The unjustified absence of federal fraud protection in the labor market

Yale Law Journal

Volumn 107, Issue 3, 1997, Pages 715-788

  Greenfield, Kent ^a,b,c  

^a BOSTON COLLEGE   (United States)

^b BROWN UNIVERSITY   (United States)

^c UNIVERSITY OF CHICAGO   (United States)

Author keywords

[No Author keywords available]

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EID: 0348199763     PISSN: 00440094     EISSN: None     Source Type: Journal    
DOI: 10.2307/797253     Document Type: Article

References (382)

1. 15 U.S.C. § 78j(b) (1994).
2. Manipulative and Deceptive Devices and Contrivances, 17 C.F.R. § 240.10b-5 (1997). For further discussion of section 10(b) and Rule 10b-5, see infra notes 48-66 and accompanying text.
3. For a discussion of the very limited remedies federal law provides, see infra notes 89-97 and accompanying text. Moreover, federal law actually throws up obstacles to such protection that the employees might otherwise receive under the common law. See infra Subsections IV.B.1-2.
4. The analogy between fraud in the labor market and fraud in the securities market has been largely invisible. No scholarship found during the course of writing this Article sought to compare a corporation's duty of truthfulness to investors to its duty of truthfulness to its employees. Perhaps the analogy has been largely unnoticed because of the power of categorization within the law. Labor law and corporate law are rarely studied together; few lawyers and legal academics claim expertise in both areas. Corporate law is seen as a basic, serious, and usually "conservative" subject in law school; it typically has little or nothing to do with workers. On the other hand, labor and employment law are all about workers; they are probably viewed as much more peripheral to the current law school curriculum and as trivial, "liberal," and somewhat past their prime. This stark dichotomy obfuscates areas of analogous interests and shared analysis. The duty to tell the truth explored in this Article is only one example of this actual overlap; there are probably many more. For one article that explicitly draws comparisons between corporate law and labor law but does not focus on issues of fraud, see Daniel R. Fischel, Labor Markets and Labor Law Compared with Capital Markets and Corporate Law, 51 U. CHI. L. REV. 1061 (1984), which describes the similar incentives that workers and investors face when entering into contracts with firms.
5. For a perhaps hopeful example of corporate and labor scholars coming together, see the papers presented at the Conference on Employees and Corporate Governance, Columbia Law School/Sloan Project on Corporate Governance (Nov. 22, 1996)
6. (unpublished manuscript, on file with the Yale Law Journal).
7. See also Katherine Van Wezel Stone, Labor and the Corporate Structure: Changing Conceptions and Emerging Possibilities, 55 U. CHI. L. REV. 73 (1988).
8. This Article thus fits into the longstanding legal tradition of using analogies to explore legal problems. See EDWARD H. LEVI, AN INTRODUCTION TO LEGAL REASONING (1949);
9. Cass R. Sunstein, Commentary on Analogical Reasoning, 106 HARV. L. REV. 741 (1993);
10. cf. Joseph William Singer, The Reliance Interest In Property, 40 STAN. L. REV. 611 (1988) (drawing analogies between plant closings and certain aspects of property law).
11. See Local 1330, United Steel Workers v. United States Steel Corp., 631 F.2d 1264 (6th Cir. 1980); STAUGHTON LYND, THE FIGHT AGAINST SHUTDOWNS: YOUNGSTOWN'S STEEL MILL CLOSINGS (1982); Singer, supra note 4, at 614-22.
12. See Local 1330, 631 F.2d at 1270 n.4.
13. Id. at 1270-71 (quoting William Ashton, Superintendent, U.S. Steel's Youngstown District) (internal quotation marks omitted).
14. Id. at 1271.
15. Id. at 1272.
16. Id.
17. See id. at 1274-75.
18. Id. at 1272.
19. Id. (quoting a letter from Kirwan; C.I. Richards, Jr., an agent of U.S. Steel; and R.M. Greer, also an agent of U.S. Steel) (internal quotation marks omitted).
20. Id. at 1272-73 (quoting a letter from Kirwan and R.M. Greer) (internal quotation marks omitted).
21. In September 1979, Kirwan told a group of employees that the employees had "saved their jobs." Id. at 1276.
22. Id. at 1273. Only two things could cause a shutdown, Roderick said: "massive expenditures to meet environmental requirements" or an "unproductive plant operation." Id. But he reiterated that the Youngstown plant was "profitable" and "operating in the black." Id. In early November, another corporate representative, Frederick Foote, asserted that "[w]e've said all along the Ohio Works has been profitable and there are no plans for a shutdown." Id.
23. See id. at 1275-76.
24. See id. at 1277. Another employee admitted to his foreman that he was considering other employment because his pension had fully vested. The foreman advised him not to do so because he had a "secure future" with U.S. Steel. Id. at 1276. On the basis of this advice, the employee decided to stay with the company, bought a new car, and purchased a new house. See id. at 1276-77.
25. See Local 1330, United Steel Workers v. United States Steel Corp., 492 F. Supp. 1, 4 (N.D. Ohio), aff'd, 631 F.2d 1264 (6th Cir. 1980).
26. See Local 1330, 631.F.2d at 1279 (reviewing plaintiffs' argument that the definition of profitability the company used in setting goals for the employees was different from the one used in deciding to close the plants).
27. Id. at 1278 (quoting Local 1330, 492 F. Supp. at 7) (internal quotation marks omitted).
28. Id. at 1280 (quoting the amended complaint) (internal quotation marks omitted).
29. See Local 1330, 492 F. Supp. at 9-10.
30. See Local 1330, 631 F.2d at 1281-82. For arguments that the district court and Sixth Circuit wrongly decided this case, see Daniel A. Farber & John H. Matheson, Beyond Promissory Estoppel: Contract Law and the "Invisible Handshake," 52 U. CHI. L. REV. 903, 938-42 (1985);
31. Duncan Kennedy, Distributive and Paternalistic Motives in Contract and Tort Law, with Special Reference to Compulsory Terms and Unequal Bargaining Power, 41 MD. L. REV. 563, 630 (1982); and Singer, supra note 4, at 614-22, 632-63.
32. For example, Albert Dunlap, the former Chief Executive Officer of Scott Paper who cut 11,000 jobs in 1994, gained some public notoriety for his unabashed arguments that corporate layoffs were necessary for the health of the U.S. economy. Corporate executives are not villains, he said, but rather they are like doctors, healing sick companies and protecting the health of the economy. Even Dunlap recognized, however, that "a CEO has an obligation to communicate with workers and prepare them for the inevitable." Villains? Heck No. We're Like Doctors, NEWSWEEK, Feb. 26, 1996, at 48.
33. While the problem of employer fraud is hardly limited to plant closings, such situations often present particularly poignant examples of possible employer fraud. Not only is corporate downsizing ubiquitous, but employers also have powerful incentives to keep the truth from their workers in such situations. About 10 times a week, a large factory closes down somewhere in the United States, with each closing throwing an average of 190 people out of work (these figures do not include mining, construction, and service companies). See Jon Nordheimer, Downsized, But Not Out: A Mill Town's Tale, N.Y. TIMES, Mar. 9, 1997, at C12.
34. Between 1991 and 1995, nearly 2.5 million Americans lost their jobs because of corporate restructuring. See Corporations Under Fire, N.Y. TIMES, Feb. 25, 1996, at D14.
35. Only about a third of those who lose their jobs find replacement work that pays at least as well as their former jobs. See Louis Uchitelle & N.R. Kleinfield, On the Battlefields of Business, Millions of Casualties, N.Y. TIMES, Mar. 3, 1996, at A26.
36. Beyond U.S. Steel's experience in Youngstown, there are numerous and more recent instances of possible employer fraud. One will be described later in the text. See infra Subsection IV.B.3.a (discussing White v. National Steel Corp., 938 F.2d 474 (4th Cir. 1991)). Another recent and particularly poignant example of possible fraud comes from the Hathaway shirt factory in Waterville, Maine, where a mostly female work force had been sewing Hathaway shirts for over 150 years. See Adam Zagorin, Short-Shirted in Maine, TIME, June 3, 1996, at 58.
37. In early 1995, Linda Wachner, the Chief Executive Officer of the Warnaco Group, Inc., Hathaway's parent company, went to Waterville to quell fears of an imminent plant closing. Sales were booming in Warnaco's various brands, and the stock price was soaring. See id.; see also Shareholder Scoreboard: Industry-by-Industry, Who Leads the Field in Shareholder Returns, WALL ST. J., Feb. 27, 1997, at R4 (table titled "Apparel-Clothing & Fabrics") (showing Warnaco stock's five-year average return to be the second best within its industry group).
38. According to one account, Wachner assured Waterville workers that she "would not close the plant" if the employees "would do quality work and bring the cost of the shirt down." Sara Rimer, Fall of a Shirtmaking Giant Shakes Its Hometown, N.Y. TIMES, May 15, 1996, at A14.
39. Afterward, the plant's employees forfeited a raise to help pay for productivity consultants for the plant, and the employees' union persuaded the company to adopt a joint labor-management program to address workplace problems and improve productivity. See Union Efforts To Increase Productivity Not Enough To Keep Warnaco Plant Open, Daily Lab. Rep. (BNA) No. 98, at D-9 (May 21. 1996) [hereinafter Union Efforts].
40. By March 1996, the plant's employees had significantly increased the factory's productivity. See Rimer, supra (stating that productivity had doubled); see also Union Efforts, supra, at D-9 (stating that output had increased by 33%).
41. The productivity consultant claimed that the employees had "turned the plant around." Rimer, supra. Warnaco, in the meantime, recorded unprecedented profits. See Union Efforts, supra, at D-9. On May 6, 1996, however, Wachner announced that Warnaco would quit making the Hathaway line and either sell or scrap the Waterville plant. Hathaway shirts were not keeping up with Warnaco's other, more profitable product lines.
42. See Rachel Spevack, Warnaco Pulling Plug on the Patch, DAILY NEWS REG. (New York), May 7, 1996, at 1.
43. The Waterville workers were shocked. The chief steward of the local union said that the announcement of the closing was "totally, totally unexpected." Joe Rankin & Darla L. Pickett, Hathaway Jobs in Jeopardy, CENT. ME. MORNING SENTINEL, May 7, 1996, at A1.
44. According to the company, however, the plant closing "'shouldn't have been a surprise'" to the Hathaway employees. Union Efforts, supra, at D-9 (quoting Michael Freitag, spokesperson for Warnaco).
45. Other examples of plant closings may have involved employer fraud. For example, in Milne Employees Ass'n v. Sun Carriers, Inc., 960 F.2d 1401 (9th Cir. 1991), after the defendant corporation bought Milne, an independent trucking company, Sun Carriers's management allegedly made speeches and showed videotapes promising the Milne employees job security and asked them to refrain from seeking other employment. Several months later, Sun Carriers closed all of the Milne plants. See id. at 1405. Similarly, in Washington v. Aircap Industries, 860 F. Supp. 307 (D.S.C. 1994), the company decided in May to close a factory but, even after this decision had been made, told the workers that the plant would continue operating through the summer. The plant closed six weeks after this announcement with no advance notice to the employees. See id. at 310-11. Even more recently, British Petroleum (BP) closed a profitable refinery in Lima, Ohio, after soliciting bids but refusing to sell it to potential buyers. The Mayor of Lima claimed that BP had not dealt "honestly" with the town and its employees. Marc Cooper, A Town Betrayed: Oil and Greed in Lima, Ohio, NATION, July 11, 1997, at 11, 13.
46. Entities other than employees and shareholders have also accused corporations of making misrepresentations to them. For example, in Charter Township of Ypsilanti v. General Motors Corp., 506 N.W.2d 556 (Mich. Ct. App. 1993) (per curiam), the city of Ypsilanti sued General Motors after it closed a plant located there. The city had granted the company numerous tax abatements on the basis of implicit and explicit representations that the abatements would help enable the company to "continue production and maintain continuous employment for our employees." Marleen A. O'Connor, Promoting Economic Justice in Plant Closings: Exploring the Fiduciary/Contract Law Distinction To Enforce Implicit Employment Agreements, in PROGRESSIVE CORPORATE LAW 219, 228 (Lawrence E. Mitchell ed., 1995) (quoting a General Motors spokesperson) (internal quotation marks omitted); see also infra note 272 (discussing the case).
47. See, e.g., Diane E. Lewis, Tenn. Workers Say Firm Owes Back Pay, BOSTON GLOBE, May 1, 1997, at A1 (revealing that workers were lured to travel from Tennessee to Massachusetts with apparently false promises of lucrative work).
48. See, e.g., Albert B. Crenshaw, Retiring? Don't Assume Health Benefits Are Forever, WASH. POST, Nov. 3, 1996, at A1;
49. Diane E. Lewis, More Retirees Find Full Health Coverage an Empty Promise, BOSTON GLOBE, Oct. 30, 1996, at D2;
50. All Things Considered: 'Lifetime' Retiree Benefits Proving Ephemeral (National Public Radio broadcast, Oct. 29, 1996) [hereinafter All Things Considered] (comments of Joanne Silberner), available in 1996 WL 12727040; see also infra notes 215-230 and accompanying text (discussing Varity Corp. v. Howe, 116 S. Ct. 1065 (1996)).
51. The level of scienter required is usually knowledge or recklessness but, at times and in some jurisdictions, has been extended to include negligence. See LOUIS LOSS, FUNDAMENTALS OF SECURITIES REGULATION 713 (2d ed. 1988).
