Journal of Economics, 488-500. Since the seminal aforementioned lemons paper by Akerlof (1970), the effects of informational asymmetries in financial intermediation and security design have been examined in numerous studies, including Leland and Pyle (1977), Gorton and Pennacchi (1990), and more recently Kirabaeva (2010). 323 Please see, for example, sources mentioned in the footnote above. 324 Should the reader wish to learn more about the information asymmetry theory, it should go without saying, such endeavor should start with familiarizing oneself with the Akerlof’s initial paper as cited above.
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Morrison – the Securities Exchange Act325 does not provide a cause of action to foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign stock exchanges. However, the relevant provisions of the DoddFrank Act326 at least partly reversing the judgment (some authors suggest - drafted in reaction to the judgment327) concentrate on investor protection (Title IX Subtitle B of the act) whereby federal courts are given jurisdiction in certain actions brought by the SEC relating to fraud sections of the Securities Acts of 1933328 and 1934329, as well as the Investment Companies Act of 1940330. As the relevant provisions of the Dodd-Frank Act put it, the alleged fraud can involve conduct within the US that constitutes “significant steps” in a violation, even if the securities transaction occurred outside of the US and involves only foreign investors. Federal court jurisdiction is also established if the alleged fraudulent conduct occurred outside of the US but has a foreseeable substantial effect within the US.
In other words, and considering the lack of efficient collective remedies in other jurisdictions - the SEC is granted the power to pursue market fraud worldwide on behalf of disappointed US investors (buyers)331, which consequently means higher level of protection for the investors, and attempt to impose the duty of honesty on the sellers.
Merck case – the statute of limitations begins to run once the plaintiff actually discovered or a reasonably diligent plaintiff would have discovered the facts constituting the violation – whichever comes first. Supreme Court noted that "inquiry notice" is only useful to the extent
325Securities Exchange Act of 1934, 15 U.S.C. § 78, as amended, <
http://www.sec.gov/about/laws/sea34.pdf> accessed 11 December
326Dodd-Frank Wall Street Reform and Consumer Protection Act 2010.H. R. 4173. 327 For example: James Hamilton, ‘SEC Seeks Comments in Aid of Dodd-Frank Mandated Study on Extraterritorial Reach of Federal Securities Laws’ (WoltersKluwer Law & Business; CCH Financial Reform News Center, 27 October 2010) <http://financialreform.wolterskluwerlb.com/2010/10/sec-seeks-comments-in-aid-of-dodd-frankmandated-study-on-extraterritorial-reach-of-federal-securities-laws.html> accessed 12 December 2010, Luke Green, ‘Morrison Overturned? What Dodd Act Means For Securities Class Actions’ (RiskMetrics Group, 26 July 2010)<http://blog.riskmetrics.com/slw/2010/07/morrison-overturned-what-dodd-act-means-forsecurities-class-actions.html> accessed 11 December 2010, or Mark A. Berube, ‘Fraud international’ (The Deal Magazine, 1 October 2010) <http://www.thedeal.com/newsweekly/community/soapbox-1/fraud-international.php#bottom> accessed 12 December 2010, To name but a few. 328Securities Act of 1933, 15 U.S.C. § 77a. 329Securities Exchange Act of 1934, 15 U.S.C. § 78. 330Investment Company Act of 1940, 15 U.S.C. § 80a-1. 331 Luke Green, ‘Morrison Overturned? What Dodd Act Means For Securities Class Actions’ (RiskMetrics Group, 26 July 2010)<http://blog.riskmetrics.com/slw/2010/07/morrison-overturned-what-dodd-actmeans-for-securities-class-actions.html> accessed 11 December 2010.
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it describes the circumstances when a reasonably diligent plaintiff would have begun to investigate.
In terms of information asymmetry, the judgement provides the investors (buyers) time to think about the situation in the market and no need to sue promptly.
SEC v. Edwards - an investment scheme promising a fixed rate of return can be an "investment contract" and thus a "security" subject to federal securities law. The test the Court used for determining whether a scheme is an "investment contract" is "whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others." Because the test does not distinguish between promises of fixed returns and promises of variable returns, the scheme at issue here can be defined as an "investment contract."
Court decision (year 2003) in SEC. v. Edwards on covering more investors (buyers) with SEC protection reflected that there were more than ever new investors in the market and the aim of protecting new investors is similar to the one around the enactment of the Securities Acts back in 1930s on imposing the duty of honesty on the sellers.
ARE SECURITIES – LEMONS IN THE US SUPREME COURT?332
The notion of information asymmetry is not new at all in the judgments of the US Supreme Court. For example, evidences of these ideas can be found in cases involving the professional conduct of lawyers, the Kodak case of competition in the aftermarket, to name but a few, all of them later analyzed by academics in scholarly writings333.
332 Such a formula of a subtitle was inspired, following Akerlof’s ideas, by the ‘Are Cherries – Lemons?’ article by Rosenman and Wilson (R. E. Rosenman& W. Wilson, ‘Quality Differentials and Prices: Are Cherries Lemons?’ (1991) 39 Journal of Industrial Economics 649) and more recently the lecture ‘Are Lawyers – Lemons?’ (J. Spigelman, ‘Are Lawyers – Lemons?’ Competition Principles and Professional Regulation (The 2002 Lawyer’s Lecture, St. James Ethics Centre, Supreme Court of New South Wales, 29 October 2002) at <http://www.lawlink.nsw.gov.au/lawlink/supreme_court/ll_sc.nsf/pages/SCO_speech_spigelman_291002> accessed 12 December 2010). 333 For lawyers - Are Lawyers – Lemons? see J. Spigelman, ‘Are Lawyers – Lemons?’ Competition Principles and Professional Regulation (The 2002 Lawyer’s Lecture, St. James Ethics Centre, Supreme Court of New South Wales, 29 October 2002) at <http://www.lawlink.nsw.gov.au/lawlink/supreme_court/ll_sc.nsf/pages/SCO_speech_spigelman_291002> accessed 12 December 2010; For Kodak Case see
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INFORMATION ASYMMETRY IN SECURITIES’ LAW CASES IN THE US SUPREME COURT
Concentrating on the securities law, it has to be mentioned that the US Supreme Court made its first attempt to solve information asymmetry problem by imposing the duty of honesty in this sphere as early as 1909, when in Strong v. Rapide case it decided that firms must either disclose inside information or abstain from using it in trade334. One cannot refrain from noticing here that the case had been decided over 20 years before the Securities’ Acts335 were enacted.
This and a number of other US Supreme Court cases relating to securities law336, also the ones involving insider trading, all evoke in one or another way the ideas of information asymmetry theory and attempts to solve the problem, though without using this explicit terminology. Consequently, it is definitely safe to say that in the US Supreme Court case-law, relating to securities law, one will most probably find traces of Akrelof’s ideas in each of them, it just depends on how deep one may sometimes have to look for them.
Furthermore, it is worth noting, as illustrated above, that it has taken the US Supreme Court 100 years of attempting to solve information asymmetry problems in securities law already, and one must be a true optimist to claim that the final solution has been found. The problem one notices in this situation is that US Supreme Court addresses the issue with a step-by-step approach and is therefore reluctant to show any bit of judicial radicalism in solving information asymmetry problems, which may be reasonably explained by its unwillingness to commit to a high level of judicial activism in securities law.
SahinArdiyok, ‘Aftermarket Theories in Competition Law and an Empirical Analysis of Regulation on Motor Vehicles’ (ACT ECON, 6 August 2010), pp. 18, 39 <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1654387> accessed 12 December 2010. 334Strong v. Repide, 213 U.S. 419 (1909). 335Securities Act of 1933, 15 U.S.C. § 77a;Securities Exchange Act of 1934, 15 U.S.C. § 78. 336 For example, Dirks v. SEC, 463 U.S. 646, 658 n.16 (1983); Chiarella v. United States, 445 U.S. 222, 231-32 (1980) (rejecting notion that federal securities laws were intended to provide equal access to all information), also Lowe v. SEC 472 U.S. 181 (1985), See Antony Page & Katy Yang ,’Controlling Corporate Speech: Is Regulation Fair Disclosure Unconstitutional?’ (2005) 39 U.C. Davis Law Review, pp. 10, 37.
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As a first part of the conclusion, let us have a final quick run through the judgments. In the Morrison case the Court held the Securities Exchange Act not to provide a cause of action to foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign stock exchanges. In the Merck case it was held the statute of limitations starts to run once the plaintiff actually discovers or a reasonably diligent plaintiff should discover the facts constituting the violation – whichever comes first. Finally, in the SEC v.Edwards the Court held that even a fixedrate return investment scheme could be an "investment contract" and thus a "security" subject to federal securities law.
