Warren Buffett once called credit default swaps "financial weapons of mass destruction" — and later bought a mess of them.

Why would the Oracle of Omaha turn such a seeming hypocrite?

He didn't.  Not really.  When he got CDSs, he did it to protect himself against possible losses on actual investments he'd made.  A CDS, you see, gives the purchaser an insurance policy against Bad Things that could happen to a firm whose stock, bonds, or other securities you've invested in.  If the outfit defaults on a loan, drops below $X million in market value, delists from a stock exchange, or moves headquarters to Antigua all of a sudden – to name a few examples of possible "credit default" events — your investment likely will look shakier than when you acquired it.  The CDS helps assure that you'll at least get your money back.

Mr. Buffett had in mind a different kind of CDS buyer — ones who just liked to bet that Bad Things will occur.  Speculators.  Riff-raff.  Hooligans.  Worse — market manipulators!  If enough of them elbow their way into the notional $583 trillion market — yes, Blawgletter did say trillion — too many folks would want the Bad Things.  Which really screws up the investing community's incentives.  Makes the effect of Bad Things on the financial system and the broader economy unpredictable.  Possibly causing a meltdown.  Which it almost did in 2008.

Okay.  So Congress passes financial reform — the Dodd-Frank law — in 2010.  The statute includes a direction for the Securities and Exchange Commission to write rules that would make CDSs and like instruments less dangerous.  The rulebook must cover exchanges and facilities that trade CDSs.  The SEC came out with the rulebook in October 2010.

Last week, the Department of Justice said it liked the SEC's draft but offered an improvement in one area.  Wall Street, the DOJ's Antitrust Division said, shouldn't control the game.  The rules should bar Wall Street from owning 50 percent or more of these Securities-Based Swap Execution Facilities and National Securities Exchanges, the Division's Chief, Christine Varney, wrote.  Indeed, firms that buy and sell CDSs or otherwise participate in the CDS industry should own more like 40 percent — tops.

Why, you ask?  Do you really need to ask?  If you let an industry run the game, it will find a way to game the game.  Add in people who have no reason to game the game.  Let them collectively exercise control.  Allow Wall Street firms to contribute their sponsorship and expertise.  But, please, don't let the fox guard the hen house.  Because we already know what'll happen to the hens then.

Happy 2011, y'all. 

If you feel a wee bit sluggish on the first Monday of the New Year, don't fret.  All of us have a touch of it.  March forward.  It will pass.

Blawgletter feels something else today.  The red face thing.  Blushing.  Because before now we hadn't given you a link on our Blawgroll to one of the best blogs on juries, jury research, and jury trials:  The Jury Room.

Our friend Doug Keene (of Keene Trial Consulting out of Austin, Texas) runs the thing, with ample help from Rita Handrich.

We'd somehow missed The Jury Room until we studied the winners of ABA Journal's Blawg 100 for 2010.  And there, in the "Niche" group, we found Doug's splendid blog.  We urge you to check it out.

Also, by the way, check out Doug's trial consulting skills.  Dr. Keene aided us with a case that went to verdict not long ago, so we know of what we speak.  Doug did a terrific, first-class job.  And we enjoyed working with him.  So will you.

Do you text?  You know — that typey thing you do with your mobile phone.  Choose the number, key in the words, hit send and — presto — the text goes over the wireless network to your best friend's Storm/iPhone/Android/Pixon/i8510/Touch HD/n85/Renoir.

Easy, right?  But not cheap.

Which fact seems to have prompted the filing of class actions awhile back against the four firms that dominate the Short Message Service universe.  The quadrumvirate, the complaints alleged, handle 90 percent of the texting market and fixed prices so that they could jack up rates even as their costs dropped.

Yesterday, the Seventh Circuit upheld a district judge's ruling that the texting complaint stated a claim for price-fixing under section 1 of the Sherman Act.  In re Text Messaging Antitrust Litig., No. 10-8037 (7th Cir. Dec. 29, 2010).  Writing for the panel, Judge Richard Posner noted that the trouble courts have had with Twombly and Iqbal — which some wits call Twom-bal, Tw-iqbal, or even Iq-bly — justified the court in granting mid-course review of an order denying a motion to dismiss.

Judge Posner also tweaked the Court for claiming in Iqbal that Twombly didn't create a "probability" test:

The Court said in Iqbal that the "plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully."  129 S. Ct. at 1949.  This is a little unclear because plausibility, probability, and possibility overlap.  Probability runs the gamut from a zero likelihood to a certainty.  What is impossible has a zero likelihood of occurring and what is plausible has a moderately high likelihood of occurring.  The fact that the allegations undergirding a claim could be true is no longer enough to save a complaint from being dismissed; the complaint must establish a nonnegligible probability that the claim is valid; but the probability need not be as great as such terms as "preponderance of the evidence" connote.

Id., slip op. at 12-13.

There you have it.  Plausible means nonnegligibly probable or moderately likely.  Twombal.

How can you hold down the cost of hiring the best talent?

In lots of businesses, the skill, knowledge, and creativity of workers make a crucial difference.  Those traits matter most on the high end of the high-end.  Think law, medicine, engineering, physics, computer science, rocket science, oenology, epistemology, and macrame.  The high-end could hardly exist without these titans.

So what can you do to manage what you have to pay for their services?  Can you agree with firms that compete with you to limit the talent's compensation?  Can you exchange promises not to solicit one another's employees?  Can you, in short, conspire to restrain trade?

Of course not.

