Class Exercise: Limits of Market

Source: Michael Sandel, Justice: The Right Thing to Do,

In the summer of 2004, Hurricane Charley roared out of the Gulf of

Mexico and swept across Florida

to the Atlantic Ocean. The storm claimed twenty-two lives and

caused $11 billion in damage. 1 It also left in its wake a debate
about price gouging.

At a gas station in Orlando, they were selling two-dollar bags of ice

for ten dollars. Lacking power for refrigerators or air-conditioning in
the middle of August, many people had little choice but to pay up.
Downed trees heightened demand for chain saws and roof repairs.
Contractors offered to clear two trees off a homeowner’s roof—for
$23,000. Stores that normally sold small household generators for
$250 were now asking $2,000. A seventy-seven-year-old woman
fleeing the hurricane with her elderly husband and handicapped
daughter was charged $160 per night for a motel room that
normally goes for $40.2
Many Floridians were angered by the inflated prices. “After Storm
Come the Vultures,” read a headline

in USA Today. One resident, told it would cost $10,500 to remove a

fallen tree from his roof, said it was wrong for people to “try to
capitalize on other people’s hardship and misery.” Charlie Crist, the
state’s attorney general, agreed: “It is astounding to me, the level of
greed that someone must have in their soul

to be willing to take advantage of someone suffering in the wake of

a hurricane.”3Florida has a law against price gouging, and in the
aftermath of the hurricane, the attorney general’s office received
more than two thousand complaints. Some led to successful
lawsuits. A Days Inn in

West Palm Beach had to pay $70,000 in penalties and restitution for
overchargingcustomers.4But even as Crist set about enforcing the
price-gouging law, some economists argued that the law— and the
public outrage—were misconceived. In medieval times, philosophers
and theologians believed that the exchange of goods should be
governed by a “just price,” determined by tradition or the intrinsic
value of things. But in market societies, the economists observed,
prices are set by supply and demand. There is no such thing as a
“just price.”
Thomas Sowell, a free-market economist, called price gouging an
“emotionally powerful but economically meaningless expression that
most economists pay no attention to, because it seems too confused
to bother with.” Writing in the Tampa Tribune , Sowell sought to
explain “how ‘price gouging’ helps Floridians.” Charges of price
gouging arise “when prices are significantly higher than what people
have been used to,” Sowell wrote. But “the price levels that you
happen to be used to” are not morally sacrosanct. They are no more
“special or ‘fair’ than other prices” that market conditions—including
those prompted by a hurricane—may bring about. 5
Higher prices for ice, bottled water, roof repairs, generators, and
motel rooms have the advantage, Sowell argued, of limiting the use
of such things by consumers and increasing incentives for suppliers
in far-off places to provide the goods and services most needed in
the hurricane’s aftermath. If ice fetches ten dollars a bag when
Floridians are facing power outages in the August heat, ice
manufacturers will find it worth their while to produce and ship more
of it. There is nothing unjust about these prices, Sowell explained;
they simply reflect the value that buyers and sellers choose to place
on the things they exchange.6
Jeff Jacoby, a pro-market commentator writing in the Boston Globe,
argued against price-gouging laws on similar grounds: “It isn’t
gouging to charge what the market will bear. It isn’t greedy or
brazen. It’s how goods and services get allocated in a free society.”
Jacoby acknowledged that the “price spikes are infuriating,
especially to someone whose life has just been thrown into turmoil
by a deadly storm.” But public anger is no justification for interfering
with the free market. By providing incentives for suppliers to
produce more of the needed goods, the seemingly exorbitant prices
“do far more good than harm.” His conclusion: “Demonizing vendors
won’t speed Florida’s recovery. Letting them go about their business
will.”7

Attorney General Crist (a Republican who would later be elected

governor of Florida) published an op- ed piece in the Tampa paper
defending the law against price gouging: “In times of emergency,
government cannot remain on the sidelines while people are
charged unconscionable prices as they flee for their lives or seek the
basic commodities for their families after a hurricane.” 8 Crist
rejected the notion that these “unconscionable” prices reflected a
truly free exchange: This is not the normal free market situation
where willing buyers freely elect to enter into the marketplace and
meet willing sellers, where a price is agreed upon based on supply
and demand. In an emergency, buyers under duress have no
freedom. Their purchases of necessities like safe lodging are
forced.9

The debate about price gouging that arose in the aftermath of

Hurricane Charley raises hard questions of morality and law: Is it
wrong for sellers of goods and services to take advantage of a
natural disaster by charging whatever the market will bear? If so,
what, if anything, should the law do about it? Should the state
prohibit price gouging, even if doing so interferes with the freedom
of buyers and sellers to make whatever deals they choose?

