In 2012, we'll again be tracking annual meetings among America's largest public companies at the Manhattan Institute's ProxyMonitor.org. Our 2012 Proxy Scorecard contains relevant proxy-ballot information on the largest 200 public companies, as ranked by Fortune magazine, including links to all shareholder proposals and executive compensation advisory votes. Our publicly available, easy-to-use database is sortable by meeting date, company name, type of proposal, proponent, and voting results. We will be adding companies' information to the scorecard throughout the year, as soon as ballots have been distributed to shareholders, and we will update the database with voting results after meetings occur and results have been reported to the Securities and Exchange Commission's Edgar website.
Although the corporate annual meeting season begins in earnest in mid-April, twelve Fortune 200 companies have already held their annual meetings, and 51 had mailed proxy ballots as of March 15. From this partial sample, we can already discern some trends of interest.
Of the 12 companies to hold meetings to date, three companies have seen shareholder proposals receive majority support:
• Johnson Controls, which at its January 25 annual meeting saw over 85 percent of its shareholders vote for a proposal by Gerald Armstrong calling on the company to declassify its board;
• Emerson Electric, which at its February 7 annual meeting saw over 76 percent of its shareholders vote for a proposal by the pension fund of the American Federation of State, County, and Municipal Employees (AFSCME) to declassify its board; and• Apple, which at its February 23 annual meeting saw over 80 percent of its shareholders vote for a proposal by the California Public Employees' Retirement System to adopt a majority-voting standard for director elections.
That 2012's successful shareholder proposals have involved procedural rules such as board declassification and majority voting is in keeping with recent trends.
Such corporate-governance related proposals, not involving executive compensation or social or public-policy issues, thusfar constitute a majority of all shareholder proposals in 2012, a higher share than that seen recently. Proposals relating to executive compensation remain far less frequent relative to their levels before 2011, when executive compensation advisory votes became mandatory for all public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
2012's early returns involving such say-on-pay votes demonstrate the substantial role being played by the nation's largest shareholder advisory firm, Institutional Shareholder Services (ISS), in such voting. While no Fortune 200 company has seen shareholders reject executive pay packages in 2012, the four companies to have received the lowest percentage support--Johnson Controls, Navistar, Qualcomm, and Walt Disney--each received "no" vote recommendations from ISS on their executive pay plans. On average, these companies received 64 percent support from shareholders in say-on-pay votes, as compared to an average 94 percent support for other companies meeting by mid-March.
Since ISS's position almost certainly helped to influence the markedly different shareholder votes on pay packages, it would seem that an unintended side effect of Dodd-Frank-mandated say-on-pay votes is to give the proxy advisory firm a major "gatekeeper" role over executive pay. ISS's strengthened position might be enhanced further if institutional investors heed its newly promulgated advice to challenge management to respond whenever fewer than 70 percent of shareholders approve of board-proposed compensation packages--a position that would seem to be rather self-fulfilling given ISS's influence over the votes in the first place. Given that many of ISS's clients are labor-union pension funds and social-investing funds that may be motivated by issues other than maximizing shareholder value--and have respectively sponsored one-third and one-fifth of all shareholder proposals to date in 2012--I'll be watching the proxy advisory firm's role closely.
What else will I be watching in the upcoming annual meeting season? I'll be paying particular attention to certain classes of shareholder proposals in which union and social funds have taken a special interest:
• Proposals related to corporate spending on politics and lobbying (looming for Citigroup on April 17, Honeywell on April 23, BB&T and IBM on April 24, Johnson & Johnson on April 26, AT&T on April 27, and UPS on May 3), which have been increasing in number--though not getting majority support--in the wake of the Supreme Court's 2010 Citizens United decision affirming First Amendment protection for corporate political speech;
• Proposals calling on the company to separate the positions of chairman and CEO (looming for Bank of New York Mellon on April 10, Honeywell on April 23, General Electric on April 25, Johnson & Johnson and Lockheed Martin on April 26, and AT&T on April 27), which have been pushed hard by union funds and certain shareholder activists; and• Proposals calling on the company to grant proxy access to shareholders nominating directors (looming for Wells Fargo on April 24), which are reappearing on this year's proxy ballots after the D.C. Circuit last summer rejected the mandatory proxy access rule proposed by the SEC.
The legislation is intended to apply federal prohibitions against insider trading to government officials, but a story in Politico ran with a typical headline: "Cantor under fire for STOCK Act tweaks," referring to provisions in the House legislation that departed from the earlier version of the bill passed by the Senate.
Just what were these "tweaks"?
In some respects, the House version of the STOCK Act strengthened rather than weakened limitations on profiteering off of government secrets, relative to the Senate bill.
It's hard to make any objection to extending insider-trading rules to the executive branch and to initial public offerings of securities, apart from the fact that the former would limit Democrats currently in control of the White House and the latter might embarrass former Speaker Nancy Pelosi, who has profited from IPOs of businesses directly affected by House legislation.
But it's similarly difficult to make a strong principled objection to the House bill's two most controversial dilutions of the Senate's STOCK bill.
To begin with, unlike the Senate bill, the House version eliminates sweeping registration requirements for private parties outside the government. The Senate STOCK Act would require registration as a lobbyist for anyone who might be characterized as trading in "public intelligence" -- i.e., facilitating investment-related guesses about the future shape of government policy based at least in part on conversations with government officials.
Such registration requirements clearly affect First Amendment rights to speak and petition the government. Moreover, as legal ethics scholar Richard Painter has suggested, it's perverse to target government officials' leaks of inside information by "requiring people to register before they gather information about their government," rather than by developing "stricter rules for government employees who selectively disclose government information to persons outside the government."
The second way in which the House version of the STOCK Act modifies the Senate bill is by eliminating the latter's provision that would target "undisclosed self-dealing by public officials."
Twice in the last 14 years, the Supreme Court has unanimously rejected prior versions of this rule, largely because the statutory provisions involved were so broad and vague that no one could precisely tell what conduct was actually prohibited.
Unfortunately, the Senate's proposed law would continue to offer little clarity as to what conduct would constitute "self-dealing." It's hard to know exactly what legislation considered by Congress would not affect the interests of, for instance, Sen. John Kerry, D-Mass., who directly and through his wife owns pieces of the Forbes and Heinz family trusts.
Moreover, the Senate bill's self-dealing restriction would reach not only federal officials, but also public servants across state and local governments. The Senate bill would thus impose a new federal mandate, uncertain in scope, which in many cases would depart from states' own disclosure requirements. It's hard to see why the federal government should be the chief ethics enforcer for state governments.
Just as insider trading is a misappropriation of corporate assets -- such that employees profiting off inside knowledge are stealing from the company -- so is government employees' profiting off their inside knowledge a violation of the public trust.
But the fact that we should want our public officials to be bound by the same insider trading laws that govern those in the private sector hardly means that we should support any and all pieces of legislation that would achieve that effect.
The House version of the STOCK Act is an improvement on the Senate version, and its proponents should be lauded, not criticized.
]]> Jim invites Pam, an employee of a potential customer, to lunch. Over the next several years, during which Jim and Pam enjoy dozens of lunches and dinners, and Jim treats Pam to many rounds of golf, Pam's company becomes one of Jim's biggest customers. None of this is extraordinary -- most, if not all, businesses, entertain customers in the hope of developing business. However, a recent decision by the U.S. District Court for the District of Columbia threatens to criminalize this practice. In United States v. Ring, the court held that an individual who provides a "thing of value" to another, with the "corrupt intent to influence" her, may face up to 20 years in prison for violating the federal "honest services fraud" statute.
The federal mail and wire fraud statutes prohibit schemes to "obtain[] money or property, but prior to 1987, courts expanded the statutes' reach, applying them to reach, in addition, deprivations of "intangible rights," including the right to another's "honest services." This theory of "honest services" fraud was applied most often in cases of bribery of public officials, but was also applied in the commercial context. However, in 1987, the Supreme Court held that the mail and wire fraud statutes are limited by their terms to deprivations of money or property. Congress responded nearly immediately, passing a separate statute defining fraud to include deprivations of "honest services."
After his 2006 conviction for "honest services" fraud, former Enron CEO Jeffrey Skilling argued on appeal that the statute should be struck down for failing to specify what conduct is prohibited. The Court agreed that the statute is vague, but rather than striking it down, held that it must be limited to conduct at its "core" -- i.e., bribes or kickbacks paid to influence decisions. In other words, to prove honest services fraud after Skilling, the government must show not merely a deprivation of "honest services," but also that the deprivation resulted from a bribery or kickback scheme. To prove bribery, the government must show an understanding between the giver and the recipient that there will be a quid pro quo, with the recipient providing something of value in exchange for the bribe. However, in Ring, the court held that a defendant may be convicted of honest services fraud with no showing of any quid pro quo agreement, but on a showing of only a unilateral "corrupt intent to influence." Skilling applied this theory both to charges of honest services fraud involving public officials, and those involving conduct in the private sector -- in each case, the statute covers only bribery or kickback schemes.
Kevin Ring was a Washington lobbyist who worked with Jack Abramoff. Unlike Abramoff and several other of his associates, Ring was not charged with bribery or defrauding clients. Instead, he was indicted for several counts of honest services fraud, for providing members of Congress and their staff with travel, "fundraising assistance," drinks, golf and tickets to sporting events and concerts. The government claimed that Ring provided these items in order to "groom" officials by making them "more receptive to requests for official actions on behalf of [Ring's] clients in the future." However, the government presented no evidence of any agreement between Ring and any public official that there would be any quid pro quo. Instead, prosecutors were permitted to argue that Ring could be convicted upon a showing that he intended to "to influence and reward official acts." And at the government's request, the court instructed the jury that it was "not necessary for the government to prove that . . . the public official actually accepted the thing of value or agreed to perform the official act."
The jury in Ring clearly had difficulty discerning and applying the law. During deliberations, it asked the judge for additional clarification of the line between "legal and illegal gifts," but the court refused any additional instruction. A short time later, the jury returned with a guilty verdict.
The Ring jury -- and the American public -- may have found his wining and dining Congressional staffers in order to obtain access distasteful, but absent a quid pro quo agreement, it was not honest services fraud. The Ring decision represents a disturbing trend toward "overcriminalization," in which regulatory transgressions and other conduct is transformed into criminal offenses by legislators eager to prove they are "tough on crime," abetted by courts that fail to enforce necessary limits on prosecutors' efforts to expand the scope of "criminal" conduct. Kevin Ring's appeal will be heard in the spring. If allowed to stand, the Ring decision would make potential criminal defendants of the millions of men and women who provide current and potential customers with "things of value" in order to make them "more receptive" or to "build a reservoir of goodwill." That prospect should send shivers down the collective spine of American business.
Published on 01/18/12
By now, others have well documented the extraordinary nature of President Obama's appointments to fill the National Labor Relations Board and head the new Consumer Financial Protection Bureau -- purportedly exercising authority under the Constitution's Recess Appointments Clause, but almost certainly acting outside the constitutional provision's scope.
But beyond the constitutional issues, the political and policy implications of the president's action has drawn insufficient attention. The president has, in an election year and without congressional oversight, assumed sweeping and virtually unilateral authority to make policy that will generate windfalls for his two most financially crucial campaign constituencies -- organized labor and the plaintiffs' bar. Just how important are trial lawyers and labor unions to the president's election? In the 2008 election, lawyers and law firms funneled over $45 million into Obama's campaign, more than twice as much as any other industry.
The Service Employees International Union spent over $31 million in independent expenditures to aid the president's campaign -- again, more than twice as much as any other outside group.
The organized plaintiffs' bar and various labor unions constituted a staggering 19 of the top 20 political-action committees' spending on behalf of Democrats in the 2008 campaign, doling out between $1.7 million and $3.2 million each.
Since assuming office, Obama has worked to repay these campaign benefactors. The auto-company bailouts propped up unions by undercutting the clear legal rights of secured debt holders, and much of the "stimulus" spending was designed to protect public-sector unions by shielding them from budget cuts made by strapped state and local governments.
Trial lawyers avoided any serious tort reform in Obamacare, and they got legislation that gutted statutes of limitation for employment-discrimination lawsuits and expanded the scope of private litigation against government contractors.
That said, Congress has frustrated the president's most ambitious plans to help labor and lawyers. Even with large majorities in both houses of Congress, Obama was unable to muster support for the Employee Free Choice Act -- the deceptively labeled "card check" bill that would have allowed unions to form without secret-ballot elections and empowered federal bureaucrats to make sweeping changes to private labor contracts.
Similarly, the most sweeping reform bills on the tort bar's wish list also never came to pass, including legislation designed to make it easier to file baseless claims in federal court; a bill to expand securities litigation by allowing lawyers to sue customers and suppliers for companies' alleged frauds; and a trial-lawyer tax break that would have allowed plaintiffs' lawyers to treat contingency-fee loans as immediate expenses.
