Good faith and law evasion

UCLA Law Review

Volumn 58, Issue 3, 2011, Pages 611-666

  Buell, Samuel W ^a  

^a DUKE UNIVERSITY   (United States)

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EID: 79955009463     PISSN: 00415650     EISSN: None     Source Type: Journal    
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References (432)

1. See H.L.A. HART, THE CONCEPT OF LAW 124-36 (2d ed. 1997);
2. FREDERICK SCHAUER, PLAYING BY THE RULES: A PHILOSOPHICAL EXAMINATION OF RULE-BASED DECISION-MAKING IN LAW AND IN LIFE 31-37 (1991).
3. See Neal Kumar Katyal, Deterrence's Difficulty, 95 MICH. L. REV. 2385, 2391-402 (1997).
4. See Carol S. Steiker, Counter-Revoiution in Constitutional Criminal Procedure? Two Audiences, Two Answers, 94 MICH. L REV. 2466, 2534 (1996).
5. Johnson v. United States, 333 U.S. 10, 14 (1948) (footnote omitted);
6. see also Steiker, supra note 3, at 2534;
7. Mark Tushnet, Constitutional Workarounds, 87 TEX. L REV. 1499 (2009).
8. See W. Bradley Wendel, The Torture Memos and the Demands of Legality (Cornell Law Sch. Legal Studies Research Paper Series, Paper No. 09-019, 2009), available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=1422603.
9. Because the exchange goes so directly to the nub of the matter, I must point the reader to one of the memo authors' statements in an interview for a television program that might otherwise be said to lack gravitas. The Daily Show With Jon Stewart, Exclusive-John Yoo Extended Interview Pt. 1 (Jan. 7, 2010), http://www.thedailyshow.com/watch/thu-january-7-2010/exclusive-john-yoo- extended-interview-pt-1.
10. For extensive analyses of the memo authors' intellectual honesty by Brian Tamanaha, Jack M. Balkin, and others,
11. see Marty Lederman, The Anti-Torture Memos: Balldnioition Posts on Torture, Interrogation, Detention, War Powers, Executive Authority, DOJ and OLC, BALKINIZATION (July 8, 2007), http//balkin.blogspot.com/2005/09/anti-torture- memos-balkinization-posts.html.
12. See also Editorial, The Torture Lawyers, N.Y. TIMES, Feb. 25, 2010, at A32 (asserting that the memo authors "were not acting as fair-minded analysts of the law but as facilitators of a scheme to evade it").
13. The idea of legality "principles" or "values" represents a complex and contestable category of ideas that I do not wish to nail down here. My working assumption is that these values include some degree of commitment to fair notice and control of enforcement discretion, implemented through doctrines such as vagueness limitations and ex post facto prohibitions.
14. See John Calvin Jeffries, Jr., Legality, Vagueness, and the Construction of Penal Statutes, 71 VA. L REV. 189, 196-212 (1985);
15. Dan M. Kahan, Lenity and Federal Common Law Crimes, 1994 SUP. CT. REV. 345, 346-49;
16. Note, The Void-for-Vagueness Doctrine in the Supreme Court, 109 U. PA. L REV. 67, 67-75 (1960).
17. Samuel W. Buell, The Upside of Overbreadth, 83 N.Y.U. L. REV. 1491 (2008).
18. Samuel W. Buell, Novel Criminal Fraud, 81 N.Y.U. L. REV. 1971 (2006).
19. See Richard A. Epstein & M. Todd Henderson, Marking to Market: Can Accounting Rules Shake the Foundations of Capitalism? (Univ. of Chi. Law & Econ., Olin Working Paper No. 458, Apr. 15, 2009), avdlable at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=1385382.
20. See, e.g., HENRY M. HART, JR. & ALBERT M. SACKS, THE LEGAL PROCESS: BASIC PROBLEMS IN THE MAKING AND APPLICATION OF LAW 139-41 (1994);
21. Isaac Ehrlich & Richard A. Posner, An Economic Analysis of Legal Rulemaking, 3 J. LEGAL STUD. 257, 258-61 (1974);
22. Duncan Kennedy, Form and Substance in Private Law Adjudication, 89 HARV. L REV. 1685, 1687-1701 (1976);
23. Pierre Schlag, Rules and Standards, 33 UCLA L REV. 379,381-90 (1985);
24. see also Ralf Poscher, Ambiguity and Vagueness in Legal Interpretation, in OXFORD HANDBOOK ON LANGUAGE AND LAW (Lawrence Solan & Peter Tiersma eds., forthcoming 2011), available at http://ssrn.com/abstract=1651465 (explaining how vagueness in law imposes costs, but those costs are an unavoidable price of obtaining essential benefits of stating law generally).
25. Ehrlich and Posner, for example, equate the problem of loopholes in legal rules with underinclusion. Ehrlich & Posner, supra note 13, at 269, 275 & n.24. The concepts are not the same, at least as I think they are profitably understood. Underinclusion describes mismatch between the terms of a law and its objectives, which can result from bad drafting, the limitations of language, or deliberate lawmaker choice. Loopholes are spaces that actors reveal through new behaviors that render law underinclusive in ways lawmakers did not foresee and may have been unable to foresee.
26. Others have observed that the important question for many projects of law design is not one of rules versus standards but rather one of what sorts of rules, backed by what sorts of standards.
27. See, e.g., William W. Bratton, Enron, Sarbanes-Oxley and Accounting: Rules Versus Principles Versus Rents, 48 VILL. L REV. 1023 (2003);
28. Lawrence A. Cunningham, A Prescription to Retire the Rhetoric of "PrinciplesBased Systems" in Corporate Law, Securities Regulation, and Accounting, 60 VAND. L REV. 1411 (2007);
29. Louis Kaplow, Rules Versus Standards: An Economic Analysis, 42 DUKE L.J. 557 (1992).
30. The meaning of good faith varies with legal context, as with other versatile tools like reasonableness or duty. The use of good faith explored in this Article is more conceptually precise than its frequent use simply to denote conduct that lacks a higher degree of fault.
31. See, e.g., Hudson v. McMillian, 503 U.S. 1, 7 (1992) (holding that the question of whether prison officials used excessive force in violation of the Eighth Amendment involves an inquiry as to "whether force was applied in a good-faith effort to maintain or restore discipline, or maliciously and sadistically to cause harm," which in turn requires considering "the need for application of force, the relationship between that need and the amount of force used, the threat 'reasonably perceived by the responsible officials,' and 'any efforts made to temper the severity of a forceful responce"'
32. (quoting Whitley v. Albers, 475 U.S. 312, 321 (1986)));
33. Official Comm. of Unsecured Creditors of Allegheny Health Educ. & Research Found, v. PriceWaterhouseCoopers, LLP, 989 A.2d 313, 335-39 (Pa. 2010) (holding that the in pari delicto defense to liability of an outside auditor is available if the auditor acted in good faith, even if also negligently, but not if the auditor engaged in "secretive, collusive conduct" with insiders).
34. Assaf Hamdani, Mens Rea and the Cost of Ignorance, 93 VA. L. REV. 415, 425-30 (2007).
35. See United States v. Black, 530 F3d 596, 604 (7th Or. 2008);
36. United States v. Giovannetti, 919 F.2d 1223, 1228 (7th Cir. 1990).
37. See, e.g., 42 U.S.C. §2000e-2 (2006);
38. Batson v. Kentucky, 476 U.S. 79 (1986).
39. Perhaps it would be useful, therefore, to think about good faith in terms of sincerity, rather than (according to some common definitions of good faith) in terms of the broader concept of honesty.
40. See Micah Schwartzman, The Sincerity of Public Reason, 19J.POL.PHIL (forthcoming 2011) (defining sincerity, defending its possibility in the realm of public reason, and distinguishing it from motivation).
41. The most influential expression of this scheme is the Model Penal Code. MODEL PENAL CODE §2.02 (1985). I draw my definitions from there.
42. See Lynn A. Baker & Mitchell N. Berman, Getting off the Dole: Why the Court Should Abandon Its Spending Doctrine, and How a Too-Clever Congress Could Provoke It to Do So, 78 IND. L.J. 459, 508-11 (2003).
43. See FREDERICK SCHAUER, THINKING LIKE A LAWYER: A NEW INTRODUCTION TO LEGAL REASONING 158-67 (2009).
44. Though the matter can be a good deal more complicated than this, one can generalize that a purposivist interpretive method, often contrasted with a textualist method, seeks to construe the words of a legal rule in a manner that furthers the general objectives sought to be achieved by those who crafted the rule.