Class Exercise: Fiduciary Relationship

1) Meinhard v. Salmon

Meinhard claimed that his former business partner, Salmon, had violated a fiduciary duty by
taking an opportunity to renew a lease in his own name without sharing the benefits. In 1902,
Salmon bought a 20-year lease for the Hotel Bristol, owned by Elbridge Thomas Gerryin
New York. Salmon wished to convert the hotel into shops and offices. To raise money, he
entered a joint venture with Meinhard. They put the terms of their relationship in writing.
Meinhard provided the investment capital while Salmon managed the business. The first five
years, Meinhard would receive 40% of the profits and 50% every year after until the
twentieth year. Meinhard was given the sole power to assign the lease during the term of the
venture. The venture was created to terminate at the end of the lease.

After 20 years, as the lease was expiring and the joint venture coming to an end, the owner of
the reversion of the lease, Gerry, approached Salmon to negotiate a substantial redevelopment
of the property. Gerry was ignorant of the partnership. The terms of the new lease
contemplated destruction of the then-existing buildings after a period of seven years followed
by reconstruction. Salmon resigned the lease in his individual capacity without telling
Meinhard. When Meinhard found out, he sued. Meinhard argued the new opportunity
belonged to the joint venture and sued to have the lease transferred to a constructive trust.
Salmon argued any interest in the new lease could not belong to the joint venture since both
parties expected the venture to terminate when the first lease expired.

2) Smith v. Van Gorkom

The case involved a proposed merger of TransUnion into Marmon Group which was
controlled by Jay Pritzker. Defendant Jerome W. Van Gorkom, who was the TransUnion's
chairman and CEO, chose a proposed price of $55 without consultation with outside financial
experts. He only consulted with the company's CFO, and that consultation was to determine a
per share price that would work for a leveraged buyout.[5] Van Gorkom and the CFO did not
determine an actual total value of the company. [5] The board approved the sale of TransUnion
because it suffered accelerated depreciation and a reduced income.At the Board meeting, a
number of items were not disclosed, including the problematic methodology that Van
Gorkom used to arrive at the proposed price. Also, previous objections by management were
not discussed. The Board approved the proposal.

3) Walt Disney Derivative Litigation

The Walt Disney Company appointed Michael Ovitz as executive president and director. He
had founded Creative Artists Agency, a premier Hollywood talent finder. He had an income
of $20m. Michael Eisner, the chairman, wanted him to join Disney in 1995, and negotiated
with him on compensation, led by Disney compensation committee chair Irwin Russell. The
other members of the committee and the board were not told until the negotiations were well
underway. Ovitz insisted his pay would go up if things went well, and an exit package if
things did not. It totalled about $24 million a year. Irwin Russell cautioned that the pay was
significantly above normal levels and ‘will raise very strong criticism’. Graef Crystal, a
compensation expert warned that Ovitz was getting ‘low risk and high return’ but the report
was not approved by the whole board or the committee.

In August 1995 Eisner released to the press the appointment, before the compensation
committee had formally met to discuss it. Russell, Raymond Watson, Sidney Poitier and
Ignacio E. Lozano, Jr. met on 26 September for an hour. They discussed four other major
items and the consultant, Crystal, was not invited. Within a year Ovitz lost Eisner's
confidence and terminated his contract. Ovitz walked away with $140m for a year's work.
Shareholders brought a derivative suit.

Source: US Case Database

Class Exercise: Lobbying by Business

Political Lobbying In The U.S. And India: How It's Different And Why It Matters

Ronak D. Desai

In 2013, a political firestorm engulfed India’s parliament after Wal-Mart Stores Inc. stated in
a routine disclosure report to Congress that it had spent $25 million on lobbying activities
in Washington over the past four years, including on issues related to “enhanced market
access for investment in India.”

