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Spring 2007

A Few Good Lawyers

BY DAVID M. SCHIZER
Published: April 16, 2007

THOSE of us hurrying to finish our taxes by tomorrow’s deadline will probably, at some point, succumb to thoughts of the I.R.S. as an all-powerful bully. But the truth is, the government is not always a match for the tax advisors of wealthy people, so a lot of taxes will go unpaid at the top of the income scale.

Lawyers who represent high-income taxpayers earn more than 10 times what senior government lawyers do — an obvious disadvantage for the I.R.S., the Departments of Justice and Treasury, and for Capitol Hill in attracting and retaining top talent. The lawyers who write our tax rules are overworked and sometimes inexperienced, so they leave loopholes that are exploited by more experienced private lawyers. When the government challenges these aggressive strategies, it loses some cases that it should win, setting precedents that taxpayers then invoke to justify other aggressive strategies.

As this vicious cycle shows, skimping on tax administration is a false economy. We collect less tax revenue, while encouraging taxpayers to invest in socially unproductive tax planning. Instead, if we substantially increase government salaries and staffing levels (the I.R.S. needs more than the 1,500 lawyers it has now) we can raise more revenue, with lower tax rates and less waste. Four reforms should be adopted immediately.

First, the government should focus on hiring talented young lawyers, since the pay disparity with the private sector is narrower for them. For example, new I.R.S. lawyers earning $65,000 to $70,000 are making about 50 percent of the starting salary in the private sector; by contrast, senior lawyers there earn barely 10 percent of a partner’s compensation at a leading law firm. To his credit, the I.R.S. Chief Counsel, Donald Korb, is already trying to recruit young lawyers. These efforts will be more effective if Congress helps new graduates repay student loans, which often are more than $100,000. A loan repayment program would be a powerful recruiting device.

Second, the government should tap another promising talent pool — recent retirees from private practice — to mentor young lawyers. The salary gap is less of an issue for retirees, and the opportunity to give back to the tax system can be quite appealing.

Third, the government should retain a small team of a dozen top tax lawyers at salaries closer to the market rate. They can serve as a rapid reaction force, deciding whether to shut down a new aggressive strategy immediately or to let it be evaluated through usual government channels.

Fourth, the government should retain private lawyers to help with high-priority projects. An important constraint, of course, is that lawyers who represent private clients may view it as a conflict to help the government. But this is not always true.

Through bar associations, private lawyers already volunteer to review proposed changes in the tax law and offer ways to improve them — advice that the government can put to good use. Tax academics can also be a valuable and conflict-free source of expertise, since they ordinarily do not represent clients. And some tax litigators may view it as a prestigious opportunity, as well as a patriotic service, to represent the government in a tax case that could set an important precedent — just as the prominent lawyer David Boies represented the government in an antitrust action against Microsoft.

The tax system can be only as strong as the people who run it, so the government has to recruit and retain the most promising talent. I am reminded of an old story about a man who loves Beethoven and readily agrees when his brother invites him to come hear the Ninth Symphony — only to learn that the performance actually is by his nephew’s middle school orchestra. Just as a symphony is at its best when it is played properly, a tax system can be fair and efficient only when it is administered soundly.

This op-ed first appeared in The New York Times on April 16, 2007.

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It's the Litigation, Stupid

Securities litigation is the culprit behind the declining competitiveness of America’s capital markets, argues Professor John C. Coffee.
BY JOHN C. COFFEE
 
This week Senator Schumer and Mayor Bloomberg have commendably directed our attention to the danger that New York and America may be losing their competitiveness in the capital markets arena. As with last year's report by the Committee on Capital Markets Regulation, much of the blame for the current decline and the apparent refusal of foreign companies to list their stock in American markets is assigned to the Sarbanes-Oxley Act.
 
Though the report does address securities litigation, the press coverage gives the impression that post-Enron reform has singlehandedly driven investors away from Wall Street. That's a misimpression.
 
As someone who has consulted in the production of these documents, if only marginally, I think it is important to emphasize that Sarbanes-Oxley is not the key problem. For both the public and reformers, the emphasis should rather be on two things: acknowledging the importance of globalization and reining in litigation that harms investors rather than benefiting them.
 
Consider, for starters, the Sarbanes-Oxley problem. The principal provision in Sarbanes-Oxley that significantly increases costs is Section 404. The Securities and Exchange Commission has already released new proposals to downsize the requirements of the section, and once implemented, these should substantially ease the problem. This week the senator and the mayor suggested further liberalization of Sarbanes-Oxley by proposing that non-American companies and smaller American companies be permitted to opt out of some of its onerous components. In other words, this is a problem on its way to solution.
 
But to say the whole story is a "Sox story" is misleading. Sure, initial public offerings in America are declining as a share of the world's IPOs, but that has been happening since 1996. As an accounting regulator, Charles Niemier, has noted, the American share of IPOs fell to 8% from 60% between 1996 and 2001, a year when Ken Lay was still viewed as a national hero.
 
Some of the pressure here is that of globalization. The reality is that many more Chinese want to invest than in the past, and they are happy to trade on exchanges close to home that use their language. Similarly, the euro has made European exchanges all the more attractive, and de-regulation in London has changed that city's markets dramatically. And so on.
 
But there are real reasons why foreign issuers fear the U.S. market.
One might be called the danger of American "legal imperialism." That is, if you enter America as a company, you may find that American law will be applied so as to pre-empt and overrule the local law of your own country. Securities litigation, just as the report says, poses a related danger. Capital in America might have a lower price tag than it does elsewhere, but the price difference can be more than offset by regulatory and legal risks.
 
Consider what actually can happen. A company is based in another country. It lists its stock on the home exchange. But, in addition, it also lists a small quantity of its shares as American Depositary Receipts in the United States. A shareholder in America decides to sue the company to allege that some wrongful action caused, say, a decline in share price.
That shareholder's lawyer may stand to gain far more than the loss on his client's shares. For U.S. courts are sometimes willing to certify worldwide class actions that multiply the damages to the point that the foreign issuer can face a risk of insolvency. At that point London's markets become far more attractive than New York's.
 