45. See, e.g., Henry Paul Monaghan, Supremacy Clause Textuahsm, 110 COLUM. L. REV. 731, 732-34&n.2 (2010).
46. See John F. Manning, What Divides Textualists From Purposivists?, 106 COLUM. L REV. 70 (2006).
47. See, e.g., Pub. L. No. 111-152, §1409(a), 124 Stat. 1067 (to be codified at 26 U.S.C. §7701(o)) (codifying judicial doctrine that otherwise tax-compliant transactions will be invalidated for tax purposes if found to lack genuine economic substance, defined as objective economic substance and subjective business purpose). Such a scenario differs markedly from the kind of example often used to illustrate how purposivist theory might justify essentially rewriting statutes.
48. See Manning supra note 25, at 105 (discussing how purposivist theory might be used to interpret a statute prohibiting only "dogs" in the park as also prohibiting pigs, on the argument that the legislature meant to prohibit all disruptive animals).
49. As John Manning carefully describes (and, as a textualist, concedes), even textualist methods of interpretation take policy objectives of a law into account, whether or not practitioners of those methods believe those objectives can be linked in any meaningful way to the collective or individual mental states of the group of legislators who voted on the law. Manning, supra note 25, at 79-85.
50. See Dan M. Kahan, Ignorance of Law Is an Excuse-But Only for the Virtuous, 96 MICH. L. REV. 127, 137-41 (1997).
51. MODEL PENAL CODE §2.02 (1985).
52. The old saw that motive is irrelevant to criminal liability is false.
53. See, e.g., Carissa Byrne Hessick, Motive's Role in Criminal Punishment, 80 S. CAL. L. REV. 89, 89-90 (2006). The issue is whether the definition of an offense makes motive relevant and, if so, just how.
54. See United States v. Aaron, 590 F.3d 405, 409 (6th Cir. 2009) (explaining that the good faith defense to a charge of willfully making a false tax return applies to an actor who is unaware of the illegality of his conduct, not to an actor who asserts a benign motive for his clear-eyed choice to violate tax law).
55. The term is unfortunately confusing because it has been used to mean different things. It at least (and most helpfully) refers to purposes that are separate requirements for liability that do not attach to the actions in which an actor must engage to violate a prohibition. JOSHUA DRESSLER, CASES AND MATERIALS ON CRIMINAL LAW 156-57 (4th ed. 2007);
56. see, e.g., United States v. Fekete, 535 F.3d 471,476-77 (6th Cir. 2008) (discussing the specific intent element in the federal offense of carjacking).
57. See 18 U.S.C. §§ 242, 1348, 1503 (2006).
58. MODEL PENAL CODE § 2.02 (1985).
59. Id.
60. See Kenneth W. Simons, Mistake of Fact or Mistake of Criminal Law? Explaining and Defending the Distinction, 3 CRIM. L 6k PHIL. 213 (2009) (describing and analyzing concepts relating to mistake of law).
61. See Lambert v. California, 355 U.S. 225 (1957);
62. People v. Marrero, 69 N.Y.2d 382 (1987);
63. JEROME HALL, GENERAL PRINCIPLES OF CRIMINAL LAW 382-87 (2d ed. 1960);
64. OLIVER WENDELL HOLMES, THE COMMON LAW 41 (1881).
65. See, e.g., Cheek v. United States, 498 U.S. 192 (1991) (recognizing the claim of mistake as a potential defense to tax evasion).
66. Kahan, supra note 28, at 142-44.
67. Cheek, 498 U.S. at 202.
68. Ratzlaf v. United States, 510 U.S. 135, 136-37 (1994).
69. The prosecutor would have to prove a general intent to evade reporting requirements but not specific knowledge of what the law said about any particular means of evasion.
70. Examples from other areas of law could serve the same purpose. These might include, among others: aspects of good faith purchaser doctrines,
71. see, e.g., U.C.C. §1-201(9) (2004),
72. Ashton Hawkins, Richard A. Rothman & David B. Goldstein, A Tale of Two Innocents: Creating an Equitable Balance Betuieen the Rights of Former Owners and Good Faith Purchasers of Stolen Art, 64 FORDHAM L REV. 49, 49-55 (1995);
73. Saul Levmore, Variety and uniformity m the Treatment of the Good-Faith Purchaser, 16 J. LEGAL STUD. 43, 58 (1987);
74. doctrines about bad faith litigation conduct leading to an award of attorneys' fees to a defendant, see, e.g., F.D. Rich Co., Inc. v. Indus. Lumber Co., Inc., 417 U.S. 116, 129 (1974);
75. Fritz v. Honda Motor Co., Ltd., 818 F.2d 924 (D.C. Cir. 1987);
76. Lipsig v. Nat'l Student Mktg. Corp., 663 F.2d 178, 181-82 (D.C. Cir. 1979);
77. or the rule under the Uniform Fraudulent Conveyance Act that a debtor's transfer will not be invalidated if it was made for "fair consideration," determined in part by asking whether the transferee took in good faith, that is, without intent to hinder or defraud creditors, UNIF. FRAUDULENT CONVEYANCE ACT §3 (1978);
78. see also Note, Good Fmth and Fraudulent Conveyances, 97 HARV. L. REV. 495, 496-500 (1983).
79. See, e.g., Robert H. Jerry, II, The Wrong Side of the Mountain: A Comment on Bad Faith's Unnatural History, 72 TEX. L REV. 1317, 1319, 1324-25 (1994);
80. Simon Whittaker & Reinhard Zimmermann, Good Faith in European Contract Law: Surveying the Legal Landscape, m GOOD FAITH IN EUROPEAN CONTRACT LAW 16-17 (Reinhard Zimmermann 4k Simon Whittaker eds., 2000).
81. See 5 WILLIAM HOLDSWORTH, A HISTORY OF ENGLISH LAW 79-81 (2d ed. 1937);
82. J.F. O'CONNOR, GOOD FAITH IN ENGLISH LAW 8 (1990);
83. James Gordley, Good Faith in Contract Law in the Medieval lus Commune, m GOOD FAITH IN EUROPEAN CONTRACT LAW, supra note 44, at 94;
84. Martin Josef Schermaier, Bona Fides in Roman Contract Law, in GOOD FAITH IN EUROPEAN CONTRACT LAW, supra note 44, at 63, 67-68, 77-78;
85. Whittaker & Zimmermann, supra note 44, at 16-18.
86. O'CONNOR, supra note 45, at 2;
87. Jerry, supra note 44, at 1321-22, 1325;
88. Whittaker & Zimmermann, supra note 44, at 16.
89. John P. Dawson, Unconscionable Coercion: The German Version, 89 HARV. L. REV. 1041, 1044-45, 1069 (1976);
90. Whittaker & Zimmermann, supra note 44, at 16-20, 30-31.
91. O'CONNOR, supra note 45, at 94-98;
92. Whittaker 6k Zimmermann, supra note 44, at 32-39.
93. Jerry, supra note 44, at 1330-31.
94. STEVEN J. BURTON & ERIC G. ANDERSEN, CONTRACTUAL GOOD FAITH: FORMATION, PERFORMANCE, BREACH, ENFORCEMENT 330-31 (1995);
95. O'CONNOR, supra note 45, at 18;
96. see Richard E Speidel, The "Duty" of Good Faith in Contract Performance and Enforcement, 46 J. LEGAL EDUC. 537, 539-40 (1996).
97. But see RESTATEMENT (SECOND) OF CONTRACTS §205 cmt. c (1979). For exploration of exceptions and qualifications to the lack of a general duty to negotiate,
98. see E. Allan Farnsworth, Precontractual Liability and Preliminary Agreements; Fair Dealing and Failed Negotiations, 87 COLUM. L. REV. 217 (1987).
