Monthly Archives: July 2012

The Dark Knight Rises III: Nuclear Shenanigans

Last week we mentioned that there are some… problems with the way the law is handled in The Dark Knight Rises. Specifically, the corporate angle doesn’t make any sense, and there are some real unresolved issues pertaining to Bane’s occupation of Gotham.

This time, we’re going to look at something mentioned by a few commenters, i.e., how the heck did Wayne Industries build a fusion reactor immediately below Gotham City?

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Wolfram & Hart and…Legal Ethics?

Our latest monthly column at Subculture for the Cultured has just been published.  It answers the following question sent in by Arthur:

On Joss Whedon’s show Angel, the law firm Wolfram and Hart hire Angel as CEO. As far as I know, if you incorporate a law firm, it can only be owned by lawyers. Does any rule like this apply to officer positions as well? Would there be any legal ramifications of having Angel as their CEO without any business or legal experience?

The answer might just surprise you!

The Dark Knight Rises II: Now What?

Yesterday, we looked at some of the problems with the way The Dark Knight Rises handles corporate law. Today we’re looking at, not so much problems with the movie, as issues the movie raises that are going to be problems for somebody, almost right away. We’re going to be doing some speculation here, but it’s all in good fun.  Major spoilers ahead.

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The Dark Knight Rises I: Corporate Shenanigans

The latest and presumably last installment in Christopher Nolan’s epic Dark Knight Trilogy, beginning with Batman Begins, continuing through The Dark Knight and now culminating in The Dark Knight Rises, came out on Friday. The reviews are generally positive, but as always, we’re more interested in how the film handles the legal side of things.

Unfortunately… there are some problems.  Major spoilers follow.

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Hi Superman, I’m A Lawyer

While we work on our next post, we thought you might enjoy this excellent (and exhaustive) law review article by William A. Hilyerd: Hi Superman, I’m A Lawyer:  A Guide To Attorneys (and Other Legal Professionals) Portrayed In American Comic Books, 15 Widener L. Rev. 159 (2009).  While there are a lot of law review articles discussing legal issues surrounding the comic book business (e.g. the ownership of characters such as Superman), there are very few law review articles that consider the actual content of comic books.

We should also take this opportunity to thank Prof. Hilyerd; his article pointed us to the Fordham Intellectual Property, Media, and Entertainment Law Journal’s citation format for comics (published as Britton Payne, Comic Book Legal Citation Format, 16 Fordham Intell. Prop. Media & Ent. L.J. 1017 (2006)), which we have used in our upcoming book.

CBS Seattle

Yesterday, James and Ryan did an interview with a reporter from CBS. The conversation served as part of the basis for an article currently featured at CBS Seattle: Suit Up: Becoming Batman on a Budget.

Thanks to Peter Milo for getting in touch!

The Dark Knight: Embezzlement

On Friday we talked about legal ethics in The Dark Knight. Now we’re going to take a look at an issue with consequences beyond the movie’s version of Batman. Specifically: does being the CEO or majority shareholder of a corporation give you the right to use corporate assets for personal projects? In the movie, Bruce Wayne (majority shareholder) goes to Lucius Fox (CEO) whenever he needs another cool toy, and Coleman Reese’s discoveries suggest that he’s not just buying them from the company but is actually using corporate resources to develop and manufacture his stuff. Is this okay?

I. Wayne Enterprises in The Dark Knight

In the Christopher Nolan movies, Wayne Enterprises is portrayed as a publicly traded company. It’s got a board of directors. It’s got institutional and private shareholders. Bruce Wayne has a controlling interest and therefore gets to call a lot of the shots, but the corporation is not, in fact, his personal plaything.

Though you wouldn’t know it from the way he treats it. Turns out that Fox has probably committed what amounts to embezzlement, i.e., the fraudulent conversion of the property of another over which one had lawful possession. It’s also often a felony, particularly when it involves large amounts of money.

Here’s the deal. Fox, as the CEO of Wayne Enterprises, has lawful possession of all of Wayne Enterprises’ assets by dint of the fact that he has lawful control over those assets.  Note that possession is separate from ownership; Fox controls the assets but he does not own them.  Generally speaking, the CEO of any given company is just that: the chief executive officer.  He or she has complete and inherent authority to commit corporate assets to any lawful purpose for the benefit of the corporation, except as limited by the corporate charter. For example, if Lucius decides one day that Wayne Enterprises isn’t going to sell X-type widgets anymore, he can sell off or shut down that division of the company overnight, unless the Wayne Enterprises charter requires a more complex procedure, such as a vote by the board of directors.

