Cato @ Liberty
When a Lawyer Creates His Own "Evidence," It Shouldn't Help Him Win Millions
Mon, 16 Oct 2017 17:31 EDT

Should judges consider evidence that’s inadmissible at trial when deciding whether to certify a class for class-action litigation? Particularly given the serious consequences of certification—most defendants settle class actions to avoid greater liability, and non-certified cases are often not worth pursuing—due process should require that evidence presented at the class-certification stage meet the same standards as that presented at trial.

One case out of California illustrates how allowing inadmissible evidence in any part of a legal proceeding not only violates the due-process rights of defendants and absent class members, but contradicts recent Supreme Court rulings and the Federal Rules of Civil Procedure. Maria del Carmen Pena is the lead plaintiff of a group of agricultural employees alleging that they were denied breaks due them under the governing law. Pena tried to gain class certification by presenting a spreadsheet summarizing work hours, but this evidence was inadmissible for trial purposes because it was created by her attorney.

Nevertheless, the district court certified the class and the U.S. Court of Appeals for the Ninth Circuit affirmed. Cato has now filed a brief supporting the employer’s cert. petition, urging the Supreme Court to address just that evidentiary issue.

If, as the Supreme Court recently said in Walmart Stores, Inc. v. Dukes (2011), “mere allegations” are insufficient to support certification, then it is also wrong to allow otherwise inadmissible evidence to provide the foundation for certification. Because the Court insisted in Dukes that “certification is proper only if the trial court is satisfied, after rigorous analysis, that the prerequisites of Rule 23(a) [laying out the requirements for class certification] have been satisfied,” lower courts should consider examinations of both fact and legal merits when determining if certification is appropriate.

Adhering to the 1974 decision of Eisen v. Carlisle, in which the Court held that, “for purposes of determining certification, allegations made in the complaint are taken as true and the merits of the claim are not considered,” many lower courts avoid considering any issue at the certification stage that may overlap with a question on the merits—and thus have avoided requiring that evidence used to certify a class meet the normal standards for admissibility.

But Dukes established that due process demands a rigorous inquiry (which sometimes may go beyond the bare pleadings) before certification. When courts accept inadmissible evidence to support class certification, the basic requirements of due process are compromised. Once certified, expenses and risks often compel settlements divorced from merit considerations; certification is, as the Eleventh Circuit has explained, “the whole ball game.”

Absent class members also suffer because it is the act of certification that determines whether they are bound by a settlement or adverse judgment that wipes out their individual claims. Unfortunately, confusion over the decades-old holding in Eisen lingers; a refusal to view it in light of the Court’s more recent decisions has resulted in an inconsistent application of evidentiary standards.

The Court should take up Taylor Farms v. Pena, dispel confusion among lower courts, and protect due-process rights by clarifying that evidence submitted at the class-certification stage must meet the same time-tested standards as evidence submitted at trial.

Corporate Tax Cuts and Tax Revenues
Mon, 16 Oct 2017 14:43 EDT

The Republican tax reform framework envisions cutting the federal corporate tax rate from 35 to 20 percent. There may be pressure in coming weeks to scale-back some of the framework’s pro-growth provisions in order to hit revenue targets, but policymakers should stick with their corporate rate target.

Various groups have modeled the revenue effects of proposed corporate rate cuts, but they generally do not account for the full dynamic effects of reform. We can get an idea of the full effects by looking at actual reforms abroad.

Sharp corporate tax rate cuts in Canada and Britain do not seem to have lost those governments much, if any, revenue. That is likely because companies responded with a wide range of real and paper changes that increased their reported income. The same would happen in the United States, which is why dropping our rate to 20 percent would probably not lose revenue over the long term.   

Here is some evidence. For 19 OECD countries with good rate and revenue data back to the 1960s, I calculated the average corporate tax rates and average corporate tax revenues as a share of GDP. The chart illustrates the Laffer Curve effect of chopping high tax rates on a mobile tax base—rates go down, the tax base expands, and revenues remain strong.

From 1985 to 2005, corporate tax revenues as a share of GDP soared even though the average tax rate across the 19 countries fell from 45 to 29 percent. Then there is a sharp drop in revenues in 2010, presumably because of the recession or slow growth in many countries at the time. But note that even in the poor economic climate of 2010, corporate tax revenues were the same or higher than in years prior to the 2000 boom year.

By 2015, revenues were rising again even as the average tax rate continued to fall to a new low of 24 percent. The average revenue for these countries in 2015 at 2.9 percent of GDP is below 2000 and 2005, but above all prior years when rates were much higher.