99. U.C.C. §1-304 (2004);
100. RESTATEMENT (SECOND) OF CONTRACTS, supra note 49, §205. Parties generally cannot negotiate away this obligation.
101. See, e.g., Indus. & Gen. Trust v. Tod, 73 N.E. 7, 9 (N.Y. 1905).
102. See generally U.C.C. §1-302(b) (2004).
103. Compare Robert S. Summers, The General Duty of Good Faith-Its Recognition and Conceptualization, 67 CORNELL L. REV. 810, 831-32 (1982) (arguing against defining bad faith performance in economic terms and contending that bad faith can be defined only as a diverse collection of behaviors determined undesirable through the common law process),
104. Robert S. Summers, "Good Faith" in General Contract Law and the Sales Provisions of the Uniform Commercial Code, 54 VA. L REV. 195, 215 (1968),
105. and E Allan Farnsworth, Good Faith Performance and Commercial Reasonableness Under the UrtformCarrarertial Code, 30 U. CHI. L. REV. 666, 668 (1963)
106. with Steven J. Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith, 94 HARV. L REV. 369, 394-402 (1980) (arguing that bad faith performance should be defined, in economic terms, as a party recapturing an opportunity foregone at the time of contracting, without paying for such an opportunity),
107. Teri J. Dobbins, Losing Faith: Extracting the Implied Covenant of Good Faith From (Some) Contracts, 84 OR. L REV. 227, 230-31 (2005),
108. Mark P. Gergen, The Use of Open Terms in Contract, 92 COLUM. L REV. 997, 1067-68 (1992),
109. Clayton P. Gillette, Limitations on the Obligation of Good Faith, 1981 DUKE L.J. 619, 620-21, 650-52,
110. Victor P. Goldberg, Discretion in Long-Term Open Quantity Contracts: Reining in Good Faith, 35 U.C. DAVIS L. REV. 319, 320-21 (2002),
111. and Michael P. Van Alstine, Of Textualism, Party Autonomy, and Good Faith, 40 WM. & MARY L. REV. 1223, 1228-30, 1255-56 (1999).
112. See U.C.C. §1-304 official cmt. ("[T]he doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness and reasonableness which can be independently breached.");
113. U.C.C. PEB Commentary No. 10 ("[The obligation of good faith] serves as a directive to protect the reasonable expectations of the contracting parties.").
114. But see Gillette, supra note 52, at 643 (arguing that courts' enforcement of a good faith obligation is likely to lead to uncertainty and inefficient results).
115. "Bad faith" is often used in another context in contract law: egregious or "wanton" forms of straight breach that some courts and commentators have concluded should merit punitive damages. William S. Dodge, The Case for Punitive Damages m Contracts, 48 DUKE L.J. 629, 657-62 (1999).
116. See Market Street Assocs. Ltd. P'ship v. Frey, 941 F.2d 588 (7th Cir. 1991).
117. Id. at 591-92.
118. Id.
119. Id. at 593-94;
120. see also Rio Algom Corp. v. Jimco Ltd., 618 P.2d 497, 505 (Utah 1980) ("A duty of good faith does not mean that a party vested with a clear right is obligated to exercise that right to its own detriment for the purpose of benefiting another party to the contract.").
121. Market Street, 941 F.2d at 594.
122. Id. at 594-95.
123. Id. at 595.
124. Id. at 597-98.
125. Id. at 597;
126. see also Burton, supra note 52, at 385 (arguing that causing the other party to lose the benefits of the agreement is not sufficient for a violation of good faith and that "the purpose of the discretion-exercising party is a key factor").
127. See Cone v. Ivinson, 33 P. 31, 34 (Wyo. 1893) (noting that good faith requires "an honest intention to abstain from taking any unconscientious advantage of another, even through the... technicalities of law");
128. see also Foley v. Interactive Data Corp., 765 P.2d 373,394 (CaL 1988) ("[T]he covenant of good faith is read into contracts in order to protect the express covenants or promises of the contract").
129. See ROSCOE POUND, AN INTRODUCTION TO THE PHILOSOPHY OF LAW 188 ( 1922) ("[Men] must be able to assume that those with whom they deal in the general intercourse of society will act in good faith[.]"). Todd Rakoff argues that if the purpose of good faith doctrine is to give the parties what they would have wanted, Judge Posner did not succeed in justifying limitation of the doctrine to cases of intentional trickery. He speculates that Judge Posner may have wanted to limit enforcement of the doctrine in this fashion out of concern that judges might not be good at identifying what parties would have wanted beyond prohibiting trickery.
130. Todd D. Rakoff, Good Faith in Contract Performance: Market Street Associates Ltd. Partnership v. Frey, 120 HARV. L REV. 1187, 1196-98 (2007).
131. Gergen, supra note 52, at 998-99;
132. see, e.g., Burton, supra note 52, at 394-402. Such deals are efficient if parties would incur excessive costs in trying to predict or calculate ex ante some aspect of their future interactions.
133. See generally Gergen, supra note 52, at 1000-37.
134. Another purpose of imposing an obligation to perform in good faith under a contract containing a discretionary term is to render legally sufficient the consideration given by the party retaining discretion.
135. See Mattet v. Hopper, 330 P.2d 625, 627 (Cal. 1958).
136. For a case similar to this example,
137. see Neumiller Farms, Inc. v. Cornett, 368 So. 2d 272 (Ala. 1979).
138. See Baker v. Ratzlaff, 564 P.2d 153, 156-67 (Kan. Q. App. 1977) (discussing the distinction between termination of a contract and violation of the obligation of good faith performance).
139. G also has an obligation under this deal to deliver a quantity and quality of output in good faith.
140. See generally U.C.C. § 2-306 (2004).
141. The Restatement and the U.C.C. define good faith with a hybrid subjective-objective approach.
142. See id. § 1-201(20) (2004) ('"Good faith,' except as otherwise provided in Article 5, means honesty in fact and the observance of reasonable commercial standards of fair dealing.");
143. RESTATEMENT (SECOND) OF CONTRACTS §205 cmt. d ("A complete catalogue of types of bad faith is impossible, but the following types are among those which have been recognized in judicial decisions: evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate in the other party's performance.");
144. see also 2 E. ALLAN FARNSWORTH, FARNSWORTH ON CONTRACTS 400 (3d ed. 2004) ("[C]ourts have often been perplexed as to whether, in particular situations, good faith is to be judged solely by the traditional subjective standard of honesty or also by an objective standard of reasonableness.").
145. However, many states have chosen to retain the approach of former versions of the U.C.C. defining good faith solely as "honesty in fact." Russell A. Hakes et al., 2005 Uniform Commercial Code Survey: Introduction, 61 BUS. LAW. 1541, 1541 & nn.3-4 (2006).
146. 2 ROWLAND H. LONG, THE LAW OF LIABILITY INSURANCE §5A.06 (2008);
147. Robert E. Keeton, liability Insurance and Responsibility for Settlement, 67 HARV. L REV. 1136, 1136-38 (1954);
148. Thomas E Myers, Recent Developments, Insurance - Limitations on Insurers' Liability for Bad Faith Refusal to Defend and to Consider Settlement Opportunities, 58 CORNELL L. REV. 1255, 1255-56 (1973).
149. Robert H. Jerry, II, Remedying Insurers' Bad Faith Contract Performance: A Reassessment, 18 CONN. L REV. 271, 276-77 (1986).
150. Samuel Issacharoff, Contracting for Employment: The Limited Return of the Common Law, 74 TEX. L REV. 1783, 1788-89 (1996).
151. Jerry, supra note 73, at 286.
152. Id. at 280. Whether this dilemma requires a legal solution is a point of controversy. Some suggest that the market can correct for the problem because insurers who commonly followed such practices would sell few policies.
153. See Alan O. Sykes, "Bad Faith" Breach of Contract by First-Party Insurers, 25 J. LEGAL STUD. 405, 417-18 (1996);
154. LONG, supra note 72, §5A.06. Others suggest that there might need to be a mechanism to police whether insurers are genuinely performing their obligations under third-party contracts but that contract law has existing means to deal with the problem.
155. Compare Mark Gergen, A Cautionary Tale About Contractual Good Faith in Texas, 72 TEX. L REV. 1235, 1263-74 (1994)
156. with Gordon v. Nationwide Mut. Ins. Co., 285 N.E.2d 849, 854 (N.Y. 1972) (stating that the insured is limited to contract remedies against the insurer). A majority of jurisdictions have recognized a right of the insured to recover tort damages that exceed the insurer's exposure under the contract.
