• Apple's Side-Step on Income Taxes

    The headquarters for Apple’s income investment is not the Silicon Valley – it is found in a small office in Reno, Nevada and is known as Braeburn Capital.  Apple does all of its investing of its profits out of this office and this subsidiary because companies pay nothing in income tax in Nevada.  Companies pay 8.84% in taxes in California.  Apple steers as much of its earnings as possible into Nevada, Ireland, the Netherlands, Luxembourg, and even the British Virgin Islands in order to take advantage of lower corporate tax rates in those places.  With a simple office located in these countries and states, an office that does not have the Apple logo, Apple, Inc. is able to reduce its overall tax rate.  As the chart indicates, Apply pays an increasingly lower percentage of its income in taxes.

    High-tech companies are able to shelter more of their income because unlike an auto manufacturer, saddled with physical inventory and dependent upon sales of cars and trucks that are physically identifiable by location, Apple (like Google, Microsoft, and HP) earns a great deal of its income from patents and software.  The physical goods sales are either non-existent or a small part of their earnings.  When you have intellectual property earnings, they are like the cloud – they float above the physical jurisdiction of a state. Tech-based companies, the fastest growing segment of the U.S. economy, are also the least taxed segment of the U.S. economy. 

    Under the U.S. Constitution, states can tax corporations from another states and earnings from domestic corporations doing business in another state only to the extent there is a sufficient nexus (i.e., the companies are doing business in their states) and there is fair apportionment of the income across the various states in which the company does business so that there is not double taxation.  In other words, California doesn’t get to tax Apple on all of its income if Apple can show that the income is generated outside the state of California.  Hence, the Reno office as the central point for managing most of Apple’s investment income as well as its intellectual property royalties. For example, all the income from the songs we download from iTunes is funneled off into countries with zero or low corporate income taxes.

    In response to a Sunday, April 29, 2012 exposé on Apple’s tax strategy, the company released a statement, “Apple has conducted all of its business with the highest of ethical standards, complying with applicable laws and accounting rules.  We are incredibly proud of all of Apple’s contributions.”  Charles Duhigg and David Kocieniewski, “How Apple Sidesteps Billions in Taxes,” New York Times, April 20, 2012, p. A1.

    In Cupertino, California, the assumed headquarters for Apple, its neighbors question the tax strategy.  For example, De Anza Community College, a school that Apple co-founder Steve Wozniak attended, has cut over 1,000 courses and 8% of its faculty because of reduced funding.  Its president describes the college's current status as being in a death spiral and wonders why Apple does everything in its power to avoid paying the taxes that provide the support for a college that has educated so many Apple employees.

    Discussion Starters

    1.      What advantage does Apple gain by having an office in Reno, Nevada?

    2.     What is the constitutional standard for taxation of a corporation’s income?

    3.     Evaluate Apple’s ethics in its income tax strategies.


  • SEC Investigates Hollywood for Possible Bribes in China


    The Securities and Exchange Commission (SEC) has initiated an investigation to determine if Hollywood movie studios are bribing Chinese government officials to secure for their films access to movie screens in Chinese theatres.  Among those contacted by the SEC are 20th Century Fox, Walt Disney Company and DreamWorks Animation. 

    Payments for access are outlawed by the Foreign Corrupt Practices Act (the Act).  It bars companies in this country from making illegal payments to officials of other countries for the purpose of securing an improper advantage, or obtaining or retaining business in those countries.   Additionally,  to underscore the anti-bribery provisions of the Act, it requires companies that do business in other countries to maintain accounting records that accurately reflect the international transactions of the corporation.   

    The chief enforcement agency for the Act is the Department of Justice, with a related role played by the SEC.  Investigations have increased in the last year.  Violations can lead to both criminal and civil penalties, including for business entities a fine up to $2,000,000, and for individuals (officers, directors, stockholders, employees and agents), up to $100,000 and five years imprisonment.    

    To date the investigation has involved letters of inquiry (an investigatory tool that requests information from a party of interest)  to the studios seeking information about potential inappropriate payments, and interactions with specified Chinese government officials.


     The back story is this.  The movie industry in the United States has been experiencing a marked downtown.  Attendance at movies in 2011 was the lowest since 1993.  No surprise then that Hollywood has set its sights on China, which boasts the world’s largest population a/k/a potential movie-goers. Efforts to crack the Chinese market has accelerated in recent years because China has targeted the movie industry for significant growth, including increasing theater construction and upgrading existing movie houses. 

    Chinese law limits the number of foreign-produced films that can be screened there.  In February of this year, China’s vice president visited the United States and met with Vice-President Biden, and the CEOs of DreamWorks Animation and Disney.  The result was a change in Chinese law raising the number of foreign-produced films that can be shown there each year from 20 to 34.  Chinese rules also restrict the portion of box office revenue allocated to movie studies. Following the US visit, China raised the percentage from 15 to 25.

    For more information click here.


    1) Why did Congress set the penalties for violation of the Foreign Corrupt Practices Act as high as it did?

    2)  How do the referenced accounting requirements of the Foreign Corrupt Practices Act support the anti-bribery provisions of that Act?

  • George Lucas, NIMBYs, and No Studio in Marin County

    Quietly over the years, beginning in the 1970s when the money from his films began to roll in, George “Star Wars” Lucas has been acquiring land in Marin County (6,000 acres in total) with the goal of preserving its natural beauty and stopping its development. In fact, 97% of the acreage cannot be developed under deed restrictions. Mr. Lucas has planted 8,000 trees on the land and restored pathways for walking and hiking.

    However, Mr. Lucas always intended to build a studio complex there, a 269,000-square-foot facility that would be located on a little over 1,000 of the acres. The plan has been 27 years in the making and was canceled last week because of what Mr. Lucas called “regulatory delay” and fierce opposition from the neighborhoods around the planned site.  The neighbors (often called NIMBYs for Not in My Back Yard) oppose the facility, known as the Grady Ranch project,  because it would employ 463 people and bring too much noise and traffic into the area. Neighbors indicated that regardless of county approval that they would file suits that would delay the project until their concerns were fully litigated.  More details on the project can be found at Victoria Baret, "Millionaire NIMBYs 1; Billionaire Filmmaker 0,"  Forbes, May 2, 2012, p. 18.

