Resolving Disputes between Manufacturers and Distributors/Dealers

Since at least the last half of the 20th century, manufacturers of consumer goods typically have gotten their products to the end user in the U.S. via independent distributors and dealers or franchisees. Usually the manufacturers are larger companies while the others are smaller entities. They all have a community of interest in promoting the sales of the products at the highest prices with the greatest profits. But there also is a constant tension and friction between them and the potential for disputes. This is at its worst when the manufacturer terminates the distributor or dealer or franchisee.

I frequently was the attorney for the manufacturer in such termination cases. I successfully represented Chrysler Motors Corporation against a terminated Duluth dealer and Benjamin Moore & Company against a terminated St. Paul distributor.[1] I also was able to obtain judicial reduction of adverse results against a manufacturer and a franchisor that had been represented by other counsel.[2] Three of these four cases started in Minnesota’s federal court (Post: Minnesota’s Federal Court (June 28, 2011).

In addition, I helped to settle other such cases. One was for a Canadian manufacturer of snowmobiles. Another, for a U.S. manufacturer of farm equipment. Both of these cases were in Minnesota’s federal court.

Another type of dispute erupted between Chrysler and its Dodge dealer in St. Paul over the planned relocation of another Dodge dealer from East Lake Street in Minneapolis (the automobile row of the early 20th century) to Roseville, a suburb between the Twin Cities. Under a Minnesota statute that sought to protect existing dealers, the St. Paul dealer sued to block the relocation. The trial court, however, decided in favor of Chrysler, and the appellate court affirmed that result.[3]

Because of the costs and risks of such litigation and because of my interest in Alternative Dispute Resolution, I helped other lawyers in the firm draft dispute resolution provisions for various agreements, including distribution agreements.

Often such provisions would first call for mediation where a neutral third-party assists the disputants in trying to settle their disputes. This was my preferred dispute resolution method because it empowered the parties themselves to settle their disputes, because it opened the way for creative solutions that were not possible in court or in arbitration and because it was the least expensive option. Only if mediation failed, would such a contractual provision call for submitting the dispute to arbitration under one of several general sets of arbitration rules where the arbitrator resolves the dispute. Arbitration was preferred to court litigation because the former eliminated the expensive pre-trial discovery and other processes of the latter and because the parties participated in selecting the arbitrator who was seen as a safer decider than an unknown judge or jury.

From the outside these disputes took the form of a large corporation versus a small corporation. But human beings were involved on both sides. The executives of the manufacturer had made decisions they thought were fully justified, and their careers and compensation conceivably could be affected by the resolution of the conflict. The same was true of those on the other side. Moreover, emotions often were intense in such quasi-divorce situations. In one case, the owner of the dealership sued his own lawyer over the settlement of his case against the manufacturer. Later that owner killed his girl friend and was acquitted on the grounds of insanity. I was worried because he might view me as part of the conspiracy against him.


[1] Piccard Motor Co. v. Chrysler Motors Corp., 940 F.2d 1163 (8th Cir. 1991)(held Minnesota statute requiring manufacturer to pay terminated dealer one-year’s fair rental value of facilities did not apply to dealer that owned the facilities); Elvgren Paint Supply Co. v. Benjamin Moore & Co., 948 F.2d 1082 (8th Cir. 1991)(affirmance of summary judgment for manufacturer’s termination of an at-will distributor).

[2] W.K.T. Distributing Co. v. Sharp Electronics Corp., 746 F.2d 1333 (8th Cir. 1984)(remand to trial court to reconsider award of $300,000 damages); W.K.T. Distributing Co. v. Sharp Electronics Corp., 786 F.2d 898 (8th Cir. 1986)(noting trial court’s reduction of damages from $300,000 to $85,000 after remand, but refusing to make further reduction); Team Central, Inc. v. Teamco, Inc., 271 N.W.2d 914 (Iowa Sup. Ct. 1978)(en banc reduction of adverse judgment from $2,550,000 to $1,500,000).

[3] Wilkins Dodge, Inc. v. Chrysler Corp., 426 N.W.2d 903 (Minn. Ct. App.), pet. for review denied (Minn. Sup. Ct. 1988).