As an outcome, this paper provides a deep analysis of three recent US Supreme Court cases relating to securities law, supported by their facts as well as legal implications and evidence as to the presence of the information asymmetry problem in each of them and attempts of the US Supreme Court to solve it. It is apparent that the Court has spent over 100 years already looking for the solution to this problem in the particular area of securities law and, as there is no indications of a rise in the level of judicial activism in the area of clarifying information asymmetry, the only thing one can be certain of is that the story is not over yet. Finally, the present analysis, of almost randomly selected recent securities law cases, allows one to venture as far as saying that it’s more probable than not, any securities law case in front of the US Supreme Court involves a certain degree of reference to the information asymmetry theory. VII BIBLIOGRAPHY Legislation
Securities Act of 1933, 15 U.S.C. § 77a Securities Exchange Act of 1934, 15 U.S.C. § 78 Investment Company Act of 1940, 15 U.S.C. § 80a-1 SEC Rule 10b-5, 17 C.F.R. § 240 Federal Rules of Civil Procedure (FRCP) Dodd-Frank Wall Street Reform and Consumer Protection Act 2010. H. R. 4173 U.S. Code Title 28 - Judiciary and Judicial Procedure, 28 U. S. C. Private Securities Litigation Reform Act 1995
In re Bayer AG Securities Litigation, No. 03-1546 (S.D.N.Y.) Copeland v. Fortis, et al., 08 Civ. 09060 (S.D.N.Y.) EEOC v. Arabian American Oil Co., 499 U.S. 244, 248 (1991) Merck & Co. v. Reynolds, No. 08-905 Parks v. Fairfax Financial Holdings, Ltd., et al., 06 Civ. 2820 (S.D.N.Y.) In re Royal Dutch/Shell Transport Securities Litigation, No. 04-374 (D.N.J.) SEC v. Edwards, 540 U.S. 389. Smith v. United States, 507 U.S. 197, 204 n.5 (1993) 2 WminLawRev 1 69
In re National Australia Bank Securities Litigation, No. 03 Civ. 6537 (BSJ), 2006 WL 3844465, *8 (SDNY, Oct. 25, 2006) Morrison v. National Australia Bank Ltd., 2008 WL 4660742 (2d Cir. Oct. 23, 2008). Morrison et al. v. National Australia Bank Ltd., p. 1, No. 08-1991, 2010 WL 2518523 (U.S. June 24, 2010). SEC v. Siemens Aktiengesellschaft, No. 1:08-cv-02167 (D.D.C. Filed Dec. 15, 2008) Strong v. Repide, 213 U.S. 419 (1909). U.S. v. Siemens Aktiengesellschaft, No. 08-367 (D.D.C. Filed Dec. 15, 2008); In re Vivendi Universal, S.A. Sec. Litigation, 02 Civ. 5571 (RJH/HBP)(S.D.N.Y.)
Brief for the United States as Amicus Curiae Supporting Respondents in Morrison et al. v. National Australia Bank Ltd. No. 08-1991, February 2010, p. 31.<http://www.sec.gov/litigation/briefs/2010/morrison0210.pdf> accessed 11 December 2010.
de Tocqueville, Alexis, Democracy in America (George Lawrence tr, J.P. Mayer ed, Garden City, N.Y.: Doubleday 1969) The Oxford companion to the Supreme Court of the United States (Kermit Hall; James W. Ely 1938-; Joel B Grossman, 2nd ed. Oxford: Oxford University Press 2005)
Journals, Newspapers and Online resources
Akerlof, George A., 'The Market for “Lemons”: Quality Uncertainty and the Market Mechanism', (1970) 84/3 Quarterly Journal of Economics, 488-500. Ardiyok, Sahin, ‘Aftermarket Theories in Competition Law and an Empirical Analysis of Regulation on Motor Vehicles’ (ACT ECON, 6 August 2010)<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1654387> accessed 12 December 2010. ‘Bayer AG Securities Litigation’ <http://www.bayeragsecuritieslitigation.com/index.html> accessed 12 December 2010. ‘Bernstein Liebhard LLP Announces Final Approval of Royal Dutch Shell Securities Class Action Settlement’ (Bernstein Liebhard LLP, 10 October 2008) <http://www.bernlieb.com/featured-cases/royal-dutch-shell-settlement/index.html> accessed 11 December 2010. Berube, Mark A., ‘Fraud international’ (The Deal Magazine, 1 October 2010) <http://www.thedeal.com/newsweekly/community/soapbox-1/fraudinternational.php#bottom> accessed 12 December 2010. ‘Court Adopts Relaxed Time Limits On Securities Fraud Lawsuits (Merck & Co. v. Reynolds, No. 08-905)’ (Washington Legal Foundation Litigation Update, 27 April 2010) 2 WminLawRev 1 70
<http://www.wlf.org/Upload/litigation/litigationupdate/042710Merk.pdf> accessed 11 December 2010. Delawalla, Ambreen, ‘Supreme Court Narrows Possible Securities Fraud Claims Against Foreign Issuers’ (Securities Litigation blog; Alston Bird LLP, 14 July 2010) <http://securities.litigation.alston.com> accessed 11 December 2010. ‘Fairfax Financial Holdings Limited: Settled and/or Concluded Case’ (Class Action World, April 2010)<http://classactionworld.com/Fairfax+Financial+Holdings+Limited/saaoc/10335.html> accessed 11 December 2010. Gorman, Thomas O., ‘Tellabs, Inc. v. Makor Issues & Rights, LTD; Pleading a Strong Inference of a Scienter’ (2007) Securities Litigation & Enforcement Institute, <http://www.secactions.com/articles/scien/Article1.pdf> accessed 11 December 2010. Green, Luke, ‘Morrison Overturned? What Dodd Act Means For Securities Class Actions’ (RiskMetrics Group, 26 July 2010) <http://blog.riskmetrics.com/slw/2010/07/morrison-overturned-what-dodd-act-means-forsecurities-class-actions.html> accessed 11 December 2010. ¾ ¾ ‘Morrison v. National Australia Bank – The Dawn of a New Age?’ (RiskMetrics Group, 25 July 2010) <http://blog.riskmetrics.com/slw/2010/06/morrison-v-national-australia-bank--the-dawn-of-a-new-age.html> accessed 11 December 2010. Hamilton, James, ‘SEC Seeks Comments in Aid of Dodd-Frank Mandated Study on Extraterritorial Reach of Federal Securities Laws’ (WoltersKluwer Law & Business; CCH Financial Reform News Center, 27 October 2010) <http://financialreform.wolterskluwerlb.com/2010/10/sec-seeks-comments-in-aid-of-doddfrank-mandated-study-on-extraterritorial-reach-of-federal-securities-laws.html> accessed 12 December 2010. Hans, Richard; Gill, Anthony D., ‘Landmark Morrison ruling: Supreme Court rejects extraterritorial application of Securities Exchange Act’ (DLA Piper Litigation Alert, 30 June 2010) <http://www.dlapiper.com/landmark-morrison-ruling-supreme-court-rejectsextraterritorial-application-of-securities-exchange-act/> accessed 12 December 2010.
2 WminLawRev 1 71
You Should Never Look a Gift Horse in the Mouth: One-Size-Fits-All Compensation in Wrongful Conception Jack Clayton Thompson* Abstract This article reconsiders the House of Lords decision in Rees v. Darlington Memorial Hospital NHS Trust (2003) and the decision to award a conventional award of ÂŁ15,000 in all cases of failed sterilisation resulting in the birth of an unwanted child. In so doing, it briefly recites the history of the Wrongful Conception action and the unique facts of Rees. It then goes on the consider the implications of two fundamental aspects of the judgment. Firstly, it looks at the 'conventional award' itself and considers the reasoning behind the award and the effect that it has on our understanding of (particularly women's) reproductive autonomy. Secondly, it analyses the rather 'unique' judgment of Lord Scott and his decision to evaluate these cases using the possessory analogy of an unwanted foal; particular focus is given to the notion of parental 'choice' in these cases and whether mitigation (i.e. abortion or adoption) can ever be considered "reasonable". Table of Contents
Introduction .................................................................................................................................. 73
Wrongful Conception .................................................................................................................... 73
III The Facts ....................................................................................................................................... 74 IV The House of Lords........................................................................................................................ 76 V
Comment ....................................................................................................................................... 77
VI Conclusion ..................................................................................................................................... 93 VII Bibliography .................................................................................................................................. 94
2 WminLawRev 1 72
INTRODUCTION This article reconsiders the, now nine year old, House of Lords’ decision in Rees v. Darlington Memorial Hospital NHS Trust337, which was, to say the least, a novel claim that found resolution in a previously unheard of approach. It was novel because of the solution which was adopted by the House of Lords to resolve the issue of compensating for Wrongful Conception.338 Ms Rees presented the courts with a set of factual circumstances that had not been envisaged in the development of the law in this country or any other, it was the first case which concerned the health of the parent rather than the child. This article will begin by giving a brief explanation of Rees and the prior decisions which led to the adoption of such a novel and, it is submitted, highly unconventional approach. It will show that, despite an unwillingness to reconsider it, the Mcfarlane decision no longer stands as the highest authority in this area; Rees is, at least, on a par with it. In the main body the article will then go on to critically consider the adoption of the conventional award, and the justifications given for and against it, and the use of Lord Scott's professional negligence analogy. In so doing, some wider criticisms of the judiciary's approach to these cases will be made in context.
WRONGFUL CONCEPTION Essentially, wrongful conception is a claim of clinical negligence; so the claimant must prove that there was a Duty of Care which was breached and this caused the ‘harm'. It is the harm involved which leads us to give these claims a distinct nomenclature of ‘wrongful conception’. A claim of wrongful conception arises where a patient has sought sterilisation as a means to avoid the use of contraceptives and to avoid the birth of an (at least originally) unwanted child. As a result of negligence on the part of the medical practitioner in either the performance of the procedure itself or in the provision of post-operative advice this has proved ineffective, the mother has subsequently become pregnant. The essence of the claim is that, because of the medical practitioner's negligence, the claimants have, contrary to their wishes and intentions, been burdened with the unwanted process of pregnancy and parental responsibilities, the very consequences that medical intervention was sought to avoid. The damage is essentially split in to two elements. In the first, the ‘Mother’s claim', the damage claimed for arises as a result of the pregnancy and birth itself, for example the pain and suffering and loss of amenity. In the second, the damage claimed for is the financial burden of rearing the child up until the age of majority. It is this second claim which has proved particularly controversial. As medicine advances, especially in the realms of procreation, it is understandable that so do common attitudes concerning sex, contraception, abortion, marriage, divorce and our autonomy * PhD Candidate, University of Westminster School of Law 337
 UKHL 52,  1 AC 309.
