Deferred Prosecution Agreements

Deferred Prosecution Agreements have been covered by a sizeable number of firms for example all of these hyperlinks link to some summary or another. The scheme itself is relatively straightforward. A DPA is a negotiated agreement whereby a company agrees to abide by punitive terms in return for the suspension (and ultimate termination) of criminal proceedings. There is no criminal conviction. The terms will generally include a fine, set at a level “broadly comparable” to that on a guilty plea. They are now available to prosecutors, and there is Code of guidance for them.  

There are two things that I am interested in. One is a practitioner’s concern, the other very much an academic one.

Practically speaking, the issue of “privilege” is not well dealt with in the Code.  (Privilege is the (fundamental) right, in the legal proceedings, not to divulge certain information, usually and especially communications with lawyers.) The Code only says that the law on privilege is unchanged. However, the Director of the Serious Fraud Office has said publically (and erroneously) that “The Code… lists factors which militate… towards a DPA. These include… a waiver of privilege”. Such a factor is decidedly not listed in the Code, and it is worrying to expect corporates to waive privilege. Particularly as corporates will be worried about what happens to the privileged material if and when DPA negotiations break down.

But my real interest is how DPAs play into the differential treatment of corporates and individuals. DPAs are a negotiable way out of criminal proceedings. If companies are allowed them, why not individuals? In fact, why are corporates allowed them at all? Is it a good thing that companies can get them, or are the authorities, as the esteemed FCPA professor blog puts it, really just saying that it is too hard to prove criminal conduct, they cannot be bothered, and they’ll satisfy themselves with a quasi-criminal compromise?

Moreover, the DPA scheme looks to use corporate DPAs as a tool to secure individuals’ convictions. Once a DPA is agreed with a corporate, the prosecutor can merrily prosecute the executives involved. There may be a moral basis for this, but it is not explained or codified. The best explanation, I think, would be the idea that criminal bad behaviour really only makes sense from an individualistic point of view. People do bad things; companies only do bad things when their people do bad things. Those people are the correct objects of scorn. But that can only take us so far, because if it is true, why bother with DPAs at all? Ought we then just have the companies cooperate with the punishment of the individuals?

Complex Cases

The press, in recent years, has made much of the unfairness of HMRC pursuing small companies for small tax bills, whilst cutting deals with large avoiders.  A similar complaint may be made about criminal prosecution.  I have seen, in a magistrates court, a case brought against a man carrying a novelty-belt-buckle-cum-knuckleduster on the Eurostar, at a time when criminal prosecutions for large scale financial misconduct seem scarce and unsuccessful.

The problem on both counts is two-fold; complexity and (relatedly) outside option. A large scale tax avoider, or long running fraud, are doing clever and complicated things. In any case, they are vast. A fraud running for 6 years will necessarily involve more documentation, money movements and representations than a mugging or a bank heist. To decide whether the actions were illegal is more difficult, and involves more work – for an investigator or a prosecutor.  All the while, its subject will be taking legal advice from top end lawyers with a long billing leash. (A big corporate would, in all likelihood, outspend the Serious Fraud Office in any given proceedings.)

An investigator, then, has to decide whether to take that gamble. If he is wrong, he has spent a large amount of money and time achieving nothing.  The knuckleduster chap got off – at a small cost to the taxpayer.  The Tchenguiz litigation, a failed SFO case relating to the Icelandic banking crisis, is a serious loss to the public purse.

Outside options are the state’s way of bypassing this risk.  Cutting a deal with Fyodor plc saves litigation costs and risks; even if the recovery isn’t as good as it may be. In a simpler case, there is no reason to cut a deal – a hairdresser who doesn’t pay VAT is a stonewall court win, why negotiate? Deferred Prosecution Agreements look to be a way to bring an element of that negotiation to the criminal table. But, as we will see, there are problems with those too. 

Of Gingerbread Lattes

Picking your battles is a very good idea. Which arguments do you need to have, which points are worth dropping, and what is the ultimate outcome that you need to achieve?

This is what I was thinking about after I had a stand up argument with a Starbucks barista. (Barista has always struck me as a very impressive sounding name for someone who foams milk.) I had ordered a latte with gingerbread syrup and whipped cream (I know, not exactly a cutting edge hipster coffee choice). He put it through his till as a gingerbread latte, and tried to charge me accordingly.

Now, the problem is that a gingerbread latte costs more than the sum of its parts. If you take an ordinary latte and add supplements for syrup and cream it costs 20p less (for a tall latte) than a “gingerbread latte”. I pointed this out to barista-man. He told me I was trying to be clever.  I would like to think that when I try and be clever, gingerbread lattes are not key players.  We had an argument and eventually, reluctantly, he worked some magic such that a till, that hitherto was completely incapable of putting through my order as I’d ordered it, was finally able to deal with the complex concept that I had shared with its operator.

I don’t think I was being clever; I think Starbucks was being cheeky. There is a good rule of thumb in business ethics that your customer should understand what’s going on – that you, as a business, can explain frankly and openly how you operate and make money. To have a surcharge attached to a name is pretty hard to explain.

I know Starbucks have a pretty poor corporate governance profile, and the Battle of the Gingerbread Latte is probably not the key one. But it really does not help Starbucks’ image. 

Being a City lawyer: Jurisprudence

Recently, I was having lunch with some other trainees. Something came up in the course of a pretty normal, non-legal conversation which reminded me of something vaguely jurisprudential – Hart’s primary and secondary laws, Finnis’ central case of law, or something. And so I said as much. And one fellow said “Oh, don’t bring jurisprudence into it”.

Now, I can see that lunch breaks are not always the time to delve too deeply into tricky philosophical riddles. I can see that no one likes to have Rawls quoted at them when they were just trying to decide whether to have a pudding or not. But I was a little worried that just the very mention of legal philosophy was enough to exasperate a colleague.