Downgrading the U.S. Credit Rating

On Friday, August 5th, after the close of the U.S. securities markets, Standard & Poor’s (S&P) reduced its rating of the U.S. Government’s debt from S&P’s highest rating of “AAA” to its second highest rating of “AA+.” [1]

S&P’s announcement of this action was headlined: “United States of America Long-Term Rating Lowered To ‘AA+’ Due To Political Risks, Rising Debt Burden; Outlook Negative.” The key reasons for this downgrade were the following:

  • “The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”
  • “More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.”
  • “Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.” [2]

In short, this objective outsider concluded, properly I think, that the U.S. “policymaking and political institutions” are not working. As S&P further stated, the U.S. recently has seen “political brinksmanship,” and “the statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.” In addition, S&P noted that “new revenues have dropped down on the menu of policy options.”[3]

While these observations are appropriately phrased in terms of the “U.S. policymaking and political institutions,” they really are a negative assessment of the political objectives, strategy and tactics of the Tea Party contingent of the Republicans in the House of Representatives and to a lesser extent in the Senate.[4]

Moreover, according to S&P, “the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging.”[5] This comment raises the important need for the U.S. to reduce unemployment and achieve higher economic growth, which is made more difficult by the austerity measures promised in the debt ceiling compromise that became law on Tuesday, August 2nd.[6]

If the above were not enough criticism of the U.S. federal government, S&P made the following two ominous statements about its future actions:

  • First, S&P signaled that on Monday, August 8th, it will be downgrading its credit ratings of “the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors.”
  • Second, S&P said, “The outlook on the long-term rating [of the U.S.] is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.”[7] This warning stemmed from S&P’s “downward scenario.” There were two key facts for this scenario. The “recent [U.S.] recession was deeper than previously assumed, so the GDP this year is lower than previously thought in both nominal and real terms. Consequently, the debt burden is slightly higher.” The U.S. is experiencing “sub-par path of the current economic recovery when compared with rebounds following previous post-war recessions.”[8]

Although two other independent credit-rating entities did not change their top ratings of the U.S. government, S&P’s downgrade, the rationale for its downgrade and its ominous warnings of further negative assessments of the U.S. undoubtedly will create next week another turbulent period in U.S. and world security markets.


[1] S&P, United States of America Long-Term Debt Rating Lowered to ‘AA+’ Due To Political Risks, Rising Debt Burden; Outlook Negative (Aug. 5, 2011), http://www.standardandpoors.com.

[2]  Id.

[3]  Id.

[4]  See Post: Disgusting U.S. Political Scene (July 23, 2011); Post: The Founder of Modern Conservatism’s Perspective on the Current U.S. Political Turmoil (July 28, 2011); Post: A Message for Speaker Boehner (July 29, 2011); Post: Dysfunctional U.S. Congress Careens Toward U.S. Default (July 30, 2011); Post: Dysfunctional U.S. Congress Averts Default (Aug. 2, 2011); Editorial, Political Roots in U.S. Economic Crisis, N.Y. Times (Aug. 5, 2011).

[5]  See n.1 supra.

[6]  See n.3 supra.

[7]  See n.1 supra.

[8]  Id.

 

Westminster Town Hall Forum: Fall 2011 Speakers

This coming Fall, the Westminster Town Hall Forum will welcome the following speakers: Norm Ornstein, Jeffrey Sachs, Tom Brokaw and Chris Matthews.[1]

Norm Ornstein
Jeffrey Sachs

Norm Ornstein:”Broken Government: Where Do We Go from Here?” (September 15). Ornstein is a Resident Scholar at the American Enterprise Institute for Public Policy Research in Washington, D.C. He is an election analyst for CBS News and writes a weekly column for Roll Call, the Capitol Hill newspaper. He also serves as co-director of the Transition to Governing Project that seeks to create a better climate for governing. A Minnesota native, he earned M.A. and Ph.D. degrees in political science from the University of Michigan.[2]

Jeffrey Sachs: “Reawakening American Virtue and Prosperity” (October 20). Sachs is Director of The Earth Institute and Professor of Health Policy and Management at Columbia University. As a leading economist, he advocates continuing economic development with environmental sustainability and mitigating human-induced climate change. His latest book is The Price of Civilization, a blueprint for America’s economic recovery. He holds B.A., M.A. and Ph.D. degrees from Harvard University.[3]