With his recess appointments, however, Obama is now in a position to avoid such congressional obstacles and help unions and lawyers through fiat. With three of the five NLRB members slipped into power in the dead of night -- and two of these three were nominated only two days before the Senate's Christmas break, hardly stalled by congressional inaction -- the president's labor-friendly cronies will be well-positioned to make rulings advantageous to unions.
Expect to see more along the lines of the Obama NLRB's extraordinary effort to thwart a Boeing plant's construction in right-to-work South Carolina. As CFPB director, Cordray will be positioned to green-light state tort litigation previously blocked by federal regulation and to "delegate" enforcement to state attorneys general, who in turn will farm out lawsuits to the plaintiffs' bar.
Cordray himself leveraged the Ohio state attorney general's office into a powerful campaign fundraising mechanism, when his election pulled in over $800,000 from out-of-state plaintiffs' law firms and he then hired many of those same firms to sue on the state's behalf.
The president's NLRB and CFPB appointments should be understood not only as an affront to the Constitution's system of checks and balances, but also as an aggressive move to energize his deepest-pocket electoral supporters. Sadly, American law and policy will be the likely casualty of this Chicago-style campaign gambit.
Last week, several Internet sites protested against two bills, the Stop Online Piracy Act and Protect IP Act, that would take a heavy-handed approach to preventing copyright infringement.
Though the movement was led by left-leaning technology sites, the SOPA/PIPA kerfuffle has the potential to demonstrate why conservative principles are important.
The problem with SOPA and PIPA was their broad scope. The bills went beyond primary infringers to impose criminal penalties on search engines and service providers that linked to infringing domain names.
The threatened censorship of the Internet -- hundreds of innocent sites could be blocked because of alleged infringement by a single blog -- led many sites to go "dark" for a day to protest SOPA's drastic consequences.
It was certainly amusing to watch thousands of teenagers take to Twitter to complain, profanely, that in the absence of Wikipedia and other sites, they had no place to go to plagiarize their homework assignments.
But, more importantly, several senators and representatives, including a number of former supporters of the legislation, announced their opposition.
Hollywood, which has predicted catastrophic consequences from piracy since the now-obsolete VCR became commonplace decades ago, is outraged and continues to support the legislation -- but it now seems clear that SOPA and PIPA will not become law without substantial modifications.
In the meantime, some observations:
First, we should be thankful: Legislative "gridlock" is a feature, not a bug, of our constitutional system. We often see parties in power complain how hard it is to get legislation passed, but the number of bottlenecks in the system means that legislation is considerably less likely to pass without consensus.
Without these bottlenecks, special interests would find it far easier to ram through bad legislation like SOPA. The deliberate pace of legislation gave time for Internet opponents to mobilize.
Second, both bills demonstrate the problem of overcriminalization. All too often, a special interest asks Congress to "fix" a problem by threatening to send more people to prison.
When criminal law goes beyond punishing intentional, violent and fraudulent behavior to ensnare innocent business people guilty only of running afoul of complex and technical regulations, the chilling effect on free enterprise and job creation can be tremendous.
Bloggers had fun pointing out the number of instances where SOPA supporters were violating the proposed law, but millions of Americans already unknowingly violate hundreds of other laws on the books.
When everyone is a criminal, federal prosecutors have the awesome power to pick and choose who will have their lives ruined. The possibility of politically motivated prosecutions is a severe danger to liberty.
Third, Congress passes bills all the time without knowing what's in them, each time with dramatic unintended consequences. Bloggers were outraged at a congressional hearing where committee members had no clue about the damage SOPA was going to do to the Internet.
Further, they seemed to care very little about the effect of their ignorance. But this ignorance extends far beyond the Internet. Limited-government conservatives oppose bad legislation like Dodd-Frank and Obamacare because of the unintended consequences and adverse effects of government meddling in the market.
Finally, the successful opposition to SOPA demonstrates the importance of corporate free speech. It has become trendy on the left to assert after Citizens United that corporations are not people, and thus have no free-speech rights; there's even a constitutional amendment to that effect pending.
One wonders how far that argument goes: Do corporations have no Third Amendment rights, either, allowing the government to quarter troops at the Ritz? Corporate free speech made a decisive difference in the SOPA/PIPA debate. The media, generally SOPA supporters, were unwilling to cover the issue until corporations like Google and Wikipedia forced them to pay attention. The Left should re-evaluate its attempt to limit political speech.
The near-catastrophic passage of SOPA demonstrates the power of limited-government principles. Conservatives should use it as a teaching moment.
The U.S. Supreme Court decided last month in Skilling v. U.S. that a federal law purporting to criminalize the act of depriving another of "the intangible right to honest services" actually criminalizes only "bribes and kickbacks," although neither the word "bribe" nor the word "kickback" appears in the statute. This narrow view of the troublesome law is sensible as a matter of public policy but muddled as judicial precedent. The Court has confused the distinction between interpreting a law and making up its meaning. Invalidating the law entirely would have been a better course.
The words "vague or ambiguous" appear together often, but they are not synonyms, and the task of judicial interpretation is usually simpler in cases of ambiguity. An ambiguous law has two or more specific, distinct meanings. For example, a statute might prohibit "the possession of arms in a public library." The word "arms" may refer either to firearms or to human limbs, making the statute ambiguous. To interpret the statute, a court may choose between these possibilities based on context, on the likely understanding of the average citizen, and (arguably) on the legislative history of the law.
Vagueness presents a more difficult problem for judges. For example, when is physical danger "immediate," under a law that requires police protection for those in immediate danger? Immediacy is one of those qualities -- like "tall" or "old" -- that simply does not have any clear cut-off. Is 6 feet, 2 inches tall? Is a day or two immediate? To interpret vague terms courts must choose a threshold on a spectrum of possibilities.
In Skilling (and in two other honest services cases, Black v. U.S. and Weyhrauch v. U.S. , the Supreme Court faced the unenviable task of interpreting language that had both problems. The word "right," for example, is ambiguous. Does it refer to a legal right under existing state law? Under existing federal law? Or did Congress mean to assign it some inchoate meaning unique to the honest services law itself? The phrase "honest services" is hopelessly vague. Does visiting Facebook at work constitute a scheme to deprive your employer of honest services? A prison sentence of up to 20 years suggests that this surely can't be right, but the "honest services" language provides no indication of where the line must be drawn.
The Court understandably wished to avoid this Herculean interpretive task, but it declined to simply hold the statute unconstitutional and invite Congress to clarify its meaning. Instead, the Court looked for the "overlap" between the lower courts' various interpretations over a period of decades. The Court then held that the statute criminalizes only "bribery and kickbacks" because these two forms of conduct seemed to fall within every lower court's interpretation of the statute.
But it isn't an act of interpretation to determine the "overlap" between several existing interpretations of a statute and then decide that the statute refers only to that overlap. For example, suppose a school teacher must interpret an instruction to give a test to all of the "exceptional older students" in her classroom. One fellow teacher had thought the instruction referred to honor students over the age of 10, while another thought the instruction referred to students with special needs over the age of 11. It wouldn't be sensible for the third teacher to give the test only to the one 12-year-old student in the class who was both an honor student and had special needs. It would be silly. And yet, that is the course that the Court has taken, even though it -- like the teacher in our example -- would have been better advised to go back to Congress (or the principal) to ask for clarification.
The fractious history of the honest services law illustrates well why the Court might have been reluctant to take the obvious course. The statute was enacted by a careless earlier Congress in a fit of pique following the Court's effort to clarify vague federal fraud laws in a 1987 case called McNally v. U.S. Congress did such a bad job of responding to the McNally decision that no jurist could relish the prospect of inviting them to try again, and public officials and businesspeople will be justifiably relieved by the relatively clear and narrow meaning that the Court has assigned to the honest services statute. The Court would have been truest to its interpretive role, however, to declare this law unconstitutional instead.
Marie Gryphon is a former practicing attorney and a senior fellow at the Manhattan Institute's Center for Legal Policy.
]]>Perhaps signaling that the conservative critique of judicial activism has won over American voters, Supreme Court nominee Elena Kagan opened her confirmation hearings Monday by articulating a "modest" vision of judging: being "properly deferential" to elected representatives. But what exactly does she mean? It's of course true by definition that courts should defer to legislatures when the legislatures behave "properly"--but disputes over jurisprudence center precisely over disagreement about what's proper and what's improper.
For instance, should the courts defer to the elected branches when they violate explicit constitutional commands and try to seize our guns or homes? I'd say not, but the same left-leaning justices prone to finding new "unenumerated rights" in our Constitution seem to think differently. In this week's McDonald v. Chicago and in 2008's Heller v. District of Columbia, these judges essentially read the Second Amendment right to bear arms out of the Constitution, much as they did with the Fifth Amendment's Takings Clause in 2005's Kelo v. New London.
Similarly, why should the Supreme Court defer to elected representatives when they set out to ban political speech in clear violation of the First Amendment? President Obama disingenuously demagogued the Court's recent Citizens United campaign-finance ruling in his State of the Union address earlier this year, but let's be clear what that case was about: the federal government was trying to prevent a nonprofit group from distributing a video critical of then-presidential candidate Hillary Clinton. The Solicitor General's office headed by Kagan actually suggested that the government could ban books (though it later backed off that claim).
When elected leaders are trying to tinker with the rules governing their own reelections, courts should be skeptical, not deferential. As the Supreme Court invalidated campaign-finance rules in its 1976 decision Buckley v. Valeo, it took notice that Congress had set election-spending limits below the threshold level of any successful challenge to an incumbent in the preceding election. And let's not forget that political leaders can attempt to game such rules for partisan advantage, too. Kagan herself understood as much, when in the Clinton White House she noted with enthusiasm that a provision of the campaign-finance bill that became McCain-Feingold "affects Repubs, not Dems!"
Saying that the courts should defer to Congress also presupposes that Congress is clear about what it wants. Many times, it isn't. Congressmen and Senators regularly pass vague or ambiguous laws and force the other branches of government to determine what these laws actually mean.
Loose congressional drafting leads to broad regulatory schemes that may (or may not) preempt state rules and tort litigation. By failing to clarify their intent, congressional leaders can avoid upsetting business leaders and doctors on the one hand, and trial lawyers on the other.
In a criminal context, congressional vagueness allows politicians to "get tough on crime" without really saying what's criminal. Discretion shifts to prosecutors, and the rest of us are left unable to ascertain the boundaries of laws that might put us in jail. To save innocent citizens from being imprisoned, courts are forced to toss out Congress's laws in their entirety or to try to rewrite the laws to make them clearer--as the majority of the Supreme Court did last week with a ridiculous federal law that had made it a crime "to deprive another of the intangible right of honest services".
The left, including many of the Democratic Senators on the Judiciary Committee, has made a concerted effort to define "judicial activism" as "overturning Congress." But Congress should be overturned when it crosses its clear constitutional boundaries: that's why we have judicial review. And when Congress is unclear about its intentions, it makes no sense to say courts should defer to its wishes.
Elena Kagan's self-professed judicial "modesty" thus does little to inform us about how she would judge. Because her sparse record gives so few additional clues, Congress should hold her to the standard she once articulated as a law professor and engage her substantively on legal issues before confirming her to a lifetime seat on the nation's highest court.
]]>To protect First Amendment values, special rules to constrain lawsuits that might chill free speech are important. Indeed, these rules -- called "anti-SLAPP" laws -- are now more critical than ever given the rise of communication on the Internet.
The only problem is that they're too limited. Such laws should be expanded to curb lawsuit abuse more broadly.
Anti-SLAPP rules like those in California create two exceptions for speech-related lawsuits. First, unless suing parties can show they are likely to win, legal defendants do not have to submit to "discovery," the process in which opposing lawyers get access to paper and e-mail records and force defendants to face intense questioning in depositions. Second, unless suing parties win their suits, they must reimburse defendants' attorney fees.
These anti-SLAPP rules are the exception in America, but they're the norm in much ofthe rest of the world. The U.S. is the only developed nation that forces defendants to submit to expensive and invasive discovery before plaintiffs have done anything to establish the merits of their case. Every country in Western Europe requires that losers in lawsuits reimburse the winners' legal bills.
Unsurprisingly, America's unique litigation system costs more than these other countries', too. Tort lawsuits consume about 2% of U.S. gross domestic product, more than twice the share of the economy they consume in Germany, and three times that in Britain and France.
Just as the Internet has raised the stakes for anti-SLAPP legislation, electronic communications have made broader legal reform that much more imperative. Millions of e-mails are now subject to legal discovery, which makes for a lot of work for lawyers and a lot of cost for the rest of us. By some estimates, "electronic discovery" constitutes as much as 50% of corporate litigation costs.
