Archives For First amendment

On December 11 I published a Heritage Foundation Legal Memorandum on this topic. I concluded that the federal courts have done a fairly good job in harmonizing antitrust with constitutionally-based federalism and First Amendment interests (petitioning, free speech, and religious freedom). Nevertheless, it must be admitted that these “constitutional constraints” somewhat limit the ability of antitrust to promote a procompetitive, pro-efficiency, pro-innovation, pro-consumer welfare agenda. Anticompetitive government action – the most pernicious and long-lasting affront to competition, because it is backed by the coercive power of the state – presents a particularly serious and widespread problem. How can antitrust and other legal principles be applied to further promote economic freedom and combat anticompetitive government action, in a manner consistent with the Constitution?

First, it may be possible to further tweak antitrust to apply a bit more broadly to governmental conduct, without upsetting the constitutional balance.

For instance, in 2013, in Phoebe Putney, the United States Supreme Court commendably held that general grants of corporate powers (such as the power to enter into contracts) to sub-state governmental entities are not in themselves “clear articulations” of a state policy to displace competition. Thus, in that case, a special purpose hospital authority granted general corporate powers by the State of Georgia could not evade federal antitrust scrutiny when it orchestrated a potentially anticompetitive hospital merger. In short, by requiring states to be specific when they authorize regulators to displace competition, Phoebe Putney makes it a bit more difficult to achieve anticompetitive results through routine state governmental processes.

But what about when a subsidiary state entity has been empowered to displace competition? Imposing a greater requirement on states to actively supervise decisions by self-interested state regulatory boards could enhance competition without severely undermining state prerogatives. Specifically, where members of a profession dominate a state-created board that oversees the profession, the risk of self-dealing and consumer harm is particularly high, and therefore the board’s actions should be subject to exacting scrutiny. In its imminent ruling on the Federal Trade Commission’s (FTC) challenge to anticompetitive rules by the dentist-dominated North Carolina Dental Board of Dental Examiners (rules which forestall competition by storefront teeth whitening services), the Supreme Court will have the opportunity to require that states actively supervise the decisions of self-interested regulators as a prerequisite to federal antitrust immunity. At the very least, such a requirement would make states be more cautious before giving a blank check to potentially anticompetitive industry self-regulation. It could also raise the costs of obtaining special government favor, and shed needed light on rent-seekers’ efforts to achieve regulatory capture.

Unfortunately, though, a great deal of anticompetitive governmental activity, both state and federal, is and will remain beyond the bounds of federal antitrust prosecution. What can be done to curb such excesses, given the practical political difficulties in achieving far-reaching pro-competitive legislative and regulatory reforms? My December 11 Heritage Memo highlights a few possibilities rooted in constitutional economic liberties (see also the recent Heritage Foundation special report on economic liberty and the Constitution). One involves putting greater teeth into constitutional equal protection and due process analysis – say, by holding that pure protectionism standing alone does not pass muster as a “rational basis” justification for a facially anticompetitive law. Another approach is to deploy takings law (highlighted in a current challenge to the U.S. Agriculture Department’s raisin cartel) and the negative commerce clause in appropriate circumstances. The utility of these approaches, however, is substantially limited by case law.

Finally, competition advocacy – featuring public statements by competition agencies that describe the anticompetitive effects and welfare harm stemming from specific government regulations or proposed laws – remains a potentially fruitful means for highlighting the costs of anticompetitive government action and building a case for reform. As I have previously explained, the FTC has an established track record of competition advocacy filings, and the International Competition Network is encouraging the utilization of competition advocacy around the world. By shedding light on the specific baleful effects of government actions that undermine normal competitive processes, competition advocacy may over time help build a political case for reform that transcends the inherent limitations of antitrust and constitutional litigation.

With Berin Szoka

We’ll be delving into today’s oral arguments at our live-streamed TechFreedom/ICLE event at 12:30 EDT — and tweeting on the #NetNeutrality hashtag.