Tom Brokaw
Chris Matthews

Tom Brokaw: “The Time of Our Lives: Past, Present, Promise (November 8). Brokaw is a Peabody and Emmy Award-winning journalist. He served as anchor and managing editor of the NBC Nightly News from 1983 to 2005 and now is a special correspondent for the network. His latest book is The Time of Our Lives: Past, Present, Promise which examines changes in America’s life since the Great Depression of the 1930’s and a reflection on our future.[4]

Chris Matthews: “Jack Kennedy: Elusive Hero” (December 8). Matthews is a writer, political commentator and the host of the nightly MSNBC show “Hardball with Chris Matthews”and the weekly NBC panel discussion “The Chris Matthews Show.” Before entering journalism, he was on the staff of four members of Congress and former Speaker of the House Tip O’Neill and also served as a speechwriter for President Jimmy Carter. His latest book is Jack Kennedy: Elusive Hero.[5]

The Forum engages the public in reflection and dialogue on the key issues of our day from an ethical perspective. [6] The Forum is nonpartisan and nonsectarian. Forums are free and open to the public. They are held from noon to 1:00 p.m. (CT) at Westminster Presbyterian Church, Nicollet Mall and 12th Street, in downtown Minneapolis. Each forum is preceded by music at 11:30 a.m. A public reception and small group discussion follow the forum from 1:00 to 2:00 p.m. The Forum presentations also are broadcast on Minnesota Public Radio.


[1] Westminster Town Hall Forum, http://westminsterforum.org/ .

[2] AEI, Norman J. Ornstein, http://www.aei.org/scholar/48.

[3] Earth Institute, Prof. Jeffrey Sachs, Director, http://www.earth.columbia.edu/articles/view/1804.

[5]  Wikipedia, Chris Matthews, http://en.wikipedia.org/wiki/Chris_Matthews.

[6] See Post: Westminster Town Hall Forum (July 25, 2011); Post: Westminster Town Hall Forum: Krista Tippett (July 26, 2011); Post: Westminster Town Hall Forum Marcus Borg (July 27, 2011).

Dysfunctional U.S. Congress Averts Default

The good news: the U.S. Congress and the President, at the last moment, were able to come to an agreement on increasing the U.S. Government’s debt limit and thereby avert a default on the government’s securities.

More good news: military spending is specifically included for possible reduction, rather than leaving all the cuts to discretionary spending for the benefits of our citizens.

The bad news: the Congress demonstrated its functionality in reaching this agreement. The rest of the world has looked in disbelief at the congressional spectacle and has less confidence in our political system and leaders.[1]

More bad news: the agreement calls for cuts in discretionary government spending when our economy is sputtering. Keynesian economics suggests the need for the federal government to run deficits during economic recessions.[2]

More bad news: the agreement means that much attention will continue to be spent on deficit reduction, rather than improving our deteriorated infrastructure and frayed social safety net.

The public is disgusted at the recent spectacle in the Congress and eager to blame all who were involved. Democrats, in my opinion, although not blameless, need to focus attention on the destructive role played by the Tea Party in the House of Representatives and to seek their defeat in the 2012 election.[3]


[1] See Post: Disgusting U.S. Political Scene (July 23, 2011); Post: The Founder of Modern Conservatism’s Perspective on the Current U.S. Political Turmoil (July 28, 2011); Post: Dysfunctional U.S. Congress Careens Towards U.S. Default (July 30, 2011).

[2] Krugman, The President Surrenders, N.Y. Times (July 31, 2011).

[3] Krugman, The Centrist Cop-Out, N.Y. Times (July 28, 2011).

Buying Banks and Selling Hot Dogs Are the Same Under the Law

Federal Reserve Building, Washington, D.C.

In the early 1970’s the Board of Governors of the Federal Reserve System (the Board) approved the acquisition of two Iowa (Bettendorf and Keokuk) banks by Minneapolis-based Northwest Bancorporation (Northwest).[1]

At the time, federal law provided that no acquisition of a state bank by an out-of-state bank holding company was permissible unless such an acquisition was “specifically authorized by the statute laws of the State in which . . . [the acquired] bank is located.”[2] An Iowa statute at the time generally barred out-of-state bank holding company acquisitions of Iowa banks “unless such bank holding company was on January 1, 1971, registered with the federal reserve board as a bank holding company, and on that date owned at least two banks in [Iowa].”[3] This is what is colloquially called a “grandfather clause,” and at the time Northwest was the only out-of-state bank holding company owned or controlled any Iowa banks and thus was the only person covered by this grandfather clause.[4]

