Archives For separation of powers

On October 7, 2015, the Senate Judiciary Committee held a hearing on the “Standard Merger and Acquisition Reviews Through Equal Rules” (SMARTER) Act of 2015.  As former Antitrust Modernization Commission Chair (and former Acting Assistant Attorney General for Antitrust) Deborah Garza explained in her testimony, “t]he premise of the SMARTER Act is simple:  A merger should not be treated differently depending on which antitrust enforcement agency – DOJ or the FTC – happens to review it.  Regulatory outcomes should not be determined by a flip of the merger agency coin.”

Ms. Garza is clearly correct.  Both the U.S. Justice Department (DOJ) and the U.S. Federal Trade Commission (FTC) enforce the federal antitrust merger review provision, Section 7 of the Clayton Act, and employ a common set of substantive guidelines (last revised in 2010) to evaluate merger proposals.  Neutral “rule of law” principles indicate that private parties should expect to have their proposed mergers subject to the same methods of assessment and an identical standard of judicial review, regardless of which agency reviews a particular transaction.  (The two agencies decide by mutual agreement which agency will review any given merger proposal.)

Unfortunately, however, that is not the case today.  The FTC’s independent ability to challenge mergers administratively, combined with the difference in statutory injunctive standards that apply to FTC and DOJ merger reviews, mean that a particular merger application may face more formidable hurdles if reviewed by the FTC, rather than DOJ.  These two differences commendably would be eliminated by the SMARTER Act, which would subject the FTC to current DOJ standards.  The SMARTER Act would not deal with a third difference – the fact that DOJ merger consent decrees, but not FTC merger consent decrees, must be filed with a federal court for “public interest” review.  This commentary briefly addresses those three issues.  The first and second ones present significant “rule of law” problems, in that they involve differences in statutory language applied to the same conduct.  The third issue, the question of judicial review of settlements, is of a different nature, but nevertheless raises substantial policy concerns.

  1. FTC Administrative Authority

The first rule of law problem stems from the broader statutory authority the FTC possesses to challenge mergers.  In merger cases, while DOJ typically consolidates actions for a preliminary and permanent injunction in district court, the FTC merely seeks a preliminary injunction (which is easier to obtain than a permanent injunction) and “holds in its back pocket” the ability to challenge a merger in an FTC administrative proceeding – a power DOJ does not possess.  In short, the FTC subjects proposed mergers to a different and more onerous method of assessment than DOJ.  In Ms. Garza’s words (footnotes deleted):

“Despite the FTC’s legal ability to seek permanent relief from the district court, it prefers to seek a preliminary injunction only, to preserve the status quo while it proceeds with its administrative litigation.

This approach has great strategic significance. First, the standard for obtaining a preliminary injunction in government merger challenges is lower than the standard for obtaining a permanent injunction. That is, it is easier to get a preliminary injunction.

Second, as a practical matter, the grant of a preliminary injunction is typically sufficient to end the matter. In nearly every case, the parties will abandon their transaction rather than incur the heavy cost and uncertainty of trying to hold the merger together through further proceedings—which is why merging parties typically seek to consolidate proceedings for preliminary and permanent relief under Rule 65(a)(2). Time is of the essence. As one witness testified before the [Antitrust Modernization Commission], “it is a rare seller whose business can withstand the destabilizing effect of a year or more of uncertainty” after the issuance of a preliminary injunction.

Third, even if the court denies the FTC its preliminary injunction and the parties close their merger, the FTC can still continue to pursue an administrative challenge with an eye to undoing or restructuring the transaction. This is the “heads I win, tails you lose” aspect of the situation today. It is very difficult for the parties to get to the point of a full hearing in court given the effect of time on transactions, even with the FTC’s expedited administrative procedures adopted in about 2008. . . . 

[Moreover,] [while] [u]nder its new procedures, parties can move to dismiss an administrative proceeding if the FTC has lost a motion for preliminary injunction and the FTC will consider whether to proceed on a case-by-case basis[,] . . . th[is] [FTC] policy could just as easily change again, unless Congress speaks.”

Typically time is of the essence in proposed mergers, so substantial delays occasioned by extended reviews of those transactions may prevent many transactions from being consummated, even if they eventually would have passed antitrust muster.  Ms. Garza’s testimony, plus testimony by former Assistant Deputy Assistant Attorney General for Antitrust Abbott (Tad) Lipsky, document cases of substantial delay in FTC administrative reviews of merger proposals.  (As Mr. Lipsky explained, “[a]ntitrust practitioners have long perceived that the possibility of continued administrative litigation by the FTC following a court decision constitutes a significant disincentive for parties to invest resources in transaction planning and execution.”)  Congress should weigh these delay-specific costs, as well as the direct costs of any additional burdens occasioned by FTC administrative procedures, in deciding whether to require the FTC (like DOJ) to rely solely on federal court proceedings.