The prospect of getting sued for an Internet blog post is scary, but it is no less scary for small-business owners, such as dry cleaners Jin and Soo Chung, who faced an economically crippling $54 million lawsuit in Washington, D.C., over allegations that they had lost a customer's pants. Applying anti-SLAPP rules to all lawsuits would not eliminate such abusive cases, but it would make them far less frequent.
]]>[Originally published in the Milwaukee Journal-Sentinel, 1-30-10.]
In Citizens United vs. FEC, the United States Supreme Court held that corporations (and - probably - unions) have a constitutional right to make independent expenditures advocating the election or defeat of political candidates. Much criticism of the decision turns on two assertions. "Money," the critics say, "is not speech," and "corporations are not people."
These are just sound bites. They are legally irrelevant and have been for a long time.
Money may not be speech, but a right to speak without the corresponding right to make one's voice heard would be an empty liberty. A genuine freedom to speak cannot be limited to the right to stand on the corner and holler at passersby. It takes money to use the Internet, print pamphlets, publish books or broadcast ads. Citizens United is an important case, but its recognition that prohibiting someone from spending money to disseminate a message can be the equivalent of suppressing that message is not novel. It's been settled constitutional law for almost 40 years.
Corporations are not people, but they are associations of people whose common endeavor is affected by government policy and election results. Like natural persons, some are wealthy and others are not. Some are formed to seek profit by providing goods and services, while others are nonprofit. Like natural persons, these associations have an interest in being heard on matters that affect them. Not surprisingly, courts have recognized that a corporation may have constitutional rights for well over 100 years.
What is new about Citizens United is its recognition that corporate free speech rights include not only the right to speak about issues but to engage in "express advocacy" for or against a particular candidate. Rather than limit themselves to gravely narrated ads asking you to call Sen. Foghorn and tell him to stop destroying the republic, corporations (and unions) can now simply ask you to vote for his opponent.
Corporations still may not contribute to candidates. Corporate speakers will have to identify themselves, and companies may be reluctant to become involved in public debate for fear of consumer or shareholder backlash. Contrary to the claims of President Barack Obama, foreign corporations are still prohibited from attempting to influence federal elections.
But, as a law professor who teaches election law, I do think that the ramifications of Citizens United are huge.
One of the motivations for campaign finance reform has been to reduce the amount of money spent on politics and to "equalize" political resources. This is not as noble as it sounds.
To restrict what can be spent on speech is to restrict speech itself. Restricting speech tends to favor incumbents - who generally hold an advantage in name recognition and fund raising. Allowing legislators to set the rules that govern the elections in which they seek to retain their jobs is a bit like asking a chronic gambler to manage your money.
For centuries, political thinkers ranging from James Madison to Alexis de Tocqueville have recognized that democracy - with its potential for unchecked majority rule - may lead to certain excesses. Madison, in particular, thought that one solution to this problem was to allow society's various "factions" - today we call them "special interests" - to offset one another.
That best happens when all are permitted to fully participate in the public debate.
"Corporations" and even "the wealthy" are not a monolithic interest. As we have seen in recent years, both Democrats and Republicans and both conservatives and liberals have successfully raised large sums of money. In addition, the Internet has increased the significance of small donors. No one faction is likely to dominate the political debate. No significant voice is unlikely to be heard.
As Justice Samuel Alito recently observed, candidates and factions all have different advantages. These might include wealth, incumbency, celebrity, intensity of interest and populist appeal. It is for voters - not the state - to decide which are and are not "legitimate."
In a recent article in an academic journal, I argued that campaign finance reform had turned into a never-ending game of Whack-A-Mole in which the moles always win. Efforts to stop spending "here" inevitably lead to more spending "there." Every "reform" is swamped by unintended consequences.
In the end, the only way to truly level the playing field is censorship managed by one side in the game. During oral argument in Citizens United, the government argued that - in the interests of "reform" - Congress could prohibit corporations from publishing books critical of candidates for federal office.
That scared me. That scared the court.
Citizens United is the result.
Rick Esenberg is professor of law at Marquette University Law School and blogs at Shark and Shepherd. He is a community columnist for the Milwaukee Journal-Sentinel, where this essay first appeared.
]]>Right now, the Senate is anxiously considering HR-SA 3590, the Patient Protection and Affordable Care Act—a.k.a. the Reid Bill—which builds on earlier efforts in the Senate and House to reach a new consensus on health-care reform.[1] Many legislative uncertainties remain, but its key characteristics seem fixed in stone, and they highlight the radical nature of this legislation.
Senator Orrin Hatch has long urged that the legislation is unconstitutional for its overreaching on individual choice. This paper focuses on the constitutional question in the ratemaking context, by comparison to analogous regulations in the context of public-utility regulation.
One telling sign of the relevance of this analysis comes from the Congressional Budget Office ("CBO"). In a recent release, it has treated the proposal as if it nationalizes much of the private health insurance industry, most specifically because it may well require that rebates to customers kick in whenever, in its words, "medical loss ratios are less than 90 percent."[2] In plain English, the Reid Bill assumes that health-care administration, which is always costly, can be done cheaply even in the new legal environment, so cheaply in fact that these health-insurance rebates kick in whenever insurers' administrative expenses exceed 10 percent of their premium dollar. As the CBO has concluded, "this further expansion of the federal government's role in the health insurance market would make such insurance an essentially governmental program ..."
In effect, the onerous obligations under the Reid Bill would convert private health insurance companies into virtual public utilities. This action is not only a source of real anxiety but also a decision of constitutional proportions, for it systematically strips the regulated health-insurance issuers of their constitutional entitlement to earn a reasonable rate of return on the massive amounts of capital that they have already invested in building out their businesses.
In order to make out this argument, let me proceed as follows. In part I, I shall give a general overview in order to place in context the system of health-care regulation that shall be operated through the State Exchanges that would be formed under the Reid Bill. In part II, I shall give a detailed analysis of some of the major provisions of the Reid Bill. In part III, I shall give a brief analysis of the economic assumptions that underlie the Reid Bill, and the way in which they are likely to lead to extensive price fixing. In part IV, I shall flesh out the constitutional implications of the above analysis. I shall then close with a brief conclusion, which recommends that the Reid Bill be scrapped.
I. AN INSTITUTIONAL AND CONSTITUTIONAL OVERVIEW The concern that I wish to address at the outset deals with the unprecedented level of systemic coercion that the Reid Bill exerts on the various firms that supply health-insurance coverage in the small-group and individual health-insurance markets. Constitutional concerns with these provisions arise even if one assumes that Congress has the power under the Commerce Clause to pass comprehensive regulation of health care in this form. Independent of any question about the scope of Congressional power, it is critical to consider that the Fifth Amendment affords regulated health-insurance companies protection against the taking of property without compensation and without due process of law.
These overlapping guarantees bind both the federal government and the state governments in all of their activities, whether undertaken jointly or independently.
These constitutional provisions have been subject to extensive interpretation in the Supreme Court in ratemaking cases, which must be taken into account in dealing with the legislation. The Supreme Court's basic constitutional requirement is that any firm in a regulated market be allowed to recover a risk-adjusted competitive rate of return on its accumulated capital investment. See Duquesne Light Co. v. Barasch, 488 U.S. 299 (1988).
The Reid Bill emphatically fails this test by imposing sharp limitations on the ability of health-insurance companies to raise fees or exclude coverage. Moreover, the Reid Bill forces on these regulated firms onerous new obligations that they will not be able to fund from their various revenue sources. The squeeze between the constricted revenue sources allowable under the Reid Bill and the extensive new legal obligations it imposes is likely to result in massive cash crunch that could drive the firms that serve the individual and small-group health-insurance markets into bankruptcy.
Although the Constitution requires that regulations permit regulated firms to recover a risk-adjusted competitive rate of return, the Supreme Court has left it up to federal regulators to decide which approach to rate regulation they wish to take. On page 20, I discuss the two major tests that are used to determine whether rates are confiscatory. In one instance, the risk of imprudent investments is left on the firm, and in the other, it is imposed on the ratepayers. Here, the combined effect of all the provisions in HR-SA 6590 makes it unimportant to choose between these two tests, because the blunt truth is that the Reid Bill flunks both tests.
To make this analysis more concrete, it is important to understand the pervasive transformation that the Reid Bill, if passed, will work on both suppliers and users of all health-insurance services. On the one hand, the Reid Bill depends on a combination of huge general tax increases, which is coupled with special levies on industries such as medical-device and pharmaceutical companies. These tax revenues are then used to fund subsidies for large segments of the population in order to allow them to purchase qualified health-care plans that are sold through a set of State Exchanges that the Reid Bill creates. In order to prevent these subsidies from flowing through to the various health-insurance issuers, the Reid Bill imposes extensive obligations on any health-insurance issuer or health-plan provider that wishes to participate within the system in order to keep them from capturing subsidies meant for others. The effect of the subsidies is to increase the level of health care that will be demanded in the United States. The effect of the regulations is likely to be to impose huge costs on various health-insurance companies as they struggle to meet the influx of demand when they are at the outer limit of their capacity.
There are at this point enormous uncertainties about how this entire scheme will play out. My view is that it will prove ruinous on all three fronts. The general public tax increases will be so sharp that it is unlikely that they will generate additional revenues. The subsidies will be so large that the demand for medical services will be left largely unsatisfied, so two consequences are likely. First, an increased queuing for various health care services is to be expected. Second, there will be increased pressure to exclude large groups of people from the system, on the lines of Massachusetts's recent decision to cut from its system 31,000 legal immigrant aliens (who pay taxes but do not vote).
Furthermore, on the supply side of the market, all health-insurance companies will find themselves in an impossible dilemma. If they decide to offer their health-insurance plans outside the State Exchanges, they will be unable to compete for the subsidized consumers who are only able to spend their tax dollars within the framework of the State Exchanges. Their position will be worse because they shall continue to be subject to all present mandates and regulations that have an impact on their business. Insurers outside the Exchanges also face the likely prospect that they will still be further taxed and regulated to help finance the intolerable burdens that arise under the subsidized insurance supplied within the State Exchange system.
Therefore, it is impossible in my view to look in isolation at the regulations of the health plans and health-insurance issuers that operate under the State Exchange system. This is not a case in which a lonesome competitor complains about a subsidy that some private person gives to its competitor. This is a case in which the party that provides the subsidy to health-insurance consumers for use within the State Exchanges also has the power to regulate and tax the non-Exchange competitors in whatever fashion it sees fit. These impositions are, of course, not only applied at the federal level, for the full consideration of the regulatory burden must also take into account any additional regulations and taxes that the states, with explicit Congressional blessing, are allowed to impose on health-insurance plans and insurance issuers that remain outside the State Exchange system.
This level of systemic coercion frames the debate about the constitutionality of the Reid Bill. Those parties that do not wish to suffer the Bill's regulations in order to gain access to a subsidized consumer base are not free to compete in an unregulated market. Direct federal and state government regulation remains a fixed feature of their life. Government regulators at the state and federal levels have both the power and the motive to hit non-Exchange health insurance issuers with a range of taxes and regulations that could quickly make their economic position intolerable. I reached this conclusion before I read the recent CBO report, which concluded that the level of government regulation with the new proposal to require rebates when the Medical Loss Ratio was under 90 percent left so little flexibility for private carriers that they should no longer be treated as nongovernmental entities. It is worthwhile to quote the CBO's words here:
Certain policies governing MLRs, particularly those requiring health plans whose MLR falls below a minimum level to rebate the difference to enrollees, can be a powerful regulatory tool. Insurers operating at MLRs below such a minimum would have a limited number of possible responses. They could change the way they provide health insurance, perhaps by reducing their profits or cutting back on efforts to restrain benefit costs through care management. They could choose pay the rebates, but if they raised premiums to cover the added costs they would simply have to rebate that increment to premiums later. Alternatively, they could exit the market entirely. Such responses would reduce the types, range of prices, and number of private-sector sellers of health insurance...
The CBO of course is not charged with drawing the constitutional implications from its findings. But its report reaffirms what should be evident from the Reid Bill itself, namely, that health-insurance issuers subject to the rebate provisions are practically forced to operate within the State Exchange system where the guaranteed-issue and renewal provisions coupled with the onerous requirements of the essential-benefit plans put them in this impossible position: They cannot earn a reasonable return on their investment, which is required under the Takings and Due Process Clauses of the Fifth Amendment to the Constitution. Let me now offer a more detailed analysis of how this looming tragedy is likely to play itself out.
