Her post–Ohio Supreme Court Preview: Confrontation Clause Issues
–provides a concise summary of recent confrontation clause jurisprudence and a clear explanation of the unique facts of the cases. All four cases involve homicides and the right to confront the State’s medical experts.
A century ago, the Supreme Court circumscribed copyright owner’s exclusive rights. In Bobbs-Merrill,2 it held that a copyright owner’s exclusive right to distribute copyrighted material does not include the power to control a purchaser’s subsequent disposition of the purchased copy3 Whatever benefit a copyright owner seeks it must be bargained for at the first sale. Congress codified this “first sale” principle 17 U.S.C. § 109(a).4
The first sale doctrine is the animating principle courts have relied upon in limiting the use of intellectual property law to prevent parallel imports. Under this doctrine unless title to the copy passes through a first sale by the copyright owner, subsequent sales do not confer good title.5
Since Bobbs-Merrill, producers have sought other legal mechanisms to maintain prices and exclusive marketing programs. But Congress has resisted efforts to alter the balance of competing interests reached in Bobbs-Merrill.6 Attempts include the use of trademark law,7 patent law,8 and legislation specifically controlling prices.9
Quality King is the Supreme Court’s most recent opinion to circumscribe these efforts. Specifically it limits the right of copyright holders to bar parallel imports of U.S.-manufactured copyright materials.
This paper reviews lower court decisions related to parallel trade in copyrighted materials since Quality King.10 Part II briefly defines parallel imports and price discrimination. Part III gives the facts, procedural history, and reasoning of Quality King. Part IV expands the discussion to include the copyright related parallel import cases decided since Quality King. Part V summarizes the state of copyright law with respect to parallel imports and the future of parallel imports.
II. Background: Price Discrimination & Parallel Imports
To understand the interests at issue in parallel trade, a brief discussion of price discrimination is warranted. Price discrimination is where a seller charges different prices to different buyers when the price difference cannot be explained by a difference in cost.11 Common examples include coupons, ladies nights, and last-minute airfares. In each of these examples the seller is able to charge a different price for the same goods or services.
Producers seek to sell their goods at the most profitable price. Transnational producers traditionally seek higher prices in developed nations like the United States or in European countries and offer their products at a lower price in developing countries such as Mexico or India.
Price discrimination is only effective when producers do not face price arbitrage. Arbitrage is the buying and selling of goods in different markets in order to take advantage of different prices for the same goods. The difference in prices is what makes parallel imports possible. Parallel imports, or gray-market goods, are non-counterfeit goods. They are goods that are purchased on a foreign market and resold in the domestic market.12
Producers dislike parallel imports because they undermine their ability to maintain higher domestic prices and exclusive marketing programs. The parallel imports typically compete against the non-imported goods at lower prices and through different channels of trade. Producers may rely on contract law13 to limit parallel imports but when contract law fails14 to prevent parallel imports producers often turn to trademark and copyright law.
With respect to copyrighted material there are two basic parallel import scenarios: The first is when the materials are produced in the U.S, exported and re-imported. This round-trip is the scenario at issue in Quality King.15 The second scenario is when the materials are produced abroad. This scenario was expressly not addressed in Quality King. Several species of the second scenario are relevant. First, a market allocation agreement. In this variation the copyrighted materials are manufactured in the U.S. and abroad. The copyright owner licenses the U.S. copyright to a U.S. distributor and the foreign copyright to second distributor with the understanding that each distributor may only distribute within their domestic market. If the foreign distributor begins distributing in the U.S., the materials are parallel imports.16 This is the hypothetical scenario discussed in Quality King and the actual facts of Pearson Educ., Inc. v. Jun Liao.17 In the second species, the U.S. copyright owner produces copyrighted materials outside the U.S. and bars the import of the materials. This is the scenario in Omega S.A. v. Costco Wholesale Corp.18 and the legality of which was left ambiguous in Quality King.
III. Quality King: Facts, Procedural History, & Supreme Court Holding
L’Anza sold hair care products to U.S. distributors.19 These distributors, per a distribution agreement, sold the L’Anza products exclusively to barber shops and salons.20 L’Anza promoted these products in trade magazines and at salons.21 It also sold these U.S.-produced products in foreign markets for prices 35%-40% lower than the U.S. prices.22 L’Anza’s distribution agreements prevented distributors from reselling the products to unauthorized resellers. But through a chain of unknown events a shipment of L’Anza products found it way back to the U.S.