  1. Differences Between FTC and DOJ Injunctive Standards

The second rule of law problem arises from the lighter burden the FTC must satisfy to obtain injunctive relief in federal court.  Under Section 13(b) of the FTC Act, an injunction shall be granted the FTC “[u]pon a proper showing that, weighing the equities and considering the Commission’s likelihood of success, such action would be in the public interest.”  The D.C. Circuit (in FTC v. H.J. Heinz Co. and in FTC v. Whole Foods Market, Inc.) has stated that, to meet this burden, the FTC need merely have raised questions “so serious, substantial, difficult and doubtful as to make them fair ground for further investigation.”  By contrast, as Ms. Garza’s testimony points out, “under Section 15 of the Clayton Act, courts generally apply a traditional equities test requiring DOJ to show a reasonable likelihood of success on the merits—not merely that there is ‘fair ground for further investigation.’”  In a similar vein, Mr. Lipsky’s testimony stated that “[t]he cumulative effect of several recent contested merger decisions has been to allow the FTC to argue that it needn’t show likelihood of success in order to win a preliminary injunction; specifically these decisions suggest that the Commission need only show ‘serious, substantial, difficult and doubtful’ questions regarding the merits.”  Although some commentators have contended that, in reality, the two standards generally will be interpreted in a similar fashion (“whatever theoretical difference might exist between the FTC and DOJ standards has no practical significance”), there is no doubt that the language of the two standards is different – and basic principles of statutory construction indicate that differences in statutory language should be given meaning and not ignored.  Accordingly, merging parties face the real prospect that they might fare worse under federal court review of an FTC challenge to their merger proposal than they would have fared had DOJ challenged the same transaction.  Such an outcome, even if it is rare, would be at odds with neutral application of the rule of law.

  1. The Tunney Act

Finally, helpful as it is, the SMARTER Act does not entirely eliminate the disparate treatment of proposed mergers by DOJ and the FTC.  The Tunney Act, 15 U.S.C. § 16, enacted in 1974, which applies to DOJ but not to the FTC, requires that DOJ submit all proposed consent judgments under the antitrust laws (including Section 7 of the Clayton Act) to a federal district court for 60 days of public comment prior to being entered.

a.  Economic Costs (and Potential Benefits) of the Tunney Act

The Tunney Act potentially interjects uncertainty into the nature of the “deal” struck between merging parties and DOJ in merger cases.  It does this by subjecting proposed DOJ merger settlements (and other DOJ non-merger civil antitrust settlements) to a 60 day public review period, requiring federal judges to determine whether a proposed settlement is “in the public interest” before entering it, and instructing the court to consider the impact of the entry of judgment “upon competition and upon the public generally.”  Leading antitrust practitioners have noted that this uncertainty “could affect shareholders, customers, or even employees. Moreover, the merged company must devote some measure of resources to dealing with the Tunney Act review—resources that instead could be devoted to further integration of the two companies or generation of any planned efficiencies or synergies.”  More specifically:

“[W]hile Tunney Act proceedings are pending, a merged company may have to consider how its post-close actions and integration could be perceived by the court, and may feel the need to compete somewhat less aggressively, lest its more muscular competitive actions be taken by the court, amici, or the public at large to be the actions of a merged company exercising enhanced market power. Such a distortion in conduct probably was not contemplated by the Tunney Act’s drafters, but merger partners will need to be cognizant of how their post-close actions may be perceived during Tunney Act review. . . .  [And, in addition,] while Tunney Act proceedings are pending, a merged company may have to consider how its post-close actions and integration could be perceived by the court, and may feel the need to compete somewhat less aggressively, lest its more muscular competitive actions be taken by the court, amici, or the public at large to be the actions of a merged company exercising enhanced market power.”

Although the Tunney Act has been justified on traditional “public interest” grounds, even its scholarly supporters (a DOJ antitrust attorney), in praising its purported benefits, have acknowledged its potential for abuse:

“Properly interpreted and applied, the Tunney Act serves a number of related, useful functions. The disclosure provisions and judicial approval requirement for decrees can help identify, and more importantly deter, “influence peddling” and other abuses. The notice-and-comment procedures force the DOJ to explain its rationale for the settlement and provide its answers to objections, thus providing transparency. They also provide a mechanism for third-party input, and, thus, a way to identify and correct potentially unnoticed problems in a decree. Finally, the court’s public interest review not only helps ensure that the decree benefits the public, it also allows the court to protect itself against ambiguous provisions and enforcement problems and against an objectionable or pointless employment of judicial power. Improperly applied, the Tunney Act does more harm than good. When a district court takes it upon itself to investigate allegations not contained in a complaint, or attempts to “re-settle” a case to provide what it views as stronger, better relief, or permits lengthy, unfocused proceedings, the Act is turned from a useful check to an unpredictable, costly burden.”