The world’s largest retailer—already in the midst of an internal investigation over whether it
had potentially violated the Foreign Corrupt Practices Act in India—suddenly found itself the
target of bribery accusations by some of India’s political leaders. “It has been officially
confirmed that Wal-Mart Company has indulged in lobbying in India, or in simple terms
indulged in bribery,” one party spokesman, Ravi Shankar Prasad, declared to the Indian
press.

The uproar shut down Parliament for two days and forced the Indian government to launch an
inquiry to investigate the allegations that Wal-Mart had bribed officials in New Delhi to gain
access to India’s lucrative retail market, which is estimated to reach more than $860 billion
by 2017. The company denied any wrongdoing, emphasizing that the lobbying had occurred
with members of the United States Congress only, not with any Indian officials, and in
accordance with American law.

The controversy highlights just how differently India and the United States view the concept
of lobbying, while raising questions about the lawfulness and permissibility of the practice in
the world’s largest democracy. It also serves as a potent reminder that American companies
still face a host of perils in their efforts to conduct business in India.

Unlike in India, lobbying is a routine practice in the United States, long regulated by the
legislature. In 1995, Congress passed the Lobbying Disclosure Act (LDA) that defined the
term “lobbyist” as “any individual who is employed or retained by a client for financial or
other compensation for services that include more than one lobbying contact….” The purpose
of the legislation was to cultivate greater transparency and accountability in federal lobbying
practices by requiring lobbyists to register and make specific disclosures to Congress about
their activities and interactions with American legislators. The LDA was amended in 2007 by
the Honest Leadership and Open Government Act, which significantly strengthened these
disclosure requirements and increased penalties for violations of the enactment.

Ironically, Wal-Mart’s disclosure report—which critics like Prasad argued point to clear
evidence of “bribery”—in reality demonstrated the company’s compliance with governing
U.S. law regarding lobbying activity in the United States. The State Department echoed this
crucial fact in response to a question about the bribery accusations, stating “The [disclosure]
report that some of these [bribery] allegations cite was a regularly required report for the U.S.
Government as part of our open government transparency in governance requirements.”
But assertions that lobbying is tantamount to bribery are common in India and reflect the
country’s own legal and policy ambivalence towards the practice, which, in sharp contrast to
the United States, is not yet formally recognized, let alone regulated. With no statutory or
non-statutory basis for lobbying, many policymakers in India believe that it contravenes
Indian law.

As a result, lobbying in India exists in a perennially grey legal and policy arena. Both local
and foreign firms operating there are left with virtually no guidance on questions concerning
the permissibility of lobbying or what the practice even entails.

The ambiguity surrounding lobbying in India is further exacerbated by the country’s endemic
corruption, which many see as inexorably tied to the practice itself. A host of powerful public
relations firms across India effectively serve as corporate lobbyists for a wide variety of
diverse industry interests ranging from construction to telecommunications. These firms,
however, operate completely unregulated. These lobbyists exercise their influence over New
Delhi clandestinely. The conspicuous absence of any transparency in the process has
predictably led many to conclude that lobbying is both a symptom and a cause of India’s
corruption crisis, encouraging graft, bribery and other forms of misconduct.

As a consequence, a growing number of leading government officials and corporate experts

are calling for lobbying in India to be regulated in a manner similar to that of the United
States and other countries which officially recognize the practice and mandate the kind of
registration and disclosure requirements memorialized in the LDA. Such a move is long
overdue and would help foster a more stable and attractive investment climate for both Indian
and foreign firms, particularly in light of the Modi government’s efforts to advance India’s
economic recovery. That being said, given India’s notoriously slow bureaucracy, entrenched
resistance to reform and competing policy priorities at present, companies like Wal-Mart
should not expect meaningful change anytime soon.

Although the commission appointed by New Delhi to investigate Wal-Mart’s purported

bribery unsurprisingly did not find any evidence of misconduct, American businesses
operating in India should consider the controversy surrounding the retail giant’s lobbying
activities as both revealing and instructive. Despite being cleared of any wrongdoing by
Indian authorities, press reports reported Wal-Mart ceased all of its India-related lobbying in
the United States. Its decision to do so is a powerful demonstration of the profound
differences between India and the United States with respect to lobbying and the far-reaching
consequences those differences can have for American companies seeking to conduct
business in India.

Source: Forbes