Legislation could cure this problem. But its likelihood has receded after November's election. The solution will probably have to come from the SEC. Recent scholarship, including my own and that of Joseph Grundfest of Stanford, suggests that the SEC now has the power to restrict such suits through new rules. In fact, Congress has already authorized such reforms by passing the National Securities Market Improvements Act of 1996, which gives the SEC broad authority to adopt rules making exemptions. NSMIA, as it is known, added Section 36 to the Securities Exchange Act of 1934 giving the SEC power to "conditionally or unconditionally exempt any person, security, or transaction, from any provision or provisions of this chapter or of any rule or regulation thereunder, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors." What could the SEC do? For example, it could place a ceiling on damages imposable in a single lawsuit against a major auditor, thereby removing the significant danger that another major accounting firm could fail and disrupt our markets.
 
The SEC could and should use its power not simply to protect foreign issuers, but rather to address basic problems that have made securities class actions increasingly dysfunctional. The scale of the recoveries in securities class actions has recently soared. Payments made to settle securities class actions in 2005 came to about $10 billion, even more if you count the pending Enron settlement. Not long ago, the annual amount was well under $1 billion.
 
I could go on, and have done so in a recent article in the Columbia Law Review. The point here is that the litigation is not a footnote to the story, but rather a major chapter in it. To make Wall Street competitive, we have to recognize that our courts cannot police the world.
 
This article first appeared in the New York Sun on January 23, 2007. Reprinted with permission from the author.
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Anticipatory Self-Defense: The Law, Ethics and Politics of Preemptive and Preventive War (excerpt)

BY MICHAEL W. DOYLE

Since 9/11, the accepted situation that would permit one nation to make a preemptive strike against an enemy has changed dramatically, especially in regard to U.S. foreign policy. The change has come about, in part, because the United States found itself threatened by a terrorist group with no formal national identity, rather than another nation with recognized borders and a government. Current U.S. strategic doctrine rejects the traditional standards that allow a preemptive strike only in response to an imminently anticipated planned attack. President Bush has made it clear – most recently in June 2005 in a speech at Fort Bragg – that the U.S. government takes a much broader view of the circumstances that permit preemptive military action, defined as a preventive anticipation of threats posed by those who share a “murderous ideology.”

This expanded definition has created a gray zone for national and international policymakers trying to interpret what type of preemptive force is allowed today. In short, where is the idea of preemptive war going and in what direction should it go?

This is just the type of question that Professor Michael Doyle has built a career addressing, both in his scholarly life and as assistant secretary-general and special adviser to the UN Secretary-General. Prof. Doyle was invited to share his ideas at Princeton University’s prestigious 2006 Tanner Lectures in November. His address was titled “Anticipatory Self-Defense: The Law, Ethics and Politics of Preemptive and Preventive War.” Currently the Harold Brown Professor of U.S. Foreign and Security Policy at the Law School and the Columbia School of International and Public Affairs, he is one of the world’s leading scholars of international affairs.

In his talks, Prof. Doyle stated that nations should be guided by four standards to assess the seriousness of threats not yet imminent and the appropriate responses to them. Those standards are: (1) lethality, which identifies the likely loss of life if the threat is not eliminated; (2) likelihood, which assesses the probability that the threat will occur; (3) legitimacy, which covers the proportionality, necessity, and deliberativeness of proposed responses; and (4) legality, which asks whether the threatening situation is itself produced by legal or illegal actions, and whether the pro­posed remedy is more or less legal.

“Absent good reasons relevant to each standard, I believe preventive action is not justified,” says Prof. Doyle.

To give people an idea of how his theory would work, he applied it to multilateral preventive decisions made by the UN Security Council and unilateral decisions by the United States described here. In this excerpt, he applies his standards to counterterrorism efforts in the Sudan in 1998 and in Afghanistan in 2001.

The full and footnoted text of Prof. Doyle’s talks will be available from Princeton University Press this spring.

Counterterrorism Efforts: Al Qaeda, 1998, and Afghanistan, 2001

On August 7, 1998, car bombs exploded at the U.S. embassies in Dar-es-Salaam, Tanzania, and Nairobi, Kenya, killing 257 persons and wounding approximately 4,000. On August 20, the Clinton administration fired cruise missiles against an al Qaeda training camp near Khowst in Afghanistan and al-Shifa, a pharmaceutical plant, near Khartoum, Sudan. Osama Bin Ladin, thought to have planned the two embassy attacks, was said to be at Khowst with a number of top al Qaeda operatives. Al-Shifa was thought to be a nerve gas plant under the control of Bin Ladin. The attack at Khowst killed 20-30 al Qaeda operatives, but unfortunately failed to eliminate Bin Ladin.

If the Clinton administration’s intelligence had been completely reliable, neither attack would have been “preventive.” That is, if Osama Bin Ladin was actually planning future attacks at the Khowst meeting, then the embassy attacks and the fatwa of February 23, 1998, declaring war on the West in general, and the United States in particular, would have constituted an “ongoing” attack within the meaning of Article 51 self-defense.

Some of the intelligence justifying the attacks, however, appears to have been faulty. The administration was not able to provide evidence of nerve gas manufacture in response to the many critics who provided evidence that the al-Shifa plant in Sudan produced pharmaceuticals. Unless we learn more, the al-Shifa attack seems to have been a mistake.

Furthermore, if the Khowst meeting was not a planning meeting for specific attacks, then the U.S. attack was at best justifiable prevention, not self-defense. The administration did apparently have good intelligence that al Qaeda had planned the bombings of the two embassies. Additionally, the fatwa was public knowledge. It was therefore reasonable to assume that al Qaeda had both the intention and the capability (the double explosions in Nairobi and Dar-es-Salaam were significant demonstrations of this) to attack American citizens again in the foreseeable future, even if not imminently. Having reasonably determined lethality and likelihood, the administration also demonstrated a legitimacy enhancing concern with proportionality. Before deciding to strike the camps, the planners determined that they were overwhelmingly jihadist encampments and remote from noncombatant Afghan residences.

Yet, what was missing from the administration’s use of force was an attempt to secure a legal basis for the counter-terrorist strike. Even if the August 20 intelligence was too time-and-place sensitive to allow for adequate deliberation and a specific authorization in the Security Council, the attacks should subsequently have been deliberated there. Very likely, the United States would have been embarrassed for lack of evidence to sustain the al-Shifa attack, but a case could have been presented against al Qaeda as the Reagan administration did publicly against Libya when it bombed Tripoli in 1986. The outcome is far from certain, but a resolution indicting al Qaeda as a terrorist organization and perhaps even the establishment of a tribunal to try its members would have gone a long way toward legalizing war against terrorists.