But here are a few thoughts to help guide the frantic tea-leaf reading everyone will doubtless be engaged in after (and probably even during) the arguments:

While most commentators have focused on ancillary jurisdiction questions, the FCC first and foremost asserts that Section 706 of the Telecommunications Act gives it direct authority to regulate the Internet.

  • The FCC purports to find this authority primarily in the language of the Section 706, which directs the Commission to “encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans… by utilizing… measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.”

  • The DC Circuit in Comcast suggested that this language might constitute a direct grant of authority, but in that case it’s clear the court was talking about a grant of authority sufficient to constitute the basis for ancillary jurisdiction. Here, the FCC explicitly claims that the language confers direct authority (although the Commission still claims other sections as the basis for ancillary authority).

  • In any case, the court in Comcast didn’t address the substance of the Commission’s claim, and despite some commentators’ claims to the contrary, nothing in the court’s analysis of Section 706 in Comcast directly forecloses the arguments the FCC makes in this case (although some of its language suggests the court may be uncomfortable with the FCC’s claim of authority).

  • Rather, because the FCC had not yet offered the revised interpretation of Section 706 contained within the Open Internet Order, the court in Comcast simply accepted the FCC’s then-current interpretation that Section 706 conferred no direct authority on the Commission to regulate broadband information services.

  • Since then, however, the FCC has changed course, and it now asserts such authority in the OIO. It is worth noting, as Commissioner McDowell discussed in his dissent from the OIO, that the process by which the FCC majority repudiated its previous interpretation and set up the basis for its authority under Section 706 was remarkably disingenuous and underhanded. The court may or may not take notice of this, but it should serve as a caution.

Thus the case is likely to hinge primarily on whether the court accepts the FCC’s claim that Section 706 grants direct authority, and, if so, whether the Open Internet Order adduces sufficient evidence to justify the FCC’s claim that Section 706 constitutes a valid basis for the specific regulations encompassed in the OIO.

  • The FCC’s arguments that it has ancillary jurisdiction under other provisions of the Telecommunications Act aren’t likely to get any more traction than last time.

  • The analysis of Section 706 as a basis for direct or ancillary jurisdiction is similar — and the court may well agree with Verizon that the FCC is really still claiming ancillary jurisdiction with a different label. So why does the distinction matter?

In order to establish Section 706 as the jurisdictional basis for the OIO under ancillary jurisdiction, the FCC would have to demonstrate that the OIO is necessary to implementation of Section 706’s (Section 4(i) of the Act says the FCC “may perform any and all acts, make such rules and regulations, and issue such orders … as may be necessary in the execution of its functions”). But if Section 706 confers authority for the OIO directly, the FCC need only show that its interpretation of the provision authorizing the Order is reasonable and not arbitrary and capricious. In other words, the FCC is trying to significantly lower its factual burden for using Section 706 (even as it claims that section confers authority narrower in scope than would ancillary authority). If the court accepts this argument, it could accept the FCC’s argument (however poorly supported and contrary to Congress’s clear intent) that the regulation of ISPs in order to encourage broadband deployment is a legitimate action under Section 706.

But the analysis doesn’t end there. Authority may exist in the abstract, but that doesn’t mean that this particular implementation of Section 706 is appropriate (or consistent with the Communications Act or the Constitution).

  • Rather, the plain language of Section 706 demands regulation that encourages deployment by means of removing barriers to infrastructure deployment. It is thus a sort of effects-based standard, and the FCC’s implementation of it is permitted only to the extent that its regulation actually has the effect of encouraging deployment.

  • This means that the FCC must adduce evidence sufficient to support the claim that, on net, its regulation will encourage deployment. To us, the FCC hasn’t met its burden.

  • The problem for the FCC is that, while the OIO contains a raft of assertions that prohibiting discrimination against, and forbidding the blocking of, edge content will encourage demand for, and thus deployment of, broadband infrastructure, the Order gives short shrift to the obvious reality that, at the same time, constraining broadband providers will reduce their incentive to invest in infrastructure.

  • It is an empirical question which effect is stronger, and, in theory, the Commission may be correct that the OIO meets the obligations imposed on it by Section 706.