The Board’s approval was contested and challenged by the Iowa Independent Bankers Corporation (Iowa Bankers), an association of over 400 Iowa banks on various grounds. The key ground was the Equal Protection Clause of the 14th Amendment to the U.S. Constitution. The Iowa Bankers argued that the Iowa statute violated equal protection by creating two classes of out-of-state bank holding companies: (a) those owning one or no Iowa banks and (b) those owning two or more Iowa banks with Northwest being the only such holding company in the latter class.[5]

The Board in approving the acquisitions declined to rule on this constitutional objection. It said that only the judiciary could do so.[6] Thus, the Iowa Bankers petitioned the appropriate federal court of appeals in Washington, D.C. to set aside the Board’s approval on this and other grounds.

Faegre & Benson was the regular outside general counsel for Northwest, and I was designated as the Faegre lawyer responsible for defending the Board’s approval of the acquisitions. With the help of others at the law firm, I wrote the appellate brief for Northwest and argued the case before the appellate court.

U.S. Courthouse, Washington, D.C.

In February 1975, the appellate court unanimously affirmed the Board’s approval of the acquisitions and dismissed the petition by the Iowa Bankers.

On the Equal Protection issue, the court stated that as the Iowa statute did not create a suspect classification or impinge upon fundamental rights, the court’s review was limited to determining whether the statute had a rational relationship to a legitimate state purpose. The appropriate classes under the statute, said the court, were those holding companies not owning any Iowa banks and those that already did. More importantly, the court concluded it was “perfectly rational for the Iowa legislature to determine that Northwest . . .  [had] a pre-existing stake in the Iowa banking system and [had] . . . proven itself to be a positive force in the system [and] should be allowed to compete on the same basis as other Iowa banks . . . .” Likewise it was rational for the Iowa legislature, according to the court, to decide that Iowa would not be well served if other out-of-state holding companies “were allowed wholesale entry into the Iowa market.”[7]

Jackson Square, French Quarter, New Orleans
French Quarter, New Orleans

At the same time as the Northwest litigation, the same legal issue was presented to the U.S. Supreme Court. In City of New Orleans v. Duke, a New Orleans ordinance banned pushcart vendors in the French Quarter except for those who already had done so continuously for over eight years with only two such vendors (one hot dogs; the other, ice cream) qualifying under that grandfather clause.[8] The Supreme Court held that the ordinance was constitutional. It stated, “When local economic regulation is challenged solely as violating the Equal Protection Clause, this Court consistently defers to legislative determinations as to the desirability of particular statutory discriminations.” Such regulations are valid, according to the Court, so long as their classifications are “rationally related to a legitimate state interest. States are accorded wide latitude in the regulation of their local economies under their police powers, and rational distinctions may be made with substantially less than mathematical exactitude.” Therefore, the Supreme Court concluded that the “record makes abundantly clear that the . . .  ordinance, including the ‘grandfather provision,’ is solely an economic regulation aimed at enhancing the vital role of the French Quarter’s tourist-oriented charm in the economy of New Orleans.”[9]

That is why I say buying banks is the same as selling hot dogs under the law.


[1] Iowa Independent Bankers v. Board of Governors, 511 F.2d 1288 (D.C. Cir. 1975), cert. denied, 423 U.S. 875 (1976). Northwest Bancorporation in 1983 changed its name to Norwest Corporation, which in 1998 was merged into Wells Fargo & Company of San Francisco.

[2] 12 U.S.C. § 1842(d).

[3] Iowa Code Ann. § 524.1805.

[4] 511 F.2d at 1291-92.

[5] Id. at 1292, 1294.

[6] Id. at 1292-93.

[7] Id. at 1294-96.

[8] City of New Orleans v. Duke,  472 U.S. 297 (1976).

[9] Id.

[10] Iowa Independent Bankers v. Federal Reserve Board, 423 U.S. 875 (1975).