The 1998 attacks missed Bin Ladin and no other equivalently good opportunity to prevent al Qaeda’s subsequent attacks arose before 9/11. A year after the 1998 attacks, the Clinton administration sought and received U.N. Security Council condemnation (Resolution 1267) of the attacks and a request backed by (increasingly heavy) sanctions against the Taliban for the extradition of Osama Bin Ladin. The Bush administration continued planning for covert assassinations via Predator drones, but no effective strategy was in place by 9/11. The Taliban continued to provide sanctuary and support for al Qaeda, which in turn continued to finance the Taliban until it was toppled in October 2001 by a U.S.-led coalition acting in self-defense (and the very likely continuing threat of future al Qaeda attacks).

Conclusion

Should a responsible government try to deter a potential foe, or should it strike first—that is, preventively—to spare itself from a blow that the other seems to intend, has delivered before, and could again deliver? Is it safer to wait and threaten punishment than to throw the first punch? Or is it wiser to strike now, before the risks increase, even though that means taking the chance that danger might not materialize?

One recourse is for citizens in democracies to trust their elected leaders to identify threats worth attacking preventively. But after Iraq, the American public has become less inclined to back such declarations as President Bush’s famous post-9/11 vow not to “wait to be attacked again,” to “take the fight to the enemy,” and “to defeat them abroad before they attack us at home.”

In the end, the right decisions about prevention will rest with democratic publics who understand that their acts will set procedures that others will follow. Answers to questions of lethality, likelihood, legitimacy, and legality are far from cure-alls, but they can help publics and the leaders who claim to represent them do a better job of making careful decisions in matters of life and death.

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Decision on Gay Marriage is Absurd

BY SUZANNE B. GOLDBERG

NEWSFLASH TO MARRIED COUPLES: Your right to marry depends not on your love and commitment to each other but rather on your risk of careless procreation. That, at least, is what New York’s high court announced in its opinion rejecting marriage rights for same-sex couples. To be precise, the court held that the New York State Legislature could reasonably restrict marriage to heterosexuals as a way of inducing them to procreate responsibly and as a way of preferring households headed by a mother and a father over households headed by two moms or dads.

The New York State Court of Appeals decision is as absurd as it is disappointing. If the point of marriage law is to protect children by securing their parents’ relationships, allowing heterosexual parents to marry but barring gay parents from doing the same doesn’t make much sense.

Perhaps if New York were more like Florida, which bans gay people from adopting children, or Alabama, which denied custody to a lesbian mother because of her sexual orientation, the preference for heterosexual parents might be remotely logical (though still incorrect).

But New York has a long tradition of treating gay and nongay parents as fully equal in the law’s eyes. Gay people can adopt, be foster parents, be guardians and provide care to children in every way that heterosexuals do, without regard to sexual orientation.

This commitment to equal treatment is backed up by every reputable social science study out there. Indeed, the American Academy of Pediatrics issued a report in 2005 that concluded “same-gender marriage harms no one, whereas prohibiting civil marriage for gays and lesbians harms these couples and their children.”

Our nation’s history of marriage also bluntly contradicts the court’s decision. Race-based marriage rules, once thought essential for children’s well-being and the nation’s survival, were finally understood to be invidious discrimination.

Remember, too, that women used to lose their legal independence after marriage. Without legally imposed sex roles, it was thought that both marriage and children would suffer.

One might think, in 2006, that we have come far enough to know that discriminatory marriage rules cannot rest simply on “intuitions” that these rules serve children’s best interests. “Intuitions” are, too often, stand-ins for unquestioned discomforts or prejudices.

This is not to say that everyone should love the idea of lesbian and gay couples marrying. Or even that everyone must believe that gay parents are as good to and for their children as heterosexual parents.

But when all of the facts – as well as our history and legal traditions – provide no meaningful support for these intuitions, it is the job of the courts to push back against traditions, however long-standing, and make meaningful our constitutional guarantees of equality under law.

Although the legislature now can do its part to ensure the equality of all New Yorkers by amending the marriage law to include same-sex couples, the court’s ruling will no doubt come to be seen as a failure of will in the face of an opportunity to do justice.

This article first appeared in Newsday on July 12, 2006. Prof. Goldberg is a clinical professor and director of Columbia’s new Sexuality and Gender Law Clinic.

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A Recipe for Weak Results

BY LOUIS LOWENSTEIN

THE AVERAGE MUTUAL FUND turns over its portfolio by more than 100 percent/year. Think about that. In the course of one year, it sells the equivalent of all the stocks it started out with, and then some. Turnover at some big, established funds can even exceed 200 percent.

I call it investing at warp speed, and it's not good. All that senseless turnover takes a toll on performance and, of course, creates tax liabilities. Patient, long-term value investing would serve everyone much better.

That was just one of the lessons that emerged when I examined 15 large-cap growth funds. These are the 15 biggest such funds from 1997 that are still in business today, and they’re a fair sample of where Wall Street has been in recent years.

For the five years through last August – a period that included the market’s post-9/11 swoon – the group, on average, lost 8.89 percent a year, more than six percentage points worse than the S&P 500’s drop of 2.71 percent.

In contrast, a group of 10 value-oriented funds enjoyed annual returns of 9.83 percent – 18 percentage points better than the average for the 15 big-cap funds. I wrote about the 10 good-performing funds in Barron’s two years ago, exploring the practices that helped them thrive during the boom, bust, and recovery of 1999-2003 (“True Believers," Oct. 11, 2004).

To get a sense of what was behind the weak performance of the large growth funds, I took a closer look at three of the 15, comparing them with the value funds.

The first was Massachusetts Investors Growth Stock (ticker for its shares: MIGFX), chosen because of its long history – it was founded in 1932. I am confident that the founders would no longer recognize the fund. It has become a caricature of the “do something" culture, which theorizes that managers should be constantly buying and selling to earn their keep. The turbulent pace of trading would have puzzled and distressed the founders. In 2001, even as the fund remarked on its “fundamental . . . bottom-up investment process" turnover reached a stratospheric 305 percent. For the five years ended in 2003, it averaged 250 percent/year.