But if he’s acting against the orders of the board or without the board’s permission, he exposes himself to a charge of embezzlement. CEOs of major corporations have disputes about business strategy with their respective boards of directors all the time, and while it frequently leads to people getting fired (either the CEO or the board, depending on who does better with the shareholders), it isn’t generally criminal. But using corporate assets for personal purposes is something else entirely. Coleman Reese discovers that the R&D department is “burning through cash” on a project purported to be “cell phones for the Army.” If such a contract had actually existed, Fox could commit the company to it. But it doesn’t. It’s a pretext for fitting out Bruce Wayne with a really cool if ethically and legally problematic surveillance system. Fox doesn’t have the authority to divert corporate assets for those sorts of personal projects. So he is fraudulently converting the property of the company over which he has lawful possession to his own use, namely, giving it to Wayne.

Why? Because the fact that Bruce Wayne is the majority shareholder doesn’t actually give him an ownership interest in any corporate assets in particular. He can’t walk up and say “Hey, I own half of the company, so I get to use the corporate jet half the time.” That’s not how that works. The business owns its assets, and an interest in the company does not transfer to an interest in the company’s assets as such. The distinction gets a bit blurrier in closely-held corporations, particularly when there is only one owner—as is frequently the case in small businesses—but the mingling of corporate and personal assets is a pretty big no-no in the area of corporate law, and one of the things that courts look to when they consider piercing the corporate veil. We actually talked about that here.

Wayne himself wouldn’t be guilty of embezzlement, as he never had lawful possession of the property, but he would be guilty of conspiracy to commit embezzlement—as would Fox—which is almost as bad. Conspiracy is distinct from the underlying crime, and one can be guilty of conspiracy even if one does not or could not commit the underlying crime. Even if Fox turned him down, Wayne would still be guilty of solicitation for even asking. Also, being in possession of the goods probably counts as receiving stolen property. This is just bad all around.

II. Billionaire industrialists generally

Note that things would be different if Bruce Wayne were using his own assets to fund his projects. Wayne is independently wealthy, and much of this income is presumably in the form of dividends on his Wayne Enterprises stock. This is money he can use for absolutely anything he wants (within the ordinary bounds of the law, of course). Compare this to the way Tony Stark is portrayed in Iron Man. Stark, too, is the CEO of a company he mostly owns, in this case Stark Industries. But Stark develops the Iron Man technology entirely on his own and doesn’t use corporate assets to develop or manufacture it. He has a lab and fabrication equipment in his mansion. He may then have Stark Industries use some of this technology for other purposes, e.g., developing the Arc reactor for commercial and industrial power generation, but as far as the movie goes, no corporate assets are devoted to his activities as Iron Man.

This is entirely okay, at least as far as corporate law is concerned. Stark is free to use his own fortune in any way he wants. So is Bruce Wayne. So in a sense, the way the comic books portray Batman is actually a bit more realistic than the way the movies do. In the comic books, Wayne has a situation far closer to Stark’s position in the movies, i.e., the billionaire industrialist who has a superhero alter ego but who mostly uses his own inventions, manufactured by himself, financed by his personal fortune. Ironically, in the comic books, Stark is generally portrayed as mixing his corporate and Iron Man activities in much the same way as Bruce Wayne does in the movies. Quite the reversal.

III. Alternatives

Still, Wayne is a very rich man. Why couldn’t Wayne simply buy anything he needed from Wayne Enterprises? Fox is certainly capable of authorizing such a transaction. Wayne could even enter into a contract with Wayne Enterprises wherein the latter could be paid by Wayne personally to develop and manufacture Batman gear for Wayne’s use. That would be okay. If done right it could even result in a profit for the company. The problem is that for such a setup to be legally okay, some bits would need to be public, or at least known to the board of directors and its accountants and auditors.  It would be very hard to keep something like that secret.

Similarly, why couldn’t Fox arrange things such that Wayne simply received his Batman gear as part of some kind of compensation package? Two reasons. For one thing, Wayne isn’t portrayed as an employee of the company in The Dark Knight. He’s a shareholder, but not an employee or officer. So there isn’t really any obvious way he could get any compensation apart from regular dividends. And setting up some kind of cushy straw position wouldn’t necessarily work either. The Batman gear is presumably ludicrously expensive. Receiving that as compensation would almost certainly make Wayne one of the most highly-compensated people in the company. Not only would the board of directors need to approve that, but it would probably need to be filed with the SEC. So the choice would either be completely blowing the secrecy angle or violating a lot of laws about corporate filings, executive compensation, and taxes. Again, no good.

