L3C Crowd Fools NPR; Cooperative Movement Ignored Again

There is often a difference between what’s true and what some folks just want to be true – and that contract was on vivid display during NPR’s Morning Edition on March 9.

Reporter April Dembosky and her editors accepted at face value some highly questionable assertions by proponents of so-called Low-Profit Limited Liability Corporations (L3Cs). Authorized under Vermont law as well as the law of several other states, LC3s are supposed to be a hybridization of non-profit corporations and for-profit limited liability companies (LLCs). It’s basically heads-I-win-tails-you-lose public policy for so-called ‘social entrepreneurs’ who want the law to treat them like nonprofits unless and until they start making a lot of money, in which case they can shed their low-profit status and act like every other profit-maximizing firm.

According to NPR, “right now, businesses can be either for-profit companies or nonprofit organizations. The law doesn't recognize a corporate form that falls in between.” As authority for these propositions, Morning Edition cited California attorney Todd Johnson.

Though NPR doesn’t mention it, Johnson is a partner with a huge global law firm known as Jones Day. (Here’s a few highlights from the Jones Day client list: Abbott Labs, Bank of America, Chevron, PepsiCo, Pfizer, JP Morgan, and Verizon. According to the Firm’s web site, Johnson's big client is SunPower, builder of the world’s biggest solar power project (and a publicly traded, traditional business corporation with $2.6 billion in assets and $450 million in annual sales as of September 2009)).

It appears that Attorney Johnson is so busy representing, according to the bio on his firm’s web site, “founders, investors, and companies pursuing renewable energy solutions, impacts on sustainable growth, energy efficiency, energy optimization, corporate governance transparency, and those pursuing "for-benefit" models,” that he simply doesn’t realize that there is, in fact, a legally recognized corporate form that “falls in between” for-profit and nonprofit. It’s called the cooperative.

This lack of awareness on Johnson’s part – and that of NPR – would be understandable if cooperatives were some obscure phenomenon limited to owners of Grateful Dead t-shirts and their loved ones. But, in fact, cooperatives are responsible for wiring up 71 percent of the continental U.S. for electric service. Cooperatively organized banks (i.e., credit unions) are the only banking sector that didn’t suffer a meltdown in 2008 and nearly take the entire U.S. economy down with it. Cooperatives are a bulwark of the U.S. agricultural sector – ever heard of Ocean Spray, Land o’ Lakes, Cabot, Organic Valley, and Sunkist? These are cooperatives. Associated Press is a cooperative. Housing cooperatives provide 1.5 million homes in the U.S. Food co-ops invented the natural foods industry. Altogether, according to the web site www.go.coop, 47,000 co-ops in the United States serve 130 million people.

Attention Todd Johnson and NPR — that’s 43 percent of the U.S. population, all enjoying the benefits of true social entrepreneurship as provided by entities duly organized under applicable state law as neither nonprofit nor for-profit.

The typical plot line for those who tout L3Cs, “social entrepreneurship” and other euphemisms for profit maximization quickly moves to Ben & Jerry’s. So, too, with NPR – which bought the enduring myth that Ben & Jerry’s was a groovy little Vermont company that (1) was compelled to offer its shares publicly in order to remain viable and reach its potential as an avatar of corporate responsibility, and (2) was forced by evil yet enduring principles of corporate law and fiduciary responsibility to accept a buyout offer from Unilever, a monolithic food conglomerate based in Europe.

Wrong again! As Professor Antony Page of the University of Indiana School of Law explained last month at a conference on L3Cs at Vermont Law School, the truth about Ben & Jerry’s is much more complicated and tends to cast Ben and Jerry themselves (especially co-founder Ben Cohen) in a much less favorable light.

According to Page, Cohen himself had spearheaded a prior, unsuccessful effort to buy Ben & Jerry’s back from the people who had acquired shares of Ben & Jerry’s in the open market. And this failed tender offer triggered so-called Revlon duties, leading inexorably to the Unilever sale. Revlon, a 1986 decision of the Delaware Supreme Court (considered the gold standard for principles of American corporate law), basically established the principle that once a board of directors has put its company “in play,” they are obliged to accept whatever offer is best (i.e., most lucrative) from the perspective of the shareholders.

That’s a good deal more nuanced than what Cohen was heard to say the other day on NPR: “The laws required the board of directors of Ben & Jerry's to take an offer, to sell the company despite the fact that they did not want to sell the company. But the laws required them to sell the company to an entity that was offering an amount of money, far in excess of what the stock was currently trading at.”

The point here is not to trash Ben, Jerry, or Ben & Jerry’s (although, as Page also noted, they didn’t come out with their “caring capitalism” schtick until the late 1980s, running the company pretty much like any other business prior to that and even, at one point, entering into and backing out of an agreement to sell the company). The point is that most of the hype around LC3s as a needed reform to allow so-called social entrepreneurs to flourish in what would otherwise be a greed-based economy is nothing more than mythology.

