The recent Supreme Court decision in Comcast v. Behrend is not likely to attract much popular press. The case is worlds apart from the Court's highly publicized class-action decision in Wal-Mart v. Dukes, which addressed burning issues of workplace parity between men and women. In contrast, Behrend reads like a quintessential technical case reserved for class action gurus and antitrust professionals. But on closer look, it may well turn out to be much more.
The Factual Background In Behrend, the plaintiffs allege that the cable company Comcast is violating the Sherman Act through its "clustering" program. Under that program, the company swaps its facilities in areas where it has a low concentration of customers to other cable TV companies, in exchange for those companies' facilities in regions where Comcast has a higher customer concentration. One such area was the Philadelphia Metropolitan Region, where, as Justice Scalia reports in his five-member majority opinion:
In 2001, [Comcast] obtained Adelphia Communications' cable systems in the Philadelphia DMA, along with its 464,000 subscribers; in exchange, petitioners sold to Adelphia their systems in Palm Beach, Florida, and Los Angeles, California. As a result of nine clustering transactions, petitioners' share of subscribers in the region allegedly increased from 23.9 percent in 1998 to 69.5 percent in 2007.
These numbers suggest that Comcast had acquired a dominant position in the geographically discrete Philadelphia market, which under orthodox theory should allow it to raise prices above the competitive level, holding service quality constant. On the other side of the scale is the prospect that Comcast generated various kinds of operating efficiencies that could offset, either in whole or in part, the social welfare loss from higher market concentration.
Even this brief summary reveals that any individual plaintiff in the Philadelphia DMA could face a unique set of considerations to the extent that they subscribe to different systems in different geographical markets. Nothing about this overall pattern indicates that the Comcast clustering strategy should have the same antitrust effect across various submarkets. In some submarkets, the concentrations may not rise up to dangerous levels. In others they will be more severe. But the overall 46 percent increase makes it highly likely that some real negative effects occurred in at least some, and perhaps many, of these submarkets. The fact that swaps instead of direct purchases were used to achieve these concentration levels is irrelevant to the Sherman antitrust issues. The short statement of fact shows that something is afoot. The question is what to do about it.
The Majority Response It is here that the plot thickens because of how the evidence was presented. The plaintiff introduced four different theories as to how the higher concentration hurt consumers. To quote Justice Scalia again:
First, Comcast's clustering made it profitable for Comcast to withhold local sports programming from its competitors, resulting in decreased market penetration by direct broadcast satellite providers. Second, Comcast's activities reduced the level of competition from "overbuilders," companies that build competing cable networks in areas where an incumbent cable company already operates. Third, Comcast reduced the level of "benchmark" competition on which cable customers rely to compare prices. Fourth, clustering increased Comcast's bargaining power relative to content providers. Each of these forms of impact, respondents alleged, increased cable subscription rates throughout the Philadelphia DMA.
None of these so-called theories leap out from the others. From this morass, however, the District Court held that only the overbuilding theory made any sense. Once that was done, the plaintiff introduced an expert analysis by Dr. James McClave that presented a "regression model comparing actual cable prices in the Philadelphia DMA with hypothetical prices that would have prevailed but for petitioners' allegedly anticompetitive activities," and which yielded a tidy sum of about $876 million in damages for the entire class. Justice Scalia speaking for the five conservative justices held that this procedure did not meet the exacting standards for class certification that apply uniformly to all issues under Rules 23(a) & (b), in this instance on the predominance requirement, by showing that the proof of individual antitrust injury could be established by evidence that was common to all class members. To Justice Scalia, the great sin of the plaintiff's proof is that it attempted to show the McClave model bore on the question of class certification just because it was relevant to establishing the damages in the case if the merits had been reached on the overbuiding theory. In his view, the fatal mismatch at the certification stage took place because the regression analysis did not relate exclusively to the single overbuilding theory that the District Judge had allowed into evidence.
An Alternative View A stinging dissent by Justices Ginsburg and Breyer claimed that the writ of certiorari was improvidently granted because of a set of procedural wrangles on the question presented that have been ably analyzed elsewhere, and need not be discussed again here. But the larger question that they raise is whether class actions can ever be brought in this fashion if the type of regression prepared by McClave is insufficient to meet a class-certification threshold. What follows is how I would defend this approach.
The District Court was not concerned that three of the plaintiff's theories for antitrust damage were struck because the regression in question picked up all the losses by comparing the price movements in areas where Comcast had a large concentration with those where it did not. In my mind, the regression asked just the right question for estimating these damages. Unfortunately, the decision of the District Court raised an unnecessary damages kerfuffle by treating the four different lines of proof as though they were separate and distinct, such that the plaintiffs had to win on one or all of them. I regard that as a mistake. Properly understood, this case should have been able to go forward on an antitrust theory even if the District Judge had concluded that none of the four mechanisms identified by the plaintiff drove up the price of services to monopoly level.
The ultimate question in these cases is whether the price increase was attributable to the added concentration, and for that question the regressions have to be admitted because they apply to the class as a whole. The information on the four possible sources of the increase should not be looked at in the alternative; if examined at all, the theories should be treated at most as cumulative descriptive evidence that is weaker in kind than the quantitative evidence in the regression itself. It is therefore a plus that the regression is not tied to the overbuilding theory. If this analysis is correct, it is mistaken to insist that the harms suffered by the plaintiff class do not derive from the distinctive overbuilding theory put forward by the plaintiff. Instead, the numbers tell the key story, as each of the four theories mentioned could offer a partial explanation as to the subsidiary question of how the antitrust injury came to pass.