    Mr. Lucas negotiated with the NIMBYs over the years, offering to close down the studio at 11 PM each evening.  He also proposed to spend $70 million to restore creeks and waterways in the area. Mr. Lucas said he simply could not please the NIMBYs or local officials and he was experiencing “death by delay” on the project. Mr. Lucas’s spokeswoman responded to a plea from Marin County officials for Mr. Lucas to reconsider, "In order to stay on schedule for our productions, the decision to move was supposed to have been made in January. We held on a few more months hoping the county would be able to overcome the obstacles. It was clear that the neighbors were going to oppose this with lawsuits that could drag on for another year. We have to move on.”

    The discussion is ongoing and passionate, on both sides.

     Mr. Lucas is going to sell most of the acreage with yet another deed restriction – it can only be used for low-income housing developments.  Oh, how sweet is revenge accomplished through private deed restrictions. 


  • Sloppy Trial Work Means No Restitution for Victim

    Chemical & Metal Industries (C&MI) does recycling work of hazardous chemicals used by various manufacturers. One client is the company Honeywell. In 2003, a Honeywell employee, Delvin Henry, died when he opened a canister that C&MI had mislabeled as containing a non-toxic substance. In fact it contained a highly toxic industrial waste.

    Five years later, a two-count indictment was issued against C&MI by a federal grand jury in federal court in Louisiana. The company was accused of violating 42 USC § 6928 by illegally storing hazardous waste. CM&I was also indicted of violating 42 U.S.C. § 7413 of negligent endangerment that results in death.

    CM&I then agreed to plead guilty to the second charge in exchange for the first charge being dropped. It waived its right to appeal except for any punishment imposed that was in excess of the statutory maximum.

    The district court accepted the agreement and sentenced C&MI to two years of probation, fined the company $1 million, and ordered it to pay $2 million in restitution. CM&I appealed the size of the fine and the award of restitution.

    The court of appeals agreed with CM&I. It had the right to appeal an improper fine. The statutory maximum fine is $500,000. The trial judge cannot increase that to $1 million, so it must be reduced. A larger fine could be imposed only if it was shown that CM&I profited from the incident.

    Restitution must be based on the victim actual losses or damages. The government, in arguing for restitution, admits now that it "failed to meet its burden" to demonstrate the loss suffered by the victim. The government now wants to reargue that issue and present evidence of loss. Too late. "The government generally may not present new evidence on remand when reversal is required due to the failure to present evidence originally." The government failed to take advantage of the opportunity at trial and does not get a second chance.

    Discussion: Does a fine of $500,000 seem adequate for loss of life? The statute would permit restitution, which was botched here, but only allows specific loss. How would tort liability potentially differ from that?


  • Honda Sued for Inaccurate Claims about Civic Hybrid's MPG


    Have you ever bought a car and discovered to your dismay that the miles per gallon (MPG) is much lower than claimed?  Heather Peters of Los Angeles had that exact experience with her Honda Civic hybrid and decided to take the manufacturer to court.  She bought the car based on Honda’s representations that it would get about 50 mpg.  Turns out it averages around 42, but got significantly worse.  The company discovered that the vehicle’s battery sometimes deteriorated and eventually failed earlier than expected.  The manufacturer therefore recommended a software update intended to increase the life of the battery and improve performance.  Peters had her civic hybrid “updated” as advised.  Thereafter the fuel economy dropped below 30 mpg.  Off to Small Claims Court she went. 

    That court is intended for people with claims of limited amounts for which hiring an attorney would not be economically productive.  The maximum permissible claim varies from state to state.  For example, in Arizona and Kentucky it is $2500; in California where this case was pursued the ceiling is $10,000.  In Small Claims Court the procedures followed by the judge are relaxed, enabling litigants to appear without an attorney and not be at a significant disadvantage.  Indeed, in Los Angeles where this case was pursued, parties are prohibited from bringing a lawyer.  This is true for corporations as well.  Plaintiff, a non-practicing attorney, purposefully chose this court to prevent the car manufacturer from bringing a high-priced legal team. She could have framed her case as fraud (intentional misrepresentation by a seller that is relied upon by buyer), breach of express warranty (making an untruthful claim about a product), or negligence (carelessness).

     Honda claimed plaintiff’s low mileage results were due to her driving habits or how she maintains the vehicle. 

    The court disagreed with Honda  and ruled in favor of Ms. Peters.  She was awarded  $9,867.19.  This figure includes the “hybrid premium” she paid in excess of the sticker price, her increased costs for gas resulting from the much-lower-than-advertised mileage per gallon, and the reduced resale value of her car. 

    Peters now maintains a website to encourage other owners to sue Honda rather than join a class action.  The site is www.DontSettleWithHonda.org

     A class action is a lawsuit brought by many plaintiffs who are similarly situated, meaning they all suffered injury from the same wrongful conduct.  Peters’ decision to sue was an alternative to participating in a pending class-action lawsuit brought against Honda by many Civic hybrid owners, all of whom suffered a loss because of the discrepancy between claimed and actual MPG.   Parties who qualify to participate have a choice – either opt in or bring their own lawsuit.  Plaintiff learned that the trial lawyers in the class action would receive $8.5 million while the car owners would get $100 - $200 each plus approximately $1500 in rebate coupons for the purchase of a new car.  In response to Peters’ website, 1700 owners have opted out of the class-action to pursue a small claims case. 

    Honda is appealing the decision.  For more information click here.   On appeal the company is entitled to representation by counsel.  Keeping with the concept of small claims court being user-friendly, only one appeal is permitted.  This will be Honda’s last chance.


    1) How could Honda have avoided all the lawsuits generated by the Civic hybrid’s MPG claims? 

    2) What would motivate a potential plaintiff in a class action case to opt in?  To opt out? 

    3) Why do you think California law allows only one appeal from Small Claims Court?



  • We Don't Like It Just Because

    The Clean Air Act (CAA) splits responsibilities between the federal government (through the EPA) and the state governments. The EPA identifies air pollutants and establishes the National Ambient Air Quality Standards (NAAQS). The states have primary responsibility for implementing the standards. Each state must adopt a State Implementation Plan (SIP). They are given leeway to adopt a mix of standards, so long as the overall goal can be reached. The EPA reviews the SIPs for consistency with the CAA’s requirements and must approve a state plan so long as it is in compliance with NAAQS standards.

    The SIPs include permitting programs for the construction or modification of stationary sources that emit pollutants. The permit programs include “New Source Review” (NSR). These are highly complex regulations for major construction projects. Small construction projects or minor changes in existing stationary sources are subject to less complex controls. The minor NSR rules vary significantly from state to state.