52. In the words of the Restatement: One who fraudulently makes a misrepresentation of fact, opinion, intention or law for the purpose of inducing another to act or to refrain from action in reliance upon it, is subject to liability to the other in deceit for pecuniary loss caused to him by his justifiable reliance upon the misrepresentation. RESTATEMENT (SECOND) OF TORTS § 525 (1977);
53. see also W. PAGE KEETON ET AL., PROSSER AND KEETON ON THE LAW OF TORTS § 105, at 728 (5th ed. 1984); LOSS, supra note 29, at 712.
54. See KEETON ET AL., supra note 30, § 105, at 727.
55. Much of this central idea was originally captured in the remedy of recision. The defensive employment of the law of recision entailed resisting a seller's action for breach of a contract when the seller had made a misrepresentation to induce the buyer's purchase. Recision was also available as an offensive tool by the buyer in an action for restitution. See id. at 729-30; LOUIS LOSS & JOEL SELIGMAN, FUNDAMENTALS OF SECURITIES REGULATION 971 (3d ed. 1995).
56. In 1789, English courts severed the previously necessary connection between misrepresentation and the existence of a contract. See Pasley v. Freeman, 100 Eng. Rep. 450 (K.B. 1789). In Pasley, the tort was held to lie where the plaintiff had no dealings with the defendant but had been induced by his misrepresentations to sell goods on credit to a third person, who subsequently defaulted. A dissenting judge argued that the precedents would not allow the action when there was no privity of contract between the parties, and the defense claimed that recognizing such a cause of action would bring about "mischiefs and inconveniences" for businesspeople. Id. at 455. But the court believed that the equities were sufficient to allow the case to go forward, even without any precedent exactly on point. It would be "repugnant to law [and] morality," in the words of one judge, to allow "a man [to] assert that which he knows to be false, and thereby [to] do an everlasting injury to his neighbor, and yet not [to] be answerable for it." Id.; see also J.H. BAKER, AN INTRODUCTION TO ENGLISH LEGAL HISTORY 376-78, 401-02 (3d ed. 1990); KEETON ET AL., supra note 30, § 105, at 728; LOSS, supra note 29, at 714.
57. See, e.g., Downey v. Finucane, 98 N.E. 391, 394 (N.Y. 1912); see also KEETON ET AL., supra note 30, § 106, at 736.
58. See, e.g., Equitable Life Ins. Co. v. Halsey, Stuart & Co., 312 U.S. 410, 426 (1941) ("[A] statement of a half truth is as much a misrepresentation as if the facts stated were untrue."); The King v. Kylsant (Lord), [1932] 1 K.B. 442 (Eng. Crim. App.) (holding that a prospectus that truthfully stated a steamship line's average net income and dividends over a 10-year period was false because it did not reveal the fact that earnings during the first three of those 10 years had been greatly augmented by World War I); LOSS, supra note 29, at 714-15.
59. As Lord Blackburn said in Smith v. Chadwick, [1883-84] 9 App. Cas. 187 (P.C. 1884) (appeal taken from Eng.): If they palter him in a double sense, it may be that they lie like truth; but I think they lie, and it is a fraud. Indeed, as a question of casuistry, I am inclined to think the fraud is aggravated by a shabby attempt to get the benefit of a fraud, without incurring the responsibility. Id. at 201.
60. Mulligan v. Bailey, 28 Ga. 507, 510 (1859); see also KEETON ET AL., supra note 30, § 106, at 736-37.
61. See, e.g., KEETON ET AL., supra note 30, § 106, at 737-38; LOSS, supra note 29, at 715.
62. See RESTATEMENT (SECOND) OF TORTS § 551(2)(a) (1977).
63. A fiduciary has "an affirmative duty of utmost good faith, and full and fair disclosure of all material facts, as well as an affirmative obligation to employ reasonable care to avoid misleading his clients." SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963) (citation omitted) (internal quotation marks omitted). This exception has provided a basis for liability for silence in the context of fiduciary relations such as principal and agent, see McDonough v. Williams, 92 S.W. 783, 788 (Ark. 1905); executor and beneficiary of an estate, see Murphy v. Cartwright, 202 F.2d 71, 73 (5th Cir. 1953); Foreman v. Henry, 210 P. 1026, 1030 (Okla. 1922); bank and investing depositor, see Brasher v. First Nat'l Bank, 168 So. 42, 46 (Ala. 1936); majority and minority stockholders, see Speed v. Transamerica Corp., 99 F. Supp. 808 (D. Del. 1951); and old friends, see Feist v. Roesler, 86 S.W.2d 787, 789 (Tex. Civ. App. 1953, no writ). The exception for silence that misrepresents has been undergoing something of an expansion recently in that courts have recognized more and more instances in which an affirmative duty to speak is recognized. For example, the former common law rule was that the seller of a house was under no affirmative duty to disclose to a buyer an infestation of termites. See Swinton v. Whitinsville Sav. Bank, 42 N.E.2d 808, 808 (Mass. 1942). Yet this rule has been under attack in recent years. The Restatement now requires disclosure of facts basic to the transaction, if [the defendant] knows that the other is about to enter into it under a mistake as to them, and that the other, because of the relationship between them, the customs of the trade or other objective circumstances, would reasonably expect a disclosure of those facts. RESTATEMENT (SECOND) OF TORTS § 551(2)(e).
64. This provision is illustrated as follows: "A sells to B a dwelling house, without disclosing to B the fact that the house is riddled with termites. This is a fact basic to the transaction." Id. § 551 illus.3. As one commentator has observed, "[U]nder the modern law of misrepresentation, the existence of a duty to disclose is not limited to situations involving preexisting fiduciary relationships." Alison Grey Anderson, Fraud, Fiduciaries, and Insider Trading, 10 HOFSTRA L. REV. 341, 351 (1982). Indeed, "there has been a rather amorphous tendency on the part of most courts in recent years to find a duty of disclosure when the circumstances are such that the failure to disclose something would violate a standard requiring conformity to what the ordinary ethical person would have disclosed." KEETON ET AL., supra note 30, § 106, at 739.
65. RESTATEMENT (SECOND) OF TORTS § 550.
66. See KEETON ET AL., supra note 30, § 106, at 737.
67. See Schneider v. Heath, 170 Eng. Rep. 1462, 1463 (C.P. 1813).
68. See Chisolm v. Gadsden, 32 S.C.L. (1 Strob.) 220 (1847).
69. See Smith v. Beatty, 37 N.C. (2 Ired.) 456 (1843) (per curiam); KEETON ET AL., supra note 30, § 106, at 737.
70. See KEETON ET AL., supra note 30, § 106, at 738.
71. See RESTATEMENT (SECOND) OF TORTS § 551(2)(c) (1977).
72. See Loewer v. Harris, 57 F. 368 (2d Cir. 1893).
73. See LOSS, supra note 29, at 712. The elements of a misrepresentation claim under the federal securities laws are aligned with the elements of the common law tort claim. The analyses under the common law and the federal statutes are sufficiently related that Loss has stated that "it seems reasonable to assume at the very least that the most liberal common law views on these questions should govern under these statutes." Id. at 716. While courts have said repeatedly that the fraud provisions of the Securities Acts, as well as the mail fraud statute, are not limited to circumstances that would give rise to a common law action for deceit, see, e.g., Charles Hughes & Co. v. SEC, 139 F.2d 434, 437 (2d Cir. 1943) (SEC Acts); United States v. Groves, 122 F.2d 87, 90 (2d Cir. 1941) (mail fraud), it is difficult to say precisely how much further the federal provisions extend, see LOSS, supra note 29, at 716.
74. 15 U.S.C. § 78j(b) (1994). Section 10(b) reads as follows: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange - (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. Id.
75. Manipulative and Deceptive Devices and Contrivances, 17 C.F.R. § 240.10b-5 (1997). The Rule reads as follows: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, (a) to employ any device, scheme, or artifice to defraud, (b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. Id.
76. See SEC v. National Sec., Inc., 393 U.S. 453, 465 (1969) (noting that section 10(b) and Rule 10b-5 "may well be the most litigated provisions in the federal securities laws"); FEDERAL SECURITIES EXCHANGE ACT OF 1934 § 5.05[1], at 5-46 & n.4 (Matthew Bender's Sec. Regulation Series, 1997) (noting that section 10(b) and Rule 10b-5 have become "the most important of the causes of action under the federal securities laws"); LOSS, supra note 29, at 728 (discussing the "revolution" in Rule 10b-5 litigation).
77. 15 U.S.C. § 77l; see also LOSS & SELIGMAN, supra note 32, at 982-83. The penalties for a violation of section 12 can be quite severe. See FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 335-36 (1991).
78. 15 U.S.C. § 77k. Section 11 makes issuers strictly liable for material misstatements, and the purchaser can recover her trading loss without proving reliance. See Paul G. Mahoney, Precaution Costs and the Law of Fraud in Impersonal Markets, 78 VA. L. REV. 623, 632-33 (1992); see also LOSS & SELIGMAN, supra note 32, at 1003. The causes of action under both section 12(2) and section 11(a) vary somewhat from what the common law would have required. See LOSS & SELIGMAN, supra note 32, at 984-87, 1008-13.
79. 15 U.S.C. § 77q(a)(1)-(2). Other pertinent provisions include section 9(a)(4) of the 1934 Act, which makes it unlawful for any dealer or broker . . . to make, regarding any security registered on a national securities exchange, for the purpose of inducing the purchase or sale of such security, any statement which was at the time and in the light of the circumstances under which it was made, false or misleading with respect to any material fact, and which he knew or had reasonable ground to believe was so false or misleading. 15 U.S.C. § 78i(a)(4). See generally LOSS, supra note 29, at 699-711 (identifying federal statutory protection including section 17(a) of the 1933 Act, 15 U.S.C. § 77q(a), section 15(c) of the 1934 Act, 15 U.S.C. § 78o(c), and the mail and wire fraud statutes, see 18 U.S.C. §§ 1341, 1343 (1994)). Before the Securities Act of 1933, the federal government could deal with securities fraud only through criminal prosecution for violations of the mail fraud statute, see 18 U.S.C. § 1341, or for conspiracy to violate it, see 18 U.S.C. § 371, or through the Postmaster General's administrative ability to enter a so-called "fraud order" under which all mail directed to the respondent or his agent would be returned to the sender, see 39 U.S.C. § 3005(a) (1994). See LOSS, supra note 29, at 699.
80. The federal securities laws require companies to file certain current, quarterly, and annual reports with the SEC. See J. ROBERT BROWN, JR., THE REGULATION OF CORPORATE DISCLOSURE at vii (2d ed. Supp. 1 1997).
81. For example, filings are required under the 1933 Act in "registration statements for public offerings or distributions or in circulars to be furnished in the case of 'exempt' offerings under Regulation D, 17 C.F.R. § 230.501-506 (1980), or Rule 144, 17 C.F.R. § 230.144 (1988)." Victor Brudney, A Note on Materiality and Soft Information Under the Federal Securities Laws, 75 VA. L. REV. 723, 726-27 n.11 (1989).
82. Also, the 1934 Act mandates filings under "the registration and continuous disclosure requirements of §§ 12 and 13(a) and the rules thereunder; the proxy rules promulgated under § 14(a); the 'going-private' rules promulgated under § 13(e); the tender offer and takeover rules promulgated under §§ 13(d), 13(e), and 14(d); and the insider trading rules under § 16." Id. The focus of this Article is whether the duty to refrain from fraud should be applied to the labor markets through a federal law. Whether the additional duty to make certain affirmative disclosures should apply to the labor market is not considered here. Some, however, have attacked mandatory disclosure requirements. See, e.g., RICHARD POSNER, ECONOMIC ANALYSIS OF LAW 444-45 (4th ed. 1992) (stating that prospectuses are "[w]ritten in a forbidding legal and accounting jargon" that are "of no direct value to the unsophisticated stock purchaser" and that it is "widely accepted by economists" that "regulation of new issues does not help investors").
83. But see Frank H. Easterbrook & Daniel R. Fischel, Mandatory Disclosure and the Protection of investors, 70 VA. L. REV. 669 (1984) (concluding that the economic case against mandatory disclosure is equivocal). This debate, however, is beyond the scope of the more basic protection that this Article proposes.
84. In SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), for example, the company voluntarily distributed a misleading press release about a huge ore strike. The Second Circuit concluded that "[i]t does not appear to be unfair to impose upon corporate management a duty to ascertain the truth of any statements the corporation releases to its shareholders or to the investing public at large." Id. at 861-62. Rule 10b-5, said the court, is violated whenever assertions are made . . . in a manner reasonably calculated to influence the investing public, e.g., by means of the financial media . . . if such assertions are false or misleading or are so incomplete as to mislead irrespective of whether the issuance of the release was motivated by corporate officials for ulterior purposes. Id. at 862.
85. See BROWN, supra note 54, § 3.02, at 3-6. It is worth noting here that there are differences between the obligations established under the antifraud scheme (duties not to mislead) and those obligations established under contract doctrine (duties to fulfill promises). Although the obligations in these two areas are sometimes similar, they do differ. See infra Section IV.A (discussing contract doctrine).
86. See McMahan & Co. v. Warehouse Entertainment, Inc., 900 F.2d 576, 579 (2d Cir. 1990) ("[A] statement which is literally true, if susceptible to quite another interpretation by the reasonable investor . . . may properly . . . be considered a material misrepresentation . . . ." (citations omitted) (internal quotation marks omitted)).
87. First Va. Bankshares v. Benson, 559 F.2d 1307, 1317 (5th Cir. 1977); see also Heil v. Lebow, No. 91 Civ. 8656 (JFK), 1994 WL 637686, at *7 (S.D.N.Y. Nov. 14, 1995) ("[L]iterally true disclosures can be rendered misleading through omission.").