  • But it is not enough simply to argue, as the FCC has done, that the OIO will encourage deployment along one dimension, while dismissing the other.

  • Unfortunately for the FCC, the OIO does just that (and badly, it must be added. Not only does the record clearly demonstrate only the most minimal instances of non-neutrality, but most of these were resolved without FCC intervention. Moreover, despite its bold claims, the economic evidence connecting neutrality and infrastructure deployment is vanishingly thin, to say the least).

It seems clear that the FCC is reading Section 706 with the wrong emphasis. The provision is not meant to be a broad grant of power (and to its credit the FCC asserts that it understands there are some limits to the provision and whatever powers it might confer). But in contorting the provision to find a basis for the OIO, the FCC doesn’t go far enough in accepting the limits of Section 706.

  • Properly understood, Section 706 is meant rather to be a broad limitation on the FCC’s power, requiring it to act, but only insofar as doing so encourages, on net, deployment, increases competition and removes barriers. This obligation is the most likely reason why the FCC had previously minimized the importance of Section 706.

  • The NTIA, for example, seems to understand this. As it wrote in a letter to the FCC in 1998, “the legislative history of section 706 suggests that it would operate only in the event that competition failed to produce reasonable and timely broadband deployment.” In asserting this the NTIA cites to, among other things, a statement from then Sen. Burns that “If competition is stalled, the [bill] gives the FCC authority to quicken the pace of competition and deregulation to accelerate the deployment of advanced telecommunications infrastructure.”

  • Quite clearly, the provision is not meant to authorize regulation except where regulating will improve the status quo — will “quicken the pace of competition.”

The evidence required to defend a regulation promulgated under this provision thus must include evidence not only that the regulation is intended to increase competition relative to the status quo, but that it actually does so. The OIO contains no such evidence. Instead, the FCC

  • identifies vanishingly few instances of discrimination by ISPs and fails to note that most of these wouldn’t be affected by the OIO or were resolved without the FCC’s intervention;

  • asserts that ISPs have an ill-defined “incentive” to foreclose content providers and offers no baseline from which to assess whether foreclosure, if it exists, would actually cause consumer harm;

  • merely asserts that the benefits of the OIO outweigh its costs;

  • draws only a tenuous connection between neutrality and broadband deployment;

  • does not address how excluding vertically integrated broadband providers from profiting from the “virtuous circle of innovation” will affect net outcomes;

  • neglects to establish the requisite baseline showing that that competition and deployment have stalled in the status quo and that they will improve under its rules.

  • fails to confront the possibility that its expansive reading of its authority will further deter investment and innovation; and

  • fails to analyze the rules within the well-established framework of consumer welfare economics.

The Commission may be correct that “[e]ach round of innovation increases the value of the Internet for broadband providers, edge providers, online businesses, and consumers.” But the OIO explicitly forbids broadband providers from capturing these rents in any but the most blunt fashion, ensuring that whatever positive effects edge content innovation will confer, they will not substantially be enjoyed by the companies actually making infrastructure investment decisions.

  • Moreover, directly flouting Section 706’s mandate, the Order contains a number of explicit exceptions (for, e.g., CDNs, VPNs, peering arrangements, game consoles and app stores) that collectively have the effect of enshrining the competitive conditions of the status quo rather than encouraging innovation. These exceptions are well-taken and clearly benefit consumers. But by acknowledging that many aspects of today’s Internet are appropriately non-neutral and by establishing exceptions for these existing technologies, but not for the non-neutral technologies of tomorrow that will also benefit competition and consumers, the OIO impedes rather than quickens the pace of competition.

Even if the FCC gets this far, it still has to establish that it hasn’t violated the Communications Act by imposing common carrier status on broadband providers, which the FCC has classified as a Title I non-common-carrier service. To win here, the court would have to find that the Net Neutrality rules leave room for “commercially reasonable negotiation” — as it did in upholding the FCC’s mandate that wireless carriers offer data roaming to the subscribers of other carriers. The Order insists that the FCC hasn’t regulated negotiations with consumers, which the agency claims is all that matters. But that’s clearly inconsistent with Judge Tatel’s analysis in the data roaming order, which focused on whether the data roaming rule left room for such negotiations on the other side of the market— between carriers. So look for Judge Tatel to ask tough questions about this point today.