If you’re feeling some sympathy for passengers in this financial vehicle, hold on. Investors – and I’m using the term loosely – were for several years spinning their holdings in and out of the fund. In 2001, for example, its stockholders cashed out of $17.5 billion Class A shares and bought $16 billion in new shares, leaving the fund with net assets of about $14 billion. Having attracted not investors but speculators trying to catch the next new thing, management got the shareholders it deserved.

In fact, there was a story behind all that churning by shareholders: MFS, the management company, became one of 23 fund managers implicated in the market-timing scandals. In 2004, it settled charges brought by the Securities and Exchange Commission and state authorities. Nowadays, the fund’s turnover rate is down to 125 percent, though that’s still above the industry’s average. An MFS spokesman declined to comment.

The 10 value funds I studied earlier are in no such scramble to trade stocks. Unable to find shares at prices they liked, half of them last year were holding one-sixth or more of their assets in cash, a level matched by only one of the 15 growth funds. Portfolio turnover for the value funds has, on average, been one-fourth that of the growth funds. The low turnover at these funds reflects their commitment to buying only when they can find good companies at a reasonable discount from the true value of the business – what their mentor, Ben Graham, called a “margin of safety." It’s that discipline that enabled them to push away from the table during the bubble years of the late 1990s.

Turnover, however, isn’t the only problem at the 15 large growth funds. I continued my study by looking at Fidelity Growth Company (FDGRX) because it was then the largest of the bunch, with $25 billion in assets, and American Group Amcap (AMCPX), the one fund in the group with even modestly positive returns over the past five years. What’s more, its low portfolio turnover and substantial cash holdings gave it a seeming resemblance to our value funds.

In both funds, however, I was struck by something else: The managements seemed excessively focused on asset growth, rather than performance. The two families that the funds are part of each oversees well over $800 billion. Fidelity alone manages more than 20 large-cap growth funds. What’s the point of this slicing and dicing, except to accumulate assets? Why not focus one’s best skills so as to maximize the returns?

Among them, the three large growth funds I examined held an average of 180 stocks last August. And while managers of the value funds I looked at – including Longleaf Partners (LLPFX), First Eagle (FEFAX), Oakmark Select (OAKLX), and Legg Mason Value (ILVVW) – talk up front about their personal stakes in their funds, managers of these large-cap funds don't.

The late Bill Ruane, who had been head of the Sequoia Fund, concluded years ago that thoughtful investing meant three things: a small portfolio (20 stocks at most), low turnover and “eating your own cooking," meaning that the managers invest substantial personal money not just in the management company but in the funds themselves.

The contrast with the 15 large-cap growth funds is all too clear.

Reprinted by Permission of the Wall Street Journal, a Dow Jones Company. All Rights Reserved Worldwide. This article, which first appeared in Barron’s on July 17, 2006, is adapted from a speech to the New York Society of Security Analysts.

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First, Rename All the Lawyers

By JOHN FABIAN WITT

IF A ROSE WOULD SMELL as sweet by any other name, will trial lawyers smell better with a new one? That’s the question posed by the impending self-reinvention of the Association of Trial Lawyers of America. After Election Day, the 65,000-member outfit whose lawyers brought us multibillion dollar settlements in cigarette cases, millions of asbestos injury claims and lawsuits over McDonald’s coffee changed its name to the American Association for Justice.

There’s already been much wry snickering about the organization’s vaguely Orwellian new banner. But it’s not the first time the kings of torts have changed their name, and it probably won’t be the last. For a half-century now, trial lawyer identity crises have been exquisitely sensitive barometers of American politics.

In the late 1940s, a cadre of poorly paid and status-starved lawyers representing injured workers (the claimants) in the workers’ compensation system banded together to form a lobby dedicated to the advancement of their own and their clients’ interests. They called their group the National Association of Claimants’ Compensation Attorneys.

That name worked for only a few short years. The problem was that the workers’ compensation system was designed to streamline the resolution of worker injury cases by eliminating (or at least minimizing) lawyers’ fees. Lawyers in the system therefore had little hope of gaining wealth or prestige. With the assistance of early association leaders like the flamboyant San Francisco lawyer Melvin Belli, the group’s lawyers began to extend their expertise to personal injury cases in the courts, where the fees ran much higher and where their Perry Mason-like trial techniques might earn them a measure of respect.

In 1960, the association formalized its new outlook by changing its name to the National Association of Claimants’ Counsel of America, a moniker that repositioned the group as one of lawyers for victims not just in the compensation system but also in the courts. Four years later, the organization renamed itself the American Trial Lawyers Association. By then its transformation was complete: the lawyers had left the compensation system behind altogether for the free-wheeling, high-risk and high-return world later made famous by Julia Roberts in Erin Brockovich and John Travolta in A Civil Action.

But the 1964 name stuck for less than a decade. Another lawyer organization – the American College of Trial Lawyers – complained that the names were too similar. The defense lawyers in the college apparently worried that it would be tainted by nominal association with the lowly lawyers’ group. In 1972, the American Trial Lawyers Association gave in to the litigation by the college and altered its name to the current (and now soon to be abandoned) Association of Trial Lawyers of America.

The trial lawyers’ struggle for identity is a near-perfect parable for the course of American politics since the 1930s. In a political system long dominated by courts and political parties, Franklin Roosevelt and the New Dealers envisioned a new kind of federal government made up of administrative bureaucracies like workers’ compensation, which would provide rationalized services to citizens.

After World War II, however, American politics slowly reverted to form: resistant to European-style public bureaucracy, shaped by powerful courts and the legal profession, and highly susceptible to the influence of interest groups and party politics.

As American politics has changed, so have the trial lawyers. They began as cogs in the wheels of the New Deal’s bureaucratic machinery. They became legal entrepreneurs, identifying creative ways to produce higher awards for their clients in the courts and line their own pockets in the process. Thanks to mass torts cases arising out of things like cigarettes and asbestos, the association’s membership includes some of the wealthiest lawyers in the country. And in the past two decades, the trial lawyers have become a crucial source of financial support for the Democratic Party.

The problem for the lawyers is that the genius of the tort system – its capacity to marshal the entrepreneurial energies of the bar – is also its greatest public relations liability. Indeed, whether trial lawyers are part of a distinctively American regulatory solution or part of a distinctively American problem, the new name seems unlikely to change the way Americans view them.