88. See BROWN, supra note 54, § 3.03[1], at 3-8 n.26 (citing cases). Actionable communication can include an overstatement of revenue, a misleading press release about a new product, misstatements about the product's stage of development, references about a production date that turn out to be false, untrue suggestions that a new product will be shipped soon or will be shipped in substantial quantities, overly optimistic statements about the impact of a product on the market, statements incompletely characterizing the results of new product testing, and the failure to disclose known difficulties with a product. See id. § 1.01[1], at 1-3; id. § 5.03[2][d], at 5-17 to -29; id. § 5.03[3][b-c], at 5-31 to -41; see also In re Apple Computer Sec. Litig., 886 F.2d 1109 (9th Cir. 1989) (denying the defendant summary judgment where it had made overly optimistic statements about a new product).
89. See BROWN, supra note 54, § 3.02, at 3-6; Brudney, supra note 54, at 749 n.72 (citing cases and scholarship).
90. The SEC believes that, depending on the circumstances, there is a duty to correct statements made in any filing . . . if the statements either have become inaccurate by virtue of subsequent events, or are later discovered to have been false and misleading from the outset, and the issuer knows or should know that persons are continuing to rely on all or any material portion of the statements. LOSS, supra note 29, at 737 (quoting Securities Act Release No. 6084, 17 SEC Dock. 1048, 1054 (July 10, 1979)); see also Butler Aviation Int'l, Inc. v. Comprehensive Designers, Inc., 425 F.2d 842, 843 (2d Cir. 1970) (finding liability for failure to correct a press release); SEC v. Shattuck Denn Mining Corp., 297 F. Supp. 470, 475-76 (S.D.N.Y. 1968) (same); LOSS, supra note 29, at 737 n.57 (citing cases).
91. LOSS, supra note 29, at 738 (citing John M. Sheffey, Securities Law Responsibilities of Issuers To Respond to Rumors and Other Publicity, 57 NOTRE DAME LAW. 755 (1982)); see also LOSS, supra note 29, at 738 n.58 (citing cases).
92. See Basic Inc. v. Levinson, 485 U.S. 224, 249-50 (1988); LOSS, supra note 29, at 736.
93. See, e.g., SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 861-62 (2d Cir. 1968); Brudney, supra note 54, at 737 n.44. In addition, under the "misappropriation" doctrine of 10b-5, which the Supreme Court recently validated, the duty to disclose or abstain attaches to others who have access to information unavailable to the market generally and who would violate a fiduciary duty "or other similar relationship of trust and confidence" by using the information, without disclosure to the principal, to gain an advantage in a market transaction. United States v. O'Hagan, 117 S. Ct. 2199, 2216 (1997).
94. See Dirks v. SEC, 463 U.S. 646, 654 (1983); Chiarella v. United States, 445 U.S. 222, 228 (1980); Anderson, supra note 38, at 344; Victor Brudney, Insiders, Outsiders, and Informational Advantages Under the Federal Securities Laws, 93 HARV. L. REV. 322, 353-67 (1979);
95. Frank Easterbrook, Insider Trading. Secret Agents, Evidentiary Privileges, and the Production of Information, 1981 SUP. CT. REV. 309, 314-39.
96. For a defense of fiduciary duty in corporate law, see Scott FitzGibbon, Fiduciary Relationships Are Not Contracts: A Defense of Fidelitatis Connexio Against the Assault by Utilitarianism and Economic Analysis, 81 MARQ. L. REV. (forthcoming Summer 1998). The fraud arises from the interaction between the nondisclosure and the existence of a fiduciary duty. See Chiarella, 445 U.S. at 232-33; see also United States v. Chestman, 947 F.2d 551, 575-76 (2d Cir. 1991) (Winter, J., concurring in part and dissenting in part) (discussing the development of insider trading case law by the Supreme Court). In the misappropriation context, the fraud is seen as arising from the failure of the misappropriator to disclose to the principal that she intends to trade on the basis of the information. See O'Hagan, 117 S. Ct. at 2211.
97. See Brudney, supra note 54, at 736.
98. See id. at 735-36; see also H.R. REP. No. 73-1383, at 11 (1934) (stating that with accurate information the competing judgments of buyers and sellers will lead to a price that reflects as nearly as possible a hypothetical just price), reprinted in 1 SECURITIES L. COMM., FEDERAL BAR ASS'N, FEDERAL SECURITIES LAWS: LEGISLATIVE HISTORY 1933-1982, at 793, 804 (1983) [hereinafter SECURITIES LAWS: LEGISLATIVE HISTORY];
99. Alison Grey Anderson, The Disclosure Process in Federal Securities Regulation: A Brief Review, 25 HASTINGS L.J. 311, 314 (1974) (noting that disclosure promotes accurate investment analysis and protects unsophisticated investors from unfair treatment); Brudney, supra note 65, at 334 (suggesting that the goal of disclosure is to make price reflect value).
100. This is also the rationale for the affirmative duties of registration and disclosure. See supra note 54; see also Brudney, supra note 54, at 741. In the insider trading cases, reference is often made to the importance of maintaining "'fair and honest markets.'" E.g., O'Hagan, 117 S. Ct. at 2209 (quoting the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1994)). The market rationale cannot be the principal basis for the insider trading rules, however, because the requirement that the trader violate a fiduciary duty means that only a subset of traders with greater-than-market information will be prohibited from trading. Indeed, as the Supreme Court said in Dirks and reiterated in O'Hagan, "There is no 'general duty between all participants in market transactions to forgo actions based on material, nonpublic information.'" Id. at 2212 (quoting Dirks, 463 U.S. at 655). Indeed, in O'Hagan, the Court made clear that if the misappropriator of information disclosed to her principal (as opposed to the other party in the securities transaction) that she intended to trade on the information, there would be no liability under section 10(b), even though the market would be as deceived as if there had been no disclosure to the principal. See Id. at 2211 n.9; id. at 2225 (Thomas, J., concurring in the judgment in part and dissenting in part). The principal rationale for the insider trading rules is the notion that it is "desirable to deny persons having exclusive possession of certain kinds of information an advantage over others with whom they effectively transact, but who cannot lawfully get such information." Brudney, supra note 54, at 735; see also Brudney, supra note 65, at 334. This rationale is related to another justification that animated Congress in adopting the acts, that the public interest would be served by recognizing and equalizing "the gross inequality of bargaining power between the professional securities firm and the average investor." LOSS, supra note 29, at 716. As the Second Circuit explained in an early case under the securities acts, "The essential objective of securities legislation is to protect those who do not know market conditions from the overreachings of those who do." Charles Hughes & Co. v. SEC, 139 F.2d 434, 437 (2d Cir. 1943). Another court has stated that the securities laws were enacted "for the very purpose of protecting those who lack business acumen." United States v. Monjar, 47 F. Supp. 421, 425 (D. Del. 1942), aff'd, 147 F.2d 916 (3d Cir. 1944); see also Morris & Hirshberg, Inc. v. SEC, 177 F.2d 228, 233 (D.C. Cir. 1949) (stating that "the investing and usually naive public needs special protection in this field"); LOSS, supra note 29, at 719 (noting that the purpose of securities laws was to protect unsophisticated investors). But even these explanations overstate the rationale for the insider trading rules because inequality in knowledge is not enough; there must be a breach of fiduciary duty as well.
101. See Mahoney, supra note 52, at 631.
102. See F.A. Hayek, The Use of Knowledge in Society, 35 AM. ECON. REV. 519, 526-27 (1945).
103. For a general review of the efficient capital market hypothesis, see RONALD J. GILSON & BERNARD S. BLACK, THE LAW AND FINANCE OF CORPORATE ACQUISITIONS 135-81 (2d ed. 1995); for an analysis of the informational content of prices in other markets, see Mahoney, supra note 52, at 641-44.
104. Fischel, supra note 4, at 1066. Uninformed investors may, of course, lose somewhat if they purchase or sell securities during the period of time that the market price is adjusting to the activity of the informed investor (indeed, they may be selling to the informed investor). But prices in the capital market typically adjust very quickly, so the uninformed investor will be protected in the great majority of cases. See Daniel R. Fischel, Use of Modern Finance Theory in Securities Fraud Cases Involving Actively Traded Securities, 38 BUS. LAW. 1, 12-13 (1982). The corollary to this point is that investors with new information will make better-than-market returns only until the price adjusts. See GILSON & BLACK, supra note 69, at 135.
105. EASTERBROOK & FISCHEL, supra note 51, at 336.
106. See id.; see also Mahoney, supra note 52, at 633 (arguing that "the wealth transfer to the defendant is a good proxy for the net social cost of primary-market frauds").
107. See EASTERBROOK & FISCHEL, supra note 51, at 335-36.
108. See Fischel, supra note 4, at 1063.
109. Companies can contract around the registration requirements of the securities laws in certain limited circumstances if the securities to be sold are offered only to a small number of sophisticated investors. See, e.g., Rule 144A, 17 C.F.R. § 230.144A (1996). The antifraud rules, however, cannot be contracted around even in these circumstances. See id. preliminary note 1 ("This section relates solely to the application of section 5 of the [1933] Act and not to antifraud or other provisions of the federal securities laws.").
110. The mandatory nature of the antifraud rules also reflects Congress's determination that investors should not have to rely on common law remedies in tort or contract. See infra Part IV.
111. See, e.g., Easterbrook & Fischel, supra note 54, at 669; see also infra note 85 and accompanying text.
112. See, e.g., Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 741 (1975) (recognizing the social costs of strike suits); Elliott J. Weiss, The New Securities Fraud Pleading Requirement: Speed Bump or Road Block?, 38 ARIZ. L. REV. 675, 678-79 (1996);
113. see also Mahoney, supra note 52, at 624-25 (criticizing the expansion of federal fraud protection that came about through the adoption of the "fraud-on-the-market" theory of reliance); Roberta Romano, Directors' and Officers' Liability Insurance: What Went Wrong?, in NEW DIRECTIONS IN LIABILITY LAW 67, 69 (Walter Olson ed., 1988) (describing the increase in the number of claims filed against directors).
114. Pub. L. No. 104-67, 109 Stat. 737 (to be codified at 15 U.S.C. § 77z); see also John W. Avery, Securities Litigation Reform: The Long and Winding Road to the Private Securities Litigation Reform Act of 1995, 51 BUS. LAW. 335 (1996) (analyzing the statute and its legislative history).
115. The SEC had previously provided other safe harbors. For 45 years, the SEC discouraged firms from making any projections of profits or other forward-looking disclosures on the ground that this kind of information was inherently misleading. In 1979, however, the SEC issued Rule 175, 17 C.F.R. § 230.175 (1996), permitting the disclosure of projections and forecasts provided they are adequately supported. See Easterbrook & Fischel, supra note 54, at 696; James R. Repetti, Management Buyouts, Efficient Markets, Fair Value, and Soft Information, 67 N.C. L. REV. 121. 140-41 (1988).
116. Private Securities Litigation Reform Act of 1995 § 27A(c)(1)(A)(i), 109 Stat. at 750; see also Avery, supra note 79, at 355.
117. See Private Securities Litigation Reform Act of 1995 § 27A(c)(1)(B), 109 Stat. at 750-51. No cautionary language is necessary under this safe harbor. See Avery, supra note 79, at 355.
118. See, e.g., Mahoney, supra note 52, at 625, 630-31. Though Mahoney criticizes the Supreme Court for loosening the reliance element that was previously essential under the common law, he does not retreat from the notion that legal protection from fraud is necessary.
119. Without a detailed empirical analysis, it is difficult to prove absolutely that the costs of a rule against fraud outweigh the benefits. Lynn Stout has pointed out, however, that if the absence of federal fraud protection caused the value of the securities market to be discounted only one percent, that would be equivalent to a $100 billion dollar decline in the value of outstanding corporate securities. See Lynn A. Stout, Type I Error, Type II Error, and the Private Securities Litigation Reform Act, 38 ARIZ. L. REV. 711, 714-15 (1996).
120. As Stout suggests, it is difficult to imagine the costs of strike suits outweighing the benefit of avoiding such a decline. See id. 85. See id. at 713 (stating that there is a "consensus" among securities scholars that fraud is "very, very bad"). In a forthcoming article, Roberta Romano calls for the end of mandatory federal regulation of securities in favor of "a market-oriented approach of competitive federalism" that would allow states to compete with each other on the basis of their systems of securities regulation. Roberta Romano, Empowering Investors: A Market Approach to Securities Regulation, 107 YALE L.J. (forthcoming June 1998)
121. (manuscript at 2, on file with the Yale Law Journal).
122. She bases her argument on what she calls the "successful experience of the U.S. states in corporate law, in which the 50 states and the District of Columbia compete for the business of corporate charters." Id. While Romano questions the efficiency of mandatory fraud protection at the federal level, she does not argue that fraud law itself is inefficient or improper. Whether the proper situs for fraud protection in the capital market is at the state or federal level is beyond the scope of her article. Nevertheless, Romano appears to be expressing a minority view, and there are a number of grounds on which to question her argument. As Joel Seligman has pointed out, the federalization of antifraud protection took place because of a "widely held belief" that a web of state laws could not provide adequate checks on fraud in the capital market. Joel Seligman, The Historical Need for a Mandatory Corporate Disclosure System, 9 J. CORP. L. 1, 18 (1983).
123. With the growing sophistication and size of the capital markets, it is worth questioning how one could expect states to be more successful at fraud regulation in the 1990s than in the 1930s. See Stephen J. Choi & Andrew T. Guzman, National Laws, International Money: Regulation in a Global Capital Market, 65 FORDHAM L. REV. 1855, 1882-83 (1997) (arguing that, in most countries, including the United States, it is more efficient for there to be a single national securities regime than a multitude of state regimes). In the context of fraud protection for workers, this Article discusses below whether a federal antifraud scheme for workers would be more efficient than state protection. See infra notes 182-184, 303-312 and accompanying text.