157. See Centennial Ins. Co. v. Liberty Mut Ins. Co., 404 N.E2d 759, 762 (Ohio 1980) ("[Bad faith] imports a dishonest purpose, moral obliquity, conscious wrongdoing, breach of a known duty through some ulterior motive or ill will partaking of the nature of fraud." (internal quotation marks omitted)). Courts have identified tells that raise the likelihood that an insurer has acted this way: attempts to induce the insured to contribute to the settlement; failure to investigate; failure to advise the insured of the insurer's conflict of interest, the consequences of a refusal to defend, the danger of an excess judgment, or the existence of a settlement offer; failure to respond to settlement offers or initiate settlement talks; rejection of reasonable settlement offers; and failure to appeal a verdict in excess of liability limits when grounds for appeal exist
158. See Henry G. Miller, Living With Bad Faith, 46 INS. COUNS. J. 34, 35 (1979);
159. Myers, supra note 72, at 1264-65;
160. Douglas R. Richmond, Advice of Counsel and Insurance Bad Faith, 73 MISS. L.J. 95, 97-98 (2003).
161. See Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973);
162. Best Place, Inc. v. Penn Am. Ins. Co., 920 P.2d 334 (Haw. 1996);
163. Douglas R. Richmond, An Overview of Insurance Bad Faith Law and Litigation, 25 SETON HALL L REV. 74, 108-15 (1994).
164. Advice of counsel - to which 1 return in Part III, infra-plays an important role. If the insurer asked a lawyer objectively to assess trial prospects and genuinely used the lawyer's advice as a basis to make its settlement decision, it made what looks like a decision on the merits (unless it manipulated the lawyer to get the opinion it wanted or knew the lawyer was supplying bogus advice).
165. See James M. Fischer, Should Advice of Counsel Constitute a Defense for Insurer Bad Faith!, 72 TEX. L REV. 1447, 1461-67, 1480 (1994);
166. Richmond, supra note 77, at 96-97;
167. Richmond, supra note 78, at 120-21.
168. 29 U.S.C. §158(a)(5) (2006).
169. Id. §158(d). Early in its history, this edict was explained as requiring "more than the holding of conferences and the exchange of pleasantries." Conn. Coke Co., 2 N.LR.B. 88, 89 (1934). It required that both parties "approach the negotiations with an open mind and... make a reasonable effort to reach a common ground of agreement."
170. Id. In addition, it required that one "match... proposals, if unacceptable, with counterproposals." N.LR.B. v. Am. Nat'l Ins., 343 U.S. 395, 402 (1952) (citing Houde Eng"g Corp., 1 N.L.R.B. 35 (1934)).
171. N.L.R.B. v. Boss Mfg. Co., 118 F.2d 187, 189 (7th Cir. 1941).
172. See Richard C Cooper, Boukvarism and the Duty to Bargain in Good Fdth, 20 RUTGERS L. REV. 653, 656 (1966);
173. Keith N. Hylton, An Economic Theory of the Duty to Bargain, 83 GEO. L.J. 19, 51-52 (1994);
174. Harry H. Wellington, Freedom of Contract and the Collective Bargaining Agreement, 112 U. PA. L REV. 467, 468 (1964);
175. Aditi Bagchi, Note, Unions and the Duty of Good Fdth in Employment Contracts, 112 YALE L.J. 1881, 1882-85 (2003).
176. See Wellington, supra note 83, at 475-76.
177. Archibald Cox, The Duty to Bargain in Good Faith, 71 HARV. L REV. 1401, 1413 (1958).
178. See Hylton, supra note 83, at 49;
179. Note, Boulwareism and Good Faith Collective Bargaining, 63 MICH. L REV. 1473, 1476 (1965).
180. Cont'l Ins. Co. v. N.L.R.B., 495 F.2d 44, 48 (2d Cir. 1974).
181. Truck Drivers & Helpers Union, Local No. 170 v. N.LR.B., 993 F.2d 990, 996 ( 1st Cir. 1993).
182. Cox, supra note 85, at 1414-15.
183. See Bagchi, supra note 83, at 1897;
184. Cooper, supra note 83, at 657;
185. Wellington, supra note 83, at 473.
186. N.L.R.B. v. Am. Nat'l. Ins. Co., 343 U.S. 395, 402 (1952);
187. Cooper, supra note 83, at 654.
188. See N.LR.B. v. Herman Sausage Co., 275 F.2d 229, 232 (5th Cir. 1960) (stating that the employer is not required "to contract in a way the Board might deem proper," but the employer may not use this right "as a cloak" and that "bad faith is prohibited though done with sophistication and finesse");
189. R.W. Fleming, The Obligation to Bargain in Good Faith, 47 VA. L. REV. 988, 989 (1961) (explaining how Congress sought to advance both concerns when enacting the legislation but failed to specify how to reconcile them).
190. Cox, supra note 85, at 1418-28;
191. fleming, supra note 92, at 991-92;
192. see also Note, Employer "Good Faith Doubt", 116 U. PA. L REV. 709, 717-18 (1968) (explaining that refusal to recognize union representatives without a good faith doubt as to the existence of a union majority is a violation of the duty to bargain collectively).
193. See Hylton, supra note 83, at 24 6k n.16. The good faith inquiry is also potentially overinclusive. If good faith negotiation is defined to mean engaging in give-and-take, the test could wrongly identify as a violation a case in which the employer made genuine and honest calculations about its best offer and came to the table to present that offer without any room to modify it. This was the problem with "Boulwareism," a practice of General Electric in the post-war period.
194. See Cooper, supra note 83, at 659-66;
195. Note, supra note 86, at 1474-81. Deeming this kind of employer posturing to lack good faith perversely leads to a regime that, in effect, requires employers to come to the table with positions that they plan to abandon all along.
196. See N.LR.B. v. Gen. Elec. Co., 418 F.2d 736 (2d Cir. 1969);
197. Gen. Elec. Co., 150 N.L.R.B. 192 (1964).
198. Cooper, supra note 83, at 694.
199. Cox, supra note 85, at 1430.
200. Archibald Cox perhaps unwittingly made this apparent in his seminal article on this subject: "Although the law cannot open a man's mind, it can at least compel him to conduct himself as if he were trying to persuade and were willing to be persuaded."
201. Id. at 1411 (emphasis added).
202. See Paul Weiler, Promises to Keep: Securing Workers' Rights to Self-Organization Under the NLRA, 96 HARV. L REV. 1769, 1794-95 (1983) (arguing that requiring the employer to bargain, while allowing the employer to retain full freedom to reject terms, fails to accomplish the goal of facilitating labor agreements).
203. See, e.g., United States v. Gole, 158 F.3d 166, 167 (2d Cir. 1998);
204. United States v. Foshee, 578 F.2d 629, 634 (5th Cir. 1978).
205. MODEL PENAL CODE §2.02 cmt. 2 (1985).
206. Id. §2.02(2)(a).
207. See, e.g., United States v. Walker, 191 F.3d 326, 334 (2d Cir. 1999) (stating that the elements of mail fraud are "(1) a scheme to defraud victims of (2) money or property, through the (3) use of the mails");
208. United States v. Autuori, 212 F.3d 105, 115 (2d Cir. 2000) (defining "scheme to defraud" as "a plan to deprive a person 'of something of value by trick, deceit, chicane or overreaching"' and as "characterized by a departure from community standards of 'fair play and candid dealings"' (
209. quoting McNally v. United States, 483 U.S. 350, 358 (1987) and
210. United States v. Ragosta, 970 F.2d 1085, 1090 (2d Cir. 1992))).
211. See Buell, supra note 11, at 1972-83 (developing this argument in more detail).
212. See, e.g., Carpenter v. United States, 484 U.S. 19, 27 (1987) (explaining that intent to defraud means an intent to obtain property from someone by deceiving or cheating them);
213. United States v. Giles, 246 F.3d 966, 973 (7th Cir. 2001) ("To obtain a conviction for mail fraud, the government must show that the defendant acted with intent to defraud. He must act with the specific intent to deceive or cheat the victim, either for financial gain or to cause financial loss. The scheme must be reasonably calculated to deceive persons of ordinary prudence.").
214. Buell, supra note 11, at 1996-2005.
215. See Durland v. United States, 161 U.S. 306, 314-15 (1896);
216. United States v. Goss, 650 F.2d 1336, 1344 (5th Or. 1981);
217. United States v. Williams, 728 F.2d 1402, 1404 (11th Cir. 1984);
218. see also 2 KATHLEEN F. BRICKEY, CORPORATE CRIMINAL LIABILITY §8:17, at 51-52 (2d ed. 1991).