The justifications presented by the author are open to serious question.  Whether “influence peddling” can be detected merely from the filing of proposed decree terms is doubtful – corrupt deals to settle a matter presumably would be done “behind the scenes” in a manner not available to public scrutiny.  The economic expertise and detailed factual knowledge that informs a DOJ merger settlement cannot be fully absorbed by a judge (who may fall prey to his or her personal predilections as to what constitutes good policy) during a brief review period.  “Transparency” that facilitates “third-party input” can too easily be manipulated by rent-seeking competitors who will “trump up” justifications for blocking an efficient merger.  Moreover, third parties who are opposed to mergers in general may also be expected to file objections to efficient arrangements.  In short, the “sunshine” justification for Tunney Act filings is more likely to cloud the evaluation of DOJ policy calls than to provide clarity.

b.  Constitutional Issues Raised by the Tunney Act

In addition to potential economic inefficiencies, the judicial review feature of the Tunney Act raises serious separation of powers issues, as emphasized by the DOJ Office of Legal Counsel (OLC, which advises the Attorney General and the President on questions of constitutional interpretation) in a 1989 opinion regarding qui tam provisions of the False Claims Act:

“There are very serious doubts as to the constitutionality . . . of the Tunney Act:  it intrudes into the Executive power and requires the courts to decide upon the public interest – that is, to exercise a policy discretion normally reserved to the political branches.  Three Justices of the Supreme Court questioned the constitutionality of the Tunney Act in Maryland v. United States, 460 U.S. 1001 (1983) (Rehnquist, J., joined by Burger, C.J., and White, J., dissenting).”

Notably, this DOJ critique of the Tunney Act was written before the 2004 amendments to that statute that specifically empower courts to consider the impact of proposed settlements “upon competition and upon the public generally” – language that significantly trenches upon Executive Branch prerogatives.  Admittedly, the Tunney Act has withstood judicial scrutiny – no court has ruled it unconstitutional.   Moreover, a federal judge can only accept or reject a Tunney Act settlement, not rewrite it, somewhat ameliorating its affront to the separation of powers.  In short, even though it may not be subject to serious constitutional challenge in the courts, the Tunney Act is problematic as a matter of sound constitutional policy.

c.  Congressional Reexamination of the Tunney Act

These economic and constitutional policy concerns suggest that Congress may wish to carefully reexamine the merits of the Tunney Act.  Any such reexamination, however, should be independent of, and not delay expedited consideration of, the SMARTER Act.  The Tunney Act, although of undoubted significance, is only a tangential aspect of the divergent legal standards that apply to FTC and DOJ merger reviews.  It is beyond the scope of current legislative proposals but it merits being taken up at an appropriate time – perhaps in the next Congress.  When Congress turns to the Tunney Act, it may wish to consider four options:  (1) repealing the Act in its entirety; (2) retaining the Act as is; (3) partially repealing it only with respect to merger reviews; or, (4) applying it in full force to the FTC.  A detailed evaluation of those options is beyond the scope of this commentary.

Conclusion

In sum, in order to eliminate inconsistencies between FTC and DOJ standards for reviewing proposed mergers, Congress should give serious consideration to enacting the SMARTER Act, which would both eliminate FTC administrative review of merger proposals and subject the FTC to the same injunctive standard as the DOJ in judicial review of those proposals.  Moreover, if the SMARTER Act is enacted, Congress should also consider going further and amending the Tunney Act to make it apply to FTC as well as to DOJ merger settlements – or, alternatively, to have it not apply at all to any merger settlements (a result which would better respect the constitutional separation of powers and reduce a potential source of economic inefficiency).

Once again, my constitutional law professor has embarrassed me with his gross misunderstanding of the U.S. Constitution.  First, he insisted that it would be “unprecedented” for the U.S. Supreme Court to overturn a statute enacted by a “democratically elected Congress.”  Seventh-grade Civics students know that’s not right, but Mr. Obama’s misstatement did have its intended effect:  It sent a clear signal that the President and his lackeys would call into question the legitimacy of the Supreme Court should it invalidate the Affordable Care Act (ACA).  Duly warned, Chief Justice Roberts changed his vote in NFIB v. Sebelius to save the Court from whatever institutional damage Mr. Obama would have inflicted.

Now President Obama – who chastised his predecessor for offending the constitutional order and insisted that he, a former constitutional law professor, would never stoop so low – has both violated his oath of office and flouted a key constitutional feature, the separation of powers.  I’m speaking of the President’s “administrative fix” to the ACA.  That “fix” consists of a presidential order not to enforce the Act’s minimum coverage provisions, a move that President Obama says will allow insurance companies to continue offering ACA non-compliant policies to those previously enrolled in them if the companies wish to do so and are able to obtain permission at the state level.

This is, of course, nothing more than a transparent attempt to shift blame for the millions of recently canceled policies.  Having priced their more generous ACA-compliant policies on the assumption that there would be an influx of healthy customers now covered by high-deductible, non-compliant policies, insurance companies would shoot themselves in the foot by accepting Mr. Obama’s generous “offer.”  Moreover, state insurance commissioners, aware of the adverse selection likely to result from this last-minute rule change, are unlikely to give their blessing.  (Indeed, several have balked – including the D.C. insurance commissioner, who was promptly fired.)

But putting aside the fact that the administrative fix won’t work, the main problem with it is that it is blatantly unconstitutional.  The Constitution divides power between the three branches of government.  Article I grants to the Congress “all legislative Powers,” including “Power to lay and collect Taxes.”  Article II then directs the President to “take Care that the laws be faithfully executed.” With his administrative fix, President Obama has essentially said, “I promise not to execute the law Congress passed.”