 

Data Notes:

The 19 countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Spain, Sweden, United Kingdom, and the United States.

OECD revenue data is here and rate data is here. I used the central government rates because I have not found a source for subnational rates prior to the OECD data, which goes back to 1981. As a result, the revenues (which include subnational) and the rates (which do not) are not an exact match, but that is not a big problem for illustrating trends over time.

Financial Regulatory Reform is In the Air
Mon, 16 Oct 2017 14:35 EDT

A decade after the start of the 2007-2008 financial crisis, and seven years after the passage of Dodd-Frank, it seems both the legislative and executive branches may be making small steps toward financial regulatory reform. Earlier this month, the Treasury Department released the second in a series of reports on the U.S. financial sector, this one focused on the capital markets. And last week, the House Financial Services Committee passed a suite of bills aimed at reforming many areas of financial regulation. 

While passing out of committee is only the first of many steps toward legislation, it is encouraging that several of the House bills passed with either unanimous or bi-partisan support. Although the House notably passed the CHOICE Act earlier this year, a bill that would serve effectively as a repeal-and-replace template for Dodd-Frank, that bill passed on a strict party-line vote, with only Republicans voting in favor. Therefore the fact that many of the most recent bills had some support from Democrats may bode well. Of course, any action will require the Senate as well. There has not yet been a Senate answer to the House CHOICE Act, although there is still time in the year.

As for the Treasury report and recent suite of House bills, they’re a mixed bag. On the whole, they take up several recommendations that many of us have been pushing for a while now. For example, the Treasury report recommends that all companies considering an initial public offering (IPO) be permitted to file confidentially and “test the waters,” that is, sound out potential investment interest before pulling the trigger on a costly IPO. Right now, only companies below a certain size are permitted to do this. There has been widespread concern about how few IPOs have taken place in recent years, and how few public companies now exist. Given the fact that investment in privately-held companies is tightly restricted, if companies eschew the public capital markets, average investors lose out. This change is one that may entice more companies to go public, with little risk to either investors or the markets.

Other changes would be half-measures, better than the status quo but still short of the mark. For example, both the Treasury report and one of the House bills address the restrictions on investment in private companies. Under current securities laws, investment in private offerings is effectively limited to institutions and wealthy individuals, defined as those who either earn at least $200,000 per year or have at least $1 million in assets excluding their primary residences. Both the Treasury report and the House bill would expand the definition, including individuals who can show financial sophistication through licensure or other means.

Expanding the definition is certainly a start. As it stands, existing regulation has absurd results. For example, an investment advisor who advises wealthy clients can recommend investments she herself cannot make since current law deems her insufficiently sophisticated if she is not also wealthy. Expanding the definition to remedy this would at least make the results less ridiculous. But this change doesn’t go far enough. Why should there be any restriction on how a person can spend money he has actually in hand? After all, anyone can spend money on all kinds of silly purchases thankfully without government interference. But if a person would prefer to make an investment with that money, current regulation is patently paternalistic: if the person is not wealthy, he, for the most part, cannot use that money to invest in private companies. 

Another half-measure concerns a bill that would repeal the controversial Department of Labor rule governing broker advice for the sale of retirement investments. This rule, which would require those providing advice while selling certain investments to adhere to the very stringent “fiduciary duty” standard, has been criticized on two grounds. First, that the Department exceeded its authority, shoe-horning the rule into its limited jurisdiction over employer-sponsored retirement accounts. Second, that the rule itself would result not in better advice for moderate income Americans, but no advice as brokers abandon low-value accounts due to the increase in compliance costs the rule would impose. Repealing the rule is a good place to start. However, the bill passed by the House committee would only remove the rule from the Department of Labor’s (DOL) jurisdiction. While it does not expressly impose a fiduciary standard, as the DOL’s rule does, it still uses language suggesting a heightened duty of care. Brokers are in reality salespeople who give recommendations incidental to that role. There may be some argument for requiring that such brokers disclose the fact that they may be paid based on a commission structure, to ensure that investors are not confused about their role. But any rule must ensure that the compliance costs of a higher duty of care does not outweigh the benefits, or place inappropriate requirements on those in a sales role. Otherwise the result is likely to be reduced access to information for the people who need it most. In fact, some initial reports show that this has already begun to happen in some firms under the current DOL rule.

The efforts by Treasury and the House Financial Services Committee are welcome. It is encouraging that some of the House bills passed with considerable support from both political parties. Given the breathtaking scope of Dodd-Frank’s changes, and the harmful effects it has had on the economy, any change is welcome. But there is still much, much more that can and should be done. 

 


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