    The most recent minor NSR rules issued by the Texas SIP were submitted to the EPA in 2007. More than two years later, the EPA initially disapproved the rules as they applied to Pollution Control Projects (PCPs). EPA gave no substantive reason for the rejection, which was finalized in 2010, more than three years after submitted by the state. EPA stated that the plan “does not meet the requirements of the CAA for a minor NSR Standard Permit program” but did not identify a single weakness with the program.

    Texas appealed the EPA decision to the Fifth Circuit Court of Appeals. The Court found the EPA’s decision to be “arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law.” The Court noted that EPA admitted in its brief to the Court that it had no specific reason for rejecting the Texas plan.

    While the courts normally defer to the expert judgment of administrative agencies under the Chevron doctrine, here EPA could provide no justification within the CAA to support its action, so its decision cannot stand.

    Discussion: Why would EPA fail to provide justification for its action? Do you think politics could be involved?

  • Wal-Mart, Mexico, and the Bribes

    One in every five new Wal-Mart stores around the world is located in Mexico.  With 209,000 employees there, Wal-Mart is the largest private employer in the country. The expansion of the giant retailer in Mexico has been remarkable.  The expansion has also resulted in both an internal investigation as well as one by the U.S. Justice Department for violations of the Foreign Corrupt Practices Act (FCPA).

    The internal investigation began in 2005 when a senior U.S. Wal-Mart executive received an e-mail from a former Wal-Mart executive in Mexico who revealed that Wal-Mart had paid bribes all over the country in order to obtain permits to build the new stores rapidly and ubiquitously.  Following the resulting internal investigation, Wal-Mart uncovered $24 million in payments to government officials in exchange for permits for building the stores.  The subsequent follow-up and training were delegated to Wal-Mart’s general counsel in Mexico City, the man who was identified as having authorized the payments. 

    However, despite the discovery, Wal-Mart made no public disclosure about the payments or its investigation.  Then-chairman of Wal-Mart, H. Lee Scott, told internal investigators that they were being “too aggressive” in handling their work.  The payments and evidence were not disclosed to the U.S. Justice Department until December 2011.  That disclosure was made after U.S. executives learned that the New York Times was investigating and had both documents and statements from those involved in paying the bribes.  The Times was the first news organization to break the story, David Barstow, “Vast Mexico Bribery Case Hushed Up After Top-Level Struggle,” New York Times, April 21, 2012.

    Wal-Mart issued a response to the story that explains the steps that it has taken and is taking to eliminate the problem.  You can read the company statement here.

    One of the critical issues in the outcome (in terms of criminal charges) will be whether the payments were facilitation payments, a means of getting the company’s voice heard on obtaining permits, or whether they really were bribes to government officials.  The Wal-Mart internal report describes the payments as follows: “They targeted mayors and city council members, obscure urban planners, low-level bureaucrats who issued permits — anyone with the power to thwart Wal-Mart’s growth. The bribes, he said, bought zoning approvals, reductions in environmental impact fees and the allegiance of neighborhood leaders.” How the funds were used and to whom they were paid and in exchange for what will be critical in determining whether there was a violation of the FCPA. You can read more details from the interviews in the investigations to get an idea on the payments.

    Wal-Mart’s general counsel had been pushing for a policy of “no payments to government officials,” regardless of the reason. However, Wasl-Mart executives in Mexico were using gestores, a type of unofficial lobbyist who is able to get through to local government officials and takes a 6% commission for winning an expedited permit for the company’s new stores.

    There was benefit in Wal-Mart self-reporting the issue.  However, the delay could prove costly once the government has its arms around the case and what exactly was paid, to whom, and why.  

    Discussion Starters

    1.      Why does the delay in Wal-Mart’s self-disclosure make a difference for how the company is treated in terms of charges and penalties?

    2.     Why does it make a difference whether the payments were bribe or grease/facilitation payments?

    3.     Why was general counsel pushing for a “no payments to government officials” policy?


  • Supremes: Private Eye Has Public Rights

    Delia was a firefighter for the City of Rialto, California. He missed work due to illness. Suspicious about his three week absence, the City hired a private investigator to conduct surveillance. Delia was seen shopping for insulation and other building supplies, so the City began an internal affairs investigation. It then hired Filarsky, a private attorney, to interview Delia.

    The interview was attended by those two parties plus Delia’s attorney and two fire department officials. Delia admitted to going shopping for building supplies but denied that he had done any work on his home. Filarksy asked Delia to let one of the fire department officials look in his house to see the unused building supplies. Delia refused. Filarsky told Delia to bring the materials outside so they could be seen.

    At that point, Delia’s attorney threatened to sue the City and the attorney for violating Delia’s civil rights. Later, Delia allowed people from the fire department to see the building materials.

    Delia sued the City, the Fire Department, Filarsky and others for violating his civil rights protected by the Fourth and Fourteenth Amendments (called a Section 1983 action). The district court granted summary judgment with respect to all incividual defendants on the basis of qualified immunity.

    The Ninth Circuit Court of Appeals affirmed except with respect to Filarksy, holding that he was not entitled to qualified immunity because he was a private attorney, not a City employee.

    On appeal, the Supreme Court unanimously reversed (as is usually the case with appeals from the Ninth Circuit). It held that private individuals temporarily working for the government for governmental purposes is entitled to seek qualified immunity from suit under Section 1983.

    The Court found that when Congress enacted Section 1983 in 1871 it incorporated common law principles of immunity. Since it did not specify otherwise, that immunity extends to private parties working for the government just as it applies to government employees. Governments frequently hire outside experts to assist in various work, so the conditions should be the same unless Congress specifies otherwise.

    Discussion: Without such immunity, how could private parties protect themselves in such instances?

  • Firing for Cause: The Secret Service Agents and the GSA Administrator

    Over the past week, several Secret Service agents have been terminated, resigned, or allowed to retire early because of their alleged involvement with women from escort services while they were doing advance work for a presidential visit to Cartagena, Colombia.  In addition, administrators with the GSA have been placed on paid leave as an investigation into the spending of the GSA (General Services Administration -- the purchasing agent for the federal government that also manages all federal properties) on conferences and retreats is reviewed by the Office of Inspector General.

    There are other Secret Service agents and other GSA employees who are also on leave, pending investigations.