That explains why Lucasfilm reached a deal with the Antitrust Division of the U.S. Department of Justice to end the company's pact with Pixar not to compete for digital animators.  In a Complaint it filed as part of the arrangement with Lucasfilm, the Antitrust Division charged that Lucasfilm and Pixar "entered into an agreement not to cold call, not to make courteroffers under certain circumstances, and to provide notification when making employment offers to each other's employees."  Complaint ¶ 2.  The Lucasfilm-Pixar pact, according to the press release, "eliminated important forms of competition to attract highly skilled employees and, overall, significantly diminished competition to the detriment of affected employees who were likely deprived of information and access to better job opportunities."

Pixar — along with other high-tech companies including Intel and Apple — reached a similar deal with the DOJ in September.  Post here.

Note that an agreement with a direct competitor to limit rivalry over hiring employees constitues a per se violation of the Sherman Act.  A per se violation doesn't require proof of monopoly power.  So you may not want to beguile yourself with the notion that you comply with antitrust law so long as you don't dominate your market.

Mr. Harcourt writes in two languages.  The first you have already recognized as a servic[e]able kind of American.  The second, just quoted, is the tongue indigenous to the race of college professors who inhabit Planet Tenure.  One can tease out some meaning from this tribal patois, but only with application.

James Grant, "Price and Punishment", The Wall Street Journal, Dec. 20, 2010, A21 (reviewing Bernard E. Harcourt, The Illusion of Free Markets).

Bonus:  The sentence that provoked the quote — "Neoliberal penality and its earlier iterations have fertilized the carceral sphere."

 Butch
Butch, the hellcat.

You have to admire a group that feels so little need to persuade non-believers that it describes entire U.S. metropoli as "hellholes".

The American Tort Reform Association does just that, year in, year out.

Max Kennerly, in his Litigation and Trial, takes a look at the latest instance of ATRA's preaching to the tort reform choir.  He points out that ATRA demonizes the City of Brotherly Love because state judges there move cases to trial.

Ahem.

Blawgletter did a short thing about the 2007 incarnation of the, ah, ATRA report, noting a scholarly comment that "[i]t has no apparent methodology".  We added:

[Y]ou'd better not compose your own list of judicial hellholes. That little "(R)" in Judicial Hellholes(R) means ATRA registered it with the Patent and Trademark Office — presumably so they can sue your pants off for tradmark infringement if you use "hellhole" to describe a court where, say, defendants win all the time. Even if you have a methodology.

Don't say we didn't warn you.  Because we did.  Three years ago.

[Update note:  We've swapped the photo of a sleeping Butch, the hellcat, for one of an awake, eyes a-glowing Butch, the hellcat.]

Tree

Happy holidays!

If you find World of Warcraft's first parts tedious — and Blawgletter, in spite of never having played the massively multi-player online game, guarantees that you will — you can cheat your way to WoW skills, fame, and wealth by hiring a bot to do the work for you.  Slackers everywhere rejoice!

But the Warcraft folks, ahem, don't like you to do that — because, they say, it disrupts the gaming fun of non-cheating subscribers.  They — Blizzard Entertainment — even created a program, Warden, that aims to detect and disable bots.

Blizzard told one bot maker, MDY Industries, to cease and desist selling MDY's Glider to lazy WoW players.  MDY answered in that most American of ways — by suing Blizzard (for a ruling that Glider did NOT — did NOT, I tells ya — violate any Blizzard rights).  Blizzard counter-claimed for copyright infringement, violation of the Digital Millennium Copyright Act, and tortious interference with contract under Arizona law.  Blizzard's frosty response largely warmed the district court's heart.

The Ninth Circuit's opinion on MDY's appeal bears reading for any lawyer who does practice, or wants to practice, in the realm of Computers, Computer Software, or Copyright Law.  The panel held:

  • MDY didn't infringe the Blizzard copyright in WoW because a mere violation of WoW's licensing terms — the ones that barred using bots to play the game for you — didn't trench on any copyright right (to reproduce your work, perform or display it in public, or create derivative works from it) due to the fact that the terms allowed users to load the WoW software into their computers' random access memory.
  • MDY didn't violate DMCA section 1201(a)(2) — by using Glider to get around Warden as to WoW's "literal elements" and "individual non-literal elements" — because users could access those elements via the WoW software that resided on their computers.
  • MDY did violate section 1201(a)(2) — by using Glider to circumvent Warden's ability to detect bots like Glider and cut off users' access to WoW servers and therefore its "dynamic non-literal elements" — because, but for Glider, Warden would stop bot-deploying users from experiencing "travel[] through different worlds, hearing their sounds, viewing their structures, encountering their inhabitants and monsters, and encountering other players."
  • MDY didn't violate DMCA section 1201(b)(1) because WoW's licensing terms permit loading of the Warcraft software into the RAM of the user's computer and thus Glider doesn't circumvent a measure that protects a copyright right (i.e., the right to copy the software).
  • Questions of fact precluded summary judgment against MDY on Blizzard's tortious interference claim.

MDY Industries, LLC v. Blizzard Entertainment, Inc., No. 09-15932 (9th Cir. Dec. 14, 2010).

The opinion includes a long dissertation on the panel's furious disagreement with the Federal Circuit's views on the DMCA — something about whether the DMCA requires copyright infringement as an element of a violation.  The Ninth Circuit didn't think so; the Federal Circuit did.  See id., slip op. at 20010-17 (rejecting Chamberlain Group, Inc. v. Skylink Techs., Inc., 381 F.3d 1178 (Fed. Cir. 2004)).

The Fifth Circuit not long ago went with the Federal Circuit on the point but — without explanation — changed its opinion to leave out that part.  See "Fifth Circuit Cuts DMCA Down to Size; "Dongle" in the Software Jungle"; compare the original opinion with the later one.