FInally, Verizon’s Constitutional arguments remain, and while they present an uphill battle, the court may press the FCC on whether its regulations are consistent with the the First and Fifth Amendments — the core of TechFreedom’s amicus brief.

There will be much more to say following the oral argument, but we wanted to offer these preliminary thoughts to guide court watchers. In sum, as a technical legal matter, we believe that the court will not focus on the ancillary jurisdiction question and will likely defer substantially to the FCC’s interpretation of its direct jurisdiction to regulate broadband information providers under the Telecommunications Act. But the real action will be in the court’s evaluation of the FCC’s claimed support for its specific implementation of its authority. And if the Court seems open to the FCC’s arguments, it will have to delve into the common carriage and constitutional questions.

We add one note in conclusion: The type of analysis and resulting regulation called for under even the FCC’s interpretation of Section 706 should look an awful lot like a rule of reason foreclosure analysis under antitrust law. The rule is effects-based and calls for a case by case evidentiary determination that complained of conduct results in anticompetitive foreclosure relative to the but-for world without the conduct. We can certainly imagine Judge Tatel striking down the rule, upholding the assertion of jurisdiction, and offering guidance to the FCC that it might cure its error by implementing a rule that effectively embodies the well-established law and economics of an antitrust rule of reason analysis. Or perhaps we could cut out the middleman and just let the FTC apply antitrust laws directly.

William Buckley once described a conservative as “someone who stands athwart history, yelling Stop.” Ironically, this definition applies to Professor Tim Wu’s stance against the Supreme Court applying the Constitution’s protections to the information age.

Wu admits he is going against the grain by fighting what he describes as leading liberals from the civil rights era, conservatives and economic libertarians bent on deregulation, and corporations practicing “First Amendment opportunism.” Wu wants to reorient our thinking on the First Amendment, limiting its domain to what he believes are its rightful boundaries.

But in his relatively recent piece in The New Republic and journal article in U Penn Law Review, Wu bites off more than he can chew. First, Wu does not recognize that the First Amendment is used “opportunistically” only because the New Deal revolution and subsequent jurisprudence has foreclosed all other Constitutional avenues to challenge economic regulations. Second, his positive formulation for differentiating protected speech from non-speech will lead to results counter to his stated preferences. Third, contra both conservatives like Bork and liberals like Wu, the Constitution’s protections can and should be adapted to new technologies, consistent with the original meaning.

Wu’s Irrational Lochner-Baiting

Wu makes the case that the First Amendment has been interpreted to protect things that aren’t really within the First Amendment’s purview. He starts his New Republic essay with Sorrell v. IMS (cf. TechFreedom’s Amicus Brief), describing the data mining process as something undeserving of any judicial protection. He deems the application of the First Amendment to economic regulation a revival of Lochner, evincing a misunderstanding of the case that appeals to undefended academic prejudice and popular ignorance. This is important because the economic liberty which was long protected by the Constitution, either as matter of federalism or substantive rights, no longer has any protection from government power aside from the First Amendment jurisprudence Wu decries.

Lochner v. New York is a 1905 Supreme Court case that has received more scorn, left and right, than just about any case that isn’t dealing with slavery or segregation. This has led to the phenomenon (my former Constitutional Law) Professor David Bernstein calls “Lochner-baiting,” where a commentator describes any Supreme Court decision with which he or she disagrees as Lochnerism. Wu does this throughout his New Republic piece, somehow seeing parallels between application of the First Amendment to the Internet and a Liberty of Contract case under substantive Due Process.

The idea that economic regulation should receive little judicial scrutiny is not new. In fact, it has been the operating law since at least the famous Carolene Products footnote four. However, the idea that only insular and discrete minorities should receive First Amendment protection is a novel application of law. Wu implicitly argues exactly this when he says “corporations are not the Jehovah’s Witnesses, unpopular outsiders needing a safeguard that legislators and law enforcement could not be moved to provide.” On the contrary, the application of First Amendment protections to Jehovah’s Witnesses and student protesters is part and parcel of the application of the First Amendment to advertising and data that drives the Internet. Just because Wu does not believe businesspersons need the Constitution’s protections does not mean they do not apply.

