In today’s New York Times, Richard Thaler argues that the Constitutional “slippery slope” argument in the Obamacare case (“Today health care, tomorrow broccoli”) is misguided. This is a strange argument in this particular case. We must remember that all of today’s commerce clause jurisprudence (which everyone agrees has greatly expanded the power of the Federal government to regulate economic activity) rests on Wickard v. Filburn, a 1942 case involving a small wheat and chicken farmer in Ohio. If ever there was a slippery slope, this is it, and it seems rational to fear another in the same Constitutional line.
Archives For constitutional law
Imagine if you picked up your morning paper to read that one of your astronomy professors had publicly questioned whether the earth, in fact, revolves around the sun. Or suppose that one of your economics professors was quoted as saying that consumers would purchase more gasoline if the price would simply rise. Or maybe your high school math teacher was publicly insisting that 2 + 2 = 5. You’d be a little embarrassed, right? You’d worry that your colleagues and friends might begin to question your astronomical, economic, or mathematical literacy.
Now you know how I felt this morning when I read in the Wall Street Journal that my own constitutional law professor had stated that it would be “an unprecedented, extraordinary step” for the Supreme Court to “overturn a law [i.e., the Affordable Care Act] that was passed by a strong majority of a democratically elected Congress.” Putting aside the “strong majority” nonsense (the deeply unpopular Affordable Care Act got through the Senate with the minimum number of votes needed to survive a filibuster and passed 219-212 in the House), saying that it would be “unprecedented” and “extraordinary” for the Supreme Court to strike down a law that violates the Constitution is like saying that Kansas City is the capital of Kansas. Thus, a Wall Street Journal editorial queried this about the President who “famously taught constitutional law at the University of Chicago”: “[D]id he somehow not teach the historic case of Marbury v. Madison?”
I actually know the answer to that question. It’s no (well, technically yes…he didn’t). President Obama taught “Con Law III” at Chicago. Judicial review, federalism, the separation of powers — the old “structural Constitution” stuff — is covered in “Con Law I” (or at least it was when I was a student). Con Law III covers the Fourteenth Amendment. (Oddly enough, Prof. Obama didn’t seem too concerned about “an unelected group of people” overturning a “duly constituted and passed law” when we were discussing all those famous Fourteenth Amendment cases – Roe v. Wade, Griswold v. Connecticut, Romer v. Evans, etc.) Of course, even a Con Law professor focusing on the Bill of Rights should know that the principle of judicial review has been alive and well since 1803, so I still feel like my educational credentials have been tarnished a bit by the President’s “unprecedented, extraordinary” remarks.
Fortunately, another bit of my educational background somewhat mitigates the reputational damage inflicted by the President’s unfortunate comments. This morning, the judge for whom I clerked, Judge Jerry E. Smith of the U.S. Court of Appeals for the Fifth Circuit, called the President’s bluff.
Here’s a bit of transcript from this morning’s oral argument in Physicians Hospital of America v. Sebelius, a case involving a challenge to the Affordable Care Act:
Judge Jerry E. Smith: Does the Department of Justice recognize that federal courts have the authority in appropriate circumstances to strike federal statutes because of one or more constitutional infirmities?
Dana Lydia Kaersvang (DOJ Attorney): Yes, your honor. Of course, there would need to be a severability analysis, but yes.
Smith: I’m referring to statements by the President in the past few days to the effect…that it is somehow inappropriate for what he termed “unelected” judges to strike acts of Congress that have enjoyed – he was referring, of course, to Obamacare – what he termed broad consensus in majorities in both houses of Congress.
That has troubled a number of people who have read it as somehow a challenge to the federal courts or to their authority or to the appropriateness of the concept of judicial review. And that’s not a small matter. So I want to be sure that you’re telling us that the attorney general and the Department of Justice do recognize the authority of the federal courts through unelected judges to strike acts of Congress or portions thereof in appropriate cases.