Moreover, the President went further to say, “I promise not to collect a tax the Congress imposed.”  Remember that the penalty for failure to carry ACA-compliant insurance is, for constitutional purposes, a tax.  That was the central holding of last summer’s Obamacare decision, NFIB v. Sebelius.  When the President assured victims of insurance cancellations that he would turn a blind eye to the law and allow their insurers to continue to offer canceled policies, he also implied that he would order his administration not to collect the taxes owed by those in ACA-noncompliant policies.  Indeed, this matter was clarified in the letter the Department of Health and Human Services sent to state insurance commissioners notifying them of the Obama Administration’s decision not to enforce the law as written.  That letter stated that the Department of the Treasury, which is charged (through the IRS) with collecting the ACA’s penalties/taxes, “concur[red] with the transitional relief afforded in this document.”  That means the IRS, pursuant to the President’s order, is promising not to collect a tax the Congress has imposed.

This, my friends, is a major disruption of the constitutional order.  If the President of the United States may simply decide not to collect taxes imposed by the branch of government that has been given exclusive “Power to lay and collect Taxes,” the whole Constitution is thrown off-kilter.  Any time a president wanted to favor some individuals, firms, or industries, he wouldn’t need to go to Congress for approval.  No, he could just order his IRS not to collect taxes from those folks.  Can’t get Congress to approve subsidies for green technologies?  No worries.  Just order your IRS not to collect taxes from firms in that sector.  Or maybe even order a refundable tax credit.  You think Congress has enacted job-killing regulations on an industry?  Just invoke your enforcement discretion and ignore those rules.  Whew!  This sure makes things easier.

President Obama twice promised, under oath, to “take Care that the Laws be faithfully executed.”  Unfortunately, he also rammed through a terrible law.  Our Constitution now gives him the option to enforce the enacted law and pay the political price, or seek Congress’s assistance to change the law.  On the particular matter at issue here, Congress is willing to help the President out.  On Friday, the House of Representatives voted to amend the law to allow insurance companies to continue to offer ACA non-compliant policies.  Mr. Obama doesn’t like some details of the legislative fix he’s been offered.  Unfortunately for him, though, he’s not a king.  He has to work within the constitutional order.

At least, that’s what I thought I learned in 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.

KaersvangMarbury 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.

First, thanks to TOTM for organizing this symposium on a most timely and important topic.  As computers and technology have revolutionized every aspect of human endeavor it is a particularly critical time to ask ourselves why 21st century law schools closely resemble the law schools of the late-19th century and why in court litigation would seem relatively familiar to Clarence Darrow.  One significant answer is the regulation of the legal profession, and one possible solution is significant deregulation.

My particular interest in the topic is the role that the American judiciary has played in generating the remarkably lawyer-friendly regulations that govern the practice of law.  (Self promotion alert!).  Cambridge University Press recently published my book entitled The Lawyer-Judge Bias in the American Courts.

The book starts with the relatively unremarkable observation that virtually all American judges are former lawyers. The book goes on to argue that these lawyer-judges instinctively favor the legal profession in their decisions and that this bias has far-reaching and deleterious effects on American law.  The book notes many reasons for this bias, some obvious and some subtle. Fundamentally, it occurs because – regardless of political affiliation, race, or gender – every American judge shares a single characteristic: a career as a lawyer. This shared background results in the lawyer-judge bias.

The regulation of lawyers is a prime example (in fact it’s chapters Five and Six in the book).  American lawyers have a unique regulatory structure.  Every other profession – from cosmetology to medicine – is regulated in the first instance by state or federal legislatures.  State legislatures generally set up regulatory agencies for each licensed profession and the efficacy of these agencies are a subject of some debate.  That said, at least every other American profession must push their policies and regulation through a legislature made up of members who generally practice another profession (ironically enough many state legislators are lawyers).  As such, state legislatures generally serve as some check on other professions.

The legal profession, by contrast, is governed in all fifty states by state supreme courts.  These Courts frequently delegate the actual nuts and bolts of governing lawyers to bar associations or other administrative bodies.  Predictably, this regulatory structure favors the interests of the legal profession over those of the public.

Interestingly, it was not always thus.  During most of the nineteenth century, lawyers were largely unregulated and what regulation existed came from legislatures not courts.  There was almost no formal regulation of lawyer behavior and barriers to entry like a bar exam or the law school requirement were unheard of.  Bar associations were weak or non-existent.  Admittedly this period was pre-industrialization, but note that it is not unthinkable or impossible to have a deregulated market for lawyers; to the contrary, we’ve done it before.

In the late-nineteenth century bar associations began to reform.  Priority number one was lobbying courts to step up the regulation of the profession.  Over time state supreme courts have taken control of lawyer regulation and have created the complex web of regulations that now govern the legal profession.