Finally, while Wu may be correct that the First Amendment should not apply to everything for which it is being asserted today, he does not seem to recognize why there is “First Amendment opportunism.” In theory, those trying to limit the power of government over economic regulation could use any number of provisions in the text of the Constitution: enumerated powers of Congress and the Tenth Amendment, the Ninth Amendment, the Contracts Clause, the Privileges or Immunities Clause of the Fourteenth Amendment, the Due Process Clause of the Fifth and Fourteenth Amendments, the Equal Protection Clause, etc. For much of the Constitution’s history, the combination of these clauses generally restricted the growth of government over economic affairs. Lochner was just one example of courts generally putting the burden on governments to show the restrictions placed upon economic liberty are outweighed by public interest considerations.

The Lochner court actually protected a small bakery run by immigrants from special interest legislation aimed at putting them out of business on behalf of bigger, established competitors. Shifting this burden away from government and towards the individual is not clearly the good thing Wu assumes. Applying the same Liberty of Contract doctrine, the Supreme Court struck down legislation enforcing housing segregation in Buchanan v. Warley and legislation outlawing the teaching of the German language in Meyer v. Nebraska. After the New Deal revolution, courts chose to apply only rational basis review to economic regulation, and would need to find a new way to protect fundamental rights that were once classified as economic in nature. The burden shifted to individuals to prove an economic regulation is not loosely related to any conceivable legitimate governmental purpose.

Now, the only Constitutional avenue left for a winnable challenge of economic regulation is the First Amendment. Under the rational basis test, the Tenth Circuit in Powers v. Harris actually found that protecting businesses from competition is a legitimate state interest. This is why the cat owner Wu references in his essay and describes in more detail in his law review article brought a First Amendment claim against a regime requiring licensing of his talking cat show: there is basically no other Constitutional protection against burdensome economic regulation.

The More You Edit, the More Your <sic> Protected?

In his law review piece, Machine Speech, Wu explains that the First Amendment has a functionality requirement. He points out that the First Amendment has never been interpreted to mean, and should not mean, that all communication is protected. Wu believes the dividing lines between protected and unprotected speech should be whether the communicator is a person attempting to communicate a specific message in a non-mechanical way to another, and whether the communication at issue is more speech than conduct. The first test excludes carriers and conduits that handle or process information but have an ultimately functional relationship with it–like Federal Express or a telephone company. The second excludes tools, those works that are purely functional like navigational charts, court filings, or contracts.

Of course, Wu admits the actual application of his test online can be difficult. In his law review article he deals with some easy cases, like the obvious application of the First Amendment to blog posts, tweets, and video games, and non-application to Google Maps. Of course, harder cases are the main target of his article: search engines, automated concierges, and other algorithm-based services. At the very end of his law review article, Wu finally states how to differentiate between protected speech and non-speech in such cases:

The rule of thumb is this: the more the concierge merely tells the user about himself, the more like a tool and less like protected speech the program is. The more the programmer puts in place his opinion, and tries to influence the user, the more likely there will be First Amendment coverage. These are the kinds of considerations that ultimately should drive every algorithmic output case that courts could encounter.

Unfortunately for Wu, this test would lead to results counterproductive to his goals.

Applying this rationale to Google, for instance, would lead to the perverse conclusion that the more the allegations against the company about tinkering with its algorithm to disadvantage competitors are true, the more likely Google would receive First Amendment protection. And if Net Neutrality advocates are right that ISPs are restricting consumer access to content, then the analogy to the newspaper in Tornillo becomes a good one–ISPs have a right to exercise editorial discretion and mandating speech would be unconstitutional. The application of Wu’s test to search engines and ISPs effectively puts them in a “use it or lose it” position with their First Amendment rights that courts have rejected. The idea that antitrust and FCC regulations can apply without First Amendment scrutiny only if search engines and ISPs are not doing anything requiring antitrust or FCC scrutiny is counterproductive to sound public policy–and presumably, the regulatory goals Wu holds.