These actions have also been called “Wrongful Pregnancy”; “Wrongful Conception" is preferred as a more accurate statement of the wrong which is suffered in these claims. It should also be noted that this claim is fundamentally different from the other legally viable 'Reproductive Tort’; Wrongful Birth. Whilst in the present case the negligence causes the sterilisation procedure to fail; in Wrongful Birth the claim is that the negligent pre-natal counselling meant that there was not an opportunity to abort the previously wantedpregnancy. 2 WminLawRev 1 73
more widely. It is a hardly surprising that in modern society '[s]ex is no longer inevitably tied to procreation’.339 As one eminent Australian judge has noted, courts must be aware of the fact of, ‘non-married, serial and older sexual relationships, widespread use of contraception, same-sex relationships with and without children, procedures for ‘artificial’ conception and widespread parental election to postpone or avoid children’.340 The courts’ ability to recognise these claims in the UK has been as a result of the law of tort's ability to develop, as society does, and widen the definition of ‘harm’ to encompass pregnancy and childbirth.341
THE FACTS Ms Rees was diagnosed at the age of two with ‘Retinitis Pigmentosa’, a genetic condition which caused her blindness in one eye and only partial sight in the other. In 1995, at the age of 23, she was referred, at her request, by her GP to a consultant gynaecologist at Darlington Memorial Hospital to be sterilised. In the referral letter eight points were noted. It was explained that Ms Rees was (1) registered partially sighted, (2) her vision had deteriorated over recent years, (3) she had recently given up work, (4) she had struggled to find a suitable method of contraception - at times requesting the morning after pill – but (5) was adamant that she did not nor ever would want children, (6) felt her eyesight would impede her ability to look after a child, (7) was anxious about her health and (8) scared by the prospect of labour and childbirth. She was aware that the procedure was irreversible but remained adamant at the consultation that she did not wish to have children. On 18 July 1995, the procedure was performed; however, the consultant negligently failed to occlude the fallopian tubes. Ms Rees was unaware that the procedure had failed. A year later she became pregnant and on 28 April 1997 gave birth to her son, Anthony. His father had no desire to be involved in his upbringing. She raised him herself with assistance from her mother and other relatives. Whilst there was a low risk that Anthony may have inherited his mother’s condition he otherwise was a healthy and normal child. On 21 September 1999, Ms Rees issued proceedings in the County Court claiming the costs of bringing Anthony up to the age of majority which would be incurred by a healthy parent as well as
Nicolette Priaulx, “Rethinking Progenitive Conflict: Why Reproductive Autonomy Matters?” (2008) 16 Medical Law Review 169-200, 169. 340
Cattanach v. Melchior  HCA 38 (Aus),  (Kirby J).
This is not to say that acceptance of the action has been straightforward; Udale v. Bloomsbury Area Health Authority  2 All ER 522. See also: Macfarlane v. Tayside Health Board (1997) SLT 211 (OH), 214 (Lord Gill), ‘In my view, a pregnancy occurring in the circumstances of this case cannot be equiparated with a personal injury. Pregnancy and labour are natural processes resulting in a happy outcome…’ cf: Thake v. Maurice  2 WLR 215 (HC), 230: ‘By 1975, family planning was generally practised. Abortion had been legalised over a wide field. Vasectomy was one of the methods of family planning which was not only legal but available under the National Health Service. It seems to me to follow from this that it was generally recognised that the birth of a healthy baby is not always a blessing’. 2 WminLawRev 1 74
those additional costs she would incur by reason of her disability342. At this time Emeh v. Kensington, Chelsea and Westminster Area Health Authority343 was the highest authority in wrongful conception. The Court of Appeal had ruled that the recovery of damages for the costs of raising the uncovenanted child344 were available and there were no grounds of principle or policy which prevented this. Shortly after proceedings were issued, in November 1999, the House of Lords, in Mcfarlane v. Tayside Health Board345, took a different view by holding that the post-birth losses were not recoverable. It is, for the purpose of this article, sufficient to accept the ratio of Mcfarlane as it was described by the court in Rees.346 First, it is impossible in monetary terms to accurately calculate the respective benefits of avoiding the birth and having a healthy child.347 Second, ‘society itself must regard the balance as beneficial... it is morally offensive to regard a normal, healthy baby as more trouble and expense than it is worth’348. The House had therefore decided that the costs for rearing the child were unavailable in cases where the child was born healthy – leaving open the question of whether costs, at least those additional costs, could be recovered in cases where the child was born with a disability. The Court of Appeal then heard Parkinson v. St James and Seacroft University Hospital NHS Trust349 in April 2001. It held that a parent was able to recover those costs 342
It is worth noting that at the hearings there was no evidence submitted on behalf of Ms Rees that she would suffer any greater financial loss or the extent to which might be incurred. See: Clare Dixon, “An Unconventional Gloss on Unintended Children” (2003) 153 New Law Journal 1732: ‘Perhaps her additional costs will prove to be like the snail in a certain ginger [beer] bottle: extremely important – but was it ever there?’ 343
 QB 1012 (CA).
The term “Uncovenanted Child” is preferred to “Unwanted Child” by the author for the same reasons given by Kenyon Mason & Graeme Laurie, Mason and McCall Smith’s Law and Medical Ethics 8th Ed (OUP, 2011) 338. For legal use of the term, see: Richardson v. LRC Products Ltd (2001) 59 BMLR 185, 195 (Kennedy J). 345
 2 AC 59 (HL).
It should be noted that this is because of the lack of space and strict relevance; there is still plenty to be said about Mcfarlane (n 8) and whether this is the true ratio or not is up for debate. It is worth noting that this "ratio" was not explicitly referred to during the course of the judgment in that case. I would prefer to recognise that each member of the House took a different means to reaching their respective conclusions and there are numerous factors which their Lordships considered – the undertone of the majority, however, may be expressed as rejecting the post-birth losses as pure economic loss which failed the Caparo v. Dickman  2 AC 605 fair, just and reasonable test. The House was also particularly apprehensive of the magnitude of the awards on the financially stretched NHS – recognised by Lord Bingham (Rees (HL) (n 1), ) - it is clear that the House thought the damages were disproportionate to the fault. 347
Rees (HL) (n 1), Lord Steyn, ; Lord Millett, -
Mcfarlane (n 9), Lord Millett, 113-4.
 EWCA Civ 530,  3 WLR 376. 2 WminLawRev 1 75
which were above and beyond the normal costs of raising a healthy child incurred as a result of the child's disability. On 1 May 2001, the High Court heard a preliminary issue to determine whether, in light of Mcfarlane, any part of the costs of bringing up Anthony, a healthy child, were available on account of Ms Rees’ disability350. Stuart Brown QC found that he was bound by the House of Lords decision and subsequently Ms Rees could not recover any of the costs for raising Anthony. The matter then came before the Court of Appeal, in which Hale LJ succinctly recognised that the issue was, ‘does the House of Lords’ decision in McFarlane mean that none of the costs of bringing up a healthy child can ever be claimed whatever the circumstances or can it be distinguished in the particular circumstances of this case?’351 By a majority,352 the court held that the disabled parent was able to recover those extra costs, which were attributable to and incurred as a result of her disability, involved in discharging her parental responsibility to the child.
THE HOUSE OF LORDS The Trust appealed the decision and the House of Lords, by a bare majority, allowed the appeal but in so doing attached an important caveat. Ms Rees had invited the House to reconsider Mcfarlane, in light of widespread criticism, but the panel of seven unanimously declined; finding that it would ‘reflect no credit on the administration of the law if a line of English authority were to be disapproved in 1999 and reinstated in 2003 with no reason for the change beyond a change in the balance of legal opinion’.353 By a majority of 4:3, the House held that Rees could not be distinguished from Mcfarlane and so the additional costs could not be recovered - the mother's disability did not alter this. The majority instead suggested that the real harm which was suffered in these cases was the ‘denial of an important aspect of…personal autonomy, viz the right to limit the size of their family’354. This, it was said, justified the ‘gloss’ of £15,000 by way of general damages as a nonderisory, non-compensatory, non-nominal, "conventional" award which would recognise the infringement to the parents’ autonomy355. Lord Bingham preferred that the conventional award be available in addition to the mother's claim; presumably replacing the rearing costs that were no longer available. Pinning his award to the loss of autonomy, his Lordship noted: To speak of losing the freedom to limit the size of one's family is to mask the real loss suffered in a situation of this kind. This is that a parent, particularly (even today) the mother, has been denied, through the negligence of another, the opportunity to live her life in the way that she wished and planned. I do not think that an award immediately 350
Rees v. Darlington Memorial Hospital NHS Trust (unreported, 1 May 2001).
Rees v. Darlington Memorial Hospital NHS Trust  EWCA Civ 88,  QB 20, .
Walker and Hale LJJ; Waller LJ dissenting.
Rees (HL) (n 1),  (Lord Bingham).
ibid  (Lord Millett).
ibid  (Lord Bingham). 2 WminLawRev 1 76
relating to the unwanted pregnancy and birth gives adequate recognition of or does justice to that loss.356 Recognising that Mcfarlane is an exception to the normal rules of tort law, the majority criticised an approach of carving out exceptions to the exception. The House acknowledged two reasons for not awarding full compensation: (1) the birth of a healthy child is a blessing and it would be contrary to public morality to deem it to be compensable loss, and (2) though the parents did suffer the detriment of additional costs they also experienced the benefit of raising the child. The award of a modest, ‘conventional’ sum did not compensate the parents fully, which would be unjust enrichment, but did go some way to recognising the wrongdoing done to them. The minority found that the award was a novel procedure for judges that risked ‘straying into forbidden territory’357 so was a matter for Parliament and instead preferred to allow for the additional costs to be recovered.358 The award was not supported by any authority within the UK or elsewhere and had not been raised in any of the earlier cases.359 It was therefore a ‘backdoor evasion’360 of the legal policy enunciated in Mcfarlane.361 It was more appropriate, and intra vires of the court’s discretion, to recognise an exception to the “rule” based on the special requirements of the parent.
COMMENT What this sequence of cases shows is that if the Law Lords…are to take their law making function seriously… they must, at least, be prepared to contemplate the possibility that it
ibid  (Lord Steyn).
ibid - (Lord Steyn); - (Lord Hope).
With the exception of Lord Millett in Mcfarlane (n 9) who proposed a similar award but in rather different circumstances and values - he had proposed an award of £5,000 instead of both the mother’s claim (the pre-birth losses; such as pain and suffering, loss of amenity etc.) and the costs of rearing the child - though he did in Rees (HL) (n 1)  that he would have awarded it to both parents and that he had been persuaded that, on reflection, it should be ‘a purely conventional one which should not be susceptible of increase or decrease by reference to the circumstances of the particular case’ and so he agreed with Lord Bingham’s figure of £15,000 (). 360
Rees (HL) (n 1),  (Lord Steyn).