124. See, e.g., EASTERBROOK & FISCHEL, supra note 51, at 336 ("There is no good reason for not registering stock required to be registered or for telling lies in the issuance of stock.").
125. See infra notes 120-123 and accompanying text.
126. See infra notes 139-142 and accompanying text.
127. 29 U.S.C. §§ 2101-2109 (1994).
128. See id. § 2102.
129. See id. § 2104(a)(1); see also North Star Steel Co. v. Thomas, 515 U.S. 29, 31-33 (1995) (providing an overview of WARN Act); cf. Washington v. Aircap Indus., 860 F. Supp. 307 (D.S.C. 1994) (holding that employees were entitled to back pay only for "work days" within the violation period).
130. See, e.g., Occupational Safety and Health Act of 1970 (OSHA), 29 U.S.C. §§ 651-678. OSHA regulations provide that "employees have both a need and a right to know the hazards and identities of the chemicals they are exposed to when working." 29 C.F.R. § 1910.1200 app. E (1996). Pursuant to OSHA, employers must provide all employees with access to Material Safety Data Sheets that contain vital information about the health hazards associated with chemicals present in the workplace. See id. OSHA also established the Records Access Rule, 29 C.F.R. § 1910.1020, which requires employers to provide their employees with access to records voluntarily created by the employer that contain the medical and exposure histories of other employees who have been previously exposed to toxic substances or other physically harmful agents.
131. See NLRB v. Truitt Mfg. Co., 351 U.S. 149, 153 (1956) (ruling that it is an unfair labor practice for a company to claim financial inability to pay a wage increase and then to refuse to allow the union to see the company's books to verify the claim); Oil, Chem. & Atomic Workers Local 6-418 v. NLRB, 711 F.2d 348, 358-59 (D.C. Cir. 1983) (holding that the employer's duty to bargain in good faith with a labor union includes a duty to supply the union with "'requested information that will enable [the union] to negotiate effectively and to perform properly its other duties as bargaining representative'" (quoting Local 13, Detroit Newspaper Printing & Graphic Communications Union v. NLRB, 598 F.2d 267, 271 (D.C. Cir. 1979))). This duty to provide relevant information typically includes matters central to the bargaining process, such as wages and work hours, and can extend to details of chemical exposure and other work hazards. See Oil, Chem. & Atomic Workers Local, 711 F.2d at 359, 361.
132. 29 U.S.C. §§ 151-169.
133. See First Nat'l Maintenance Corp. v. NLRB, 452 U.S. 666, 677 n.15 (1981); Thomas C. Kohler, Distinctions Without Differences: Effects Bargaining in Light of First National Maintenance, 5 INDUS. REL. L.J. 402, 415 (1983);
134. Katherine Van Wezel Stone, The Legacy of Industrial Pluralism: The Tension Between Individual Employment Rights and the New Deal Collective Bargaining System, 59 U. CHI. L. REV. 575, 589 n.52 (1992).
135. There are significant loopholes in the NLRA's protective scheme. Most crucially, companies are not required to bargain over whether a plant should be closed in the first place. See First Nat'l Maintenance, 452 U.S. at 686; United Food & Commercial Workers Int'l Union Local 150-A v. NLRB, 880 F.2d 1422, 1430 (D.C. Cir. 1989); Stone, supra, at 588. Moreover, according to Stone, effects bargaining generally takes place after the employer has made and implemented a decision, when the union no longer has leverage to protect its members. If the employer violates its obligation to engage in effects bargaining, the remedy for the violation is limited to back pay and is typically calculated from five days after the date of the court or board order until the time the parties reach either agreement or impasse. This time period is not to exceed the time the employee actually was out of work but cannot be less than two weeks. See In re Transmarine Navigation Corp., 170 N.L.R.B. 389, 390 (1968). In effect, "this means that when a violation is found, the employer quickly bargains to impasse and is liable for back pay for only two weeks." Stone, supra, at 589 n.52 (citing as an example Yorke v. NLRB, 709 F.2d 1138, 1144-46 (7th Cir. 1983)).
136. 29 U.S.C. §§ 1001-1461.
137. See infra notes 215-230 and accompanying text (discussing Varity Corp. v. Howe, 116 S. Ct. 1065 (1996)).
138. 29 U.S.C. § 185.
139. See Stone, supra note 95, at 593-96.
140. See id. at 577.
141. See infra note 213 and accompanying text.
142. These preemption doctrines are considered in more detail below. See infra Subsections IV.B.1-2.
143. As a descriptive matter, the difference between the level of fraud protection may be explained not by public-regarding reasons but by the interplay of pressure groups on the legislative and regulatory process. See, e.g., MURRAY EDELMAN, THE SYMBOLIC USES OF POLITICS 56 (1964) ("Administrative agencies are to be understood as economic and political instruments of the parties they regulate and benefit, not of a reified 'society,' 'general will,' or 'public interest.'");
144. Sam Peltzman, Toward a More General Theory of Regulation, 19 J.L. & ECON. 211 (1976) (arguing that government officials are vote maximizers who arbitrate among competing interests that seek to use the government to redistribute resources);
145. Richard A. Posner, Taxation by Regulation, 2 BELL J. ECON. & MGMT. SCI. 22 (1971) (arguing that one function of regulation is the performance of distributive and allocative chores usually associated with the taxing branch of the government);
146. George J. Stigler, The Theory of Economic Regulation, 2 BELL J. ECON. & MGMT. SCI. 3, 3 (1971) ("[R]egulation is acquired by the industry and is designed and operated primarily for its benefit.").
147. Because they are a result of pressure group politics, the argument would go, regulations serve the broader public interest only by accident. See Easterbrook & Fischel, supra note 54, at 671. In this view, the difference between the high level of protection against fraud available to capital investors and the low level of protection available to workers is explained simply by the greater ability of capital investors to affect the political process. There may be much to this story that is correct. But even if this explanation is factually accurate, it serves only as a positive explanation rather than a normative justification for the difference between the two levels of legal protection. Justifications ought to matter. See, e.g., ARISTOTLE, POLITICS 69 (Benjamin Jowett trans., The Viking Press 2d prtg. 1959).
148. As Aristotle wrote: The true forms of government, therefore, are those in which the one, or the few, or the many, govern with a view to the common interest; but governments which rule with a view to the private interest, whether of the one, or of the few, or of the many, are perversions. Id. To the extent that justifications do matter (to public servants, legislators, judges, lawyers, or academics, among others), the pressure group description is incomplete and dissatisfying. Indeed, some scholars have argued that, even as a descriptive matter, regulatory politics are not completely about power and that justifications are important in the formulation of legislative and regulatory initiatives. See, e.g., James Q. Wilson, The Politics of Regulation, in THE POLITICS OF REGULATION 357, 370-72, 393 (James Q. Wilson ed., 1980) (arguing that the power of ideas often shapes regulation, even in the face of concentrated political opposition);
149. see also Robert L. Rabin, Federal Regulation in Historical Perspective, 38 STAN. L. REV. 1189, 1293-94 (1986) (arguing that the National Environmental Policy Act and the Clean Air Act, among other initiatives, were not products of interest group politics);
150. cf. JERRY L. MASHAW, BUREAUCRATIC JUSTICE 13 (1983) (discussing observations of administrative agencies that operate independently and sensibly, even in the face of varied political pressure). To the extent that these scholars have a point, justifications would matter not only in helping one discover what the right outcome should be but also in helping one achieve it. One might also pose a historical hypothesis for the difference between the levels of fraud protection in the capital and labor markets. Stability of and truthfulness in the capital market were to be protected by the Securities Act of 1933, 15 U.S.C. § 77 (1994), and the Securities Exchange Act of 1934, 15 U.S.C. § 78. Stability of and truthfulness in the labor market, on the other hand, were to be ensured by labor unions operating under the protection of the NLRA, an initiative "that recognized organized labor as a countervailing force to big business." Rabin, supra, at 1252; cf. Oil, Chem. & Atomic Workers Union Local 6-418 v. NLRB, 711 F.2d 348, 358-59 (D.C. Cir. 1983) (discussing the duty of unions to represent intelligently and effectively employees in collective bargaining with employers). As the strength of unions has declined, workers have been able to rely on them less to protect themselves from employer fraud. Meanwhile, as legal and nonlegal protection against fraud has increased in the capital markets, see supra notes 54-66 and accompanying text, the differences between the protection available to workers and those available to investors have grown as well.
151. See, e.g., SISSELA BOK, LYING 18 (1978) ("[S]ome level of truthfulness has always been seen as essential to human society . . . .").
152. This Article does not attempt to make a moral argument for an antifraud statute for workers. This is not to say that moral arguments are meaningless in the public sphere but simply to acknowledge that this Article focuses on legal, economic, and public policy arguments.
153. E.g., BRUCE E. KAUFMAN, THE ECONOMICS OF LABOR MARKETS 241-42 (4th ed. 1994).
154. Some basic principles will help illustrate this argument. A competitive market allocates goods, services, labor, and capital through variations in prices. When something (whether a tomato, a car, or an engineer) is highly desired but in short supply, its price (or wage, in the case of the engineer) will rise, decreasing the quantity demanded until the market clears. If something is in surplus, or not greatly desired, its price will fall until the quantity demanded rises sufficiently to clear the market of any surplus goods. When the market clears, it is in equilibrium because the quantity demanded of the item equals the quantity supplied. This equilibrium state is seen as efficient because it allows both suppliers and buyers to allocate their resources to uses that produce the most utility. This is one of the basic principles of economics: If voluntary exchange through a market is permitted, resources will tend to gravitate toward their most valuable uses. As Judge Posner writes, "By a process of voluntary exchange, resources are shifted to those uses in which the value to consumers, as measured by their willingness to pay, is highest." POSNER, supra note 54, at 11. A widget manufacturer is willing to spend more for labor and materials than other potential users of those resources only if she thinks she can use those resources to obtain a higher price for her finished widgets than could the other users. Similarly, Company A is willing to pay an engineer a higher wage than Company B only if his services are worth more to Company A than to Company B, meaning that A can use him to produce a more valuable output, as measured by the prices consumers are willing to pay. Thus efficient, voluntary exchange is possible only if people have sufficient information to evaluate the various uses for their resources. See, e.g., STEPHEN BREYER, REGULATION AND ITS REFORM 26 (1982);
155. Easterbrook & Fischel, supra note 54, at 673 ("Fraud reduces allocative efficiency. So too does any deficiency of information."). Usually, the necessary information is captured through the action of the price system. That is, a producer of tin does not need to know the uses to which various competing buyers will put the tin; the producer needs only to know how much each buyer is willing to pay for the tin. See Hayek, supra note 69, at 526-27. Fraud is unlawful, in part, because it distorts the price system's ability to convey information. Without such information, firms will be unable to decide whether to dedicate their resources toward building widgets or for some other use, and engineers will be foiled in choosing between Companies A and B. If, for example, both companies were prohibited from disclosing to the engineer the amount they would pay him, the engineer would be unable to choose between them with certainty, and there would be no assurance that the engineer's labor would be dedicated to the use that society valued the most (as measured by the market valuation of his labor). It is important to note, however, that in some contexts the benefits of the disclosure of information are outweighed by other values, such as the importance of privacy. Cf., e.g., Paul M. Schwartz, Privacy and the Economics of Personal Health Care Information, 76 TEX. L. REV. 1, 4-5 (1997) (arguing that the unlimited disclosure of personal health care data is not economically efficient).
156. See, e.g., KAUFMAN, supra note 106, at 372. For a similar analysis of the securities markets, see Easterbrook & Fischel, supra note 54, at 673.
157. Admittedly, this is a simplistic assumption, but it is helpful in comparing jobs that are similar. In jobs that require radically different skills, the effect of the labor supply on wages will likely swamp the effect of the compensating wage differential. That is why major league baseball players earn more than coal miners even though mining coal is less desirable work. See, e.g., KAUFMAN, supra note 106, at 377-78; cf. JOHN STUART MILL, PRINCIPLES OF POLITICAL ECONOMY 235 (Longmans, Green & Co. 1900) (1848) (noting the simplicity of assumptions with regard to wage differentials).
158. In this portion of the analysis, the level of job security each company offers is assumed to be an exogenous variable. This assumption will be relaxed in the following section.
159. See John M. Abowd & Orley Ashenfelter, Anticipated Unemployment, Temporary Layoffs, and Compensating Wage Differentials, in STUDIES IN LABOR MARKETS 141, 143-45 (Sherwin Rosen ed., 1981); see also KAUFMAN, supra note 106, at 373 (discussing the effect of seasonal employment on wage compensation).
160. See Abowd & Ashenfelter, supra note 110, at 144-45. Note that this analysis would essentially be the same for any two conditions of employment. To the extent that Company A offers a non-wage benefit (whether safer working conditions or better cafeteria lunches), Company B must increase its wages to compensate.
161. Another complexity should be noted here as well. One additional factor in the difference between the wages at the secure employment firm and the insecure employment firm will be the elasticity of the labor supply, i.e., the variance in the laborer's preference for work over leisure and other uses of time as the wage increases. The more "elastic" the labor supply, the more the supply of labor will change for any given change in the wage rate. See, e.g., KAUFMAN, supra note 106, at 59-62 & n.10. Many studies show that the labor supply curve for both men and women is very inelastic, that is, for every one percent wage increase, the hours worked will increase considerably less than one percent. See, e.g., id. at 60-62. The more inelastic the labor supply, the greater the compensating differential will be between the wage rate at the secure employment firm and the insecure employment firm. See Abowd & Ashenfelter, supra note 110, at 147. This is because the insecure employment firm will have to increase its wages significantly in order to entice a sufficient number of workers to join it. In other words, let us assume that if the insecure employment firm paid no wage differential it would have a labor shortage of 10%. If the supply of labor were elastic, the firm would be able to increase its work force sufficiently by increasing its wages by less than 10%. If the supply were inelastic, it would have to increase its wages by more than 10%.