II. AN ANALYSIS OF H.R.-S.A. 3590—THE REID BILL The most obvious feature of the Reid Bill is the incredible level of coercion it imposes on the private companies that supply health-insurance coverage, levied in a coordinated one-two attack. On the one hand, the Reid Bill imposes major requirements on how they do business. On the other, it imposes powerful financial limitations on the revenues that such firms can collect for the provision of their services. Yet the Reid Bill contains no mechanism that guarantees that the revenues in question will be sufficient to cover the new obligations that it imposes. Instead, the Reid Bill relies on extensive but standardless delegation to the Secretary of Health and Human Services to fill in the gaps of the legislation. (The Reid Bill does not create, as does section 241 of H.R. 3962, a new Health Choices Administration with its own commissioner.)
The range of matters that are subject to administrative control under the Reid Bill transforms a large sector of the insurance industry. The traditional law of insurance gave the insurer the complete power to determine whether to accept or reject a given risk, or to determine the premiums to be charged to an insured, the policy limits, and the terms and conditions on which the policy was issued. The duties to disclose were extensive but these were correctly imposed on the insured who alone possessed the relevant knowledge about the nature and scope of the risk.
In this traditional environment, regulation of insurance companies was directed to two different issues. The first was a general form of consumer protection, which requires a full disclosure of the terms of policies, which of course does not negate the critical duties to disclose information about material risks imposed on insured parties. The second went to the issue of solvency, in order to counter the real risk that the insurance carrier that had accepted a premium today might not be around to pay off the health care bills that it had promised to pay tomorrow. Competitive forces were generally used to determine premiums. The various efforts to impose mandatory price controls and coverage on insurance contracts in both the individual and small-group markets have typically driven up the cost of business and have resulted, for example, in a reduction of the number of individual employees who are covered by voluntary plans.
What is most striking about the combined effect of the various provisions in the Reid bill is its cavalier disregard for the long-term stability of all segments of the private health-insurance market, which are likely to be caught in a pincer between the heavy mandates for coverage on the one side and their inability to exercise any underwriting control over their book of business on the other. The Reid Bill does not achieve this objective by imposing direct restraints. Instead, its preferred method of social control lies in the power of the Secretary to designate any health plan of a given insurance company as a "qualified health plan" ("QHP"), as defined in section 1301, which allows the health-insurance company to serve customers who are eligible for financial assistance under this bill. The size of these various benefits is sufficiently large that no company that fails to become a QHP issuer is likely to survive in an insurance market in which coverage is offered on the Exchange, as few people will prefer to purchase a full-price plan to a heavily subsidized one. The restrictions imposed on QHPs, however, are so onerous that all health insurance companies are in effect caught in an impossible bind. The only way to reach subsidized customers is to submit to ruinous financial regulation. The system, therefore, operates in effect as a direct set of controls on virtually all companies that wish to remain in the marketplace.
Let me set out some of the key provisions that are likely to have negative impact on firms, which are added to the Public Health Service Act by section 1201 of the Reid Bill. Section 2704 provides: "[a] group health plan and a health insurance issuer offering group or individual health insurance coverage may not impose any preexisting condition exclusion to such plan or coverage." Unlike the earlier House and Senate Finance Committee bills, there appear to be no exceptions to this particular rule. Yet section 2705 makes it clear that the "health status, medical condition, claims experience, receipt of health care, medical history, genetic information, evidence of insurability, disability, or source of injury (including conditions arising out of acts of domestic violence) or any other health status-related factor determined appropriate by the Secretary" cannot be taken into account in setting rules concerning enrollment eligibility.
In addition, section 2702 provides that every health insurance issuer in the individual or group market must accept all applicants. Section 2703 imposes the similar requirements on health-insurance issuers to renew or continue in force all individual and group plans. These sections create the risk that some firms will be inundated with applications that they will be unable to serve. Unfortunately, the mechanisms that the Reid Bill relies on for dealing with the capacity questions are unequal to the challenge of regulation in any fast-moving and complex market.
The technical amendments found in section 1562 of the Reid Bill would make applicable to all issuers in the group and individual health-insurance markets certain provisions in section 2711 of the current Public Health Service Act, 42 U.S.C. § 300gg-11, which are currently applicable only to issuers in the small-group health-insurance market. These provisions are codified at the end of new section 2702.
To begin with, the provision, as amended by the Reid Bill, would require issuers in the group and individual health-insurance market to accept every employer and eligible individual who applies for coverage, unless such an issuer could demonstrate to the applicable state authority that it lacks the financial capacity to underwrite additional coverage. No firm has the capacity to underwrite all the business that comes its way. At some point, its marginal cost of supplying additional coverage becomes prohibitively high. It is relatively easy for any health-insurance issuer to determine that point for itself. It is far more difficult for it to have to incur the time and expense to demonstrate that point to some applicable state authority, which will then be given the power to determine, without bearing financial responsibility of its mistakes, just how much business the health-insurance issuer must underwrite, and which individuals should be eligible for that coverage.
The amended provision also requires the health-insurance issuer to further show that its decisions to deny coverage are not based on the differential costs of supplying that coverage to various individuals and groups under new section 2702 of the Public Health Service Act. And once it makes those determinations, it must remain out of the market for 180 days unless it gets state administrative approval. When market conditions change, or some individuals or groups opt out of coverage, yet another hearing is required to reenter into the market. There is no assurance that these applicable state authorities have either the resources or capacities to determine these multiple questions for huge numbers of health-insurance issuers within the short period necessary to allow them to participate effectively in the health insurance market, including in the Exchange. There does not appear to be any federal funding to help out the states in the discharge of these responsibilities.
The overall level of federal control is heightened by the requirement that all health-insurance issuers in the individual or small-group market provide an essential benefits package that includes a wide range of "ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance abuse disorder services, including behavioral health treatment, prescription drugs, rehabilitative and habilitative services and devices, laboratory services, preventive and wellness services and chronic disease management, pediatric services, including oral and vision care." Section 2707. These essential benefits are subject to explicit minimum requirements that the Secretary "shall ensure that such essential health benefits reflect an appropriate balance among" the required services set out in section 1302(b)(1), not discriminate in any way "against individuals because of their age, disability, or expected length of life," and cover the full needs of "diverse segments of the population, including women, children, persons with disabilities and other groups." No health-insurance issuer that participates in this market will be able to skimp on coverage.
In addition, the cost of compliance is heightened by the requirements of section 2711, which covers all group health plans and health-insurance issuers and prohibits the use of "lifetime limits on the dollar value of benefits for any participant or beneficiary" (except for certain exempt plans that are not otherwise regulated under state or federal law) and "unreasonable" annual limits on the value of benefits for any participant or beneficiary. At the same time that these coverages are guaranteed, the Reid Bill limits the amount of cost-sharing that can be required of plan participants and the size of the deductibles ($2,000 for an individual and $4,000 for a family in the small-group market). Such is the command of section 2707(b), making section 1302(c)(2) applicable to health insurance issuers in the individual and small-group markets. Finally, termination of enrollees is often difficult under section 2712, which allows for the rescission of coverage only with respect to any individual enrollee "who has performed an act or practice that constitutes fraud or makes an intentional misrepresentation of material fact as prohibited by the terms of the plan or coverage."
The combined impact of these interconnected provisions is clear: there is no feasible way that an insurance carrier can respond to the increased costs of servicing of its book of business either by declining coverage or by reducing services. With all escape hatches closed, the critical question is whether the health-insurance issuer is in a position to raise rates in order to offset the risks in question. On this question, section 2794 introduces a complex system of de facto price controls that depends on the close cooperation of state and federal officials. The initial process that goes into effect in 2010 requires the Secretary and the states to develop a plan to look for "unreasonable increases" in charges for insurance coverage. At this point, all health-insurance issuers must submit to the state insurance commission authority "a justification for an unreasonable premium increase prior to the implementation of the increase." (It is not stated as to how one justifies increases that are, by definition, unreasonable.) Thereafter, once the information has been submitted and evaluated, it appears that the state insurance commissioner shall make appropriate recommendations "to the State Exchange about whether particular health insurance issuers should be excluded from participation in the Exchange based on a pattern or practice of excessive or unjustified premium increases." In effect, it appears that the State Exchanges can exclude health-insurance issuers from offering their plans through the Exchanges, at which point the subsidies to insurers will be lost.
As of 2014, the Secretary is put in a position to "monitor premium increases of health insurance offered through an Exchange and outside of an Exchange." Section 2794(b)(2)(A). Of equal importance, the combined effect of section 2794(b)(2)(B) and section 1312(f)(2)(B) would seem to permit the states to influence the premiums charged in the large-group market, even when no large-group coverage is offered through the State Exchange. And the states are put in the position under the Reid Bill to deny Exchange access to those small-group and individual plans that they determine have excessive rates. That power to exclude from the Exchange remains a death knell for all plans in health-insurance markets in which coverage is offered through the Exchange, so that the power to exclude again converts itself into a de facto power to set maximum rates.
In addition, after 2014, it is at least possible that the power of the Secretary to "monitor" could be read as a way to introduce price controls through the back door. The natural reading of the section seems not to support that view, but administrative officials often receive deference in their statutory interpretations under Chevron, Inc. v. National Resources Defense Council, 467 U.S. 837 (1984). More specifically, the primary meaning of "monitor" is to "observe" or to "keep an eye on." But a secondary meaning is to supervise, which in this context might be read to give the Secretary those more expansive powers.
The level of regulation over prices is not confined to these provisions. As currently configured, the Reid Bill contains global caps on profits that operate on a heads-I-win-tails-you-lose principle. Thus, section 2718(a) of the Public Health Service Act, as added by the Reid Bill, imposes on "[a] health insurance issuer offering group or individual health insurance coverage" reporting obligations on the amount of premium dollars that are spent on "clinical services," activities to "improve health care," and all other "non-claim costs." Up to the end of 2013 (unless extended), if this information reveals that the non-claim charges exceed 20 percent of total costs in the group market, or 25 percent in the individual market, the Reid Bill provides that, in the first instance, there "shall" be an annual rebate in the amount of the excess over that level, section 2718(b)(1)(A) & (B). Section 2718(b)(1)(A) & (B) also provide that the individual states may order a reduction in the 20 or 25 percent non-claim figures, so that the annual rebate kicks in at a lower percentage.
In making that determination, under section 2718(b)(2), the states "shall seek to ensure adequate participation by health insurance issuers, competition in the health insurance market in the State, and value for consumers so that premiums are used for clinical services and quality improvements." The amount of any state-adjusted rebate under section 2718(b)(1)(B) with respect to coverage in the individual health insurance market can be adjusted only if the Secretary determines that such rebates will "destabilize" the market. It is difficult to understand how these inconsistent commands can be simultaneously achieved. "Adequate participation" suggests that rates must be kept high enough to keep firms in the market, while "value for consumers" pushes strongly in the opposite direction. In the middle, "competition in the industry" is effectively gutted by the extensive system of regulation that prevents firms from gaining extra profits from valuable new innovations in health-care management or delivery systems.
The most insidious feature of this provision, however, lies in its unconstitutional insistence on a global limitation on the profits obtained by any firm that runs this regulatory gauntlet. The first point here is that no firm would be able to show that its non-claim expenses do not exceed the maximum statutory allowances. Given the high level of administrative costs that the Reid Bill imposes, this is, to say the least, a strong possibility. It could easily be that the health-insurance companies will find themselves in the unenviable position of having to issue rebates at a time when they are operating at a loss. In addition, neither bill takes into account the strong likelihood that overall costs will vary from year to year. These statutory provisions are strictly one-way ratchets, such that the gains, if any, in one year will be taxed away even if there were losses in previous years, or even if losses are expected in future years. The lack of any averaging provision, therefore, has the unhappy effect of placing a hard cap on earnings that is unrelated to the overall risk of the venture.
There is yet another feature that requires some brief notice, for it goes to the stability of preexisting plans. One of the ways that the legislation allows for "acceptable" coverage to be obtained is by enrollment in a "grandfathered" health-insurance coverage plan. That sanctuary is far narrower than is commonly supposed. Under section 1251 of the Reid bill, the only new enrollees that allow the plan to keep its protected status relative to the State Exchanges are those that admit new dependents of an employee or new employees. The admission of any other person into the plan, such as retirees, will eliminate the preferred grandfathered status under section 1401 of the Reid bill, which adds section 36B to the Internal Revenue Code; section §36B(1)(b)(3)(c)(iii) determines the eligibility of plan enrollees for various refundable tax credits or other premium assistance.
