Max Planck Institute for Intellectual Property and Competition Law For further volumes/weitere Bände: http://www.springer.com/series/7760 MPI Studies on Intellectual Property and Competition Law Volume 19 Edited by Josef Drexl Reto M. Hilty Joseph Straus Wolfgang Fikentscher • Philipp Hacker Rupprecht Podszun FairEconomy Crises, Culture, Competition and the Role of Law Wolfgang Fikentscher Max Planck Institute for Intellectual Property and Competition Law Munich Germany Philipp Hacker Humboldt University Berlin Berlin Germany Rupprecht Podszun Max Planck Institute for Intellectual Property and Competition Law Munich Germany ISSN 2191-5822 ISSN 2191-5830 (electronic) ISBN 978-3-642-36106-7 ISBN 978-3-642-36107-4 (eBook) DOI 10.1007/978-3-642-36107-4 Springer Heidelberg New York Dordrecht London Library of Congress Control Number: 2013933135 © Springer-Verlag Berlin Heidelberg 2013 This work is subject to copyright. 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Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com) Foreword This book aims to show that imminent economic crises can be discovered earlier, ongoing crises better controlled, and past crises healed more efficiently if certain economic laws of freedom and fairness, of risk-taking and liability are observed. Its three co-authors submit their ideas about what free and fair competitive economy and adjacent social cost economy may contribute to foresee, mitigate and overcome crises in national, regional and world economies. At the core of this concept is a functioning market economy with competition at its center. This economy, however, is also workable in a culturally freedom- and justice-oriented society where competition is absent or of no interest. The central economic value under scrutiny in this investigation is contained in a principle of a merchant’s ordinary, recognized behavior and engagement in trade and commerce. Part of this behavior and engagement is an adequate involvement in taking economic risks and carrying certain legal responsibilities if those risks become reality. To initiate a market, to keep it going, to protect it against disturbances and in case of emergency to imitate it (by “as-if-competition”), rules concerning economic freedom of competition are required. Free competitive bargaining includes entering into economic risks and someone to be held liable if they hit. Therefore, competition involves a decision of whether to keep a risk concealed or having to bring the business partner up-to-date. Whether the one or the other is recommendable or even due, is judged by legal rules regulating fair competition. Thus free competition has to be fair and fair competition concerns, among other circumstances of the deal, the relation between risk and liability. The offer to sell a toxic derivative as well as the incitement to acquire one serve as an example. The title “FairEconomy – Crises, Culture, Competition and the Role of Law” aims at indicating this program.1 The book consists of five chapters, on the anthropological and economic foundations of FairEconomy as a free market system (drafted by Wolfgang Fikentscher), on Rules of Freedom and Fairness (drafted by Rupprecht Podszun), on Risk and Liability (drafted by Philipp Hacker), and on possible Sanctions and some 1 The unusual word combination “FairEconomy” is to distinguish between the authors’ intent to concentrate on a study on reasons and dealings with economic crises from the point of view of competitive economies and social cost economies on the one hand, and the so-called Fair Trade movement that propagates and organizes procurement and supply of food and merchandise from developing countries, produced there under humane conditions such as minimum wages, ILO conforming labor conditions, exclusion or reduction of child labor, protection of environment, sustainability of harvesting, etc., on the other. Surveys on Fair Trade in this sense: www.fairtradefederation.org; Raschke, Fairer Handel. Engagement für eine gerechte Weltwirtschaft, 2009; Kuhn, Fairer Handel und Kalter Krieg, 2005; Stiglitz/Charlton, Fair trade for all, 2005; Warrier, The politics of fair trade, 2011. FairEconomy, by contrast, focuses on the engagement in markets, under fair conditions, in the broad sense of an economic system. V VI Foreword Procedural Aspects (drafted by Wolfgang Fikentscher). Rupprecht Podszun provided the draft of the summary. The contributors joined in working on all texts so that the scientific responsibility remains with all three co-authors alike. The links between the concepts of a free market system (Chapter 1), economic freedom and fairness (Chapter 2), risk and liability (Chapter 3) and sanctions (4) are discussed in Subchapter 1.5 below. The three authors are affiliated with the Max Planck Institute for Intellectual Property and Competition Law, Munich. Josef Drexl, one of the Institute’s directors, encouraged the authors from the beginning