    Many question why the agents and GSA employees are not fired immediately, especially because possible criminal charges could result from the conduct of the GSA employees. There is a big difference between charging someone with a crime and terminating his or her employment because he or she has been charged with a crime.  Employment law still affords employees the protection of their contracts or the due process employers afford, according to contracts or practices and policies. Even employees who are “at will” have certain protections, such as the right to the steps in discipline that their employers have taken in the past and that are outlined in the employee handbook or employer policies and procedures.  Even when there are no written documents on termination, the employer is obligated to follow those processes used in the past in disciplining employees.  Employees who have contracts enjoy the rights and protections provided in the contract.  In the case of the Secret Service agents and GSA employees, there are additional special protections that are provided for federal employees. Government employees are all protected by federal rules that require the establishment of some cause for termination.  One of the Secret Service agents who was fired was specifically released due to cause. Even with a firing for cause, the federal government must still be able to establish the facts that would rise to the level of an automatic termination, not probation, leave, or note in the file.

    In the GSA situation, then-administrator of the agency, Martha Johnson, had ordered an investigation on October 10, 2010 into the spending by her agency on a Las Vegas conference.  The deadline for the report on the spending for the conference was postponed several times.  When the report was finalized in March 2012, Ms. Johnson fired several employees and then resigned herself.  Congressional hearings were held on the conference and spending, but the administrator who was responsible for the conference, Jeff Neeley, invoked the Fifth Amendment and declined to testify.  Mr. Nelley is on paid leave from GSA. 

    Discussion Questions

    1.  What are the requirements for terminating an employee?

    2.  Why aren't criminal charges an automatic valid reason for termination of employment?

    3.  Why would employees resign if they could not be fired immediately?

  • Partnership Gone Bad; Archie Comics’ Co-Owners Can't Co-Exist


    The adage – breaking up is hard to do – applies not just to couples but also to business partners.  A partner is defined as a party who who carries on a business for profit that is co-owned with at least one other person.  Like many human connections, the relationship of partners is fragile.  This is illustrated in the circumstances of the warring owners of Archie Comic Publications, the company that produces Archie comic books.

     Least you think this mode of entertainment is outdated, consider this. In 2010 (the last year for which figures are available) the company reported $40 million in sales.  Recently it debuted a mobile phone app which was downloaded four million times. Further, the storyline recently adopted a new character, Kevin Keller, who is gay.

     Alas, the state of the company’s senior management is rocky at best.  A dispute between its two principals - Jonathon Goldwater, son of a company founder, and Nancy Silberkleit, daughter-in-law of another founder - jeopardizes the company’s future. The two are co-chief executives, suggesting their authority is equal.  However a court order bars Silberkleit from even entering the company’s offices.  To ensure she stays away, the administrative offices are double-locked, and security cameras have been installed. 

    Part of the problem is divergent views about the company’s future.  Goldwater wants to expand the brand with the help of outside investors. Silberkleit seeks to retain family ownership.  Additionally Goldwater accuses her of harassing the employees, sexually and otherwise, and brought a lawsuit to force her to stop.  Per Goldwater, all two dozen company employees offered to testify to Silberkleit’s aggressive behavior.  She claims in response that he defamed her (made untruthful and unflattering statements) to the employees   She is suing for defamation asserting $100 million damage to her reputation. 

    Goldwater sought and obtained a restraining order (a court order barring contact by someone with another person) , limiting Silberkleit's contact with the employees to spare them from her harassing behavior.   She failed to comply and so he went to court requesting a preliminary injunction  (a court order requiring someone to do or refrain from doing something while a lawsuit is pending).  The court granted the injunction in January, 2012, banning her from the company’s headquarters, including her own office.  

     The two CEOs have now agreed to try mediation to resolve their differences.  Mediation is a form of alternative dispute resolution in which a third party mediator helps the parties chip away at their differences.  The mediator however has no authority to impose a resolution.  If mediation fails, Goldwater will likely continue his lawsuit to break-up the company and ban Silberkleit permanently.  She no doubt will pursue her defamation claim for $100 million.

     This is of course no way to run a business.  The fighting jeopardizes the brand which has enjoyed impressive enduring popularity over 73 years.  In addition to the comics, there was an Archie TV show, a radio program, a hit song (“Sugar, Sugar,”  by a singing group called the Archies), books,  and now an app.  

    For more information, see the unusually long New York Times article.


     1) Might some of the problems between the principals have been avoided by a well-worded partnership agreement?  If so, what terms in the agreement would have been helpful in prevening the animosity and litigation? 

     2) What is the likelihood Silberkleit will win on the merits of her defamation case against Goldwater?  If she wins on liability, what is the likelihood she can prove damages to reputation in the amount of $100 million?

    3) Why do you think the parties chose mediation as an alternative dispute resolution method rather than arbitration?

  • Look Confusing?

    “If you watch the Phillies a lot during the season, you’ll see stupid local commercials almost as much as the team. Maybe more! The gold standard of this, of course, is this Steak ‘Em Up commercial, a Budweiser “Wassup” parody 10 years late. What, they couldn’t get three frogs to spell out Steak ‘Em Up?” So sayeth a Philadelphia blogger.

    Steak ‘Em Up is a small company in Philly that sells steak sandwiches and pizzas from a store in South Philadelphia—and has even had an ad on TV as seen above--noted for being so bad it is cool. 'Em-Up ran afoul of a larger frozen-meat producer, Steak Umm. Umm, which sells meat products in grocery stores. sued ‘Em-Up for trademark infringement, claiming confusion between the names Steak ‘Em-Up and Steak Umm.

    Steak Umm has been a registered mark since 1976. Steak ‘Em-Up started in business in 2005. The name came from, the owner said, the phrase “stick ‘em-up.” The logo of the shop had a gangster holding a hoagie (sub sandwich) as it it were a gun.

    Umm sued for infringement when ‘Em-Up would not change its name. An expert for Umm said that 12.9% to 24.1% of local consumers indicated confusion between the two names. ‘Em-Up’s expert said that no more than 10% of people were confused based on its survey.

    The district court held for ‘Em-Up, citing the ten factors used in the Third Circuit in such cases of trademark confusion: The court found mixed evidence. However, Steak Umm is a weak mark since the product is meat and the word “steak” is in the mark, which is descriptive. Confusion between the two marks by consumers in the real world would seem likely to be minor contrasted to the survey questions asked of people. One company sells frozen meats in grocery stores; the other is a take-out/delivery deli. They do not overlap and the product packaging is not similar.

    Umm cannot claim trademark dilution—that applies to famous marks that could be tarnished by an infringing mark. Steak Umm is not a distinctive and famous mark. Summary judgment granted to Steak ‘Em-Up.