162. See notes 6-16 and accompanying text.
163. See, e.g., Donald P. Judges, Of Rocks and Hard Places: The Value of Risk Choice, 42 EMORY L.J. 1, 18-26 (1983) (discussing the positive worth of risk and risk-seeking).
164. Again, the analysis would be the same if we were comparing wages and workplace safety (or lunchroom food, or size of office space, or any other condition of employment) rather than wages and security. Some workers will value any one of these factors more than their coworkers, and the market will ensure that workers who value those things more will allocate themselves to the firms that offer them at lowest cost.
165. There is a complexity that should be noted here although it is discussed further below. See infra notes 122-123 and accompanying text. If the risky company is able to mislead the workers in the labor market into believing that the company is less risky than it in fact is, the company is robbing society of a portion of its allocational efficiency. Some of the difference is deadweight loss, and some is redistributed to the company that lies.
166. See, e.g., Abowd & Ashenfelter, supra note 110, at 149-50. Similarly, if workers differ in the elasticity of their supply of labor, the workers with the highest elasticity will be sorted into firms that have the greatest amount of job discontinuities (for example, seasonal employment). This allows the firm to achieve its demanded employment flexibility at the lowest cost.
167. Cf. Easterbrook & Fischel, supra note 54, at 673 (describing how securities markets match prospects, managers, and funds).
168. See H.R. REP. No. 73-1383, at 11 (1934), reprinted in 1 SECURITIES LAWS: LEGISLATIVE HISTORY, supra note 67, at 793, 804. The full passage reads: No investor, no speculator, can safely buy and sell securities . . . without having an intelligent basis for forming his judgment as to the value of the securities he buys or sells. The idea of a free and open public market is built upon the theory that competing judgments of buyers and sellers as to the fair price of a security brings about a situation where the market price reflects as nearly as possible a just price. Just as artificial manipulation tends to upset the true function of an open market, so the hiding and secreting of important information obstructs the operation of the markets as indices of real value. There cannot be honest markets without honest publicity. Id.
169. Cf. Easterbrook & Fischel, supra note 54, at 673 (noting that securities investors lacking sufficient information will view all securities as average). Some workers might be able to search out and discover which employers are lying, but such search is unlikely to be cost-free. These costs could be avoided by a rule against fraud. See infra notes 292-294 and accompanying text.
170. For a similar analysis applied to the securities markets, see Easterbrook & Fischel, supra note 54, at 673-74.
171. Cf. George A. Akerlof, The Market for "Lemons": Quality Uncertainty and the Market Mechanism, 84 Q.J. ECON. 488, 495 (1970) (describing how dishonest dealings "tend to drive honest dealings out of the market"); Farber & Matheson, supra note 24, at 928 (relating a similar analysis as an explanation for the need to enforce promissory estoppel doctrine).
172. One cannot, however, say on the basis of the discussion thus far whether the need for regulation is necessary in the labor market or whether the need for such regulation is as great or greater than in the securities market. See infra Section II.C.
173. See supra note 109.
174. For example, the layoffs in the steel mills of Youngstown came in part because of the failure of U.S. Steel to invest in the modernization of its facilities. See LYND, supra note 5, at 16. By some accounts, the potential closure of Warnaco's Hathaway shirt factory, see supra note 26, came in part because of the failure of the company to dedicate resources necessary to market the shirts effectively. See Rimer, supra note 26 (noting that Warnaco "had long since all but stopped advertising Hathaway shirts nationally").
175. The following discussion is analogous to that provided in KAUFMAN, supra note 106, at 392-98, on the provision of health and safety protection.
176. This is because, in the aggregate, most people are assumed to be risk averse, i.e., they have an increasing aversion to additional increments of risk. See id. at 394-95.
177. Cf. id. (discussing, in the context of health and safety provisions, that if firms are required to reduce injury rates below an optimal level they must offer workers lower wages in order to stay in business). If a firm has a greater level of discontinuity than that represented by its optimal point, it will increase its preventative expenditures because the benefit of lower labor costs will outweigh the costs of prevention. If a company has a level of discontinuity that is less than optimal, an increase in wages to compensate workers for additional insecurity will cost less than the savings in prevention costs.
178. This would at least be the short term effect and would last until workers learned that they could not rely on any statement from their employer pertaining to job security. The length of time in which this is likely to occur begs reference to Keynes's famous aphorism that "[i]n the long run, we are all dead." JOHN MAYNARD KEYNES, A TRACT ON MONETARY REFORM 80 (1923). In the long run, workers' willingness to accept lower wages in return for representations about job security would decrease as well. The demands of workers would then depend in part on workers' evaluations of the likely number of firms offering secure employment and firms offering insecure employment. One might even observe that in firms that offer secure employment, workers will require higher wages per incidence of job discontinuity because they can no longer rely on their company's representation of continued job security. In the long term, therefore, the continuance of the effects mentioned in the text will depend on whether there are more insecure employment firms that would benefit from a rule allowing fraud or more secure employment firms that would lose from such a rule.
179. See infra notes 296-298 and accompanying text. Yet, even with these private mechanisms, legal protection against fraud in the capital markets is still seen as essential.
180. See infra notes 301-302 and accompanying text.
181. Allegedly fraudulent employer representations have at times lured workers across state lines. See, e.g., Lazar v. Superior Ct., 909 P.2d 981 (Cal. 1996) (examining whether an employer fraudulently enticed a potential employee to move from New York to Los Angeles to accept a job), discussed infra note 271; Charter Township of Ypsilanti v. General Motors Corp., 506 N.W.2d 556 (Mich. Ct. App. 1993) (per curiam) (rejecting a fraud claim against General Motors for moving its plant production capacity from Michigan to Texas), discussed infra note 272; Lewis, supra note 27 (examining a case in which workers were lured to move from Tennessee to Massachusetts with apparently false promises of lucrative work).
182. For example, collective bargaining, see, e.g., National Labor Relations Act, 29 U.S.C. §§ 151-169 (1994), the minimum wage, see 29 U.S.C. § 206, occupational safety, see Occupational Safety and Health Act of 1970 (OSHA), 29 U.S.C. §§ 651-678, and employee benefits,
183. see Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001-1461, are all regulated at the national level.
184. Local 174, Teamsters v. Lucas Flour Co., 369 U.S. 95, 103 (1962) (quoting Pennsylvania R.R. v. Public Serv. Comm'n, 250 U.S. 566, 569 (1919)).
185. See supra text accompanying note 63.
186. Mahoney, supra note 52, at 633.
187. Id. at 633-34.
188. Econometric studies reveal that advance notice of layoffs tends to reduce the length of unemployment workers suffer after the layoff. See, e.g., John T. Addison & Pedro Portugal, Advance Notice and Unemployment: New Evidence from the 1988 Displaced Worker Survey, 45 INDUS. & LAB. REL. REV. 645, 658 (1992) (concluding that advance notice is associated with a reduction in joblessness for most categories of workers); see also id. at 660 tbl.A1 (discussing other econometric analyses on point).
189. Fischel, supra note 4, at 1065.
190. Id. at 1066.
191. See id. at 1067.
192. These two points, that fraud is particularly costly in the labor market because of the scarcity of adequate substitutes and that it is particularly costly because of workers' inability to diversify their risk, apply much more persuasively on the employee's side of the equation than on the employer's. An employer need worry about fraud from employees much less than vice versa because employers are typically better able to find adequate substitutes and are generally better able to diversify away the risk that some employees are deceiving them in some material way. The case for federal fraud protection in the labor market is thus much stronger vis-à-vis employers' deceit of employees than vis-à-vis employees' fraud of employers. The statute proposed infra in Part V, therefore, makes only the former actionable.
193. See supra Section I.B.
194. See Easterbrook & Fischel, supra note 54, at 674 ("One cannot leap from the difficulties of a market with asymmetric information to the conclusion that there is need for regulation - even such mild regulation as a prohibition of fraud.").
195. Even if the market does not self-correct, one would also need to argue that regulation would be less costly than the continuation of nonregulation. Moreover, to the extent that the proposed antifraud law for the labor market would be federal in scope, one would have to provide a basis to believe that a federal remedy would be more effective than protection rooted in state law. These issues are discussed infra in Part V.
196. Easterbrook & Fischel, supra note 54, at 674 n.7.
197. See id. at 675.
198. Id. at 674.
199. EASTERBROOK & FISCHEL, supra note 51, at 95.
200. Easterbrook & Fischel, supra note 54, at 675.
201. Id.
202. Id. at 674 n.7; see also Nicholas L. Georgakopoulos, Frauds, Markets, and Fraud-on-the-Market: The Tortured Transition of Justifiable Reliance from Deceit to Securities Fraud, 49 U. MIAMI L. REV. 671, 695 (1995) (arguing that verification costs are particularly high in financial markets). Indeed, only a limited amount of information can be verified at all in the securities markets. Investors cannot deduce future profits or risks of a business venture and would not want to spend their resources doing that even if they could. See Easterbrook & Fischel, supra note 54, at 674-75. Employees face the same difficulties when evaluating the prospects of a potential employer's business.
203. See infra notes 203-205, 301-302 and accompanying text.
204. See infra notes 295-302 and accompanying text.
205. See infra notes 299-300 and accompanying text.
206. This analysis tracks that offered in Stout, supra note 84, at 713.
207. See Akerlof, supra note 122, at 495.
208. See Easterbrook & Fischel, supra note 54, at 677.
209. Cf. id. (noting that verification expenses go down for high quality securities if informational warranties are generally enforced).
210. See id. at 678; cf. Brudney, supra note 54, at 733 n.31 (noting that hindsight often exposes corporate enterprises to liability if projections are unfulfilled); Stout, supra note 84, at 715 (admitting that securities fraud "[s]trike suits may . . . be imposing significant costs on United States firms").
211. For a "back of the envelope" calculation that the benefits of a rule against fraud in the securities markets far outweigh the costs of such a rule, see Stout, supra note 84, at 714-15.
212. See supra Section I.A.
213. See supra notes 31-32 and accompanying text.
214. See JONATHAN SHELDON, UNFAIR AND DECEPTIVE ACTS AND PRACTICES 31 (3d ed. 1991) ("Every state and the District of Columbia have enacted at least one statute with broad applicability to most consumer transactions, aimed at preventing consumer deception and abuse in the marketplace."); see also id. app. A at 527-42 (providing a state-by-state analysis of each statute).
215. See supra text accompanying notes 79-82.
216. See supra notes 84-86 and accompanying text.
217. See Pasley v. Freeman, 100 Eng. Rep. 450 (K.B. 1789) (severing the previously necessary connection between misrepresentation and a contract); see also supra note 32.
218. See E. ALLAN FARNSWORTH, CONTRACTS 9 (1982) (observing that, "From the perspective of society as a whole, the function of the law of contracts might have been seen as furthering the general economic good by encouraging parties to enter into . . . transactions" based on an exchange of promises, and that it "was essential to provide a general basis for the enforcement of promises").
219. Remember the Youngstown case in this context. See supra notes 5-24 and accompanying text. Many of the statements there were promissory in nature, yet the plaintiffs lost their promissory estoppel claim in the district court on the grounds that the statements did not constitute promises. See Local 1330, United Steel Workers v. United States Steel Corp., 631 F.2d 1264, 1277 (6th Cir. 1980). Also consider in this context the many cases arising under ERISA concerning company statements about "lifetime" benefits. Many of these cases, decided on contract reasoning, hold that such statements do not rise to the level of enforceable contracts, usually because of "reservation of rights" clauses. See, e.g., Sprague v. General Motors Corp., 92 F.3d 1425, 1434 (6th Cir. 1996); In re Unisys Corp. Retiree Med. Benefit "ERISA" Litig., 58 F.3d 896, 902-03 (3d Cir. 1995); Moore v. Metropolitan Life Ins. Co., 856 F.2d 488, 489 (2d Cir. 1988). But see Armistead v. Vernitron Corp., 944 F.2d 1287, 1299-300 (6th Cir. 1991) (using equitable estoppel doctrine to protect employees from the effects of misleading representations concerning retiree benefits). When courts in these kinds of cases apply tort reasoning, however, reasoning which is available when employees bring a fiduciary duty claim against the plan administrator, see infra notes 215-219 and accompanying text, the reservation clauses are not determinative. The outcome is instead determined in part according to whether it was reasonable for the employees to rely on the statements notwithstanding the reservation clauses. See, e.g., Varity Corp. v. Howe, 116 S. Ct. 1065, 1073 (1996).
220. Reliance might be reasonable even with certain disclaimers or cautionary statements made within the same communication or elsewhere. The key question would be whether the disclaimers or cautions were sufficiently influential as to make reliance unreasonable. Cf. Dale v. Rosenfeld, 229 F.2d 855, 858 (2d Cir. 1956) ("Availability elsewhere of truthful information cannot excuse untruths or misleading omissions in the prospectus."); LOSS, supra note 29, at 892 n.19 (recognizing the possibility that under section 12(2) of the 1933 Act, 15 U.S.C. § 77l (1994), true statements in one communication would not necessarily deny recovery if statements appearing in another communication were false).