Quality King, a U.S. distributor, purchased this gray-market shipment of Lanza products from a distributor in Malta.23 Quality King then sold the L’Anza products at lower prices to retailer unauthorized by L’Anza.24 These sales undermined L’Anza’s pricing and exclusive marketing program.
L’Anza owned copyrights for the labels on their packaging.25 Based on these copyrights L’Anza sued Quality King under 17 U.S.C. § 602(a) claiming the importation of copyrighted material without authorization infringed.26 Quality King staked its defense on the first sale doctrine. It argued that § 109(a) is a complete defense to any copyright infringement claim. Neither the district court or the Court of Appeals were persuaded. Both found for L’Anza. The district court reasoned that Congress intended to protect domestic copyright holders by preventing competition from its own products.27 It held that only domestic sales trigger the first sale doctrine and when products are sold to a foreign distributor the sale is not considered a U.S. sale for purposes of the first sale doctrine.28
The court of appeals affirmed. It agreed that the purpose of § 602(a) is to prevent copyright owners from losing control over domestic distribution.29 The court described the downward pressure on prices as “just the evil that Congress sought to prevent in adopting § 602(a).”30 The court was concerned that parallel trade deprived copyright owners of “the ‘full value’ to which they were entitled…even though the imported copies may have been the subject of a valid first sale.”31 The court held that the first sale doctrine did not apply to to legally made copies imported into the U.S. without the authority of the the copyright owner.32
The Supreme Court disagreed. Focusing on the language of §§ 109(a), 106(3), and 602(a) it found that § 602(a)’s bar on importation was an infringement of the § 106(3) right to distribute.33 Further, it reasoned that all the rights granted in § 106 “are limited by the provisions of §§ 107 through 120.”34 Applying this reasoning to the question of “whether the ‘first sale’ doctrine endorsed in section 109(a) is applicable to imported copies,” the court unanimously held that once a copyright owner places an item in the stream of commerce by selling it he has exhausted his exclusive right to distribute.35
Justice Ginsburg joined the majority opinion and filed a two sentence concurrence: “This case involves a ’round trip’ journey, travel of the copies in question from the United States to places abroad, then back again. I join the Court’s opinion recognizing that we do not today resolve cases in which the allegedly infringing imports were manufactured abroad.”36 Her concurrence presaged or precipitated the next legal frontier for producers seeking to curtail parallel imports.
IV. Parallel Import Decisions After Quality king
Few round-trip parallel import cases have been brought in the decade since Quality King was decided. Most cases citing to Quality King rely on it for its explanation of the first sale doctrine.37 Cases raising Justice Ginsburg’s question have been primary decided on summary judgment at the district court level. Only one case, Omega v. Costco.,38 has been heard on appeal. The post-Quality King cases include plaintiffs seeking to protect the value of their copyrighted works and plaintiffs using copyright law to protect pricing and exclusive distribution programs. Most of these turn on questions of law so the factual records are often less than full.
The following summaries illustrate the parallel import scenarios, legal reasoning, and outcome of the relevant cases decided since Quality King.
Pearson Educ., Inc. v. Jun Liao39
Pearson owns copyrights in textbooks in both the U.S. and foreign jurisdictions. The U.S. editions are manufactured in the U.S. and the foreign editions are manufactured outside of the United States. The foreign manufactured editions are intended by Pearson for sale exclusively outside the U.S. Liao purchased foreign editions of the textbooks and resold them in the U.S. This is not a round-trip parallel import. It is analogous to the hypothetical market allocation agreement postulated in Quality King.
Pearson sued for infringement under § 106, the exclusive right to distribute and prevailed on a motion for summary judgment. The decision turned on where the materials were manufactured. The outcome accords with Quality King but the reasoning relied on the pre-Quality King decision in BMG Music v. Perez.40BMG held that the first sale doctrine does not provide a defense to infringement under § 602 for goods manufactured abroad.The court concluded “that application of the first sale defense to all cases would vitiate section 602(a).”41
Omega S.A. v. Costco Wholesale Corp.42
Omega, a Swatch brand, manufactures watches in Switzerland and sells them through authorized dealers.43 Costco was not authorized to deal in Omega watches.44 Omega sold a shipment of Swiss-made watches to a foreign distributor. Through third-party sales, the shipment made its way to a U.S. distributor. This distributor sold the shipment to Costco, who sold the watches in its retail stores. Because the watcher were manufactured in Switzerland they are not a round-trip parallel imports.