Is jurisprudence relevant to my day job? Not immediately. Proof reading contracts doesn't need Dworkin (thank goodness), research memos don’t need me to identify rules of recognition. But I like to think that jurisprudence is part of the fundamental grounding of legal practice. To be au fait with some of the theory of the common law, or how and why principles of certainty and fairness should be balanced, or what judges do when they interpret contracts are relevant in a high-level way.

*metaphor alert*

You can probably build an engine with some basic mechanical knowledge. You can understand (and build) it better by knowing more of the physics and chemistry behind it. Equally, any lawyer will know what a contract does, but ought he not think about why they matter, how they’re justified, and what role a court has in them?

Given that jurisprudence might be a ‘silent prologue’[1] to aspects of legal practice,  maybe a lunch break is a good time to give it some air time.

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[1] Ronald Dworkin, in "Law's Empire"

Parent Company Liability (nothing to do with vicarious liability)

Dear old Mr. Droog works for Fyodor Ltd in the 1960s. Fyodor Ltd was a bit bad, and exposed Mr. Droog to batemanium, a chemical that caused Mr. Droog to go blind in his later life. By the time Mr. Droog suffers his loss, realises the cause, and wants to sue, Fyodor Ltd is history. It was wound up. Can Mr. Droog sue the extant parent company, Dostoevsky Plc?

By Chandler v Cape [2012] EWCA Civ 525, he can. The Court of Appeal agreed with the judge at first instance, and upheld the imposition of parent company liability. This was because the parent had assumed responsibility for the safety of its subsidiary’s employees.

What I find interesting about this case is the fact that it has no relation whatsoever with vicarious liability. Arden LJ made passing reference to the fact that the first instance judge had not found liability on “any form of vicarious liability”. That’s the only mention it gets, and no vicarious liability cases were cited in argument. Google “chandler cape vicarious”, and you get the square root of hee-haw.

Given that it was accepted by the parent in Chandler v Cape that the subsidiary would have been liable, it seems surprising that there was no argument at all regarding whether the parent ought to be liable vicariously. If vicarious liability were to apply to parents and subsidiaries, the parental liability would be a slam-dunk success.  Instead, counsel for the claimant argued for the direct liability of the parent. It is worth noting that counsel’s approach was breaking new legal ground, in that the idea of ‘parent company liability’ is new. Although the approach taken is a far less iconoclastic approach than arguing for vicarious liability. All the court had to do was accept that the normal rules of assumption of responsibility in the tort of negligence could apply to the parent company, and did indeed apply on the facts of the case.

I think the reason why vicarious liability was left to one side can be explained in this quote:

“69  I would emphatically reject any suggestion that this court is in any way concerned with what is usually referred to as piercing the corporate veil. A subsidiary and its company are separate entities. There is no imposition or assumption of responsibility [read, liability] by reason only that a company is the parent company of another company.”

This concern is fair enough. If we are to have “limited liability” companies, and the bundles of legal risk are supposed to be capable of being parcelled up and apportioned amongst a corporate group, vicarious liability might be the wrong approach.

But let's apply this logic to natural beings. Why should it be that we (as individuals or companies) be liable on one set of terms for the acts of natural persons we employ (vicarious liability is expressly fault free) but a different set for the actions of legal persons we own (where normal tort rules apply)?   Is the commercial uncertainty caused by a raggedy corporate veil a better reason to keep liability separate than the moral oddness of being responsible for the vulgar, deliberate and secret acts of your employees?

Put another way, if the correct way to decide if a parent is liable to its subsidiaries employees, or Borstal guards are liable to terrorised residents[1] is through the application of a general tortious test that incorporates an element of fairness, why is that different for companies and employees? Given that vicarious liability is dogged by uncertain theoretical foundations, ought it ignore the more stable reasoning afforded by the general law of negligence? Abandoning vicarious liability in favour of the general test would replace strict liability with fault based liability, and import a measure of fairness. Vicarious liability cases could be re-theorised to fit that model. The role of control would be more central. And in those cases where the employer is truly blame free, they would not be saddled with a tort liability they could have done nothing to avoid. 

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[1] I’m referring to the Dorset Yacht Co Ltd v Home Office [1970] AC 1004 

Minimum Alcohol Pricing in Scotland 3: A Decision

I have blogged about minimum pricing before; both on its possible illegality, and on the SWA’s approach. Now a Scottish court has heldthat there is no problem in law with the proposals, and so it would appear minimum pricing will become a reality. (Except that other EU states are challenging the measure at a higher level, as reported here).

I don’t propose to go through all the aspects of the judgment, which is here, at any length. I am more interested in the free movement of goods (FMG) issue, which I discussed before. This was, as I understand, the main argument of the SWA. Other arguments, including ones based on the Scotland/England Acts of Union hardly passed a smell-test.

On the FMG point, it was held that the Scottish measure did impinge on free movement, but was justified on the basis of the protection of the life and health of humans (Art 36 TFEU). This is a treaty-enshrined basis that allows derogation from strict free movement of goods. Lord Doherty held that there was a legitimate aim, and that the measure was proportionate to that aim.

[55] There is overwhelming evidence of grave health, social, economic and public order consequences caused in Scotland as a result of excessive alcohol consumption. Such consumption by harmful and hazardous drinkers is particularly concerning, and is harmful to those drinkers and to others. On the basis of the material placed before me I am in no doubt that reduction of alcohol consumption generally, and reduction of consumption by hazardous and harmful drinkers in particular, are both legitimate aims in terms of Article 36.