And obfuscating things to try to disguise Wayne’s Batman activities is also no good, as it would involve falsifying all sorts of official corporate documents. Part of the Sarbanes-Oxley Act, a corporate reform law passed in 2002, imposes personal, individual responsibility for corporate filings upon both executives and directors, so as soon as anyone figures out that there’s funny business going on—and if there’s one thing about the movie that is accurate, it’s that a halfway-decent auditor will figure things out eventually—Fox and Wayne are going to be in huge trouble.

IV. Conclusion

So really, as far as corporate law goes, the version of Batman/Bruce Wayne depicted in The Dark Knight trilogy is actually quite problematic. Fox is likely guilty of embezzlement, and Wayne would be guilty of conspiracy and receiving stolen property. Further, the most obvious ways of “fixing” the problem are themselves problematic, mostly because they’d make Wayne’s identity as Batman that much closer to public knowledge. Tony Stark has a much better way of going about this: use one’s personal fortune, founded upon but distinct from the corporation, to finance his toys (though he also has the benefit of not worrying about a secret identity). Considering that this is generally how it’s depicted in the comic books, and that in those stories Batman frequently invents most of his own gear, the way things are written in The Dark Night trilogy is surprisingly bad, if unintentional, or puts Wayne in a very grey area, if it’s intentional.

The Dark Knight: Legal Ethics

So The Dark Knight Rises comes out next week. In preparation, we’re taking a look at one of the issues from The Dark Knight. Specifically… isn’t Coleman Reese violating the rules of professional ethics? (Spoilers below!)

I. The Setup

Coleman Reese is an attorney hired by Wayne Enterprises to assist with the pending merger with LSI Holdings. While “running the numbers,” Reese discovers some irregularities and goes on a fishing expedition. He finds blueprints of the Batmobile (aka the Tumbler) and—correctly!—concludes that Bruce Wayne is Batman. One of the funnier moments in the movie is here, where Reese attempts to blackmail Wayne Enterprises by confronting Lucius Fox about this discovery. Suffice it to say that he hadn’t crunched all of the relevant numbers.

Later, Reese goes public, or at least tries to. This is after the Joker threatens to kill people if Batman doesn’t come forward. Things don’t go as planned, and the Joker changes his mind, but that’s the basic idea.

II. The Blackmail

Clearly, blackmail is a bad idea. Blackmailing Batman is a worse one. But apart from the blackmail, Reese was right to go to Fox about his discoveries. ABA Model Rule 1.13, Organization as Client, reads, in part, as follows:

(b) If a lawyer for an organization knows that an officer, employee or other person associated with the organization is engaged in action, intends to act or refuses to act in a matter related to the representation that is a violation of a legal obligation to the organization, or a violation of law that reasonably might be imputed to the organization, and that is likely to result in substantial injury to the organization, then the lawyer shall proceed as is reasonably necessary in the best interest of the organization. Unless the lawyer reasonably believes that it is not necessary in the best interest of the organization to do so, the lawyer shall refer the matter to higher authority in the organization, including, if warranted by the circumstances to the highest authority that can act on behalf of the organization as determined by applicable law.

Bruce Wayne is certainly a “person associated with the organization,” and he’s definitely acting in a manner related to the representation—spending Wayne Enterprises’ money, if nothing else—which is probably a violation of a legal obligation to the organization, i.e., not wasting shareholder dollars or using corporate assets for personal projects. That’s called “embezzlement”. It’s also “likely to result in substantial injury to the organization,” as that cellphone surveillance project wasn’t exactly free. Not to mention any negative press or damage to the corporation should Batman’s identity be discovered. And the right thing to do if a lawyer for a corporation discovers something like that is to go to the CEO. Which Reese did. And if he’d simply said “Mr. Fox, we’ve got a problem here,” he’d have been entirely in the clear. Unfortunately, he got greedy, with hilarious results.

III. The Media Interview

But when the Joker threatens mayhem should Batman not step forward, Reese decides to go to the media. This time, he’s actually in the clear, completely. ABA Model Rule 1.6, Confidentiality of Information, reads, in part:

(b) A lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary:(1) to prevent reasonably certain death or substantial bodily harm;

It doesn’t say that the client will be causing the death or injury, just that revealing the information is reasonably necessary to prevent such. So if a lawyer has information about a client, and the lawyer reasonably believes that revealing it will save someone’s life, they can reveal it (NB they don’t have to, but they may). That’s what Reese decided to do. The Joker threatened to kill people unless he got this information, and Reese reasonably concluded that revealing that information might save people.

Of course, the Joker changed his mind, at which point revealing that information would not be reasonably calculated to save anyone’s life. So if he had revealed the information after the Joker changed the terms, he’d have violated the rules of ethics.

III. Conclusion

So while Reese trying to blackmail Wayne was a problem, going to Fox wasn’t. And going public when the Joker threatened Gotham City was actually fine. We’ll have another post about the potential embezzlement issue next week as we prepare for the release of The Dark Knight Rises!