Meanwhile, cooperatives are a reality and have been so since a bunch of textile workers in Rochdale, England, trying to fight back against the depredations of the Industrial Revolution, formed the Rochdale Equitable Pioneers Society in 1844. Since that first cooperative, this unique and legally recognized form of doing business has flourished around the world. Cooperatives are democratically controlled (with boards elected on a one-member-one-vote basis), are free to be as entrepreneurial as Ben Cohen (or any of Todd Johnson’s clients) would like to be, pay their share of taxes (unlike tax-exempt nonprofits), and exist to serve their members rather than faraway shareholders seeking profit.

Wrong! Valley News Overstates Case for Free Speech

The Local Daily Newspaper was certainly on the right side of the virtue line when it came to the defense of the New Hampshire lawmaker who wrongly claimed during a legislative debate that fifth graders at a Nashua school had been shown pictures of naked men and taught how to engage in anal sex as part of their classroom instruction. It matters not that Rep. Nancy Elliott (R-Pleistocene) uttered pernicious falsehoods in an effort to cause bigotry to triumph over New Hampshire's legalization of same-gender marriage. As the paper pointed out in its March 7 editorial, the Speech and Debate clauses of both the U.S. and New Hampshire constitutions provide absolute immunity to legislators in these circumstances.

But, as newspapers are apt to do when pontificating about free speech, the Valley News overstated its case. According to the editorial, "Free societies hold it as an article of faith that the only proper remedy for inaccurate speech and spurious ideas is more speech, which will, in the end, expose their lack of merit."

Wrong! There's another remedy for inaccurate speech -- one that gives newspapers the shivers -- it's called a defamation lawsuit. The law allows you to recover civil damages if someone disseminates falsehoods about you and this has the effect of harming your reputation. And, by the way, it matters not whether the falsehood is disseminated negligently or intentionally. From a legal standpoint, a person's reputation is a priceless asset and, once damaged, can never be fully repaired.

Forty-six years ago, the U.S. Supreme Court had one of its finest hours when it decided New York Times v. Sullivan. This important First Amendment case limited, but did not eliminate, the ability of public officials to recover damages in defamation lawsuits. Subsequent cases extended this principle to "public figures" as well as public officials.

So, whether it is the racist southern sheriff at issue in Sullivan or whether it is Rev. Jerry Falwell (who famously lost his defamation lawsuit against Larry Flynt's Hustler Magazine), certain people will have to suffer harm to their reputations in the interest of allowing open and robust discussion of important public issues. Public figures can still win defamation lawsuits, but they have to prove by clear and convincing evidence (a tougher standard than the "preponderance of the evidence" standard in garden variety civil litigation) that the source of the falsehood acted with actual malice. In this context, "actual malice" is a term of art that means either actual knowledge the statement was false or a reckless disregard for the truth or falsity of the statement.

The Local Daily Newspaper might like you to believe it may write anything it wants about you -- true, false or somewhere in between -- without being subject to any possible legal liability should it harm you thereby. But this is patently wrong and the newspaper knows it's wrong. How ironic that the falsehood in the Valley News editorial would meet the "actual malice" standard if it had been made about a person who could bring a lawsuit!

Oregon's $20 Million Study Hall: A Sunshine Law Parable for Vermont

Sunshine is a virtue in most every field of human endeavor, but possibly nowhere more so in the realms of architecture and law.

When designing new buildings, architects typically strive to admit as much natural light because human beings are known to thrive in such conditions. When designing instrumentalities of government, lawmakers seek to build notions of accountability and openness into the organizational structure because, as Louis Brandeis famously observed, sunshine is the best disinfectant.

Louis Brandeis would likely have an aneurism if he ever visited the University of Oregon (UO) in Eugene.

Driving into town along Franklin Boulevard, and arriving on the campus, three things are immediately striking. One is a brand new rectangular building, clad almost entirely in glass. In fact, the building has an inner and an outer sheet of glass, between which is an insulating layer of air and a skrim of stainless steel strands that just enough light to make the interior spaces pleasant. This is the classic Miesian box, updated for 21st Century energy efficiency imperatives, two sides of which seemingly float on a placid reflecting pool , constructed in every respect with the most expensive possible materials and craftsman ship.

Though this remarkable building looks like it might be a library for rare books, or perhaps an art museum, or maybe even the denizen of some lucky university bureaucrats, the actual program, revealed in freestanding metallic lettering at curbside, is astonishing. The Jaqua Academic Center for Student Athletes is 40,000 square feet of special help for jocks, designed by the prominent Seattle architecture firm Zimmer Gunsul Frasca.

A few hundred feet away is a vast construction site, featuring a gigantic building with impressive trusses still visible from the sidewalk as of March. It is a new basketball arena that, from the standpoint of size, would rival anything that houses an NBA team. Welcome to the world of athletics in the NCAA’s high-powered Pacific-10 Conference.

The third striking object, as one arrives at the university, is not visible until one turns around and faces north. It is a billboard, the top of which shouts: “Respect Public Records Laws.” Beneath this are the words “UO Arena Project” and, below that, “www.nobidcontracts.org.”

Eugene therefore really should be a mandatory field trip for Vermont lawmakers, voting this very Tuesday on a bill that would exempt certain records of the University of Vermont, and other state-owned institutions of higher education, from Vermont’s public records statute. At issue are record relating to the schools’ private donors.