221. See LOSS, supra note 29, at 716.
222. See supra Section I.A.
223. See RESTATEMENT (SECOND) OF TORTS § 550 (1977).
224. See KEETON ET AL., supra note 30, § 106, at 737.
225. See id. § 106, at 738.
226. Id.
227. Professor Georgakopoulos has argued that securities laws are stricter than common law deceit because of the relaxation of the reliance element on the basis of the fraud-on-the-market theory. See Georgakopoulos, supra note 152, at 711-19. He contends convincingly that a relaxation of the reliance requirement makes sense in the financial markets. But there is nothing about the fraud-on-the-market theory that limits it to the federal securities context and excludes common law courts from using it in common law deceit actions involving securities. In other words, the use of the fraud-on-the-market theory says less about the difference between federal and common law than about the market for securities and the market for real goods. One can support an antifraud statute for workers and remain agnostic with regard to whether the fraud-on-the-market theory should apply in actions brought under such a statute. For a discussion of the fraud-on-the-market theory in the capital markets, see infra notes 282-286 and accompanying text.
228. Cf. Diamond v. Oreamuno, 248 N.E.2d 910, 915 (N.Y. 1969) (recognizing a common law proscription against insider trading and noting that "[t]here is nothing in the Federal law which indicates that it was intended to limit the power of the States to fashion additional remedies to effectuate similar purposes").
229. See Easterbrook & Fischel, supra note 54, at 670.
230. See Seligman, supra note 85, at 18.
231. See supra notes 85-86 and accompanying text.
232. For an analysis of whether the proper locus of statutory protection is at the state or federal level, see infra Section V.B.
233. See Easterbrook & Fischel, supra note 54, at 699.
234. See Michael J. Missal, The Affairs of State: Securities Regulation by States Presents Its Own Challenges, LEGAL TIMES, Feb. 24, 1997, at S34.
235. See Labor Management Relations Act (LMRA), 29 U.S.C. § 185 (1994); see also Stone, supra note 95, at 577.
236. Section 301 states in relevant part: Suits for violation of contracts between an employer and a labor organization representing employees in an industry affecting commerce . . . may be brought in any district court of the United States having jurisdiction of the parties, without respect to the amount in controversy or without regard to the citizenship of the parties. 29 U.S.C. § 185(a).
237. Stone, supra note 95, at 577.
238. Id. at 598 (citing Franchise Tax Bd. v. Construction Laborers Vacation Trust, 463 U.S. 1, 23-24 (1983)).
239. Pennsylvania R.R. v. Public Serv. Comm'n, 250 U.S. 566, 569 (1919); accord Local 174, Teamsters v. Lucas Flour Co., 369 U.S. 95, 103 (1962); see also Stone, supra note 95, at 596 (discussing Lucas Flour).
240. 471 U.S. 202 (1985).
241. Id. at 220.
242. See id. at 211.
243. See, e.g., Talbot v. Robert Matthews Distrib. Co., 961 F.2d 654, 661-62 (7th Cit 1992); Smith v. Colgate-Palmolive Co., 943 F.2d 764, 767-71 (7th Cir. 1991); Dougherty v. American Tel. & Tel. Co., 902 F.2d 201, 203-04 (2d Cir. 1990); Terwilliger v. Greyhound Lines, Inc., 882 F.2d 1033, 1040 (6th Cir. 1989); Darden v. United States Steel Corp., 830 F.2d 1116, 1118-20 (11th Cir. 1987); Young v. Anthony's Fish Grottos, Inc., 830 F.2d 993, 997-1002 (9th Cir. 1987); Stallcop v. Kaiser Found. Hosps., 820 F.2d 1044, 1048-49 (9th Cir. 1987); Bale v. General Tel. Co., 795 F.2d 775, 779-80 (9th Cir. 1986); Serrano v. Jones & Laughlin Steel Co., 790 F.2d 1279, 1286-89 (6th Cir. 1986).
244. See Stone, supra note 95, at 594-96.
245. Id. at 595; see also United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 584-85 (1960) (announcing the presumption of arbitrability); United Steelworkers v. American Mfg. Co., 363 U.S. 564, 567-68 (1960) (ruling on a motion to compel arbitration that the judicial role is limited to determining whether the plaintiff has asserted "a claim which on its face is governed by the contract").
246. Stone, supra note 95, at 595; see also United Paperworkers Int'l Union v. Misco, Inc., 484 U.S. 29, 36 (1987) ("[C]ourts are not authorized to reconsider the merits of an [arbitral] award even though the parties may allege that the award rests on errors of fact or on misinterpretation of the contract.").
247. See Warrior & Gulf Navigation, 363 U.S. at 581-81; Stone, supra note 95, at 595 & n.74.
248. An additional difficulty posed by section 301 is that the statute of limitations is six months while the limitations period under state common law fraud is usually greater. See, e.g., CAL. CIV. PROC. CODE § 338 (West 1982 & Supp. 1997) (three years); 735 ILL. COMP. STAT. ANN. 5/13-205 (West 1992) (five years); MASS. GEN. LAWS ANN. ch. 260, § 2A (West 1992) (three years);
249. N.Y. C.P.L.R. 213 (Consol. 1997) (six years).
250. See Caterpillar, Inc. v. Williams, 482 U.S. 386 (1987); Stone, supra note 95, at 600-01. In some other cases, courts have held that section 301 did not preempt employees' common law fraud claims. See Milne Employees Ass'n v. Sun Carriers, Inc., 960 F.2d 1401 (9th Cir. 1991); Wells v. General Motors Corp., 881 F.2d 166 (5th Cir. 1989); Berda v. CBS Inc., 881 F.2d 20 (3d Cir. 1989); Varnum v. Nu-Car Carriers, Inc., 804 F.2d 638 (11th Cir. 1986); Anderson v. Ford Motor Co., 803 F.2d 953 (8th Cir. 1986); Barske v. Rockwell Int'l Corp., 514 N.W.2d 917 (Iowa 1994).
251. See supra note 95 and accompanying text.
252. Because section 301 is part of a federal law, a federal statute would be required to avoid these preemption obstacles completely.
253. See Lewis, supra note 28; All Things Considered, supra note 28.
254. See David Charny, The Employee Welfare State in Transition, 74 TEX. L. REV. 1601, 1618 (1996).
255. Id. at 1619.
256. Id. Charny cites a General Accounting Office study that determined that over 70% of retired workers misunderstood when they would be eligible for retirement benefits. See id. at 1619 n.48 (citing JOHN H. LANGBEIN & BRUCE A. WOLK, PENSION AND EMPLOYEE BENEFIT LAW 75 (1990)
257. (citing U.S. GEN. ACCOUNTING OFFICE, PENSION PLANS: MANY WORKERS DON'T KNOW WHEN THEY CAN RETIRE 2 (1987))).
258. Cf. Pace v. Signal Tech. Corp., 628 N.E.2d 20 (Mass. 1994) (examining a situation in which an employee had accepted a severance package that stretched payments over six months, with the understanding that the insurance would continue during the payout period, but when the employee was subsequently diagnosed with multiple sclerosis, the employee found out that the insurance coverage had ceased on the final day of employment).
259. 29 U.S.C. §§ 1001-1461 (1994).
260. See Boggs v. Boggs, 117 S. Ct. 1754, 1760 (1997).
261. 29 U.S.C. § 1144(a).
262. California Div. of Labor Standards Enforcement v. Dillingham Constr., N.A., 117 S. Ct. 832, 837 (1997) (citation omitted) (internal quotation marks omitted).
263. Id. (quoting District of Columbia v. Greater Wash. Bd. of Trade, 506 U.S. 125, 129 (1992)).
264. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41,46 (1987) (citation omitted) (internal quotation marks omitted); see also Boggs, 117 S. Ct. at 1763-65 (holding that ERISA preempts state community property law); Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 138-39 (1990) (noting that Congress chose expansive language with regard to state law preemption).
265. See, e.g., Vartanian v. Monsanto Co., 14 F.3d 697, 700 (1st Cir. 1994); Kelso v. General Am. Life Ins. Co., 967 F.2d 388, 390-91 (10th Gr. 1992); Pohl v. National Benefits Consultants, Inc., 956 F.2d 126, 128 (7th Cir. 1992); Consolidated Beef Indus., Inc. v. New York Life Ins. Co., 949 F.2d 960, 964 (8th Cir. 1991); Bernatowicz v. Colgate-Palmolive Co., 785 F. Supp. 488, 492-93 (D.N.J.), aff'd, 981 F.2d 1246 (3d Cir. 1992). But see DiPietro-Kay Corp. v. Interactive Benefits Corp., 825 F. Supp. 459 (D. Conn. 1993); Sandler v. New York News Inc., 721 F. Supp. 506, 512-15 (S.D.N.Y. 1989); Greenblatt v. Budd Co., 666 F. Supp. 735 (E.D. Pa. 1987); Pace v. Signal Tech. Corp., 628 N.E.2d 20 (Mass. 1994).
266. Vartanian, 14 F.3d at 700.
267. 116 S. Ct. 1065 (1996).
268. See id. at 1068-69.
269. 29 U.S.C. § 1104(a)(1) (1994).
270. Varity, 116 S. Ct. at 1074.
271. Since the Court decided Varity, employees have indeed been able to use ERISA fiduciary duties to win victories in fraud cases in lower courts. See, e.g., Ballone v. Eastman Kodak Co., 109 F.3d 117 (2d Cir. 1997) (vacating the district court's judgment against employees who brought a fiduciary duty claim); Sprague v. General Motors Corp., 92 F.3d 1425 (6th Cir. 1996) (reinstating a fiduciary duty claim).
272. See 29 U.S.C. § 1132(a)(3); Howe v. Varity Corp., 36 F.3d 746, 752, 755 (8th Cir. 1994), aff'd, 116 S. Ct. 1065 (1996).
273. Cf., e.g., Howe, 36 F.3d at 756-57 (vacating a jury award of 57.6 million in compensatory damages to one group of plaintiffs and substituting equitable relief of less than 5700,000, reinstatement into the plan, and restitution for accrued benefits).
274. Varity, 116 S. Ct. at 1071 (quoting 29 U.S.C. § 1002(21)(a)).
275. Id.
276. Id. at 1074.
277. Id. at 1073.
278. Id.
279. Id.
280. See 29 U.S.C. § 1108(c)(3) (1994); Varity, 116 S. Ct. at 1071 (noting that the defendant was both employer and plan administrator, as ERISA "permits"); id. at 1084 (Thomas, J., dissenting) ("Under ERISA, an employer is permitted to act both as plan sponsor and plan administrator.").
281. Cf. Pohl v. National Benefits Consultants, Inc., 956 F.2d 126 (7th Cir. 1992). In Pohl, the defendant, the employer's health benefits provider, told Mrs. Pohl that her husband's benefit plan would cover 80% of the costs of treating their daughter's psychiatric illness. In fact, the plan limited payment to $10,000. The daughter underwent treatment, and the Pohls were billed a total of $19,000. They subsequently brought a misrepresentation claim. The district court preempted the common law claim. In an opinion by Judge Posner, the Seventh Circuit affirmed, holding that the plan administrator's function under the plan was ministerial only, rather than discretionary. The administrator was therefore not a fiduciary. The Pohls were left "remediless." Id. at 127. Judge Posner emphasized that preemption was required by the statute even though "ERISA does not provide a substitute remedy." Id. at 128.
282. See supra notes 29-30, 43-51 and accompanying text.
283. Even if common law courts dealt fairly with workers' claims, the proponent of a common-law-only regime would still have to demonstrate that a state remedy is better than a federal one. As noted below, see infra Section V.B, drawbacks to this approach include possibly lower protection under the common law than under federal securities laws, variation across jurisdictions, and the costs associated with elastic legal rules.
284. 938 F.2d 474 (4th Cir. 1991).
285. See id. at 488-90. The suit was originally filed in state court in West Virginia but was subsequently removed to federal district court pursuant to 28 U.S.C. § 1441(c) (1994), presumably because of the federal questions arising under the section 301 preemption doctrine. See White v. National Steel Corp., 742 F. Supp. 312, 318 n.4 (N.D. W. Va. 1989), aff'd, 938 F.2d 474 (4th Cir. 1991); cf. Berda v. CBS Inc., 881 F.2d 20, 21 n.1 (3d Cir. 1989) (explaining removal to federal court when federal law preempts a state cause of action).
286. See White, 938 F.2d at 489.
287. The court reached the merits after deciding that the plaintiffs' claims were not preempted by section 301 or by other aspects of federal labor law because the claims were based on individual employment contracts and were "independent of any collective bargaining agreement." Id. at 482.
288. Stanley v. Sewell Coal Co., 285 S.E.2d 679, 683 (W. Va. 1981), quoted in White, 938 F.2d at 489.
289. See Stanley, 285 S.E.2d at 683 ("The law indulges in an assumption of fraud for the protection of valuable social interests based upon an enforced concept of confidence, both public and private.").
290. See White, 938 F.2d at 478.
291. See White v. National Steel Corp., 742 F. Supp. 312, 339 n.31 (N.D. W. Va. 1989) ("In fact, there does not appear to be any evidence in the voluminous record before this Court of any former bargaining unit member who was not permitted to return prior to the layoffs giving rise to the claims in this litigation."), aff'd, 938 F.2d 474 (4th Cir. 1991).
