Archives For constitutional law

Holtz-Eakin & Smith on The Economics of ObamaCare

Josh Wright —  19 March 2012

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.

In business, commerce clause, constitutional law, economics, health care, nobel prize
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Religious Liberty for Dummies

Thom Lambert —  9 February 2012

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.]

In constitutional law, First amendment, free to choose, health care reform debate, musings, politics, regulation
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Abolishing corporate personhood: still stupid

Larry Ribstein —  13 December 2011

Doug Mataconis criticizes efforts in Congress to overrule Citizens United by abolishing corporate personhood (HT Bainbridge).

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.

In constitutional law, corporate law
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Abolishing corporate personhood

Larry Ribstein —  6 November 2011

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.

In constitutional law, First amendment
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Shouldn’t the Wall Street Occupiers Oppose Obamacare?

Thom Lambert —  12 October 2011

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.

In commerce clause, constitutional law, health care reform debate, regulation
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Should the SEC regulate corporate political speech?

Larry Ribstein —  4 August 2011

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.

In constitutional law, disclosure regulation
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Groupon’s tmi

Larry Ribstein —  28 July 2011

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.

In constitutional law, disclosure regulation, IPOs
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Some implications of the proxy access decision

Larry Ribstein —  24 July 2011

Bloggers have had much to say about the DC Circuit’s proxy access decision.  Of special note is our own Jay Verret and Steve Bainbridge, who adds a useful roundup.   I have a few additional comments.

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.

In constitutional law, mutual funds, securities regulation
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The First Amendment and unauthorized practice of law

Larry Ribstein —  19 July 2011

I recently discussed the policy issues regarding litigation against LegalZoom for unauthorized practice of law (as well as noting my potential interest in this litigation).  A recent paper analyzes the legal issues:  Catherine Lanctot, Does LegalZoom Have First Amendment Rights? Some Thoughts About Freedom of Speech and the Unauthorized Practice of Law.  Here’s some of the abstract:

The article first sketches some potential problems with the reflexive assumption that LegalZoom and its fellow travelers are engaged in the unauthorized practice of law. Even assuming that the practice of preparing routine legal documents for consumers runs afoul of many unauthorized practice statutes, however, there remains an open question of whether these statutes may themselves interfere with First Amendment guarantees. In particular, to the extent that these statutes broadly sweep vast amounts of law-related speech within their scope, they may infringe on free speech rights. The article sets forth some of the possible First Amendment arguments available to document preparers, without extensive elaboration, to call attention to the possibility that they may be raised in defense to an unauthorized practice prosecution. It concludes with a caution about aggressive pursuit of these online document preparers without careful consideration of the possible risks involved. A successful First Amendment challenge to an unauthorized practice statute could have repercussions far beyond the world of LegalZoom.

With respect to the “caution about aggressive pursuit of these online document preparers,” Professor Lanctot concludes:

The legal profession has deliberately left itself free to define a host of activities as “unauthorized practice” on an as-needed basis. This flexibility may have served the bar’s regulatory needs in the past, but it could prove fatal to enforcing unauthorized practice laws in the face of a serious First Amendment challenge. The broad and standardless definition of “practice of law” could then collide with the requirement of specificity and narrow tailoring that underlies many aspects of relevant First Amendment doctrine. Whether or not these First Amendment arguments may succeed ultimately in the courts is less important than the fact that they have a sufficient basis to complicate any action for unauthorized practice.

In other words, by arguing that any individualized advice about the law by a non-lawyer is illegal, the bar has exposed all of this regulation to the risk of invalidation.

Of course the bar might think this strategy is worth the risk because the alternative is the horrors of free competition.  But in the end, the bar may have little choice.  Law’s information revolution, and the general forces of competition and deregulation (particularly including the UK’s Legal Services Act) are pressing on all fronts whatever the bar does.

Waking the First Amendment bear in LegalZoom litigation could have implications not only for unauthorized practice laws but for all kinds of other regulation of commercial speech, particularly including the securities laws.  See my and Butler’s Corporate Governance Speech and the First Amendment, 43 U. Kans. L. Rev. 163 (1994) and The Corporation and the Constitution.

I would add that the majority’s broad reasoning in Citizens United has makes this a particularly good time to raise these arguments. See my recently published article, The First Amendment and Corporate Governance.

The political and market pressure to deregulate and thereby lower the costs of legal services may make this regulation a particularly inviting target for First Amendment claims.  In contrast with Citizens United, a case on the constitutionality of unauthorized practice could be portrayed not as big corporations against the little guy, but as the little guy against a powerful entrenched interest group of greedy lawyers.  This could make the claim a useful lever to bring down large chunks of regulation of truthful commercial speech.