    Discussion: Since a firm can be found to abandon a trademark if it does not defend it, isn’t Steak Umm in a difficult position if it ignores Steak ‘Em-Up?

  • Cracker Barrel is Take-Over Target; Responds with A Poison Pill


     Cracker Barrel Restaurants, famous for their Old Country Stores located in each eatery, is the take-over target of restaurant investor Sardar Biglari.  He has acquired to date 16% of the outstanding shares.  Cracker Barrel, seeking to fend off Biglari’s holding company, responded with a poison pill, a method to discourage a takeover bid by making the target less attractive to the acquirer. The restaurant’s board of directors adopted a plan to devalue the company’s shares if Biglari acquires 20% or more of the outstanding stock.

     Biglari has proven himself a force to be reckoned with in the restaurant industry.  He is chairman of the board of Western Sizzlin, a chain of mostly franchised buffet restaurants.  He wrested control of the company’s board after buying a small share of the business and forcing a proxy fight, that is, he convinced shareholders to cast their votes at the annual shareholders meeting in favor of new management, including Biglari. He persuaded the owners, over contrary arguments by the existing board, that Biglari's management team could significantly improve the company's performance.  Similarly, he became CEO of Steak ‘n Shake after purchasing  a steak (okay, stake) in that company and pursuing another hard-fought proxy battle.  He advanced a similar argument - the company was underperforming and the existing management was to blame. 

     A proxy fight is an alternative to a tender offer as a means to gain control of a company.  A proxy fight achieves the take-over without the acquirer having to pay a premium for the target’s stock.     

    Biglari also attempted a takeover of Friendly’s that proved less successful, and his holding company owns a significant share of Red Robin, both family-friendly, moderately- priced restaurants.  Now his attention is on Cracker Barrel which he calls a company “in need of a turnaround.” 

    The poison pill adopted by Cracker Barrel is effective immediately and consists of two parts.  First, the board declared a dividend of a right to purchase one preferred share for each outstanding share of Cracker Barrel common stock.   Second, each right will, in a designated circumstance, entitle its holder to purchase, for $200, a number of Cracker Barrel’s common shares having a market value of twice that price.  The circumstance is acquisition by someone such as Biglari of 20% or more of the company’s outstanding common stock.  Additionally, once the 20% level is reached, Cracker Barrel’s board  can exchange one share of Cracker Barrel common stock for each outstanding right (other than those owned by the acquirer which become void upon ownership of 20%).   The plan does not apply to all-cash tender offers that are open for a minimum of 60 business days.  

     The plan will remain in effect until the annual meeting where a vote of shareholders will be taken.  For more information see an article from the New York Times.

    In certain circumstances, a company seeking to secure a significant interest in another company must get antitrust clearance from the Federal Trade Commission and Department of Justice before completing the acquisition. The agencies investigate both the acquiring and target companies to determine if the combination would significantly decrease competition in the relevant industry. If the reviewing agency concludes that a proposed transaction will violate the antitrust laws, it can seek an injunction in federal court to bar the acquisition.  The law requiring the advance approval is the Hart-Scott- Rodino Act. Biglari has sought and received authorization to purchase up to 49.99%.

    Discussion Questions:

    1)  In an attempted corporate takeover, what defensive options are available to an unwilling target besides poison pill?  

    2) How might the action taken by the Cracker Barrel Board of Directors discourage a would-be acquirer?

    3) A "controlling share" of a company, which enables a shareholder to control the outcome of votes cast by directors, is typically less than 50%.  Why is that? 


  • Sit Still Until You Eat Everything on Your Plate!

    The law in California, as in other states, has long required that workers be given meal breaks and rest periods during a workday. But, before 2000, the statute did not provide monetary remedies for violations. Since the damages have been allowed, there have been many class action suits brought by workers claiming to have had their rest and meal rights violated. If a worker is denied rest or meal time, they must be compensated with “premium wages.”

    The latest issue in this regard came from a suit by a group of employees who work at restaurants run by Brinker, including Chili’s, Maggiano’s Little Italy, and Romano’s Macaroni Grill. There were various issues involved in the case, but the key one was whether or not an employer had to ensure that employee took a full rest or meal break. If not, could the employer be liable for payment to the employees?

    The California high court unanimously held that “An employer must relieve the employee of all duty for the designated period, but need not ensure that the employee does not work.” That is, the employer does not have to strictly police the break periods to ensure that employees sit still for the entire break period.

    That is, employees must be scheduled for at least a 30-minute meal break in a five-hour period, but if the employee cuts it short to get back to work, that is the employee’s business. Employers may not pressure employees to cut breaks short, but employees may do so without being owed premium pay.

    Discussion: What costs would be imposed on management if required to supervise employees to be sure they sit out specified break periods? What incentives could employees, especially at restaurants, have to get back to work without taking a full break?

  • E-Books, Apple, and Antitrust Allegations of Price-Fixing

    The U.S. Department of Justice (DOJ) has filed an antitrust suit against Apple and five of the largest publishers in the United States (Simon & Schuster, HarperCollins, Hachette, Penguin, and Macmillan) alleging that Apple conspired with the five to battle Amazon, the market leader on e-book sales, by agreeing ahead of the release of the iPad tablet and iBook to raise prices for e-books.  The move by the publishers would thus force Amazon, if it wanted the books in electronic form, to raise its prices.  Amazon has traditionally charged $9.99 for its e-books, a price that other publishers could not compete with. The Justice Department press release includes the following information:


    The publishers also agreed with Apple to pay Apple a 30 percent commission for each e-book purchased through Apple’s iBookstore and promised, through a retail price-matching most favored nation (MFN) provision, that no other e-book retailer would sell an e-book title at a lower price than Apple. As stated in the department’s complaint, Apple’s then-CEO Steve Jobs said, “the customer pays a little more, but that’s what you [publishers] want anyway.” Based on the commitments to Apple, the publishers imposed agency terms, over some objections, on all other e-book retailers. As a result, no e-book retailer is able to compete by using its commission to discount or reduce the price that the publishers set for their e-book titles or offer any special sales promotions to encourage consumers to purchase those e-books. The department said that the intent and effect of the publishers’ contracts with Apple was to raise the prices that consumers nationwide pay for e-books.


    The government’s complaint also alleges that because of the agreement, e-book prices climbed $2 to $3 per book in early 2010 when the iPad was released. The complaint also outlines the communication between and among the CEOs of Apple and the publishing houses.  The CEOs met quarterly in Manhattan to discuss Amazon and pricing.   During December 2009 and January 2010, the publishers’ CEOs placed at least 56 phone calls to one another.

