For all the drama surrounding the Commerce Clause challenge to the individual mandate provision of the Patient Protection and Affordable Care Act (“PPACA”),[1] the doctrinal question presented is simple. Under existing doctrine, the provision is as valid as can be. To be sure, the Supreme Court could alter existing doctrine, and many interesting things could be written about the dynamics that sometimes prompt judges to strike out in new directions under the pressures of cases like this one. But it is not my intention to pursue that possibility here. My own suspicion, for what it is worth, is that the Supreme Court will abide by its previously announced doctrines and uphold the individual mandate. So I mean to engage U.S. Department of Health and Human Services v. Florida as the easy case it is and to explore an underappreciated feature of how it came to be so easy. 

My focus is the role of United States v. Lopez, in which the Supreme Court famously struck down the Gun-Free School Zones Act of 1990 as beyond Congress’s power to enact under the Commerce Clause.[2] In the conventional telling, Lopez (along with its sidekick, United States v. Morrison[3]) is the source of the doctrinal threat to the PPACA’s individual mandate. Before Lopez, the Supreme Court had settled into the practice of upholding pretty much anything that Congress claimed to be within its commerce power, largely on the strength of the econometrically undeniable proposition that every law that does anything (or at least every law that does anything to a lot of people) has effects on interstate commerce. But for Lopez, the conventional view therefore runs, we would live for practical purposes in a world of plenary federal power. Courts would not take Commerce Clause challenges seriously, and any attack on the PPACA would have to be mounted on other grounds.

I think this conventional telling may be backwards. That is, I think it nearer the truth to say that Lopez may be the PPACA’s salvation-that without Lopez, the individual mandate would be considerably more precarious. I say this not because Lopez announced some rule that creates a safe harbor for the individual mandate. On its face, Commerce Clause doctrine was obviously more favorable to federal regulation on the day before Lopez was decided than on the day after. I say it instead for two other reasons, one practical and one discursive.

The practical reason is located in the common law dynamics of Supreme Court decisionmaking. Lopez announced limits on the commerce power, but it also forced the Court in later cases to articulate rules that would limit those limits. Without Lopez there would be no Gonzales v. Raich,[4] and it is Raich that makes upholding the individual mandate so blisteringly easy as a matter of doctrine.

Then there is the discursive reason. As a matter of the dynamics of American constitutional discourse, the Supreme Court feels pulled to show respect for the maxim that the federal government is one of limited and enumerated powers. But having demonstrated that respect in Lopez (and Morrison), it need not do so again and again and again: Lopez (and Morrison) may be enough to let the Court look itself in the eye as it recites the maxim, and that may be all that is necessary. On the other hand, if the modern Court had not yet demonstrated that it takes the enumerated powers maxim seriously, the urge to do so now might be irresistible.

In what follows, I will first explain why the individual mandate is within Congress’s Article I power under existing doctrine. That will happen quickly. As I’ve said, the question is pretty easy, and there is no need to tarry over it. I will then move to something a bit more subtle: the idea that Lopez has made the world safe for the PPACA.

I.

Here, in four sentences that would be uncontroversial if health insurance reform were not a divisive political issue, is the explanation of why enacting the individual mandate is within Congress’s power. (1) Congress has the power to regulate interstate commerce, including the power to regulate economic activities with substantial effects on interstate commerce.[5] (2) The health insurance market is either an interstate commercial market or, at the very least, a market with massive effects on interstate commerce. (3) When Congress uses its commerce power to regulate with a comprehensive legal scheme, it may under the Necessary and Proper Clause make rules for things that are themselves neither interstate nor commercial, if those rules are necessary for effecting the policy of the regulatory scheme overall.[6] (4) The PPACA regulates the health insurance market comprehensively, and the individual mandate is necessary for making that comprehensive regulatory scheme work.

That’s pretty much it. If there are remaining niceties, they have been thoroughly addressed in opinions by Judges Lawrence Silberman and Jeffrey Sutton.[7] To be sure, the individual mandate is enormously controversial as a political matter, and we have all observed that certain kinds of political controversy get articulated in the language of constitutional objection. Indeed, such objections are sometimes felt powerfully enough among the decisionmaking class as to prompt a change in constitutional doctrine. This is a basic dynamic of living constitutionalism. But if the question before us is how settled constitutional law bears on the individual mandate, we need say no more. As John Marshall almost put the point, whether the PPACA’s individual mandate provision is within Congress’s commerce power “is a question deeply interesting to the United States,” but it is “not of an intricacy proportioned to its interest.”[8]

II.

What is intricate as well as interesting, I think, is the set of forces that have made this much-anticipated decision so doctrinally easy. My focus is on the role of Lopez-a decision that I see as a critical step toward upholding the individual mandate. That may seem unorthodox, given that Lopez represents the contemporary Court’s commitment to putting limits on the commerce power. But fans of the individual mandate are deeply fortunate that Lopez was decided as it was. As noted above, there are two reasons why, one rooted in the common law process of Supreme Court decisionmaking and one located in the dynamics of American constitutional discourse.