219. See, e.g., United States v. Leahy, 445 F.3d 634, 651-52 (3d Cir. 2006) (discussing the circuit split over whether separate good faith instruction is mandatory and holding to the majority position that it is not)
220. ; United States v. Dockray, 943 F.2d 152, 154-55 (1st Cir. 1991) (same);
221. United States v. Casperson, 773 F.2d 216, 222-23 (8th Cir. 1985) (holding that good faith instruction is mandatory with record evidence);
222. United States v. Hopkins, 744 F.2d 716, 718 (10th Cir. 1984) (en banc) (same).
223. See, e.g., Willis v. United States, 87 F.3d 1004, 1008 (8th Cir. 1996);
224. 2 BRICKEY, supra note 105, §8:17, at 52. Decisions addressing fraud liability under the Securities Exchange Act of 1934 also have stated that an actor's good faith is incompatible with the presence of scienter. E.g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 206 (1976);
225. Backman v. Polaroid Corp., 893 F.2d 1405, 1418 (1st Cir. 1990) (depublished);
226. Hoffman v. Estabrook & Co., 587 F.2d 509, 513 n.7 (1st Or. 1978);
227. In re Apple Computer Sec. Litig., 886 F.2d 1109, 1116-17 (9th Cir. 1989).
228. United States v. Alkins, 925 F.2d 541, 550 (2d Cir. 1991 );
229. see also Williams, 728 F.2d at 1405.
230. This is why, for example, the prohibition on fraud under the Securities Exchange Act of 1934 covers more than false representations. 15 U.S.C §78j (2006) (prohibiting "any manipulative or deceptive device");
231. 17 C.F.R. §240.10b-5 (2009) (making it a violation to "employ any device, scheme, or artifice to defraud... [or] 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").
232. United States v. Martin-Trigona, 684 F.2d 485, 492 (7th Cir. 1982).
233. United States v. Behr, 33 E.3d 1033, 1036 n.7 (8th Cir. 1994);
234. United States v. Tarallo, 380 F.3d 1174, 1191 (9th Cir. 2004);
235. United States v. Sayakhom, 186 F.3d 928, 940 (9th Cir. 1999);
236. see also United States v. Nacchio, 519 F.3d 1140, 1165 (10th Cir. 2008) (approving jury instruction similarly defining good faith in the context of securities fraud);
237. United States v. Smith, 13 F.3d 1421, 1426 (10th Cir. 1994) (explaining that the defendant has a defense if she "in good faith actually believed (1) that the plan, howsoever visionary and impractical, would succeed, (2) that promises made would be kept and (3) that representations made would be fulfilled").
238. For an interesting discussion of fraud and religious belief, see the opinions in United States v. Bollard, 322 U.S. 78 (1944). The majority thought that a trial court properly kept the jury from considering the truth of the religious beliefs of the defendants, who were charged with fraud for procuring supporters for a movement called "I Am."
239. Id. at 85-88. In dissent, Justice Jackson argued that the indictment should be dismissed because "any inquiry into intellectual honesty in religion raises profound psychological problems."
240. Id. at 93 (Jackson, J., dissenting).
241. United States v. Fowler, 735 F.2d 823 (5th Cir. 1984).
242. Id. at 828-29.
243. United States v. Goss, 650 F.2d 1336 (5th Cir. 1981).
244. Id. at 1344-45.
245. See 2 BRICKEY, supra note 105, §8:17, at 51 ("Good faith is incompatible with awareness of wrongdoing.");
246. see also United States v. Bailey, 327 F.3d 1131, 1143 (10th Cir. 2003) (holding that the actor's belief that his victims will recoup their losses in the end does not establish good faith);
247. United States v. Dunn, 961 F.2d 648, 651 (7th Cir. 1992) (same);
248. United States v. Shareef, 714 F.2d 232, 234 (2d Cir. 1983) (same);
249. United States v. Lamont, 565 F.2d 212, 227 (2d Cir. 1977) (holding that it is not good faith to continue to utter previously innocent misrepresentations after learning that they are false).
250. Such a concept animates a rule providing that an actor cannot be guilty of larceny if she takes property in the "genuine" belief that it is hers-meaning she really thought it was hers and is not just saying so to exploit an exception to criminal liability. N.Y. PENAL LAW §155.15(1) (West 2010);
251. People v. Green, 841 N.E.2d 289, 291-92 (N.Y. 2005).
252. See David Enrich et al., BofA to Release Details of Merrill Advice, WALL ST. J., Oct. 13, 2009, at C1.
253. See 2 BRICKEY, supra note 105, §8:17, at 53-54.
254. Common iterations of the problem include the commission of accounting fraud, see, e.g., United States v. Ebbers, 458 F.3d 110, 125-26 (2d Cir. 2006),
255. United States v. Simon, 425 F.2d 796, 805-06 (2d Cir. 1969),
256. JULIE R. O'SULLTVAN, FEDERAL WHITE COLLAR CRIME 593-605 (3d ed. 2007), and the use of novel tax shelter structures to commit arguable tax evasion or tax fraud,
257. see Background and Present Law Relating to Tax Shelters: Hearing Before the S. Comm. on Finance, 107th Cong. (2002).
258. See also Steven A. Dean & Lawrence M. Solan, Tax Shelters and the Code: Navigating Between Text and Intent, 26 VA. TAX REV. 879 (2007);
259. David A. Weisbach, Formalism in the Tax Law, 66 U. CHI. L REV. 860 (1999).
260. See e.g., United States v. Hansen, 772 F.2d 940, 947 (D.C. Cir. 1985);
261. 3 BRICKEY, supra note 105, §11:03, at 24 (discussing good faith reliance in the context of corporate criminal liability).
262. See generally Note, Reliance on Advice of Counsel, 70 YALE L.J. 978 (1961).
263. United States v. Schaefer, 299 F.2d 625, 630-31 (7th Cir. 1962).
264. United States v. Danser, 26 F.R.D. 580,587 (D. Mass. 1959);
265. see United States v. Van Allen, 524 F.3d 814, 823 (7th Cir. 2008);
266. United States v. Dardi, 330 F.2d 316, 331 (2d Cir. 1964);
267. United States v. Winans, 612 F. Supp. 827, 48 (S.D.N.Y. 1985);
268. 2 BRICKEY, supra note 105, §8:51, at 133-34;
269. 3 BRICKEY, supra note 105, §11:02, at 9-10;
270. see also United States v. DeFries, 129 F.3d 1293, 1308-09 (D.C. Cir. 1997) (holding that the good faith defense does not require disclosure of every fact to a lawyer but only those "primary facts which a lawyer would think pertinent");
271. United States v. Piepgrass, 425 F.2d 194, 197-98 (9th Cir. 1970) (rejecting the good faith defense where the attorney was a financial participant in client activities and had a personal interest in their success). In the tax-shelter context, a lawyer providing a "marketed" opinion also must make inquiry as to relevant facts and follow up if she has reason to believe any facts are untrue; the lawyer must also opine as to whether it is more likely than not that the client will prevail on each material issue. 31 CRR. §10.35 (2009). These requirements are enforced not through application of a good faith defense in litigation against the client but as professional disciplinary rules that govern the practice of attorneys before the Internal Revenue Service.
272. See id. 10.50. As to the taxpayer's potential criminal liability, some decisions suggest that mere consultation with a lawyer, without regard to the nature of the disclosure to the lawyer, might be sufficient to establish good faith.
273. See United States v. Bursten, 395 F.2d 976, 981-82 (5th Cir. 1968). I am skeptical whether this could hold up now if tested. It seems close to saying that there can be no criminal liability for tax evasion because tax law is too unclear to form the intent to evade it Cf.
274. United States v. Critzer, 498 F.2d 1160, 1162 (4th Cir. 1974) (holding that there can be no intent to evade as a matter of law if different branches of the federal government on the record have "plausibly reachfed] directly opposing conclusions" on the underlying question of taxability);
275. United States v. Garber, 607 F.2d 92, 98 (5th Cir. 1979) (stating that the "unresolved nature" of the underlying question of tax law is relevant but not dispositive on the defendant's intent to evade tax). Other courts have said that Garber is incorrect for not further requiring a showing that the uncertain nature of the law has been known to the defendant.
276. See, e.g., United States v. Curtis, 782 F.2d 593, 598-99 (6th Cir. 1986);
277. United States v. Ingredient Tech. Coro., 698 F.2d 88, 96-97 (2d Cir. 1983)).
278. See DeFries, 129 F.3d at 1309 ("It is an important part of a lawyer's job to warn his client about behavior that, while not illegal, nonetheless has the potential to embroil a client in controversy.").