…

[64] If … alternative measures would be just as effective as minimum pricing in achieving the legitimate aims being pursued, the contention that they would be less of an obstacle to freedom of movement of goods would appear, at least prima facie, to be logical and have force…

…

[73] The petitioners [argue] that excise duty on alcohol can be increased as much as is necessary to raise the prices of cheaper products to desired levels. Such an approach would not affect, or target, drinkers of cheaper products only: but it could subject them to price increases of at least the same order as under minimum pricing. … In those circumstances [an excise duty] would be no less effective in reducing the consumption of cheap alcohol or the consumption of alcohol by hazardous and harmful drinkers.

…

[77] That argument would have been more persuasive if the legitimate aims of the measures had been to reduce consumption, including consumption by hazardous and harmful drinkers, to the maximum extent possible regardless of possible economic or social consequences. However, those are not the aims of the measures. Rather, the relevant aims are [ [54][striking] a reasonable balance between, on the one hand, public health and social benefits, and, on the other, intervention in the market … The Parliament and the Ministers recognised that many people have "a balanced, positive and enjoyable relationship with alcohol": such drinkers are not the target of the measures. The major problem is excessive consumption of cheap alcohol. The measures seek to address this by increasing the price of such alcohol.]

This is proportionality doing what proportionality does worst. Proportionality, as a concept, is primarily found in EU law. If measure is tied to a legitimate aim, and goes no further than necessary to achieve that aim, it is proportionate. On this occasion, that has the net result of blowing an FMG argument out the water.

But note the judicial sleight of hand. We have defined the aim of the measure such that there is much less scope for an alternative, less-FMG-infringing measure. An excise duty would raise all prices, and that is not the aim. The aim is to increase prices of cheaper products only. But it is precisely the increase at the lower end that means there is an FMG issue – a foreign drinks company now can’t compete on pricing. By defining the aim of the measure with such tight reference to the measure made the proportionality hurdle a much lower one for the Scottish Ministers to clear.

Being a City lawyer: Pro Bono

Here’s the thing, kid. Corporate lawyers aren’t into charity work. Or at least, they aren’t as part of their day-to-day. Some of them are excellent people who do marvellous charitable things, but it can’t be allowed to get in the way of the job.

I’ve been to a couple of graduate recruitment events, and students ask about the extent of pro bono work at my firm. Truthfully, if you want to be helping people with landlord disputes, benefits and immigration issues, don’t come to the City.

City firms often have a pro bono commitment. You can do a set number of hours on business time of pro bono work, take days off to do charitable things, give ad hoc advice at drop-in legal clinics. The theory behind this is a bit odd, I think. It is supposed to show clients that the firm is committed to doing good deeds, and this is supposed to make clients want to use the firm. Frankly, everyone knows that both the firm and the client exist to make money, and therefore, to my mind, the idea of impressing clients with these efforts is backward. If a firm spends firm time on charity, it basically needs to charge more to cover those costs (or, certainly, it will make sure any pro bono work achieves a net positive financial result). The client is then (in theory) paying more so that the firm can spend it (given time = money) on someone else. Cut out the middleman, chaps. Let the clients give direct.

The problem too is that City firms aren’t really cut out to give the pro bono advice that is most needed. Commercial property lawyers don’t know about residential tenancy rules. Those who advise on complex international construction disputes aren’t really your first choice consumer litigation advisers. Maybe they’d be better providing services (books, facilities, trainee resource) to those lawyers who can do those things.

Ronald Dworkin, Tom Bingham and the Rule of Law

Modern jurisprudence has lost one of its most renowned intellectual heavyweights. Ronald Dworkin was the legal philosopher who really challenged HLA Hart’s “Concept of Law”, and in so doing, shaped many theoretical debates from the 1970s onwards.

As an undergraduate, I did not subscribe to Dworkin’s beliefs. I must confess that it may well have been largely due to my inability to really grasp his arguments, and nail down how his views changed over the years. This is not a flaw in his writing; I am not sure I could promise I read his books with anything like the requisite diligence. As a full time working chap, I was delighted to come across this piece, which outlines the Hart v Dworkin debate; although I would caution that I think Shapiro’s proselytising at the end may go so far as to his view on what the debate is, not just his view in the debate.

Dworkin believed moral principles were part of the law and any theory of law had to account for them. Sometimes law runs out, and morality plugs the gaps. I hope I’ve not simplified too brutally.

I prefer, where possible, to keep law and morals separate (not in my day job, of course). As I’ve discussed before, what is legal and what is good form are not one and the same. I do not know how helpful it is to get bogged down in typographical issues of what can therefore be ‘law’ or (as Finnis would have it) the central case of law. I prefer to identify law, and then decide if it’s any good.

Which reminds me of a book by another legal superstar, Lord Bingham. In The Rule of Law, Bingham argues for a ‘thick’ ‘Rule of Law’. The rule of law, or the principle of legality, is a nebulous concept that many different authors have ascribed many different meanings. At its core, it’s about all people being subject to clear rules, applied by an independent judiciary. In this thin meaning, it is a sword that can cut both ways. It is feasible to have malicious, discriminatory laws that conform to the definition[1]. Bingham argues for a ‘thick’ definition, that includes the substantive protection of Human Rights.

For all that I disagree, I have sympathy with his view. Bingham had such an enormous impact on human rights protection in the UK, and if I were him, I’d include ‘human rights protection’ as part of my definition of ‘breakfast cereal’, never mind ‘the rule of law’. My point remains, however, that as the bare legality principle can be conceptually distinguished from the substantive protection of human rights, it should be. In legal theory, I don’t want catch-all handles. The more elements to a definition, the more utopian and inapplicable the definition becomes.

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[1] And this is what Joseph Raz would tell you the Rule of Law is. 

My Reaction to Starbucks' Reaction to the Public Reaction to Starbucks not paying tax.