At this point, the relevant choices should be stark, given the limitations of regression analysis. No matter what regression is used, it is still the case that all the individual members of a given class will suffer somewhat different injuries that could never be picked up or measured if each person were to bring his own separate lawsuit. But in this instance, the class action offers a better vehicle for analysis because it attempts to measure aggregate social harm. That calculation in turn sets the stage for determining optimal deterrence against a defendant, by taking the total amount of antitrust injury that their actions caused and dividing it among the plaintiffs in a form that is certain not to reflect the exact injuries that each member of the class sustained. Yet at the same time, these errors do not systematically favor any identifiable class members and thus tend to cancel out. Allowing averaging across the plaintiffs, therefore, does improve the position of every member of the class, for each does far better off with a pro rata recovery than with nothing at all.
Why Class Actions Anyhow? These observations only go to show that the class action in the context of many smallish harms has a hidden advantage over individual law suits when precise estimates of individual harms are not possible. It still leaves open the prior question as to whether the proper antitrust response is through any kind of damage action. The transactions between Comcast and its trading partners were all matter of public record, and it could have been possible to vet the transaction for its positive and negative effects by some kind of pre-clearance procedure that sought to address any net consumer welfare losses that derived from the swaps. But if that is not done, then it seems odd to kill the private right of action by forcing the plaintiff to take what surely seems an unnecessary step in these cases, namely pleading the particular type of evidence that they use to establish the injury in question. So at this juncture, it is hard to predict what will be made of Behrend. Will it be treated as a misadventure in pleading or a major revolution in the proof of damages in consumer class actions? Only time will tell.
]]>In dealing with Supreme Court decisions it is dangerous to allow the questions that the Court deems worthy of review to set the intellectual agenda. That conclusion is especially true in property rights cases, where the Court is prisoner to its own defective jurisprudence, which all too often turns somersaults in order to steer clear of fundamental questions.
Just that pattern emerged clearly in the oral arguments made before the Supreme Court this past January 15, 2013 in Koontz v. St. John's Water Management District. As my earlier posts on Koontz have noted, the factual pattern in the case raises this fundamental issue: how sound is the doctrine of environmental mitigation? That doctrine, it will be recalled, allows the federal or state government to condition the grant of a development permit on the willingness of the landowner to "mitigate" perceived environmental damage stemming, we are told, from the construction itself, by providing some explicit collateral benefit to the government. That benefit could take the form of setting aside in perpetuity other lands owned by the developer as an environmental sanctuary. It could require a landowner to purchase for the state land that he does not own for exactly the same purpose. It could require that he either make repairs or otherwise pay money for environmental causes to which the government attaches positive value.
The use of these environmental easements is in most instances a no-lose situation for environmentalists. Accept the attached conditions and the government acquired something for nothing. Reject the condition and the status quo of no development takes place. This Hobson's choice should elicit all sorts of concerns on the simple question of whether real estate development should be regarded as a wrong that needs mitigation, or whether that doctrine should be understood as the largest and most unremarked land grab ever, which produces, as most land grabs do, serious social dislocations.
Asking the Wrong Question Nonetheless when the question came before the Supreme Court, it showed an unfortunate instinct to go right to the capillary. It did so by framing the question as whether or not the landowner's duty to mitigate is restricted to mitigation on the particular plot of land for which the building permit is required. The narrowness of that became apparent in oral argument when Justice Ruth Bader Ginsburg quickly extracted from Koontz's lawyer, Paul Beard, this fatal concession, namely that "he recognized, from day one, that there had to be some mitigation for what he was seeking to do in the permit," in the form of a "conservation easement" over the property.
Beard's move was a bad one intellectually. But in his defense, it was forced upon him by the narrow scope of the question on which the Supreme Court agreed to review the case. In my view, Beard should have risen to the challenge by telling Justice Ginsburg that this false notion of an "environmental easement" has turned takings law into intellectual shambles, by giving local, state, and national government an unquestioned veto right over the development of every acre of land in the United States. He could have then stressed that Exhibit A is Koontz itself, where the scope of this mythical environmental easement remains unresolved since 1994. It should not take 20 years to decide a case that has these simple parameters, as I have described in detail elsewhere. Koontz owned 14 acres of prime lands and wanted to put developments on three of those acres. The Water District insisted that this offer in mitigation was insufficient and wanted to add back in offsite improvements on any one of 50 sites located between 4.5 and 7.0 miles within the land.
The one fact that we can be sure of in Koontz is that it is a classic illustration of bargaining breakdown, given the inability of the parties to agree on the price of mitigation needed to allow the new construction to go through. The issue is in fact so pervasive that the breakdown cannot be attributed to the peculiar personalities of these parties. It clearly has to lie in the basic structure of the underlying rights regime once the environmental easement passes unobstructed into the current law.