279. William H. Simon, The Market for Bad Legal Advice: Academic Professional Responsibility Consulting as an Example, 60 STAN. L. REV. 1555, 1562-66 (2008);
280. William H. Simon, After Confidentiality: Rethinking the Professional Responsibilities of the Business Lawyer, 75 FORDHAM L. REV. 1453, 1455-64(2006).
281. See United States v. Rigas, 490 F.3d 208, 220 (2d Cir. 2007);
282. United States v. Ebbers, 458 F.3d 110, 125-26 (2d Cir. 2006);
283. United States v. Simon, 425 F.2d 796, 805-06 (2d Cir. 1969).
284. See, e.g., Complaint for Violations of the Federal Securities Law at 2-3, SEC v. Meridian Holdings, Inc., No. CV07-06335-DDP (C.D. Cal. Sept. 28, 2007), available at http://www.sec.gov/litigation/complaints/2007/comp20318.pdf (charging a firm with securities fraud for doubling its stock price by reporting a large default judgment and interest on the judgment as assets and income, though managers had no basis to believe the judgment was collectible);
285. Superseding Indictment at 24-25, United States v. Causey, Cr. No. H-04-25 (S-2) (S.D. Tex. July 7, 2004), available at http://news.findlaw.com/hdocs/ docs/enron/usvlay70704ind.pdf (charging former Enron Chairman and CEO Kenneth Lay with criminal fraud for, in part, avoiding a large write-down to the value of a major business by falsely asserting to auditors an intention to invest in the business in the future, when, in fact, the business was failing and being abandoned).
286. See David Luban, Selling Indulgences, SLATE, Feb. 14, 2005, http://www.slate.com/id/2113447;
287. see also Marvin A. Chirelstein & Lawrence A. Zelenak, Tax Shelters and the Search for a Silver Bullet, 105 COLUM. L REV. 1939, 1939 (2005) (stating that marketing of tax shelters by investment and accounting firms "has developed into a perfect plague").
288. See MODEL PENAL CODE, §2.04 (1985);
289. see also United States v. Cross, 113 F. Supp. 2d 1253, 1263 (S.D. Ind. 2000) (stating that reliance on advice of counsel is not a defense to "general intent" crimes, such as illegal gambling offenses). Notwithstanding the defense of good faith, mistake of law is not a defense to a fraud charge.
290. United States v. Stockheimer, 157 F.3d 1082, 1088-89 (7th Cir 1998);
291. United States v. Hollis, 971 F.2d 1441, 1451-52 (10th Cir. 1992).
292. See, e.g., United States v. Christopher, 142 F.3d 46, 48-50 (1st Cir. 1998) (describing a case in which the defendant, in prosecution for fraudulent representations about the value of collateral made to procure approval of state insurance regulators for purchase of insurance companies, unsuccessfully proffered the advice-of-counsel defense based on a claim that transactional lawyers who worked on acquisition were aware of liens on the collateral with which the defendant allegedly defrauded regulators).
293. See Luban, supra note 129.
294. See STUART P. GREEN, LYING, CHEATING, AND STEALING: A MORAL THEORY OF WHITE COLLAR CRIME 30-47 (2006) (comparing differences in determining mens rea, harmfulness, and moral culpability of street crime versus white-collar crime).
295. It is rarely socially welcome, and never routine, to cause the death of another person, but it is common and usually unobjectionable to cause a person to part with property.
296. 18 U.S.C. §1503 (2006);
297. id. §1505. For further discussion of obstruction of legal process,
298. see Buell, supra note 10, at 1541-45.
299. United States v. Griffin, 589 F.2d 200, 206-07 (5th Cir. 1979)
300. (quoting Anderson v. United States, 215 F.2d 84, 88 (6th Cir. 1954)).
301. United States v. Tackett, 113 F.3d 603, 607 (6th Cir. 1997).
302. 18 U.S.C§1512.
303. Id. §1519.
304. See Buell, supra note 10, at 1541-45;
305. Lisa Kern Griffin, Criminal Lying, Prosecutorial Power, and Social Meaning, 97 CALIF. L REV. 1515, 1517-33 (2009);
306. Erin Murphy, Manufacturing Crime: Process, Pretext, and Criminal Justice, 97 GEO. L.J. 1435, 1446-91 (2009);
307. Julie R. O'Sullivan, The Federal Criminal "Code" Is a Disgrace: Obstruction Statutes as Case Study, 96 J. CRIM. L & CRIMINOLOGY 643, 688-89 & n. 185(2006).
308. See United States v. Thompson, 76 F.3d 442, 452 (2d Cit. 1996) (holding that this mens rea formulation saves the statutes from the charge that they are unconstitutionally vague);
309. see also Bosselman v. United States, 239 F. 82, 86 (2d Cir. 1917) (holding that any endeavor to obstruct justice is "corrupt").
310. See Arthur Andersen LLP v. United States, 544 U.S. 696, 698-701, 704-06 (2005) (stating that a concept of "consciousness of wrongdoing" should be used in jury instructions in order to distinguish between these cases).
311. Courts occasionally have used formulations such as "good faith belief when discussing a defendant's mental state in relation to obstruction of justice charges.
312. See, e.g., United States v. Frankhauser, 80 F.3d 641, 649 ( 1st Cir. 1996).
313. Another example of an obstructive actor lacking good faith might be a class action plaintiffs' counsel who, to secure lead position in a lawsuit, makes payments to persons who agree to serve as named plaintiffs while concealing such payments from the court.
314. See First Superseding Indictment, United States v. Milbetg Weiss Bershad & Schulman LLP, No. CR-05-587(A)-DDP (CD. Cal. 2004).
315. See Stuart P. Green, Why It's a Crime to Tear the Tagoffa Mattress: Overcriminalization and the Mord Content of Regulatory Offenses, 46 EMORY L.J. 1533 (1997).
316. See John C. Coffee, Jr., Does "Unlawful" Mean "Criminal"?: Reflections on the Disappearing Tort/Crime Distinction in American Law, 71 B.U. L REV. 193 (1991);
317. Sanford H. Kadish, Some Observations on the Use of Criminal Sanctions in Enforcing Economic Regulations, 30 U. CHI. L REV. 423 (1963).
318. STEPHEN M. BAINBRIDGE, CORPORATION LAW AND ECONOMICS 362-64 (2002);
319. JAMES D. COX & THOMAS LEE HAZEN, CORPORATIONS 476-82, 515-17 (2ded. 2003).
320. See BAINBRIDGE, supra note 147, at 242;
321. Cox & HAZEN, supra note 147, at 487.
322. Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985).
323. DEL. CODE ANN. Tit 8, §§102(b)(7), 145 (2001 & Supp. 2009);
324. BAINBRIDGE, supra note 147, at 241-51;
325. Cox & HAZEN, supra note 147, at 482-84;
326. see also Stephen M. Bainbridge, The Business Judgment Rule as Abstention Doctrine, 57 VAND. L REV. 83, 95 (2004) ("[T]he whole point of the business judgment rule is to prevent courts from even asking the question: did the board breach its duty of care ?");
327. Geoffrey P. Miller, A Modest Proposal for Fixing Dekware's Broken Duty of Care (New York Univ. Sch. of Law, NYU Ctr. for Law, Econ. & Organization, Law & Econ. Research Paper Series, Working Paper No. 09-41, 2009), available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=1495029.
328. See Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1167-72 (Del. 1995);
329. Guth v. Loft, 5 A.2d 503, 510 (Del. 1939);
330. BAINBRIDGE, supra note 147, at 306;
331. Cox & HAZEN, supra note 147, at 517.
332. See Edward B. Rock, Saints and Sinners: How Does Dekware Corporate Law Work?, 44 UCLA LREV. 1009 (1997).
333. Delaware courts often have specified procedures that directors may follow to avoid liability for breach of fiduciary duty.
334. See, e.g., Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 180-65 (Del. 1986);
335. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955-58 (Del. 1985);
336. see also BAINBRIDGE, supra note 147, at 277 (stating that the Von Gorkom decision provides a "procedural roadmap" for corporate decisions of large magnitude);
337. Lynn A. Stout, In Praise of Procedure: An Economic and Behaviord Defense of Smith v. Van Gorkom and the Business Judgment Rule, 96 NW. U. L REV. 675 (2002) (exploring the idea of enforcing the duty of due care through procedural requirements).