In Mcfarlane (n 9) it was only Lord Millett that spoke of ‘legal policy’ the others had shied away from the policy debate and denied its relevance; however, in Rees (n 1) Lord Bingham ; Lord Steyn ; Lord Hope ; and Lord Millett  all explicitly found that Mcfarlane had been based on legal policy. 2 WminLawRev 1 77
may be dangerous to consider individual cases too much in isolation… Stumbling from one set of facts to the next is, as Rees shows, a formula for confusion and instability…362 This case raises a number of issues of its own but also goes someway toward resolving others that, due to the myopic approach of the House in Mcfarlane, had been left open. The purpose of this comment is to deal with two aspects of the judgment which are, firstly, important in their own right and, secondly, will open the door for investigation of some of the wider issues surrounding this case and the common law more generally in this area. To this end, it will first look at the nature of the ‘Conventional Award’ and some of the implications surrounding the support given for that award by the majority and the criticism which it received by the minority. It will then look more closely at the judgment of Lord Scott and the comparisons his Lordship draws with another, ‘analogous’, case of professional negligence. A Very (Un)Conventional Award In the four years between Mcfarlane and Rees there were seventeen individual judgments363 across four key cases in which there were a myriad of views and approaches proposed exemplifying the difficulty of these cases and the challenge, ‘if not incoherence’364, that Mcfarlane poses. It is worth, at this point, briefly reciting what happened in Mcfarlane. Mr and MrsMcfarlane had been assured of the husband’s sterility after his vasectomy procedure; on this advice they dispensed with contraceptive methods and the wife became pregnant with their fifth child. MrsMcfarlane claimed damages for the harm suffered through pregnancy and birth and both husband and wife claimed the costs of rearing the healthy child until maturity. The majority of the House accepted the wife's claim with relative ease as constituting actionable physical harm. There was complete agreement in the House that the costs of rearing the child were not recoverable, though there were a number of techniques adopted in reaching this conclusion; these differing approaches mean that Mcfarlane is not a straightforward judgment. It is enough here, again, to accept that it was based on the two reasons given in Rees as the ratio of the judgment365 – which were clearly policy reasons. Baroness Hale has claimed, ‘At the heart of their reasoning was the feeling that to compensate for the financial costs of bringing up a healthy child is a step too far’.366 The problem with this is that no matter how one puts it, it seems disingenuous to the parents to assert that the unsought child is a ‘blessing’ which justifies the departure from the well-established tortious principles. It may seem a step too far for those who hold children in that regard. However, to those parents who, for whatever 362
Peter Cane, “Another Failed Sterilisation” (2004) 120 Law Quarterly Review 189-93, 190-1.
I feel justified in disregarding the judgment of Sir Martin Nourse in Parkinson (n 13)  in which he was content to simply say ‘I agree’. 364
Nicolette Priaulx, The Harm Paradox: Tort Law and the Unwanted Child in an Era of Choice (Routledge-Cavendish, 2007), 71. 365
These were: (1) the impossibility of balancing the respective benefits and burdens; and (2) the fact that society must hold the balance to be beneficially. 366
Baroness Hale, “The Value of Life and the Cost of Living – Damages for Wrongful Birth” (2001) 7 British Actuarial Journal 747-63, 755. 2 WminLawRev 1 78
reason, opt to forego the possibility of procreating, compensating for negligence causing that outcome seems no less reasonable than to compensate for some other physical injury caused by clinical negligence. It is hardly surprising that in the face of this confusion that there were attempts by the lower courts to subvert the harshness of Mcfarlane and a growing wave of academic criticism367. The law, having ‘found the ‘answer’ in more nebulous concepts of benefits, blessings, and of course, our trusty commuter, the oracle of distributive justice’,368 was accused of coming ‘adrift from principle’369 and served as a warning for commonwealth jurisdictions ‘against following the same course’.370 Whilst it was hoped that in Rees the House might make a swift U-turn it was not to be371. The House was unanimous that a previous decision, given only four years earlier, could not be overruled simply because a differently constituted court concluded that a different approach should be taken – this was not the effect of the 1966 Practice Statement. One may well wonder whether this is precisely what this was the effect which was the intention to achieve. Surely, if the conclusion that a different approach should be taken is based on the fact that the original decision was causing an injustice this will justify overruling it? Given that the majority’s reasoning behind the conventional award, as we shall see, was based on the conclusion that to award nothing for a legal wrong suffered was unjust, was this alone not enough for the court to justify, at least, revisiting the previous decision? The direct challenge to Mcfarlane had seemingly failed. The challenge to Mcfarlane ‘pure’372, however, did not. A 'gloss’ was added by a bare majority of the seven strong House to ease the harshness of Mcfarlane ‘pure'; the ‘conventional’ award of £15,000 would go someway towards making up for the unavailability of the maintenance costs. Thus the child remains a blessing such that, at least in the 367
See: J Thomson, “Abandoning the law of delict?” (2000) Scots Law Times 43; Hoyano (n 32); Cane (n 22); Cameron-Perry (n 57); Booth (n 57); Priaulx (2007) (n 28); Mason (2007) (n 40). See also, for support of the pre-Mcfarlane position: Alastair Mullis, “Wrongful Conception Unravelled” (1993) 1 Medical Law Review 320-335. For US support, see; Patricia Baugher, “Fundamental Protection of a Fundamental Right: Full Recovery of Child-Rearing Damages for Wrongful Pregnancy” (2000) 75 Washington Law Review 1205-1236. 368
Priaulx (2007) (n 28), 72. See: Mcfarlane (n 9), 82 (Lord Steyn) for reference to the 'oracle of distributive justice'. 369
Laura Hoyano, “Misconceptions about Wrongful Conception” (2002) 65 Modern Law Review 883906, 900. 370
Cattanach (n 4)  (Kirby J).
Kenyon Mason, "Wrongful Pregnancy, Wrongful Birth and Wrongful Termination” (2002) 6 Edinburgh Law Review 46-66, 66: “Most importantly, it shows the way by which a future panel of the House of Lords – possibly one by now including a female member – could retreat from Mcfarlane with good grace and no loss of face.” See also: Priaulx (2007) (n 28), 72. 372
This term is used to refer to the Mcfarlane rule in its unaltered form; essentially the legal position pre-Rees. 2 WminLawRev 1 79
eyes of society, s/he cannot be the basis of an award of damages; albeit a blessing whose imposition on the parents is enough to base an award of £15,000. It is clear that Mcfarlane ‘pure’ no longer stands. Ironically, nor would it have stood had the balance been shifted in favour of the minority approach. A shift from compensation being unavailable to the conventional award is a fairly large move, especially given that the parents were so unharmed by their blessing. Whilst the factual variant, the parent's disability, was unforeseen before Rees, the case covers essentially the same ground as Mcfarlane - it concerns a claim in which the uncovenanted child is healthy. Despite their emphasis on Mcfarlane being sound, the minority still took the view that those extra costs ought to be available, in spite of accepting the arbitrariness of allowing an award on this basis when other parents in equal or greater need financial, physically or mentally will be unable to recover. In a Canadian case shortly after Rees, Groberman J said: It appears to me that the decision to award “conventional damages” is a substantial retreat from the approach taken in McFarlane… I see these variations as recognition that the Limited Damages approach, whatever its merits, does not succeed in adequately compensating parents in wrongful… [conception] actions.373 Perhaps the House was influenced to make the concessions by the claimants in the case before them. In Mcfarlane, the claimants were a married couple with a ‘happy’ family of five healthy children and the new addition was a much-loved, cherished member of that family. In Rees, meanwhile, the mother before them was a severely visually disabled woman, unable to work, adamant she did not want any children and fearful of what would happen if she did, sterilised at the age of 23 and with child at the age of 25, the father of whom played no part in his life. It hardly seems surprising that Ms Rees tugged at the House's sympathy while the McFarlanes did not. Turning now to the conventional award itself, it is striking just how unconventional it really is. It had found favour with Lord Millett in Mcfarlane but even there the award was far removed from that which was proposed in Rees, even if one accepts that his Lordship had intended it to be available to both parents374, that award would have consisted of £5,000 and would have been awarded instead of both the pre-birth injury and the maintenance costs. At that time, however, Lord Millett's proposed solution received little attention from his colleagues in the House. By the time Rees was heard, there had been a shift in the judicial mindset; the abhorrence that parents were claiming for 373
Bevilacqua v. Altenkirk, 2004 BCSC 945 (Can (SC)), 63 (Groberman J). In this case, the mother was awarded the sum of $30,000 (£11,939 – at 24 February 2004) for both the pre-birth and the postbirth aspects of her claim whilst the father was also awarded the sum of $20,000 (£7,959– at 24 February 2004) which was admittedly for the non-pecuniary losses associated with rearing the child. Back dated currency figures acquired using <http://finance.yahoo.com/currency-converter>, accessed 24 May 2012. 374
Rees (HL) (n 1),  (Lord Millett). Interestingly if this had been Lord Millett's intention originally, one may well ask where exactly the fairness would be in awarding the sum twice when the parental unit are still together and only once when they are separated; simply, the Mcfarlanes would have been award £10,000; whilst Ms Rees would only have received £5,000, surely the latter would have a far greater need for the larger sum given that she was raising the child alone, though admittedly with assistance, and struggling to cope with her own disability. 2 WminLawRev 1 80
the birth of a child, who was, invariably, a blessing and, whether the parents accepted it or not, society was sure that it always would be a blessing, had mellowed. The inclination that justice was not being done was clear to see when Lord Nicholls stated, ‘an award of some amount should be made to recognise that...the parent has suffered a legal wrong, a legal wrong having a far-reaching effect on the lives of the parent and any family she may already have’.375 Surely the fact that a legal wrong has been suffered, especially one having such a far-reaching effect, is a suitable reason to follow the normal principles of tort law? If the 'limited damages approach’ was not doing justice, the House ought to have paid more attention to why this was. The award itself, as noted, had nothing to do with the financial burden of raising the child but instead was pinned to the loss of autonomy which the parent(s) suffered.376 Unfortunately, as Mason notes, ‘it is hard to find a commentator who does not, at this point, start to scratch his or her head’.377 Lord Bingham’s award in Rees, after all, applies in the situation which was covered by Mcfarlane, the birth of a healthy child, and applies quite differently from that covered by Lord Millett’s suggestion. It is difficult to see how the suggestion that ‘the point is still open for consideration without the need to depart from the decision in Mcfarlane’378 can be sustained unless one is to admit that its basis is the result of ‘a change in the balance of judicial opinion’ 379 which was the unanimous reason given by the House for not reconsidering Mcfarlane. Nor could one easily deny the suggestion that ‘quite simply, Mcfarlane no longer stands as good law in light of Rees’.380 The most that can be said for Mcfarlane is that it is on a par with Rees. If Mcfarlane truly remains good law, then the oracle of distributive justice may well ask how the legal policy enunciated in 1999 had made way to the admission that there was a wrong which deserved compensating for in 2003. If the answer is that either the judicial mindset had soften or there was a feeling that justice was not being done - each of which could be described by the obdurate statement; "a change in the balance of judicial opinion" - surely the solution would have been to reconsider the previous judgment. If it was wrong it ought to be righted sooner rather than later. It is now necessary to consider on what each of their Lordships based the conventional award. As noted, Lord Bingham in his mind considered that though the award would recognise the harm that had been suffered, pinning it to the loss of autonomy to the mother, rather than the parents381, it
Rees (HL) (n 1),  (Lord Nicholls).