    Under the Sherman Act, discussions of pricing, credit terms, and any other terms of sale would constitute a per se violation.  Price is a critical and sensitive element of competition and controls that result in higher prices harm consumers.

    Simon & Schuster, HarperCollins, and Hachette have already settled the suit with the DOJ. Experts indicate that a settlement entered into before the complaint was filed is an indication of the seriousness of the charges as well as the scope of evidence. 

    Discussion Starters

    1.  How did the agreement between and among the competitors work and how was Apple involved?

    2. Which law does price-fixing among competitors violate?

    3. Describe the contacts the companies had where price was discussed.  


  • Drawing the Line on Computer Abuse

    David Nosal used to work for Korn/Ferry, a prominent executive search firm. After he left the company to set up a competing business, he got some of his former associates at Korn to use their access to company confidential databases to download information helpful to him in his new endeavor.

    Korn’s policy clearly prohibited such data uses. When employees logged in to data, a warning would pop up: “This product is intended to be used by Korn/Ferry employees for work on Korn/Ferry business only.”

    When the data transfer was discovered, Korn called in the feds. They indicted Nosal on multiple counts, including trade secret theft, mail fraud, conspiracy, and violation of the Computer Fraud and Abuse Act (CFAA). The federal district court dismissed the CFAA charges, finding that the phrases in the statute about access “without authorization” and “exceeds authorized access…to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter” should be narrowly interpreted. The government appealed. In a 9-2 en banc ruling, the Ninth Circuit upheld the district court, holding that the CFAA should be narrowly applied.

    Judge Kozinski noted that the government’s view would mean that any computer access by an employee who wanders from an assigned task could lead to prosecution: It goes well beyond the hacking one presumes was the purpose of the statute.

    “Minds have wandered since the beginning of time and the computer gives employees new ways to procrastinate, by chatting with friends, playing games, shopping or watching sports highlights. Such activities are routinely prohibited by many computer-use policies, although employees are seldom disciplined for occasional use of work computers for personal purposes. Nevertheless, under the broad interpretation of the CFAA, such minor dalliances would become federal crimes. While it’s unlikely that you’ll be prosecuted for watching Reason.TV on your work computer, you could be. Employers wanting to rid themselves of troublesome employees without following proper procedures could threaten to report them to the FBI unless they quit. Ubiquitous, seldom-prosecuted crimes invite arbitrary and discriminatory enforcement.”

    Employer-employee relationships regarding computers should be governed by tort and contract law. The government’s view of the CFAA allows computer-use on the job to be turned into a criminal matter based on company policies about computers that few take seriously.

    Since many services and devices—Kindles and Facebook—are subject to the CFAA, the government view could allow arrests for a wide array of violated policies, Until recently, Google’s policy—which no one read or enforced—prohibited use of Google by minors. According to Facebook, you cannot give your log in information to anyone else. It is done all the time.

    The court said “The government assures us that … it won’t prosecute minor violations.” Open-door views of criminal statutes are not favored due to the “discriminatory and arbitrary enforcement” prosecutors would then have available.

    Discussion: Can Nosal still be prosecuted for theft of trade secrets? What do you suppose Korn/Ferry did to the employees who passed on the information?

  • Razorback Coach Fired For Cause: Employee and Employer Rights

    Bobby Petrino, the former head football coach for the University of Arkansas Razorbacks had amassed an impressive record. The coach was at 21-5 over the last two seasons, including his 11-2 record for 2011. Those two losses were to the eventual national champion University of Alabama and the runner-up Louisiana State University. If the coach were a run-of-the-mill employee, his performance evaluations would have been outstanding. However, job performance is but one part of an evaluation.  Mr. Petrino was terminated from his job by the university’s athletic director for several reasons: (1) Having an inappropriate relationship with a football office employee, 25-year-old Jessica Dorrell; (2) Not being forthcoming about his relationship with Ms. Dorrell; and (3)Misrepresenting the circumstances surrounding a motorcycle accident in which both Ms. Dorrell and Mr. Petrino were involved.


    An investigation revealed that Mr. Petrino and Ms. Dorrell had an ongoing relationship and that she was also injured in the motorcycle accident, something that Mr. Petrino did not disclose. The investigation also found that Mr. Petrino had advanced Ms. Dorrell from a group of 159 applicants for an athletic department job in order to be certain that she was hired for a direct-report job in football. Prior to Ms. Dorrell's application for the job, Mr. Petrino had given her $20,000 as a gift, information that also was not disclosed before the hiring or in the course of the investigation that resulted in his termination.

    Mr. Petrino fits into a unique group of employees:  they can be fired at will, but they still have a contract.  That contract entitles them to certain buy-out amounts if they are fired without cause. Because Mr. Petrino was fired for cause (reckless conduct and intentionally misleading his boss), those contract buy-out rights do not apply. So, he loses the remaining amount on his seven-year contract that totaled $24.92 million. 

    Firing at will has become more difficult for employers who prefer firing for cause, which means that the employee has violated employer rules and policies.  Firing under those circumstances leaves employees with few options and, like in college footbal, no buy-outs. 

    Interestingly, the athletic director noted that relationships between faculty and staff with students are not prohibited, but could be considered sexual harassment. Mr. Petrino's termination did nto focus on the relationship.  Rather his attempt to cover up the relationship resulted in his termination.  Ironically, Ms. Dorell is considering a sexual harassment suit. 

    Discussion Starters 

    1.  What is the effect of misconduct on a buy-out? on the termination of an employee-at-will?

    2.  Why is it important that a termination be for cause?

    3.  Was the termination the result of the relationship between the coach and the young employee or for other reasons?



  • Facebook Pays $1 Billion to Buy Instagram, a Photo-Sharing Business


    Giant Facebook paid $1 billion (yes, billion) for Instagram, a small start-up company that provides photo-sharing services on mobile devices.   What was Facebook’s  attraction to this company which has only 13 employees and virtually no income?  This is a question that underlies any merger or acquisition.  The reasons that drive a company to purchase another are many and include the following: elimination of a competitor, acquisition of a valuable resource,  access to new markets, expansion of the acquirer’s products, strengthening of the acquirer’s position among competitors, and efficiencies of scale. 