Ideally, a sound system of property rights is driven by a single imperative: What is the proper initial assignment of rights needed to reduce the bargaining costs that must incur in order to reach the ideal assignment of property? The environmental easement sets up a bilateral monopoly game that becomes costly to unravel. By way of contrast, note that all private easements are formed by voluntary transactions that set out the precise rights of both parties. The larger the easement is, the higher the payments to procure it. Because the process is voluntary it insures the transaction, when completed, should be expected to generate mutual gains. It cannot grow to limitless extent like the so-called conservation easement, which is made out of whole cloth. Never in Roman, English, or American private law has any government commanded an unbounded easement, whether for environmental mitigation or any other purpose, by fiat alone. The problem here is that, under this regime, there is no necessary limit on the demands that the Water District can impose. Under current law, who is to say whether the Water District could demand the landowner set aside one, ten or twenty acres of wetland to get his prized building permit?
In Koontz, the Water District sought to disarm this objection by portraying itself as the paragon of restraint. After all, it offered Koontz all sorts of choices on how to mitigate his supposed environmental harm: he could shrink the project so as to mitigate out of his own acreage; he could repair public ditches and culverts; or he could purchase other lands.
This misuse of the "choice" metaphor misses the key point. A thief could tell his victim, "I just want a thousand dollars worth of stuff. But I am reasonable thief. I take wallets, watches, or cufflinks. You pick. All that I ask for is property worth $1,000, not a penny more." The presence of a choice is not, of course, the issue. After all, the victim is entitled to all his possessions, not just some fraction of it. Similarly, the landowner is entitled to develop his land without paying tribute to the state for public projects better funded out of general tax revenues.
Back to First Principles The better way to handle Koontz was to go back to first principles. That issue first hit the Supreme Court in the 1987 case of Nollan v. California Coastal Commission. There Justice Antonin Scalia sought to capture this sound instinct by holding that the Coastal Commission could not require Nollan to surrender a lateral easement across the front of his property in order to obtain a building permit to expand his own home. Scalia rightly denounced this government tactic as "out-and-out extortion."
That is surely the right instinct. But he justified it for the wrong reasons. Scalia only objected to a lateral easement because it was "unrelated" to the state's desire to preserve a view shed over the Pacific Ocean to drivers on the Pacific Coast Highway. What was missing, he said, was an "essential nexus" between the two. Alas, by that constrained logic, Koontz loses, for Water District only seeks environmental mitigation, either on or off site. Both of these issues fall, as it were, within the same environmental silo. Accordingly, it looks as though the Supreme Court might be prepared to say that this form of mitigation is acceptable on the ground that the Water District is not asking Koontz to pony up for a new sports arena.
Yet the Scalia test misfires in embracing the holy grail of germaneness. The eminent domain law is meant to ensure that the state takes land only when it is worth more in public hands than in private ones. That needn't happen here: if Nollan's right to expand his house is worth $10,000, and the lateral easement costs him only $2,500, Nollan takes the state's deal even if it provides only $1,000 in public benefits, notwithstanding that the easement is worth more in private than public hands. It is a perverse social result, which results in a loss of $1,500 in social benefits. That result is unacceptable, for the extraordinary power of eminent domain should never be unleashed in ways that diminish overall social welfare.
All this mischief is forestalled if environmental mitigation disappears tomorrow. It would no longer matter whether mitigation is sought on or off site. What matters is that the state can still buy whatever easements or wetlands it wants with tax dollars. At that point, the only issue left is valuation, and that surely does not take 20 years to resolve. It is less-likely that a financially-constrained local government would long keep its electoral base by foolishly spending $2,500 to get only $1,000 worth of benefits in return. But it is more likely generally that they pay for that same easement if it is worth more than $2,500 value it has in private hands.
There is, alas, some slippage here if the local government can finance its new projects by special taxes, which is one reason why I think that the correct financing rule always requires flat taxes for general public improvements of the sort here. Put those in place, and the odds increase mightily that standard compensation procedures will lead to the socially correct result in the broad run of cases, quickly, accurately, and at low cost. Scalia's germaneness test is a pointless diversion from the essential question of resource allocation. It gets a tiny fraction of the improper transactions, but lets far too many go by unimpeded.
Second Order Questions Once the mistakes in Scalia's Nollan opinion are understood, it becomes clear that there is no principled resolution of the second order questions that preoccupied the Supreme Court in the Koontz oral argument. For too much of the argument it belabored the silly question of whether a taking could have taken place by a simple denial of the building permit. The answer to that question is that the denial of the permit to develop surely strips a landowner of a key property right. It makes absolutely no sense to say that the owner must accept the permit, build the unwanted structure, and then claim damages for the loss of additional value. In fact, the Nollans built without a permit precisely to put the permit question in issue.
More importantly, there is no principled way to resolve the second-order question on the scope of mitigation within the Court's impoverished conceptual framework. The key issue here has to do with the scope of the bargaining range. One advantage of the position taken by Koontz is that it limits the amount of exploitation open to the Water District. If therefore, it thinks that it is better off with the development and the eleven free acres it will take the deal, rather than keep the status quo.
But we have no idea whether that is indeed the case. Much depends on the size of the bargaining range. Thus if the local government is determined never to grant building permits if they receive only 10 acres of undeveloped land, someone in Koontz's position wants to be able to engage in off-site mitigation, for otherwise the state will just deny the permit without adverse consequences under current law. But if they will in fact take 3 acres, then the limitation that Koontz sought would in fact reduce the risk of expropriation by limiting the Water District to gains on the lower end of its hoped-for distribution. The trouble is that bargaining ranges cannot be observed from without, so that no one knows whether folks like Koontz are helped by his victory or defeat so long as the current law remains in place.