At KFC (né Kentucky Fried Chicken), the chicken is still fried. At Altria (né Philip Morris), the cigarettes still cause cancer. And at the American Association for Justice, some will say that the trial lawyers are still chasing ambulances.

This article first appeared in the New York Times on October 24, 2006, and appears in longer form in Prof. Witt’s new book Patriots and Cosmopolitans (Harvard University Press), which is described in the Faculty Books section.

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Bellwether

Ma Bell is back. Should you be afraid?

BY TIM WU

Ma Bell is back. Blown into eight pieces by an antitrust court in 1984, AT&T, like a self-repairing robot, has slowly put itself back together. Last Friday, the Federal Communications Commission, demanding net neutrality and other conditions, approved AT&T's acquisition of BellSouth. That will make AT&T—once again—the world's largest technology company. And don't just think big. Think Goliath, with about $110 billion in annual revenue, more than 300,000 employees, and 90 million paying accounts. Google, by way of comparison, brings in about $9 billion a year. Even Microsoft, at $45 billion, is a mere elephant compared to the AT&T mammoth.

So, should you be afraid? A little. AT&T will wield power over the nation's information networks to a degree unprecedented in the Internet age. How you feel about that depends on whether you trust the company, and unfortunately, AT&T has the corporate version of a criminal record. From the 1950s through the 1970s, AT&T—while creating the greatest network on earth—also killed long-distance competition, bottled up new technologies like the cell phone and home answering machine, and resisted the innovations that were later known as "the Internet." Some will argue that letting AT&T run the nation's networks is like putting Hannibal Lecter in charge of making dinner.

Yet the passage of time has also clarified the lessons learned from that era. Chiefly this: The danger posed by AT&T, both then and now, is not merely size. There is such a thing as a friendly giant, and perhaps a reformed AT&T will be the Hogwart's Hagrid of telecom. The enduring danger is that AT&T will instead be the evil giant who uses its power to mess with everything attached to the AT&T system. Today, that would mean messing with search engines, slowing down your cousin's blog, degrading YouTube or voice-over-IP, and so on. Guarding against those dangers are the milestone network-neutrality rules—the most important rules the FCC has made AT&T agree to. But those rules will last only two years, and it is now clear that Congress needs to make those rules into enduring law.

From 1913 through the 1980s, the Bell Company, now AT&T, held a near–total monopoly over telephone service in the United States. The company was a magnificent product of American ingenuity, famous for reliable service and a sponsor of important research. But that AT&T also had a dark side. The company blocked or tried to kill emerging competitors for long-distance services. It also suppressed a range of new consumer technologies. The firm took centralization and integration to new levels, exercising total control over the nation's local lines, long-distance service, and even telephones. Its old motto was "One Policy, One System, Universal Service." Catchy, but it also left little room for anyone else. Today's sloppy collectivism of Wikipedia or the blogosphere was not exactly the AT&T way.

In the 1970s the U.S. government, under the banner of "deregulation," awoke to AT&T's abuses and began an attack on its power, through a strategy we might call slice and dice. It sliced the company into eight separate pieces—a long distance company (as AT&T-in-exile, it kept the name) along with seven regional local phone companies—Bell Atlantic, Pacific Bell, and so on. Meanwhile, a different line of FCC efforts severed AT&T's local line monopoly—the "bottleneck"—from the rest of the business world. The FCC barred AT&T from using its power over local phone lines to mess with any of the businesses surrounding it, meaning that AT&T was forced to allow consumers to plug in any phone they wanted and use any long-distance service or Internet service provider they liked. These neutrality rules (known as the Computer Inquiries in telecom jargon) are the direct ancestors of today's network neutrality rules.

We will never know what would have happened had Bell been left alone. Yet like ferns growing out of a fallen redwood, new firms grew out of AT&T's carcass, making the years since the slice-and-dice operation the most vibrant in the nation's communications history.

Optimists predicted cheap telephones and long-distance service. That's happened, but no one anticipated the full consequences of free market entry in telecom. Among the bounty: the appearance of a cell-phone industry, the birth of a mass Internet created by companies like AOL and Earthlink, and, in time, the myriad companies of the World Wide Web, from Netscape through eBay, Google, the blogosphere, and Wikipedia. In 1984, no one imagined that more people would be watching lonelygirl15 than 60 Minutes, over the lines once policed exclusively by AT&T.

Looking back, the "slice" demanded by the Justice Department looks much less important than the "dice" part. Breaking AT&T into small pieces failed to introduce much local competition. The Baby Bells, as they are called, simply worked together to eliminate most of their direct competitors. Only cable, which has its own networks, survived. The horizontal split arguably just created new inefficiencies.

Instead, the most important rules were the vertical neutrality rules—rules preventing the Bells from killing, crippling, or controlling the companies dependent upon Bell lines to reach their consumers. In the 1980s, that meant companies like USRobotics, which sold modems. In the 1990s, it meant AOL—which, as we said, built mass Internet access over Bell's phone lines. And today that means companies like MySpace or Google, which need broadband to reach their users. In each case, the phone company, or a cable company, is a silent but essential partner.

In effect, this is the core difference between a giant like AT&T and a giant like Exxon: Both supply a good (bandwidth and gas) which is essential to doing what we want to do. Both, in business jargon, are "big dog" firms that support a "long tail" of uses. But the nature of gas makes it much harder for Exxon to exercise control over its end uses. Exxon has no control over whether you use your gas to power a chainsaw or drive a hybrid, motorcycle, or SUV. Information networks are different. AT&T has the power to control what you do with the Internet. It can control Internet speech and the Internet economy, and that makes all the difference.

So, the recombination of AT&T has effectively undone the "slice" part of the FCC's meddling—the breakup. The AT&T of 2007 reconstitutes five of the original eight pieces, leaving Verizon and Qwest as the last companies that haven't returned to the mother ship. The question isn't whether AT&T will be big. It is whether AT&T will be a giant in the image of Harry Potter's friend Hagrid, or the more bloodthirsty variety from "Jack and the Beanstalk." Will the behemoth be a faithful provider of well-priced, reliable, and ultra-high-speed broadband connections, a beloved common carrier? Or a company that tries to remake the Internet in its own image, use its networks to control who comes to market, and in the process ruin the freewheeling competition that has made the network great? That's the question that makes network neutrality the center of the debate.