It is a hard thing to live a moral life. I have vegan friends, who would insist that the delight I take in [eating] a melting slab of pork belly is depraved. There are difficulties in both utilitarianism and deontology, the two major competing schools of moral philosophy. And what happens when morals run out, and you have to choose between ‘fighting the Nazis’ and ‘saving your grandmother’[1]?

And there’s always the temptation of a gingerbread latte in a red cup, a sweet elixir that the fourth wise man brought Jesus 2000 years ago.

The Starbucks story is well known. Through internal corporate group transfers and payments, Starbucks can manipulate where profits end up. Usually, they end up in countries with lower rates of corporation tax, so that the Starbucks family can cream off the biggest chunk of money that it can. This is a standard sort of ‘tax avoidance’, a perfectly legal way of arranging your finances. But as we know, what is legal is not always what is moral.

Another time, I will look at two ways a state can deal with tax avoidance in law  - retrospective law making and a ‘general anti-avoidance rule’ (or GAAR).

For present purposes, I am more interested in the corporate communications of Starbucks. To me, they look stupendously ill advised.

The initial Starbucks reaction was hilarious. In it, Starbucks claimed to be acting not only to the letter of the law, but in its spirit as well. The ‘spirit’ of taxation, in my view, is that those who benefit from society contribute to it. Not that you move your money away to low tax jurisdictions which are not realistically your key business centres so you can benefit handsomely  Starbucks also claimed to pay £160m in the UK in tax, including in National Insurance, business rates and VAT. Forgive me, but isn’t VAT a consumer tax, paid at the very end of the supply chain? I paid some VAT for Starbucks; give me a medal.

A month or so on, and it’s now reported that Starbucks has acknowledged the ”feedback from our customers and employees, and understand that to maintain and further build public trust we need to do more”.

I like many things about this statement. One, that it’s taken a month or so, and public feedback, for Starbucks to see that their approach sticks in the craw of your average UK taxpayer. Jimmy Carr could have told them tax avoidance isn’t popular. Second, is that it reeks of the corporate sentiment of maintaining customer loyalty, when really what is needed is an appreciation that paying tax is a good thing for society. Capitalism does not necessitate that you forget the world outside your direct business chain. Finally, the ‘need to do more’. No, the need to do the right thing. It’s not more. It’s standard.

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[1] I have no idea if this is a common example. I’ve lovingly borrowed it from John Finnis. 

Phone Hacking Charges: What do we need to prove?

It’s been widely reported that eight people related to News International are facing charges relating to the phone hacking scandal. This post details what the prosecution will have to prove to secure a conviction. The charges are for conspiracy to commit an offence under section one of the Regulation of Investigatory Powers Act 2000, regarding ‘unlawful interception of communications’.

For a defendant to be convicted, they will need to be:

1.       A person

2.       Who agreed

3.       With another person to

4.       Intentionally and

5.       Without lawful authority

6.       Intercept

7.       ,In the UK,

8.       A communication

9.       Made by a private telecommunication system

10.   In the course of its transmission

11.   Without having the right to control the operation or the use of the system; and

12.   Without consent to make the interception

The first three tests are the ‘conspiracy’ requirements. By the Criminal Law Act 1977, a person guilty of conspiracy to commit crime X is liable to be punished as harshly as a person who actually committed crime X. A conviction here could result in a prison sentence of up to two years.

Crib sheets like these are useful things. They let you see where argument in court really happens. No one will argue in this case that they aren’t a person, aren’t in the UK, or that a victim asked them to tap phones. I imagine some or all of the defendants will argue that they had nothing to do with phone tapping, that it happened where they were working but they didn’t know about it and weren’t involved.

It’s interesting that the prosecutors have gone for the ‘inchoate’ offence of conspiracy. Inchoate offences are the step behind the actual commission of an offence. Attempted murder or conspiracy to defraud. The attraction for a prosecutor is that you don’t need to show that the thing happened. Here, the actual phone tapping will be excellent evidence that the defendants conspired to do it, but prosecutors don’t need to show that Rebekah Brooks sat down one day and hacked phones.

Inchoate offences are interesting because it makes us wonder about why things are bad. Attempted murder can result in the same sentence as murder, because why should an incompetent or unlucky assailant get off lightly? But, the reality is, a conspirator need not necessarily have caused any harm. When we decide what crimes are, should we be more concerned with harm caused or the intrinsic naughtiness of an action? If one pushes the boundaries of conspiracy too far, you can end  in the realms of fantasists. Which is exactly what this policeman is arguing – he says he never actually intended to do the thing (my step 2). 

Unfair or Unread Standard Terms

I’ve not long moved into a flat. To get to stay in the flat, I signed a lease agreement. Because I’m a man who likes some law, I read my lease. One of the terms was that I have to regularly iron my net curtains for the duration of my stay.

I doubt very much that anyone will notice if I do, or do not, iron the net curtains. In fact, there are no net curtains. Or indeed curtains. So I’m almost certain no one will mind that I don’t iron the non-net not-curtains. The terms in the lease were standard terms, used by our estate agent, and likely others, when they rent out residential property for short periods to normal, average people.

These standard term agreements abound. You buy a plane ticket, update iTunes, sign up to phone contracts, change bank accounts, and all the time you’re ticking boxes or signing forms saying you agree to terms and conditions. And you’ve not read them. Easyjet have tickets, I have money, and I can’t negotiate with them. Their terms will have to do, and so I’ll tick the box.

There is statutory protection for us little Droogs when dealing with Fyodor Ltd’s standard terms. Landlord and tenant law is a peculiar area that I won’t delve into here. But the main protection for consumers dealing on standard terms with companies come from two pieces of legislation.