Kaersvang: Marbury v. Madison is the law, your honor, but it would not make sense in this circumstance to strike down this statute, because there’s no –
Smith: I would like to have from you by noon on Thursday…a letter stating what is the position of the Attorney General and the Department of Justice, in regard to the recent statements by the President, stating specifically and in detail in reference to those statements what the authority is of the federal courts in this regard in terms of judicial review. That letter needs to be at least three pages single spaced, no less, and it needs to be specific. It needs to make specific reference to the President’s statements and again to the position of the Attorney General and the Department of Justice.
I must say, I’m pretty dang proud of Judge Smith right now. And I’m really looking forward to reading that three-page, single-spaced letter.
Douglas Holtz-Eakin and my former George Mason colleague and Nobel Laureate Vernon Smith are in the WSJ today discussing the economic wisdom and constitutionality of ObamaCare. From the WSJ:
The Obama administration defends the mandate on the ground that a person’s decision to not buy health insurance affects commerce by materially increasing the costs of others’ health insurance. The government adds that health care is unique and therefore can be regulated constitutionally in ways other markets cannot.
In reality, the mandate has almost nothing to do with cost-shifting. The targeted population—the young, healthy and not poor who choose to forgo coverage—has a minimal role in the $43 billion of uncompensated health-care costs. In 2008, for example (the latest figures available), the Department of Health and Human Service’s Medical Expenditure Panel Survey showed that the uncompensated care of the mandate’s targeted population was no more than $12.8 billion—a tiny one-half of 1% of the nation’s $2.4 trillion in overall health-care costs. The insurance mandate cannot reasonably be justified on the ground that it remedies costs imposed on the system by the voluntarily uninsured.
The government’s other defense is that the health-care market does not exhibit textbook competition. No market does. The economic features relied upon by the government—externalities, imperfect information, geographically distinct markets, etc.—are characteristic of many markets. The presence of externalities and other market imperfections does not justify a departure from the normal rules of the constitutional road. Health care is typically consumed locally, and health-insurance markets themselves primarily operate within the states. The administration’s attempt to fashion a singular, universal solution is not necessary to deal with the variegated issues arising in these markets. States have taken the lead in past reform efforts. They should be an integral part of improving the functioning of health-care and health-insurance markets.
Holtz-Eakin and Smith conclude:
Without the individual mandate, ObamaCare imposes total net costs of $360 billion on health-insurance companies from 2012 through 2021. With the mandate, the law would provide a net $6 billion benefit—i.e., revenues in excess of costs—over that same time period. In other words, the benefits of the individual mandate to health-insurance companies, along with their additional revenues provided by ObamaCare’s Medicaid expansion, are projected to balance, nearly perfectly, the costs that the law’s various regulatory mandates impose on insurers.
The individual mandate and Medicaid expansions appear to many to be unconstitutional. They are certainly bad economic policy. When they go, the entire law must fall. The administration built an intricate, balanced policy on a flawed economic foundation. It is up to the Supreme Court to pull it down.
Go read the whole thing.
According to Senators Barbara Boxer, Jeanne Shaheen, and Patty Murray, the Catholic Church is the real bully in the fight over whether religious employers must include coverage for contraception in the insurance policies they offer their employees. In yesterday’s Wall Street Journal, the three responded to, in their words, the “aggressive and misleading campaign” against this new Obamacare mandate. They wrote:
Those now attacking the new health-coverage requirement claim that it is an assault on religious liberty, but the opposite is true. Religious freedom means that Catholic women who want to follow their church’s doctrine can do so, avoiding the use of contraception in any form. But the millions of American women who choose to use contraception should not be forced to follow religious doctrine, whether Catholic or non-Catholic.
The three Senators seem to believe that as long as the government doesn’t force Catholic women to use birth control and the morning after pill, religious liberty is protected. They also believe that in praying to the Almighty One (not that Almighty One) for permission not to pay for a medical intervention that offends their deeply and sincerely held religious beliefs, Catholic officials are trying to force women to follow their religious doctrine.
That’s ridiculous, and it shows how desperate the defenders of President Obama’s intrusion on individual conscience have become. In a world in which religious employers were exempt from paying for a measure that violates their sacred beliefs, any woman who didn’t share those beliefs would be perfectly free to obtain birth control. The Catholic Church, after all, doesn’t have the power to overrule Griswold v. Connecticut.