A. Common Law Process

Lopez imposed limits on the commerce power for the first time in decades. But Lopez did not undo all of the ways in which the world changed during those decades, and the Court has not been so impractical or so ideologically blinkered as to think that it can fully turn back the clock. Instead, the Court has recognized that we live now under conditions of pervasive federal regulation, much of which it would be foolish to eliminate. Once Lopez was on the books, therefore, its holding forced the Court to engage seriously with the question of how constitutional law could impose a limit on the commerce power while still permitting the elaborate edifice of federal law that keeps modern America running. That engagement took the form of normal common law development: here a case limiting a principle that should not be too far extended, there a case refining a rule that was stated too crudely before.

The high moment of this process to date has been Gonzales v. Raich, in which the Court upheld a provision of the federal Controlled Substances Act as applied to an individual citizen growing marijuana for his own noncommercial use. Justice Antonin Scalia’s opinion in Raich stands as one of the most cogent expositions of the commerce power ever written. With its clear-sighted view of the difference (and interaction) between the Commerce Clause and the Necessary and Proper Clause, Justice Scalia’s opinion credibly explains both the impermissibility of far-flung, scattershot federal laws like the Gun-Free School Zones Act and the validity of the comprehensive federal regulatory schemes on which the modern American economy now depends. The Commerce Clause itself, the opinion teaches, reaches only interstate commerce, defined in terms of the three categories-channels, instrumentalities, and substantial effects-that Lopez deems regulable.[9] But when Congress enacts a regulatory scheme whose object lies within those categories, its chosen implementation may also reach beyond those categories. If need be, it may reach into space that is neither interstate nor commercial, so long as the implementing regulation is an integral part of the overall scheme authorized by the commerce power.

It is Raich, therefore, that makes upholding the individual mandate so straightforward. In my earlier four-sentence explanation of the validity of the individual mandate, sentence (3) and perhaps also sentence (4) owe not just their authority but also their crisp formulation to Raich, and in particular to Justice Scalia’s analysis in that case. Without Raich, the Supreme Court would approach the PPACA and individual mandate without the benefit of a prominent, well-articulated, ready-to-hand framework explaining that otherwise ultra vires congressional action can be unproblematically within Congress’s power if it is an integral part of a larger legal scheme regulating interstate commerce.

To be sure, there is no conceptual reason why that framework had to be articulated in Raich rather than awaiting articulation in Department of Health and Human Services. Either set of facts would make it appropriate for the deciding Court to explain that a challenged provision that by itself might not regulate interstate commerce is valid if part of a larger system that does regulate interstate commerce. But as observers of common law development know, not every case is an equally likely occasion for every possible doctrinal development. Principles are refined when refinement is needed, and whether a refinement is needed is something that the particular court applying the doctrine decides. When faced with the alternative of undermining congressional drug policy and permitting Angel Raich to grow his marijuana, the Rehnquist Court was moved to refine its doctrine and allow federal law to stand. It is far less clear that the Roberts Court would feel the need to refine doctrine in order to sustain the individual mandate.

So: Without Raich, the Court would lack a framework that cogently explains why permitting the individual mandate to stand does not mean permitting Congress to do anything it likes. And Raich as we know it came into being because of Lopez (and Morrison). Without Lopez (and Morrison), the justices would not have needed to articulate any complex or refined theory in order to uphold a portion of the Controlled Substances Act.

To be sure, it is also true that without Lopez (and Morrison) the Court could not strike down the individual mandate on the authority of Lopez (or Morrison). But the problem that sank the Gun-Free School Zones Act in Lopez would still be deployed against the individual mandate, even if Lopez had never been decided. The party challenging the statute would contend that to permit this federal law is to say that the Commerce Clause authorizes anything, and that just cannot be. Without Raich, the justices might not have already formulated (and committed to writing) the insight that permitting a rule as part of a general regulatory scheme is not the same as permitting any rule at all. Unless the justices were willing to work to find that answer with the PPACA before them, the individual mandate would fall. And it is not clear that the Roberts Court would see the incipient death of the individual mandate as a sign that something was going wrong, such that doctrinal refinement would be necessary to set things right.