Omega adds an interesting twist to this case. Engraved on the back of the watches was a one-half centimeter “Omega Globe,” a simple design consisting principally of three Greek “Omega” symbols inside a circle.45 The Omega Globe is registered as a copyright with the United States Copyright Office.46 The highest ranking representative of Omega’s U.S. affiliate testified that the Omega Globe was not designed or used for any creative purpose.47 Omega used it specifically to control the importation of Omega watches and “to prevent unauthorized dealership.”48
Omega sued Costco alleging infringement under §§ 106(3) and 602(a). Both parties moved for summary judgment. Costco claimed the first sale doctrine barred any claim of infringement. The district court accepted this defense and ruled in favor of Costco.
Omega appealed.49 It argued that Quality King does not overrule Ninth Circuit precedents50 that hold the first sale doctrine is only available as a defense where the disputed works were “either made or previously sold in the United States with the authority of the copyright owner.”51 Costco argued that holding is inconsistent with the the plain language of the statute and its legislative history.52 Most compelling, in the court’s eyes, is Costco’s contention that under this interpretation copyright owners have an incentive to produce their copyrighted materials abroad. This absurd result, Costco argued, militates against a first sale doctrine that turns on the location of manufacture and for a doctrine that turns on the location of the first sale.53
Despite the potential of this absurd result, the Ninth rejected Costco’s argument and held “that Quality King did not invalidate our general rule that § 109(a) can provide a defense against §§ 106(3) and 602(a) claims only insofar as the claims involve domestically made copies of U.S.-copyrighted works.”54
Swatch S.A. v. New City Inc.55
This case is similar to the Omega case in that it involves watches and the same plaintiff. The watches at issue were manufactured and first sold abroad. Like Omega, this too was not a round-trip case. New City Inc. a U.S. reseller acquired a shipment of Swatch watches not authorized for importation into the U.S. The watches were then sold without Swatch’s consent.56 Swatch sued for infringement under § 602(a) and prevailed on a motion for summary judgment.57
New city, argued “that the first sale doctrine set forth in § 109(a) bars all claims of copyright infringement against lawful owners who resell copyrighted works — regardless of the importation protection provision of § 602(a).”58 The court rejected New City’s reading of Quality King as overly broad.59 Where the goods were manufactured, the court noted, distinguishes Swatch from Quality King. It explained that “[h]ad the goods not been manufactured domestically, § 109(a) would not have applied.”60
O’Well Novelty Co. v. Offenbacher, Inc.61
O’Well, a Taiwanese exporter, hired a Chinese artist to create sculptures of lighthouses. O’Well directed a Taiwanese manufacturer, Chiu Yi, to produce the sculptures.62 O’Well owned part of Chiu Yi.63 O’Well sold the sculptures to Offenbacher. When O’Well could not keep up with demand. Offenbacher began buying virtually identical sculptures from Taiwan Novelty Co., who was buying them from Chiu Yi. This too is not a round-trip scenario.
O’Well, to prevent the sales by Taiwan Novelty to Offenbacher, registered copyrights in the sculptures and sued, claiming Offenbacher violated O’Well’s § 106 distribution right and § 602(a) importation right.64 O’Well moved for summary judgment.
The court analyzed whether the first sale doctrine applied by asking whether the sale of the sculptures by Chiu Yi to Taiwan Novelty was authorized by the copyright owner—O’Well.65 “[I]f the [statues] were legitimately acquired, Taiwan Novelty is free to sell [them] to any party it wishes and those parties are free to distribute them further.”66 The ultimate of this case is unknown. Questions of fact remained so the court did not grant the motion for summary judgment, but the the court’s interpretation of § 109 is clear—as long as the first sale was authorized, without respect to where it occurred, then the first sale doctrine applies.67 This only case to be decided not on the location of manufacture but instead on whether the copyright holder authorized the sale.