By contrast, in the world of Mr. Obama’s contraception mandate, Catholic officials who choose to follow their consciences by refusing to subsidize interventions that violate their religious beliefs may ultimately be thrown in jail. That, Honorable Senators, is a full-frontal assault on religious liberty.
[More on the deeply misguided contraception mandate here.]
I’ve already addressed this issue, noting among other things that “the loss of personhood would not have the slightest effect under Citizens United” because that case reasoned that the speaker’s identity is irrelevant. In any event, I pointed out that “if personhood matters at all under Citizens United and subsequent decisions, the loss of personhood actually could be a constitutional boon to corporations.” That’s because “the post-Bellotti cases on corporate political speech showed that it is easier to deny First Amendment rights if the speech is attributed to an artificial person.”
In general, as I noted in my earlier post, this attempted sneak attack around CU crosses St. Hubbins-Tufnel fine line between clever and stupid.
Since the day it was handed down, Citizens United has been a kind of political flypaper for bad laws. The first dead bugs sought to exploit the decision’s caveats by targeting disclosure and shareholder approval (the Shareholder Protection Act, critized here) and prohibiting political expenditures by government contractors (the Disclose Act).
More recently, CU-haters are trying a more frontal assault. Some senators have proposed a constitutional amendment that would authorize Congress and the states to regulate contributions and expenditures in connection with political candidates. See the Law Blog.
And now ballot initiatives in such corporate powerhouses as Boulder, Madison and Missoula are striking out against “corporate personhood.” See MoveToAmend.org.
Bainbridge notes that this move is “kind of clever” because it would distinguish corporations from unions, which are unincorporated voluntary associations and the left’s key source of campaign funds.
But even David St. Hubbins and Nigel Tufnel know there’s but a fine line between clever and stupid (side comment: this coming Friday is Nigel Tufnel day). Bainbridge notes that personhood is an important corporate characteristic in protecting corporate and shareholder assets. He asks how “the brilliant legal minds behind this movement propose to preserve this feature of corporate personhood if they succeed” and observes that “lots of pillars of the liberal political movement are limited liability entities with the status of legal persons.”
Actually, I’m skeptical that abolishing artificial personhood would have a lot of non-constitutional implications. To be sure, it would introduce massive confusion and provided needed work for lawyers. But in the final analysis, personhood is more a description than a creator of legal consequences (see Bromberg & Ribstein, §1.03). If state law says corporations have limited liability and owners’ creditors have limited recourse to business assets, these consequences should and probably would still hold even in Madison, Wisconsin.
The real problems arise on the constitutional front. To begin with, the loss of personhood would not have the slightest effect under Citizens United. The Court held that the First Amendment “protects speech and speaker, and the ideas that flow from each” (130 S.Ct. at 899). As I have discussed, “the First Amendment does not guard corporations’ expressive rights, but rather the public’s interest in hearing what corporations have to say.” The “entity” nature of corporations doesn’t seem to have anything to do with this reasoning.
On the other hand, if personhood matters at all under Citizens United and subsequent decisions, the loss of personhood actually could be a constitutional boon to corporations. As I noted some time ago (The Constitutional Conception of the Corporation, 4 Supreme Court Economic Review 95, 129 (1995)):
Under the corporate person theory, speech is attributed to the corporate entity rather than to individuals. Although Bellotti held that speech is protected even if uttered by artificial persons, the post-Bellotti cases on corporate political speech showed that it is easier to deny First Amendment rights if the speech is attributed to an artificial person.
CU avoided this problem by reasoning that the identity of the speaker should be irrelevant. In the article just cited I argued that corporations would derive more robust constitutional protection, including under the First Amendment, if courts squarely applied the contract theory. Explicitly overruling artificial personhood would force courts to look through the artificial entity to actual people whose speech is clearly protected. In other words, the courts would finally have to recognize that corporate speech is people speech.