But why should the law be reduced to this unsatisfactory condition? The nonstop and pointless negotiations in Koontz would be a thing of the past if the state could no longer impose its mitigation obligation on Koontz out of thin air. Koontz should win his case cleanly, at least if the Supreme Court returns to constitutional fundamentals, and kisses environmental mitigation, off-site or on, good-bye. But judging from the flailing around in oral argument, the prospects are indeed dim for a principled rationalization of this important corner of environmental law.
Richard A. Epstein is the Laurence A Tisch Professor Law at New York University, the Peter and Kirsten Senior Fellow at The Hoover Institution, and the James Parker Hall Distinguished Service Professor of Law and senior lecturer at the University of Chicago, as well as a visiting scholar with the Manhattan Institute's Center for Legal Policy.
A Four-Part Saga The recent decision of the Supreme Court of the United States in Arkansas Game and Fish Commission v. United States represents a victory of sorts for the property rights movement. I have already provided an earlier analysis of the underlying issues in this case, which stresses the need to clarify the relationship between common law tort actions that are subject to the defense of sovereign immunity and government takings for which the government is obliged to provide just compensation. While the Court passed by that question in silence, it fortunately did give, the Arkansas Game and Fish Commission (AGFC) a second chance to make a case for compensation on remand, in a unanimous decision (Justice Kagan recused). That door had previously been slammed shut by a divided Federal Circuit, which had adopted a per se rule denying compensation in all cases in which the government invaded property by temporary flooding. (The Circuit Court decision had overturned an excellent decision in the Court of Federal Claims by Judge Charles Lettow.) But what should have been a clean victory for the Arkansas Game and Fish Commission (AGFC) has turned into a messy remand to an unfriendly Federal Circuit for further proceedings. Three chapters of this saga have now been completed. A fourth remains.
In the opening chapter of this extensive litigation, the AGFC brought a suit against the US for its flood-control operations in Missouri during the years 1993-2000. The U.S. Army Corps of Engineers (Corps) was keen to provide farmers in Missouri with a longer growing season, and did so by ordering timed releases from behind its Clearwater Dam. In order to slow up releases during the growing season, the Corps had to release large quantities of water thereafter. Eventually, these reached the AGFC's Dave Donaldson Black River Wildlife Management Area, located 115 miles down stream. The waters did not permanently remain there, but even after they receded, the accumulated moisture destroyed or degraded some 18 million board feet of timber located on some 23,000 acres to the tune of $5.7 million. The Court of Federal Claims accepted the AGFC's claim that the Takings Clause embraces the principle that destruction of property by flooding is the same as its occupation by the government.
The divided Federal Circuit reversed the decision without challenging any of the factual findings below. Its argument was that no government action could ever give rise to a viable takings claim unless there was "permanent destruction" of the property. It seems easy enough to reject that claim if we start, as Justice Ruth Ginsburg did, from the familiar premise of the 1960 decision in Armstrong v. United States that the Takings Clause "is designed to bar Government from forcing some people alone to bear public burdens, which in all fairness and justice, should be borne by the public as a whole."
Note, however, that this language does not quite cover this case. The losses that were suffered by the AGFC were not done for the benefit of the public as a whole, but for a discrete group of Missouri farmers who benefited from the water supply in question. The ideal solution therefore is to impose some kind of special assessment on the winners to force them to compensate the downstream losers. Chances are they would not be prepared to pay the freight, at which point the correct result is for the Corps to discontinue the flooding, which would minimize the social losses to all parties, resulting from various government activities.
Balancing Forever In this instance, the government hasn't shown any willingness to seek compensation from the special beneficiaries, which means that special groups have yet a stronger incentive to lobby for particular programs that will give them localized benefits financed by the property losses sustained by others. But Justice Ginsburg's opinion shows no interest whatsoever in either the incentive effects of the compensation rules or in the public-choice dynamics that are unleashed by a narrow application of the Takings Clause. Nor does she worry how future water-management groups might seek to time their releases to minimize their liability to downstream owners. These major omissions come at a high intellectual cost. The only way to get to the right result is to reinstate the District Court's compensation award, without going through the costly and pointless relitigation on remand.
The Supreme Court, however, went into balancing tests with a vengeance. Justice Ginsburg's initial ploy was to explain at great length why its earlier decision in Sanguinetti v. United States did not commit the Court to the position that only permanent takings were compensable. In so doing, it used the familiar trope that broad language in judicial decisions should be limited by their context in which it appears. From that conclusion it noted that its increased willingness to allow for compensation cases of temporary total takings, governed by its 1987 decision in First English Evangelical Lutheran Church of Glendale v. County of Los Angeles, indicated a more receptive attitude toward temporary takings. But at this point it just fails to seal the deal. Instead of staying with the per se takings cases, the Court embraces in the context of a direct and immediate physical invasion the useless balancing tests developed under its misguided decision in Penn Central Transportation Co. v. City of New York, which, ironically, did say that physical invasion warrant greater scrutiny than regulatory takings. By citing Penn Central, the Supreme Court reinforced its unwillingness to back off the extraordinary deference that it shows to government regulators in cases of zoning and other land use restrictions. But the Court was willing to remand this decision on for further consideration on the unpersuasive technical ground that the Federal Circuit looked solely at the temporary nature of the taking, thereby ignoring other factors that could bear on the ultimate decision on compensation.