B. The Dynamics of Constitutional Discourse

As part of their socialization into the world of American constitutional law, lawyers learn the maxim that the federal government is one of limited and enumerated powers. For a long portion of the twentieth century, expert observers could be forgiven for wondering whether that maxim had remaining force. But the maxim never disappeared: it was never consigned to the dustbin of constitutional expressions. It stayed around, repeated from teacher to student as a living idea. Even most supporters of strong federal power were loath to jettison the enumerated powers maxim as a matter of principle. At no point in our post-1937 history does one find judges or law professors routinely or ordinarily contending that the federal government has plenary power. To be sure, many people felt that the federal government had something close to plenary power in practice, such that the maxim that the federal government is one of limited and enumerated powers was essentially a nostrum devoid of meaningful present content. But for a great many well-socialized American lawyers-perhaps enough to claim the mainstream of constitutional discourse-the phrase “our federal government is one of limited and enumerated powers” was always one that induced head-nodding, at least as a matter of principle.

To utter this maxim is to engage in a profession of faith. For many American lawyers, declaring that the federal government is one of limited and enumerated powers is a way of showing fidelity to the Founders’ design, to American tradition, to the structure of the document, and perhaps to their own experience of induction into the discipline of constitutional law. To disavow the maxim officially would be to break faith along all of these dimensions. Constitutional law has tolerated tremendous expansions of federal power in practice, as the logic of modern life has directed. But it has proved easier to tolerate those expansions while continuing to pay homage to the maxim than to repudiate the maxim openly. A piece of our identity is invested in the maxim: articulating it reminds us of a part of who we are, or of a story in which we locate ourselves.

Lopez was decided as it was partly because a majority of the Court felt that it could not uphold the Gun-Free School Zones Act and still utter the maxim. At oral argument in the case, the Solicitor General of the United States was asked to identify a law that the federal government could not make if the statute at issue were upheld. He could not provide an example.[10] In the absence of such an example, and once the question had been asked, those justices most concerned with limiting federal power (or keeping faith with certain inherited maxims) could surely have felt that upholding the Gun-Free School Zones Act would have made the hallowed phrase unsayable. Seen in this light, the Court’s decision in Lopez was partly a compulsory demonstration of bona fides. If you really believe in this maxim, the contention ran-and of course you do-then there can be no justification for your upholding the statute. Or put the other way, if you uphold the statute, you will be forever estopped from claiming that you honor this traditional maxim. You will be, to that extent, a heretic. And if you are supposed to be the guardian of the principles at whose articulation well-socialized constitutional lawyers nod their heads, a heretic is an uncomfortable thing to be.

That said, the maxim does not demand that the Supreme Court constantly strike down federal laws. It demands only evidence that it is taken seriously. Lopez and Morrison insulate the Court against charges of heresy on the point-not perfectly, but considerably more than would be the case had those decisions not been rendered. In later cases, the Court can uphold far-reaching exercises of the commerce power without laying itself as open to the claim that it has let the maxim come to nothing.[11] When it upholds other federal statutes, the Court can identify concrete examples of laws that are beyond the commerce power, laws with respect to which it has exercised its solemn duty to police the boundaries of federal legislative power.[12] So when it upholds other laws as within the commerce power, it can adduce evidence that it has not left the maxim empty.

Now imagine the counterfactual world in which the Gun-Free School Zones Act had not come before the Supreme Court. The Court’s case law would not include Lopez‘s demonstration of fidelity. For simplicity’s sake, assume also that there was no Morrison. To those justices for whom it matters, the anxiety that the enumerated powers maxim has been abandoned would be more potent than it is today, and the payoff for holding some law to be beyond the commerce power would be commensurately greater. So if the PPACA and its individual mandate were to come before a Court that had not yet stood up for the maxim, several justices might experience a deeply powerful pull toward demonstrating fidelity to the maxim, especially in light of the public salience of the decision. With no Raich framework on the books, the doctrinal path to that demonstration of fidelity would be easier than the one that now exists. And one need not be a crude attitudinalist to think that this Court would need less than overwhelmingly favorable conditions to be convinced to rule against the PPACA.

Conclusion

My argument has been both anticipatory and speculative. If the Court strikes down the individual mandate, my thoughts here may come to seem quaint or benighted or naïve. And even if the Court upholds the mandate, as I expect it to do, I will not be able to prove what would have happened in a world without the Gun-Free School Zones Act. Not knowing the contents of other people’s minds, I can make no conclusive statements about the extent to which the dynamics I have described operate, consciously or unconsciously, within the decisionmaking process of any given justice. This is particularly true of my claims about the role of the enumerated powers maxim in American constitutional discourse. Nonetheless, the thought experiment I have rehearsed has value in thinking about the dynamics of American constitutional law. Among other things, it makes the point that the alternative to the world of Lopez is probably not a world where the federal judiciary merrily dispensed with any impulse to honor the idea of limited federal power. It is more likely a world where that impulse had not yet been given expression and force in a modern Supreme Court decision. Discourses evolve, and sometimes hallowed maxims disappear. But while they live, they can be mobilized. And sometimes they lie about like loaded weapons.