292. See White, 938 F.2d at 479.
293. See id. at 480.
294. See id.
295. W. at 489. It could be argued that this reasoning reveals a presumption against using fraud law to assist workers. The court apparently believed that the employment context is sufficiently different from property sales that the precedents developed in the latter are not persuasive in the former. This is hardly self-evident, as courts for decades have used property imagery to help make judgments with regard to employment law and the relationship between laborers and their employees. See, e.g., State v. Goodwill, 33 W. Va. 179, 183 (1889) (striking down a labor law on due process grounds, saying a man's labor was his "most sacred" property); cf. Richard A. Epstein, The Mistakes of 1937, GEO. MASON U. L. REV., Winter 1988, at 5, 19 ("At common law, all workers owned their labor and employers owned their capital."). Although many of the older cases making such an analogy have been overruled, see, e.g., Adkins v. Children's Hosp., 261 U.S. 525 (1923), overruled by West Coast Hotel Co. v. Parrish, 300 U.S. 379 (1937) (upholding a minimum wage law for women), it remains true that property doctrine is often used to interpret and analyze the employment relation. For example, scholars have argued powerfully that property law is a helpful metaphor for explaining and categorizing certain problems that arise within the employment relation. See, e.g., Singer, supra note 4, passim. The Supreme Court, too, has recognized the powerful similarities between jobs and other kinds of property. See, e.g., Perry v. Sindermann, 408 U.S. 593, 601-02 (1972) (stating that a junior college teacher might have a property interest in continued employment under his school's informal tenure system). One can disagree, of course, with specific holdings in cases and specific analyses in law journals and still accept the point that the analogy between property and employment can be a close one. The White court, however, thought the differences between property and employment were so great that it was unnecessary to explain why constructive fraud precedents arising out of property sales were not persuasive when used in the employment context. The court simply stated that the cases cited by the plaintiffs came from the context of property sales. See White, 938 F.2d at 489. In effect, the court was saying that when negotiating the conditions of a stock purchase (which, the court assumed, involves the sale of "property"), it is important that the parties not deceive each other, and fraud law will protect against such deception. When negotiating the conditions of employment, however, each party will have to assume the risk that the other is deceiving her. And, the court must have concluded, the situations are so different that the differences need not be explained.
296. White, 938 F.2d at 489-90 (citing Miller v. Huntington & Ohio Bridge Co., 15 S.E.2d 687, 695 (W. Va. 1941)). This reasoning is similarly open to attack. The court was correct to note that affirmative duties to disclose information arise most often in situations in which there is a fiduciary relationship between the parties, a relationship that did not exist in this case. But there are numerous exceptions, and the exceptions are growing. See supra notes 37-46 and accompanying text. Some of the cases cited by the court, in fact, involved factual circumstances in which the doctrine of constructive fraud was recognized even without the existence of a fiduciary relationship. See, e.g., Chamberlaine & Flowers, Inc. v. McBee, 356 S.E.2d. 626 (W. Va. 1987) (holding that a vendor has a duty to disclose substantial defects in housing to potential purchasers); Thacker v. Tyree, 297 S.E.2d 885 (W. Va. 1982) (holding that a builder-vendor has a duty to disclose to potential purchasers substantial defects in housing that would not be revealed by a reasonably diligent inspection). The court did recognize that the absence of preexisting fiduciary duty does not end the inquiry. If "public policy" would be served, the doctrine of constructive fraud could be applied even without a fiduciary duty. But if the absence of fiduciary duty does not end the analysis, then the question becomes much more difficult than the court admitted. The key question the court had to resolve in analyzing the employees' constructive fraud claim was not whether there existed a fiduciary relationship between the employees and employer. Instead, the pivotal inquiry should have been whether an exception to that principle should be recognized in this case as it had been elsewhere. The court could have looked at the range of cases in which exceptions had been recognized and then determined in what ways they were similar to the case at hand, or the court might have taken its own language seriously and analyzed whether "important public policy concerns" were at stake. But the court hardly nodded toward either inquiry. To be sure, the court did look beyond the fiduciary duty doctrine in one sense. It noted that the facts did not "show behavior so arbitrary and irresponsible as to be egregious," White, 938 F.2d at 490, an unsympathetic test that all but sealed the fate of the employees' claim. A basic problem with the court's use of this test was that it was derived not from the law of West Virginia but from that of Maine. See id. (citing Broussard v. CACI, Inc.-Federal, 780 F.2d 162, 164 (1st Cir. 1986) (citing Larrabee v. Penobscot Frozen Foods, 486 A.2d 97, 99-100 (Me. 1984); Terrio v. Millincocket Community Hosp., 379 A.2d 135, 137 (Me. 1977))). Instead of looking at the doctrine's exceptions or analyzing public policy concerns, as the law of West Virginia would seem to have dictated, the court borrowed from a First Circuit case.
297. White, 938 F.2d at 490.
298. Id.
299. See id. ("We see no indication that West Virginia would have us adopt a legal doctrine developed in the context of commercial sales and apply it within employment relationships.").
300. Id.
301. Id.
302. See supra notes 120-122 and accompanying text (noting that absent a fraud law employers will have economic incentives to mislead employees to believe their jobs are more secure than they are, in order to entice workers to develop firm-specific skills).
303. The district court in White fell into the same logical trap. The district court stated, "It would appear that, in an 'at will' state, a holding that the employer had an affirmative duty to disclose to prospective at will employees terms and conditions under which the employee was to be laid off, would deprive the employer of his 'at will' rights." White v. National Steel Corp., 742 F. Supp. 312, 337 (N.D. W. Va. 1989), aff'd, 938 F.2d 474 (4th Cir. 1991). The only way the court's statement would be true, however, is if what the employer had failed to disclose was indeed some limit on the employer's ability to lay off the employee. And if there is indeed some limitation on termination, the employment relation is not in fact at will.
304. See White, 938 F.2d at 490.
305. See id. at 491.
306. Id. at 490.
307. Id. (quoting Steele v. Steele, 295 F. Supp. 1266, 1269 (S.D. W. Va. 1969)).
308. But see White, 742 F. Supp. at 339 ("Usually the questions [asked by the employees] were general (e.g., could I go back if I didn't like the job?).").
309. White, 938 F.2d at 491 (quoting Steele, 295 F. Supp. at 1269).
310. See Lissmann v. Hartford Fire Ins. Co., 848 F.2d 50, 52 (4th Cir. 1988); Allegheny Dev. Corp. v. Barati, 273 S.E.2d 384, 387-88 (W. Va. 1980).
311. White, 938 F.2d at 490.
312. Id. at 490-91.
313. Id. at 491.
314. Id.
315. See Janssen v. Caroline Lumber Co., 73 S.E.2d 12, 17 (W. Va. 1952); Dyke v. Alleman, 44 S.E.2d 587 (W. Va. 1947); see also RESTATEMENT (SECOND) OF TORTS § 530 (1977). The White court appeared to admit as much later in the opinion. See 938 F.2d at 491 (stating that the plaintiffs could state a claim for fraud if National was simultaneously making specific plans to lay off the very employees it was promising not to lay off).
316. See supra text accompanying notes 33-35.
317. White, 938 F.2d at 491.
318. See id.
319. Id.
320. See id.
321. See supra note 30.
322. White, 938 F.2d at 491 (quoting White v. National Steel Corp., 742 F. Supp. 312, 341 (N.D. W. Va. 1989), aff'd, 938 F.2d 474 (4th Cir. 1991)).
323. Perhaps one case that provides grounds for worker optimism is Lazar v. Superior Court, 909 P.2d 981 (Cal. 1996). In Lazar, the Supreme Court of California allowed an employee plaintiff to state a suit in tort for the fraudulent inducement of an employment contract. Lazar had moved to Los Angeles from New York to accept a job after his new employer made assurances of job security. He was subsequently terminated. The court declined to "exempt[] employers from ordinary fraud rules that apply to Californians generally." Id. at 989. Lazar is less beneficial to workers than it might at first appear, however. While it reaffirmed the availability of tort remedies to workers, the California Supreme Court heard it because it had previously weakened tort protection for workers. See Hunter v. Up-Right, Inc., 864 P.2d 88 (Cal. 1993) (holding that employees may not recover in tort for fraud and deceit used by an employer to bring about the employee's resignation); see also Lazar, 909 P.2d at 992 (Mosk, J., concurring) (explaining how Hunter limited employees' tort remedies). Thus, while Lazar should be applauded, it is probably best seen as a rear-guard action. Employees also emerged victorious in a handful of other cases. See, e.g., Tolbert v. United Ins. Co. of Am., 853 F. Supp. 1374, 1377 (M.D. Ala. 1994) (finding that at will employees can bring fraud claims if they involve matters collateral to the employees' status); Abdulrahim v. Gene B. Glick Co., 612 F. Supp. 256, 264 (N.D. Ind. 1985) (applying Indiana law to find that an employee negligent misrepresentation claim survives a motion to dismiss); Telesphere Int'l, Inc. v. Scollin, 489 So. 2d 1152 (Fla. Dist. Ct. App. 1986) (allowing employees to go to the jury on a fraudulent concealment claim); Verway v. Blincoe Packing Co., 698 P.2d 377 (Idaho Ct. App. 1985) (upholding a jury verdict in favor of employees in a fraud action); Johnson v. George J. Ball, Inc., 617 N.E.2d 1355 (Ill. App. Ct. 1993) (reversing the trial court's dismissal of an employee fraud claim); Wildes v. Pens Unlimited Co., 389 A.2d 837 (Me. 1978) (upholding a jury verdict in favor of an employee in a fraud action); Liggett Group, Inc. v. Sunas, 437 S.E.2d 674 (N.C. Ct. App. 1993)
324. Consider Charter Township of Ypsilanti v. General Motors Corp., 506 N.W.2d 556 (Mich. Ct. App. 1993) (per curiam). There, General Motors won a series of tax abatements for its Willow Run factory from the city of Ypsilanti. General Motors' plant manager had stated to the city that, "'Upon completion of this project and favorable market demand, [the abatement] will allow Willow Run to continue production and maintain continuous employment for our employees.'" Id. at 558. After the corporation subsequently announced that it would be shutting down the plant, the city sued General Motors alleging, inter alia, promissory estoppel and misrepresentation. The trial court found for the city and enjoined the company from closing the plant, see Charter Township of Ypsilanti v. General Motors Corp., No. 92-43075-CK, 1993 WL 132385 (Mich. Cir. Ct. Feb. 9, 1993), but the court of appeals reversed on the grounds that the company's statement was "puffery," General Motors, 506 N.W.2d at 560, and "hyperbole," id. at 561, that the city should have expected. In the securities context, meanwhile, "the 'puffing' concept . . . has all but gone the way of the dodo." LOSS, supra note 29, at 717. Numerous other decisions have come down against employees. See, e.g., Marsh v. Coleman Co., 774 F. Supp. 608, 610-11, 613-14 (D. Kan. 1991) (finding that an employee could not reasonably rely on an employer's statements that "there will always be a place" for the employee, that "everything's going to be all right," and that he should "relax [and not] worry"); Hindley v. Seltel, Inc., 672 F. Supp. 1093, 1094-96 (N.D. Ill. 1987) (applying Illinois law to find that employer representations that an employee would participate in upcoming management discussions and would be "rewarded" when the company's financial situation improved were insufficiently explicit to support a fraud claim); Rice v. Rent-a-Ctr. of Am., 664 F. Supp. 423, 429 (N.D. Ind. 1987) (holding that, under Indiana law, an employer's statement that an employee would probably receive his position back after a short time would not support a fraud claim); Salter v. Alfa Ins. Co., 561 So. 2d 1050, 1053-54 (Ala. 1990) (finding that, when an employee who had been told that she did not have to perform a certain act was then terminated for failing to perform that act, no actionable injury supported a fraud claim because the employee was employed at will); Merrill v. Crothall-Am., Inc., 606 A.2d 96, 100 (Del. 1992) (holding that a contract between an employer and an employee, stating that employment was at will, barred the employee's fraud claim based on the employer's assurances that the employee's position was "permanent"); Ikemiya v. Shibamoto Am., Inc., 444 S.E.2d 351, 352-53 (Ga. Ct. App. 1994) (finding a claim that an employer acted fraudulently in enticing an employee to enter an employment contract was not supportable because the underlying employment contract was at will); Wheeling v. Ring Radio Co., 444 S.E.2d 144 (Ga. Ct. App. 1994) (same); Romack v. Public Serv. Co., 499 N.E.2d 768, 775 (Ind. Ct. App. 1986) (finding that departure from another job did not constitute a sufficiently concrete detriment to support a constructive fraud claim); Bower v. Atlis Sys. Inc., 582 N.Y.S.2d 542, 544 (App. Div. 1992) (holding that, because a prospective employee would have been at will if hired, she could not have reasonably relied on assurances of prospective employment by the defendant); Brumbach v. Rensselaer Polytechnic Inst., 510 N.Y.S.2d 762, 764 (App. Div. 1987) (holding that the defendant's alleged misrepresentation that an employee professor's position was tenure-tracked was a representation of a possible future contingency and therefore insufficient to support a fraud claim); Grant v. DCA Food Indus., 508 N.Y.S.2d 327, 328 (App. Div. 1986) (finding that an employer's assurances of "secure" employment if the plaintiff relocated could not support a fraud claim because a failure to perform future acts is actionable only in contract and the employee was at will).
325. See supra notes 17-23 and accompanying text.
326. For a first-person account of the fight against the Youngstown closings from the perspective of the unions' lead attorney, see LYND, supra note 5.
327. In fact, the genesis of this Article was a seminar discussion at Boston College Law School where participants noticed and discussed the absence of a fraud claim in the Youngstown case.
328. Perhaps the attorneys believed that the promissory estoppel claim did the work of the fraud claim. The promissory estoppel claim is akin to a fraud claim; they are not, however, identical twins. A fraud claim would not have required the showing of a promise, and the company's changing definitions of "profitability" would have bolstered a fraud claim even though it doomed the promissory estoppel claim. Cf. supra note 32 (noting that a fraud claim does not require the existence of a contract). Concerns about remedy might also have provided a reason for relying on promissory estoppel rather than fraud. According to Daniel Farber and John Matheson, courts have tended to offer expectation, rather than reliance, damages in promissory estoppel cases. See Farber & Matheson, supra note 24, at 909-10. In the Youngstown case, expectation damages would presumably have been higher than reliance damages. The difference would not explain, however, why the plaintiffs failed to raise a fraud claim in the alternative.