First Amendment Dynamism

The application of the First Amendment to the Internet Age does not involve large leaps of logic from current jurisprudence. As Stuart Minor Benjamin shows in his article in the same issue of the U Penn Law Review, the bigger leap would be to follow Wu’s recommendations. We do not need a 21st Century First Amendment that some on the left have called for—the original one will do just fine.

This is because the Constitution’s protections can be dynamically applied, consistent with original meaning. Wu’s complaint is that he does not like how the First Amendment has evolved. Even his points that have merit, though, seem to indicate a stasis mentality. In her book, The Future and Its Enemies, Virginia Postrel described this mentality as a preference for a “controlled, uniform society that changes only with permission from some central authority.” But the First Amendment’s text is not a grant of power to the central authority to control or permit anything. It actually restricts government from intervening into the open-ended society where creativity and enterprise, operating under predictable rules, generate progress in unpredictable ways.

The application of current First Amendment jurisprudence to search engines, ISPs, and data mining will not necessarily create a world where machines have rights. Wu is right that the line must be drawn somewhere, but his technocratic attempt to empower government officials to control innovation is short-sighted. Ultimately, the First Amendment is as much about protecting the individuals who innovate and create online as those in the offline world. Such protection embraces the future instead of fearing it.

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.]

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.

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.

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.

Robert Jackson recently discussed an SEC staff ruling that the ordinary business exception for shareholder proposals under Rule 14a-8 did not justify excluding a proposal recommending that the board disclose and let shareholders vote on its policies related to corporate political spending. Jackson opines that “the decision will help bring corporate political speech decisions into line with the interests of shareholders” in the wake of the Supreme Court’s Citizens United decision. 

Meanwhile, Jackson’s article with Bebchuk, Corporate Political Speech: Who Decides? 124 Harv. L. Rev. 83 (2010), proposes going beyond merely permitting shareholder recommendations under 14a-8 to, among other things, majority shareholder voting on corporate speech decisions.

The idea of bringing corporate political speech into line shareholder interests sounds unobjectionable until you ask, “which shareholders?” As I discuss in my recent paper, First Amendment and Corporate Governance, shareholder voting on corporate speech could amplify activist business skeptics while muting the diversified shareholders who would prefer that business views be heard.  

There’s also the clash between diversified and non-diversified pro-business shareholders.  The latter may prefer rules that facilitate costly wealth transfers between firms, while the former want only corporate acts and legal rules that maximize the value of their entire portfolios.

And then we could ask why shareholders’ interests should matter more than those of other stakeholders, particularly including employees, whose political interests may sharply diverge from those of shareholders with broadly diversified portfolios.

The most likely effect (and possible intent) of requiring shareholder voting on corporate contributions would be to burden and therefore reduce corporations’ ability to speak at all.  This could promote government censorship of corporate speech, precisely what the Supreme Court said in CU the First Amendment didn’t permit.  

I note in my article that it’s far better to delegate business decisions regarding corporate political spending, like others, to the board. I, of course, cite Steve Bainbridge (who posts to similar effect).  Corporate law provides many ways to deal with directors who act contrary to corporate interests, including fiduciary duties and shareholder exit.  This discipline may be imperfect, but it doesn’t work worse for corporate speech than for other types of decisions where managers’ interests conflict even more directly with those of the corporation.   

The main point to emphasize here is that there is no special free speech reason to protect shareholders from managerial control of corporate speech.  If anything, the arguments cut the other way.  Government control of corporate speech surely raises some voices, and therefore some ideas, above others.  And legislators and regulators seek to promote their own interests, which is the First Amendment’s main concern.

The bottom line is that First Amendment should constrain government regulation not only directly of corporate political speech, but also of the governance processes that produce it. The SEC’s 14a-8 ruling and Bebchuk and Jackson’s proposals would move securities regulation toward a confrontation with the First Amendment that has been brewing since 1933.  See my article with Butler, Corporate Governance Speech and the First Amendment, 43 U. Kans. L. Rev. 163 (1994).