Donors are definitely driving the bus at UO, a campus that is gradually becoming a sprawling athletic complex with a few academic out-buildings appended thereto. As the billboard suggests, university officials commissioned the Knight Arena behind closed doors, using money donated by alumnus and Nike shoe mogul Phil Knight. His donative inclinations are also what bankrolled the opulent tutoring center – indeed, a looming image of his face, etched in mirrored glass, decorates two bathrooms. What’s odd is that they’re women’s bathrooms.

What was the budget of this high-gloss building? University officials have steadfastly declined to say, according to the local papers. One low-level employee from the facilities department mentioned the figure of $20 million to The Oregonian.

Down Franklin Boulevard, the $200 million Knight Arena will accommodate more than 12,000 spectators. Eugene had a population of roughly 138,000, according to the 2000 Census. Imagine a public university with the pluck to build a basketball court that can welcome nearly ten percent of its host city’s population and you get a sense of what the University of Oregon is all about.

TVA Architects in Portland designed the Knight Arena in cooperation with Ellerbe Beckett, the mega firm that designed the homes of the Atlanta Braves, the Arizona Diamondbacks, the NBA’s San Antonio Spurs, and the NFL’s Seattle Seahawks, among lots of others. According to the Oregon Daily Emerald, it will be the nation’s most expensive basketball arena.

The “no bid contracts” web site is the work of something called the Foundation for Fair Contracting, funded by a group of contractors and labor unions, including the Teamsters. According to their web site, “Our concern is not with the basketball arena, but rather the process by which $200 million of bonds (backed by the full faith and credit of the state of Oregon) were spent through a questionable use of an emergency declaration, special procurement and sole source procurement that exist exclusively for the Oregon University System” under Oregon law.

Their web site complains that an open-records request for the contracting documents was rejected. When the planning process began seven years ago, the university’s president noted that, because the school and its donors created a separate, and private, nonprofit organization to build the project, public scrutiny would be limited.

It would be improvident for a visitor from Vermont (in town to attend an environmental law conference at UO’s law school) to speculate on the merits of these controversies. But two realities emerge.

First, the Jaque Center is a stunning work of contemporary architecture – the very embodiment of the reality that true simplicity is both beautiful and expensive. The second is that this orgy of athletic construction, at a school where NCAA competition seems to trump all, appears to be unfolding beyond the realm of public accountability.

Attention Vermont Legislature: This is what happens when state-supported educational institutions are allowed to raise and spend tens if not hundreds of millions of dollars behind tightly shut doors. Vermont’s state-supported institutions of higher education still put academics first. But when donors call the shots, doing so outside the normal requirements of public scrutiny, athletic boosterism can too often become the driving strategic priority.

And the result? A $20 million study hall.

[Picture: The University of Oregon's Jaqua Academic Center for Student Athletes at night.]

From the Dept. of "Letters We Wish We'd Written"

To the Editor [of the Valley News]:

The actions of the Republican Party ("the Party of No") have precedents. Having heavily contributed to the financial meltdown of 1928 and the Great Depression that followed, the GOP adamantly opposed Securities and Exchange Commission oversight of the corporations that had caused it. Sound familiar?

It fought against the WPA and Civilian Conservation Corps, both of which provided so many jobs and built America's infrastructure of schools, roads, parks and dams durring that Depression.

Republicans oppossed the Rural Electrification Agency that brought electricity to underserved rural areas and farms -- and generated unprecedented growth markets for electrical appliances, improved farm efficiencies, and produced new factories.

They resisted the TVA and Columbia River dam projects that later underpinned American's modern steel, aluminum, aircraft, and nuclear programs and saved the Allies in World War II. The GOP's "America First" wing vociferously opposed building up the U.S. military prior to World War II and the lend-lease programs programs that enabled Britain to survive. Oops!

Republicans opposed going off the gold standard which, if continued, would have devastated lend-lease -- and U.S. and world economic growth both pre- and cost-World War II. They repeatedly tried to dismantle the Food and Drug Administration, designed to keep ineffective or unsafe medicines off the U.S. market.

They harassed those who favored expansion of our national parks and forests, which were envisioned by their own Teddy Roosevelt and now provide recreation and safe water sheds for many important population centers.

They fought Social Security, Medicare and Medicaid, which have saved so many lives and built our medical education, research and hospital infrastructures -- and provided millions with much-needed jobs and safety nets against catastrophe.

The GOP opposed labor unions, the Fair Labor Practices Act, the Civil Rights Acts, the 40-hour week, equal pay for women, and the programs that cleaned up American's waterways and air, while creating both $3.5 trillion a year in well-paid American jobs (until Bush 2001) and preventing our cities from becoming (literally) uninhabitable.

Think where our world would be if these earlier "tea baggers" had prevailed in their attempts to further line the pockets of their rich supporters.

James Brian Quinn
Hanover

[The above appeared in the Valley News on February 16, 2010. I don't know the author, though I note that the web site of the Tuck Business School at Dartmouth College identifies a James Brian Quinn as a professor emeritus.]