The lower courts have attempted to answer the question raised and left open in Ginsburg’s concurrence—whether copyrighted material manufactured abroad may trigger the first sale doctrine. Not surprisingly the answer to this question is unclear. The scant case law and factual records tend towards the notion that only U.S. manufacture materials first sold in the U.S. trigger the § 109(a) first sale doctrine. Copyrighted materials manufacture abroad do not. Leading commentators generally agree. William Patry, Melville and David Nimmer all agree that § 602(a) give copyright owner the right to exclude parallel imports.68
But the Supreme Court has a history of circumscribing intellectual property rights with respect to parallel imports. And the court is not the only entity that may answer the question. Congress may settle the question by amending the statutes. Or the question may be answered on the international stage. Tensions caused by the disparity in prices charged in developed and developing nations could prompt changes in exhaustion policies.
Under the Wipo Copyright Treaty, signatory nations are free to establish their own exhaustion regimes. If consumer concern over disparate pricing grows, so to will support for regional or international exhaustion.
Another phenomena, digital distribution of copyrighted material, may push nations towards international exhaustion, or perhaps so blur the distinction between domestic and foreign manufacture that domestic exhaustion based on manufacture is untenable. Consider a French movie sold on a U.S. website and downloaded from a U.K.-based server. Where was the copy manufactured? The answer does not come easily. But the answer may be irrelevant. Digital distribution with its DRM and click-through end user licenses agreement may obviate the question altogether and allow copyright owners to achieve what they could not in the century since Bobbs-Merrill—perfect price control. When copyrighted material is licensed instead of sold the license its may dictate what the licensee may do with the material.69
In short until the law in this area is settled by the court, the legislature, or by treaty the location of manufacture is probably the dispositive factor when determine whether a copyright owner may bar parallel imports.70
Appendix A: Parallel Import
Factors, likely outcomes, and relevant case law.
Initial sale in U.S.
Initial sale abroad
Materials Manufactured in U.S.
First sales doctrine applies. SeeBobbs-Merril. Note: there is no importation.
First sales doctrine applies. SeeQuality King.
Materials Manufactured abroad
First sales doctrine applies. But SeePatry.
Split of authority. Omega, (first sale doctrine does not apply); O’Well Novelty, (when the copyright owner authorizes the initial sale then the doctrine applies.)
1Quality King Distribs. v. L’Anza Research Int’l, 523 U.S. 135 (1998).
2Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908). Bobbs-Merrill, a book publisher, sought to control the resale price of its books by including a notice in the books proscribing sale of the book for less than $1. Macy’s (Straus) sold the book for $.89 and Bobbs-Merrill sued.
4 “Notwithstanding the provisions of section 106 (3), the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” 17 U.S.C. § 109(a).
5Novell, Inc. v Unicom Sales Inc., 2004 U.S. Dist. LEXIS 16861 at *13 (N.D. Cal. 2004).
6Action Tapes, Inc. v. Mattson, 462 F.3d 1010, 1012 (8th Cir. 2006)
7K Mart Corp. v. Cartier Inc., 486 U.S. 281 (1988) (“A Customs Service regulation, 19 C.F.R. § 133.21(c) (1987) provides an “authorized-use” exception, which permits importation of gray-market goods where the articles of foreign manufacture bear a recorded trademark or trade name applied under authorization of the U.S. owner.”)
8BBS Kraftfahrzeugtechnik AG and BBS Japan, Inc. v. Rasimex Japan, Inc., Supreme Court Heisei 7 (o) No. 1988 (July 1, 1997), J. of S. Ct., No. 1198 (July 15, 1997) (Japan doesn’t recognize international exhaustion, but the outcome treats the parties as though international exhaustion is recognized); Fuji Photo Film Co. v. ITC, 474 F.3d 1281, (Fed. Cir. 2007) (patent rights were exhausted with respect to goods first sold in the U.S., but were not exhausted with respect to the goods first sold abroad.)
9See generally the Miller-Tydings Act of 1937, 15 U.S.C. § 1 (legalized retail price maintenance, allowing manufacturers to maintain minimum prices for the sale of their goods); the McGuire Act of 1952, 15 U.S.C. § 45(a) (provides that contracts prescribing minimum or stipulated prices for the resale of a trademarked commodity shall be exempted from the operation of the Federal Anti-Trust Laws). Both were repealed by the Consumer Goods Pricing Act of 1975.
