Research Spotlight: Empirically Testing Scotchmer’s Theory of Sex-Based Risk Aversion

This post will inaugurate a new feature of this blog. At times, whenever I come across a paper or research talk that poses an interesting legal finding or issue, I’ll profile it as a research spotlight. To kick off this feature, I’ll discuss a paper written by a colleague at Florida State University.

Today I attended a talk at the FSU Law School at which Professor Dino Falaschetti presented his paper: “A Difficulty in the Concept of Affirmative Action: Evidence from Females in Legislatures”. The paper empirically tests Suzanne Scotchmer’s theory, which posits that: “(1) winner-take-all games (e.g., promotions in hierarchies) favor inherently risk-taking males, but (2) successful females maintain greater skill on average and (3) see this skill-advantage depreciate with repeated play.”

The paper makes a contribution since the theory has rarely ever been empirically tested. A clever experiment was designed using elections in legislatures in both majoritarian (winner take all) vs. proportional election systems. The U.S. follows the majoritarian electoral system, where the candidate who garners the majority (> 50%) votes wins. Many, if not most, countries follow a proportional system whereby parties and their candidates obtain representation in proportion to the votes they obtain.

The article’s findings suggest a statistically significant result that demonstrates a negative correlation between elected female legislators and winner take all (majoritiarian) electoral systems across time and 130 countries . Ultimately, the author positions these findings as challenging the outcomes of affirmative action programs, since gender may ultimately lead to unintentional results due to the outcomes generated by risk preferences unique to gender type.  I think the paper may also raise some interesting questions related to institutional economics, given that similar outcomes were seen across a broad spectrum of societies and cultures

The link to the article on SSRN is here.

Apple Asserts iPhone and iPad Shape Trademarks

Apple recently sued Samsung, claiming that the Korean manufacturer’s mobile phones and tablets infringe the trademark rights related to the iPhone and iPad line of products. I have written extensively about Apple’s unique and sophisticated approach to securing its design-related innovations with overlapping intellectual property rights. As I’ve mentioned in those writings, very few manufacturers have the legal knowledge and execution expertise to obtain shape trademarks for their products. Now it seems that Apple will assert the rights to their products’ look-and-feel in federal court against an aggressive competitor that has partnered up with another Apple arch rival, Google. Samsung’s devices use Google’s Android operating system.

In its complaint, Apple alleges that three federal configuration (shape) trademarks are infringed by Samsung’s devices. The two mobile phone devices are depicted side by side below:

Samsung's Galaxy next to Apple's iPhone

The trademarked elements relate to the rounded edges, the black finish and screen, the silver band running alongside the edge, and the configuration of software icons on the touchscreen.  Apple’s ability to obtain product shape and ornamental trademarks on all of these innovative product attributes indicate the high level of sophistication of their intellectual property strategy. Even today, many company executives are surprised to learn that it is possible to get federal trademark rights on anything other than a company name or logo. For Apple, it may be that their appreciation and investment in these product attribute trademarks may offer them a key weapon in the firecely competitive battle for mobile device supremacy.

Samsung’s allegedly infringing devices have sold well into the millions since their introduction in 2010. As part of the bundle of trademark rights, Apple may ask for reimbursement for any lost profits due to trademark infringement. Samsung’s operating margin is reportedly lower than Apple’s, yet that may still amount to hundreds of millions of dollars. Apple claims that the infringement was willful, since the copying is a case of “slavish” imitation. If this case ever reaches trial (which is unlikely) a judge and jury may award trebled damages due to Samsung’s willful behavior. Finally, and most importantly, Apple will seek a preliminary injunction early on in this litigation to prevent Samsung from selling any additional devices until the litigation is resolved. Given the strength of Apple’s trademarks, and the similarity between Apple’s and Samsung’s products, the judge may very well grant this extraordinary relief to Apple.

As part of any settlement (the more likely outcome), Apple may also require Samsung to redesign its mobile devices and tablets so that they do not create the likelihood of consumer confusion between the two competing companies’ products. That will, in the end, protect the Apple brand and differentiation that this company has worked so hard to develop and protect through the intellectual property system.

My guess is we’ll hear about a settlement to this case with terms favorable to Apple within a few months’ time.

The Rule of Law

The unrest in the Middle East illustrates what happens in societies where those in power deprive citizens of the rule of law. Absent the rule of law, there is no room for property, markets, freedom or progress.

I was first exposed to the concept of the rule of law in a civil liberties course during my undergraduate studies at New York University. The professor for this singular course was Dr. Peter V. Rajsingh. During an initial lecture dealing with law and philosophy, Professor Rajsingh mentioned that a critical concept sustaining any liberal democracy is the rule of law.

