Volume 65, Number 3 – December 2015

Articles

Privacy as a Public Good
Joshua A.T. Fairfield & Christoph Engel
PDF

Privacy is commonly studied as a private good: my personal data is mine to protect and control, and yours is yours. This conception of privacy misses an important component of the policy problem. An individual who is careless with data exposes not only extensive information about herself, but about others as well. The negative externalities imposed on nonconsenting outsiders by such carelessness can be productively studied in terms of welfare economics. If all relevant individuals maximize private benefit, and expect all other relevant individuals to do the same, neoclassical economic theory predicts that society will achieve a suboptimal level of privacy. This prediction holds even if all individuals cherish privacy with the same intensity. As the theoretical literature would have it, the struggle for privacy is destined to become a tragedy. 

But according to the experimental public-goods literature, there is hope. Like in real life, people in experiments cooperate in groups at rates well above those predicted by neoclassical theory. Groups can be aided in their struggle to produce public goods by institutions, such as communication, framing, or sanction. With these institutions, communities can manage public goods without heavy-handed government intervention. Legal scholarship has not fully engaged this problem in these terms. In this Article, we explain why privacy has aspects of a public good, and we draw lessons from both the theoretical and the empirical literature on public goods to inform the policy discourse on privacy.

Predicting Outcomes in Investment Treaty Arbitration
Susan D. Franck & Lindsey E. Wylie
PDF

Crafting appropriate dispute settlement processes is challenging for any conflict-management system, particularly for politically sensitive international economic law disputes. As the United States negotiates investment treaties with Asian and European countries, the terms of dispute settlement have become contentious. There is a vigorous debate about whether investment treaty arbitration (ITA) is an appropriate dispute settlement mechanism. While some sing the praises of ITA, others offer a spirited critique. Some critics claim that ITA is biased against states, while others suggest ITA is predictable but unfair due to factors like arbitrator identity or venue. Using data from 159 final cases derived from 272 publicly available ITA awards, this Article examines outcomes of ITA cases to explore those concerns. Key descriptive findings demonstrate that states reliably won a greater proportion of cases than investors; and for the subset of cases investors won, the mean award was US$45.6 million with mean investor success rate of 35%. State success rates were roughly similar to respondent-favorable or state-favorable results in whistleblowing, qui tam, and medical-malpractice litigation in U.S. courts. The Article then explores whether ITA outcomes varied depending upon investor identity, state identity, the presence of repeat-player counsel, arbitrator-related, or venue variables. Models using case-based variables always predicted outcomes whereas arbitrator-venue models did not. The results provide initial evidence that the most critical variables for predicting outcomes involved some form of investor identity and the experience of parties’ lawyers. For investor identity, the most robust predictor was whether investors were human beings, with cases brought by people exhibiting greater success than corporations; and when at least one named investor or corporate parent was ranked in the Financial Times 500, investors sometimes secured more favorable outcomes. Following Marc Galanter’s scholarship demonstrating that repeat-player lawyers are critical to litigation outcomes, attorney experience also affected ITA outcomes. Investors with experienced counsel were more likely to obtain a damage award against a state, whereas states retaining experienced counsel were only reliably associated with decreased levels of relative investor success. Although there was variation in outcomes, ultimately, the data did not support a conclusion that ITA was completely unpredictable; rather, the results called into question some critiques of ITA and did not prove that ITA is a wholly unacceptable form of dispute settlement. Instead, the results suggest the vital debate about ITA’s future would be well served by focusing on evidence-based insights and reliance on data rather than nonreplicable intuition.

Notes

Rethinking Janus: Preserving Primary-Participant Liability in SEC Antifraud Enforcement Actions
Greg Gaught
PDF

The Securities and Exchange Commission relies heavily on the securities laws’ antifraud provisions in fulfilling its role as watchdog of the U.S. securities markets. But the Supreme Court’s decision in Janus Capital Group, Inc. v. First Derivative Traders has frustrated the SEC’s efforts to keep fraud at bay. There the Court drastically narrowed the scope of actors who can qualify as primary participants in misrepresentations perpetrated in connection with the purchase or sale of securities under Rule 10b-5(b). This Note argues that Janus’s holding creates an incongruence in the SEC’s ability to enforce the securities laws’ misrepresentation provisions, with the SEC’s ability to prosecute misrepresentations now varying depending on the stage of securities dealings at which the misrepresentation occurred. This result runs counter to the SEC’s purpose in creating Rule 10b-5 and to Congress’s desire that the SEC enjoy broad authority to pursue fraudsters. This Note analyzes solutions for curing this incongruence, including the SEC’s recent bid for judicial deference to its interpretations of the relevant regulations and statutes.

Beyond Bitcoin: Issues in Regulating Blockchain Transactions
Trevor I. Kiviat
PDF

The buzz surrounding Bitcoin has reached a fever pitch. Yet in academic legal discussions, disproportionate emphasis is placed on bitcoins (that is, virtual currency), and little mention is made of blockchain technology—the true innovation behind the Bitcoin protocol. Simply, blockchain technology solves an elusive networking problem by enabling “trustless” transactions: value exchanges over computer networks that can be verified, monitored, and enforced without central institutions (for example, banks). This has broad implications for how we transact over electronic networks.

This Note integrates current research from leading computer scientists and cryptographers to elevate the legal community’s understanding of blockchain technology and, ultimately, to inform policymakers and practitioners as they consider different regulatory schemes. An examination of the economic properties of a blockchain-based currency suggests the technology’s true value lies in its potential to facilitate more efficient digital-asset transfers. For example, applications of special interest to the legal community include more efficient document and authorship verification, title transfers, and contract enforcement. Though a regulatory patchwork around virtual currencies has begun to form, its careful analysis reveals much uncertainty with respect to these alternative applications.