11FTC v. A. E. Staley Mfg., 324 U.S. 746, 757 (U.S. 1945)
12 The terms gray-market and parallel imports are also used to describe trademark or patented goods.
13 2-8 Nimmer on Copyright § 8.11. “Contract law has proven inadequate to redress this situation, given that relief is available only against parties with actual knowledge of territorial limitations in the contract between the original grantor and grantee.” Citing Johnson & Johnson Prods., Inc. v. Dal Int’l Trading Co., 798 F.2d 100 (3rd Cir. 1986).
14Id. “Having lost in other fields of law, manufacturers are now realizing that copyright may furnish a supplemental vehicle for protection.”
37 For an amusing read on pro se copyright litigation consider Kettenburg v. Univ. of Louisville, 2005 U.S. Dist. LEXIS 12170 (W.D. Ky. June 16, 2005). The opinion cites to a Quality King footnote, explaining the VARA.
50BMG Music v. Perez, 952 F.2d 318 (9th Cir. 1991) (“The words ‘lawfully made under this title’ in § 109(a) grant first sale protection only to copies legally made and sold in the United States.”); Parfums Givenchy v. C & C Beauty Sales, 832 F. Supp. 1378 (C.D. Cal. 1993).(“The first sale doctrine cannot apply to actions such as an action for infringement under 17 U.S.C.S. § 602(a). 17 U.S.C.S. §§ 106(3), 109(a), and 602(a) all rest on the principle that the copyright owner is entitled to realize the full value of each copy or phonorecord upon its disposition. Applying the first sale doctrine to actions for unauthorized importation of goods manufactured and first sold abroad would violate this principle and defeat Congress’s intent, in enacting § 602(a), to expand importation protection for copyright owners so as to avoid circumvention of the distribution right.”) aff’d sub nom. Parfums Givenchy v. Drug Emporium, 38 F.3d 477 (9th Cir. 1994) (“Sales abroad of foreign manufactured United States copyrighted materials do not terminate the United States copyright holder’s exclusive distribution rights in the United States under 17 U.S.C.S. §§ 106, 602(a).”)
The Ohio Rules of Professional Conduct should be amended to emphasize that disclosure and informed consent do not cure all conflicts of interest. The current rules allow conflicts of interest to be waived by providing full disclosure and obtaining informed consent. Likewise, the Supreme Court of Ohio’s opinions hold that attorneys can avoid sanctions by simply disclosing their conflicts of interest. But two arguments militate against disclosure as a cure-all. First, the underlying assumption that clients are capable of evaluating the disclosed risks and adjust their behavior accordingly is only warranted when clients are sophisticated. Second, empirical evidence suggests that disclosure may exacerbate the bias created by conflicts of interest.
The touchstone of the attorney-client relationship is the belief that the attorney represents the client’s interest and that this representation is not diluted by conflicting interests. The Rules prohibit attorneys from accepting or continuing representation if a conflict of interest exists. ((Ohio Prof. Cond. Rule 1.7(b) (2007).)) Rule 1.7(a) states a conflict of interest is created when
(1) the representation of that client will be directly adverse to another current client;
(2) there is a substantial risk that the lawyer’s ability to consider, recommend, or carry out an appropriate course of action for that client will be materially limited by the lawyer’s responsibilities to another client, a for a third person or by the lawyer’s own personal interests.
Rule 1.8(a) uses similar language to describe conflicts of interest that may arise between the client’s interest and the attorney’s own “ownership, possessory, security, or other pecuniary interest.” ((Ohio Prof. Cond. Rule 1.8(a) (2007).)) Rule 1.9(a) proscribes representation of a new client when “that person’s interests are materially adverse to the interests of the former client.” ((Ohio Prof. Cond. Rule 1.9(a) (2007).))
The rules detail some situations in which conflicts cannot be waived by the client. These conflicts are not distinguished by a single principle but are based on value judgments by the drafters. ((Jack A. Guttenberg and Lloyd B. Snyder, The Law of Professional Responsibility in Ohio, 1998. § 10.2.))