It was initially puzzling to think of a society being “ruled” by something as abstract as the law. In my mind, we were ruled by politicians, judges and the other individuals with authority and power. But then Professor Rajsingh provided an analogy that has stayed with me since. He said that the rule of law can be analogized to a game of chess.

There are rules to chess, which are necessary for the game to proceed. Similarly, Professor Rajsingh explained, a liberal democracy needs rules to work, and those rules are defined by a well functioning and impartial legal system. Without the rule of law, those in government would not be constrained by principles or the will of the people. The antithesis to the rule of law is repression, autocracy, arbitrariness and unprincipled application.

Perhaps John Adams captured the idea best when he drafted the Massachusetts Constitution: “To the end it may be a government of laws and not of men”.

Life after Facebook?

For Facebook users who are concerned with protecting their privacy, the hits just keep coming. Following right on the tail of news that the social network company planned to sell users’ addresses and phone numbers,  The Wall Street Journal recently reported that Facebook has created a system to sell content posted by users when they react positively to products and service.

The new system, which targets a user’s network of friends for Facebook’s financial benefit, is stirring up controversy. Users are objecting because they are not allowed to opt out of having their content sold, they have not been informed by Facebook that their information would be used in this manner,  and their images and names may be used without their knowledge.

As the creator of content, a user typically owns the copyright to whatever  he or she posts online. Facebook gets around this question of copyright through its terms of service agreement, to which all users are bound when they join the network. According to the company’s terms of service:

“[Y]ou grant us a non-exclusive, transferable, sub-licensable, royalty-free, worldwide license to use any IP content that you post on or in connection with Facebook (“IP License”). This IP License ends when you delete your IP content or your account unless your content has been shared with others, and they have not deleted it.”

This contract clause grants Facebook the right to sell and re-post your content, your images and even your name without your knowledge, permission or payment.

Given the outrage generated by Facebook’s lack of regard for user privacy, what recourse do users have, other than simply deleting their Facebook accounts? Unfortunately, given the company’s terms of service, anyone who feels as though their rights have been infringed likely would have few, if any, legally enforceable claims. So taking Facebook to court probably isn’t the answer.

In the Internet era, however, we all possess the power to create our own solutions to problems in the online world. There is already is a movement afoot to migrate social media to an open source platform, devoid of commercial purpose and control. I can readily think of several well-known examples in which the people behind open source movements created what they viewed as a better alternative to technologies that they could not modify. Think of the .gif case in which developers created the royalty-free alternative .jpeg image standard. Or think of Firefox as a reaction to such proprietary browsers as Internet Explorer.

With knowledgeable, rebellious developers banding together to form their own open source social media networks, options already are out there for those who prefer not to have their online content sold, but who still want to take part in a virtual community. What remains to be seen, however, is just how many people can envision an online life after Facebook.

A perspective on contract terms

After teaching contracts for several years, I’m fairly convinced that the following axiom applies whenever anyone enters into a contract:

Any agreed upon and legally binding contract terms will either work in your favor, or against you.

Contrary to popular belief, contract terms are never neutral. Instead, they will either further your goals and interests, or they will not. In ideal situations, the contract terms benefit everyone. In the worst situations, they detriment you and benefit the person or entity sitting across the negotiating table. In the vast majority of cases, some clauses further your interests and others do not, yet the bargain as a whole is worth entering into for both parties.

Each particular word, or clause, however, will have a variable impact on the outcome or value of the bargain. That value, however, as deduced from the contract axiom will always either be positive or negative. The sign (positive or negative) and the size of the quantified outcome will largely depend on things like: information, bargaining power, experience, legal knowledge and negotiating prowess.

Starting this term, I’ll start using the contract axiom whenever I introduce the subject of contracts to business students.

Letter or Spirit?

Business Insider posted a story recently about Facebook and the news the company has made working with Goldman Sachs to obtain significant capital investment without going public.

The story boils down to Facebook wanting to trade stock for a capital infusion. There is no shortage of people wanting to invest in Facebook stock. A thorny issue arises, however, if the number of Facebook stock owners of record increase to 500 or more individuals. If that is the case, Facebook must comply with the Securities and Exchange Commission (SEC) disclosure laws, which are expensive to comply with and  reveal sensitive financial and strategic information. Facebook is not quite ready for that step and has enlisted the financial experts at Goldman Sachs to engineer a special purpose entity that would buy up to $1.5 billion in Facebook stock and become the owner of record.

The rub lies in the fact that Goldman Sachs would then sell the shares to potentially hundreds of private client investors. The Business Insider story discusses that Facebook and Goldman Sachs may have legal grounds under the SEC rules to argue that the transaction does not increase shareholders beyond a single owner, the special purpose entity. The rule, however, may prove to be a sword of Damocles, since the SEC rule does not allow the transaction if the stock issuer knows, or has reason to know, that the special purpose entity is used primarily to circumvent the rule concerning 500 shareholders or more. By engaging in the transaction, Facebook may be heading for going public and complying with the SEC disclosure laws without listing on a major stock exchange.

