Volume 100 - Virginia Law Review

Improving Rights

Courts and commentators regularly assume that a single avenue for rights-making is both sufficient and unproblematic. For example, it is enough if a Fourth Amendment claim may be litigated either in suppression hearings or in civil suits under 42 U.S.C. § 1983. In previous work, I presented original quantitative and qualitative evidence that challenged this assumption, arguing that litigation in a single context tends to flatten and distort constitutional rights.

In this Article, I build on this critique by introducing cognitive psychology research suggesting that judicial rights-making is better undertaken simultaneously in multiple contexts. For example, on this view, Fourth Amendment rights would be better crafted both in suppression hearings and in civil suits under 42 U.S.C. § 1983. Such rights-making is preferable because it exposes judges to a broader range of governmental and private actors, factual circumstances, and social interests. In other words, multiple-context rights-making better captures the full array of considerations relevant to defining the proper contour of the right. Multiple-context rights-making would therefore result in better rights—that is, rights that more closely resemble the rights that judges would construct if they considered all the information relevant to the right itself and only that information, freed from bias, cognitive errors, and the influence of other contextual factors.

With this insight as a foundation, the Article then turns to the question of how to create the conditions necessary to improve constitutional rights-making. While previous commentators have wrongly treated rights-making conditions as inevitable, I explain that the conditions under which rights-making occurs are sensitive to factors well within governmental actors’ control, such as available remedies, incentives to litigate, and procedural hurdles. I conclude that government actors can and should take concrete and affirmative steps to improve the conditions of constitutional rights-making.

Market Efficiency after the Financial Crisis: It’s Still a Matter of Information Costs

Compared to the worldwide financial carnage that followed the Subprime Crisis of 2007–2008, it may seem of small consequence that it is also said to have demonstrated the bankruptcy of an academic financial institution: the Efficient Capital Market Hypothesis (“ECMH”). Two things make this encounter between theory and seemingly inconvenient facts of consequence. First, the ECMH had moved beyond academia, fueling decades of a deregulatory agenda. Second, when economic theory moves from academics to policy, it also enters the realm of politics, and is inevitably refashioned to serve the goals of political argument. This happened starkly with the ECMH. It was subject to its own bubble—as a result of politics, it expanded from a narrow but important academic theory about the informational underpinnings of market prices to a broad ideological preference for market outcomes over even measured regulation. In this Article we examine the Subprime Crisis as a vehicle to return the ECMH to its information cost roots that support a more modest but sensible regulatory policy. In particular, we argue that the ECMH addresses informational efficiency, which is a relative, not an absolute measure. This focus on informational efficiency leads to a more focused understanding of what went wrong in 2007–2008. Yet informational efficiency is related to fundamental efficiency—if all information relevant to determining a security’s fundamental value is publicly available and the mechanisms by which that information comes to be reflected in the security’s market price operate without friction, fundamental and informational efficiency coincide. But where all value-relevant information is not publicly available and/or the mechanisms of market efficiency operate with frictions, the coincidence is an empirical question both as to the information efficiency of prices and their relation to fundamental value.

Properly framing market efficiency focuses our attention on the frictions that drive a wedge between relative efficiency and efficiency under perfect market conditions. So framed, relative efficiency is a diagnostic tool that identifies the information costs and structural barriers that reduce price efficiency which, in turn, provides part of a realistic regulatory strategy. While it will not prevent future crises, improving the mechanisms of market efficiency will make prices more efficient, frictions more transparent, and the influence of politics on public agencies more observable, which may allow us to catch the next problem earlier. Recall that on September 8, 2008, the Congressional Budget Office publicly stated its uncertainty about whether there would be a recession and predicted 1.5 percent growth in 2009. Eight days later, Lehman Brothers had failed, and AIG was being nationalized.

Shareholder Derivative Litigation and the Preclusion Problem

Shareholder derivative litigation differs from other types of representative lawsuits because a lead plaintiff does not purport to stand in for an entire class of similarly situated parties. Rather, the plaintiff seeks to wrest governance control from the corporate entity itself in order to prosecute a lawsuit on the firm’s behalf. This is an extreme act: Why should one shareholder get to take the reins of an entire firm? Accordingly, corporate law only permits these lawsuits to go forward in rare circumstances, typically when there are strong signs that something is rotten in the boardroom.

Many claims are filed each year, however, and a single alleged bad act will often attract multiple lawsuits. This raises a very tricky question for derivative litigation: When can we be confident that a given shareholder adequately prosecutes a claim—such that the matter should be closed? When a case is dismissed in one court, the failure to collaterally estop a sister case (relating to the same misdeed) in another jurisdiction raises the possibility of never-ending litigation. But routine dismissal of follow-up filings could create a situation where firms are inoculated from legitimate derivative claims by ill-informed plaintiffs who rush to the courthouse with weak complaints. Relatedly, early filing pressures, amplified under a strict collateral estoppel regime, may encourage jurisdiction shopping and shoddy claims that undermine the governance goals of derivative litigation.

This Article offers a three-part strategy for navigating the preclusion problem in derivative litigation. First, more claims should be channeled into a single jurisdiction through the robust adoption (and judicial validation) of forum selection provisions for derivative litigation in corporate charters or bylaws. This will minimize the race to the courthouse(s) and alleviate conflicting judicial treatment of derivative claims. Second, following recent Delaware precedent, collateral estoppel should not be triggered until a mindful shareholder-plaintiff brings the case; prior attempts should be classified as inadequate representation. This will prevent a corporation from taking advantage of “patsy” litigation that obstructs legitimate claims. Finally, courts should be encouraged to implement legal fee shifting whenever a plaintiff undertakes derivative litigation without reasonable cause or for an improper purpose. In particular, the failure to incorporate information from a books and records investigation into a complaint should raise concerns that the lawsuit was brought without reasonable cause. Similarly, filing a follow-on lawsuit, after an initial claim has been dismissed, should only meet the reasonable cause test if the subsequent plaintiff introduces substantial incremental evidence related to the alleged misdeed. Taken together, these reforms should minimize duplicative litigation and mitigate specious claims—while still preserving the promise of shareholder lawsuits as a meaningful safeguard against dysfunctional corporate governance.

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