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Wednesday, September 16, 2015

How Contracts Trump Good Public Policy

Yesterday, I wrote about the recent Ohio Supreme Court ruling that found that White Hat Management can profit from failing kids. While I spent most of my post talking about the campaign contributions Brennan and his family have given to the Justices that ruled for him, I wanted to discuss a little bit about the legal reasoning the court gave for its ruling.

Ultimately, this case was about a business' right to contract its way around good public policy. And that interpretation of contract law has its roots in the 1990s and early 2000s fight over tort reform. Ohio was one of the ground zero states for business interests' attempts to put Justices in place who were pro-business. Ohio Supreme Court candidates have to spend upwards of $1 million to win their seat.

I wrote stories for the Beacon Journal in the 2002-2004 era about Ohio's place as the number one state for negative campaign spending for Supreme Court races. Nobody paid more for negative ads against Supreme Court candidates than was spent in Ohio.

Ultimately, the beneficiaries of these efforts were current Chief Justice Maureen O'Connor, Justice Judith Lanzinger (who wrote the pro-Brennan ruling), Justice Terrence O'Donnell (who recused himself from the White Hat case after taking $15,000 from Brennan and his family), and lately Justices Judith French and Sharon Kennedy. These are the Justices who found that Brennan could profit from the stuff he bought while running schools with public money, even if his mismanagement (White Hat is easily the worst performing big charter school operator in Ohio) caused the school's closure.

And why is that? Because they have a contract.

One of the big things tort reformers wanted was to have contract provisions override other consumer rights. Whether it's through arbitration clauses or other things, businesses want contracts they draft upheld by courts so the business can control the outcome. It's just good business.

But one of the very real consequences of the fealty to contract is the development of potentially really horrible public policy.

Like the White Hat ruling. I'm encouraged that pro-business reformers like the Fordham Institute are now calling for legislative changes to fix this ruling. I'm skeptical that the body whose political ties to Brennan and other for-profit charter school operators run even deeper than the Ohio Supreme Court will do that.

But I hope they do heed Fordham's call.

Back to the ruling.

While a majority of Justices found for White Hat -- saying they owned the property they purchased while running the school -- a lower court found against White Hat, saying instead that public funds used to procure equipment for charter schools are the school's property. So it's not like contract law makes it impossible for a competent judge to rule for the public over White Hat.

It's all a matter of perspective.

Nearly all first-year law students take Torts and Contracts. In Contracts class, you learn how difficult it is to get a contract voided. And for good reason. Caveat Emptor, right? We want contracts to be enforceable, otherwise what's the point?

But there are contracts that get voided for good reasons. I would argue that letting failing charter school operators profit from the equipment they purchased, using public dollars, for the school they ran into the ground is just such a reason.

It would prevent the bad operator from making money off their failure.

But the Justices thought the fact the board signed the contract means Tough Luck.

Never mind that in many cases, these boards were actually hand picked by White Hat. Or that Ohio operators historically have been able to essentially fire truculent board members. Or that the White Hat contract is not negotiated -- White Hat gives the board the contract on a take it or leave it basis.

In fact, the White Hat contract was not an agreement between two parties; it was a document drafted by a company and agreed to by a company-approved panel. However, when that panel turned on the operator, as they did in this case, the operator can now hold the rebellious board hostage by saying, "Sure, you can drop us. But only if you buy back all the equipment we bought for you using public money, or buy new desks, chairs, books, computers, etc."

Yet none of this matters to the Justices. What matters is whether the board signed it.

This is a pure textual argument that illustrates the peril of judges ignoring the context of their decisions. It leads to simplistic legal analysis and blinded public policy.

There is no doubt that textual arguments are sound legal arguments. However, textual arguments in a vacuum can lead to poor outcomes. And, I fear, that's what happened here.

One more thing.

I know many talk about focusing on kids rather than adults when it comes to education policy. I'm struggling to see how allowing White Hat to profit from failing those kids helps kids succeed. Instead, it seems that it will discourage charter schools from firing their failing operators because it would cost them money they don't have to retain their publicly funded equipment. So, in fact, this ruling will most likely have a potentially profound negative impact on kids. But the adults running bad charter school operations? They'll do just fine.