ibid  (Lord Bingham).
Kenyon Mason, The Troubled Pregnancy: Legal Wrongs and Rights in Reproduction (CUP, 2007), 176. 378
Rees (HL) (n 1),  (Lord Millett).
Cane (n 26), 190.
Nicolette Priaulx, “That’s One Heck of an ‘Unruly Horse’! Riding Roughshod over Autonomy in Wrongful Conception” (2004) 12 Feminist Legal Studies 317-31, 327. 381
An interesting point here is that in cases, such as Mcfarlane, where it is the father who is sterilised, it is the mother who would recover the award for the infringement to her autonomy. One 2 WminLawRev 1 81
would not be the ‘product of calculation’ nor would it be ‘a nominal, let alone a derisory award’.382 Lord Bingham’s favour for such an approach is not altogether all that surprising considering that one year earlier383 his Lordship had expressed his support for the following extra-judicial comment by McLachlin J: Tort law is about compensating those who are wrongfully injured. But even more fundamentally, it is about recognising and righting wrongful conduct by one person or a group of persons that harms others. If tort law becomes incapable of recognising important wrongs, and hence incapable of righting them, victims will be left with a sense of grievance and the public will be left with a feeling that justice is not what it should be.384 Similarly, Lord Nicholls recognised that the birth of a child should not be comparable to a personal injury.385 The award recognised the legal wrong that had been suffered386 and served to avoid means-testing the finances of a family; instead allowing a modest lump sum to be given in every case.387 Lord Millett, meanwhile, reminded us that his opinion was still: [T]o award the parents a modest conventional sum…not for the birth of the child, but for the denial of an important aspect of their autonomy, viz the right to limit the size of their family…which is increasingly being regarded as an important human right which should be protected by law. The loss of this right is not an abstract or theoretical one… [T]he parents have lost the opportunity to live their lives in the way that they wished and planned to do. The loss of this opportunity, whether characterised as a right or a freedom, is a proper subject for compensation by way of damages.388
might wonder how it is exactly that the father’s autonomy is left unaffected. This point will, unfortunately, have to be left for another time given the lack of space. 382
Rees (HL) (n 1),  (Lord Bingham).
Fairchild v. Glenhaven Funeral Services Ltd and others  UKHL 22,  (Lord Bingham).
McLaughlin J, "Negligence Law - Proving the Connection", in edMullany and Linden Torts Tomorrow, A Tribute to John Fleming (LBC Information Services, 1998), at 16. 385
ibid  (Lord Nicholls).
ibid  (Lord Nicholls).
ibid  (Lord Nicholls).
ibid  (Lord Millett).For an explanation of the difference between 'right’ and ‘freedom’, see: Wesley Hohfeld, Fundamental Legal Conceptions 3rd Ed (Yale University Press, 1964), 36-50. 2 WminLawRev 1 82
Finally, Lord Scott considered that the award was to put a monetary value on the frustration of her expectation that sterility would be achieved and, as she was owed a duty of care, to be deprived of that expectation by reason of the doctor’s negligence was an appropriate basis for such an award.389 With this varying opinion as to what was the legal wrong that needed righting, it is hardly surprising that Lord Hope was concerned by ‘the lack of any consistent or coherent ratio in support of the proposition’390. Perhaps more surprising, though, is Mason’s perception of the award as ‘a form of conscience money or as a charity designed to offset the sense of injustice’391 arising from Mcfarlane. Given the lack of a strong unifying ratio in Mcfarlane, where the Law Lords had struggled to explain why the maintenance costs were unavailable without appealing to spurious and nebulous concepts to do so, was it shocking, or surprising, or even unapprehended, that an attempt to subvert the harshness of that decision would be, to say the least, unclear? This is not to say the majority were correct in doing so. Rather it is to say that, at the very least, there was a consensus amongst the majority that there was a need for compensation because a legal wrong had been suffered; rather than the masked appeals to public policy used to subvert the claimant’s legal rights in Mcfarlane. However, as Pedain argues, there remain reasons to be concerned: If the event which has these consequences is, in law, beneficial, what then is the justification for giving general damages where special damages have been refused?... [I]f it is not compensatory, it is even less clear on what legal basis it can be awarded at all. And is it not bound to make some members of the public, whose moral sensitivities their Lordships were so concerned about in Mcfarlane, uncomfortable to learn that you get £10,000 under the Fatal Accidents Act 1976 for losing a child through another's negligence, and £15,000 at common law for having one?392 What then, were the arguments of the minority against such an award? Lord Steyn was perhaps the most fervent in his criticism of the award, describing it a ‘backdoor evasion' on the Mcfarlane rule393 having already questioned the existence of there being any authority to support it and suggesting that the creation of an award of this type was solely within the vires of Parliament394 – ironic, given
See: Rees (HL) (n 1),  (Lord Scott). Seemingly leaning closer to the approach which would allow for full compensation; as we shall see later however, the full judgment of his Lordship precludes this. 390
ibid  (Lord Hope).
Mason (2007) (n 40), 178.
Antje Pedain, “Unconventional Justice in the House of Lords” (2004) 63(1) CLJ 19-21, 20-1.
Rees (HL) (n 1),  (Lord Steyn).
ibid  (Lord Steyn). 2 WminLawRev 1 83
the criticism levelled towards the Mcfarlane decision for exceeding the ambit of viable judicial considerations of ‘policy'.395 As Mason argues: However one likes to look at it, in the end, the Mcfarlane decision removes this right [to compensation under the orthodox application of the law of tort] on the grounds of legal policy. Any conflict between a legal right and legal policy is normally settled at the stage recognition of that right. In Mcfarlane, it is being resolved at the stage of quantification of compensation for breach of a right – which is a new departure… They were, thus, on the horns of a self-made dilemma – and this must be the anomaly that the House was anxious to set aside.396 (Un)Conventional Justice Whilst the Rees ‘gloss’ undoubtedly produces a far more benevolent end than did Mcfarlane 'pure’, to what extent can it be said that applying a flat rate award to all cases be said to achieve the justice it sets out to? Cases in which claimants will surely be situated in a range of circumstances, where the injury suffered is at the very least ‘variable’, and where it remains unclear whether we are compensating or simply recognising a wrongdoing. The award may be pleasing to a National Health Service, which is ‘always in need of funds to meet pressing demands’397, given that the need to negotiate over the intricacies of projected expenses is removed in favour of a one-size-fits-all award which can be handed out fairly swiftly without any great fear of additional litigation costs if settlement cannot be reached398. Simple to administer though it may be, can it really be said to be fair?399 Whilst it has been suggested that the ‘beauty of such an award is that it makes no unjustly arbitrary distinction between the claimants, all of whom will receive the same award’400, it is difficult to comprehend quite how an award, pinned to the interference with an individual claimant's autonomy, which deems all victims to be identically situated actually respects their autonomy.401 If
See: Priaulx (2007) (n 28); Mason (2007) (n 33); J Ellis Cameron-Perry, “Return of the Burden of the ‘Blessing’” (1999) 149 New Law Journal 1887; Penny Booth, “A Child is a Blessing – Heavily in Disguise, Right?” (2001) 151 New Law Journal 1738.cf Tony Weir, “The Unwanted Child” (2000) 59(2) CLJ 238-41. 396
Mason (n 40), 179.
Rees (HL) (n 1),  (Lord Bingham).