Volume 65, Number 3 – December 2015

Articles

Privacy as a Public Good
Joshua A.T. Fairfield & Christoph Engel
PDF

Privacy is commonly studied as a private good: my personal data is mine to protect and control, and yours is yours. This conception of privacy misses an important component of the policy problem. An individual who is careless with data exposes not only extensive information about herself, but about others as well. The negative externalities imposed on nonconsenting outsiders by such carelessness can be productively studied in terms of welfare economics. If all relevant individuals maximize private benefit, and expect all other relevant individuals to do the same, neoclassical economic theory predicts that society will achieve a suboptimal level of privacy. This prediction holds even if all individuals cherish privacy with the same intensity. As the theoretical literature would have it, the struggle for privacy is destined to become a tragedy. 

But according to the experimental public-goods literature, there is hope. Like in real life, people in experiments cooperate in groups at rates well above those predicted by neoclassical theory. Groups can be aided in their struggle to produce public goods by institutions, such as communication, framing, or sanction. With these institutions, communities can manage public goods without heavy-handed government intervention. Legal scholarship has not fully engaged this problem in these terms. In this Article, we explain why privacy has aspects of a public good, and we draw lessons from both the theoretical and the empirical literature on public goods to inform the policy discourse on privacy.

Predicting Outcomes in Investment Treaty Arbitration
Susan D. Franck & Lindsey E. Wylie
PDF

Crafting appropriate dispute settlement processes is challenging for any conflict-management system, particularly for politically sensitive international economic law disputes. As the United States negotiates investment treaties with Asian and European countries, the terms of dispute settlement have become contentious. There is a vigorous debate about whether investment treaty arbitration (ITA) is an appropriate dispute settlement mechanism. While some sing the praises of ITA, others offer a spirited critique. Some critics claim that ITA is biased against states, while others suggest ITA is predictable but unfair due to factors like arbitrator identity or venue. Using data from 159 final cases derived from 272 publicly available ITA awards, this Article examines outcomes of ITA cases to explore those concerns. Key descriptive findings demonstrate that states reliably won a greater proportion of cases than investors; and for the subset of cases investors won, the mean award was US$45.6 million with mean investor success rate of 35%. State success rates were roughly similar to respondent-favorable or state-favorable results in whistleblowing, qui tam, and medical-malpractice litigation in U.S. courts. The Article then explores whether ITA outcomes varied depending upon investor identity, state identity, the presence of repeat-player counsel, arbitrator-related, or venue variables. Models using case-based variables always predicted outcomes whereas arbitrator-venue models did not. The results provide initial evidence that the most critical variables for predicting outcomes involved some form of investor identity and the experience of parties’ lawyers. For investor identity, the most robust predictor was whether investors were human beings, with cases brought by people exhibiting greater success than corporations; and when at least one named investor or corporate parent was ranked in the Financial Times 500, investors sometimes secured more favorable outcomes. Following Marc Galanter’s scholarship demonstrating that repeat-player lawyers are critical to litigation outcomes, attorney experience also affected ITA outcomes. Investors with experienced counsel were more likely to obtain a damage award against a state, whereas states retaining experienced counsel were only reliably associated with decreased levels of relative investor success. Although there was variation in outcomes, ultimately, the data did not support a conclusion that ITA was completely unpredictable; rather, the results called into question some critiques of ITA and did not prove that ITA is a wholly unacceptable form of dispute settlement. Instead, the results suggest the vital debate about ITA’s future would be well served by focusing on evidence-based insights and reliance on data rather than nonreplicable intuition.

Notes

Rethinking Janus: Preserving Primary-Participant Liability in SEC Antifraud Enforcement Actions
Greg Gaught
PDF

The Securities and Exchange Commission relies heavily on the securities laws’ antifraud provisions in fulfilling its role as watchdog of the U.S. securities markets. But the Supreme Court’s decision in Janus Capital Group, Inc. v. First Derivative Traders has frustrated the SEC’s efforts to keep fraud at bay. There the Court drastically narrowed the scope of actors who can qualify as primary participants in misrepresentations perpetrated in connection with the purchase or sale of securities under Rule 10b-5(b). This Note argues that Janus’s holding creates an incongruence in the SEC’s ability to enforce the securities laws’ misrepresentation provisions, with the SEC’s ability to prosecute misrepresentations now varying depending on the stage of securities dealings at which the misrepresentation occurred. This result runs counter to the SEC’s purpose in creating Rule 10b-5 and to Congress’s desire that the SEC enjoy broad authority to pursue fraudsters. This Note analyzes solutions for curing this incongruence, including the SEC’s recent bid for judicial deference to its interpretations of the relevant regulations and statutes.

Beyond Bitcoin: Issues in Regulating Blockchain Transactions
Trevor I. Kiviat
PDF

The buzz surrounding Bitcoin has reached a fever pitch. Yet in academic legal discussions, disproportionate emphasis is placed on bitcoins (that is, virtual currency), and little mention is made of blockchain technology—the true innovation behind the Bitcoin protocol. Simply, blockchain technology solves an elusive networking problem by enabling “trustless” transactions: value exchanges over computer networks that can be verified, monitored, and enforced without central institutions (for example, banks). This has broad implications for how we transact over electronic networks.

This Note integrates current research from leading computer scientists and cryptographers to elevate the legal community’s understanding of blockchain technology and, ultimately, to inform policymakers and practitioners as they consider different regulatory schemes. An examination of the economic properties of a blockchain-based currency suggests the technology’s true value lies in its potential to facilitate more efficient digital-asset transfers. For example, applications of special interest to the legal community include more efficient document and authorship verification, title transfers, and contract enforcement. Though a regulatory patchwork around virtual currencies has begun to form, its careful analysis reveals much uncertainty with respect to these alternative applications.