Over the 2006 holidays, AT&T's lawyers and two commissioners of the FCC were in intense and quiet negotiations. To merge with BellSouth, AT&T needed the FCC's approval, and two of four voting FCC commissioners demanded that AT&T agree to basic network-neutrality rules. After many rounds, AT&T agreed, just before New Year's Eve, to the neutrality rules described in this agreement. (Click here for more on network-neutrality theory; for a legal analysis of the rules, read this.) The rules are a milestone: While there have been many ancestors, these are the first full-fledged network-neutrality rules that are fully enforceable as law.

AT&T has promised not to discriminate—not to "prioritize, degrade, or privilege" based on "source, ownership, or destination." And if AT&T indeed plays by those rules, its expanded size and efficiency may do much to restore America's slipping status in the Internet world. We may see the softer "reach out and touch someone" face of the old Bell Company. But if it begins to pick and choose favorites in an attempt to create an "AT&T Internet," watch out. The threat of recidivism is real.

That is why Congress should pass a network neutrality law, and make what has worked for the last 20 years endure for the next 20. But congressional action is only part of the solution, and the other part is you. Because even if passed, there is only one way net neutrality can work, and that's if it becomes the third rail of telecom politics. The advantage of the neutrality concept is that while the subject is complex, people know they're angry when the phone or cable company decides how they should be using the Internet. That kind of interference gets libertarians as mad as Naderites. If there's one thing the Internet has shown, it's that Americans like a huge variety of strange and obscure stuff, and they get mad when they can't get it. Oddly enough, that's the public spirit that, as much as any law, can keep AT&T a friendlier giant.

Professor Wu’s article first appeared in Slate magazine on January 4, 2007.

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Faculty Briefs

José E. Alvarez, the Hamilton Fish Professor of International Law and Diplomacy, was the featured dinner speaker at the Westchester County Bar Association in January on “Torturing the Law: Treatment of Detainees of the War on Terror.” In March, he presided over the annual meeting of the American Society of International Law in Washington, D.C., where he delivered the president’s address on “The Future of Our Society.” In April, at the invitation of the UN Association, he delivered a speech at Pace University Law School in White Plains, N.Y., titled “UN Treaties: A Threat to Sovereignty?” and was a speaker at a Colloquium on Constitutional Theory: Constitutionalism in an Era of Globalization and Privatization at Cardozo School of Law, Yeshiva University in New York.

George Bermann ’75 LL.M., the Jean Monnet Professor of EU Law, Walter Gellhorn Professor of Law, and director of the European Legal Studies Center, delivered in January a paper on “La Concertation reglementaire transatlantique” at the University of Paris I, where he held the Tocqueville-Fulbright Distinguished Chair for the fall semester 2006-07. The paper is to be published in festschrift for Prof. Helene Gaudemet-Tallon (Univ. of Paris II). That same month, he spoke on expert witness testimony in international arbitration for a workshop held in Paris. Prof. Bermann organized ABA workshops on the ABA project on EU administrative law held in February in Brussels. Also in February, Prof. Bermann gave a paper on coordinated regulation in the EU at a conference at University of Luxembourg. In May he is speaking at the International Bar Association in Rome on “U.S. class action judgments and their recognition overseas.” And in June, he is addressing a group of U.S. state and federal judges on European Union Law at Princeton University at the annual Harold Medina program for judges sponsored by the Federal Judicial Center.

John C. Coffee, the Adolf A. Berle Professor of Law, served as the annual distinguished lecturer at Saint Thomas University Law School in Miami in February; in March, he presented the principal paper at the annual joint conference of the corporate and finance departments of the Wharton School and the University of Pennsylvania Law School. Also in March, he presented a paper and served as a panelist at a Harvard Law School conference on “Enforcement and Corporate Governance.” Over spring break, Prof. Coffee visited Australia and presented three papers at the University of Melbourne Law School, Australian National University in Canberra, and the University of Sydney Law School. In April, he spoke at a conference on securities litigation and insurance held by the University of Connecticut Law School in Hartford, and served as the moderator of an ABA panel on the backdating of stock options at the annual meeting of the ABA litigation section in San Antonio. Also in April, Prof. Coffee presented a paper at the law and economics seminar at Harvard Law School, served as a panelist at a BNA conference on the implications of the Wal-Mart case for class actions, spoke in Toronto at the fourth annual Osgoode-Hall Law School symposium on Canadian class actions, and served as a moderator and panelist at the Duke Global Capital Markets Conference in Washington, D.C.

Mike Dorf, Isidor & Seville Sulzbacher Professor of Law, presented his articles “Fallback Law” at the University of Pennsylvania Law School legal theory workshop in February and “Does Federal Executive Branch Experience Explain Why Some Republican Supreme Court Justices ‘Evolve’ and Others Don’t?” at the Advanced Constitutional Theory workshop at Georgetown Law Center in March. In March he also discussed his recent book No Litmus Test: Law Versus Politics in the Twenty-First Century at an event sponsored by the NYU chapter of the American Constitution Society. That month he also discussed executive privilege on NPR’s “All Things Considered.” In April, Prof. Dorf was the guest speaker at the Columbia University Club of New England’s annual scholarship luncheon in Cambridge, Mass. He discussed his book, judicial appointments, and legal aspects of the war on terror. An entry on Dorf on Law (michaeldorf.org) regarding the citation of one of his articles in the recent D.C. Circuit decision invalidating the District’s gun control laws was discussed in a March New York Times article on the declining citation of law review articles by courts.

Professor Elizabeth Emens spoke in January at the annual meeting of the American Society for Political and Legal Philosophy, presenting a commentary titled “Shared Laughter: A Triad of Convergences Between Conservatives and Liberals.” Later that month, her article “Shape Stops Story” was published in the journal Narrative in a dialogue on “Disability, Narrative, and Law.” In February, she presented a paper titled “Integrating Accommodation” at the Harvard public law workshop and the Columbia University disability studies seminar. In March, she spoke to the NYU American Constitution Society on her forthcoming article “Changing Name Changing: Framing Rules and the Future of Marital Names.”

Jeffrey Fagan, professor of law and public health, presented a paper in February titled “Political Economy and the Crime Decline” at the annual meeting of the American Association for the Advancement of Science. In April, he presented a paper to the National Research Council on crime, law, and neighborhood change. In May, he is testifying before the Constitutional Court of Indonesia, its highest court, on the death penalty. In June, he is presenting a paper titled “The Comparative Continuity of Race and Urban Violence” at the University of Sorbonne (Paris IV) at a conference titled Inequalities, Race and Poverty: Forty Years after the Kerner Commission in the U.S. and 25 years after the Scarman Report in U.K.