Priority one for the new bar associations was to encourage state supreme courts to take over lawyer regulation and then to raise barriers to entry.  For example, from its inception the ABA pilloried what it considered to be the undesirable element in the bar and proposed a tightening of bar admission standards because low admissions standards had contributed to “extraordinary numbers” of the “ignorant” and “unprincipled” becoming lawyers.  See 2 A.B.A. Rep. 212 (1878).  In 1891, the ABA Committee on Legal Education produced a 60-page report on entry to the profession that proved incredibly prophetic.  The report recommended virtually every major innovation to come: including state supreme court control over entry, written bar exams, a three year requirement for law schools, and specific law library and facility requirements.  The report’s very first resolution was to “strongly recommend that the power of admitting members to the Bar, and the supervision of their professional conduct, be in each state lodged in the highest courts of the State.”

State supreme courts obliged by claiming an “inherent authority” to regulate the legal profession as an outgrowth of the constitutional separation of powers between the legislative and judicial branches.  State supreme courts used this “inherent authority” to seize entry regulation from the legislature, conduct sua sponte investigations of the unauthorized practice of law, and even to make many bar associations unified or mandatory.  In states with unified bars, a lawyer must be a member of and pay dues to the state bar association to practice law in that state.  Obviously, a mandatory bar association has significant benefits for the legal profession in those states.  In many of these states, the Supreme Courts ceded control over the profession to the unified bars, making lawyers in those states the most self-regulated professionals in the world.   Further, like a closed union shop, the mandatory collection of dues and the associated political clout of having all lawyers be members of the bar association are significant advantages to the profession.

I raise this history and the close interplay between the interests of judges and lawyers to note how difficult any deregulation effort will prove.  State supreme courts govern lawyer regulation in all fifty states.  There have been federal incursions by the SEC and others, but judges control the nuts and bolts of both entry and conduct.  Any large-scale changes to regulation will likely have to go through state supreme courts and if history is any guide those courts will naturally (and frequently unconsciously) care more about the needs and desires of bar associations and the legal profession than the public at large.

David Zaring has noted

that courts have formed an unimportant part of the financial crisis interventions by the government, and that the end of the Supreme Court’s most recent term suggests that it gets to matters years, if not decades, after they have become settled law one way or the other.

Steve Bainbridge responds:

The very nature of their social role precludes judges from being proactive regulators. They can make law, of course, but they can’t do so without an actual case or controversy to use as a vehicle for doing so. Finding a case that has the right facts and the right procedural posture to make new law can take quite a while. This is especially true for the SCOTUS, of course, since it can take years for cases to find their way through the lower court system.* * * And, of course, the judiciary is the least accountable branch. If you’re going to be in a position to plunge the entire world economy into a depression, you ought to be democratically accountable.

I agree with Steve. Indeed, I find the view that the Supreme Court is “unimportant” because it doesn’t keep up with the news rather surprising. The Court lays general ground rules. It is not for many reasons the appropriate institution for setting social policy in reaction to current events.

But this doesn’t end the discussion, because the Court could still be unimportant if it does not serve its ground-rule-making role well – that is, if it shies away from making hard decisions for political reasons.

However, in my column this week for Forbes.com I argue that the Court has been important this term precisely because it has bucked anti-business political winds in making or reinforcing Constitutional rules that serve business’s long-term interests. After discussing the regulatory excesses that have followed the financial busts at the beginning and end of this decade, I summarize the Court’s actions this term, concluding:

In a single term, despite widespread popular support for punishing and restricting corporations and their agents, the Court admonished Congress that it had to respect the structure of government and draft criminal statutes clearly, noted the dangers of court interference in business decisions, restricted the international reach of the securities laws and, perhaps most importantly, ensured that business’s voice would be heard in future lawmaking. The Court demonstrated that it can be a good friend to business in bad times.

These decisions accord with my prediction last February in the course of a Federalist Society debate on Citizens United. Barry Friedman noted that the decision’s timing was “inauspicious as a public relations move,” coming just as “the public generally is up in arms about financial matters, corporations, money in politics, and the like.” I responded that “Justices Scalia and Kennedy are both approaching 74 and might not survive eight Obama years. Perhaps the time to correct Austin is now or never.” I continued:

[T]he very thing that makes the political moment wrong arguably makes the judicial moment right: corporations are under political siege and need the Constitution more than ever. This returns to my theme that this case is at least as much about corporations and business as it is about the First Amendment. It will be interesting to apply this political theory to decisions due later this term on mutual fund executive compensation (Jones v. Harris) and Sarbanes-Oxley (FEF v. PCAOB). The Citizens United majority might be inclined to ensure in the PCAOB case that separation of powers protects business from unwise regulation in a hostile political environment. On the other hand, the Court may go with the political environment on executive compensation in Jones where no strong Constitutional principle is at stake.

This is, of course, precisely what happened, not only in these cases but in the others I summarize in my Forbes post. At the same time, the Court did not ignore political considerations: Its decisions went no further than absolutely necessary to make the important structural points. The Court, for example, refused to completely throw out the “honest services” rule and preserved Sarbanes-Oxley. Although I complained about the latter decision at the time it came out, here I want to emphasize that the Chief Justice compensated rhetorically for the case’s modest result:

Our Constitution was adopted to enable the people to govern themselves, through their elected leaders. The growth of the Executive Branch, which now wields vast power and touches almost every aspect of daily life, heightens the concern that it may slip from the Executive’s control, and thus from that of the people.