As a professor, I found this to be a good case to discuss in class, not just because many students enjoy hearing about Facebook. The case also illustrates an important point about a bigger issue facing business and legal regulation. The point is whether a business should strive to comply with the letter of the law, or go beyond this and seek to comply with its spirit. The SEC rule mentioned above has a built-in provision that guides enforcement of the law’s spirit. Many other important regulations lack this type of provision, however.

Ultimately, the whole issue of compliance with the SEC’s disclosure rules triggered by reaching 500 shareholders or more may amount to little more than a smokescreen for Facebook. The transaction with Goldman Sachs using the special-purpose vehicle places a much higher value on Facebook stock. Those who invested in Facebook prior to this transaction just saw their paper net worth increase substantially. Also, at the time of Facebook’s inevitable public offering and listing on a stock exchange, whoever is the lead book runner and investment banker to the transaction (Goldman Sachs?) will have strong precedent and argument to sell the stock to the public (the rest of of us) for at least as much as it was valued during this most recent transaction.

As with most legal issues involving Facebook, this is a case worth watching.

Blogging Resolution

Ringin' in the new year

Dear Readers:

For 2011, I resolve to respond to your questions and comments on any business law topics you consider worth discussing. I want this blog to be yours, so please feel free to contact me with your comments and suggestions, at:

Best for 2011!

Prof. Orozco

2010 in review

The stats helper monkeys at mulled over how this blog did in 2010, and here’s a high level summary of its overall blog health:

Healthy blog!

The Blog-Health-o-Meter™ reads This blog is doing awesome!.

Crunchy numbers

Featured image

A Boeing 747-400 passenger jet can hold 416 passengers. This blog was viewed about 3,000 times in 2010. That’s about 7 full 747s.


In 2010, there were 10 new posts, growing the total archive of this blog to 65 posts. There were 14 pictures uploaded, taking up a total of 4mb. That’s about a picture per month.

The busiest day of the year was January 6th with 84 views. The most popular post that day was Liquidators Buy Bankrupt Brands For $175 Million.

Where did they come from?

The top referring sites in 2010 were, WordPress Dashboard,,, and

Some visitors came searching, mostly for matsuflex, kanwal rekhi, ryan matsunaga, rekhi, and tool academy matsuflex.

Attractions in 2010

These are the posts and pages that got the most views in 2010.


Liquidators Buy Bankrupt Brands For $175 Million April 2009


Matsuflex March 2009


Watch Kanwal Rekhi’s Lecture at Michigan Technological University March 2009


Vote For Your Favorite Shape Trademark September 2009


Google Obtains Design Patent For Its Website September 2009

Betty Dukes v. Wal-Mart – Part II

In the prior post, I mentioned the case of Dukes vs. Wal-Mart, where the trial and appellate courts certified more than a million women in a class-action lawsuit alleging employment discrimination at Wal-Mart stores across the United States. If you are the defendant corporation, you now face the scenario in which millions of individuals allege that they suffered similar harm because of systematic employment practices at your organization.  But, how does a plaintiff offer evidence that these disparate individuals located all across the nation indeed faced the same type of harm because of the actions of thousands of different Wal-Mart managers? The ideal way is to interview every single manager and all the allegedly harmed employees. That, however, would be too costly and impractical. Instead, a plaintiff’s attorney hired an expert witness trained in social science research.

In the Dukes vs. Wal-Mart case, the plaintiffs hired the renowned sociology professor William T. Bielby to perform what is known as a social framework analysis. From what I can gather by reading the expert report, this type of analysis surveys the scientific literature on gender-based discrimination to find the organizational and situational attributes that are likely to give rise to cases of gender stereotyping and discrimination in the workplace.  Once the literature is surveyed, the theoretical propositions about discrimination and stereotyping are applied to the case at hand, i.e. Wal-Mart’s employment practices and routines.In this way, the expert made an informed assertion based on primary evidence related to the case by interviewing managers, reading memos, and analyzing policy manuals, organizational charts and statistics that may suggest unlawful gender-based differences in pay and promotion due to systemic employment practices.