Lopez dissipated our constitutional culture’s discursive pressure to vindicate the enumerated powers maxim. Not entirely, of course-some people who recognize that the individual mandate is within the commerce power under present doctrine continue to worry that the Court is not giving the enumerated powers maxim its full due.[13] But one or two examples of taking the maxim seriously do infinitely more to allay that worry than zero examples would. Just as importantly, Lopez set in motion a process of common-law refinement that by 2006 produced an articulate framework for upholding pervasive federal regulation. Forced to live in the modern world, Lopez begot Raich, and Raich makes upholding the individual mandate easy. Stated differently, Raich requires the Court to work hard to explain why the mandate is unconstitutional, whereas before Raich greater effort would have been required to show that the mandate was valid. And the burden of cognitive effort can matter a great deal, especially when combined with a Court’s inclination to go one way or another in the first place.

In his dissent in Lopez, Justice David Souter wrote that it would be a mistake to think of the decision rendered that day as a minor development in the law. It is sometimes the case, he wrote, that one does not realize how important a decision will become until years later, when one sees the course on which that decision set the law. At a certain level of generality, Justice Souter’s observation is surely correct. But Justice Souter’s point was that Lopez could be the beginning of a large rollback of the commerce power, one that could imperil the world of federal regulation in which his generation had always lived. So far, that has not come to pass. Instead, one of the most consequential effects of Lopez may be the development of a more stable rubric for upholding comprehensive federal regulation-a rubric that has more or less by accident taken shape just in time to preserve one of the most ambitious federal laws in American history.

Richard Primus, professor of law at the University of Michigan Law School. Thanks to Jessica Morton and Samuel Rudman.

Suggested citation: Richard Primus, Commentary, How the Gun-Free School Zones Act Saved the Individual Mandate, 110 Mich. L. Rev. First Impressions 44 (2012), http://www.michiganlawreview.org/assets/fi/110/primus.pdf.

[1].      Pub. Law No. 111-148, 124 Stat. 119 (2010), as amended by the Health Care and Education Reconciliation Act of 2010, Pub. Law No. 111-152, 124 Stat. 1029 (2010).

[2].       514 U.S. 549 (1995).

[3].       529 U.S. 598 (2000).

[4].       545 U.S. 1 (2004).

[5].       Lopez, 514 U.S. at 559.

[6].       See Raich, 545 U.S. at 17-18; id. at 34-35 (Scalia, J., concurring).

[7].       See Seven-Sky v. Holder, 661 F.3d 1 (D.C. Cir. 2011); Thomas More Law Ctr. v. Obama, 651 F.3d 529, 549-66 (6th Cir. 2011) (Sutton, J., concurring in part).

[8].       Marbury v. Madison, 5 U.S. (1 Cranch) 137, 176 (1803).

[9].       Raich, 545 U.S. at 34-35 (Scalia, J., concurring).

[10].      Oral Argument at 4:52, United States v. Lopez, 514 U.S. 549 (1995) (No. 93-1260), available at http://www.oyez.org/cases/1990-1999/1994/1994_93_1260#argument.

[11].       E.g., United States v. Comstock, 130 S. Ct. 1949 (2010).

[12].       See e.g., id. at 1963 (citing Lopez, 516 U.S. at 567); Raich, 514 U.S. at 23 (citing Morrison, 529 U.S. 598; Lopez, 514 U.S. 549).

[13].       See e.g., Thomas More, 651 F.3d at 549-66 (Sutton, J., concurring in part).

Professor Arthur Hellman has called the JVCA “the most
far-reaching package of revisions to the Judicial Code since the Judicial
Improvements Act of 1990.”[2] The Act addresses a variety of
removal issues-including unrelated federal and state claims, multiple
defendants, removal of criminal cases, and the amount in controversy-and makes
several major changes to the law of venue. This essay addresses one of those
removal issues: the amount in controversy in a case removed from state court. I
argue that there are at least three respects in which the JVCA failed to
adequately clarify the law of diversity removal jurisdiction.

I. The Removal Problem

Federal jurisdiction in diversity cases requires that “the
matter in controversy exceed[] . . . $75,000, exclusive of interest
and costs.”[3] When the
plaintiff files the lawsuit in federal court in the first instance, this is
easy to establish. The complaint must contain “a short and plain statement of
the grounds for the court’s jurisdiction,” and will typically demand at least
that much money, plus allege facts sufficient to establish that such a sum
might be recoverable.[4]

But when the defendant seeks to remove a case that has
started out in state court (which he can do so long as the case could have been filed in federal court,
and so long as he acts promptly), two complications arise. One is that the
complaint will have been designed to comply with state laws of form, not
federal laws. In many states there is no requirement that the complaint demand
a particular sum of money.[5] Even if there is a stated amount, it
is not necessarily a binding cap on the plaintiff’s recovery.[6] Some states even forbid the naming of
a specific sum, apparently believing that lawyers will vie for publicity by
naming irresponsible amounts.[7]

The second complication is that the plaintiff has no
incentive to establish a large amount in controversy, because it is the
defendant who seeks federal jurisdiction. One should therefore not expect the
complaint to contain the information necessary to decide whether there is
jurisdiction to remove the case. Yet it is not always clear what other evidence
there will be, or what authority to
give such evidence when it exists.