This is precisely the sort of concern with general ground rules I predicted in the Federalist Society debate.

In short, in business cases at least, the Court has gotten its role exactly right, and this role has been far from unimportant.

Update: David Zaring thinks my Forbes.com post “is an interesting way to characterize what has been going on.”

Well, it looks like Congress is going to attempt to enact the Senate’s health care bill using the reconciliation process. President Obama certainly suggested as much in Thursday’s Health Care Summit, downplaying the significance of such a move and suggesting it may be necessary in order to “move forward.”

First, he said to Senator McCain:

You know, this issue of reconciliation has been brought up. Again, I think the American people aren’t always all that interested in procedures inside the Senate. I do think that they want a vote on how we’re going to move this forward. And, you know, I think most Americans think that a majority vote makes sense, but I also think that this is an issue that could be bridged if we can arrive at some agreement on ways to move forward.

I interpret that as, “Agree with us, or we’ll pursue this using reconciliation. Americans won’t mind.” That also was the thrust of the President’s closing remarks, where he said:

[T]he question that I’m going to ask myself and I ask of all of you is, is there enough serious effort that in a month’s time or a few weeks’ time or six weeks’ time we could actually resolve something? And if we can’t, then I think we’ve got to go ahead and make some decisions, and then that’s what elections are for. We have honest disagreements about — about the vision for the country and we’ll go ahead and test those out over the next several months till November. All right?

This is most unfortunate. Reconciliation — the process by which budget-related bills can be approved without threat of a filibuster (and thus without winning the support of at least 60 Senators) — moves the Senate away from its constitutional role as a moderating, consensus-building check on the other two entities that must approve legislation, the House of Representatives and the President. While the House and the President are designed to respond to majority impulses, the Senate is explicitly designed not to work that way; otherwise, California, with its 38 million people, wouldn’t have the same voting power as Wyoming, with its population of 540,000. If the Senate transforms itself into what is effectively a second House of Representatives for this piece of non-budget legislation (which, somewhat ironically, is actually opposed by a majority of Americans) then what’s to stop it from doing so on any future bill? The Senate will no longer be the Senate.

But don’t just take my word for it. Democratic Senator Robert Byrd, who defined the narrow contours of the reconciliation process in the so-called “Byrd Rule,” adamantly insists that the process is inappropriate for sweeping social legislation like the pending health care reform bill. On April 2, 2009, he wrote the following to his Senate colleagues:

I oppose using the budget reconciliation process to pass health care reform and climate change legislation. Such a proposal would violate the intent and spirit of the budget process, and do serious injury to the Constitutional role of the Senate.

As one of the authors of the reconciliation process, I can tell you that the ironclad parliamentary procedures it authorizes were never intended for this purpose. Reconciliation was intended to adjust revenue and spending levels in order to reduce deficits. It was not designed to cut taxes. It was not designed to create a new climate and energy regime, and certainly not to restructure the entire health care system.

Just last week, Senator Byrd reiterated his position in another “Dear Colleague” letter. In that letter, he insisted that any attempt to use reconciliation to enact health care reform would be “grossly misguided.”

Senator Byrd isn’t the only Democrat who recognizes the importance of maintaining the Senate’s supramajority rule for important social legislation. Friday afternoon, I spent several hours reading through the Congressional Record from May 10, 2005 to May 25, 2005, a period during which the then-Republican majority leadership in the Senate was threatening to eliminate the supramajority requirement for approving judicial nominees. A number of Democratic senators — including Senators Bayh, Biden, Clinton, Dodd, Durbin, Feingold, Feinstein, Harkin, Kohl, Lautenberg, Leahy, Murray, Nelson, Reid, and Schumer — spoke eloquently and passionately about the Senate’s crucial and constitutionally prescribed role as a non-majoritarian body. Their characterization of the Senate’s special role was spot on.

Here’s some of what they had to say (emphasis added, of course):

SENATOR CHUCK SCHUMER, May 10, 2005:

It is the Senate where the Founding Fathers established a repository of checks and balances. It is not like the House of Representatives where the majority leader or the Speaker can snap his fingers and get what he wants. Here we work many times by unanimous consent where you need all 100 Senators to go along. In some instances, we work where 67 votes are needed, in some with 60, and in most with 51. But the reason we don’t always work by majority rule is very simple. On important issues, the Founding Fathers wanted — and they were correct in my judgment — that the slimmest majority should not always govern. When it comes to vital issues, that is what they wanted.

The Senate is not a majoritarian body. My good friend from Utah spoke. He represents about two million people in Utah. I represent 19 million in New York State. We have the same vote. You could have 51 votes for a judge on this floor that represents 21 percent of the American people. So the bottom line is very simple. This has not always been a 50.1 to 49.9 body. It has been a body that has had to work by its rules and by the Founding Fathers’ intent. Even when you are in the majority, you have to reach out and meet not all, not most, but some of the concerns of the minority.