and offered many valuable comments. The authors are very grateful to him. They also wish to thank the editors of this series and Dr. Brigitte Reschke from Springer for their support to publishing “Fair Economy”.In the Max Planck Institute, a politically and economically independent research institution, fundamental aspects of free and fair competition form part of its daily agenda. In 1993, the presentation of a Draft International Antitrust Code and, in recent years, proposals for the reform of the law of unfair competition to European Union authorities and the World Intellectual Property Organization, Geneva, reflected activities within the framework of said agenda. The present series of economic crises gave rise to resuming the idea to contribute old and new thoughts to the field of national, regional and international market and competition issues and to submit them to the interested public. Of interest are not the histories of these crises as such that began to attract public attention in 2006 with the real estate crisis in the U.S.A., and were followed by the international banking crisis in 2007 and the general economic crisis of 2009, which in turn triggered the debt and financing crisis of 2010 including the Euro crisis of 2011. Instead of focusing on particular facets and singular acts of this drama, the focus is on the underlying story, that is, on what might have gone wrong with regard to the driving forces of contemporary economy: competitive market behavior in a globally interconnected world. Thus, our suggestions do not contain blueprints for formalized legal provisions. They are meant as a stimulus for further thought. Looking for a general trend underlying the unrest and upheavals not only in the economic sphere – which of itself is broad enough – but also with respect to political, cultural and societal longings, one concern or drive seems to be evident: the longing for individual participation in matters that affect oneself. In politics, the plea goes for democratization, as in Arabia; in environmental affairs, for individual protection, such as against the consequences of oil spills and global warming; in health, for vaccination campaigns, personal inoculations and the availability of pharmaceuticals; in economics, for private law suits against merger and monopoly power. There is a global mistrust in all existent powers. Private litigation in economic matters is a recurrent theme in these deliberations. In economic matters private enforcement exists in many variations in a number of countries. EU law favors customers’ rights, common law countries use tort actions, the U.S.A know class actions and treble damage claims. Younger antitrust and unfair trade practices systems often prefer a public law administrative approach over private claims raised by individual victims of restraints of competition and unfair trade practices. The PR of China, China RoC and Indonesia are examples. Foreword VII Yet, these jurisdictions also have private enforcement mechanisms in place. India’s collective claims use a middle road by rallying economically underprivileged victims around a more powerful and politically respected leader as their authorized plaintiff. Whether to go one way or the other depends on the prevailing social and economic culture and tradition, including the aims a government seeks to achieve by using economy-related litigation. The PR of China, for example, presently opts for government regulated control of economic relations.2 As is common for younger self-industrializing nations, the PR of China partly uses its economic law to protect business at home in a mercantilist way in order to catch up with competing nations.3 Under this ideology, the wealth of nations is seen as the wealth of one’s own nation, and it takes a while until it is seen as a matter of competing individuals of several nations. While the PR of China understandably took a rather selfabsorbed path in the past, it now seems to seek at least minimal cooperation. This is the background for the attempt, repeated in 2011 after a long period of limited activity, to reinforce and expand ASEAN, the Association of Southeast Asian Nations. Now PR China, Japan, Australia, New Zealand and U.S.A. show, if reluctantly, interest in acceding ASEAN as a free trade agreement in one way or another. If successful, ASEAN’s legal impact – administrative measures and/or private claims – will be of interest. One of the major characteristics in today’s economic-political world is the desire to turn to democratic individual participation in daily political and economic life, as against the dictatorship of a one-party system, an aggressive theocracy, a militant junta or a charismatic leader. Those countries in the world that want to pursue cultural diversity and tolerant value assessment could be called – for lack of a name – the “Free Nations”. Amazingly, freedom seeking nations proceeded collectively, but not under this or any other name, in 2010 and 2011 on issues concerning Libya, Syria and Iran. They acted as nations that wanted to resist cross-border human right abuses and expansionist trouble-making.4 Would Free Nations settle on rules of economic law and good performance intended to establish and maintain social and economic justice and fairness, and would they do so by assigning standing to the individual victim? 