The comments to Rule 1.7 begin by asserting “[t]he principles of loyalty and independent judgment are fundamental to the attorney-client relationship and underlie the conflict of interests provisions of these rules.” These principles should guide and inform the drafting and interpretation of the rules governing conflicts of interest. But Rules 1.7, 1.8, and 1.9 each allow attorney’s to accept or continue representation despite a conflict of interests. If the conflict is fully disclosed and the affected client provides written informed consent. These exceptions are not consistent with the principles asserted in the comments. They undermine the principles by allowing clients, perhaps unwittingly, to waive the loyalty and independent judgment which they expect from an attorney.
Investing the client with the power to waive the conflict of interests is predicated on the assumption that the client “is capable of weighing the risk of the conflict against the value of the representation.” ((Id.)) But this assumption is likely unfounded except when attorneys are working with the most sophisticated and least vulnerable clients.
Consider Disciplinary Counsel v. Rafidi. ((Disciplinary Counsel v. Rafidi, 114 Ohio St. 3d 336 (Ohio 2007).)) An attorney agreed to represent two suspects in a drug cartel investigation. The attorney agreed to represent the first for a $200 flat fee. From this first client the attorney learned that a second suspect in the same matter also needed representation. The attorney offered his services to this second suspect, who agreed to a $20,000 retainer. This created an obvious conflict of interest: one suspect might choose to implicate the other.
Both clients made their decisions to hire the attorney while in police custody with no readily apparent alternatives.
The Supreme Court of Ohio suspended the attorney for six months based on this and other related ethical violations. The court stated the attorney “had an obligation under DR 5-105(A) ((The Supreme Court of Ohio Task Force on Rules of Professional Conduct indicates that Ohio Code of Professional Responsibility DR 5-105(A) was replaced by Ohio Rules ofprofessional Conduct Rule 1.7. http://www.sconet.state.oh.us/Atty-Svcs/ProfConduct/proposal/rule_updates_102805/appendix_c.pdf (last visited Dec. 7, 2007).)) to fully disclose to [his potential clients] his dual representation and to obtain the consent of both clients.” ((Rafidi, 114 Ohio St. 3d at 336.)) This holding indicates that the potential conflict of interest could have been cured by a disclosure.
To illustrate the effect of the conflict the Court noted the attorney focused his attention on the higher paying client. The original client had to call the attorney to find out that he was still a suspect.
The full disclosure may have saved the attorney’s disciplinary record but it is unlikely that disclosure would have changed the behavior of the clients or the attorney. It is unlikely that the disclosure would have compelled the attorney to call his $200 client any sooner. The Court’s opinion notes that the $200 client had previously retained the attorney for another unrelated matter and that the client contacted the attorney for advice in the criminal matter because “he was the only attorney [he] knew”. ((Id.)) This statement reveals that the $200 client was not a sophisticated client and that the full disclosure of the conflict would probably not have inspired the $200 client to seek alternative representation.
The findings of the Board of Commissioners on Grievances and Discipline suggest the second client was not in a position to properly evaluate the disclosed conflict or to seek alternative representation either. The Board noted that “persons who are incarcerated on criminal charges have restricted access to legal representation and are vulnerable to overreaching and improper solicitation”. ((Id. at 336, 338.)) The mere disclosure would not have assured either client of the “loyalty and independent judgment [that] are fundamental to the attorney-client relationship.” ((The Law of Professional Responsibility in Ohio, supra note 4.))
In Disciplinary Counsel v. Jacob ((Disciplinary Counsel v. Jacob, 109 Ohio St. 3d 252 (Ohio 2006).)) the Supreme Court of Ohio again implied that disclosure could cure a conflict of interest. In Jacob the attorney represented husband and wife clients. After the husband and wife separated, the attorney helped the husband remove the wife as a beneficiary from a trust and advised the husband to protect some of the husband’s assets from the wife. Subsequently, the attorney accepted representation of the wife. He removed the husband from her will. The attorney did not disclose to the wife his representation of her husband on similar matters. Consequently he did not secure informed consent. For this failure the Court sanctioned the offending attorney.
As in Rafidi the attorney could have saved his good name by disclosing the conflict but it is not clear the wife’s interests would have been any better served. Considering her existing relationship with the attorney, an attorney she trusted, the disclosure of the conflict may not have inspired the wife to seek alternative counsel.