329. Allis-Chalmers Corp. v. Lueck, 471 U.S. 202 (1985), the case that expanded the section 301 preemption doctrine to bar tort claims, was decided in 1985, several years after the Youngstown plant closings. So even if the Youngstown plaintiffs had been successful with a tort claim in 1980, it is hardly clear that they would be successful today.
330. See supra text accompanying notes 182-184. This elasticity would be especially troubling vis-à-vis the labor market, since "'uniform law'" is "'peculiarly'" of interest when it comes to labor agreements. Local 174, Teamsters v. Lucas Flour Co., 369 U.S. 95, 103 (1962) (quoting Pennsylvania R.R. v. Public Serv. Comm'n, 250 U.S. 566, 569 (1919)); see also supra text accompanying note 189.
331. See, e.g., Brudney, supra note 54, at 733-34 nn.31-34 (discussing the social costs of truth-telling).
332. See Basic Inc. v. Levinson, 485 U.S. 224, 250 (1988) ("Materiality depends on the facts and thus is to be determined on a case-by-case basis.").
333. Moreover, in the absence of a federal statute, the common law of fraud still applies. As noted above, see supra text accompanying notes 182-184, the common law imposes large costs because of the variation of legal rules across jurisdictions and the elasticity and uncertainty of the legal rules within each jurisdiction. A federal statute would minimize interjurisdictional differences and would decrease uncertainty costs.
334. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).
335. 485 U.S. 224 (1988).
336. In recognizing the fraud-on-the-market theory, the Court allowed plaintiffs who traded in reliance on the market price to establish a presumption that they relied on the alleged misstatement even if they never actually heard or read the misstatement. See id. at 245-47. This holding can be correct only if one assumes that changes in prices cause changes in investors' decisions.
337. See supra Section II.C.
338. As noted above, see supra Section II.C, the labor market's inefficiency in some ways makes the fraud that occurs more costly. Once again, a difference between the securities and labor markets cuts in favor of protection in the latter.
339. Cf. Romano, supra note 78, at 69-70 (discussing causes of the increased numbers of employee suits against corporate directors, including those filed by employers).
340. See supra notes 63-66 and accompanying text.
341. See supra Section II.C.
342. Cf. Elliott J. Weiss & John S. Beckerman, Let the Money Do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securities Class Actions, 104 YALE L.J. 2053, 2054 (1995) ("Controversy abounds about securities class actions, centering on the fact that attorneys operating on a contingent fee basis initiate most such suits in the name of 'figurehead' plaintiffs with little at stake." (footnote omitted)).
343. See supra notes 139-142 and accompanying text.
344. See Fischel, supra note 4, at 1074-75 (discussing the willingness of firms to make job security commitments).
345. See supra notes 148-157 and accompanying text.
346. It would be interesting to test this hypothesis empirically. One would expect, holding other things equal, that in jurisdictions with strong antifraud protection, employers would tend to offer more secure employment than in those jurisdictions with weak protection.
347. It seems likely that the benefits would outweigh the costs. Wages and salaries for all nongovernmental employees in the United States during 1995 (the most current data available) totaled just under $2.8 trillion, and compensation of employees not included in wages and salaries totaled another $790 billion. See U.S. DEP'T OF COMMERCE, STATISTICAL ABSTRACT OF THE UNITED STATES - 1996, at 449 (1996). If we make the reasonable assumption that the absence of fraud protection has increased labor costs by one percent, a fraud rule would thus create a savings in the range of $36 billion dollars per year. Even if monitoring and enforcement costs are quite high, it is difficult to imagine that they would swamp this figure. Cf. Stout, supra note 84, at 713-14 (making a similar calculation for the securities market).
348. See Joel Seligman, The Obsolescence of Wall Street: A Contextual Approach to the Evolving Structure of Federal Securities Regulation, 93 MICH. L. REV. 649, 657 (1995).
349. Seligman cites data showing that, as of the end of the first quarter of 1992, institutions held 54.2% of the $4.96 trillion market value of outstanding stock. See id. at 658 n.47 (citing Institutions Hold Dominant Stake in Equities Market, Fed Board Data Show, 25 Sec. Reg. & L. Rep. (BNA) 943 (July 9, 1993)).
350. Cf. HOUSE COMM. ON INTERSTATE & FOREIGN COMMERCE, 95TH CONG., REPORT OF THE ADVISORY COMMITTEE ON CORPORATE DISCLOSURE TO THE SECURITIES AND EXCHANGE COMMISSION 620-21 (Comm. Print 1977) ("[C]ompetition among analysts results in security prices that reflect-a broad set of information.");
351. Ronald J. Gilson & Reinier H. Kraakman, The Mechanisms of Market Efficiency, 70 VA. L. REV. 549, 571 (1984) ("In today's securities markets, the dominant minority of informed traders is the community of market professionals, such as arbitrageurs, researchers, brokers and portfolio managers, who devote their careers to acquiring information and honing evaluative skills.").
352. In the capital market, there also exists "a uniquely active and responsive financial press which facilitates the broad dissemination of highly timely and material company-oriented information to a vast readership." Proposed Comprehensive Revision to System for Registration of Securities Offerings, Securities Act Release No. 33-6235, 20 SEC Dock. 1175, 1179 (Sept. 16, 1980).
353. Moreover, the New York Stock Exchange (NYSE), the American Stock Exchange, and the National Association of Securities Dealers (NASD) require their member companies to disclose promptly all developments material to investors and to correct market rumors. See BROWN, supra note 54, § 3.02. See generally id. § 3.06 (describing self-regulatory organizations in the security markets). For example, the NYSE expects its listed companies "to release quickly to the public any news or information which might reasonably be expected to materially affect the market for its securities." NEW YORK STOCK EXCHANGE LISTED COMPANY MANUAL ¶ 202.05 (1996).
354. To be sure, these self-regulatory organizations do not have the legal power to impose civil or criminal penalties. But violations of these rules can result in significant sanctions, including the suspension of trading, the delisting of a company, or, in the case of the NASD, a denial of access to the automated quotation system important for over-the-counter securities trading. See BROWN, supra note 54, § 3.06[5]. The oversight of these organizations, which have no analogy in the labor market, provides a significant brake on the incentive to mislead investors. See Jonathan R. Macey, Administrative Agency Obsolescence and Interest Group Formation: A Case Study of the SEC at Sixty, 15 CARDOZO L. REV. 909, 934-35 (1994) (arguing that the self-regulation of the various security exchanges provides significant protection for investors). It may not be correct to view these institutions as totally private monitoring devices, however, because it is unclear that they would exist absent the threat of regulation.
355. See INTERNATIONAL LABOR OFFICE, WORLD LABOR REPORT 1993, at 34 tbl.3.1 (1993) (showing union density in the United States at 15% in 1989 compared to, for example, 32% in Germany, 39% in the United Kingdom, 45% in Australia, and 81% in Sweden).
356. See id.; see also Stone, supra note 95, at 578 (stating that, between 1980 and 1990, union membership declined from almost 25% of the nonagricultural work force to less than 17%).
357. See PAUL C. WEILER, GOVERNING THE WORKPLACE 74 (1990) ("[T]he worker who is shopping for a job will find it very difficult to learn (and certainly will not want to ask) about the actual dismissal risks in the firms being interviewed.");
358. Stewart J. Schwab, Life-Cycle Justice: Accommodating Just Cause and Employment at Will, 92 MICH. L. REV. 8, 27 (1993) ("Young job entrants cannot easily assess an employer's reputation for how it handles senior workers.").
359. Moreover, the law already has a method to deal with those cases in which the employee in fact does have information that causes them to doubt the employer's representation. If the employee knows the employer is lying, reliance on those lies is unreasonable and recovery is barred. See supra note 30 and accompanying text.
360. See Easterbrook & Fischel, supra note 54, at 691; Macey, supra note 298, at 935-36; Romano, supra note 85 (manuscript at 6-7).
361. See supra Parts II & III.
362. Indeed, courts in Connecticut, Georgia, Massachusetts, Minnesota, and North Carolina have held that disputes arising out of the employer-employee relationship are not covered by those states' unfair trade practices statutes. See DEE PRIDGEN, CONSUMER PROTECTION AND THE LAW § 4.02[5][f] (1996) (collecting cases). California is an exception. See id.
363. See, e.g., MASS. GEN. LAWS ANN. ch. 93A, § 2 (West 1997) ("Unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful."). Chapter 93A has been interpreted to exclude disputes arising from the employer-employee relationship. See Manning v. Zuckerman, 444 N.E.2d 1262, 1265 (Mass. 1983).
364. See CASS R. SUNSTEIN, AFTER THE RIGHTS REVOLUTION 49 (1990).
365. To be sure, workers will be willing to relocate to such a jurisdiction because of the added protection the state offers. In times of labor surplus, however, there would be little benefit from such an effect. In fact, additional workers in the labor force, linked with fewer jobs, will increase unemployment and decrease wages.
366. See supra Part III.
367. This "race to the bottom" analysis parallels the analysis sometimes offered as an explanation for the trend in corporate law toward more permissive state incorporation statutes. In the corporate context, the literature is extensive and somewhat contentious. See, e.g., EASTERBROOK & FISCHEL, supra note 51, at 212-15 (describing the debate over whether a race to the bottom exists); MORTON J. HORWITZ, THE TRANSFORMATION OF AMERICAN LAW 1870-1960, at 84 (1992) (describing competition among states on the basis of allowances for corporate consolidations);
368. William L. Cary, Federalism and Corporate Law: Refections upon Delaware, 83 YALE L.J. 663 (1974) (arguing that competition among states occurs on the basis of which state best allows managers to exploit investors);
369. Roberta Romano, The State Competition Debate in Corporate Law, 8 CARDOZO L. REV. 709 (1987) (claiming that Delaware is the preferred state of incorporation because of its body of legal precedents and sophisticated corporate bar);
370. Ralph K. Winter, Jr., State Law, Shareholder Protection, and the Theory of the Corporation, 6 J. LEGAL STUD. 251 (1977) (arguing that competition among states is driven by investor interests).
371. See supra notes 120-122 and accompanying text.
372. See supra text accompanying notes 182-184.
373. Cf. supra note 49 (reprinting Rule 10b-5).
374. Note also that the statute as proposed focuses only on employer fraud. This can be justified on a number of grounds. As discussed above, see supra note 142, the costs of employer deceit of employees is likely to be greater than the reverse because employers can easily diversify their risk of employee deceit and can substitute honest employees for deceitful ones at lower cost. In addition, the scale of the harm to the efficiency of the labor market is likely to be greater when an employer deceives employees than when an employee deceives her employer. That is, an employer's misrepresentations will tend to affect a number of workers, and thus the labor market as a whole, while an individual worker's deceit is unlikely to have significant impact beyond her own employment relationship. In addition, employers would not face the preemption problems that workers are likely to face because any employee fraud is unlikely to concern collective bargaining agreements or ERISA plans. Finally, the focus on employer, rather than employee, deceit finds an analogy in the securities laws. As discussed above, see supra Subsection I.B.1, a number of antifraud provisions of the securities laws focus only on the "issuer" or "seller" of securities: Section 12(2) of the 1933 Act applies to "any person who . . . offers or sells a security"; section 11(a) of the 1933 Act focuses on "issuers" of securities; and section 17(a) concentrates on fraud by "any person in the offer or sale of any security," which has always been interpreted to mean sellers. See also Loss & SELIGMAN, supra note 32, at 743 (discussing sections 9(a)(4) and 10(b) of the 1934 Act, 15 U.S.C. § 78i(a)(4), j(b) (1994), which also focus on the issuer). The core idea that market participants should not lie in a market transaction in order to take value from others was thus first, and most firmly, applied against those who sought fraudulently to induce others to invest their resources in a venture, i.e., when the justifications for antifraud protection are at their highest. See supra note 32 and accompanying text. The analogy in the labor market is to employer fraud. When a company uses fraud to induce workers to invest their resources - that is, their labor - in a venture, the justifications for antifraud protection in the labor market are similarly at their highest.
375. See supra note 65 and accompanying text. In the misappropriation context, the obligation to disclose or abstain from trading arises out of a fiduciary duty to the source of the inside information. See supra note 65.
376. There are powerful arguments to the contrary. See O'Connor, supra note 26 (arguing that courts should expand directors' fiduciary duties to require them to mitigate disruptions caused by corporate changes); Marleen A. O'Connor, Restructuring the Corporation's Nexus of Contracts: Recognizing a Fiduciary Duty To Protect Displaced Workers, 69 N.C. L. REV. 1189 (1991) (same).
377. See supra note 67 and accompanying text.
378. See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).
379. See supra notes 56-59 and accompanying text.
380. See supra notes 60-62 and accompanying text.
381. The calculation of damages under such a statute would in some circumstances entail much complexity. In the securities context, however, several observers do not find the system to be as chaotic as it initially appears. See, e.g., EASTERBROOK & FISCHEL, supra note 51, at 315-16. For a further discussion of damages in the securities context, see Mahoney, supra note 52, at 627 & n.13. The details of this issue, however, are beyond the scope of this Article. It is worth noting, in any event, that damages in a common law fraud action can be either contract (benefit-of-the-bargain) damages or tort damages. See RESTATEMENT (SECOND) OF TORTS § 549 (1977); Loss, supra note 29, at 875-76, 965-75. The choice between them depends on a number of factors. Depending on the case and facts at hand, courts could make similar judgments under the labor market fraud statute.
382. White v. National Steel Corp., 938 F.2d 474 (4th Cir. 1991).