On the point, see: Alasdair Maclean, “An Alexandrian Approach to the Knotty Problem of Wrongful Pregnancy: Rees v. Darlington Memorial Hospital NHS Trust in the House of Lords” (2004) 3 Web JCLI - <http://webjcli.ncl.ac.uk/2004/issue3/maclean3.html>, accessed 18 May 2012. 399
Nicolette Priaulx “Damages for the ‘Unwanted' Child: Time for a Rethink?” (2005) 73 MedicoLegal Journal 152-163, 161. 400
See: Priaulx (2005) (n 62), 162: ‘Moreover, given that the conventional award is said to recognise the reproductive autonomy of individuals and their 'right to limit the size of their family', which is 2 WminLawRev 1 84
the award is said to reflect something as intensely personal and individual as autonomy, surely the correct approach would be to emphasise the dignity and respect of that person and not simply ‘pay mere lip service to the value of autonomy’.402 As Priaulx argues: If the law is truly to respect individual autonomy, then it must be recognised that a ‘self’ is always implicated in that concept – whether the harm is founded in disability, or indeed located in isolation, poverty and hardship – the experience of unsolicited parenthood will be different in each situation, based on differential experience, lives and aspirations.403 The courts should apprehend the fact that their decision to forego compensation applies in claims ‘in the particular given circumstances of childbirth and child-rearing, circumstances that biologically and socially pertain to the female experience and traditionally fall within the domain of women’.404 Their decision to treat the loss of all women’s reproductive autonomy as equally felt does nothing to soften the discriminatory message. Is it, however, all that surprising that members of the Judiciary, even in the highest appellate court, ‘from the skewed masculine viewpoint of a father whose almost exclusive role lies in economic provision’405, failed to properly comprehend a loss that is suffered inevitably mostly by the mother. Having advocated a view which suggests that a child is or ought to always be thought as, on balance, a benefit, the courts have left open the question of how this sits with other policies which are accepted by law. Unfortunately, it does not sit well. How can the promotion of the idea of family planning be reconciled with the view that, despite the disappointment of the initial failure, the uncovenanted child is a benefit? If the duty of parenthood is such a benefit, why as a society do we recognise the need to allow persons to divest themselves of that duty? If the courts are to show respect for the unavoidably different situations women and men find themselves in in relation to reproduction, they ought to begin by recognising that the obligation involves more than merely financially caring for and subsequently benefitting from the child’s existence. This is, after all, an obligation which attaches automatically to the mother and centres, not around financial support but, around caring for the child. The conventional award treats the mother's loss of autonomy as a one-off incident where her expectations are frustrated or opportunities lost which over time will give way to joy and love. Such a view is insidious for the House to take. It overlooks the perennial loss of personal freedom which is suffered by the mother; she is forced to change her lifestyle, submitted to the hands of doctors, unable to rid herself of responsibility without the approval of others, psychologically imbalanced, legally responsible after after all, an 'important aspect of human dignity', one might have some doubts as to how extensive the law's commitment to reproductive autonomy really is. The conventional approach not only risks ‘pleasing no one', but if applied across the board...will only further entrench the manifest unfairness that results from its application’. 402
Priaulx (2007) (n 28), 78
Cattanach (n 4),  (Kirby J).
Alasdair Maclean, “Mcfarlane v Tayside Health Board: A Wrongful Conception in the House of Lords?” (2000) 3 Web JCLI, <http://webjcli.ncl.ac.uk/2000/issue3/maclean3.html>, accessed 28 May 2012. 2 WminLawRev 1 85
birth and obliged to care for and supervise the child until it is able to take care of itself, and much more. In the face of this all, how can it be said that a flat-rate award labelled as recognising (rather than protecting) her autonomy is adequate compensation? The reasoning behind creating the conventional award is clear; Mcfarlane ‘pure' – and the limited damages approach - was causing an injustice by completely foregoing compensation where a legal wrong had been suffered. The court's attempts to subvert this harshness by allowing additional costs where there was a disability, in either parent or child, were creating indistinct and arbitrary lines which may have satisfied justice in the individual case but would have sacrificed formal justice in doing so. The true basis, or lack thereof, of the award is, however, concerning, as is its strict application as a ‘one-size-fits-all’ measure of the loss of reproductive autonomy where sterilisation procedures fail due to the negligence of the performing doctor. In any event, some four years after the House in Mcfarlane had left open the issue of the claim where the child is disabled, it has once again been left unanswered – it seems likely, though, that that avenue has also been closed. Perhaps most worryingly, nine years on there has not been a single wrongful conception case reported; the implication seemingly being that any dwindling incentive which potential claimants had, which would have allowed some of these unresolved issues resolution, has now been extinguished completely. The 'beauty' of the administrative ease of the award could have removed the wrongful conception claim from the judicial ambit for the foreseeable future at the very least. Never Look a Gift Horse in the Mouth It is now necessary to consider the rather exceptional judgment of Lord Scott that highlights, very aptly, how these cases have a tendency to confuse and conjure emotive reactions even behind the mask of what appears to be essentially 'law speak'. It is hardly surprising that these cases tend to provoke such strong reactions from both commentators and judges alike; Lord Scott’s attempt to resolve the claim in simple terms demonstrates that even the most straightforward analysis can quickly become muddied. Lord Scott began his judgment by recognising that, whether a claim was brought in tort or in contract, the general principle of damages required that the claimant be returned to the position she would have been in had the negligence not occurred or, more accurately, had the baby not been born. This was however, he recognised, rather astutely, complicated by the fact that the case involves the birth of a human being. To avoid this, Lord Scott proposed to approach the issue of damages by way of analogy, considering how professional negligence would look in a context that did not involve these difficulties. This new starting point concerned the negligent performance by a vet of a gelding procedure on a two year old colt; the result being that the colt succeeds in getting a mare in foal whose condition ‘is not discovered until it is too late to do anything about it and in due time the mare gives birth to a healthy foal’.406 Though, the mare (rather fortunately) is undamaged by these events, the owner sues the vet for damages. Lord Scott admitted, with ease, that the veterinary costs associated with
Rees (HL) (n 1),  (Lord Scott). 2 WminLawRev 1 86
the unwanted pregnancy and birth would be recoverable407 but, leaving special claims aside, found it less straightforward to accept the cost of rearing the foal to majority: The proposition that the defendant vet would be liable for such costs seems absurd. It is instructive to ask oneself why that is so. It is absurd, in my opinion, because the owner of the foal does not have to keep it. Its unexpected and originally unwanted arrival would present him with a number of choices. He could have the foal destroyed as soon as it was born. But this would be an unlikely choice for the foal would be likely to have some value and it would cost very little to leave it with its dam until it could be weaned. Or the owner could decide to keep the foal until it could be weaned and then to sell it. Or he could decide to keep it until, as a yearling or a two year old, it had reached a little more maturity and then sell it. Or he could try and add value to it by breaking it in, schooling it and then selling it. Or he could keep it for his own use. Each of these choices, bar the first, would have involved the owner in some expense in rearing the foal. But the expense would be the result of his choice to keep the foal. Moreover, the expense of rearing the foal would have to be set against the value of the foal. The owner could not claim as damages reimbursement of the expenses without bringing into account the benefit.408 So, essentially, the owner can either have the foal destroyed immediately or sell it at some later date? The prior being unlikely because it has some tradable value. This tradable value could be used to offset the expense of rearing it to the point of sale. Already, one may well ask whether this analogy is really a close one, given that the child has no (legally) tradable value. After all, while the mare, the gelding and the foal are all mere property, both mother (and father) and child are autonomous human beings. The colt had no determination over whether it was gelded, nor does the mare have determination over what happens to the foal; the only agent capable of determining an outcome in the analogy is the owner of the horses. They are simple possessions of the owner. There being no difficulty or issue of principle in finding that the owner was unable to claim the rearing costs led Lord Scott to this rather straightforward assessment of the analogous case; he then returned to his astute observation that cases such as Rees and Mcfarlane are complicated by the fact that human life ‘is regarded by society generally and by the law as uniquely precious’409 and fortunately recognising that the child is ‘incapable of value in monetary terms’.410 This meant that the balance between benefit and detriment could not be struck. Or, perhaps, meant that the child could not be sold. Nevertheless the expense of raising the uncovenanted child must ‘result from the decision of the parent(s)...to keep the child’.411 Despite the rather obvious difference in the two claims, after all ‘the originally unwanted progeny is a human being, not an animal’412, there were 407
ibid  (Lord Scott).
ibid  (Lord Scott).
ibid  (Lord Scott). 2 WminLawRev 1 87
comparisons, since ‘if the parents decided, for example, to place the child with an adoption society with a view to adoption, they would not incur those costs and expenses. Nor would they incur them if, for whatever reason, the mother had had the unwanted pregnancy terminated’.413 Nor would they have if it was possible to have the child destroyed at birth, as it was for the owner of the foal.414 One might have been forgiven at this point for wondering whether Lord Scott was preparing to reconsider the mitigation ethic which had seemingly been put to rest long ago.415 After all, Hale LJ had recently made a point that whilst mitigation had been rejected so too had the child maintenance costs, meaning that 'the result of their Lordships' decision could well be that some will have no other sensible option (than to have the pregnancy terminated)’.416 Lord Scott was led to consider the question of ‘choice’ that was presented. Recognising that whilst most parents would not think of their decision ‘as representing a choice’417, realising that the owner of the foal exercises ‘a true choice’418, and for a mix of cultural, moral and religious reasons they are expected to accept responsibility and ensure the well-being of their offspring, which the law reinforces with its own expectations and duties, it may be that there is ‘no parallel in the case of the unwanted foal’.419 So the parents have 'decided' to keep the uncovenanted child, but they have not 'chosen' to keep it? Or, at least, if they have ‘chosen’, it was not a ‘true choice’? Despite accepting that the negligence was the causa sine qua non of the costs and a reasonably foreseeable consequence, this, however, according to Lord Scott, did nothing to answer the question of the economic consequences. Given that the avoidance of pregnancy was the outcome for which the parents sought the doctor's services;420 one may well be inclined to ask: what then of the choice which Ms Rees, and the parents in other cases, did make, the choice to permanently forego their fertility?
ibid  (Lord Scott).
See, for discussion of the argument in favour of so doing: Alberto Guibilini& Francesca Minerva, “After-Birth Abortion: Why Should the Baby Live?” (2012) J Med Ethics (Online) <http://jme.bmj.com/content/early/2012/04/12/medethics-2011-100411.full.pdf+html> accessed 1 June 2012. It should be noted that this article has proved to be very controversial since its publication. 415
The issue had be dealt with in Emeh (n 7), 1024 (Slade LJ): ‘Save in the most exceptional circumstances, I cannot think it right that the court should ever declare it unreasonable for a woman to decline to have an abortion in a case where there is no evidence that there were any medical or psychiatric grounds for terminating that particular pregnancy’. This was later confirmed by Lord Steyn in Mcfarlane (n 9), 81. 416
Parkinson (n 13),  (Hale LJ).