    What prompted Facebook to buy  Instragram?  And if Facebook was going to venture further into the photo-sharing market, why Instragram and not one of its many compeititors?  For starters, Instagram’s 30 million users, accumulated in less than two years, suggests the company has a desirable product.  Additionally, Facebook had ventured into the photo-sharing business so Instagram eliminates a competitor.  Further, Facebook’s service was cumbersome and not favored by many.  The acquisition thus enhances Facebook’s position in the photo-sharing market.   Plus, Instagram’s focus on mobile devices gives Facebook, which is largely a computer-based company,  a boost in the lucrative mobile device market as people’s migration there  from computers continues to grow.  Also, Facebook wants to stay ahead of its competitors, all of whom are strong forces in the market – Google, Apple and Microsoft, among others. 

    Who besides Facebook benefits from this transaction?  The owners of Instragram  will walk away with incredible wealth.  The company’s creators are two Standford University graduates in their 20’s.  Others who benefit will be investors in the venture capital firms that supported Instagram.  These are companies that provide early-stage seed money to start-up businesses  perceived to have high growth potential. 

    Interestingly, in Instagram’s  early months with but four employees, it  occupied the early offices of Twitter in San Francisco.  Those offices will likely be rendered sacred ground. 


    1) What motivates a company to pursue the acquisition of another.

    2) What do you think were the most important reasons for Facebook’s acquisition of Instagram?





    Giant Facebook paid $1 billion (yes, billion) for Instagram, a small start-up company that provides photo-sharing services on mobile devices.   What was Facebook’s  attraction to this company which has only 13 employees and virtually no income?  This is a question that underlies any merger or acquisition.  The reasons that drive a company to purchase another are many and include the following: elimination of a competitor, acquisition of a valuable resource,  access to new markets, expansion of the acquirer’s products, strengthening of the acquirer’s position among competitors, and efficiencies of scale. 

    What prompted Facebook to buy  Instragram?  And if Facebook was going to venture further into the photo-sharing market, why Instragram and not one of its many compeititors?  For starters, Instagram’s 30 million users, accumulated in less than two years, suggests the company has a desirable product.  Additionally, Facebook had ventured into the photo-sharing business so Instagram eliminates a competitor.  Further, Facebook’s service was cumbersome and not favored by many.  The acquisition thus enhances Facebook’s position in the photo-sharing market.   Plus, Instagram’s focus on mobile devices gives Facebook, which is largely a computer-based company,  a boost in the lucrative mobile device market as people’s migration there  from computers continues to grow.  Also, Facebook wants to stay ahead of its competitors, all of whom are strong forces in the market – Google, Apple and Microsoft, among others. 

    Who besides Facebook benefits from this transaction?  The owners of Instragram  will walk away with incredible wealth.  The company’s creators are two Standford University graduates in their 20’s.  Others who benefit will be investors in the venture capital firms that supported Instagram.  These are companies that provide early-stage seed money to start-up businesses  perceived to have high growth potential. 

    Interestingly, in Instagram’s  early months with but four employees, it  occupied the early offices of Twitter in San Francisco.  In the business world, those offices will likely be rendered sacred ground. 


    1) What motivates a company to pursue the acquisition of another.

    2) What do you think were the most important reasons for Facebook’s acquisition of Instagram?






  • Should Different Standards Apply in Public Safety Situations?

    Hoeper worked as a pilot for Air Wisconsin. The Transportation Security Adminiatration (TSA) had issued Hoeper a firearm under a federal law that allows TSA to deputize pilots as federal law enforcement officers “to defend the flight decks of aircraft … against acts of criminal violence or air piracy.” Such a pilot is called a federal flight deck officer (FFDO).

    Air Wisconsin quit using the kind of aircraft Hoeper had flown for many years. So he had to train to fly another aircraft and had to pass a text to certify his ability to fly another aircraft. Hoeper failed three tests. After failing the second time, Doyle, a manager involved in the testing, stated that Hoeper lost his temper. Another administrator testified that Hoeper was angry after he failed the third test. Air Wisconsin gave him one more chance. Hoeper new if he failed he would likely lose his job.

    During the fourth test, Hoeper became angry because he believed administrators were sabotaging his testing. Hoeper ended the test abruptly and yelled at the administrator. The administrator testified that he feared for his physical safety at the time. The administrator told Doyle about the confrontation. Doyle booked Hoeper to fly home from Virginia back to Denver.

    Doyle did not know if Hoeper was carrying his firearm with him or not. He called the TSA while Hoeper was waiting at the airport for his flight and reported that Hoeper was an unhappy employee who may be armed and that Air Wisconsin was firing him. TSA officers arrested Hoeper and searched him, then let him fly back home.

    Hoeper sued Air Wisconsin in Colorado court for defamation under Virginia law. The jury found that Doyle’s statements (on behalf of Air Wisconsin) were defamatory. The court held, and the appeals court agreed, that Air Wisconsin was not immune from liability under the Aviation and Transportation Security Act (ATSA). The jury found the defamatory statements to be willfully malicious and awarded $1.4 million in damages.

    Air Wisconsin appealed to the Colorado high court, arguing that the ATSA provides that a carrier that voluntarily discloses any suspicious transaction relevant to aircraft security rules “shall not be civilly liable.”

    The court held that immunity does not apply if the information provided is false, inaccurate or misleading. Since Doyle could not know if Hoeper was mentally unstable, his conclusions about Hoeper posing a threat were not justified. The information Doyle had about Hoeper did not indicate violence or instability. He was just angry about failing the test and losing his job. If Hoeper was a threat, Doyle would not have booked him on a flight to go home. The statements made to the TSA were done with actual malice, so the damages are warranted.

    Discussion: Dissenting members of the court argued that Doyle was acting properly due to the strong public policy involving air safety. Federal safety protocol requires the reporting of flight risks even if based on tentative information. This undermines the incentives to report potential threats. Which position do you think is reasonable?

  • This Bud Is Not for You

    The Illinois Liquor Control Commission ruled a couple years ago that Anheuser-Bush could not buy an Illinois alcoholic beverage distributor, City Beverage. Illinois liquor law prohibits a non-Illinois resident from owning an interest in a licensed Illinois distributor. Like many states, Illinois has a three-tier system (producers, distributors, and retailers) that, the Commission says is a fundamental objective of the Liquor Control Act for public policy purposes.

    Anheuser-Busch and City Beverage challenged the Commission ruling in federal court, contending that it prevented out-of-state brewers from competing on an equal footing with in-state beer producers, who are allowed to distribute their own products and bypass the three-tier system.

    The court held, in 2010, that the Illinois Liquor Control Act of 1934 violated the Commerce Clause as it permitted in-state, but not out-of-state, producers to distribute products directly.