What’s the answer to those looking for a constitutional fix for CU? The Supreme Court decided that the for-profit corporation is one of those ideas the First Amendment forbids government from censoring. So there would seem to be only two ways around CU: change the Supreme Court or repeal the First Amendment.
It’s hard to discern much that’s coherent — much less cogent — from the cacophony that is Occupy Wall Street, but one valid complaint continually sounds through the noise: When business interests get in bed with the government, injustice tends to result.
The Wall Street Occupiers are of course focused primarily on bailed-out financial firms (though not on union favorites GM and Chrysler, which, unlike most of the bailed-out financial firms, will end up costing taxpayers a huge pile of money). But surely the Occupiers will also take a firm stand against one of the crassest examples of crony capitalism in the last three decades.
I’m speaking of the deal the Obama Administration struck with the insurance industry, pursuant to which industry leaders initially agreed not to oppose Obamacare in exchange for a provision forcing all Americans to purchase the industry’s product or pay a fine. Not only does this deal privilege powerful business interests at the expense of ordinary Americans, it also promises to exacerbate income inequality by allowing medical professionals, who face very little price competition when buyers purchase their services using third-party insurance, to sustain their high salaries.
Surely the Wall Street Occupiers recognize that if Congress can use its power to regulate commerce to coerce citizens, as a condition of merely existing, to purchase a private company’s product, then future instances of crony capitalism are inevitable.
Ten leading corporate and securities law professors have petitioned the SEC to develop rules to require companies to disclose their political spending.
This is the latest iteration of efforts to end-run Citizens United’s restrictions on regulating corporate campaign activities by calling it corporate governance regulation. See my recent post on the Shareholder Protection Act. I’ve written on these issues in my recently published The First Amendment and Corporate Governance.
The proposed regulation has a good chance of passing muster under the First Amendment because it would focus on disclosure rather than imposing substantive restrictions on corporate speech. Nevertheless, the First Amendment is still relevant. I have already noted my view that the SEC’s proxy access rule (which is also basically a disclosure rule) avoided a confrontation with the First Amendment only because the DC Circuit could invalidate it on other grounds. At some point mandatory disclosure can sufficiently burden corporate speech to be unconstitutional. To give just one example, requiring firms to pre-disclose all of their spending for the coming year, thereby preventing them to respond flexibly to changes in the political environment, could push the line.
Even if the SEC rules are constitutional, they would still not necessarily be good policy. Notably, the law professors’ rulemaking petition, while spending some time discussing the supposed importance to investors of corporate political spending, said nothing about whether an SEC rule was necessary. The petition highlighted the fact that many corporations already were voluntarily disclosing political spending, sometimes even without shareholder request. Why not continue the experimentation and evolution rather than locking down a one-size-fits-all rule? Do the benefits of standardization outweigh the costs of experimentation?
The petition cites precedents such as executive compensation disclosure as evidence of the “evolving nature of disclosure requirements.” But there’s nothing about this evolution that suggests it needs to proceed toward more disclosure about every political hot-button issue.
No doubt the SEC will proceed as the petition requests. After all, it needs a juicy political issue to deflect attention from the recent questions about the SEC’s soundness and competence as a financial cop. But let’s at least hope that the Commission has learned something from its most recent run-in with the DC Circuit and tries to get some data on exactly who would be helped and hurt by regulation of political disclosures and how much. As with proxy access, would this be all about empowering certain activists at the expense of others, or passive diversified shareholders? My article discusses some of these tradeoffs. The SEC’s analysis might benefit from data on exactly what was accomplished by the Commission’s past disclosure enhancements the petitioners highlight.
The danger that the SEC will fall prey to the arbitrariness the DC Circuit criticized is especially intense given the petitioners’ argument that the “symbolic significance of corporate spending on politics suggests setting an appropriately low threshold” on when disclosure is required. I don’t even want to think about the consequences of inviting the SEC to weigh the benefit of “symbolism” against the direct and indirect costs of disclosure.
Anyway, get ready for a contentious debate which, while providing an enjoyable distraction, does nothing to protect investors from the fraud and market dangers that are supposed to be the SEC’s top priority.