Rees (HL) (n 1),  (Lord Scott).
ibid  (Lord Scott). 2 WminLawRev 1 88
As the question as to compensation was still unanswered, his Lordship set out to find the determinative considerations, which, fortunately, did not involve comparisons with horses that would help to resolve the issue. First, Lord Scott considered that there was no escaping the fact that the expenses which had been sought for recovery from the negligent doctor had been accepted by the parents as a ‘price to be paid’421 for having the child. As the parents had never suggested that ‘the price was not worth paying’, was it right to charge the defendant with the costs of providing the parents with something that was of unique value and yet invaluable?422 As Priaulx has noted, ‘Was it ever suggested by claimants that the 'price was not worth paying?'423 Surely the fact that, as his Lordship had already noted, the parents might have thought they had no choice about whether to keep the child means that it was in reality a price which had to be paid. As it was been noted in a US case: The parents made a decision not to have a child. It was precisely to avoid that “benefit” that the parents went to the physician in the first place. Any “benefits” that were conferred upon them as a result of having a new child in their lives were not asked for and were sought to be avoided. With respect to emotional benefits, potential parents in this situation are presumably well aware of the emotional benefits that might accrue to them as the result of a new child in their lives. When parents make the decision to forego this opportunity for emotional enrichment, it hardly seems equitable to not only force this benefit upon them but to tell them they must pay for it as well by offsetting it against their proven emotional damages. With respect to economic benefits, the same argument prevails.424 Nonetheless, his Lordship was convinced that ‘the impossibility of drawing up a balance fair to both sides seems to me a strong argument why no balance should be drawn up at all’.425 One might well wonder where the fairness in this practice is for the claimant. After all, it is clear that there is a loss, a loss for which a monetary value can be placed, what is unclear is the benefit. Generally speaking, the difficulty in determining a precise figure for the damages award does not justify awarding the victim nothing.426 The court ought to strive to find an appropriate figure to compensate for the wrongdoing.427 The argument may have been more convincing here, if as the House argued in Mcfarlane, Lord Scott had shown apprehension to the possibility that there could be no loss. The 421
ibid  (Lord Scott).
Priaulx (2007) (n 28), 107.
Marciniak v. Lundborg, 1990 153 Wis 2d 59, 450 NW 2d 243 (Wisc SC), Wis 73-4, NW 2d 249.An American wrongful conception case. 425
Rees (HL) (n 1),  (Lord Scott).
Allan Beever, Rediscovering the Law of Negligence (Hart Publishing, 2009), 398.
The principle of compensating in tortious cases has long since been settled but was provided aptly in the oft quoted passage in Livingstone v. Rawyards Coal Company (1880) 5 App Cas 25, 39 (Lord Blackburn): ‘[W]here any injury is to be compensated by damages, in settling the sum of money to be given for reparation of damages you should as nearly as possible get at that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation’.
2 WminLawRev 1 89
possibility, however remote, that there the claimant has not suffered loss surely cannot justify ignoring her assertion that she would have been better off but for the birth of the child, especially in cases such a Rees and Parkinson where the claim is not only for the ‘normal’ costs but also those incurred over and above due to the disability of either the parent or the child. Yet these determinative considerations led Lord Scott to conclude that a departure from the normal rules of tort was justified; the exception being based on the ‘unique nature of human life, a uniqueness that our culture and society recognise and that the law, too, should recognise’.428 So unique, in fact, that it was ‘an acceptable irony’ that the conclusion is the same as the case of the unwanted foal but which had been reached by an entirely different route.429 How different really were the routes? Both essentially came down to recognising that whilst there was a loss suffered by rearing the new addition this was surpassed by the ‘value’ of that addition. The beneficial value meant that a claim for the burden was 'absurd'. The irony seems to be that, for Lord Scott, the foal and the child are essentially the same; it is only their type of 'value' which is different. Lord Scott, though, was not finished, as noted, and went on to consider that the ‘frustration of her expectation that her sterilisation operation would safeguard her against conception satisfies justice’430 and as a result of this frustration she ought to be awarded the conventional award of £15,000. So, the human life so unique and precious that it precludes an award, ironically the same outcome as in the case of a gelded colt, but the ‘frustration’ of having the child is enough for an award of £15,000? Would the ‘frustration' felt by the owner of the foal justify a conventional award? Or is that negated by the tradable value of the foal? If so, is this not simply stating that a child’s commercial value is £15,000? A Horse! A Horse! My Kingdom for… Choice! It may well be asked whether ‘the mother...is intended to be the equivalent of the unharmed mare or the choice-bearing and therefore unharmed owner’.431 Whichever character Lord Scott had in mind for the mother in his analogous scenario, if his Lordship did at all, it is clear that he was far less ambivalent toward the notion of choice than his predecessors had been. Choice, obviously, is a central element in these claims, and the lack of express consideration of it is somewhat disconcerting. It is, after all, hardly surprising that one commentator has noted, ‘It would be foolish to ignore the fact that many people who see no ethical objection whatever to sterilization (which is, after all, no more than a form of contraception) might have the strongest possible objections to abortion of a healthy foetus’.432 For if there is a 'true choice' experienced by the claimants, the courts then should, rightly, be able to assess the idea of mitigation. If, however, there is no choice and 428
ibid  (Lord Scott).
ibid  (Lord Scott).
Priaulx (2007) (n 28), 107-8.
W.V. Horton Rogers, “Legal Implications of Ineffective Sterilisation” (1985) Legal Studies 296-313, at 302. 2 WminLawRev 1 90
parents are forced by their moral, religious, societal, or even circumstantial convictions, the exception to the normal rules of tortious recovery seems far more unjust. The failure to pay due attention to the notion of choice in these claims is understandable considering that it would require consideration over the alternatives - abortion and adoption. Given that assessing mitigation would involve deciding whether the decision not to abort the foetus was unreasonable, is it astounding that the courts preferred not to explicitly decide on the matter? This, however, is uncomfortable ground to stand on; if it was negligence that placed the claimants in the position of having ‘no choice’ how can it be said that they are responsible for the financial implications of being placed in that position? Nonetheless, the courts' attitude appears to be that the decision to keep the child is reasonable because the child is a blessing. Equally, the decision to terminate the pregnancy will be reasonable if it is chosen. No matter how one puts it, a decision is made reasonable by the fact that it was chosen, whether or not this was a ‘true choice', and it is ostensibly for this reason that claimants are responsible for the financial implications. The court's swift backhand to the notion of parent's mitigating their losses is hardly surprising. The lower courts, which is essentially where the issue would be raised in the majority of cases, are hardly equipped to deal with the moral, philosophical, religious and, indeed, legal implications of challenging the parents reasoning, or even simply asking them to justify it, let alone deal with what would constitute an ‘unreasonable’ decision not to procure an abortion. Indeed, few have been more vehement in their rejection of the mitigation ethic than Gaudron J, ‘That would be about the cruellest and most inhumane submission I have heard put in this Court since I have been here. I must say, it took my breath away when I read the judgments below suggesting that that was a proper form of mitigation’.433 If we are to take stock of these objections to challenging the decision not to mitigate, and of course realise the political implications were the courts to begin challenging such ‘decisions’434, we must surely begin to lean, as Lord Scott appeared to, toward there being, at least a possibility, that the 'choice' made and experienced by the parent(s) may not only be a difficult one, but be seen as being no choice at all. It is implausible to say that all will experience the same ‘choice’ and a myriad of factors will influence this. For some abortion is a viable option, for others it is not. For some adoption will make a victim of the child, for others adoption is in the best interests of the child. For some it is selfless to have the child
Nafte v. CES (11 Sept 1996), S91/1996, per Gaudron J.
Though the courts have on one occasion willingly rejected a mother's claim based on a failure to mitigate, it was on rather ‘safer' grounds – Sabri-Tabrizi v. Lothian Health Board (1997) 43 BMLR 190 (Scots (OH)). In this case the mother became pregnant shortly after a failed sterilisation procedure and had the pregnancy terminated. Shortly thereafter, she became pregnant again, this time birthing a stillborn child. The knowledge of her fertility, in respect of the second pregnancy, meant that her conduct was unreasonable in subjecting herself to the risk of pregnancy. Anthony Grubb, "Failure of Sterilisation - Damages for 'Wrongful Conception'" (1985) 44 CLJ 30-2, 31, has also suggested that a failure to have the pregnancy terminated with the sole intention being to recover damages might also constitute a failure to mitigate - though, this seems less likely to occur today than when Grubb was writing his article. 2 WminLawRev 1 91
adopted, for others it is selfless to keep it.435 A balance must be struck between the financial burdens of raising the child and estimating the personal bereavement that will be felt after having an abortion or giving up the child for adoption. A balance which, without experience of raising a child, as was the case for Ms Rees may be extremely difficult for the claimant to begin to attempt, let alone actually weigh. This is not to forget the altruistic reasons, the influence of other parties and various other reasons all factoring in to what is, essentially, a decision which the mother must make. Furthermore, it is unlikely that the motivation of the claimant is going to be minimising their losses. Instead, their concern is likely to be doing what they believe is ‘right’ not only for themselves personally but others who are affected by their choice and, ultimately, the child. Unique, Precious and Entirely Capable of Valuation For Lord Scott, as noted, this was still not determinative of the issue; even if the parents did not have a ‘true choice’, in the sense that as a result of the rejection of mitigation it is possible to think of there being no decision to be made, the only outcome available was to keep and rear the child, this did not provide an answer as to why the parents should be compensated. It was instead the fact that the child is a unique and precious human life which precludes the award of compensation. The fact that there would be a financial burden associated with the duties owed to that unique and precious human being did not alter that, regardless of whether the doctor's services had been sought for the sole purpose of avoiding that child. What, however, does this miss: It is undeniable that some might regard a healthy child as a joy, but…[if] one decides to undergo invasive medical procedures to remove the prospect of parenting responsibilities, can the failure of that procedure be properly described as a ‘joy’ or ‘good thing’…even when that ‘joy’ is thrust upon them?436 The child may well be unique, precious and incapable of valuation; that does not mean it does not carry a cost. At this point it is necessary to return to Lord Scott’s analogy. For his Lordship the fundamental difference between Rees and his analogy was that the child was of ‘unique value but incapable of valuation’437, but there was a far more important difference which though alluded to, in his recognition that Anthony Rees was a human, not an animal, had never been expressly mentioned. The point here is that, whilst the foal, and equally the mare, are living they are not afforded the same respect as the child; they are no more than chattels in the eyes of the law. The life, admittedly, allowed his Lordship the chance to construct a myriad of avenues available to the owner with all but one involving the owner choosing to incur the financial responsibility of rearing the foal. They can, as seen, be reduced to just two. Either the owner can destroy his new chattel or he can sell it at a later 435
See: Katherine Bartlett, “Re-Expressed Parenthood” (1988) 98 Yale Law Journal 295-340, at 323: ‘She may conclude that although she longs to keep her child, the child would be better off with an adoptive family. In these circumstances, her decision to place her child for adoption is an act of selfsacrifice for the welfare of the child.’ 436
Priaulx (2007) (n 28), 4.