Section 1251 is, however, silent with respect to other possible features. The definition of "grandfathered Health Insurance Coverage" in section 202 of the House Bill made it crystal clear that this grandfather status would be lost when an existing plan added or removed a benefit, or increased the premium for one group of employees unless the same proportionate increases were imposed for all plan participants. The Reid Bill is silent about the effect of these changes, which ordinary plans necessarily make dozens of time each year. The question, therefore, remains unanswered as to whether most grandfathered plans will be able to maintain their preferred status, or whether they will lose that preferred status and be required to meet all the substantive and procedural requirements necessary for new plans to participate in the State Exchanges. Questions of this magnitude should not be left to administrative discretion, but should be resolved in the Reid Bill itself.
III. FROM COMPETITION TO PRICE CONTROLS: THE ECONOMIC ANALYSIS Whether or not the Secretary is able to claim more extensive powers, it appears that the complex price-control mechanism implicit in the Reid Bill operates on the indefensible economic assumption that price controls are needed to wring inefficiencies out of the operation of health-insurance issuers. Yet economic theory unambiguously leads to the opposite conclusion. To take only the extreme cases, the logic behind pure competition is that it leads to efficient outcomes because the ability of customers to go elsewhere leads firms to reduce the costs required to meet any specified level of service. In general, a competitive market is regarded as socially optimal because there is no movement in price, quality, or quantity that could make one party better off without making another party worse off. Any assumption that price controls, however implemented, offer some hidden road to the efficient allocation of resources has been repeatedly exploded. One need only think of the systematic cut back in services that is the hallmark of rent-controlled apartments to understand this basic economic principle.
The logic of competition is clear. In competitive markets, the firm is always engaged in a delicate balancing act whereby it must ask whether the additional services that it could supply will generate revenues equal to, or greater than, its cost of providing those services. The pressure of competition could never force a firm to offer its products or services for sale at a loss. At the same time, the ability of customers to go elsewhere will drive prices down to the marginal cost for the provision of those products or services. Even the existence of monopoly power does not allow any firm to make any money if it is forced by regulation to provide goods and services below their costs. The existence of monopoly power only speaks to the possibility of a firm raising its prices above marginal costs, for which rate regulation may be an appropriate response, although always difficult to implement. But there are clear caveats here that need to be observed first.
First, to justify rate regulation, there needs be some evidence of the existence of monopoly, which is not likely in health-insurance markets in which multiple parties are already in competition with each other. To be sure, that condition is not uniform, in part because of the state restrictions on entry that are allowed under the 1945 McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015. But the existence of this entry barrier does not require any form of rate-of-return regulation. It is a simple matter to repeal McCarran-Ferguson to the extent that it authorizes state barriers to out-of-state competition. That one legislative fix should reduce prices and expand access, but not cost the federal government a dime.
Second, the rate regulation imposed by the federal government cannot be allowed to become confiscatory by denying the firm the ability to recover an appropriate return on its capital. There is nothing that a system of price controls can do to lower costs. In fact, price controls generally increase the costs of production to firms by forcing them to meet heavy compliance costs. Under the Reid Bill, the costs of providing service will necessarily increase because of the heavy compliance costs imposed on health-insurance issuers, the uncertainty of their business position, and their inability to select or decline customers or to set premiums in accordance with known risks of various individuals or groups. There is no reason whatsoever to think that any firm operating in this heavily controlled environment could eliminate inefficiencies from its current operation to offset these losses. To give an analogy, one of the major problems of rent-control and rent-stabilization systems is that once landlords are revenue constrained, they cut services to save costs. They were already doing their best before the regulation, which offers no magic bullet. The logic same holds here. Services will be cut or delayed, in either visible or covert fashion, just as the recent CBO report indicates. As far as I know, there has never been a price-control system that can improve quality of output, and there never will be.
Third, it is wholly unclear as to how private firms will be asked to price their services under these new mandates dealing with guaranteed service and preexisting conditions. One possibility, which seems inconsistent with Section 2794, is to allow for competitive pricing without allowing the state to set the prices which are required. But given the requirements under the Reid Bill, that position will not lead to an offer to supply health insurance at a price that is lower than the blended cost incurred for serving all potential customers. Those numbers could easily make the insurance unaffordable for all but the most sick people. As healthier individuals either stay out of, or abandon, the health-insurance market because of high premiums, the blended rate will have to increase. Quite simply, the risks of adverse selection by insureds are enormous: those individuals whose health prognosis improves could leave the system, while those whose condition has worsened will continue to demand coverage at the same rates as before.
Fourth, persons who choose to stay out of health-plan coverage when healthy (even by paying some tax) will migrate to the plans quickly once their own health condition deteriorates. They would have complete and accurate knowledge of their own condition that they would not need to disclose to the insurer, which is in effect under a statutory duty to enter into a losing contract. The scope of the potential liabilities is only increased by the huge number of individuals to whom this option is made freely available. Wholly without any other consideration, the key requirements prohibiting the use of pre-existing condition exclusion and requiring guaranteed issue and renewal could easily impair the success of health insurance issuers. Ironically, the programs that have the best coverage are the ones that are most at risk, as there is nothing in either the Senate or House bill that appears to alter the rates to account for the differential level of services offered. Other things being equal, the dominant response under this type of mandate would be to reduce the level of coverage across the board, thereby decreasing the options available to many plan recipients. But even this option is blocked by the statutory requirements for "essential health benefits," with their mandatory minimums. On this score, the degrees of freedom to vary rates that the Reid Bill allows health-insurance issuers in the individual and small-group markets relate to "only" four factors, whether or not the coverage is offered through the Exchange. Section 2701(a)(1), as added by section 1201. In addition, these provisions apply with equal force to all health-insurance issuers in the large-group market if the state allows any insurer to sell large-group health insurance coverage through its Exchange.
What is noteworthy about these rate-setting provisions is that they do not allow the health-care-insurance issuers the ability to accurately price their products. The first factor stipulates that coverage for individuals may differ from that offered to families. The second calls for states to establish one or more rating areas within their respective states, subject to review by the Secretary if its areas are found to be "not adequate," under criteria that are nowhere specified in the bill. The choice of these areas--are cities and suburbs in the same or different areas, for example--could be critical for individual plans because the total premium is likely to be sensitive to the areas that are chosen. A health insurance carrier that has an expensive book of business will not be able to adjust the rates accordingly once the geographical boundaries are determined. That nonindividualized treatment could easily create substantial losses for some firms and competitive advantages for others. Finally, some variation is allowed for age up to a 3-to-1 ratio, and for tobacco use up to a 1.5-to-1 ratio. Both these numbers are smaller than the actuarial difference among these groups, so that this provision also requires cross subsidies among plan participants under the guise of "prohibiting discriminatory premium rates," set out in section 2701(a).
At this point, the only possible response of companies is to raise prices to levels that could easily prove economically and practicably unacceptable. Yet once that is done, the prohibitions against "unreasonable" premium increases of section 2794 kick in to make it highly likely that the offending heath insurance issuer will be thrown off the Exchange. But what other alternative is possible? Piling one mandate on top of the other places powerful pressures to impose price controls on the health insurance issuers. After all, the requirement for guaranteed renewal will not satisfy the purposes of universal coverage with the State Exchanges if it is only offered at a price that is beyond the reach of the individuals whom it is supposed to benefit. In the end, therefore, I think that the implementation of the Reid Bill will lead key government officials to impose direct and comprehensive price controls.
This point requires some elaboration. Every scheme that denies a firm the ability to refuse to deal with potential customers has to have either a nondiscrimination rule or a price-restriction rule or both. Thus, standard public utilities have to take all comers. In some instances, they do so on a first-come, first-served basis, as was the case typically when railroads were so regulated. Or these utilities need to articulate some rule that requires a cut back in services offered to earlier customers to make way for later ones, as was typically the case with public-utility hook-ups for gas and electricity. But those provisions will not work in an environment that imposes specific duties, for customer access could easily be denied by what some government administrator deems to be systematically high prices. The only way to make sure that these regulated plans provide access is through some system of oversight on the rates that can be charged.
At this point, the Reid Bill exacerbates the major difficulties of government regulation. The voluntary market under competition will never price goods and services below their cost to the firm. As these costs go up, the health-insurance markets will shrink, for it is quite likely that this mega-mandate will provide many people with services that they do not want and cannot afford. The only two options then are to take some benefits out from the mandate, or to impose price controls at either the state or federal level. Clearly the latter is more likely to be chosen, but there is nothing in either regulatory scheme to rule out the risk that the prices charged will not cover the full costs of providing the benefits. Once again, the risk of price controls is close at hand, even without any explicit authorization on the point.
The situation is still made worse because the federal standards are best understood as creating floors and not ceilings. Indeed, section 1311(d)(3)(B) of the Reid Bill coordinates federal and state programs by providing that state benefit mandates continue to apply to Health Insurance Exchange participating plans so long the state agrees to reimburse the federal government for any increase in premium credits that is attributable to the premium increase arising from the mandate. These additional demands could prove to be extremely costly to companies that seek to acquire nationwide coverage for their employees in the face of specialized mandates that often vary in their economic impact across state lines.
IV. CONSTITUTIONAL ANALYSIS This detailed analysis of the Reid Bill helps to set up the appropriate constitutional analysis. The applicable standards for constitutional review have usually been developed in connection with rate-making procedures in natural monopolies. Within this context, the social objective is to limit the monopoly returns to public utilities, which do not face the risk of competition from new entrants, because they operate in a market in which the declining marginal cost of the initial entrant prevents a new entrant from gaining a toehold. In such a situation, one permissible legislative response is to impose some form of regulation that brings that established player back to a competitive rate of return. I shall pass by all the difficulties in implementing such a program. It is important to note, however, that it is never a satisfactory response for regulators to drive the rates of return down to zero, for then no one would ever be prepared to provide services.
Since it is necessary to compete for capital across the entire range of activities, the constitutional protection afforded under both the Takings and the Due Process Clauses provides that the rate of return cannot fall below that which the investors in the firm could obtain in a competitive market. That calculation has to take into account the level of risk associated with the business, which in general is low with respect to public utilities that have at least de facto protection against new entry.
The hard question, therefore, is what kinds of systems of rate regulation will pass constitutional muster. Within the traditional ratemaking system, the first issue concerns what goes into the rate base. One view is to allow the firm only to include those investments that remain used and usable in the business, which means that the firm has to take the risk of investments that go to waste. For taking this risk, it receives a higher risk-adjusted rate of return. See Smyth v. Ames, 169 U.S. 466 (1899). The alternative is to permit the use of a broader rate base, and to allow therefore a lower rate of return because the risk of poor investments falls on the ratepayers. See Federal Power Commission v. Hope Natural Gas, 320 U.S. 591 (1944). In other instances, it is possible to avoid the cumbrous ratemaking proceedings by instituting a system of rate caps, which in effect tell a firm in an industry like telecommunications that its rate increases will be capped because the increased efficiencies in doing business mean that the unit costs of supplying services will always be on the decline.
What is striking is how far the ratemaking system for health insurance is from all the above. There is no natural monopoly in health insurance, and there is a powerful way to open up health-insurance markets by knocking down the state barriers to entry that have been in effect since 1945 under the McCarran-Ferguson Act. Once it is clear—and it is generally clear—that the health insurance industry is competitive or could easily be made competitive, the entire rationale for government ratemaking is undermined. The point of ratemaking was to require the firm to accept competitive rates of returns in a market setting where it enjoyed monopoly power. Here, the market is either competitive already, or easily can be made so. In this environment, ratemaking no longer serves any useful function.
Contrary to the implicit assumption behind the Reid Bill, ratemaking cannot induce further efficiencies once competitive forces have driven out all elements of monopoly power. Yet all firms are trapped, for the only way in which they can escape ever more onerous requirements and restrictions is to render themselves ineligible to enroll new groups or individuals—whose health insurance, of course, their tax dollars will continue to fund. In addition, right now the Reid Bill subjects plans outside the Exchanges to certain other legal requirements, which could easily be tightened down the road. The non-Exchange health insurance issuers are, therefore, placed in an untenable position that exposes them to the multiple strategies in the Reid bill that control rates and set the terms of service and that will have three unacceptable consequences: (1) to reduce the rate of return of health insurance companies below competitive levels, (2) to pile expensive administrative mandates on them, and (3) to generate major uncertainties as to how the federal obligations on such companies will pan out.
At this point, there is a near mathematical certainty that the scheme of health-insurance market regulation contemplated by the Reid bill will reduce the risk-adjusted rate of return below the level needed to keep these firms in the individual and small-group health-insurance markets. I am not aware of a single provision in the Reid Bill that looks to ensuring a minimum rate of return. And there are countless provisions in the bill that impose new obligations to cover services while eliminating the revenue sources to deal with them. It is just this combination of regulatory programs that leads the CBO to treat private health insurance issuers as part of a federal program--as though they have been subject to de facto nationalization.