Merritt B. Fox, the Michael E. Patterson Professor of Law and co-director of the Center for Law and Economic Studies, has been appointed a Professorial Fellow at Tilburg University, in which capacity he will be advising Dutch authorities with regard to capital market regulation. In February, Prof. Fox spoke about ways to change securities fraud litigation at a conference at Duke Law School devoted to Reform of the Securities Laws and Class Actions. Later that month, he presented a paper, “Required Line of Business Reporting and Share Price Accuracy,” at the University of Michigan Law and Economics Workshop. Also in February, he participated in a panel before a meeting of the New York Society of Security Analysts concerning the “Paulson Committee” report on capital market regulation and U.S. competitiveness. In March, he delivered comments concerning flaws in the U.S. system of corporate voting at the Activist Investors, Hedge Funds and Corporate Governance conference at the University of Amsterdam’s Center of Law and Economics. At the end of March, he presented a paper, “Civil Liability and Mandatory Disclosure,” at the Enforcement of Corporate Governance Rules conference at Harvard Law School, where he also delivered a comment on Professor John C. Coffee, Jr.’s paper, “Law and the Market: The Impact of Enforcement.”

In February Professor Philip Genty was a panelist for Restoring Fairness to Parole at the New York City Bar Association. In March he was a keynote speaker for Behind Bars: The Impact of Incarceration on Women and Their Families, a symposium at Rutgers Law School in Newark sponsored by the Women’s Rights Law Reporter. In May he and Ragini Shah, who teaches the Immigrant Children’s Representation Project Clinic, will be co-presenters, along with two colleagues from other schools, at the AALS workshop on clinical legal education in New Orleans. Their session is titled “The Practitioner and the Clinician: A Structured Conversation About What and How Senior Clinicians and Senior Practitioners Who Recently Became Clinicians Learn From Each Other About Lawyering, Teaching and Learning.”

Jane Ginsburg, the Morton L. Janklow Professor of Literary and Artistic Property Law, was elected an honorary fellow of Emmanuel College, University of Cambridge, where she had been a professorial fellow in 2004-05 during her year as the Goodhart Visiting Chair of Legal Science. She will return to the college in July to participate in an interdisciplinary workshop titled “Inspiration, Interpretation or Infringement: Interdisciplinary Approaches to Creativity and Copyright.”

Suzanne Goldberg presented at several symposiums in recent months, addressing topics including “(How) Does Morality Matter?” in a symposium on marriage rights for same-sex couples at Georgetown Law School, “The Path to Employment Rights for GLBT People” at the Rebellious Lawyering Conference at Yale Law School, and “Putting Marriage in Context: Marriage Litigation and the Art of Persuasion” at Tulane Law School Law and Sexuality Journal Symposium. In addition, Prof. Goldberg spoke with reporters from the Associated Press, the Los Angeles Times, and numerous other media outlets on issues ranging from marriage to the repeal of 19th century women’s rights laws to HIV names reporting.

Harvey J. Goldschmid ’65, Dwight Professor of Law, chaired a “Seminar for Fund Directors on Securities Lending,” sponsored by the Law School and the Mutual Fund Directors Forum in January. In February, he participated in a Duke Law School conference on “Recent Reform Proposals for Securities Litigation, Corporate Governance, and Reporting Practices,” and, in March, gave a keynote address at a meeting of the ABA Business Law Section in Washington, D.C., titled “Sense and Nonsense in the Current Business Backlash.” At that same ABA meeting, he participated on a panel with three other business law section advisers (“distinguished leaders of the profession” who share “wisdom and experience with members of the section”) on changes in the legal profession. Also in March, in Phoenix, Ariz., Prof. Goldschmid participated in a Securities Industry Financial Markets Association program on “Ethics Concerns for the In-House Attorney,” and commented on nonprofit governance at a conference sponsored by Lincoln Center and Fordham Law School.

In April, he participated in a Weinberg Center for Corporate Governance (University of Delaware) program on “nonprofit corporate governance reform” and moderated a panel discussion on corporations and capital markets evolution at the Law School’s Deals Roundtable. He also commented on the value of Sherman Act Section 2 at a Georgetown Law School conference on antitrust policy and commented on proxy access and related issues at a conference sponsored by Vanderbilt Law School and the Institute for Law and Economic Policy.

In May, Prof. Goldschmid is participating in a debate on capital market reform at the Council on Foreign Relations, giving a keynote address at the Washington Public Policy Conference of the North American Securities Administrators Association, and participating in a panel titled “The Future of Capital Markets” at the Law School’s Reunion Weekend.

Jack Greenberg ’48, the Alphonse Fletcher Professor of Law, was interviewed in December on Voice of America about the Louisville and Seattle voluntary school integration cases argued before the United States Supreme Court. In January, he gave a “Live Talk” for Newsweek.com and The E-Guide on his work in the first school desegregation cases. Also that month he spoke at University of Michigan on U.S. race relations. In March, Prof. Greenberg spoke at Washington University, St. Louis (history department and law school) on the Dred Scott case, at Florida Atlantic University on the history of Brown v. Board of Education, and via video to a meeting at the U.S. Embassy in Windhoek, Namibia, about race relations in the U.S. In April he participated in a two-day conference at Harvard Law School on the Dred Scott case.

Philip Hamburger, the Maurice and Hilda Friedman Professor of Law, is publishing “Getting Permission,” an article on censorship in universities, in the Northwestern Law Review in June. He also participated on various panels during the semester.

Professor Scott Hemphill published “Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem” in the New York University Law Review. The article offers a critical look at the increasingly common practice by drug makers to pay rivals to abandon lawsuits that threaten the drug makers’ patents. He presented related work on drug patent settlements at conferences sponsored by LECG and the Conference Board. Prof. Hemphill presented “Extraction and Applications Innovation,” a re-examination of the case for regulation of broadband Internet providers, at the Silicon Flatirons conference in Boulder, Colo.

Professor Olati Johnson was selected earlier to be the 2006-07 recipient of a fellowship from the Clifford Chance Law Firm as part of their Thought Leadership Initiative on Diversity.