At this point, the factors came thick and fast, but without rhyme or reason. The Court insisted that some attention should be paid to "the property owner's distinct investment-backed expectations, a matter often informed by the law in force in the States in which the property is located." Why Missouri law might be ignored is not explained. It also found relevant "the degree to which the invasion is intended or is the foreseeable result of authorized government action." And the Court thought it was also fair game for the government to challenge the findings of the trial court as they related "to causation, foreseeability, substantiality, and the amount of damages." And the Court then stressed that it was worth considering, as the government urged only on its appeal to the Supreme Court, that "[w]hether the damage is permanent or temporary, damage to downstream property, however foreseeable, is collateral or incidental; it is not aimed at any particular landowner and therefore does not qualify as an occupation compensable."
The use of these multiple criteria reaches its climax in the proposition that what really matters is "the particular circumstances of each case." What is so sad about this unanimous opinion is that it seems to assume that the use of ad hoc balancing tests somehow counts as a sign of the Court's own intellectual sophistication. But the exact opposite is true. To mention everything is to understand nothing. There is no evidence as to why these factors are relevant or how they should be taken into account. We thus get complexity without clarity, which is of course a hallmark of many of the balancing tests that are adopted under state tort law. The upshot is the losing combination of high administrative costs and high levels of error. The welter of factors, each with an indeterminate weight, thus cuts off any meaningful prospect of judicial review.
It is all so unnecessary. This case should have been decided on two propositions. The first is whether the water the Corps released caused damage to the plaintiff's land, which the Court of Federal Claims's findings amply demonstrated. The second was that just compensation should be set at the value of the timber lost. The remainder of the factors listed in Justice Ginsburg's opinion have nothing to do with the merits of this case. A simple decision that reinstated the judgment of the Court of Federal Claims would have done far better than the misplaced erudition that passes for Takings jurisprudence in the Supreme Court.
Richard A. Epstein is the Laurence A Tisch Professor Law at New York University, the Peter and Kirsten Senior Fellow at The Hoover Institution, and the James Parker Hall Distinguished Service Professor of Law and senior lecturer at the University of Chicago, as well as a visiting scholar with the Manhattan Institute's Center for Legal Policy.
The October 3, 2012 argument before the Supreme Court in Arkansas Game & Fish Commission v. United States revealed a grumpy Supreme Court that was struggling with a long-standing tangle in its own takings jurisprudence: just where should it draw the elusive line between a tort and taking. To most people that question has a nonsensical quality, because many torts involve the taking of the property of another person, even if others do not.
To orient the discussion, it is best to see how this distinction plays out in private disputes. Where property has been taken by the defendant, the plaintiff can sue on a theory of restitution for compensation equal to the benefits that the wrongdoer has received, if that amount exceeds the dollar value of the plaintiff's harm. But if those benefits are not easily calculable, the plaintiff can always recover full damages for the property damage sustained.
The question is what happens when the government takes actions that could be described as torts, takings, or in some cases both. The easy answer under the Takings Clause should be that the government can never be required to compensate the aggrieved property owner for the benefit it received. After all, the whole purpose of the Takings Clause is to prevent any landowner from holding out for the benefits that otherwise accrue to the state. The proper approach thus always awards the aggrieved property owner a sum equal to its actual losses. At that point, all the incentives are in the right place. The requirement of compensation has two singular virtues. First, it means that no one person has to bear all the costs of government-sponsored projects intended to benefit the public at large. Second, by making the state pay the freight, it incentivizes the government not to go ahead with those projects whose social costs exceed their social benefits.
Unfortunately, Arkansas Game showed the fragility of the torts/takings distinction. The United States Army Corps of Engineers worked hard to manage the upstream waters in Missouri on the Black River that were held in check by the state's Clearwater Dam. Between 1993 and 2000, it periodically released large quantities of water that flooded the Commission's land some 115 miles downstream. Those intermittent releases resulted in the destruction of nearly 18 million board feet of timber over its 23,000-acre management area, causing about $5.6 million in damages. In speaking about this case, a confused New York Times editorial opined that the Court should not treat the case as a taking in order to preserve needed "flexibility" for dam management. But it then allowed that this decision would not "take away the Arkansas commission's right to sue the government for a form of trespass or on other grounds," which is all the Arkansas Commission sought anyhow.
What the Times editorial board seemed not to realize is that the only reason why the Court had to face the tort/takings distinction is that it is well-settled that the United States cannot be held liable in tort for the release of the water that flooded the Commission's land. Everyone agrees that under standard tort principles, any private party could be liable for the loss. The key point here is that under American law the doctrine of sovereign immunity protects the government against liability for "mere torts," unless it agrees to waive the immunity. The federal government's only general waiver of immunity is found in the Federal Torts Claim Act, which cuts out from its scope "discretionary functions" of the United States, which include decisions to raise and lower water levels behind public dams. But the federal government's insulation from tort liability in this context does not extend to takings: the doctrine of sovereign immunity does not protect the United States when it takes lands, because the FTCA does not protect the government from its constitutional obligation to compensate landowners whose property it takes.