338. 698 A.2d 959 (Del. Ch. 1996).
339. Jennifer Arien, The Story of Allis-Chalmers, Caremark, and Stone: Directors' Evolving Duty to Monitor, in CORPORATE LAW STORIES 323, 326 (J. Mark Ramseyer ed., 2009).
340. Caremark, 698 A.2d at 960-68.
341. Id. at 968.
342. Id. at 970.
343. See, e.g., McGowan v. Ferro, 859 A.2d 1012, 1031-38 (Del. Ch. 2004) (reciting directors' shareholder-regarding reasons for extensions to a merger agreement as the basis for rejecting plaintiffs' claims that the directors extended the agreement in bad faith);
344. In re Gaylord Container Corp. Shareholders Litig., 753 A.2d 462, 477-79 (Del. Ch. 2000) (finding that the board acted in good faith in defensive response to takeover efforts because deliberative procedures involved genuine effort to evaluate proposals in an informed manner and on their merits);
345. Emerald Partners v. Berlin, No. Civ.A. 9700,2003 WL 21003437, at *41 (Del. Ch. Apr. 28, 2003) (same). Note the parallel here to the law of corporate criminal liability, which usually refuses to insulate a corporation from sanctions for the acts of its agents simply because the corporation had a policy against criminal wrongdoing.
346. See United States v. Hilton Hotels Corp., 467 F.2d 1000, 1005-07 (9th Cir. 1972).
347. Arien, supra note 155, at 325-26.
348. Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1994), modified, 636 A.2d 956 (Del. 1994);
349. see also Malone v. Brincat, 722 A.2d 5, 10-11 (Del. 1998) (stating that corporate fiduciaries have a duty of honesty to shareholders that arises from the duties of loyalty, care, and good faith);
350. Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 64 (Del. 1989) (stating that the presumption of the business judgment rule can be overcome if the plaintiff produces evidence of self-interest, self-dealing, lack of good faith, or failure to exercise due care);
351. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955-57 (Del. 1985) (holding that for a defensive measure in response to a takeover bid to be protected by the business judgment rule, directors must have been "motivated by a good faith concern for the welfare of the corporation and its stockholders" and must have been disinterested and have acted with due care).
352. DEL. CODE ANN. tit. 8, §§102(b)(7), 145 (2001).
353. 911 A.2d 362, 365-70 (Del. 2006).
354. Id. at 370.
355. Id. at 371-73.
356. Id. at 370;
357. see also Ryan v. Gifford, 918 A.2d 341, 357-58 (Del. Ch. 2007) (holding that claims that directors approved misleading backdating of stock-option grants could constitute a breach of the duty of good faith because directors were alleged to have intentionally participated in a practice that misled shareholders).
358. 970 A.2d 235 (Del. 2009).
359. Id. at 239-43
360. (citing and discussing Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 179 (Del. 1986)).
361. In re Walt Disney Co. Derivative Litig., 906 A.2d 27 (Del. 2006).
362. Id. at 64-66.
363. See Leo E. Strine, Jr. et al., Loyalty's Core Demand: The Defining Role of Good Faith in Corporation Law, 98 GEO. L.J. 629 (2010) (arguing that lack of good faith is the mental state required for a violation of the duty of loyalty). An argument against a subjective conception of good faith in corporate law might be that such an approach leaves out many cases of managerial self-deception that harm shareholders.
364. See Deborah A. DeMott, Puzzles and Parables: Defining Good Faith in the MBO Context, 25 WAKE FOREST L REV. 15, 22-23 (1990);
365. Melvin A. Eisenberg, The Duty of Good Faith in Corporate Law, 31 DEL. J. CORP. L 1, 22-23 (2006). This is a persuasive point to the extent that one believes that a duty of good faith should expand the range of managerial actions subject to liability under the duties of care and loyalty. If the duty of good faith should only fortify the duties of care and loyalty, then subjectivity of the inquiry should be a lesser concern.
366. See, e.g., Timothy P. Glynn, Delaware's Vantage Point: The Empire Strikes Back in the Post-Post-Enron Era, 102 NW. U. L REV. 91 (2008);
367. Marcel Kahan & Edward Rock, Symbiotic Federalism and the Structure of Corporate Law, 58 VAND. L REV. 1573 (2005);
368. Mark J. Roe, Delaware's Politfcs, 118 HARV. L. REV. 2491 (2005).
369. See Arlen, supra note 155, at 339 (reporting that Chancellor Allen has explained that he was motivated in Caremark by a concern that directors had been lulled into passivity and complacency by the business judgment rule).
370. See Hillary A. Sale, Dekuere's Good Faith, 89 CORNELL. L. REV. 456, 488-89 (2004) (explaining that, without distinguishing deliberate or egregious duty of care violations from ones that are merely grossly negligent, good faith duty could present the same problems as the ruling in
371. Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985)).
372. Claire Moore Dickerson, From Behind the Looking Gloss: Good Faith, Fiduciary Duty & Permitted Harm, 22 FLA. ST. U. L REV. 955 (1995);
373. Sarah Helene Duggin & Stephen M. Goldman, Restoring Trust in Corporate Directors: The Disney Standard and the "New" Good Faith, 56 AM. U. L. REV. 211 (2006);
374. Eisenbetg, supra note 171;
375. Claire A. Hill & Brett H. McDonnell, Disney, Good Faith, and Structura Bias, 32 J. CORP. L 833 (2007);
376. Elizabeth A. Nowicki, A Director's Good Faith, 55 BUFF. L REV. 457 (2007);
377. Elizabeth A. Nowicki, Not In Good Faith, 60 SMU L. REV. 441 (2007);
378. David Rosenberg, Making Sense of Good Faith in Delaware Corporate Fiduciary Law: A Contractarian Approach, 29 DEL. J. CORP. L. 491 (2004);
379. Sale, supra note 174;
380. Hillary A. Sale.Monitoring Caremark's Good Faith, 32 DEL. J. CORP. L. 719 (2007).
381. Stephen M. Bainbridge, Star Lopez & Benjamin Oklan, The Convergence of Good Faith and Oversight, 55 UCLA L REV. 559 (2008);
382. Christopher M. Bruner, Good Faith, State of Mind, and the Outer Boundaries of Director Liability m Corporate Law, 41 WAKE FOREST L REV. 1131 (2006). For an earlier take on good faith under Delaware law,
383. see John C Coffee, Jr., The Mandatory/Enabling Balance in Corporate Law: An Essay on the Judicial Role, 89 COLUM. L. REV. 1618 (1989). For examinations of good faith leaning more positive than normative,
384. see Sean J. Griffith, Good Faith Business Judgment: A Theory ofRhetoric m Corporate Law Jurisprudence, 55 DUKELJ. 1 (2005), and DeMott, supra note 171.
385. Recendy, extraordinary charges of "cheating" were lodged against a top player who discovered a loophole in a new rule banning a longstanding feature of clubs deemed to have made it too easy to impart spin to the golf ball. See Larry Dorman, Phil Mickelson Accused of Cheating at Torrey Pines, N.Y. TIMES, Jan. 30, 2010, at D5.
386. Tushnet, supra note 4.
387. Stephanie Mencimer, The Birthers' Next Target: Hillary Clinton, MOTHER JONES, Feb. 16, 2010, available at http://motherjones.com/politics/2010/02/ birthers'-next-target-hillary-clinton.
388. Tushnet, supra note 4, at 1510-11. An instructive example might be the recent litigation over a cross on federal land in the Mojave Desert. The Supreme Court concluded (barely, in a fractured decision) that the government may have acted lawfully in transferring a small amount of land under the cross to a private party after a federal court had enjoined the government from displaying the cross under the Establishment Clause.
389. Salazar v. Buono, 130 S. Ct. 1803, 1815-21 (2010). The Court said the lower court erred in deeming the statutory land transfer an "evasion" of its injunction. Surely it would be evasion, though, were Congress to grant a small plot in the middle of every national park to a private organization that proceeded to erect a large cross on each plot.
390. Cf. Steven L Schwarcz, Regidoting Complexity in Financial Markets, 87 WASH. U. L. REV. 211, 264 (2009) (arguing that principles-based regulation is more appropriate in "interpretive communities" in which regulators and regulated parties share understandings such that principles have the same meaning for all).