    The legislature then passed a new statute creating a “craft brewer’s license” for both in-state and out-of-state producers whose annual production is less than 15,000 barrels and permitting them to directly distribute up to 7,500 barrels.

    Once that law was passed, the court dismissed the original Anheuser suit as moot because the law eliminated discrimination against out-of-state brewers.

    Anheuser then moved for attorneys’ fees, arguing that they won initially and forced a change in the law to eliminate the unconstitutional restrictions on competition.

    The court rejected the request. Anheuser was not interested in the change in the law that came about as it gains nothing by it since its production is huge—the new scheme only applies to small breweries, of which there are two in Illinois.

    The court noted that what Anheuser wanted was the right to buy City Beverage and that is not going to happen. Anheuser may have “formally prevailed” in the original litigation but in fact gets nothing out of the final result, so cannot claim a right to attorney fees.

    Discussion: Why does Illinois, and many other states, cartelize the alcohol industry by forcing a three-tier distribution system?

  • Parole Denied to Imprisoned Ex-Tyco CEO, Convicted of Larceny and Fraud in 2005


    Dennis Kozlowski, past Chief Executive Officer (CEO) of Tyco Corporation, is serving eight and a third to twenty-five years in state prison following his conviction in 2005 for grand larceny (stealing more than $1000), conspiracy (an agreement between two or more people to commit a crime together), securities fraud (deception in the sale of stocks or bonds), and falsifying business records (making a false entry or altering a true entry in an official business record).  Kozlowski was fined $70 million.   

    A New York jury found him guilty on 22 of 23 counts after deliberating 11 days.  The charges stemmed from unauthorized bonuses he paid himself, abuse of an employee loan program, and manipulation of the price of Tyco’s stock by misrepresenting the company’s financial condition at a time when he sold a large amount of stock. Tyco’s Chief Financial Officer (CFO), Mark Swartz, was a co-defendant.  Hundreds of millions of dollars were involved. 

    Kozlowski defended part of the charges by claiming that the corporation’s board of directors and auditors were aware of and authorized the bonuses as part of his compensation package.  He took the stand in his own defense.  In rebuttal the prosecution presented five former directors who testified they knew nothing of the disputed payments. 

    To his significant disappointment, Kozlowski was just denied parole, which is supervised release of a prisoner prior to completion of a sentence.  In New York, parole decisions rest with The Board of Parole which consists of 19 members appointed by the Governor and confirmed by the Senate for six-year terms.  Typically a panel of 2-3 Board members makes the decision in each case.  The panel is required to interview the inmate and review summary reports prepared by the facility.   If parole is granted, the Board sets conditions of release such as attending school or seeking employment, and/or participating in alcohol or drug treatment.  The prisoner’s return to the community is supervised by a professional parole officer who assists the parolee and evaluates his adjustment in the community.  Parole can be revoked if the releasee violates the conditions.

    Kozlowski is apparently a well-behaved prisoner.  He has a clean disciplinary record and was noted for “progress and achievement” in prison programs. He also has been granted the privilege of work release, entitling him to leave confinement to work outside the prison, returning to custody when his shift is complete.  In denying parole, the board noted that he is in prison “as the result of more than $100 million theft from an international public corporation, in glaring violation of the trust placed in you as CEO by the board of directors and corporate shareholders.” 

    Tyco Corporation is a conglomerate that operates in the fields of health care, electronics, fire and security services and more.  Kozlowski first was hired by the company in 1975 and became CEO in 1992.  The company expanded significantly during his tenure through mergers and acquisitions.  He left in 2002 under a cloud relating to his compensation package.


    Do you think Kozlowski's sentence and denial of parole were appropriate?  Why or why not?


  • Hackers and Your Credit Card Liability

    Global Payments, Inc. is one of the so-called compliant Visa and Master Card credit-card processors.  Compliant credit-card processors are companies authorized by Visa and Master Card to process credit transactions submitted by merchants.  The authorization is given because a processor complies with certain security requirements. Global Payments is the seventh largest processor in the United States and processed over $120 billion in transactions in 2011.

    Sometime in January 2012, hackers from a Central American gang were able to take control of an administrative account at Global Payments. The result was that the hackers had access to up to 1.5 million account numbers and other key customer information. The information is generally used by the hacker rings to create counterfeit credit cards.

    However, the information about the security breach and the hackers’ access was not made public until the end of March 2012.Visa suspended Global’s seal of approval for its security systems.  Robin Sidel, “Card Processor: Hackers Stole Account Numbers,” Wall Street Journal, April2, 2012, p. C1.

    Under federal laws, you are not liable for expenses charged to your account without authorization.  You should monitor your credit and debit accounts often and report any unauthorized charges on your account.  You are not liable for any charges the hackers may put on your credit card account. Even if you fail to report the unauthorized charges immediately, there is still a $50 limit on your liability for such unauthorized charges. Monitor regularly!


    Discussion Starters

    1.  What do hackers do with the account information they recover?

    2.  Are you liable for the charges any hacker puts on your account?

    3.  What advice would you have for businesses to protect against hackers' use of their credit information?

  • Hoodies as Free Speech; Constitutional Rights Trump Inconsistent Rules


     Representative Bobby Rush, Democrat from Illinois, addressed his colleagues on the floor of the House of Representatives deploring the killing of Trayvon Martin.  Martin is  the 17 year old lad killed in a gated neighborhood in Florida by a community watch patrol volunteer.  The presiding officer of the House, Mississippi Representative Gregg Harper, Republican, interrupted Rush’s comments to direct Rush to remove the hoodie he wore during the speech.   Per Harper, wearing the headgear violated a House rule. 

     If Representative Rush had, for example, used the headwear for the purpose of disguising a bad hair day, the House rule would indeed apply and the hoodie would need to go.  However Rush’s reason for donning the headcover was otherwise.  He sought to demonstrate that “Just because someone wears a hoodie does not make them a hoodlum.”  Rather, people of all stripes wear them; they are not indicators of imminent aggressive or criminal activity. 

     The head cover was thus part of the message and therefore a form of protected speech.

      The Constitution is the supreme law of the land.  When a statute or rule conflicts, both cannot exist simultaneously.  Since the Constitution is supreme, the House rule must yield.   Thus, Representative Rush should be entitled to wear the hoodie on the House floor, the rule barring headwear notwithstanding.


     Discussion Questions:

     1) What does the following phrase mean, “The Constitution is the supreme law of the land.”

     2) Why does the hoodie in this situation acquire free speech protection?