The defense, in this case, vigorously attacked the expert witness’ methodology, claiming that it was speculation, and was never tested to show rigorous causality. An unreasonable inference would be required, the defense argued, to conclude that the social framework analysis actually shows Wal-Mart’s employment practices lead to gender based discrimination. To establish causation, the plaintiff’s expert would have to survey managers to find out if there is a causal link between Wal-Mart’s practices and the managers’ behavior towards women. This, however, was not the case and the plaintiff readily concluded that the purpose of social framework analysis was not to establish actual causation. The plaintiff defended the method by saying:

“Wal-Mart’s insistence that Dr . Bielby quantify the effect of stereotypes is similarly lacking in merit . In his deposition, Dr . Bielby readily admitted that he did not calculate how often stereotypes affect decision-making at Wal-Mart. This is not a flaw that makes his opinion unreliable. Dr. Bielby used social framework analysis to show that Wal-Mart created a system that increased the likelihood of stereotyping, and which provides an explanation for the statistical disparity between men and women in pay and promotions.” (Plaintiffs Opposition to Defendant Wal-Mart Stores, Inc.’s Daubert Motion, to Strike Declaration, Opinion and Testimony of Plaintiffs’ Expert William T. Bielby, Ph.D., at.11).

The plaintiffs also argued that evidence standards required that the expert’s testimony had to be admitted to argue that the class of more than a million women should be certified.They stated:

“Because the Court acts as the gatekeeper, not the fact-finder, the Court is not charged with deciding whether the expert’s opinion is factually correct .’ See In re Paoli R.R. Yard PCB Litig., 35 F.3d 717, 744 (3d Cir. 1994) (stating that plaintiffs “do not have to demonstrate to the judge by a preponderance of the evidence that the assessments of their experts are correct, they only have to demonstrate by a preponderance of evidence that their
opinions are reliable” and that “[t]he evidentiary requirement of reliability is lower than the merits standard of correctness .”). (Plaintiffs Opposition to Defendant Wal-Mart Stores, Inc.’s Daubert Motion, to Strike Declaration, Opinion and Testimony of Plaintiffs’ Expert William T. bielby, Ph.D., at.1-2).

As indicated by the plaintiffs, it ultimately is the responsibility of a jury, and not a judge, to determine the credibility of the expert’s social framework analysis, which suggests, but does not causally establish that Wal-Mart’s practices create a likelihood of gender discrimination. If the expert testimony is admitted and the judge finds it is reliable, the judge may use it, however, as he did in this case, to certify the class and allow the more than one million women to proceed as combined plaintiffs. In this case, the class amounted to a record-breaking number of plaintiffs included in one case.

The U.S. Supreme Court is scheduled to hear Dukes vs. Wal-Mart in the 2011 term.

Betty Dukes v. Wal-Mart – Part I

Can 1.5 million women stand together in a class-action suit to sue Wal-Mart for employment discrimination?

That’s the narrow legal issue that the U.S. Supreme Court recently agreed to decide by reviewing the Ninth Circuit appellate case Betty Dukes v. Wal-Mart. This specific issue gets to the heart of what is known as a class-action lawsuit, which allows bundling the complaints of similarly situated plaintiffs into one lawsuit. In this case, a woman named Betty Dukes has raised allegations the lower trial and appellate Courts found were shared by more than 1 million female Wal-Mart employees. Ms. Dukes and the the other plaintiffs in the suit allege that women who work for Wal-Mart:

(1) are paid less than men in comparable positions, despite having higher performance ratings and greater seniority; and

(2) receive fewer — and wait longer for — promotions to in-store management positions than men.

Whether these plaintiffs were appropriately grouped together and certified as a “class” by the initial trial court in California is the issue that will be examined in the Supreme Court’s pending review. This will be a very important decision that will impact the viability of other class-action lawsuits, and by extension, the liability that American corporations may face in a wide range of future class action lawsuits.

In several upcoming posts, I will examine another issue that is under-analyzed, yet equally important and fascinating: I’ll discuss and analyze the role of expert witnesses who rely on social science research to support allegations made by plaintiffs. These experts are an important source of information that juries rely on to help determine factual matters that determine whether plaintiff wins or loses. For example, a central claim made by the plaintiffs in the Dukes vs. Wal-Mart case is that:

“Wal-Mart’s strong, centralized structure fosters or facilitates gender stereotyping and discrimination, that the policies and practices underlying this discriminatory treatment are consistent throughout Wal-Mart stores, and that this discrimination is common to all women who work or have worked in Wal-Mart stores.” (Dukes v. Wal-Mart Stores, Inc., 509 F.3d 1168, at 6147 (2010).

In the next post, I’ll discuss the methods and social science literature that Dr. William T. Bielby, the plaintiff’s expert in the Dukes v. Wal-Mart case, relied on to determine that in his opinion: “Personnel policy and practice at Wal-Mart as implemented in the field has features known to be vulnerable to gender bias”.

Dr. Bielby is a sociology professor, and his expert determination based on a review of social science literature was admissible in court, despite some interesting challenges made by the defendant to discredit the evidence and testimony, which I also will examine in an upcoming post.