The WSJ reports that the SEC is on Groupon’s case for reporting “adjusted consolidated segment operating income” of $81.6 million while noting that subtracting marketing costs would produce a loss of $98 million. Groupon recently added that adjusted CSOI “should not be considered as a measure of discretionary cash available to us to invest in the growth of our business or as a valuation metric” and that, according to the WSJ’s paraphrase, “investors should look at standard financial metrics such as cash flow, net loss and others when evaluating its performance.”
Apparently the SEC thinks Groupon shouldn’t disclose CSOI at all because it’s gross revenues rather than “profits.” But does the SEC really know what investors should rely on? Might not CSOI be a more realistic measure of future earnings than focusing on the investment the company made to produce that income? Maybe not, but as long as it’s accurate, why not just give investors all the information with the appropriate qualifiers?
Then, too, Groupon co-founder Eric Lefkofsky committed the sin of “gun-jumping” by saying that “Groupon is going to be wildly profitable.” Sort of reminds me of Google’s famous Playboy interview. As I asked back then:
[S]houldn’t the First Amendment have something to say about this broad regulation of truthful speech? See my article (with Butler), Corporate Governance Speech and the First Amendment, 43 U. Kans. L. Rev. 163 (1994), a chapter in our Corporation and the Constitution.
I recognize that there’s a point to this regulation: to protect investors from rushing into horrendous investments like Google in 2004.
First, I want to pick up on Jay’s comment that the decision shows the SEC “is an agency with too many lawyers and not enough economists.” Indeed, the court emphasized that
the Commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters. * * *
The court condemned the SEC’s disregard of rigorous empirical evidence, noting its failure to utilize “readily available,” evidence of expenditures in proxy contests, and to appropriately weigh the Buckberg-Macey study of the negative effects of electing dissident shareholder nominees.
The court also criticized the SEC’s dismissal of the possible effect of 14a-11 in distracting management by noting that managers already need to incur such costs because of shareholders’ exercise of their state law rights. The court said: “As we have said before, this type of reasoning, which fails to view a cost at the margin, is illogical and, in an economic analysis, unacceptable” (citation omitted).
Second, the opinion highlights the importance of comments and dissents given rising judicial distrust of the SEC (here’s more on that). This is indicated by the court’s citation of the Buckberg-Macey report noted above, and its reference to the Paredes and Casey dissents to 14a-11. Even if the Commission’s decision might seem to be a foregone conclusion, the fact that the SEC is now essentially in judicial receivership means that these expressions of views will be heard in another venue. There’s also the (possibly slim) hope that the SEC majority will get the message and start listening to such views.
Third, it is worth noting the court’s holding “that the Commission failed adequately to address whether the regulatory requirements of the ICA reduce the need for, and hence the benefit to be had from, proxy access for shareholders of investment companies, and whether the rule would impose greater costs upon investment companies by disrupting the structure of their governance.” I have shown why it is a mistake for federal regulators to treat investment companies like ordinary state-created business associations instead of the misshapen creatures of statute that they are.
Fourth, and perhaps most important, is the court’s concluding remark that its holding striking down the rule on other grounds left it “no occasion to address the petitioners’ First Amendment challenge to the rule.”
I have previously discussed the First Amendment argument in this case. My recently published article, The First Amendment and Corporate Governance, covers the potential implications of Citizens United for regulation of corporate governance and commercial speech generally. Suffice it to say for present purposes that regulation of speech under rules like 14a-11 is vulnerable to a First Amendment challenge. After CU, it is no longer possible to dismiss this speech as merely “corporate” or internal corporate governance speech. It may be, at least in some cases, part of the political debate that must be heard regardless of the identity of the speaker and the direct audience.
Indeed, I suspect that the court’s strong language about the arbitrariness of 14a-11 may have had something to do with its desire to rest its holding solely on that ground. This court got to avoid the First Amendment can of worms, with its uncertain implications for the validity of regulation of truthful speech under securities and other laws (lawyer regulation?). But after CU courts will not be able to avoid this argument forever.