Did Pennsylvania Just Endorse “Judgment Arbitrage”?

The process of recognizing and enforcing foreign-country judgments has emerged as a critical issue in international business. Human rights groups see foreign and domestic courts as playing an indispensable role in holding multinational corporations accountable when they operate in developing countries, while those businesses worry that vulnerable foreign legal systems are being exploited to shake them down for political purposes. Somewhat more prosaically (but in my view more significantly on a day-to-day basis), the cross-border share of global capital flows has become enormous and with it has grown the need to more clearly define the standards that determine whether a judgment rendered in one country can be enforced against assets located in another. Judgment enforcement tends to be dictated by sources of domestic law and in the US is normally governed by state law.

In a recent decision in a judgment enforcement case, Standard Chartered Bank v. Ahmad Hamad Al-Gosaibi & Bros. Co., the Pennsylvania intermediate state appellate court held that a New York judgment recognizing a foreign money judgment was enforceable in Pennsylvania. This is significant in part because of the scope of the ruling: the court held that a foreign-country money judgment, once recognized by a single US court, is – poof! – rendered enforceable by a court in any other. The force of this holding is all the more potent considering that New York lacked personal jurisdiction over the judgment debtor. So a court can render a judgment compelling a party over which it lacks jurisdiction to pay a bunch of money, and then another court – in this case, one that appears to have jurisdiction – must enforce it.

This is a strong endorsement of the possibility of what I have called “judgment arbitrage.” In “Ending Judgment Arbitrage: Jurisdictional Competition and the Enforcement of Foreign Money Judgments in the United States” (which the court cited), I explain the implications of the fact that the law governing the process of collecting on a foreign judgment in the United States formally consists of two stages – recognition and enforcement – that do not need to occur in a single forum or under a single forum’s law. I posit judgment arbitrage as a natural, rational exploitation of that system: a judgment creditor can be expected to seek recognition in one US state and enforcement in a second where doing so serves its interests. (While creditors normally bring recognition and enforcement actions in a single proceeding, they are not obligated to.) Where, for example, the bulk of the debtor’s assets are located in a state where the recognition law is less creditor-friendly, the creditor may choose to bring a recognition action in a pro-creditor jurisdiction and then an enforcement action where those assets lie. That does not appear to be what happened here – New York and Pennsylvania use the same recognition statute, the 1962 Uniform Foreign Money-Judgments Recognition Act – but while the court notes this fact it does not condition its holding on the identity of the two states’ recognition laws.

When I developed the theory of judgment arbitrage, some questioned whether it really exists. My intuition, informed by my experience practicing transnational litigation, was that judgment creditors litigating enormous judgments are very sophisticated actors who would probably consider the option where it’s available, and so I set out to try and see if I could find a case where it had been used successfully. (I did not encounter sister-state judgment arbitrage while in practice.) The article cites (at p. 478) a practice manual that endorses its use, but I couldn’t find a reported case where it had actually been approved. I had noted in the article (e.g., at p. 478-80) that by definition judgment arbitrage is the kind of phenomenon for which it is hard to find traditional legal sources, because it will tend to result in confidential settlements rather than reported decisions, and further explained this challenge in a symposium the journal later held on the article. Although I was confident in my analysis of the relevant legal sources, it would have been nice to be able to point to something more concrete to demonstrate the availability of judgment arbitrage.

The Standard Chartered decision is a pretty solid data point in favor of judgment arbitrage. The opinion does a few things I had said courts might do when confronted with an enforcement action implicating three forums: a foreign merits forum (F1, here Bahrain), a US state recognition forum (F2, here New York), and a US state enforcement forum (F3, here Pennsylvania). Specifically, it endorses the enforcement by F3 of an F2 judgment recognizing the original F1 foreign judgment. And in so doing, the decision offers an energetic and thorough defense of the duty states possess to enforce one another’s judgments under the Full Faith & Credit Clause, both as a matter of constitutional law and public policy. It even says that Pennsylvania will enforce a sister-state recognition judgment where doing so would contradict Pennsylvania public policy, in the name of national unity. It emphasizes that this includes cases when the merits are litigated abroad, in F1. This is consistent with my argument in “Ending Judgment Arbitrage” (see, e.g,. pp. 488-91) that while the judicial duty to enforce sister-state judgments is far from absolute as a matter of constitutional law (the Supreme Court said in Pink v. AAA Highway that it is “not an inexorable and unqualified command”), courts often construe it to be very robust. This court not only doesn’t push back on the scope of that obligation, it offers a powerful and clear endorsement of it – and specifically of the duty to enforce sister-state judgments where the underlying judgment originates in a foreign country.

Here are some passages that support judgment arbitrage (all pages cite to the slip opinion):

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Petty Tyrants Rejoice

Today, Yelp appears to have removed almost 1,000 reviews of the Union Street Guest House, many of which were negative and stemmed from the controversy that was the subject of my post this morning. As of about 4:15PM ET, the hotel’s average Yelp review was up to 2.5 stars, from 1.5, and there were 15 total reviews, down from almost 1,000 as recently as yesterday.