2 3 4 Hertz, The Trading Crowd: An Ethnography of the Shanghai Stock Market, 1998; Fikentscher, Die Rolle von Markt und Wettbewerb in der Sozialistischen Marktwirtschaft der Volksrepublik China: Kulturspezifisches Wirtschaftsrecht, GRUR Int. 1993, 901 – 909; Chinese translation by Shao Jiandong in: Jahrbuch des Deutsch-Chinesischen Instituts für Wirtschaftsrecht der Universitäten Nanjing und Göttingen 4 (1993) 17 – 37. Masseli, The Application of Chinese Competition Law to Foreign Mergers: Lessons from the Draft on New Guidelines, Journal of European Competition Law & Practice (2012) 3 (1): 102-109. An early proposal: W. Fikentscher, Blöcke und Monopole in der Weltpolitik: Die Herausforderung der Freien Nationen, 1979 ; Chinese translation by Yeong-chin Su, 1985. Contents 1 Anthropological and Economic Foundations of FairEconomy as a Free Market System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Cultural premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1.1 The meaning of economy. The fund theory . . . . . . . . . . . . . . . . . . . 1 1.1.2 Culture and environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.2 Societal premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.3 Methodological premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1.3.1 The Martin-Rössler-Problem. Formalism or substantivism? Two determinisms and the role of empiricism . . . . . . . . . . . . . . . . . 8 1.3.2 The Jerry-Moore Problem. Inherent structures or open, but cautious generalizations? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.4 Dogmatic contours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.4.1 On reading and misquoting Adam Smith’s theoretical propositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.4.2 The environment- and culture-conscious free and fair market economy, its institutional character, and its societal elasticity limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 1.4.3 New economic institutionalism . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 1.4.4 Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 1.4.5 A principled basis for free and fair economics . . . . . . . . . . . . . . . . 29 1.4.6 The social aspects of the invisible hand . . . . . . . . . . . . . . . . . . . . . 35 1.5 Links between freedom and fairness of a market economy, and the risk and liability mechanism (a preview of Chapters 2 to 4) . . . . 44 1.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 2 Rules on Competition after the Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 2.1 Freedom needs regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 2.1.1 The two dimensions of freedom . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 2.1.2 Systemic regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 2.1.3 Challenges to the freedom principle . . . . . . . . . . . . . . . . . . . . . . . . 52 2.1.4 Market requirements and market failures . . . . . . . . . . . . . . . . . . . . 55 2.1.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 2.2 Rethinking competition rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 2.2.1 Competition and market power . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 2.2.2 Competition law enforcement in financial markets . . . . . . . . . . . . 59 2.2.3 Competition rules for a finance-driven economy . . . . . . . . . . . . . . 63 2.2.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 2.3 Markets need fairness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 2.3.1 Three characteristics of fairness . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 2.3.2 Fairness, freedom and market failures . . . . . . . . . . . . . . . . . . . . . . 75 IX X Contents 2.3.3 Challenges to the fairness principle . . . . . . . . . . . . . . . . . . . . . . . . 2.3.4 Fairness as an international concept . . . . . . . . . . . . . . . . . . . . . . . 2.3.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Unfair financial transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.1 The enforcement lacuna . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.2 Starting Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.3 The concept of general clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.4 Rules on fairness in financial transactions . . . . . . . . . . . . . . . . . . . 2.4.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 80 82 82 82 85 88 89 92 3 A Matter of Risk and Balance – Discussing a System of Liability for Financial Products . . . . . . . . . . . . . . 