***

SENATOR HARRY REID, May 18, 2005:

For further analysis, let’s look at Robert Caro. He is a noted historian and Pulitzer Prize winner, and he said this at a meeting I attended. He spoke about the history of the filibuster. He made a point about its legacy that was important. He noted that when legislation is supported by the majority of Americans, it eventually overcomes a filibuster’s delay, as a public protest far outweighs any Senator’s appetite to filibuster.

But when legislation only has the support of the minority, the filibuster slows the legislation-prevents a Senator from ramming it through, and gives the American people enough time to join the opposition. Mr. President, the right to extended debate is never more important than when one party controls Congress and the White House. In these cases, the filibuster serves as a check on power and preserves our limited government. …

For 200 years, we have had the right to extended debate. It is not some ” procedural gimmick.” It is within the vision of the Founding Fathers of this country. They did it; we didn’t do it. They established a government so that no one person and no single party could have total control.

Some in this Chamber want to throw out 214 years of Senate history in the quest for absolute power. They want to do away with Mr. Smith, as depicted in that great movie, being able to come to Washington. They want to do away with the filibuster. They think they are wiser than our Founding Fathers. I doubt that is true.

***

SENATOR CHRIS DODD, May 20, 2005:

One of the reasons the extended debate rule is so important is because it forces us to sit down and negotiate with one another, not because we want to but because we have to. I have helped pass many pieces of legislation in my 24 years here, both as a majority and minority Member of this institution. I have never helped pass a single bill worth talking about that didn’t have a Republican as a lead cosponsor. I don’t know of a single piece of legislation here that didn’t have a Republican and a Democrat in the lead. We need to sit down and work with each other. The rules of this institution have required that. That is why we exist. Why have a bicameral legislative body, two Chambers? What were the Framers thinking about 218 years ago? They understood the possibility of a tyranny of the majority. And yet, they fully endorsed the idea that in a democratic process, there ought to be a legislative body where the majority would rule.

So the House of Representatives was created to guarantee the rights of the majority would prevail. But they also understood there were dangers inherent in that, and that there ought to be as part of that legislative process another institution that would serve as a cooling environment for the passions of the day. So the Framers … sat down and said: There is a danger if we don’t adopt a separate institution as part of the legislative branch where the rights of the minority will also prevail, where you must listen to the other side in a democracy, pay attention to the other side.

***

SENATOR JOE BIDEN, May 23, 2005:

At its core, the filibuster is not about stopping a nominee or a bill, it is about compromise and moderation. That is why the Founders put unlimited debate in. When you have to-and I have never conducted a filibuster-but if I did, the purpose would be that you have to deal with me as one Senator. It does not mean I get my way. It means you may have to compromise. You may have to see my side of the argument. That is what it is about, engendering compromise and moderation.

Ladies and gentlemen, the nuclear option extinguishes the power of Independents and moderates in this Senate. That is it. They are done. Moderates are important only if you need to get 60 votes to satisfy cloture. They are much less important if you need only 50 votes. I understand the frustration of our Republican colleagues. I have been here 32 years, most of the time in the majority. Whenever you are in the majority, it is frustrating to see the other side block a bill or a nominee you support. I have walked in your shoes, and I get it. …

I say to my friends on the Republican side: You may own the field right now, but you won’t own it forever. I pray God when the Democrats take back control, we don’t make the kind of naked power grab you are doing. But I am afraid you will teach my new colleagues the wrong lessons.

***

Much, much, much more below the fold. Please read it — it’s important and, well, a little fun! Continue Reading…

I recently picked up a copy of the July Harper’s Magazine to read an essay by Barry C. Lynn entitled, “Breaking the Chain: The Antitrust Case Against Wal-Mart.” If you can’t tell from the title, the basic point is that antitrust authorities should break up Wal-Mart and put an end to the immense havoc that the retail giant has caused the economy. There is very little in the way of actual analysis in the article. It is mostly hand waving about retail consolidation without economic coherence, with some dramatic parade-of-horribles-type hyberbole mixed in. A few examples of the hyperbolic rhetoric before I move on to the merits of Lynn’s antitrust case against Wal-Mart:

“For a generation, big firms have enjoyed almost a complete license to use brute economic force to grow only bigger. And so today we find ourselves in a world dominated by immense global oligopolies that every day further limit the flexibility of our economy and our personal freedom within it.”

Whoa. Personal freedom? Really? Here’s some more:

“The ultimate danger of monopsony is that, over time, it tends to destroy the machines and skills on which we all rely.”

Or my favorite:

“If, however, we choose the path of the free market, and of individual freedom within the market; if we choose to ensure the health and flexibility of our economy and our industrial systems and our society; if we choose to protect our republican way of government, which depends on the separation of powers within our economy just as our political system–then we have only one choice. We must restore antitrust law to its central role in protecting the economic rights, properties, and liberties of the American citizen, and first use that power to break Wal-Mart into pieces.”