This systemic regulation of both Exchange and non-Exchange carriers shows, moreover, that those health-insurance issuers that participate in the Exchange are shorn of all constitutional rights. The requirement that the states order rebates of money spent on non-claim expenses is not constitutionally permissible unless and until the Reid Bill makes some allowance for earning a reasonable rate of return. That return, moreover, must take into account the extra riskiness that flows from the grant of broad delegated authority to the Secretary.
In addition, the decision to order rebates in good years without adjustments for the losses in bad years makes it impossible for a firm to earn a reasonable rate of return. In utility rate regulation, it is not constitutionally permissible to impose an annual rate cap just at the competitive level, while leaving the carrier obligated to eat the losses in poor years. Section 2718 of the Reid bill goes even further than such unconstitutional provisions in the utility context:[3] it imposes a hard cap, without any accurate accounting for administrative costs or any explicit recognition of the constitutional right to earn a reasonable profit.
To make matters worse, these overall caps apply on top of all the restrictions on the ability to decline coverage or vary rates that are involved in other provisions of the Reid Bill. These provisions necessarily raise the administrative costs of providing insurance. There are no upper bounds on what can be required by various federal and state officials who are charged with oversight of individual and small-group plans in many instances, and all health-care plans in others. At this point, it is only a matter of time before the cost obligations are so enormous that even complete freedom in setting prices would not allow the firm to remain in business. Nor will this problem be cured by the vast pattern of subsidies and taxes that permeate the rest of the bill. Quite to the contrary, the subsidies may put greater pressure on the capacity of health insurance companies to operate, given that these firms have no capacity to choose which plans to provide to which customers.
Given these facts, it is impossible for the rate regulation of firms in the competitive health insurance industry to recover the constitutionally permissible rate of return. So long as competitive rates of return remain the constitutional benchmark, rate regulation necessarily fails. The unregulated rates are already at the competitive level. Any system that reduces revenues, raises costs, and increases uncertainty cannot possibly meet the applicable constitutional standard.
To my mind, the only serious question about the legislation is whether a facial challenge will be allowed to the Reid Bill when it does not contain explicit price-control features. Such facial challenge are often denied in land-use cases, but in rate-regulation cases the result has usually been otherwise. To wait until the program has run its course is to consign a health-insurance company to the substantial risk of bankruptcy just for trying to stay in business. It does not have the option to hold off development until the legal uncertainties are resolved. Since neither the United States nor the individual states will pony up the huge losses sustained by the regulated firms, the challenges have to be allowed before the statute is implemented and not afterwards. How this issue will play out in litigation no one can say for sure. But it would be, in my view, irresponsible for the Senate to pass any health reform legislation that does not address the serious constitutional infirmities found in the Reid Bill.
CONCLUSION: This ill-conceived legislation has many provisions that regulate different aspects of private health-insurance companies. Taken together, the combined force of these provisions raises serious constitutional questions. I think that these provisions are so intertwined with the rest of the legislation that it is difficult to see how the entire statute could survive if one of its components is defective to its core. How courts will deal with these difficult issues is of course not known, but rate-regulation cases normally attract a higher level of scrutiny than, say, land-use decisions.
There is, moreover, no quick fix that will eliminate the Reid Bill's major constitutional defects. It would, of course, be a catastrophe if the Congress sought to put this program into place before its constitutionality were tested. Most ratemaking challenges are done on the strength of the record, and I see no reason why a court would let a health-insurance company be driven into bankruptcy before it could present its case that the mixture of regulations and subsidies makes it impossible to earn a reasonable return on its capital. At the very least, therefore, there are massive problems of delayed implementation that will plague any health-care legislation from the date of its passage. I should add that the many broad delegations to key administrative officials will themselves give rise to major delays and additional challenges on statutory or constitutional grounds.
The health of the American people should not be held hostage to such unwise legislation. The Senate should reject the Reid Bill because of the unsustainability of the statutory scheme regulating health-insurance markets. But there is also little doubt that its central arrangements are unconstitutional, and will face serious legal challenge for years to come. Rather than embarking on a fundamentally flawed course of action, sure to spark litigation, the Senate should start over with other reforms that go in the opposite direction: simplify the system so that market forces can increase both quality and access in ways that no system of government mandates can hope to do. Deregulation is a word that has been forgotten in the current debate. It should be returned to center stage.[4]
Richard A. Epstein is the James Parker Hall Distinguished Service Professor of Law at the University of Chicago, the Peter and Kirstin Bedford Senior Fellow at the Hoover Institution, a visiting professor at the NYU Law School, and a visiting scholar at the Manhattan Institute.
I wish to thank Paula Stannard for her prompt, gracious and expert assistance in guiding my way through the statutory quick sands. Any remaining errors are, of course, entirely my own.
NOTES:
1. H.R. 3962, The Affordable Health Care for American Act, passed the House this past November 7, 2009. A second bill, S. 1796, the America's Health Future Act of 2009, was reported in the Senate from the Senate Finance Committee on October 19, 2009. A third variant, S. 1679, the Affordable Health Choices Act, was reported in the Senate from the Senate Health, Education, Labor and Pensions Committee on September 17, 2009.
2. Congressional Budget Office, "Treatment of Proposals to Regulate Medical Loss Ratios," December 14, 2009. "A Medical loss ratio, or MLR, is the proportion of premium dollars that an insurer spends on health care: it is commonly calculated as the amount of claims incurred plus changes in reserves as a fraction of premiums earned." Id.
3. If we were to assume that the health insurance company gets, at most, a competitive return in good years--an assumption more generous than what the Reid Bill provides--it still gets less than a competitive return in poor years. The situation becomes like a coin flip, in which the regulator wins with "heads" and the regulated health-insurance company loses with "tails." Over the long run, the firm is necessarily deprived of a competitive rate of return except in the wildly improbable scenario that the firm earns exactly the competitive rate of return in all years.
4. See, e.g., Richard A. Epstein & David A. Hyman, Controlling the Costs of Medical Care: A Dose of Deregulation, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1158547.
]]>What if America's labor law were more like Canada's? Were our Congress to enact into law a more union-friendly legal code of the sort long familiar to our northern neighbors, what sorts of consequences would we expect? At present, 29.4 percent of workers in Canada are represented by unions, as contrasted with 12.4 percent of workers in the U.S. Would adopting a more "Canadian" legal regime close much of that gap, or only a little of it? And what would be the consequences for employee well-being, for managerial efficiency, and for the health of the U.S. economy generally?
These questions are not new ones among those who follow labor policy, but they have taken on fresh interest given the enormous stir in Washington over the proposed Employee Free Choice Act (EFCA). The top legislative priority of organized labor, and potentially the most significant piece of labor legislation since the Wagner Act of 1935, EFCA consists largely if not entirely of policy initiatives that follow a "Canadian" path:
* "Card check". Today, in most cases, installing a union to represent workers at a place of business requires a majority vote of the workers by secret ballot. EFCA's best-known and most controversial provision would require recognition of a union upon its presentation of signatures on union cards from a majority of the workers in a proposed bargaining unit. (1) The card-check system has a long track record in Canada.
* Imposed arbitration of first contracts. Once organization is accomplished, EFCA would compel management to reach a first contract with the new union, by providing for mandatory arbitration and imposition of a contract by a government-appointed arbitrator should negotiations not result in a contract by a certain point. Some Canadian employers both public and private are subject to imposed arbitration at negotiation impasse; in the United States up to now, such requirements have ordinarily been imposed only on some public employers.
* "Quickie" elections. As the unpopularity of eliminating the secret ballot has become clear, organized labor and its supporters have begun to cast around for "compromise" EFCA provisions aimed at bolstering unions' organizing efforts in other ways. One such idea is to speed up greatly, perhaps to 10, 12 or 15 days, the holding of elections following a union petition, which currently in the U.S. are held a median of 39 days later. In Canada, by contrast, there is usually only a five-day window before elections. Shorter periods before a vote are generally considered unfavorable for employers because it gives them little time in which to assemble a case against unionization and make it known to workers; the union, by contrast, will ordinarily have had weeks or months to make its case to workers in private persuasion before it surfaces with its election demand.
Quickie elections, in contrast to card check, are often thought to have "moderate appeal". Thus, William B. Gould IV, an influential legal scholar, former counsel to the United Auto Workers, and former chairman of the National Labor Relations Board (NLRB), supports EFCA in general principle but has criticized card-check and recently proposed quickie elections as part of a "better approach" that might command bipartisan support:
Secret ballots to resolve union representation rights are the way to go, and Obama should meet the Republicans halfway by saying so - and then add this all-important coda: Elections should continue only if the law ensures that voting is conducted expeditiously - for instance, within one or two weeks of the filing for a union's petition seeking recognition. This is the case in Canada, whereas in the United States, the resolution of union drives currently takes months and sometimes years. Quick elections are the key to meaningful reform because delay is the principal way in which labor law stacks the deck against employees. It allows employers to engage in one-sided anti-union campaigns of intimidation and coercion, with little possibility for remedy. (2)
Of all countries that might provide examples for labor law reform, Canada is the most similar to the United States culturally and politically. It is also the most familiar to American managers (many of its firms, especially in the industrial heartland of Ontario, are owned by or affiliated with American corporations, the well-known cross-national integration of Big Three auto manufacturing being only one example.) How relevant is the Canadian labor experience, and what can it teach us about the achievability of EFCA's constituent parts and the costs and benefits they might bring? (3)
Not one but multiple systems. In contrast to our system of labor law in the U.S., in which the federal government occupies most of the field and sharply limits the 50 states' scope for divergence, Canada genuinely shares the regulation of labor relations and union certification between Ottawa and the provinces, with the provinces given the lead. (4) About ten percent of the total Canadian workforce is covered by federal labor law. This includes federal government workers as well as private workers in certain industries deemed national, which include banking, shipping, telecommunications, and inter-provincial trucking.
Canada's federal labor code is a card check system with first-contract mediation and binding arbitration. There are no secret ballot elections. Instead, if more than 50 percent of the workers in a proposed bargaining unit sign cards, the union is certified by the Labour Relations Board. In short, this system does prescribe something a lot like the EFCA's proposed regime for a tenth of the Canadian workforce.
What about the ninety percent of workers not covered by Canada's federal labor law? They are subject to the labor laws of the provinces in which they reside. Up until 1976, all of the provinces used card check. Beginning in that year, however, changing political and economic circumstances have led some provinces to rethink the methods of union selection.
Today, six of the ten provinces - Alberta, British Columbia, Newfoundland and Labrador, Nova Scotia, Ontario, and Saskatchewan - require a secret ballot. The four others - Manitoba, New Brunswick, Prince Edward Island, and Quebec - use a card check system. Six provinces also mandate in some form first contract mediation and binding arbitration: British Columbia, Manitoba, Newfoundland, Ontario, Quebec, and Saskatchewan. Overall, of workers in industries covered by provincial labor law, about 68 percent of the Canadian work force lives in provinces with a mandatory secret ballot, and the other 32 percent in provinces with card check.
The numbers fluctuate because card check can be a political football in provincial politics. New Brunswick, for example, first adopted a secret ballot and then reverted to card check as contending political parties succeeded each other in office. Similarly, British Columbia adopted secret ballot elections in 1984, returned to card check in 1993, then readopted the secret ballot in 2001.
There is thus no single "Canadian" model for union organization. If there is a "median" or "most typical" law among the diverging Canadian examples, it is probably the "expedited secret ballot" system that prevails in six provinces including the most populous, Ontario.
Ontario's expedited secret ballot. Ontario switched from card check to a five-day secret ballot certification process in 1995. This change was part of a larger program of tax, budget, and regulatory reforms called the Common Sense Revolution by its architect, Mike Harris, Ontario's conservative Premier.
Upon a showing that 40 percent of the workers in a proposed bargaining unit have signed cards expressing an interest in joining a union, a secret ballot vote must occur within five business days. That's not a lot of time, especially since unions have the initiative in triggering the process and can choose the time and circumstances they consider most favorable. Businesses may not even know an organizing effort is in progress until the union, having secretly obtained the number of signatures necessary to force an election, files its application for certification.
Once a union submits an application, companies must submit a formal response, including a list of relevant employees, to the Labour Relations Board and to the union within two business days. This mandated response can itself be a costly legal scramble and paper chase, and makes it even more likely that managers will be distracted during the few days that will be their only formal chance to make their case on the organization vote.