95 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 3.2 Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 3.2.1 Products without product liability . . . . . . . . . . . . . . . . . . . . . . . . . 96 3.2.2 Benefits of securities, exemption from liabilities . . . . . . . . . . . . . 98 3.2.3 Two perspectives on risk: mathematics and behavior . . . . . . . . . . 99 3.2.4 Two types of agents: banks originating credits and entities issuing securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 3.2.5 A focus on the issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 3.2.6 A change of paradigms: rationales for a system of strict liability on the part of the issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 3.2.7 The basic features of a liability system for financial products . . 105 3.3 Setting incentives and shaping behavior . . . . . . . . . . . . . . . . . . . . . . . . 109 3.3.1 Incentives on both sides . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 3.3.2 Advantages of private enforcement . . . . . . . . . . . . . . . . . . . . . . . 110 3.4 Concrete contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 3.4.1 Applicability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 3.4.2 Conditions for liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 3.4.3 Limits to liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 3.4.4 Distribution of risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 3.5 Summarizing conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 3.5.1 General consequences for the buyer . . . . . . . . . . . . . . . . . . . . . . 128 3.5.2 The general clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 3.5.3 Strict liability of the issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 3.5.4 Lessons from and for the crisis . . . . . . . . . . . . . . . . . . . . . . . . . . 129 4 Sanctions and Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 The normative framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.1 International Treaties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.2 Self-executing general clauses. Direct application . . . . . . . . . . . 4.1.3 Possible sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Sanctions under contracts and torts law, including rules of equity . . . . 4.2.1 The universal meaning of prima facie tort theory of liability . . . 4.2.2 Breach of statutory duty – the tort action of avail . . . . . . . . . . . . 131 131 132 134 136 138 138 140 Contents XI 4.2.3 Torts, contracts, and criminal law (and equity) . . . . . . . . . . . . . . 142 4.2.4 Recent developments in democratic theory and politics and their impact on private litigation in legal-economic affairs . . 142 4.2.5 Public law interventions aiming at preventing, mitigating and curing crises into private law creations such as corporations and contracts . . . . . . . . . . . . . . . . . . . . . . . . 144 4.2.6 Single or class actions. Blocking laws. Ordre public . . . . . . . . . . 146 4.3 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 5 Conclusion: the Concept of FairEconomy . . . . . . . . . . . . . . . . . . . . . . . . . 149 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 XII Contents Authors Wolfgang Fikentscher is an emeritus professor of law for civil, commercial, intellectual property and comparative law at the LMU University of Munich and an External Scientific Member of the Max Planck Institute for Intellectual Property and Competition Law in Munich. He holds course on anthropology and methods of law; his main fields of research are competition law and comparative legal-economic cultures. His ethnographic fieldwork covers pueblo and tribal laws in the USA and Taiwan. Prof. Fikentscher has also served as a guest professor at universities and institutions in Ann Arbor, Georgetown, Yale, Berkeley, Nanjing, Wassenaar (NIAS), Santa Fe and Portola Valley (Gruter Institute). He has published on civil and comparative economic law, methods and cultures of law. Philipp Hacker studied law in Munich and Salamanca with a focus on competition and intellectual property law. After a foray into the fields of literary studies and philosophy, he recently completed his legal traineeship in Berlin. Currently, he is preparing his Ph.D. thesis on the influence of behavioral economics on European private law. Rupprecht Podszun is a Senior Research Fellow at the Max Planck Institute for Intellectual Property and Competition Law in Munich. In the winter semester 2012/ 2013 he served as Acting Chair of Civil Law and Economic Law at the University of Bayreuth. He is a member of the Asian Competition Law and Economics Centre, Hong Kong, and was a Visiting Scholar at National Tsing Hua University, Taiwan, in 2009. He has also worked as a case handler at the Bundeskartellamt, the German competition authority. His main fields of research are competition law, law of civil procedure and institutional questions on legal regimes. XIII