Professor Benjamin Liebman, director of the Center for Chinese Legal Studies, in January visited Hong Kong, Shenzhen, Nanchang, and Beijing. In Nanchang, he delivered a lecture on U.S. and Chinese media law at Jiangxi University of Finance and Economics. He also presented a paper on recent developments in China’s courts at Harvard Law School in January, Duke Law School in April, and to the Asian Affairs Committee of the New York City Bar in May.

Clarisa Long, the Max Mendel Shaye Professor of Intellectual Property Law, presented a paper on the political economy of intellectual property law at Emory Law School in January. In February, she was a speaker at the Hot Topics in Intellectual Property Law symposium at Duke Law School, where she discussed the implications of the Supreme Court’s patent decisions this term.

Lou Lowenstein, the Simon H. Rifkind Professor Emeritus of Finance & Law, spoke in February to a “delightfully responsive group” of Law School alumni in Palm Beach, Fla., on mutual funds, the subject of his forthcoming book. In March, he spoke on the same subject to a regional group of financial planners in Maryland.

Curtis Milhaupt ’89, the Fuyo Professor of Law and director of the Center for Japanese Legal Studies, presented “Reputational Sanctions in China’s Securities Market” (co-authored with colleague Ben Liebman) at Harvard Law School in March. In April, Prof. Milhaupt was the Paul Hastings Visiting Professor in Corporate and Financial Law at Hong Kong University, where he presented several lectures based on his forthcoming book (co-authored with colleague Katharina Pistor), Law and Capitalism: What Corporate Crises Around the World Reveal about Legal Systems and Economic Development (University of Chicago Press, 2008). Prof. Milhaupt is the keynote speaker at the Latin American Law and Economics Association annual meeting in Brazil this May.

Professor Alex Raskolnikov, chair of the Transactional Studies Program, presented “Relational Tax Planning Under Risk-Based Rules” at the faculty workshops at Columbia, Harvard, and the University of Michigan law schools and at the Tax Club.

Peter Rosenblum ’92 LL.M., Lieff, Cabraser, Heimann & Bernstein Associate Clinical Professor in Human Rights, spoke in March at the 20th Anniversary of the Human Rights Program at Harvard Law School on Transforming Students and Scholarship: 20 Years in Human Rights Education at Law Schools. That same month, he led a two-week joint mission of the Human Rights Clinic and the Carter Center to the Democratic Republic of the Congo to investigate the impact of mining on human rights. In April, he delivered a paper titled “The Delicate Dance: the Law and Politics of Justice in Central Africa” at a conference on Responses to Atrocity at the University of Wisconsin. In May, he is speaking at the Congo Peace Building forum at the U.S. Institute of Peace in Washington, D.C.

Carol Sanger, the Barbara Aronstein Black Professor of Law, was awarded the 2007 Willis Reese Award for Excellence in Teaching and spoke at graduation. This semester Prof. Sanger participated in monthly meetings of Columbia University Seminar on ARTs [Artificial Reproductive Technologies], Science, Religion, and the State. The group consists of professors from Medical and Public Health Schools. In January, Prof. Sanger was, with Ian Ayres (Yale) and Paul Robinson (Penn), one of three featured professorships on the Section on Scholarship panel “Developing a Scholarly Persona” at the Annual AALS meeting in Washington, D.C. In February, she presented a paper at a two-day Law and the Emotions Conference held at Boalt Hall at the University of California at Berkeley. In April, she participated on a panel on “Coercive Intervention at Birth and Early Infancy” at Harvard Law School at the ABA Center on Children and the Law’s 12th National Conference, co-sponsored by Harvard Law School Child Advocacy Program.

Professor Catherine Sharkey was Visiting Professor of Law at Harvard Law School for the spring semester.  She presented “Products Liability Preemption: An Institutional Approach” at faculty workshops at Harvard and at Boston University.  She participated as a panelist in two conferences focusing on federal preemption of common law: Ordering State-Federal Relations Through Federal Preemption Doctrine at Northwestern University; and New Frontiers in Consumer Protection at the European Institute University in Florence, Italy.  Prof. Sharkey was invited to present empirical research on the effects of legislative caps on punitive damages at the inaugural Searle Center conference on Litigation and Tort Reform: Policy Implications of Recent Empirical Research at Northwestern University.  She was also one of the organizers of a day-long remedies workshop titled “Justice and the Bottom Line” at the 2007 annual AALS conference.

Jane Spinak, the Edward Ross Aranow Clinical Professor of Law, continued research and writing on Family Court during her sabbatical this year. She spoke about problem-solving courts at Syracuse University Law School in September and presented a chapter on the same topic to the Mid-Atlantic Clinical Theory Workshop in March. She has spoken numerous times this year about youth participation in Family Court including at the Casey Family Services National Convening on Youth Permanence, the New York City Bar Association, the ABA National Conference on Unified Courts, and the First Star Congressional Roundtable on Legal Representation for Children in Foster Care. Prof. Spinak chaired the New York County Lawyer’s Association conference, The Family Court in New York City in the 21st Century: What Are Its Role and Responsibilities? in October. The reports and recommendations of the conference will be published in the CLS Journal of Law and Social Problems with a foreword by Prof. Spinak.

Peter L. Strauss, the Betts Professor of Law, testified before two congressional committees questioning elements of a presidential executive order expanding White House oversight of agency rulemaking activities. On February 13 he appeared before a hearing of the House Judiciary Committee Subcommittee on Commercial and Administrative Law, and on April 26 he appeared before the Subcommittee on Investigations and Oversight of the House Science and Technology Committee. He has also begun service as a member of two task forces exploring the uses of the Internet in government policymaking, one under the auspices of the ABA’s Section of Administrative Law and Regulatory Practice, and the other an international working group with support from the NSF and the Center for Technology in Government.

Professor Tim Wu, along with other faculty, founded Columbia’s new program on law and technology (www.columbialawtech.org). Testifying at FTC hearings in February, Prof. Wu released a paper titled “Wireless Net Neutrality,” and in May will release a paper entitled “Treaties’ Domains.” Prof. Wu is a featured speaker at the New Yorker magazine conference in May, and also will give talks at Yale, Cornell, Miami and Duke law schools, the Max Planck Institute in Bonn, and the Ecole Nationale Superieure de Telecommunications in Paris.

 

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