The current received wisdom is that the government only takes lands that its waters "permanently" flood. A temporary or intermittent intrusion--even one that causes greater damage than some permanent invasion--does not count. In 1924, Justice Sutherland said in Sanguinetti v. United States that a government intrusion on land would only constitute a taking if the landowner's injury stemmed from a "direct result of the structure, and [if the government's action] constitute[d] an actual, permanent invasion of the land, amounting to an appropriation of and not merely an injury to the land." In 1947, in United States v. Dickinson, the Court refined this approach by adopting Justice Frankfurter's view that "Property is taken in the constitutional sense when inroads are made upon an owner's use of it to an extent that, as between private parties, a servitude has been acquired either by agreement or in course of time."
The challenge in Arkansas Game was where to slot actions when the temporary flooding caused permanent damages after the water receded. A restless Supreme Court was clearly troubled in oral argument by the evident unfairness of the government's position. With Chief Justice Roberts in the lead, the questions came thick and fast. Why should downstream damage escape compensation, when the upstream damage behind the dam does not? What difference does it make if the government kills the trees by taking an axe to them as opposed to using water to destroy the roots? Does it really matter that the Commission's property was not targeted by the Army Corps of Engineers when everyone knew that it would be flooded? In the end, my guess is that a clear majority of the Court will award compensation on the ground that permanent damage triggers the constitutional obligation, even in the absence of permanent flooding.
But it is all so terribly ad hoc. The correct systematic approach for takings always starts with the following propositions. The only things that the federal government can do without having to compensate are the kinds of things that private parties can do without having to pay compensation. But once it becomes clear that the private party has committed a tort, then the federal government should be bound by the same rules. Its power to take property for public use lets it resist an injunction routinely available against a private defendant. But it should never be allowed to escape its torts scot-free.
The key point here is that the real need for government immunity arises when it performs essential government functions like prosecuting, judging cases, conducting inspections, or granting permits, where an absolute immunity is normally essential for orderly government functions. But this logic does not extend to property torts, and government should not be immune in this context any more than private property owners, who gets no free pass for damaging or destroying the property of another on the rationale that the injury was "necessary" to the private landowners' management of their own property. The basic insight here is captured in the old law of charitable immunity, which always extended to the patients of a charitable hospital, but never insulated the charity from liability for its torts to strangers.
The Constitution and public policy are both ill-served when the bottom line fatuously is: benefit by taking a servitude, and you pay, but benefit by reducing the costs of your own operations, and you get a free pass. The Supreme Court in Arkansas Game & Fish granted certiorari in the right case for the wrong reason. It should stop playing games with the supposed distinction between torts and takings. It should turn over a new leaf by making it clear that all torts are takings whenever they result from government action that causes physical harm to a stranger that is applicable under well-accepted common law principles. Once more, simple and clear beats cluttered and confused.
Richard A. Epstein is the Laurence A Tisch Professor Law at New York University, the Peter and Kirsten Senior Fellow at The Hoover Institution, and the James Parker Hall Distinguished Service Professor of Law and senior lecturer at the University of Chicago, as well as a visiting scholar with the Manhattan Institute's Center for Legal Policy.
It is widely agreed that housing markets are a mess. The run-up in prices before 2006 was fueled in large measure by a cheap money policy that allowed individuals to overbid on real estate and then mortgage the properties to the hilt. Once the house of cards came tumbling down, many of the mortgages went into default. In other cases owners kept up their mortgage payments on "underwater" property--where the amount of the lien exceeded the market value of the property.
The risks involved in these cases were all systematic, which means that the problems were not confined to the personal circumstances of this or that buyer. Systematic solutions are needed, and unfortunately, since 2008, the policies chosen have only perpetuated the difficulties. The root of the difficulty lies in the treatment of foreclosure remedies.
The traditional legal attitude on this point was clear: foreclosure was strict, delays were not tolerated. The lender had to prove nonpayment of the loan, at which point, he was entitled to reclaim possession of the property. He was also entitled to renegotiate the terms of the loan, if he were left better off by the extension than by foreclosure. The only role for the legal system was to make sure that these contracts and contract modifications were enforced to the letter.
The logic behind this position is simple. Once a borrower falls behind in his payments, and knows that foreclosure looms in the future, two motives dominate. First, don't make any payments on the mortgage because eventually you won't be able to keep it anyhow. Second, don't perform any maintenance on the property above and beyond the minimum. To maintain your property when defaulting on your mortgage is to be a sap, and to make expenditures that will only help your creditor.
Strict foreclosure forces the defaulting owner out onto the street. That is all to the good: of course, these people will need housing, but they will purchase some at far lower cost, or, more likely, return to the rental market, which demands less by way of capital. The unit then can be resold by the bank at its market value, where new buyers can afford the smaller mortgage, and make a larger down payment that will tend to stabilize the situation. After some hiccups, the situation would become far more stable.
Unfortunately our policy makers thought they had a better idea. Their first imperative was to keep the borrower in possession by delays and formalities, ignoring all these serious externalities. That policy has now failed, so other bad ideas have been put forward. At the federal government level, a Home Affordable Modification Program (HAMP) has been put into place on the ground that pressuring lenders to defer foreclosure will improve the situation. Instead it threw good public dollars after bad, prolonging the agony.