The Unfair Contract Terms Act deals with clauses that exclude or restrict liability under the contract, but applies to all contracts. The Unfair Terms in Consumer Contracts Regulation deals only with standard form consumer contracts, but with all types of clauses in them. If a clause is unfair, then it doesn't bind the consumer. The UTCCR can’t be used to challenge clauses dealing with the price in the contract, or the key subject matter. That why the (controversial) banks charges case in failed[1]. The charges on letters sent by banks form part of the price you pay for their services.

But I’d like to think that another bit of law could apply. When you sign a contract it is immaterial if you’ve read it[2]. In cases where there is no signature, then terms must be reasonably brought to the attention of the party accepting those terms[3]. But there is doctrine of ‘non est factum’. It allows those who are faultlessly unable to read a document from being bound to its terms by their signature. Traditionally, that’s blindness and illness. Further, the key case of Saunders[4] says that the doctrine would only be available to such a person when they were held to a contract radically different from that which they thought they were entering into, and would not be available to a careless person. So the capable but lazy man who misses the small point in the standard terms but signs anyway decidedly cannot plea non est factum[5].

I can’t help but think that the old cases lay down principles that apply at a very different time. Now, it is simply not plausible that anyone (including the Supreme Court Justices) read standard terms every time they book a flight. Are terms buried in reams of small print reasonably brought to our attention before we tick the box? Should the principle behind non est factum apply? I think there is, therefore, an argument to say you should only be taken to agree to standard terms that you could have realistically actually read.

It’s hard to say how big an issue this is. It’s not like Dostoevsky Ltd.’s terms give them an interest in your house, or permission to enslave your first-born. And unfair terms law prevents them introducing too onerous charges and exclusions. But no obligations should be imposed on anyone lightly. And contract law is generally about the agreement of intentions. So why should Mr Droog be bound by stuff he could not reasonably be expected to put his mind to?

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[1] [2010] 1 A.C. 696

[2] L'Estrange v F Graucob Ltd [1934] 2 KB 394

[3] Parker v South Eastern Railway Company [1877] 2 CPD 416

[4] [1971] A.C. 1004

[5] Non est factum means not my deed. 

What is Insider Trading?

This story broke on Monday 1^st October 2012. The linked article talks of intrigue involving senior bankers, stock brokers, foreign businessmen and an investigative operation codenamed ‘Tabernula’. A tabernula, apparently, is a small booth. Welcome to the small booth, in the back of a City tavern, wreathed in cigar smoke, and to the murky world of insider dealing.

Insider dealing is bad. But what is it? Quintessentially, it is the trading of shares based on secret ‘inside’ information. If I work for Fyodor plc, and I know that Fyodor is about to announce huge profits, or a potential acquisition, or the resignation of its charismatic chairperson, and I trade my shares on the basis of that knowledge, I am guilty of insider dealing. The regime exists to create parity in share trading – how can Mr Droog hope to compete in the stock markets with me (and others like me) when we know so much more than he does?

Interestingly, insider dealing is subject to two parallel sets of rules. One is criminal (and is in s52 of the Criminal Justice Act 1993), and one is civil (set out in s118 FSMA).

This is a curious situation. The rules that these contain are, whilst not identical, substantially similar. Yet, a breach of s52 is a criminal offence, punishable by up to 7 years in jail; whereas a breach of s118 is only punishable by a fine.

So why the difference? As I’ve mentioned before, it is up to us as a society what we consider ‘criminal’, and what we regulate in other ways. Here, we have a rather pragmatic fudge. Insider dealing is a dishonest way of me taking money out of Mr Droog’s pockets. It is pretty much the same sort of thing as theft, and should be criminal. But, as the linked article implies, catching and prosecuting insiders who deal is hard. Shares are traded often, and their price necessarily fluctuates. How to spot the insider needle in the haystack of trades? And, critically, how to prove that to the criminal ‘beyond reasonable doubt’ standard?

This gets to a point key to ‘white collar crime’. It is often hard to spot, hard to investigate and hard to prove. To do so costs money. The resulting rarity of enforcement means the deterrent effect of punishment is unlikely to be high. High-rollers don’t think they’ll get caught. That’s where the civil regime comes in. A lower standard (‘on balance of probabilities’) allows for more successful enforcement, but the trade-off (‘scuse the pun) is that we can’t punish the insiders so harshly.

Vicarious Liability 1: What it is.

People prefer to sue companies over individuals if they can. Companies generally have more money – Tesco has more cash kicking around than its staff on the shop floor. Sometimes, Mr Droog can sue Fyodor Plc because Fyodor Plc did something wrong in its corporate capacity. It has breached some obligation that it had.

An alternative route that might be available is opened up by the concept of ‘vicarious liability’. This is where an employee[1] (Alex)  does something that causes loss to Mr Droog. If Alex is an employee of Fyodor, and does the act that causes loss in the scope of his employment, then Fyodor is ‘vicariously’ liable. Mr Droog can sue Fyodor, even though Fyodor has itself done nothing wrong. This is no-fault, ‘strict’ liability.

The above paragraph raises a lot of questions.Who counts as an employee for the purposes of vicarious liability? What if someone is an employee of more than one employer? What on earth is the ‘scope of employment’[2]? What link between the work and the act is required? Lawyers would reckon that a London law firm wouldn’t be liable for one of its trainees negligently damaging a fence in Banff on a stag do, but a dry-cleaners will be liable for one of its staff nicking a mink stole at work[3].

Critically, I wonder about the justification of vicarious liability at all. Generally, it is seen as a way of putting economic risk on those who can afford (through insurance) to bear it; and allow tort victims a claim against a defendant who can pay out[4].