Rees (HL) (n 1),  (Lord Scott). 2 WminLawRev 1 92
date, the profit of so doing negating the cost of its upkeep until that time. If, for example, my negligence were to cause you to acquire a priceless painting, you cannot claim that I have caused you loss - you can either rid yourself of it or you can sell it for your own gain. This is not, of course, an option which is available to the parents in wrongful conception cases; for all the talk of the value of children in our society, they have no value in the commercial sense. They are not tradable. The essence of the claim is ‘every baby has a belly to be filled and a body to be clothed'438; it says nothing of metaphysical worth or the sanctity of life or the objectification or commodification of human beings and children; the claim is that the child is the cause of loss to the parent(s). With this in mind, the analogy becomes far less convincing, dubious as it already was, in fact it may be said that Lord Scott's analogy closer resembles the proverb by which this section is titled. The logic of his judgment and those in Mcfarlane seems to be that the parents might have felt they had little or no real choice, but they did have a choice and they exercised it439, and by exercising that choice in that way the parent(s) were not only unharmed but benefitted from having the child; as such, they would be advised never to look a gift horse in the mouth. Or, were some of the earlier inferences to be taken further, it may be found that the need to inspect its mouth is gone; a universal value now exists. Each and every child is unique, precious and entirely capable of valuation and that value is £15,000.
CONCLUSION This article has considered two crucial aspects of the judgment of the House of Lords in Rees. It has also given a brief explanation of the case law which led to the adoption of such a novel and, it is submitted, highly unconventional approach. Despite the House’s clear unwillingness to reconsider Mcfarlane, in light of the damaging onslaught from commentators and attempts to subvert the harshness of its application by lower courts, it is clear that, at least, in its bare form Mcfarlane no longer stands as the highest authority in this area. At a minimum, it can be said that Rees is on a par. Although there was hope at the time that Rees could have been the first case in an ongoing line of cases which would make in roads into Mcfarlane as unwavering binding authority, hindsight has shown us that Rees has removed some of the incentive for claimants to have their case heard thus negating this as a potential outcome. The conventional award, therefore, might have done more damage than good. Though undoubtedly claimants are, financially at least, better off than before, the invariable one-size-fits-all nature of the award leads to questions as to how an approach which treats all victims as having suffered an identical misfortune can truly be said to respect individual reproductive autonomy. It is surely not the case that the only interference with a woman's autonomy occurs when she is frustrated to discover that her expectations have not come to fruition. Even if this is the only interference suffered, is £15,000 an appropriate sum of compensation considering only £10,000 is available to those parents that lose a child? In Rees, the House was again eager to emphasise that the birth of a child is always a 'blessing', or in the eye of society it is, though this was less explicit than in Mcfarlane. Nonetheless, whilst at least recognising that the parents in these cases are not 438
Thake v. Maurice  QB 644, 666 (Peter Pain J).
Rees (HL) (n 1),  (Lord Scott). 2 WminLawRev 1 93
completely unharmed, there remains an implicit feeling that the House believed parents have not truly been injured by the consequences of the doctor’s negligence.440 The problem with this attitude is that it essentially treats the parent's decision to be sterilised as simply wrong and its failure has prevented the parent from making a mistake. The implication being that, therefore, all decisions surrounding family planning which prevent or postpone one from having children, or decisions to have one's progeny adopted, are irrational mistakes. As Beever argues, ‘It is contemptuous of these people to insist that their judgments are simply wrong, because one happens to regard children otherwise’441. Surely this is an attitude that, in modern society, is neither true nor that we wish to adopt. Whilst it is perhaps too much to say that this attitude lives on to quite the extent it did in the wake of Mcfarlane its presence cannot be denied. The judiciary from its skewed masculine viewpoint has demonstrated its inability to comprehend the mother's loss - though this 'conventional wisdom' might tell us that 'women are interested in sex for procreation'442 the reality is that this is no longer true, especially in these cases. Most worryingly, they have demonstrated little consideration of the extent to which the mother’s autonomy is violated; deeming it merely a single incident of frustrated expectation occurring equally in all incidents of wrongful conception. In any other circumstance, a victim of wrongdoing would not be expected to pay for the benefit of the product of another's wrongdoing; this is especially so had that victim taken active steps to prevent that eventuality from happening. Why then are these cases any different? The answer, it is submitted, is simple; the courts simply do not understand how parents (particularly mothers) have suffered or will continue to suffer by what is, in their eyes, a joyous event. It is for that reason that the House's judgement, and Lord Scott’s in particular, leaves the impression that the claimants are being lambasted for claiming ‘injury’ and attempting to put a value on their unique and precious gift. That said they are aware that a wrong has been suffered and it is for this reason that the conventional award came into existence. It is, in this author’s opinion, time for Parliament to step in and resolve an area of law that is contentious due not only to the failure to produce justice but also because of the lack of respect it has for our reproductive choices.
BIBLIOGRAPHY Case-law • • •
Bevilacqua v. Altenkirk, 2004 BCSC 945 (Can (SC)) Caparo v. Dickman  2 AC 605 Cattanach v. Melchior  HCA 38 (Aus)
On this point, Pedain (n 55), 19-20 argues: ‘They did so (blocked the claim in Mcfarlane) for reasons of a “legal policy” which, stripped of all linguistic embroidery, boils down to protecting the NHS – vicariously liable for most doctors’ negligent blunders – from expensive claims when “nothing worse happened than the birth of a healthy if unwanted child”’. 441
Beever (n 91), 391.
Sally Sheldon, “ReConceiving Masculinity: Imagining Men’s Reproductive Bodies in Law” (1999) 26 Journal of Law and Society 129-49, 130. 2 WminLawRev 1 94
• • • • • • • • • • • • • • •
Emeh v. Kensington, Chelsea and Westminster Area Health Authority  QB 1012 (CA) Fairchild v. Glenhaven Funeral Services Ltd and others  UKHL 22 Livingstone v. Rawyards Coal Company (1880) 5 App Cas 25 Macfarlane v. Tayside Health Board (1997) SLT 211 (OH) Macfarlane v. Tayside Health Board  2 AC 59 (HL). Marciniak v. Lundborg, 1990 153 Wis 2d 59, 450 NW 2d 243 (Wisc SC), Wis 73-4, NW 2d 249 Nafte v. CES (11 Sept 1996), S91/1996 Parkinson v. St James and Seacroft University Hospital NHS Trust  EWCA Civ 530,  3 WLR 376 Rees v. Darlington Memorial Hospital NHS Trust (unreported, 1 May 2001). Rees v. Darlington Memorial Hospital NHS Trust  EWCA Civ 88,  QB 20 Rees v. Darlington Memorial Hospital NHS Trust  UKHL 52,  1 AC 309 Richardson v. LRC Products Ltd (2001) 59 BMLR 185 Sabri-Tabrizi v. Lothian Health Board (1997) 43 BMLR 190 (Scots (OH)) Thake v. Maurice  2 WLR 215 (HC) Udale v. Bloomsbury Area Health Authority  2 All ER 522
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Alasdair Maclean, “An Alexandrian Approach to the Knotty Problem of Wrongful Pregnancy: Rees v. Darlington Memorial Hospital NHS Trust in the House of Lords” (2004) 3 Web JCLI <http://webjcli.ncl.ac.uk/2004/issue3/maclean3.html>, accessed 18 May 2012. Alasdair Maclean, “Mcfarlane v Tayside Health Board: A Wrongful Conception in the House of Lords?” (2000) 3 Web JCLI, <http://webjcli.ncl.ac.uk/2000/issue3/maclean3.html>, accessed 28 May 2012 Alastair Mullis, “Wrongful Conception Unravelled” (1993) 1 Medical Law Review 320-335 Alberto Guibilini& Francesca Minerva, “After-Birth Abortion: Why Should the Baby Live?” (2012) J Med Ethics (Online) <http://jme.bmj.com/content/early/2012/04/12/medethics2011-100411.full.pdf+html> accessed 1 June 2012 Allan Beever, Rediscovering the Law of Negligence (Hart Publishing, 2009) Anthony Grubb, "Failure of Sterilisation - Damages for 'Wrongful Conception'" (1985) 44 CLJ 30-2 Antje Pedain, “Unconventional Justice in the House of Lords” (2004) 63(1) CLJ 19-21 Baroness Hale, “The Value of Life and the Cost of Living – Damages for Wrongful Birth” (2001) 7 British Actuarial Journal 747-63 Clare Dixon, “An Unconventional Gloss on Unintended Children” (2003) 153 New Law Journal 1732 J Ellis Cameron-Perry, “Return of the Burden of the ‘Blessing’” (1999) 149 New Law Journal 1887; J Thomson, “Abandoning the law of delict?” (2000) Scots Law Times 43 Katherine Bartlett, “Re-Expressed Parenthood” (1988) 98 Yale Law Journal 295-340 Kenyon Mason & Graeme Laurie, Mason and McCall Smith’s Law and Medical Ethics 8th Ed (OUP, 2011) Kenyon Mason, "Wrongful Pregnancy, Wrongful Birth and Wrongful Termination” (2002) 6 Edinburgh Law Review 46-66 2 WminLawRev 1 95
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The Autumn 2012 issue of the Westminster Law Review