In that latter task, managers are far more limited by what they can say about the impact of unionization than are their American counterparts, a fact that often comes as a surprise to American companies with Canadian subsidiaries. In one notorious case, for example, from 1996, disgruntled employees of a Wal-Mart operation in Windsor, Ontario, approached the United Steelworkers of America seeking representation. Enough cards were signed to force an election. In the election, however, 79 percent of the employees voted against the union. The Employee Labour Relations Board proceeded to uphold union objections to Wal-Mart's American-style interference with the unionization process. Bizarrely, at least from an American perspective, the Board based its finding in part on Wal-Mart's silence when employees asked if the store would be closed if the unionization drive succeeded. The Board found the company's lack of comment to have had a "chilling effect" upon the union campaign. (5) By way of remedy, it did not (as one might have expected) merely throw out the election results that had gone against the union: it ordered the union installed to represent the workers, majority vote or no.
From a management standpoint, the Ontario system does have some mitigating features. For example, if a union loses an organizing vote, it must wait a year before trying to organize the same company again. The one-year ban applies not only to the losing union but to all other unions as well.
More important, Ontario no longer imposes mandatory arbitration automatically if a company and union cannot agree on a first contract. The 1995 legislation that supplanted card check with the five-day vote also modified the then-existing mandatory arbitration provision by putting in place a four-part test for evaluating first contract negotiations. This four-part test comes close to a bad-faith bargaining hurdle. In effect, if a company can show that it is bargaining with the union in good faith, it can avoid mandatory arbitration.
Accustomed as they are to campaign periods of about a month before an organizing election, most American managers would likely regard the Ontario secret ballot system, with its abbreviated, five-day campaign period, as a thumb on the scale in favor of union organization. According to a labor lawyer in Canada interviewed for this note, Ontario managers are not in revolt against the five-day system because "you get used to it." The possibility of quick organization becomes just one more "crisis management" issue, with all the transaction costs that crises inevitably entail.
Union "density" and the legal background. Union density - the percentage of total workers who belong to unions - is greater in Canada than in the United States. According to Statistics Canada, about 29.4 percent of all Canadian workers belong to unions. In the United States, the equivalent figure is about 12.4 percent.
In both countries there is a sharp disparity between union density in the public and private sectors. In Canada, 71 percent of public sector workers belong to unions, while only about 16 percent of workers in the private sector are organized. A similar ratio prevails, but at lower rates, in the United States, where union density is about 39 percent in the public sector and 7.6 percent in the private. The comparatively robust presence of unions in the public sectors of both countries reflects the disinclination of government managers to contest unionization, in part because the costs of organization - higher wages, expensive benefits, and restrictive work rules - are indirectly spread among the public at large. (6) It is also worth noting that the public sector employs a significantly higher percentage of the workforce in Canada than it does in the United States.
No one factor explains the overall density "gap" between Canada and the United States. Unquestionably card check has facilitated unionization north of the border, which tends to confirm the feeling of labor leaders in the United States that it would prove helpful to them here. (7) One often-quoted study, by Professor Susan J.T. Johnson of Wilfrid Laurier University, estimated that the greater use of card check in Canada accounts for somewhere between 17 to 24 percent of the difference in union density between Canada and the United States. (8)
Available evidence suggests that the adoption in some provinces of a secret ballot, even when accompanied by a relatively brief campaign period, has made organization more difficult. Perhaps the most striking example is in New Brunswick where the success rate of union organizing fell 19 percent when the secret ballot was put into place and rose by about the same amount when the card check regime was later restored. (9) A study of organization in Ontario found that "the overall proportion of successful certification applications [was] substantially lower under the mandatory vote than it had been under the card-check system." (10)
Note that there is surprisingly little backing for the sometimes-heard assumption that Canada (in supposed contrast with the U.S.) is a country where unionism is simply uncontroversial and popular with the broad populace. With a favorable legal framework in place for many years, a union movement that represents only 16 percent of private sector workers cannot exactly claim a decisive mandate from the Canadian working public. The Canadian experience following many provinces' introduction of secret ballot elections also suggests that when workers are allowed to vote on whether to join a union - when, in other words, they regard joining a union as a matter of individual choice in which competing considerations are brought to their attention - they are measurably less inclined to join. This is a difficult point for unions to accept.
The flagging spirit of Canadian unionism. Unionism in Canada's public sector appears for the moment to be secure. But only the growth in public sector unionization has kept Canada's overall density rate near 30 percent; Canadian private sector unions are struggling, by contrast, with what growth there has been in union membership outstripped by the greater proliferation of nonunion jobs. Pradeep Kumar of Queen's University, a sympathetic observer of the Canadian labor movement, has argued that in general "the data appear to portray a picture of a stagnant labour movement with declining density in a wide range of areas, particularly in private service industries with expanding employment, and with a false sense of security due to continuing union strength in the public sector." (11)
Even the most visible instance of new private unionization in recent years is indicative of this weakness. The giant auto-parts supplier Magna International, which had long resisted unionization, reached a 2007 agreement with the Canadian Auto Workers (CAW): in order to achieve this long-sought goal, however, the CAW gave up the right to strike, amended its grievance procedures, and permitted the company to screen candidates for union representative - so-called "employee advocates" -- at each plant before they are ratified by employee vote.
Some in Canada's labor movement are preoccupied with the hope of turning around this trend by prevailing on provincial governments to restore card check. (12) New Brunswick aside, they have had scant success. When the Liberals returned to power in Ontario in 2003, there were rumblings about restoring card check across the board. That did not happen, and instead the old system was restored in 2005 only for workers in construction workers (a move, oddly enough, condemned as "sexist" and an "atrocity" by one union because the construction industry has "a predominantly male workforce"). (13) Although Canadians are famously prickly about their social and cultural independence from the United States, it is probably true that the best boost for a return to card check in Ontario and other provinces would be the adoption of card check by the United States, Canada's largest trading partner.
In this context, calls for a return to card check may be a distraction from the more important matter of making union membership relevant for a new generation of Canadians who may not see belonging to a union as self-evidently desirable. Perhaps there is a lesson here for American labor unions as well.
FOOTNOTES
(1) In the first half of 2008, the union win rate in NLRB private sector elections was 66.8 percent. This win rate has been tracking upward, with one exception, for the last five years. In 2003 the union win rate was 58.3 percent; in 2004, 58.6 percent; in 2005, 61.3 percent; in 2006, 61.4 percent; and in 2007, 60.5 percent. See "Union Win Rate in NLRB Elections Increased Substantially in First Half 2008," BNA Daily Labor Report, 217 DLR, January 28, 2009, pp. C-1 - C-2.
(2) William B. Gould, IV, "How Obama Could Fix Labor Law," Slate, August 28, 2008.
(3) Recently three American companies sympathetic to labor law reform - Costco, Starbucks, and Whole Foods - formed an organization called the "Committee for a Level Playing Field for Union Elections." The Committee has as its centerpiece the maintenance of secret ballot elections with a shortened campaign period, along the lines of what Gould identifies as the Canadian model.
(4) Before 1925, collective bargaining legislation was the responsibility of Canada's federal government. In 1925, the United Kingdom Privy Council, in Toronto Electric Commissioners v. Snider established priority of provincial rather than federal jurisdiction over most labor and employment issues. Subsequently, the Constitution Act of 1867 delineated the separation of powers between the federal and provincial governments.
(5) See Douglas Gilbert and Brian Burkett, "Canada's Labor and Employment Laws," June 2001. Gilbert and Burkett are Canadian management-side labor lawyers and their piece can be found at http://www.shrm.org/nahrma/canada.asp
(6) In addition, government employment is by nature fairly static and captive in the sense that it cannot be "offshored." Unlike private sector workers, government employees are not buffeted by the pressures of international competition, mergers and acquisitions, technological change, or bankruptcy. Organizing government workers and bringing new members on board is thus fairly routinized and predictable. It is, in other words, easier.
(7) In addition, unlike the United States, Canada permits mandatory union membership in collective agreements as a condition of employment. And in contrast to so-called "right-to-work" states in the U.S., Canada also permits mandatory dues payments, again as a condition of employment. Jason Clements, Niels Veldhuis, and Amela Karabegovic, "Explaining Canada's High Unionization Rates, Fraser Alert, August 2005. This piece can be found at: http://www.fraserinstitute.org/researchandpublications/publications/3086.aspx
(8) Susan Johnson, "The Impact of Mandatory Votes on the Canada-U.S. Union Density Gap: A Note," 43 Indus.Rel. 356 (2004), quoted in Anne Layne-Farrar, "An Empirical Assessment of the Employee Free Choice Act: The Economic Implications," The Alliance to Save Main Street Jobs, March 3, 2009, p. 16.
(9) Chris Riddell, "Union Certification Success Under Voting Versus Card-Check Procedures: Evidence from British Columbia, 1978 - 1998," Canadian Journal of Economics, vol. 34, no. 2, quoted in Jason Clements, Niels Veldhuis, and Amela Karabegovic, "Explaining Canada's High Unionization Rates," Fraser Alert, op. cit.
(10) Sara Slinn, "The Effect of Compulsory Certification Votes on Certification Applications in Ontario: An Empirical Analysis," Canadian Labour and Employment Law Journal, vol. 10, no. 3.
(11) Pradeep Kumar, "Whither Unionism: Current State and Future Prospects of Union Renewal in Canada," June 2008, available online at: www.opseu.org/committees/equity/PradeepKumarWhitherUnionism.pdf. See also Pradeep Kumar, "is the Movement at a Standstill?", Our Times, vol. 27, issue 5, October-November, 2008.
(12) See, e.g., Bruce Allen, "On and After the Magna Vote," New Socialist, www.newsocialist.org/index.php?id=1485. See also, Mine Mill598/CAW Organizing Report, April 27, 2005, www.minemill598.com/community-based-organizing/organizing-report.html
(13) The "sexist" and "atrocity" language can be found in a draft advocacy letter to members of the Canadian Parliament that is included in the "Labour Law Reform - Lobby Kit" created in 2005 by the United Steelworkers District 6. Available at: www.usw.ca/program/adminlinks/docs//LLR_Kit.pdf.
* * *
John Endean is the president of the American Business Conference, a Washington, D.C.-based coalition of leaders of midsize growth companies. This paper, original to Point of Law, was commissioned by the Manhattan Institute as the first in a planned series of Institute papers on labor policy. It was published November 9, 2009.
* * *
For years American politics has been stirred by debate over whether the United States should join or cooperate with newly emergent instruments of multilateral law such as the International Criminal Court (ICC) and the Kyoto Accords on climate change. To these ongoing controversies may soon be added another: should the United States support or oppose plans for an international court for the environment, empowered to punish states or private actors that damage irreplaceable natural resources or fail to protect imperiled species or ecosystems?
At present, the debate over such a court is mostly being heard abroad - particularly in Great Britain, where a prominent lawyer named Stephen Hockman is spearheading a campaign that has won backing for the idea from various public figures such as Exchequer secretary Alistair Darling and Dame Judi Dench (Prime Minister Gordon Brown has also made vaguely favorable noises). At some point, however, we are likely to hear more about it on this side of the Atlantic. Already one international environmentalist group well known in this country, Friends of the Earth, has declared its backing for the concept, and others are likely to follow.
If it follows the lines promoted by Hockman's campaign, an international environmental court would have the following characteristics:
There is nothing new in itself about pursuing environmental goals through international treaties. Compacts between particular nations, neighboring or otherwise, have addressed such problems as regional water and air pollution, migratory species, aquifer depletion and so forth. For the most part, however, such agreements have been reached among particular pairs or groupings of countries rather than under the aegis and sponsorship of the world in general.
There have been many proposals for a fully international body for the protection of the environment, but none have ever gotten off the ground. Brazil proposed such a court in 2002, while France (among others) has suggested that a World Environment Organization be established in parallel with the World Trade Organization, whose disputes sometimes involve environmental elements. Others have suggested upgrading the mostly educational and development-oriented UNEP (United Nations Environment Program) to the status of an international environmental agency. Indeed, the International Court of Justice itself already has a specialized Chamber for Environmental Matters, established in 1993 but never once called upon to decide a case in the years since then, perhaps because it is empowered to hear controversies only with the consent of both parties to the case.
Among the most fundamental problems with the new proposals is the sweeping yet undefined nature of the contemplated new "right to a healthy environment". When existing environmental treaties do address issues of pollution, they most often do not spell out emissions limits that make any absolute claim to being objectively correct or a consequence of the recognition of universal human rights. Instead, they tend to call upon member nations to lower their emissions by certain percentages, depending on current pollution levels - a practical concession to the status quo and to the need to gain political support for implementation.
In short, the concept of a right to a healthy environment cannot readily be filled in with the materials that international law currently provides. Indeed, and ironically, the best-established international customary norm relating to the use of land and resources is the one holding that countries have the sovereign right to do as they wish with their own natural resources. That norm - much prized by many nations of the developing world as well as some in the developed - is in great tension with the vision of a new international body wielding power to curtail what informed world opinion might see as excessive resource development.