The result has not been a model of jurisdictional
simplicity. While two federal appeals court opinions-McPhail v. Deere and Meridian
v.
Sadowski-have attempted to bring clarity to the doctrine,[8] the leading federal practice treatise notes that federal courts have
articulated at least eight different ways of analyzing the defendant’s burden
of establishing federal jurisdiction, optimistically adding that it “is
doubtful that these different verbal formulae represent a significant variation
in practice.”[9] The JVCA’s
Committee Report similarly notes “differing standards” in the federal courts
(without the optimism).[10] Even if all courts adjudicate these cases in the same way-which a scan of a
hundred district court decisions leads me to doubt-it is surely only after a
great deal of effort and some amount of good fortune.

The JVCA provides several rules in an attempt to solve
this removal problem. As an initial matter, the amount named “in good faith” in
the plaintiff’s complaint “shall be deemed to be the amount in controversy.”[11] However, the defendant can assert a different amount in controversy in the
notice of removal if the complaint seeks nonmonetary relief, or if “State
practice either does not permit a demand for a specific sum or permits recovery
of damages in excess of the amount demanded.”[12] If the defendant has asserted an amount in controversy in the notice of
removal, the district court must “find[] by the preponderance of the evidence,
that the amount in controversy exceeds” $75,000.[13]

The Act also makes two modifications to the deadlines for
removal. It clarifies that if the defendant discovers for the first time that
the case is removable through “information relating to the amount in
controversy in the record of the State proceeding, or in responses to
discovery,” he has thirty days to remove the case. Further, if “the district
court finds that the plaintiff deliberately failed to disclose the actual
amount in controversy to prevent removal,” it allows a “bad faith” extension to
the one-year maximum deadline for notices of removal.[14]

II. The Incompleteness of the JVCA

These provisions are improvements, yet incomplete in at
least three important respects. First, the JVCA provides no rule when state law
permits but does not require the plaintiff to name a specific
dollar amount. Recall that the JVCA allows the defendant to assert his own
assessment of the amount in controversy only if state practice “does not permit a demand for a specific sum” or
“permits recovery of damages in excess of the
amount demanded.” When state law is permissive, and the plaintiff doesn’t
name a dollar figure, neither provision is triggered: state law does “permit”
specific demands, and there is no “amount demanded.” Unfortunately, there are
many states whose practice falls into this category.[15]

Second, even when the defendant is permitted to assert his
own amount in controversy, the statute adopts a “preponderance of the evidence”
standard without explaining what that standard means. Some courts treat the
preponderance standard as if it expressed a presumption of narrow construction
against removal jurisdiction.[16] McPhail and Meridian criticized that view and instead interpreted the standard
to apply only to “contested facts”
that might be relevant to the amount in controversy, whereas “once those
underlying facts are proven, a defendant . . . is entitled to stay in
federal court unless it is ‘legally certain’ that less than $75,000 is at
stake.”[17] The Committee Report suggests that the bill was intended to codify the rule in McPhail and Meridian (a welcome solution by my lights).[18] But that intention is expressed only in the Committee Report, and many judges
are reluctant to give too much weight to such legislative history instead of to
the statute’s text.[19] If Congress really meant it, they could have inserted the holding of those
cases explicitly into the statute.

Third, however one interprets the preponderance of the
evidence standard, the JVCA does little to address the problem that such
evidence can be hard to come by within the schedule of the removal deadlines.
As McPhail explained,

in
most removal cases, there is little ‘evidence’ one way or another. In most
cases, the defendant must file a notice of removal within thirty days after
receiving the complaint. Pre-removal discovery in state court is unlikely to
have produced helpful information by then . . . . And if the
plaintiff moves quickly to challenge removal in federal court, there may not be
time to produce more evidence in federal discovery before the court decides to
rule.[20]

The evidence problem is exacerbated by the fact that the
defendant must work within a set of shifting deadlines and two discovery
regimes. The defendant’s deadline to file a notice of removal is thirty days
from the point at which he first discovers that the case is removable-perhaps
from reading the initial complaint, perhaps from subsequent discovery about the
plaintiff’s case in state court.[21] When the complaint does not demand a specific sum (or demands a “lowball,”
nonbinding sum), the defendant is in a bit of a bind. The defendant is only
supposed to wait for additional information “if the case stated by the initial
pleading is not removable.”[22] Yet the case stated by the initial pleading may well be removable (it certainly
does not rule out damages above
$75,000); the problem is that the defendant may not be sufficiently certain
that he will be able to prove it. So if the defendant waits to remove until
subsequent interrogatories in state court confirm the extent of the plaintiff’s
claim, he may well be too late.[23]