In Arizona Free Enterprise Club, et al., v. Bennett, et al. and McComish, et al., v. Bennett, et al.  the Court is deciding what seems to be a couple of relatively narrow issues:

(1) Whether the First Amendment forbids states from providing additional government subsidies to publicly financed candidates that are triggered by independent expenditure groups’ speech against such candidates; and (2) whether the First Amendment forbids states from providing additional government subsidies to publicly financed candidates that are triggered by the fundraising or expenditures by these candidates’ privately financed opponents.

But at the oral argument yesterday, the issues seemed a lot broader than that. 

To begin with, excerpts from the argument in the SCOTUSblog summary suggested strongly that the challenger did not have to show that the law actually deterred speech.  Thus, the Chief Justice asked:

If you knew that a $10,000 expenditure that you would make that would support a candidate would result in $30,000, $40,000, $50,000, depending on how many opposition candidates there were available for them, wouldn’t you think twice about it?

In other words, the Court seems inclined to apply basic price theory:  you raise the price of something the demand goes down. 

Citizens United seemed to be a narrow case about “corporate” speech.  But as I pointed out in my First Amendment and Corporate Governance, the opinion didn’t really rest on the special nature of the corporation.  Its whole point was to vigorously guard the public’s right to hear: 

By suppressing the speech of manifold corporations, both for-profit and nonprofit, the Government prevents their voices and viewpoints from reaching the public and advising voters on which persons or entities are hostile to their interests.” Citizens United v. Fed. Election Comm’n, 130 S. Ct. 876, 907 (2010).  

The Court has also said, in Davis v. Federal Election Commission, that you can’t penalize candidates running on their own money.

Where is all this heading?  Consider Justice Breyer in the Arizona argument:

McCain-Feingold is hundreds of pages, and we cannot possibly test each provision which is related to the others on such a test of whether it equalizes or incentivizes or some other thing, because the answer is normally we don’t know. And it is better to say that it’s all illegal than to subject these things to death by a thousand cuts, because we don’t know what will happen when we start tinkering with one provision rather than another.  That thought went through my mind as I’ve heard this discussion.

I concluded my article linked above on the First Amendment issues concerning regulating the corporate governance processes that produce corporate speech:

In the final analysis, the majority’s listeners’ rights theory may be the only viable approach for dealing with political and commercial corporate speech. Now that it is clear that protection of corporate speech under the First Amendment cannot be diminished by shunting it off into an artificial entity, any justification for regulation would have to grapple with the complexities of corporate finance and governance and with the myriad variations among business and non-business associations. Add the risks inherent in politicians deciding who can speak and the better course is to err on the side of free speech.

Justice Breyer’s observation in the Arizona argument extended that logic beyond corporate speech. 

So Citizens United was not some little case about the power of corporations.  It was part of a bunch of big cases about the death of campaign finance regulation.  It is a passing that I, for one, will not mourn.

The Supreme Court, in a unanimous opinion by Justice Roberts, held in FCC v. ATT, Inc.:

We reject the argument that because “person” is defined for purposes of FOIA to include a corporation, the phrase “personal privacy” in Exemption 7(C) reaches corporations as well. The protection in FOIA against disclosure of law enforcement information on the ground that it would constitute an unwarranted invasion of personal privacy does not extend to corporations. We trust that AT&T will not take it personally.

Professor Bainbridge objects:

The utterly specious word games that drive this opinion simply confirm that Chief Justice Roberts  has failed to articulate  a plausible analytical framework for this important problem.

But I’m okay with the opinion.  As I’ve said about Citizens United and corporate speech rights:

corporations, as artificial entities, cannot speak in the same sense as humans do, and . . . the First Amendment is more properly concerned with the expressive rights of the individuals who speak through corporations than with the rights of artificial entities.

Same goes for “corporate” privacy. And this approach isn’t necessarily bad for business.  As I said in the above article about locating speech rights in corporations, “[a]n implication of this move is that the speech gets less protection than non-corporate speech because the right-holder is an artificial entity.” 