Wow. There is a lot to talk about here. Let me first summarize the Lynn’s argument and then discuss why they are entirely wrong as a matter of economics and sensible antitrust policy below the fold. Here are the basic moves in Lynn’s case against WM:

First, Wal-Mart is a monopsonist. Lynn writes that one in five of every American retail sales occurs at WM, and WM is dominating its retail rivals.

Second, WM leverages its monopsony power in a manner which antitrust law should prohibit. Lynn seems to have two antitrust harms in mind here.

The first is that WM has “changed the game” with respect to bargaining between supplier and retailers. WM dominates upstream suppliers by demanding lower prices, and using its own in-house brands to discipline suppliers, resulting in shrinking manufacturer profit margins. The article discusses WM’s reputation as a hard-nosed, no nonsense negotiator and cites examples of negotiations with Coca-Cola and Kraft. Lynn points to the use of “category management,” a practice where retailers delegate shelf space display decisions to a manufacturer (called the “category captain”) within a product category (say, sodas or soups).

Of category management, Lynn alleges without any substantiation that the practice has resulted in collusion by suppliers as well as retailers:

“one common result is that many producers simply stop competing head to head . . . . in many instances, a single firm ends up controlling 70% or more of US sales in an entire product line . . .. In exchange, its competitor will expect that firm to yield 70% or more of some other product line, say, snacks or spices. Such sharing out of markets by oligopolies is taking place throughout the non-branded economy . . . but nowhere is it more visible than in the aisles of Wal-Mart.”

Note the tension between the claim of supplier collusion and shrinking supplier margins. However, more importantly is the notion that category management and other changes in the bargaining relationships are necessary bad on antitrust grounds. There has been very little economic analysis of category management As a side note, Benjamin Klein, Kevin M. Murphy and are working on a paper entitled “Exclusive Dealing and Category Management in Retail Distribution,” which analyzes the economics of these arrangements as well as exclusive dealing contracts in retail (I will post a draft to SSRN when it is ready). From an antitrust perspective, it is difficult to imagine why category management would be any more of a concern than exclusive dealing, which is analyzed under the rule of reason and violates the Sherman Act when a number of conditions are satisfied (monopoly power, substantial foreclosure, barriers to entry, etc.). Category management only grants the manufacturer the right to favor his own product, and can be terminated by the retailer at any time, whereas exclusive dealing completely forecloses rivals from shelf space.

The fundamental point here, however, is that Lynn does nothing more than make assertions about the presence of collusion. Assertions that contradict evidence about profit margins earned by both retailers and suppliers over the past 20 years.

The second antitrust harm Lynn points to is equally unconvincing. Lynn writes that even if WM is efficient, increased concentration in retail represents a “gathering of power unchecked and unaccountable,” and those who would defend efficiency must “view the American citizen not as someone who yearns to decide for himself or herself what to buy and where to work in a free market but to say, instead, ‘let them eat Tastykake.'”

There are so many problems with this analysis that it is difficult to know where to start. But I sketch out a response below the fold. Continue Reading…

Measure 37 Upheld

Geoffrey Manne —  21 February 2006

You may or may not know that Oregon’s Measure 37 — our anti-takings measure — was ruled unconstitutional last year by a state trial court. See this post by Todd Zywicki. But today the Oregon Supreme Court reversed, and handed the effort to quash Measure 37 a resounding defeat. The court’s holding, on each of the claims raised:

In sum, we conclude that (1) plaintiffs’ claims are justiciable; (2) Measure 37 does not impede the legislative plenary power; (3) Measure 37 does not violate the equal privileges and immunities guarantee of Article I, section 20, of the Oregon Constitution; (4) Measure 37 does not violate the suspension of laws provision contained in Article I, section 22, of the Oregon Constitution; (5) Measure 37 does not violate separation of powers constraints; (6) Measure 37 does not waive impermissibly sovereign immunity; and (7) Measure 37 does not violate the Fourteenth Amendment to the United States Constitution. The trial court’s contrary conclusions under the state and federal constitutions were erroneous and must be reversed.

portland.jpgFor those who don’t know about it, Measure 37 is Oregon’s version of Richard Epstein’s classic refrain on takings: “Take and pay.” It leaves governments a choice — pay for land use planning (and Oregon has a lot of land use planning) or refrain from it. This won’t be the end of the saga, but the court’s opinion is sure a nice waypoint.

By the way — here’s the dispositive language of Measure 37. (There’s more to the measure than I’m about to quote, but this is the real meat of the measure. For the whole thing, follow the link to the court’s opinion and then scroll down to the appendix:

(1) If a public entity enacts or enforces a new land use regulation or enforces a land use regulation enacted prior to the effective date of this amendment that restricts the use of private real property or any interest therein and has the effect of reducing the fair market value of the property, or any interest therein, then the owner of the property shall be paid just compensation.

(2) Just compensation shall be equal to the reduction in the fair market value of the affected property interest resulting from enactment or enforcement of the land use regulation as of the date the owner makes written demand for compensation under this act.

Also sweetening the victory: The case was successfully argued by Lewis & Clark’s dean, Jim Huffman. Congratulations, Jim!