The JVCA’s solution to this problem is inadequate. The
section providing that “information relating to the amount in controversy in
the record of the State proceeding, or in responses to discovery, shall be
treated as an ‘other paper’ under [§ 1446](b)(3)”[24] (which would restart the removal clock) helps resolve a split over whether
depositions and similar documents constitute “other paper.”[25] But it does not deal with the fundamental deadline problem, because it is
triggered only if “the case stated by the initial pleading is not removable.”[26] The other section creating a bad faith exception to the one-year outside
deadline for removal[27] will presumably rein in some abusive practices, but it is still an exception
only to the outside deadline. Defendants must also comply with the thirty-day
deadline, which has no bad faith exception, and which is uncertain even when
there is no bad faith.

III. Clarifying the Clarification

A better version of the bill would not have left these
gaps. It would have explicitly dealt with states that neither forbid nor
require demanding a specific sum, presumably by including them in the new section
1446(c)(2)(a)(ii). It would have clarified its use of the preponderance standard,
ideally by providing that only facts (and presumably only facts not found in the complaint) need be proven by the
preponderance of the evidence, and that the ultimate amount in controversy is
any amount that it is legally possible to collect on the basis of those facts.
And it would have given the defendant a firmer opportunity to obtain evidence
to prove the amount in controversy to the district court-perhaps by saying that
the defendant need not try to remove the case right away if the complaint does
not name an amount in controversy,[28] by providing the defendant a right to discovery in federal court before the
removal petition is resolved,[29] or both.

It is not impossible for creative judicial interpretations of the JVCA to fill in these gaps as
Congress should have. Courts might think the purpose of section 1446(c)(2)(a)(ii)
is sufficiently obvious that it should be extended to states whose practice
does not forbid the naming of specific sums; they might find the Committee
Report’s endorsement of McPhail and Meridian sufficiently persuasive to
adopt those cases’ explication of the confusing preponderance of the evidence standard; and they might hold that a complaint
with no named sum is “not removable” for purposes of the time limit,[30] or that it is an abuse of
discretion for a district court to refuse removal without giving
adequate federal discovery. I do not wish to make the case against those interpretations
here, because I hope that courts will indeed find a way to adopt them. My point
is just that a statute aimed at jurisdictional “clarification” should not have
left those matters up for grabs.

To be sure, my criticisms are tentative and limited to
just one of the JVCA’s several provisions. But if I am right that the JVCA does
not adequately solve the problem of the amount in controversy in removal, I
worry that it may have similar shortcomings in other areas. To paraphrase Ed
Hartnett’s criticism of the restyled rules of civil procedure, “I don’t have
the chutzpah to claim that I caught everything [Congress] missed. If [Congress's]
distinguished members [and] advisors . . . missed things that I
caught, I have to believe that others will catch things that we all missed.”[31]

Judge Cardozo once lamented that “the legislature,
informed only casually and intermittently of the needs and problems of the
courts, without expert or responsible or disinterested or systematic advice . . .
patches the fabric here and there, and mars often when it would mend.”[32] The JVCA, by contrast, was prepared with extensive expert help and makes real
progress. But even experts are subject to political compromise. As the
Committee Report explained, more far-reaching reforms were contemplated as part
of the JVCA-one welcome reform would have allowed the plaintiff to make a
binding “declaration” that he sought no more than $75,000[33]-but
those proposals were rejected after a “vetting process” designed to eliminate
“provisions that were considered controversial by prominent legal experts and
advocacy groups.”[34] The apparent goal was to limit the bill to pareto-efficient changes-ones to
which nobody could raise a principled objection. But if the removal provisions
that Congress ultimately adopted are the best that can be produced under such
limitations, then maybe we cannot really restore rationality to the law of
federal jurisdiction without embracing some more “controversial” proposals.

           *Fellow, Constitutional Law Center, Stanford Law School. I appreciate prompt and helpful comments from Judge David Hamilton, Arthur Hellman, Judith Miller, and Stephen Sachs.

              [1].       Federal Courts Jurisdiction and
Venue Clarification Act of 2011, Pub. L. No. 112-63 (Dec. 7, 2011).

              [2].       Arthur
Hellman, Jurisdiction and Venue
Clarification Act, Prawfsblawg,
Dec. 2, 2011, http://prawfsblawg.blogs.com/prawfsblawg/2011/12/updated-jurisdiction-and-venue-clarification-
act.html. The committee report described Hellman as instrumental in
crafting the removal provisions. Report of the House Judiciary Committee, H.R.
Rep. 112-10, at 2 [hereinafter "Committee Report"].