In constitutional law, First amendment, lawyers, legal profession, securities regulation
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It’s baaack: The Shareholder Protection Act

Larry Ribstein —  14 July 2011

The Shareholder Protection Act been reintroduced in Congress, and Lucian Bebchuk still likes it. He and Robert Jackson wrote an article defending the basic idea, which Bebchuk describes as to “establish special corporate-governance rules for deciding when corporate resources may be spent on politics.”  He admits “the bill is unlikely to be adopted during this Congress.” However, since it seems no more likely to go away than Freddie Krueger or Michael Myers, it’s worth discussing why, like these characters, it’s a scary idea.

Bebchuk’s post is timely (for me) because it coincides with the publication of my article, The First Amendment and Corporate Governance.  This article argues generally (per the abstract)

that regulation of the corporate governance process that produces speech faces significant obstacles under the First Amendment. These include the limited efficacy of regulation of corporate governance, regulation’s potential for protecting the expressive rights of some shareholders by suppressing others, and the uncertain implications of this rationale for types of speech other than that involved in Citizens United. These problems with the corporate governance rationale for regulating corporate speech suggest that protection of shareholders’ expressive rights may be trumped by society’s interest in hearing corporate speech and the First Amendment’s central goal of preventing government censorship.

Here’s what the paper has to say about the SPA and Bebchuk & Jackson (footnotes omitted):

This Act would, among other things, require extensive quarterly and annual disclosures of corporate speech expenditures and majority shareholder authorization of “specific” expenditures a year in advance and impose damages for unauthorized expenditures.

The SPA makes clear that its purpose goes beyond merely protecting shareholders. As the bill’s “purpose and summary” notes in its opening sentences, “The [Citizens United] ruling invalidated longstanding provisions in U.S. election laws and raised fresh concerns about corporate influence in our political process. To address those concerns, the Shareholder Protection Act gives shareholders of public companies the right to vote on the company’s annual budget for political expenditures.” In other words, the proposed Act is concerned with “corporate influence.” This illustrates the tension discussed above between the concern for shareholder expression and that for corporate distortion of the political process. 

Apart from the uncertainty of the Act’s intended goal, its means of implementing this goal probably cannot survive First Amendment scrutiny under Citizens United. First, the Court suggested that, while a corporate governance regulation might pass, a remedy “based on speech, contravenes the First Amendment.” The SPA, like the restrictions at issue in Citizens United, is “based on speech.” This raises the question whether the proposed Act’s restrictions can be sustained on shareholder-protection grounds * * *.

Second, the SPA favors the expression of some stakeholders to the detriment of more passive shareholders. The provisions requiring authorization of expenditures may, depending on the applicable voting rules, empower activist shareholders, such as public pension funds, while submerging the preferences of many, perhaps a majority, of others.  

Third, the Act’s requirement that corporations get advance shareholder approval for corporate political activity sharply constrains all such speech by essentially requiring firms to lock in their political activity for a year from the close of a fiscal year. This prevents firms from dealing effectively with a dynamic political landscape. Managers’ treble damage “fiduciary” liability for unauthorized speech reinforces this inflexibility. Imposing these burdens on speech would be inconsistent with Citizens United’s emphasis on the social value of corporate speech.

Bebchuk and Jackson’s governance proposals may fare better under the First Amendment because they are more squarely aimed at corporate governance and the internal distortion problem. The authors suggest requiring the shareholders approve the firm’s overall spending budget, allowing shareholders to submit binding resolutions on corporate speech for shareholder vote, requiring that independent directors make decisions on corporate speech, and mandating more disclosure concerning corporate speech decisions. These provisions are probably less onerous than those in the SPA, depending on their specific implementation, including how they interact with the rules for shareholder voting under federal and state law. Bebchuk and Jackson also would enable shareholders to opt out of the regulation, which further mitigates the impact on corporate speech. 

The main problem with the Bebchuk-Jackson proposal is that it allows for possible super-majority shareholder authorization of corporate speech in order to protect the expressive rights of minority shareholders. * * * [P]rotecting the expressive rights of some shareholders may infringe the expression of other stakeholders and unacceptably restrict corporate speech under the Citizens United listeners’ rights rationale. These concerns increase with the level of protection for minority shareholders. Bebchuk and Jackson even suggest any level of shareholder approval is acceptable that enables “a practically meaningful opportunity to obtain the required approval.” The authors draw this standard from cases on whether state antitakeover law preempts federal law protecting shareholders’ rights. The preemption standard is based on the intent underlying federal takeover law and has little to do with determining corporations’ and corporate stakeholders’ rights regarding corporate speech.

The full article provides support for the positions underlying these criticisms, and cites to my earlier writing on these issues containing deeper background.

In constitutional law, corporate governance, First amendment
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