Now we have another equally bad proposal to intervene in the mortgage market. Recent pieces in the New York Times by Joe Nocera and Robert Schiller, have eagerly embraced an idea put forward by Cornell University Law Professor Robert C. Hockett. In an incredibly tedious and self-important article, Hockett suggests that local government agencies use eminent domain power to condemn mortgages that are underwater but not yet in default--at reduced prices (what Nocera calls "steep but fair discount")--and then let some municipal authority refinance the loans and resell them in bundles for a profit to the agencies in question. Naturally such a scheme would require a middle man, and a fat fee. Mortgage Resolution Partners (whom Hockett advises) is happy to play that role.
The idea has already been rightly panned by the Wall Street Journal. But the entire proposal needs still further consideration. First off, Hockett and his group insist that there is a huge collective action problem that prevents the rationalization of mortgage matters. And there is. It is called local government regulations that have blocked the foreclosure measures set out above. Handle those and the externalities to which they refer disappear. No longer do we have owners neglecting property or clogging the courts with endless motions.
Next, note that this whole proposal seeks to create something out of nothing, and like all such schemes, necessarily fails. The initial argument in favor of this position is that the state can condemn for public use a mortgage, just like it can condemn any other property. The current definitions of public use are so broad, that the transfer of money from one pocket to another might now qualify, which is hardly a ringing endorsement of why this ploy should be adopted.
The just compensation requirement here is a lot stiffer, and the right question to ask is just where the increase in social value comes that justifies all the financial sleight-of-hand that goes on. And here there is only one way to make the numbers work, which is to rob the current mortgage holder blind.
The key question to ask is this: why do people whose property is underwater not walk away from the property? The answer is that the subjective value of the home to them exceeds the value of the mortgage, even if the mortgage exceeds the sale price of the property. If therefore the mortgage is not in default, there is a good chance that it will stay out of default for some time to come. At that point, using a valuation process that compares mortgage amount to market value systematically undervalues the mortgages and forces the groups that hold these mortgages to part with them for a fraction of their value. The government in other words cherry picks the portfolio with a free option to take mortgages for less than their intended worth.
The scheme is, moreover, subject to all sorts of political corruption, for once borrowers know of the system, they can collude with the so-called middlemen to have their mortgages on the list. After all, what borrower is against paying less. So this turns out to be nothing more than a fancy con game, in which two parties use the power of eminent domain to pillage a third. The idea has been proposed for the City of San Bernardino, which is itself bankrupt. If this system is allowed to go forward, it too will be bankrupt--morally as well as financially.
Richard A. Epstein is the Laurence A Tisch Professor Law at New York University, the Peter and Kirsten Senior Fellow at The Hoover Institution, and the James Parker Hall Distinguished Service Professor of Law and senior lecturer at the University of Chicago, as well as a visiting scholar with the Manhattan Institute's Center for Legal Policy.
In the wake of the 2008 financial crisis, New York politicians and judges have been itching to broaden the Empire State's Martin Act, which governs securities frauds. And this comes amid an explosion of criminal laws in this state.
It may sound like warranted crackdown, but don't be fooled: It's really part of a move to shift power to pols and prosecutors -- and it leaves average Joes befuddled and at risk of turning into accidental criminals.
The proliferation of criminal statutes undermines a key principle: that folks know in advance what conduct could land them in prison.
It's obvious that crimes like murder, burglary, rape will be criminally punishable. But other laws have increasingly attempted to criminalize violations of government regulations, which often span volumes, leaving the average citizen unsure of what actions might be considered criminal.
Worse, many modern criminal laws are vague or ambiguous, ensuring that we're never truly on notice of what is or isn't a crime.
Compounding this problem is the erosion of the traditional requirement of intent (what lawyers call "mens rea") -- in essence, that we can't be imprisoned for mere accident or negligence. On this front, New York fares poorly. Its modern criminal law expressly permits so-called "strict liability" offenses -- that is, you can be found guilty of a crime whether you violated the law on purpose or by accident.
In some cases, a whole book of regulations becomes crimes by default. The state Environmental Conservation Law, for instance, makes any violation of any environmental rule or order punishable by 15 days in jail for each day a violation occurs. So, if you inadvertently breach a regulation for a year, you could face up to 15 years in prison.
Moreover, many of these laws -- like the Martin Act, former Attorney General Eliot Spitzer's weapon of choice in his efforts to reshape New York's investment banking and insurance industries -- are vague, ambiguous or overly broad.
Unlike the federal securities laws and similar laws in most other states, the Martin Act doesn't require prosecutors to show that alleged wrongdoers intended to defraud, that anyone bought or sold securities relying on the alleged fraud or that anyone was even injured by the fraud.
And it makes criminal any "promise or representation as to the future which is beyond reasonable expectation or unwarranted by existing circumstances." That means that practically any forward-looking statement by any executive (including, perhaps, statements required by the federal securities laws) might be invoked as a crime.
New York law makes corporations themselves criminally liable for violations of such provisions. As such, prosecutors hold vast power to reshape corporate practices. And such reshapings may have serious consequences unanticipated by the politician-attorneys.
Consider Spitzer's deployment of the Martin Act against AIG -- at best, a distraction from the risks that would soon swamp the companies involved; at worst, a direct contributor to the risks (and consequences) themselves.
Threatening criminal action, recall, Spitzer forced AIG to oust longtime CEO Maurice "Hank" Greenberg. As Greenberg's successor, Martin Sullivan, focused on regulatory compliance and cooperation with government probes, he lost sight of AIG's financial-products group, which sold credit-default derivatives. In the nine months after Greenberg departed, AIG wrote as many credit-default swaps as it had in the previous seven years combined.