The IBM Antitrust Litigation

In 1964 International Business Machines Corporation (IBM) introduced its System/360 mainframe computer system family, the first to cover the complete range of applications, from large to small, both commercial and scientific.[1]

One of the models in the family, System 360/91 (92?), was announced as being as fast as the then fastest machine on the market, Model 6600 from Control Data Corporation (CDC). IBM, however, was slow in producing its 360/91, but its mere announcement allegedly had adverse effects on CDC’s sales of Model 6600. As a result, in December 1968, CDC filed an antitrust lawsuit against IBM. The complaint alleged that IBM had monopolized the market for computers in violation of section 2 of the Sherman Act and that this conduct had damaged CDC’s business, entitling CDC to treble damages plus attorneys’ fees under section 4 of the Clayton Act.[2] The case was filed in Minnesota’s federal court.[3]

 

Thomas D. Barr

IBM immediately engaged its outside general counsel, Cravath, Swaine & Moore (CS&M), to defend the case. Partner Tom Barr was in charge of the CS&M team, and drafted several young associates, including Jay Gerber, David Boies and me, for the team. (As previously noted, I was an associate attorney at CS&M, 1966-1970.[4])

All of the CS&M team members soon started to learn about computers at a special school for the IBM lawyers at one of its locations in Westchester County, New York. (I do not recall what we were taught or what we learned, but this was long before the advent of personal computers and long before I had become familiar with their operation.)

Other private antitrust complaints were filed against IBM, and all of these cases were transferred to the Minnesota federal court for pretrial discovery regardless of where they initially had been filed in other federal trial courts. Minnesota’s U.S. District Judge Philip Neville was put in charge of managing all of these complicated cases. As a result, the other members of the team and I had frequent trips to Minnesota for pretrial conferences in the cases with the assistance of IBM’s local counsel, Faegre & Benson. All of the plaintiffs in these cases then embarked on a lengthy process of requesting and obtaining production of millions of IBM documents relevant to the cases.[5]

One of the companies suing IBM, however, had a different strategy. Greyhound Computer Corporation, a leasing company, filed a case under Illinois’ state antitrust law in Illinois state court (Peoria, as I recall) in order to avoid the complications of the consolidated pretrial proceedings in the Minnesota federal court. In addition, Greyhound wanted to take depositions (oral questioning of witnesses under oath) of top IBM officials as soon as possible before spending years in collecting and analyzing millions of IBM documents.

Thomas J. Watson, Jr.
Nicholas Katzenbach

One of the IBM officials to be deposed in the Greyhound case was its President, Thomas J. Watson, Jr.,[6] and I was put in charge of assisting Tom Barr in preparing Mr. Watson for his deposition. This was a daunting challenge. It meant collecting and analyzing as many IBM and public documents as possible that were potentially relevant to the Greyhound and other cases, figuring out the possible questions that might be asked of Mr. Watson by opposing counsel and then meeting with him and IBM’s General Counsel, Nicholas Katzenbach,[7]  to go over these documents and questions, all in a relatively short time period.

At the time my wife and I lived in Brooklyn Heights, across the East River from Wall Street and CS&M’s office. But Cravath had established a special office in White Plains, Westchester County, New York for the IBM litigation; this is where all the documents were stored and where the team members, including IBM employees assigned to help the lawyers, did their work. Thus, every morning I had to drive through Brooklyn and Queens, over the Throgs Neck Bridge and then through the Bronx and Westchester County to White Plains, and every evening I had to reverse this commute to my home. Traffic was heavy both ways, adding to the stress of the job. (Like many New Yorkers at the time, I did not own a car, but IBM supplied a rental car for me.)

Soon after our second son was born in December 1969, there was a bad winter storm in Westchester County, and I did not want to drive back home that night in order to get up early the next morning to return to White Plains. I, however, could not find a hotel room anywhere in the White Plains area. As a result, I had a very slow and dangerous drive home that night, and after a night of little sleep with a crying baby, I had to return to White Plains the next morning in another slow drive. I think that was the night that pushed me over the edge in deciding to leave CS&M and New York City.

Sometime in the process of preparing for this important deposition, I vividly remember Tom Barr and I flew from New York City to San Francisco one day for the sole purpose of flying back to New York City early the next morning on the IBM corporate jet with Mr. Watson because he had time on that flight to talk with us.

Soon the Watson deposition actually took place, probably in January 1970. Tom Barr and I thought it went well for IBM.[8] I then told Mr. Barr that I would be leaving CS&M in April to join Faegre & Benson in Minneapolis.