However, that rationale is far from satisfactory. Tort comes from the Latin 'tortum' meaning wrong. It is about the claims of a wronged party against a wrongdoer. In vicarious liability, we have claims between the wronged and an innocent party who can afford to pay. But only sometimes. Vicarious liability transforms tort into a most imperfect system of insurance.

This legal imperfection leads to real life moral issues. Currently, vicarious liability is being considered by the Supreme Court in a case relating to child abuse by a Catholic organisation[5]. There have been quite a few such cases in recent years. These cases lead to discussions of whether priests are employees and whether child abuse can be in the course of being a priest. Which is all horrible in itself.

Recent decisions seem to favour Diocesan liability. That may be welcomed – we might think that someone should pay. But what of cases where Mr Droog was molested by his uncle in his own home, not a priest in a church (or, a house master in a boarding school)? In the former case, Mr Droog has no claim against any rich organisation. He will unlikely recover any damages. In the latter cases, he will (remember, the church or the school has done nothing wrong).

Which makes it appear that it is better to be molested by a priest than your uncle. Our law should not let me type that.

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[1] I use this term loosely here –  it is not synonymous with employee in an employment law sense.

[2] Another time, I’ll look at these two (linked) issues of employee and scope of employment.

[3] Morris v C W Martin & Sons Ltd [1966] 1 QB 716

[4] Another time, I’ll run through the different grounds considered as justifications.

[5] The Institute of Christian Brothers case. 

Letter of Complaint: Thames Water

Below is a slightly redacted version of a letter I emailed to the Chief Exec of Thames Water. It worked: I got an apology, a partial refund (for my wasted time), and a contact at Thames Water I can call directly about any future account.

Lesson: normal customer complaint procedures are too slow and frustrating. The head honchos of big organisations often have staff to deal with emails like these.

Dear Sir,

My name is [Alex]. My customer reference number is [6655321]. I pay my water bill at a fixed rate. Critically, I pay my water bill. I have done so in strictest accordance with the advice I've been given by your employees, whom I've had cause to deal with on your premium rate phone services.

My tenancy expires in the middle of the year for which your company tried to charge me (Date 2012; the bill running between Month 2012 and 2013). As such, the bills I got were for amounts that I was never going to pay (anything post Date was irrelevant). I explained that to every single advisor I spoke to at every time I called to deal with Thames Water.

I paid for three months’ worth of water on A Day. I had agreed with the advisor on the phone that that would not quite cover me to the move out date, but as that date had not yet been fixed (although certainly 'in the month of Date'), paying for three months would be fine. I checked that paying the rest later (at Date) would have no ill-effects. I was told that it wouldn't. I asked, again, for a note of the situation to be put on whatever records your company holds about me. I was told that they would. 

On A Later Day I received a red letter from Thames Water. It was quite scary, for someone who had tried very hard to do as he needed to do, and who had made it easy for you to know what the situation was.

Thankfully, it said "If you have paid your bill in the last seven days, please ignore [this letter]". As I had paid my bill in the past 12 days, and had been so assured by the advisor on the phone that I had behaved properly and didn't need to get worried again until I moved out, I ignored the letter.

Today I got a very scary letter from a debt collection agency. I had to call another premium rate number. I was, now that the move out date is certain, able to pay off the £xx.xx I owed (not the £xxx.xx requested alongside threats of legal action and depleted credit ratings).

Clearly, at some point your systems have not worked. They have not worked because your advisors gave incorrect advice about when I had to pay, or because they didn't make the right notes on my file, or because those notes did not stop threatening letters being sent or my details being passed to a debt collection agency.

It wasn't nice to get a scary letter in the post. I don't much care for paying premium rate numbers to deal with scary letters that are not correct (or if they were correct, I don't much care for being told incorrect things by your employees).

I suppose you'll regard the whole operation as a success. I've paid.

You would be wrong though. Because I'm your customer and I am very angry at the way I've been treated, and that your flawed systems have put me at discomfort. And all at my cost.

You might not care. Who else can I get water from? But when Tube adverts tell me to be scrupulous about how long I shower for, it is galling that your company has not been scrupulous with the way it deals with its customers/income streams.

I would very much like you to consider what action by Thames Water would be appropriate to let me know that you do, in fact, care about how customers are treated; and I look forward to your response detailing those actions.

Regards,

Alex

Visiting Court and Watching Cases

I went to the Supreme Court to watch a very interesting case on vicarious liability. Vicarious liability is a doctrine that I studied at Uni, and was one of my very favourite undergraduate topics. I think I read more on that topic than I did for almost anything else. Of course, when I opened my Tort Final paper, there wasn’t a single question on it. Typical.

You might be like me, and find vicarious liability fascinating. But most people are either not fascinated by it, or don’t really know what it is. Which is fine.

What gets me is that some of those people visited the UKSC on the day in question, popped into Court 2, sat for about 5 minutes, and then ran off again.

I’m not surprised they found it boring. Counsel quoting from cases they’ve never heard of on a principle they don’t care about in the middle of a legal hearing based on facts they don’t know is not a rough-and-tumble Garrow’s Law spectacle.

What I am surprised by is that they thought the Supreme Court would be engrossing theatre. It is usually Counsel quoting from cases you’ve never heard of on a principle you don’t care about in the middle of a legal hearing based on facts you don’t know. If you didn’t know that, now you do. If you didn’t know it, and visited the UKSC, the TV screens showing the happenings of the court rooms should let you know.

The idea of seeing justice being done is a great one. But, unless you’re a person interested by any particular legal idea, my advice is this. Go to a criminal court. The stories will (generally) be better. The questions more factual and more tangible. You’ll find it hard to not form a view. When you go, ask to see the start of something, because that way you’ll hear the facts[1]. If you go to a magistrates court, you may well see a full trial, because they are shorter. (I saw a man defend himself by saying he had no intention of going to Disneyland Paris to hurt Donald Duck).  