Those credit swaps ultimately brought both the company and the financial industry as a whole to its knees. It's impossible to know what would've happened had Spitzer not intervened, but UBS credit analyst David Havens maintains that the company would've never gotten into such a dire situation had Greenberg stayed in charge.
Even those who think our corporations are under-regulated should take pause at giving virtually unchecked power to government attorneys who may not fully understand the businesses they're affecting. Rather than protect the average consumer, expanding laws like the Martin Act is more likely to drive up costs, make the New York financial industry less competitive and introduce new systemic risks into the market.
In a very real sense, the expansion of our criminal law has moved us from the rule of law to the rule of prosecutors.
And if our criminal laws are too voluminous -- if we can go to jail for a mistake -- our liberty is seriously compromised.
]]>The Justice Department appears to have learned a lesson in the 10 years since it indicted Arthur Andersen LLP for alleged improprieties in the firm's Enron bookkeeping. By 2005, when the U.S. Supreme Court unanimously vacated a conviction in the case, the accounting firm had collapsed, and all but a handful of the 85,000 employees worldwide lost their jobs.
The Justice Department has since avoided large-scale corporate prosecutions that would threaten the disastrous collateral consequences brought on by its case against the former Big Five accounting firm.
But in the place of actual prosecutions, the Justice Department has aggressively pursued what are blandly called "deferred prosecution" or "non-prosecution" agreements -- DPAs and NPAs, for short -- through which prosecutors and companies negotiate terms to avoid a criminal trial. This approach may be avoiding the sort of corporate death sentence visited upon Andersen for what proved to be non-crimes, but nonetheless does something just as worrisome: It insinuates Justice Department career bureaucrats into the day-to-day management of major American businesses.
Although only 17 DPAs or NPAs were reached between businesses and federal prosecutors in the decade before the Andersen indictment, more than 200 have followed in its wake, through both the Bush and Obama administrations. Seven Fortune 100 companies are currently operating under the supervision of federal prosecutors: CVS Caremark (CVS) Corp., Google (GOOG) Inc., Johnson & Johnson, JPMorgan Chase & Co., Merck & Co., MetLife Inc. and Tyson Foods Inc.
Wal-Mart on Deck
Seven other of the 100 largest businesses have been under a DPA or NPA in just the past few years. Others, such as Wal-Mart Stores Inc., currently facing scrutiny for alleged Mexican bribes prohibited under the Foreign Corrupt Practices Act, are sure to follow.
In each of the past three years, fines and penalties levied under federal deferred-prosecution and non-prosecution agreements have exceeded $3 billion. While such fines are not insignificant, of far greater concern are the sometimes sweeping powers that prosecutors have asserted over business practices. In recent DPAs and NPAs, federal prosecutors have variously pressured companies to change long-standing sales and compensation practices; to restrict or modify contracting and merger decisions; to carry out onerous compliance and reporting programs; to appoint corporate monitors with broad discretion over management decisions; and even to oust executives or directors.
Businesses accept the agreements with such aggressive terms because they can ill afford to fight a criminal investigation. A certified public-accounting firm like the former Arthur Andersen is uniquely vulnerable to criminal indictment and conviction. But criminal inquiries place significant pressure on stock prices for all companies and can impair the ability to obtain credit. Companies can be debarred from government contracting or denied licenses upon an indictment or conviction, making businesses in certain industries, such as health care and financial services, particularly unable to fight back against a prospective prosecution.
Just since 2009, finance companies have entered into 18 federal DPAs and NPAs and health-care businesses into 11 such agreements. The finance companies alone have a collective market value exceeding $690 billion, with more than $20 trillion in assets under management.
There is essentially no evidence that DPAs and NPAs, for all their sweep, have been effective in combating corporate crime. Some corporate-ethics watchdogs have argued that current Justice Department practices, by failing to credit internal compliance programs, have undermined companies' incentives to self-police.
No Judicial Oversight
What the agreements have been effective in doing is elevating Justice Department lawyers as business regulators who can reshape industry practices without having to engage in the cost-benefit analysis that is the norm for administrative agency action. Prosecutors in this area act largely without any judicial oversight: Judges never see NPAs and routinely rubber- stamp DPAs, and these agreements typically state that determinations of whether a company is in breach are the prosecutor's alone and are beyond judicial review.
It is long past time that Congress asserted itself over the Justice Department's use of DPAs and NPAs to assume broad and unaccountable regulatory authority. Public "tough on crime" sentiment and understandable anger over unprincipled conduct by some business leaders make most politicians hesitant to suggest that the criminal law is being too harshly applied to corporations.
Still, there's little case for prosecuting corporations as entities in the first place. Unlike individuals, they can't be imprisoned. As the Arthur Andersen case demonstrated, business entities often cannot be prosecuted, either -- at least without potentially drastic effects on corporate shareholders, employees, pensioners, customers and suppliers.
Federal prosecutors have been having a profound impact on those constituencies, with broad economic consequences, in the way they have been deciding not to prosecute businesses, but rather to control them through DPAs and NPAs. In the decade since Arthur Andersen was indicted, we haven't seen a repeat of that error. But in its place we have watched as federal prosecutors assume vast powers that make them an overarching, if hidden, regulator of American business.
]]>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.
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