391. I hasten to remind the reader that by "evasion" I mean the reshaping of behavior to avoid the terms of sanctioning rules, not ex post and ex ante efforts to avoid detection, such as destruction of evidence or non-creation of evidence (donning gloves before committing a crime, for example).
392. See Avraham D. Tabbach, The Social Desirability of Punishment Avoidance, 25 J. L. ECON. & ORG. 265 (2010) (exploring regulation of such avoidance efforts and arguing that incentives for actors to engage in avoidance can enhance deterrence by raising the costs of law violations).
393. For a recent exploration of some of the complexities in the project of regulating behaviors that damage the environment, see David M. Uhlmann, Environmental Crime Comes of Age: The Evolution of Criminal Enforcement in the Environmental Regulatory Scheme, 2009 UTAH L. REV. 1223.
394. If a state's justification for punishing murder is to see that all murderers receive their moral desert, the problem of how to prevent murderers from escaping deserved sanction is instrumental. This is true even if one's deontological commitments would lead one to the (extraordinary) position that the state should pursue punishment of all murders without regard to considerations of cost.
395. Similar reasoning lies behind practices in criminal law, such as punishing actors who attempt crimes without completing all steps necessary to their commission and who conspire with others to commit offenses, and punishing recidivists more severely.
396. Although finding that considerations of cost complicate the question of how to proceed, consequentialist analyses of the problem of "detection avoidance" have agreed that legal regimes must contend with efforts to defeat sanction.
397. See Jacob Nussim & Avraham D. Tabbach, Controlling Avoidance: Ex Ante Regulation Versus Ex Post Punishment, 4 REV. L & ECON. 45 (2008);
398. Jacob Nussim & Avraham D. Tabbach, Deterrence and Avoidance, 29 INTt REV. L & ECON. 314 (2009);
399. Chris William Sanchirico, Detection Avoidance, 81 N.Y.U. L REV. 1331 (2006);
400. Tabbach, supra note 182. A major emphasis of this literature has been on the need to consider ways in which avoidance efforts may raise costs for actors and therefore affect, if you will, both sides of the deterrence ledger.
401. Dan M. Kahan, The Logic of Reciprocity: Trust, Collective Action, and Law, 102 MICH. L REV. 71, 73-80 (2003);
402. see also HART, supra note 1, at 198 ("'Sanctions' are ... required not as the normal motive for obedience, but as a guarantee that those who would voluntarily obey shall not be sacrificed to those who would not. To obey, without this, would be to risk going to the wall.").
403. Leo Katz, A Theory of Loopholes, 39 J. LEGAL STUD. 1 (2010).
404. Id. at 15.
405. This occurs if, between B and C, judges X and Y prefer B to C and judge Z prefers C to B. Then, when third option A is introduced, judge X ranks her preferences A, B, C; judge Y ranks hers B, C, A; and judge Z ranks hers C, A, B. Before the inclusion of A, B won over C with two-thirds of the votes. With A in the vote, A, B, and C each garner one first-place vote, one second-place vote, and one third-place vote.
406. See id. at 14.
407. Id. at 19-22.
408. See, e.g., Matthew D. Adler, Popular Constitutionalism and the Rule of Recognition: Whose Practices Ground U.S. Law!, 100 Nw. U. L REV. 719, 774-77 (2006) (briefly summarizing major views in this discussion);
409. Frederick Schauer, When and How (If at All) Does Law Constrain Officid Action?, 44 GA. L REV. 769 (2010) (same);
410. Leslie Green, Legal Obligation and Authority, STANFORD ENCYCLOPEDIA OF PHILOSOPHY (Dec. 29, 2003), http://plato.stanford.edu/entries/legal-obligation (providing a more detailed summary and a bibliography of the major views). Katz argues that there is often nothing amiss from a deontological viewpoint in deliberately refashioning a norm-violating behavior to accomplish the same result without violating the formal terms of the norm.
411. LEO KATZ, ILL-GOTTEN GAINS: EVASION, BLACKMAIL, FRAUD, AND KINDRED PUZZLES OF THE LAW 1-132 (1996).
412. But see Larry Alexander, Is Morality Like the Tax Code?, 95 MICH. L REV. 1839, 1843-46 (1997) (arguing that Katz fails to establish that moral norms frequently have formal features that, if complied with, render an actor's conduct non-blameworthy even if the actor's mental state and the result of the actor's conduct suggest the actor merits blame).
413. H.LA. Hart, Positivism and the Separation of Law and Morals, 71 HARV. L. REV. 593, 607 (1958).
414. See Walter J. Blum, Motive, Intent, and Purpose in Federal Income Taxation, 34 U. CHI. L REV. 485,515 ( 1967) ("It clearly would be foolish to attempt to define tax avoidance as merely a more intense or pervasive version of tax minimization.'');
415. Stuart P. Green, What Is Wrong With Tax Evasion?, 9 HOUS. BUS. & TAX L.J. 221 (2009) (discussing the difficulty of drawing the line between tax evasion and tax avoidance). Tax law has tried doctrines like "form versus substance" and "step transactions" that authorize courts to impose liability if an actor structured conduct to comply in literal terms with the code but to accomplish ends equivalent to those barred by, and motivating, the rules.
416. BORIS I. BtTTKER & LAWRENCE LOKKEN FEDERAL TAXATION OF lNOOME, ESTATE AND GIFTS ¶4.3 (3d ed. 1999 & Supp. 2009). One way for tax law to attack evasion is to say that a transaction must be done with a non-tax purpose in order to count as non-taxable and then to attempt to police the genuineness of taxpayers' asserted non-tax motives.
417. See, e.g., United States v. Ingredient Tech. Corp., 698 F.2d 88, 94-97 (2d Cir. 1983).
418. Chirelstein & Zelenak, supra note 129, at 1939.
419. See id.; Shannon Weeks McCormack, Tax Shelters and Statutory Interpretation: A Much Needed Purposive Approach, 2009 U. ILL. L. REV. 697;
420. Leandra Lederman, W(h)ither Economic Substance', 95 IOWA L. REV. 389 (2010).
421. 15 U.S.C. §§77b, e (2006).
422. 17 C.F.R. §§230.134-174 (2009).
423. It is curious that the 1933 Act's rules contain provisions that purport to contradict this point See, e.g., id. §230.168 prelim. n.1 ("This [safe harbor] is not available for any communication that, although in technical compliance with this section, is part of a plan or scheme to evade the requirements of [the Securities Act of 1933]."). One wonders how the SEC would identify a scheme that complies with the letter of the rules but is nonetheless a scheme to evade, given an underlying legal regime as elaborate, and in places arbitrary, as the rules about what does and does not constitute "gun jumping" in issuing new securities.
424. This is because Manager 1 is willing not just to pollute but also to devote resources to finding new ways to do so that undermine legal controls. Manager 1 is a more determined, creative violator who is less constrained by a sense of normative obligation to the law.
425. See Kimberly D. Krawiec, Cosmetic Compliance and the Failure of Negotiated Governance, 81 WASH. U. L.Q. 487 (2003).
426. Jennifer Arlen & Eric Talley, Unregulable Defenses and the Perils of Shareholder Choice, 152 U. PA. L REV. 577 (2003).
427. Id. at 624-25.
428. See Meir Dan-Cohen, Decision Rules and Conduct Rules: On Acoustic Separation in Criminal Law, 97 HARV. L REV. 625, 630-34 (1984) (providing a theoretical framework for considering divergence, or lack thereof, between what legal rules say to primary actors versus legal actors); Sanchirico, supra note 186, at 1366-72 (describing the problem of recursion in sanctioning obstruction of justice).
429. JOHN C. JEFFRIES, JR. ET AL., CIVIL RIGHTS ACTIONS: ENFORCING THE CONSTITUTION 86-130 (2000). Qualified immunity is a doctrine that grants limited protection to public officials against liability for official actions in order to balance competing demands of sufficient accountability against overdeterring the performance of public functions.
430. See Harlow v. Fitzgerald, 457 U.S. 800, 814-15 (1982).
431. See, e.g., 1 WAYNE R. LAFAVE, SEARCH AND SEIZURE: A TREATISE ON THE FOURTH AMENDMENT §§1.4(a)-(e), at 115-35 (4th ed. 2004);
432. Anthony G. Amsterdam, Perspectives on the Fourth Amendment, 58 MINN. L. REV. 349, 436-37 (1974).