              [3].       28 U.S.C. § 1332(a).

              [4].       Fed. R. Civ. P. 8(a).

              [5].       See, e.g., Ala. R. Civ. P. 8(a); Fla. R. Civ. P. 1.110(b); Tenn. R.
Civ. P. 8.01. The examples are discussed in Alice M. Noble-Allgire, Removal
of Diversity Actions When the Amount in Controversy Cannot Be Determined from
the Face of Plaintiff’s Complaint: The Need for Judicial and Statutory Reform
to Preserve Defendant’s Equal Access to Federal Courts, 62 Mo. L. Rev. 681, 686-87 (1997).

              [6].       Noble-Allgire, supra note 5, at 692.

              [7].       E.g., Colo. R. Civ. P. 8(a); Ind. R. Trial P. 8(a); N.J. R. Civ.
Prac. 4:5-2; S.C. R. Civ. P. 8(a); Wis. Stat. § 802.02(1m); see also Noble-Allgire, supra note 5, at 688-89.

              [8].       McPhail v. Deere, 529 F.3d 947
(10th Cir. 2008); Meridian v. Sadowski, 441 F.3d 536 (7th Cir. 2006).

              [9].       14A Wright,
Miller, & Cooper, Fed. Prac. & Proc. Juris. § 3702.2 (4th ed.).

            [10].       Committee Report, supra note 2, at 15.

            [11].       JVCA § 103(b)(3)(C), to be
codified at 28 U.S.C. § 1446(c)(2).

            [12].       Id., to be codified at 28 U.S.C. § 1446(c)(2)(a)(i)-(ii).

            [13].       Id., to be codified at 28 U.S.C. § 1446(c)(2)(B).

            [14].       Id., §§ 103(b)(3)(B), (C), to be codified at 28 U.S.C. § 1446(b)(3),
(c)(1), (c)(3)(B). I discuss these deadlines further in a few paragraphs.

            [15].       See supra note 5.

            [16].       See, e.g., Menendez v.
Wal-Mart Stores, Inc., 364 F. App’x 62, 65 (5th Cir. 2010); Gafford v. Gen. Elec. Co., 997 F.2d
150, 158 (6th Cir. 1993), abrogated on other grounds by Hertz Corp. v. Friend, 130 S. Ct.
1181 (2010); Armour v. Transamerica Life Ins., No. 11-2034, 2011 WL 1699281 (D.
Kan. May 4, 2011); Buffington v. Home
Depot USA, No. 10-cv-01933, 2010 WL 3307368 (D. Colo. Aug. 19, 2010); see also Meridian v. Sadowski, 441 F.3d
536, 542 (7th Cir. 2006) (noting other district courts that had imposed such a
burden).

            [17].       McPhail, 529 F.3d at 954; accord
Meridian, 441 F.3d at 543.

            [18].       Committee Report, supra note 2, at 16.

            [19].       See, e.g., Exxon Mobil
Corp. v. Allapattah Services, 545 U.S. 546, 568 (2005).

            [20].       McPhail, 529 F.3d at 953-54.

            [21].       JVCA § 103(b)(3)(B), to be
codified at 28 U.S.C. § 1446(b)(2)(B), (b)(3).

            [22].       Id., to be codified at 28 U.S.C. § 1446(b)(3).

            [23].       E.g., TIC-The Indus. v.
Liberty Mut. Ins., No. 09-763, 2009 WL 1796071 (D. Colo. June 23, 2009)
(defendant should have removed earlier).

            [24].       JVCA § 103(b)(3)(C), to be
codified at 28 U.S.C. § 1446(c)(1), (c)(3)(B).

            [25].       See Briant S. Platt, Section 1446(b) Federal Removal
Jurisdiction and the Thirty-Day Clock: Should A Motion To Amend Trigger the
Time Bomb?, 4 Nev. L.J.
120, 135 n.136 (2003) (describing split).

            [26].       JVCA § 103(c), to be codified
at 28 U.S.C. § 1446(c)(3)(A).

            [27].       Id., to be codified at 28 U.S.C. §§ 1446(c)(1), (c)(3)(B) .

            [28].       See, e.g., Noble-Allgire, supra note 5, at 750-51 (proposing statutory language).

            [29].       See Committee Report, supra note 2, at 16 (“[D]iscovery may be taken with regard to [the
amount in controversy].”); McPhail v. Deere, 529 F.3d 947, 954 (10th Cir. 2008)
(encouraging jurisdictional discovery). But
see Pub. Emps. Ret. Ass’n of N.M.
v. Clearlend Sec., 798 F. Supp. 2d 1265 (D.N.M. 2011) (dismissing McPhail as “dicta”).