I’m not trying to put you off going to court. Going to the wrong court will put you off going to court. Leave the dry stuff to those who know why it’s not dry.

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[1] You really can, and should, ask any member of court staff “What’s on that’s good?” and they’ll let you know. 

Plain Vanilla

I’m not hugely against legalese or industry jargon. Lawyers have words and phrases that we use because they are handy, descriptive shorthand. Lawyers say rights in rem rather than rights in a thing, because we use the Latin to get round our English ambiguities. It’s also shorter. We say judges’ comments were made obiter because the Latin means we can avoid saying ‘the judges were just giving their opinion on something they didn’t really have to deal with’, which would sound a bit rude, and a bit long. In competition law, we say ‘hard core’ when talking about a certain set of actions that are particularly bad. It’s just a useful handle (if a bit vulgar sounding).

But I am against jargon that is contrary to good sense or cookery. ‘Plain vanilla’ is one such term. It’s used in finance to mean ‘straightforward’, ‘simple’ or ‘without finials’, as in a ‘plain vanilla bond issue’. Now, I know bankers are not renowned for their soft, homely skills. But surely we all now know that vanilla is an interesting, complex flavour and so should never be described as plain? And certainly should not be tarnished by its association with bond issues. I don’t want to be thinking of the Eurobond market when I’m having my crème brulee. Hence forth, I’m replacing plain vanilla with John Smith. 

What is IP?

I think young lawyers-to-be quite like IP. IP stands for Intellectual Property, so it reassures you that you have to be intellectual to understand it. But the concept is pretty easy to grasp.

Think back to the Vodkat case described in a previous post. There, Diageo were concerned that some other company was getting the benefit of the goodwill built up in ‘vodka’. Someone else was piggybacking on the hard work of the vodka industry to sell their own lower-strength spirit. Or think of rip-off football shirts. No one buys a knock off football shirt because they think it’s a pretty tee-shirt – they buy it because it associates them with the club and their brand. The rip-off shirt manufacturer has piggybacked on the reputation of the club.

The same applies to trademarks. If I mixed sugar, ink and fizzy water and sold it in a bottle labelled ‘Coca-Cola’ then I am using the trademark’ of Coca Cola to sell my concoction. Another aspect of IP is patents. If you work for ten years developing a wonder drug and then I just make cheap copies (because I’m not trying to pay back ten years’ worth of research), then I am piggybacking on your efforts.

Intellectual Property, then, is the fruit of one’s labours that is not tangible. You can’t steal the money I earned, or live in the house I built, so you can’t just ‘steal’ the value in a brand, a reputation, a trademark, an artistic creation, a formula or a code.

Of course, a company needs to try and protect its IP. That’s why they get copyrights and patents and trademarks. Disputes get costly when no one knows what brand belongs to who. For example, you may have come across Budweiser, in both American and Czech forms. They are beers brewed by different companies, and they have argued over who owns the name for ages. In one of the judgements, an English Court of Appeal judge suggested they should maybe just chill out and stop arguing about it (my words, not his)[1]

One question must be relate to whether and when any IP should be freely available, or what should be freely available to some. For example, should academics be allowed freer access to certain material than commercial organisations?

Another problem is where there are so many patents that it is hard for companies to know what they can do – a ‘patent thicket’. As the 2011 Hargreaves Report said:

“businesses working at the leading edge of a particular technology may find it difficult or even impossible to know with whom they are in conflict, or whom they should approach for a licence. A current generation smartphone, for example, may well be covered by hundreds of patents owned by tens of rights holders.”

And you might have spotted a legal/policy tension. IP lets companies make money. You can’t just sell my new wonder drug at cheaper prices. Usually we like companies undercutting each other on price – that’s why we have competition law. So where competition law promotes competition, IP seems to set restrictions on it. That’s so that companies have an incentive to innovate. Why put in the hard yards if someone else takes the money in the end? The interface between IP and competition is a tough one to negotiate. 

[1] Ward LJ, para 65 of [2009] EWCA Civ 1022 I would like to say the dispute is all over; a CA judgement of July 2012 [2012] EWCA Civ 880seems to put paid to it all (and both get to carry on as they were). But given that between them, the parties have let the whole thing rumble on for so long, I’m not entirely sure!

Are Contracts About Morality?

Law and morality can be an unhappy double act; as if Ant had slept with Dec’s mother. Legal theorists have a great time deciding if law in its central case is moral, or if legal validity depends on morality, or if there is de facto moral good in having law, or if a judge should think in moral terms when deciding hard cases, or if they are entirely unconnected. And many other links, non-links and permutations.[1]

One area that has also received a lot of attention is the basis of contract law: why do we have legally binding contracts that can be enforced? Is there a moral reason for it?

The argument (in simple form) runs that breaking a promise is morally bad. Therefore when you make a promise that you intend to be bound by, the law of contract creates a legal obligation to match the moral compulsion.

This is not a standard and accepted reason for why contracts are enforced. A diametrically opposite view would be one like that of Oliver Wendell-Holmes, who said “the duty to keep a contract at common law means aprediction that you must pay damages if you do not keep it, and nothing else”. This view is predicated on the idea that contracts are a matter of economic usefulness. When a breach is more efficient (i.e. I break my contract with you because I can make a better deal elsewhere that covers the cost of my breach and makes me money too) then breach is A-OK.

Other views include a great emphasis on notions of reliance, or  take alternative and composite views.

But the point here is that contract law is often (and not improperly) thought of as a dry topic, where dull men of business make boring things happen. To think of a breach as an immoral act, and damages for breach as in some way the penalty and the compensation for that immoral act, stands at odds with aspects of contract law that treat contracts simply as hardnosed, arms-length agreement.