It is difficult in 2011 to understand how powerful IBM was in the late 1960’s. It did have a large percentage of the market for computers in that earlier period, and one of the major issues in those earlier antitrust cases was defining the market, geographical and product. The plaintiffs argued for definitions that produced large market shares for IBM while IBM argued for different definitions and lower market shares.

Now, however, IBM no longer is the dominant force in the U.S. and world markets for the manufacture of computers. In 2005, IBM sold its personal computer manufacturing operations to a Chinese company, Lenovo Group Limited. Now IBM is a large, multinational computer technology and IT consulting business with some computer manufacturing business.[9] IBM’s loss of a dominant position in the computer industry is another instance of what economist Joseph Schumpeter calls “creative destruction,” capitalism’s evolutionary process of revolutionizing itself from within.[10]

IBM thus survived after the scary early 1990’s when it nearly ran out of money. In June 2011 it celebrated its centennial as a company with strong profits, a robust portfolio of products and services and stock market valuation exceeding new-start Google. The central lesson of its survival and renewed success, experts believe, was an ability to identify and build upon its past success. For IBM, its key assets were strong, long-term customer relationships; deep scientific and research capabilities; and broad technical skills in computer hardware, software and services. The company was able to take these assets and recast itself as the one that can best manage and bring together diverse technologies in modern data centers.[11]


[1] Wikipedia, IBM System/360, http://en.wikipedia.org/wiki/IBM_System/360.

[2]  Id.; Wikipedia, Control Data Corporation, http://en.wikipedia.org/wiki/Control_Data_Corporation; Computers: Tackling IBM, Time, Dec. 20, 1968. Section 2 of the Sherman Act of 1890 provides that it is a felony for any “person . . . [to] monopolize or attempt to monopolize, or combine or conspire . . . to monopolize any part of the trade or commerce among the several States.” (15 U.S.C. § 2.) This crime requires proof of (a) the possession of monopoly power in the relevant market and (b) the willful acquisition or maintenance of that power (rather than the growth or development as a result of superior product, business acumen or historic accident). (U.S. v. Grinnell Corp., 384 U.S. 563 (1966).) Under section 4 of the Clayton Act of 1914, any person injured in his business or property by reason of a violation of the Sherman Act may sue for treble damages plus attorneys’ fees. (15 U.S.C. § 15(a).

[3] See Post: Minnesota’s Federal Court (June 28, 2011).

[4] See Post: Lawyering on Wall Street (April 14, 2011); Post: The Adam Clayton Powell, Jr. Litigation (May 31, 2011).

[5] In January 1969 the U.S. Department of Justice filed a civil lawsuit against IBM alleging that it had monopolized the market for general purpose computers. In 1982 the Department concluded that the case was without merit and dropped the suit. (Wikipedia, History of IBM, http://en.wikipedia.org/wiki/History_of_IBM.) I had no direct involvement in this case.

[6] Wikipedia, Thomas J. Watson, Jr., http://en.wikipedia.org/wiki/Thomas_Watson_Jr. In 1952 Watson succeeded his father, Thomas J. Watson, Sr., as IBM’s president and held that office until 1971. In 1964 President Lyndon Johnson awarded him the Presidential Medal of Freedom, and in the Carter Administration, Watson was the U.S. Ambassador to the Soviet Union (1979-81). (Id.)

[7] Mr. Katzenbach was General Counsel of IBM from 1969 through 1986. From 1961 through 1966 he was an attorney in the U.S. Department of Justice, serving as the U.S. Attorney General, 1965-66. From 1966 through 1969 Katzenbach was Under Secretary of State. (Wikipedia, Nicholas Katzenbach, http://en.wikipedia.org/wiki/Nicholas_Katzenbach.

[8] In 1972 the Greyhound case went to trial in federal court in Arizona with a directed verdict for IBM on the antitrust claims. However, in 1977 the court of appeals reversed this decision, holding there was sufficient evidence for a verdict for Greyhound, and remanded the case for retrial. (Greyhound Computer Corp. v. IBM, 559 F.2d 488 (9th Cir. 1977), cert. denied, 434 U.S. 1040 (1978).) Just before the retrial was to start in January 1981, IBM and Greyhound settled the case for $17.7 million. (IBM Antitrust Suit Records,  http://www.hagley.lib.de.us/library/collections/.) Earlier, in 1973 IBM settled the CDC case for about $80 million in cash and assets (transfer of an IBM computer service company at less than market value). (Computers: A Settlement for IBM, Time (Jan. 29, 1973).) (I had no involvement in any of these subsequent proceedings.)