PS238: Superheroes and Tax Deductions

PS238 is a long-running comic series by Aaron Williams that is available online and in print.  The comic is set at the titular public school, which is a special school for children with superpowers, called metaprodigies.  Earlier this month we got an email from Sean asking us to take a look at PS238, and there are legal issues aplenty.  We’re going to start with a bit of tax.  Very minor spoilers below.

(Since we’re talking about tax, we should reiterate our disclaimer: this is a discussion of a fictional scenario, not legal advice, and does not constitute the formation of an attorney-client relationship.  If you need tax advice, hire a lawyer or an accountant.)

I. The Setup

One of the students at PS238, Tyler Marlocke, doesn’t have superpowers, but he’s enrolled there because his superpowered parents are certain that he’ll develop superpowers any day now.  To give him a fighting chance against the other children (particularly in gym class), the school assigns him a mentor: The Revenant, a gadget-based superhero.  During one of his training sessions he goes to the Revenant’s home, which is located above a high-end gym for people with superpowers.  The Revanant explains the unusual location thus:

Keeping a bunch of exercise equipment at home just clutters the place and since “vigilante detective” isn’t covered under the tax code, keeping my “office” at home isn’t deductible.

The naturally raises the question: would a superhero’s headquarters be tax deductible, and if not, why not?

II. Superhero Tax Deductions

What the Revenant is referring to is the fact that many (but not all!) business expenses are tax deductible.  Home offices (i.e. a proportional share of the rent or mortgage payment) can also be tax deductible, but it’s tricky to get right and can possibly increase the risk of an audit.  The situation gets even more complicated when considering “mixed purpose expenditures” that are both profit-oriented and personal (e.g. traveling for business but also to visit friends or relatives).  In the Revenant’s case, an important question is whether his vigilante detective activities are for-profit or are merely a hobby. The general rule is given by 26 U.S.C. § 183(a):

In the case of an activity engaged in by an individual or an S corporation, if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section.

§ 183(b)(1) expands on the general rule slightly, allowing “the deductions which would be allowable under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit.”  This includes deductions for real property tax payments, mortgage interest payments, casualty losses, theft losses, and personal items such as charitable contributions and medical expenses.  It does not, however, include business expenses or a home office.

Going a little further, § 183(b)(2) states that certain deductions for not-for-profit activities are allowed to the extent that income from the activity exceeds the deductions available under § 183(b)(1).  Since most superheroes don’t make any money from their heroics, however, that effectively means no additional deductions.

“For profit” means more than just wishing for a profit.  The case law speaks in terms of “a bona fide expectation of economic gain,” having the “primary purpose … to make a profit” or the “dominant hope and intent of realizing a profit” or a “reasonable potential for profit.”  Estate of Baron v. C.I.R., 798 F.2d 65, 72 (2d Cir. 1986).  Anything else is usually called a hobby, although it doesn’t  have to be done for pleasure.  See, e.g., Krause v. C.I.R., 99 T.C. 132 (1992).

The IRS has developed nine factors used to determine whether an activity is for-profit:

(1) Manner in which the taxpayer carries on the activity.
(2) The expertise of the taxpayer or his advisors.
(3) The time and effort expended by the taxpayer in carrying on the activity.
(4) Expectation that assets used in activity may appreciate in value.
(5) The success of the taxpayer in carrying on other similar or dissimilar activities.
(6) The taxpayer’s history of income or losses with respect to the activity.
(7) The amount of occasional profits, if any, which are earned.
(8) The financial status of the taxpayer.
(9) Elements of personal pleasure or recreation.

T.R. § 1.183-2(b).  Several of these factors weigh against the Revenant (and indeed most superheroes), and it seems likely that his activities would be considered a hobby rather than an activity carried on for-profit.  What’s more, a home office must be used for a trade or business, which requires more than just a  for-profit activity.

III. Conclusion

The practical upshot of all of this is that the Revenant should hire an accountant.  Certain deductions may be made despite the non-profit nature of his crime fighting activities (e.g. real property tax on his office, casualty losses from destruction of equipment).  But he’s probably correct that the IRS would not consider his “vigilante detective” activity to be a business, and his office probably could not qualify as a home office if it were part of his house.  The same is true of many other superheroes, including, most obviously, Batman.

New York Comic Con

You may have heard about a little event in San Diego this week, but the real news is that we’re attending this year’s New York Comic Con!  We will be promoting our book, which will be released on the first day of the con, and we have also pitched some panel appearances.  We also have something special planned for anyone in a comic book character costume: a free “legal consultation” for your character!  We will have more information for you as we get closer to the event, and we hope to see you there!