Scholars expert in the effects of disclosure suggest that disclosure often has then effect of building trust instead of encouraging the client discount honesty an loyalty of the relationship. ((Daylian M. Cain, George Loewenstein, and Don A. Moore, The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest, 34 J. Legal Stud. 1, 6 (2005).)) The disclosure by the conflicted party is often viewed as an act of honesty. This act engenders trust and reduces the likelihood that biased advice will be appropriately discounted.
The Rafidi opinion illustrates this effect. The Court cited the attorney’s full disclosure of the offense to the Board as a mitigating factor. In other words the disclosure increased the attorney’s esteem in the eyes of the Court.
Besides engendering misplaced trust or esteem, disclosure may exacerbate the bias inherent to conflicts of interest. In a recent empirical study of the effects of conflicts of interest researchers concluded that disclosure benefited the disclosing party and harmed the party seeking advice. This conclusion was reached by testing three scenarios involving “advisors” and “estimators.” The advisors, analogous to attorneys, provided advice to the estimators, analogous to clients, regarding the value of a jar of money. The estimator was afforded only a glance at the jar, but the advisor had time to thoughtfully inspect the jar.
In the first scenario both the advisor and the estimator earned money based on the accuracy of the estimator’s estimate of he value of the money in the jar. The advisor was rewarded for giving helpful advice. The more accurate the estimate, the more money both parties earned. There was no conflict of interest in this scenario.
In the second scenario the estimator was compensated the same way but the advisor was rewarded for misleading the estimator. The less accurate the estimate, the more money the advisor received and the less the estimator received. In this scenario the estimator was not aware that the advisor had a conflict of interests. Not surprisingly the advisor’s advice was misleading and the estimator’s estimates were less accurate. In this scenario the estimators earned less money than they did in the first scenario.
In the third scenario the incentives remained the same as in the second, but in this scenario there was full disclosure. The estimator knew that the advisor had a conflict of interest; that the advisor had an incentive to mislead the estimator. Again not surprisingly the estimator received misleading information. But what is surprising and significantly undermines the belief that disclosure cures conflicts is that the estimators faired worse when the conflict was disclosed.
Based on a statistical analysis of the data the researcher offer two explanations. First, that it is difficult to properly discount advice tainted by a conflict of interests. This difficulty was not abated by repeated experiences. ((“the results provided no grounds for concluding that either experience with the task or feedback lessened the biasing effects of disclosure.” The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest, supra note 13.)) Second, that advisors were more willing to give self serving “advice” when the estimator was on notice of the conflict. The disclosure shifted responsibility from the advisor to the estimator.
In short the researchers found that estimators (clients) faired the best when there were no conflicts of interest and that they faired the worst when conflicts were disclosed. Advisors faired the best when their conflicts were disclosed.
This research combined with the holding by the Supreme Court of Ohio that disclosure can cure conflicts of interest shows that the Ohio Rules of Professional Conduct should be amended to reduce the questionable perception that disclosure can cure a conflict of interests. Attorneys have only their good name. Similarly, the profession has only its reputation. The Rules are one way that this reputation is upheld. By reducing reliance on disclosure to cure conflicts of interest the Rules can protect and enhance the reputation of the profession.
In a recent paper two legal scholars explore the question, “How do judges judge?” There conclusion may not be surprising to all. They conclude that
“judges, like everyone else, have two cognitive systems for making judgments—the intuitive and the deliberative—and the intuitive system appears to have a powerful effect on judges‘ decision making. The intuitive approach might work well in some cases, but it can lead to erroneous and unjust outcomes in others.”
The authors propose several steps to help judges avoid erroneous intuitions—checklists and more time to deliberate.
An interesting argument was put forth at this week’s UC College of LawFederalist Society meeting. Professor Eugene Kontorovich of Northwestern Law gave a talk on the “The Quasi-Legality of Israel’s Annexation of the Golan Heights and Occupation of the West Bank”. As an aside he stated the US Government is the result of a coup. Prof. Kontorovich made this argument to support his view that at some point the facts on the ground must be acknowledged:
The Articles of Confederation required a unanimous vote of all member states.
The current US Constitution was adopted by the state without a vote on the Articles of Confederation.
This syllogism is tempting but the ratification of the Constitution by each state that was party to the Articles of Confederation is in implicit unanimous amendment to the Articles replacing them with the Constitution.
This is not to say that the facts on the ground need not be acknowledged. In general the longer a situation persists the more acceptable it becomes—eventually to the point that it becomes accepted.