[9] Wikipedia, History of IBM, http://en.wikipedia.org/wiki/History_of_IBM.

[10]  Schumpeter, Capitalism , Socialism and Democracy (1942); Wikipedia, Joseph Schumpeter, http://en.wikipedia.org/wiki/Joseph_Schumpeter.

[11] Lohr, Lessons in Longevity, From I.B.M., N.Y. Times (June 19, 2011).

Dysfunctional U.S. Congress Careens Towards U.S. Default

Yesterday’s actions in the U.S. House of Representatives and Senate regarding the U.S. debt ceiling were depressing signs of the dysfunctionality of our system of government.[1]

In the House Speaker Boehner rejected my advice to craft a truly bipartisan bill to increase our debt ceiling.[2] Instead he added another provision to his bill to gain additional support from the Tea Party members for passage of the Republican measure to increase the debt ceiling. That new provision would require Senate and House approval of a balanced budget amendment to our Constitution before there could be a second increase in the debt ceiling, presumably next year. Even with that provision, the bill was only approved 218 to 210. (In the House, a simple majority is necessary; that currently is 217.)[3]

This is not any way to go about amending our Constitution, in my opinion. Such action should be done calmly and cautiously, as suggested by the constitutional requirement for a two-thirds vote in each house for such amendments.[4] There should be fair and open hearings in both houses of the Congress for careful consideration of the pros and cons of any proposed amendment, including this one. Such has not happened on this proposal. Although I have not studied this particular proposed amendment, I am very skeptical of the merits of the idea for two main reasons. First, I believe it would be difficult to run the federal government under such a system. Second, Keynesian economics suggests the need for the federal government to run deficits during economic recessions.

Now attention turns to the U.S. Senate which yesterday immediately tabled this House bill, 59-41.

Thus, we now enter the world governed by the abominable Senate Rules.[5] Yesterday Majority Leader Reid made a motion to limit debate, and under Senate Rules the earliest that motion can be voted upon is tomorrow (Sunday) at 1:00 a.m. Passage of that motion requires 60 votes, meaning that if all 53 Democratic and Independent Senators support the motion, seven Republican votes are needed for that motion to be adopted. Yesterday Senator Reid said he did not yet have the 60 votes needed for cloture. If the cloture motion is adopted, then under the Senate Rules there has to be 30 hours available for debate, meaning that the earliest the Senate could vote on the merits of the Reid debt-ceiling bill would be 7:30 a.m. on Monday (August 1). (In the unlikely event of unanimous consent, the measure could be voted on before then.)[6]

If somehow the Senate actually adopts a debt-ceiling bill, then it has to go back to the House for its approval by 217 votes. If all the 193 Democratic representatives supported such a bill, then at least 24 Republican representatives would have to join them in order for it to pass the House. Is that possible? (I shudder to think that the House would pass a slightly different bill that would require a conference committee and subsequent votes by the two houses.)[7]

World financial markets already are signaling the adverse impact of an U.S. failure to increase the debt ceiling and an U.S. default on its obligations.

I pray that my analysis is wrong and that somehow by next Tuesday both houses of Congress can pass a debt-ceiling bill that President Obama can sign into law.


[1] See Post: Disgusting U.S. Political Scene (July 23, 2011).

[2] See Post: A Message for Speaker Boehner (July 29, 2011).

[3] Hulse & Pear, Senate Quickly Kills Boehner Debt Bill, N.Y. Times (July 29, 2011).

[4]  U.S. Const., Art. V. Actually such action by the two houses of Congress would result in a proposed amendment that would have to be approved by three-fourths (or 38) of the states in order for the constitutional  amendment to be adopted. (Id.)

[5] See Post: The Abominable Rules of the U.S. Senate (April 6, 2011).

[6] Helderman, Senate headed for critical vote Sunday, Washington Post (July 30, 2011).

[7] Yesterday, the House Republicans said that they would have a symbolic vote today to show that the Reid approach to debt ceiling cannot pass the House. (Hulse & Pear, Senate Quickly Kills Boehner Debt Bill, N.Y. Times (July 29, 2011).)