Finally, the theory of contract law is a tangly mess. There is no one accepted theory. One reason is that theories match up with different parts of legal realities. How, for example, does the morality of promising as a basis for contract law fit with the need for ‘consideration’ (i.e. both parties need to give the other party something for a contract to be valid)? If promises are morally important, is it right that you can’t make punitive provisions in a contract for breach? If promises are important, why is specific performance not a normal remedy?  Equally and oppositely, if contracts are just about economic efficiency, why do we have doctrines to protect weak and vulnerable contractors? Why do we abhor misrepresentation?

This sort of stuff keeps academics awake at night. Commercial solicitors don't normally worry about it too much!

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[1] Anybody doing any legal theory could do worse than having  a play around on this website. The example theories cover (in an embarrassingly rough way) Finnis, Fuller, [many theories in many ways], Legal Positivism and Dworkin. 

The Maths of Deterrence

One reason we punish is to deter the offender and others from doing naughty things. But how does deterrence work?

The simple idea is that if the punishment (pain) is worse than the gain achieved by doing a naughty thing (pleasure), than we, as rational people, won’t do that bad thing. I won’t steal a loaf of bread if my hand would get chopped off. Deterrence works where Pain > Pleasure.

Add a complication. What if we don’t expect to be punished? Fines for smoking inside in public places are relatively high to mitigate against the fact that it might not be applied in all cases. This is the maths of probability. A fine of £50 that is applied in (say) 25% of cases creates a probable pain of £12.50[1]. Deterrence works where Probable Pain > Pleasure.

Add another complication. What if I don’t know smoking in a museum is wrong, or if I think the punishment for stealing bread is community service, or if I wrongly guess that only 2% of offenders get caught? My calculation is skewed by my misinformation. So, Deterrence works where Expectation of Probable Pain > Pleasure.

My last complication. Humans aren’t rational. I’ve been reading a book by Daniel Kahneman, the psychologist who has made behavioural economics a thing. He writes about (among other things) how humans assign weights to probabilities incorrectly (overplaying small chances, or negating them entirely), about how they are risk averse when it comes to losses, and how people have optimistic views about how their own plans will work out. Apply that to our formula, and we can see that our irrationality mucks up our calculation[2]. A 5% of apprehension might loom larger, and feel like 10%. I might be really worried about the cost of the fine. I might think that I am such a good loaf stealer that I won’t get caught. Therefore, Deterrence works where (Expectation of Probable Pain > Pleasure) (as affected by Human Irrationality).

And this is all unapplied theory. Criminologists don’t know how well punishments deter, because it’s very hard to do controlled experiments. Further, Pain and Pleasure might be felt differently by different people. Finally (for now), a lack of other options (the hungry loaf-stealer) must have effects. With calculations this hard, who’s to say whether punishment X will deter Mr Droog or Fyodor Plc from offending or reoffending?

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[1] Which is more than you’d pay for a license to smoke one cigarette inside.

[2] Kahneman doesn’t like to say humans are irrational. But he does say they aren’t rational in the sense economists use it. So I’m going to be all blasé, use words normally, and call humans irrational. 

Freeganism, Crime and Supermarkets 1: Are freegans criminals?

Freeganism is this. What’s the law’s view on it? That was my question, and I found a very good article on the topic by Dr Sean Thomas in Legal Studies[1]. He suggested that a freegan accused of theft (Mr Droog) could argue that you cannot steal abandoned goods, but noted that in some theft cases rubbish has not been treated as abandoned. He therefore suggested a more fruitful defence would be to say that Mr Droog has not been dishonest under the Ghosh test[2], because there is no requisite ‘moral obloquy’ attached to freeganism. He suggested these things in a very full and nuanced way.

Dr Thomas is obviously sympathetic to freegans, and I must say that I am too. But I’m not sure his article which answers “Do freegans commit theft?” with “No” is all that beneficial to freegans. One, he argues that the ‘crux’ of the matter is that ‘freegans cannot be understood to be harming anyone’. This isn’t as obvious as Thomas seems to suggest. If I own a shop, I want you to buy from me. When you take things from my bin, you don’t buy them from my shelf. My economic interests are harmed. And also, harm is not the crux of the matter. No harm is a good reason not to criminalise an act, but is not correct to say that "no harm" means that a crime cannot have been committed, even when the conditions for criminality are fulfilled.

His analysis of the relationship between abandonment and honesty is more important. The person who openly takes the car that he honestly thinks is abandoned and the scuba-diving, dead-of-night golf ball taker look very different. But if the balls were abandoned, there can be no theft. Thomas points out how honesty and abandonment have been (wrongly) conflated by the courts to just be about naughtiness.

But herein lies the problem. Thomas makes it easier for Fyodor Plc to argue theft. They just need to put signs over there bins saying “this is not abandoned”. This would seal the deal on the abandonment point, and would make it harder for Mr Droog to argue that he was acting honestly.  Freegans would be left only with a “we’re good people doing no harm” 'defence', which I reckon is shoogly at best.

This is an issue of real interest. Freegans probably do a good thing. It would be a shame if they were thieves (and a recent case suggests they are). It’s also a shame that interfering with bins is an offence, as Thomas puts in a footnote. It must be true that in reality, prosecutions aren’t brought very often (it’s not great PR for Fyodor Plc to report freegans to the police). But, in my opinion, what we’re left with are policy questions, because the legal situation does not favour dear old Mr Droog. 

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[1] Legal Studies, Vol. 30 No. 1, March 2010, pp. 98–125

[2] Which I’ve discussed before, at: http://businessbehavingbadly.blogspot.co.uk/2012/04/scrapping-dishonesty-from-cartel.html