I can’t say I like this outcome. Much like the original dispute between consumers and the Union Street Guest House, any grievance over Yelp’s decision is likely to sound in contract law. While I argued that that body of law would probably produce a “pro-consumer” result (by prohibiting USGH from enforcing its policy), I think in any dispute over Yelp’s decision contract law would not be of much help to consumers.

Henry VIII was a not-so-petty tyrant.

Henry VIII was a not-so-petty tyrant.

Review controversies are a flashpoint for Yelp. Both the company and individual Yelpers have been sued repeatedly over reviews, often by business owners annoyed by what they regard as unfairly negative or even defamatory reviews (or alternatively, for fluffy Yelping by the friends and family of competitors). A few weeks ago, a businessman-plaintiff notched some progress against Yelp in a California appeals court.

Some of this litigation turns on fine distinctions that only matter to those who follow this stuff – for example, the California lawsuit alleges that the company misrepresented the accuracy and efficacy of its review filter, not that it improperly filtered reviews in the first place – but to the average consumer or business, that will seem like hair-splitting. The key question for most people is the scope of Yelp’s discretion in deleting or promoting reviews.

Yelp’s discretion is vast, by design. The company is publicly held and, as one would expect, it appears to use seasoned lawyers to draft important disclosures and agreements.

Yelp’s Terms of Service are characteristically broad for a social media company. They tell users that “you hereby irrevocably grant us . . . rights to use Your Content for any purpose(emphasis mine). Just to make the definition of “use” completely clear, they specify that “[b]y ‘use’ we mean use, copy, publicly perform and display, reproduce, distribute, modify, translate, remove, analyze, commercialize, and prepare derivative works of Your Content” (emphasis mine). In other words, the right “to use . . . Your Content” includes the right “to remove” your reviews, or for that matter do just about anything else they want to with them. Well then.

It’s possible these terms could be held to be unenforceably vague or unconscionably broad in some instances, but I doubt that would happen here. (If Yelp sought to “use” your profile picture to market pornography, you might have a case.) So if a private citizen or regulator complains about Yelp deleting Union Street Guest House reviews, you can expect the company to cite these terms while gesturing in the direction of higher principles, like improving accuracy by working to ensure that its reviews are written only by actual customers. If you were to note that many reviews of actual customers appear to have been deleted as well – which I strongly suspect has happened in this case, given that (as sorting by date reveals instantly) Yelp has removed all reviews posted between April 3, 2014 and August 5, 2014, inclusive – they would surely lean on their prerogative, under the ToS, to delete any of Your Content. This is before considering the effect of any statutory privileges that may protect Yelp.

Abstracting back from Yelp’s rights to first principles, it seems sensible, on one hand, for a company to limit reviews to actual customers (if that’s what Yelp is trying to do); one can see why Yelp wouldn’t want a ton of random people with no connection to a place commenting on it. Cf. hearsay. On the other hand, it’s a shame that reviews that discuss an official policy of the establishment aren’t allowed unless someone has patronized it. And what does “patronize” mean, anyway? Buy something? Stay the night? Surely a review site would want to let someone who walked in, or called, and was denied service because of his appearance or accent say as much in a review. How to answer these questions is up to Yelp. Whatever their internal policies, I suspect they have to make a lot of judgment calls. In the end, a contract-based analysis is unlikely to do a lot of “pro-consumer” work here.

But not all is lost. If you patronized Union Street Guest House and wrote one of those now-deleted reviews, you can feel a sense of pride in “Your Content” being nobly sacrificed in the war against petty tyranny.

The Risks of Finding a Father for Your Child on Craigslist

[cross-posted from The Conglomerate]

The Risks of Finding a Father for Your Child on Craigslist
Posted by Greg Shill

Before returning to the legal boundaries of monetary policy, I wanted to briefly highlight some interesting contract and regulatory issues lurking just beneath the surface of an unusual Kansas state court order declaring a sperm donor to be the legal father of a child, against the wishes of all persons involved.

The facts of the case, decided last month and covered nationally (news accountorder (PDF)), are straightforward and undisputed:

In 2009, a Topeka man answered a Craigslist ad soliciting sperm donations. The ad was placed by a lesbian couple, Jennifer Schreiner and Angela Bauer. The man supplied a donation. Schreiner became pregnant and delivered a baby. Schreiner began receiving Kansas welfare benefits for the child. Seeking child support payments, the state sued the sperm donor to establish paternity. The state argued that the donor—who lacks any relationship with the child or the couple (now estranged) beyond supplying the donation—was the child’s legal father, and therefore must pay child support.

This is where the case gets interesting as a matter of private ordering and trade regulation.

Prior to the donation, all persons involved—the donor and both members of the couple—signed a non-paternity agreement in which the donor waived his parental rights and was released from his parental obligations.

Both mothers opposed the state’s campaign to declare the donor the child’s legal father.

Nevertheless, the court granted the state’s paternity petition, which means it can now seek to compel the donor to provide child support. The paternity finding also appears to give the donor a good shot at asserting parental rights (though he seems unlikely to try).