Speech rights differ from privacy rights because as I argued in my article linked above, “[t]he First Amendment does not guard corporations’ expressive rights, but rather the public’s interest in hearing what corporations have to say.”

In any event, the Court saved corporate constitutional rights for another day, noting that  

[t]his case does not call upon us to pass on the scope of a corporation’s “privacy” interests as a matter of constitutional or common law. The discrete question before us is instead whether Congress used the term “personal privacy” to refer to the privacy of artificial persons in FOIA Exemption 7(C).

I have written on the constitutional privacy question in The Constitutional Conception of the Corporation, 4 Supreme Court Economic Review 95, 139-40 (1995) (most footnotes omitted):

The theories of the corporation have potential implications for the application of constitutional rules other than those discussed in this article. For example, consistent with the corporate person theory, the Court has limited corporations’ protection against self-incrimination under the Fourth and Fifth Amendments FN 176 on the theory that corporations are artificial entities. However, under the contract theory individuals would not lose Fourth and Fifth Amendment rights merely because they work for corporate firms. For example, the Fifth Amendment could be applied in appropriate cases to protect an individual from having to turn over documents which incriminate that individual even if she has custody of the records as a corporate agent. To be sure, this might allow corporations to escape some government control because they can choose agents who can claim privilege. But given the assumptions underlying the contract theory, owners have market incentives not to insulate their agents from the law. * * * But it follows from the contract analysis that corporate “entities” should not be entitled to Fifth Amendment rights because this might frustrate the firm’s contracts. The parties to the firm might choose to neutralize the self- incrimination privilege and facilitate legal surveillance by giving custody over documents to a custodian who could not assert a privilege in connection with proceedings against the corporation.

FN 176:  See United States v Kordel, 397 US 1 (1970); Hale v Henkel, 201 US 43 (1906) (reasoning that the corporation was a separate entity for Fifth Amendment purposes although not for purposes of applying the Fourth Amendment). By contrast, the privilege against self-incrimination is available to protect against requests for personal, as distinguished from corporate, records. See Wilson v United States, 221 US 361 (1911). The privilege has also been denied to non-corporate associations that are considered collective entities. See Bellis v United States, 417 US 85 (1974) (law firm); United States v White, 322 US 694 (1944) (labor union). * * *

Partnerships may have very limited rights under the Fourth and Fifth Amendment.  See Bromberg & Ribstein on Partnership, §3.05(b)(1) (some footnotes in brackets):

Neither the partner’s individual rights to possess partnership property nor the fact that the partner possesses such property in a representative capacity on behalf of the firm and the other partners has been determinative. * * * [I]n Bellis v. United States, [417 U.S. 85 (1974)] the Supreme Court refused to recognize the privilege in a three-partner law firm that “was not an informal association or a temporary arrangement for the undertaking of a few projects of short-lived duration . . . [but] represented a formal institutional arrangement organized for the continuing conduct of the firm’s legal practice.” The Court went on to state that “[t]his might be a different case if it involved a small family partnership [citing Slutsky and In re Subpoena Duces Tecum, n.9, above] or . . . if there were some other pre-existing relationship of confidentiality among the partners.”

In light of the Bellis holding that an “institutional arrangement” is sufficient, and its application to the very small partnership involved in Bellis, it is unclear what room is left for the “small family partnership” qualification. Indeed, in post-Bellis cases the self-incrimination privilege has been held not necessarily applicable to small, husband-wife partnerships.

In short, the Court has tended to look through the entity to individual interests.  But, as I said in a footnote to the above text: 

Despite the attenuation of the self-incrimination privilege in the partnership setting, the aggregate-entity distinction is still alive to some extent in that the Court has refused to recognize any Fifth Amendment privilege as to corporate records, even if these are owned by a sole proprietorship corporation. See Braswell v. United States, 487 U.S. 99 (1988).

I hope and suspect that the Court, when confronted with the question, will get rid of the unhelpful Braswell aggregate-entity.