Then there are problems of enforcement. At present, various multilateral tribunals face a risk that member nations will defy their edicts, as well as the wider risk (as with the refusal of the U.S. to join the I.C.C.) that nations will decline to submit to their authority in the first place. What happens when a new tribunal orders the closing down of a particular economic resource (hunting, ranching, mining, forestry) that provides what a local population finds to be a vital means of sustenance, with no power to offer countervailing incentives or subsidies to offset the economic pain?
The enthusiasm for the idea in Britain is unlikely to be matched in Washington, D.C. To begin with, the U.S. has shown great reluctance over the years to enter pacts that subject individual Americans or businesses to international jurisdiction (the ICJ, to which the U.S. has submitted, hears cases only against state actors.). Similarly, although the U.S. ratified the Universal Declaration of Human Rights in 1948, it opted out of a parallel agreement (known as the Optional Protocol of the International Covenant on Civil and Political Rights) meant to allow individual actors to seek remedy from the UN for violations committed by their home government.
Arguments of economic cost are also likely to be advanced against the idea. It will be recalled that the U.S. Senate effectively vetoed American participation in the Kyoto Protocol on climate change. At the time, President Bush estimated that ratification of the Protocol would cost the U.S. economy $400 billion and 4.9 million jobs. While there is no real way to estimate the costs of commitment to an international environmental court process, opponents would be likely to argue that the price tag would begin with the costs of being ordered to adopt measures aimed at averting climate change, and then go up from there since the court would enforce other sorts of environmental mandates as well.
Finally, tangible costs aside, the same sorts of concerns about loss of sovereignty that have loomed large in earlier international-law controversies, and which underlay the Bush administration's decision to keep the United States out of the jurisdiction of the International Criminal Court (ICC), would be heard again. Many U.S. Senators could be expected to object to the extension of the court's power over environmental issues that at present are handled within the United States as purely domestic concerns. Like other advanced countries, the United States already provides extensive remedies for those affected by many forms of environmental damage, and these domestic remedies, it will be argued, are (or at least could be made to be) more reliable and suited to local circumstances than those prescribed by an international tribunal.
What will be the view of the Obama administration? Presumably it will not be as strongly opposed as its predecessors to the idea, both because it takes a more favorable view of international law generally, and because it is broadly more supportive of environmental regulation (as with its support of climate change legislation which goes considerably further than many Republican critics would like, even if not as far as many environmentalists want).
If his early statements on international law are any indication, President Obama might be open to entering discussions concerning an environmental court, as he is open to discussions regarding the United States's relationship to the I.C.C. But this is not the same thing as saying that his administration would in fact endorse a resulting accord or commit political capital to getting a convention ratified. The same constraints of public opinion and American political culture are at work to bind the U.S. State Department as were at work under the previous administration.
The United States would inevitably face much criticism abroad if it refused to ratify a court once established, just as it has faced criticism for holding back from other international instruments. Assuming that no direct confrontation between the U.S. and the court resulted, the more practical issue would be the effect on U.S. entities operating abroad, in particular business interests. If treaty rights were asserted to the disadvantage of U.S.-owned interests in a particular ratifying nation, possible outcomes might include U.S.-based pressure on the other country to side-step the treaty obligations, or alternatively pressure on the U.S. to engage with the treaty process so as to speak up for its nationals' interests.
Advocates of the international court in the U.K. have been working with much energy to build momentum for the idea. Efforts are underway to enlist formal British government support in preparation for the Copenhagen climate change conference to be held this December, at which the Kyoto Protocols will be re-evaluated. In May, Hockman convened a meeting to get the project underway, one possible vehicle being a non-profit entity devoted to undertaking test cases under English law.
Even if the court idea as such fails - as at present seems the most likely outcome - it is possible that it will advance other objectives of international environmental advocates. By spurring discussion and putting national governments on the defensive, it could lead to more international scrutiny of domestic environmental policies and thence to pressure from more directions for more stringent domestic environmental laws. It might also encourage the expansion or reworking of existing mechanisms, such as the Kyoto Protocol, which could be seen as a comparatively moderate alternative to demands for a court with strong powers. Once the internationalization of environmental law gets under way, it is not clear that it will be readily turned back.
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Rona Koifman is an internationally experienced freelance writer, editor, and translator with degrees from New York University and the London School of Economics. This column is original to the Manhattan Institute's Point of Law and was published September 23, 2009.
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For further reading:
James R. Copland
[Originally published in the Forbes.com, 8-26-09.]
On Aug. 6, 2009, the Securities and Exchange Commission announced that it had reached a $15 million civil settlement with former AIG chief executive Maurice "Hank" Greenberg. This story has gotten far less attention than it deserves, given that it occurred against the backdrop of the collapse of AIG, which is now mostly owned by the federal government. Both the SEC-Greenberg settlement and AIG collapse help us to understand, in retrospect, the real costs of the war that former New York attorney general Eliot Spitzer waged against the insurance giant and its leader.
The SEC's action was not a roar but a whimper: The agency not only failed to make a criminal case against Greenberg but also failed to charge him with civil fraud. Instead, Greenberg was merely accused of being a "control person," ultimately responsible for his company's alleged accounting improprieties (allegations that Greenberg, in reaching the settlement, did not admit).
Still, the SEC's complaint, if credited, is serious enough. AIG was accused of inflating earnings and insurance loss reserves while obscuring actual underwriting losses. The allegations that appear front and center in the SEC's complaint—alleged sham transactions entered into between AIG and General Re, a reinsurer owned by Warren Buffett's Berkshire Hathaway—are those, which Spitzer focused on when going after Greenberg.
But even if Spitzer ultimately zeroed in on a corporate impropriety—he had previously looked into alleged bid-rigging and even Greenberg's 1970s-era charitable endeavors—his obsessive pursuit of AIG's captain, in hindsight, looks foolish indeed. The General Re transactions upon which Spitzer and the SEC focused may have been fraudulent, but their total alleged size—$500 million—pales in comparison to AIG's $99 billion in 2008 losses and the consequent $182.5 billion taxpayer-funded bailout of the company, designed to keep the financial system afloat. And while the transactions at the heart of the SEC's complaint may have resulted in material accounting misstatements, they are immaterial to the company's costly implosion: They occurred from 2000 to 2002 and are wholly unconnected to AIG's massive bet in the credit default markets that precipitated its ultimate collapse.
The chain of events that led to its collapse followed swiftly in Spitzer's wake. Shortly after Spitzer issued subpoenas against AIG in February 2005 related to the General Re transactions, the market began discounting the company's debt. The next month, AIG's board, under intense pressure from Spitzer, ousted Greenberg from the company; the very next day, the Fitch rating agency downgraded AIG's credit rating from AAA to AA, and Standard & Poor's followed suit later that month. The credit downgrades dramatically increased the potential collateral calls that AIG faced on its credit-derivative products.
More critically, as control of AIG shifted hands, vital risk-oversight practices waned. Greenberg's successor, Martin Sullivan, admits that he had "focused on other priorities including repairing AIG's standing with customers and regulators [and] cooperating with several government probes." AIG's financial products group, which sold credit-default derivatives and other financial instruments, wrote as many credit-default swaps over the nine-month period after Greenberg departed as it had in the previous seven years combined.
It is impossible to know whether the large derivative position amassed by AIG would have been accumulated under Greenberg's watch, though Greenberg did have a long track record of closely monitoring the financial products group's risk. David Havens, a credit analyst with UBS, insists, "Had Hank Greenberg still been running the company, I think it's pretty safe to say the situation wouldn't even be close to what is now."
Thus, AIG's downfall powerfully demonstrates the problem with turning over the regulation of corporate governance to criminal prosecutors with political agendas. The SEC's civil-enforcement powers, in addition to private civil actions at the state and federal levels, are more than sufficient to police accounting shenanigans such as those underlying the agency's settlement with Greenberg. (The power of private civil actions, themselves often abused, was exemplified one week after the SEC settlement, when Greenberg and other executives announced a $115 million settlement with class-action plaintiffs.)
Clearly, on occasion, individual business leaders' malfeasance warrants criminal prosecution. But corporate management decisions should be left to business leaders, not prosecutors who cannot understand the businesses they are investigating.
Unfortunately, the government's vast powers in the criminal arena enable prosecutors to coerce corporate boards to do their bidding, and far too often, prosecutors succumb to this temptation. Such abuses extend beyond Spitzer's crusades; federal prosecutors' criminal powers over accounting practices were expanded radically in the Sarbanes-Oxley Act of 2002, and U.S. attorneys regularly use "deferred prosecution agreements" to control corporations in the government's cross hairs. State and federal legislators should rein in such abuses, before we get another AIG.
James R. Copland is the director of the Center for Legal Policy at the Manhattan Institute.
]]>[Originally published in the Drug and Device Law Blog, 7-9-09.]
The two of us have been practicing law now for a little over 25 years. Bexis graduated law school in 1982 and Herrmann a year later. At big firms it takes a few years -- five at least -- before we could start to have any real strategic impact on the cases we were working on. And it took a few years for us to get around to being product liability defense lawyers in the first place.
But now we're here, there, whatever.
We've been doing product liability defense for the better part of a couple of decades, and we've got maybe a couple of decades more to go. So how are we -- not just us, but this generation of the defense bar generally -- doing at this midpoint of our careers?
Bottom line: Are our clients better off now than when we started?
We decided today was as good a time as any to take stock.
James Beck and Mark Herrmann are respectively lawyers in the Philadelphia office of Dechert, and the Chicago office of Jones Day, and defend drug and medical device litigation for a variety of clients. They publish the widely known Drug and Device Law Blog, where this essay first appeared.
[Originally published in the Orange County Register, 6-30-09.]
A Los Angeles judge threw out several weeks ago a lawsuit that Nicaraguan farm workers brought against Dole Food Co. for actions that occurred on Dole banana plantations in Nicaragua nearly a third of a century ago. The judge found that the plaintiffs' lawyers recruited fraudulent plaintiffs and coaxed them to lie.
"What occurred here is not just fraud on the court but blatant extortion of defendants," Judge Victoria Chaney said in her ruling.
Why, you may ask, was this case in the California courts in the first place? Good question.
When we consider the U.S. trade imbalance, we normally do not consider importing lawsuits, but we should. Increasingly, foreign plaintiffs who have never set foot in America are suing in the United States for events, or "torts," in their own countries, where the U.S. company violated no law. Many U.S. courts are accepting these lawsuits and applying U.S. law to foreign countries.
Why foreigners choose U.S. courts is easy to understand. U.S. law is typically much more pro-plaintiff. U.S. courts impose "strict liability" for products; that is, liability without proof of negligence. They allow contingent fees, so well-financed law firms can assure plaintiffs that they owe nothing unless they win. Our juries may impose punitive damages, in amounts that are mind-boggling to foreigners.
U.S. courts also offer procedural advantages that do not exist abroad, such as class actions, where one individual can represent thousands of other people who may not even know they are plaintiffs. Our courts allow extensive evidence discovery, which imposes heavy costs on the defendant. The system encourages the defendant to settle early, to avoid a costly trial.
What is hard to understand is why U.S. courts let foreigners sue here.
Normally, U.S. courts apply a doctrine called forum non conveniens, or inconvenient forum. The court dismisses the lawsuit because it should be brought in another court - in the country where the alleged wrong occurred. However, some state courts are deciding that they will hear these lawsuits and apply U.S. law, even though the country where the dispute originated would apply its own law. It is like suing after an auto accident and asking the court to apply the speed limit posted outside the courthouse instead of the speed limit at the site of the accident.
In Stangvik v. Shiley Inc. (1991) the California Supreme Court declared that California should hear the foreign case, "no matter how inappropriate the forum may be," if the foreign statute of limitations would bar the plaintiff's suit, unless the defendant agrees that he will not raise this defense in the foreign jurisdiction.
Why should U.S. courts impose on U.S. companies a statute of limitations that is more generous to foreign plaintiffs than the statute of limitations the foreign country applies to its own citizens?
This double standard - U.S. courts applying stricter rules against U.S. companies than the foreign country would apply to any company within its jurisdiction - tilts the playing field against America. It makes it more costly to invest overseas. It allows the foreign country to enforce lower safety standards, knowing that its citizens can sue in U.S. courts for punitive damages while its own companies simply follow the local rules. Only U.S. companies must comply with local laws and the law of whatever U.S. state in which foreign plaintiff decides to sue, decades later.
U.S. courts should not accommodate countries, like Nicaragua, that have adopted laws targeted against U.S. companies. In such cases, our court system is importing two things: foreign judgments and foreign plaintiffs. As Judge Chaney said, referring to Nicaragua law, "There is a lack of respect for law down there."
Ronald Rotunda, a prominent Constitutional scholar, is professor of law at Chapman University School of Law.
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