Justifying its decision to ignore the wishes of both parents and the donor, the court intoned:

A parent may not terminate parental rights by contract, however, even when the parties have consented.

Well, maybe this case is a morality tale about those who would seek a father for their child on Craigslist. A warning from a heartland state to those who would selfishly try to contract around their sacred parental obligations. A sign that courts place the welfare of the child above all else. Right?

Haha, of course not!

Kansas law makes it easy to conclusively terminate the parental rights and obligations of sperm donors by contract. Care to guess what you need to do, besides sign a contract?

Pay a doctor.

The court explained:

Through K.S.A. 23-2208(f) [PDF], the Kansas legislature has afforded a woman a statutory vehicle for obtaining semen for [artificial insemination] in a manner that protects her and her child from a later claim of paternity by the donor. Similarly, the legislature has provided a man with a statutory vehicle for donating semen to a woman in a manner that precludes later liability for child support. The limitation on the application of these statutory vehicles, however, is that the semen must be “provided to a licensed physician.” [FN1] (emphasis added)

The parties failed to do this.

So, the upshot is that you are free to find a father for your child on Craigslist—and you can even count on the State of Kansas to keep him out of your child’s life in the future—so long as you hire a doctor to do the procedure. Similarly, you can spend your free time fathering children on Craigslist without losing sleep over child support suits—as long as you kick some of the action upstairs to an M.D.

It’s not just Kansas; California, Illinois, and as many as 10 other states [FN2] follow the same law, the Uniform Parentage Act of 1973.

I’m not a family law expert, but it seems to me that a complete list of legitimate and unique public policy concerns that are implicated when a couple and a third-party sperm donor settle their parental obligations by contract looks something like this:

  1. Ensuring that the state can identify who can be held legally responsible for supporting the child.

Nevertheless, let’s assume there are also truly compelling public health reasons to involve a physician in artificial insemination. After speaking with a few doctors, I’m skeptical that this is the case, but even if it were here are ten points that I think are worth considering:

  1. Should a mother who became pregnant by artificial insemination be forced to share parental rights with a stranger who donated sperm simply because she decided not to hire a doctor for the procedure?
  2. Conversely, should the scope of a sperm donor’s rights and responsibilities as a father turn on the decision whether to enlist a doctor to oversee the procedure?
  3. Should the adequacy of a child support scheme turn on whether couples using sperm donors choose to hire a doctor?
  4. There are sound public policy reasons to be concerned about voluntariness in agreements that waive paternity. But if this case is really about ensuring voluntariness, why is enlisting doctors the solution? Establishing consent during contract formation is not some novel problem. Hiring a doctor is a novel solution, but as an evidentiary device it is not very probative.
  5. Hiring doctors for artificial insemination is not cheap. A single attempt through a physician’s office costs about $3,000, and sometimes multiple attempts are necessary. Unsurprisingly, theAmerican Fertility Association (a trade group for the fertility industry) applauded the court’s decision.
  6. This rule looks even more like an attempt to extract rents when you consider that for many people, the price of artificial insemination without physician assistance may be zero.
  7. If the state interest in the use of doctor-assisted artificial insemination is so compelling, maybe the law should simply require it on penalty of criminal sanction. I have never even heard this idea floated, probably because it would be perceived (rightly) as an excessive intrusion on various important freedoms…
  8. yet while they do not provide criminal sanctions, about 13 states are willing to provide unbelievably harsh “family-law sanctions.” If a woman declines to hire a doctor, she is placing herself and her child in eternal jeopardy; at any time, the donor or the state can move to declare the donor to be the legal father, which would put the donor in a position to seek full parental rights—even if he is a stranger. (The same is true in reverse re: child support.) It is unsurprising that both mothers opposed the state’s petition.
  9. Although facially neutral, this rule is almost certainly discriminatory in practice. It means that lesbian couples must either hire a doctor or adopt—there is no other way they can safely preclude the donor from being granted parental rights. And of course this is just one of many unofficial taxes gays and lesbians must pay, especially in states like Kansas that do not allow them to marry. It seems to me that there’s a good argument the law should fail rational basis or equal protection review, but I will leave that brief to the con law scholars.
  10. Finally, beyond any constitutional infirmity, this law should serve as a reminder that protectionist regulations—which often take the form of onerous occupational licensing restrictions and NIMBY zoning rules—frequently have regressive distributional consequences, because they tend to favor powerful incumbents. And although probably not the case here, such laws can harm the broader economy as well by stifling innovation.

I welcome your comments. And I hope my doctor friends still talk to me.

* * * *

[FN1] It should be noted that under the letter of the statute as well as a 2007 Kansas Supreme Court decision (PDF) on this issue, the court did not have an obvious alternative to finding for the state. The problem, such as there is one, is with the statute.

[FN2] An accurate count is not possible without doing a full 50-state survey. As I have written about previously, the Uniform Law Commission’s Enactment Status Maps are often unreliable or imprecise (see FNs 163 & 188).