            [30].       See, e.g., Harshey v.
Advanced Bionics Corp., No. 09-905, 2009 WL 3617756 (S.D. Ind. Oct. 29,
2009) (“The better approach is to require more of a removing defendant and to
give that defendant a reasonable opportunity to learn more about the scope of
the plaintiff’s claim.”).

            [31].       Edward A. Hartnett, Against
(Mere) Restyling, 82 Notre
Dame L. Rev. 155, 164-65 (2006).

            [32].       Benjamin N. Cardozo, A Ministry of Justice, 35 Harv. L. Rev. 113, 114 (1921).

            [33].       See 109 H.R. 5440, § 6 (2006); Arthur Hellman, The Federal
Courts Jurisdiction and Venue Clarification Act: Some Missing Pieces, JURIST (Jan. 4, 2012),
http://jurist.org/
forum/2012/01/arthur-hellman-jvca-ii.php.

            [34].       Committee Report, supra note 2,
at 2-3.

With Stare Decisis
and Constitutional Text,[1] Jonathan Mitchell has produced what
I think is the most interesting and creative textual defense[2] (or at least partial defense) to
date of the use of horizontal precedent in federal constitutional cases.[3] Mitchell’s careful analysis of the Supremacy Clause is fascinating and
instructive, and he does an impeccable job of drawing out the implications of
his premise that the Supremacy Clause prescribes only a very limited
choice-of-law rule-a rule that does not, by its own terms, specifically
elevate the Constitution above federal statutes and treaties. His innovative
and intriguing framework yields four distinct conclusions about the permissible
uses of precedent. In brief, under Mitchell’s analysis, the Supremacy Clause
forbids using precedent (1) to invalidate congressional statutes (because
congressional statutes are the supreme law of the land while prior court decisions
are not) or (2) to uphold constitutionally challenged state laws (because the
Constitution is the supreme law of the land while prior court decisions and
state-law interpretations of the Constitution are not). Yet, according to
Mitchell, the Supremacy Clause does not forbid using precedent (3) to uphold
congressional statutes (because both the Constitution and congressional
statutes are equally supreme, and there is no constitutional mandate to prefer
one to the other) or (4) to invalidate state laws (because neither prior court
decisions nor state laws are supreme, and there is no constitutional mandate to
prefer one to the other). The article is an eminently worthy contribution to a
vibrant debate, and I am delighted to have the opportunity to respond to it-as
well as to clarify some ambiguities[4] in my own prior work on precedent.

For all of its elegance and provocativeness, however,
Mitchell’s analysis has one major problem: it places all of its eggs in one
basket, and that basket simply cannot hold the eggs. Mitchell’s argument is all
about the Supremacy Clause. But the constitutional case against precedent does
not depend upon the Supremacy Clause. The argument against precedent would
exist without the Supremacy Clause. While the Supremacy Clause provides a
modicum of support for the argument, the clause’s presence in the Constitution
actually has very little effect on the argument’s logical structure.

To be sure, Mitchell’s contrary reading of my prior work
is entirely fair: there are certainly passages in that work that seem to say
that the case against precedent flows from the text of the Supremacy Clause.[5] It is no defense that I did not intend to make that claim; the baseline meaning
of a communicative text is the meaning that would be perceived by a reasonable
observer, and a reasonable observer could easily interpret my argument as did
Mitchell. In truth, however, one can (and perhaps should) construct the
constitutional case against precedent with no mention of the Supremacy Clause
whatsoever. Thus, if my antiprecedent position makes me something of a rebel in
the constitutional world, I am a rebel without a clause.

I take this opportunity to set forth the minimalist role
of the Supremacy Clause in the constitutional case against precedent, which renders
much of Mitchell’s careful analysis beside the point. But nothing that I say
here should detract from my admiration for this project and for Mitchell. The
academy’s (I trust temporary) loss is most definitely a big gain for the people
of Texas.

I. Deconstructing the Supremacy Clause

The federal Constitution’s Supremacy Clause provides:

This
Constitution, and the Laws of the United States which shall be made in
Pursuance thereof; and all Treaties made, or which shall be made, under the
Authority of the United States, shall be the supreme Law of the Land; and the
Judges in every State shall be bound thereby, any Thing in the Constitution or
Laws of any state to the Contrary notwithstanding.

Mitchell is correct to point out that the text of this
provision does not set out an express hierarchical ordering among the three
named sources of federal law (the Constitution, laws made pursuant to the
Constitution, and treaties made under the authority of the United States); it
simply declares those three sources of federal law to be hierarchically
superior to two named sources of state law (state constitutions and state
laws).[6] He is also correct that the clause’s reference to federal laws made “in
Pursuance” of the Constitution is most likely a reference to laws enacted
according to the lawmaking procedures specified in Article I, section 7, rather
than a reference to federal laws that substantively conform to wider
constitutional principles.[7] He is further correct that the Supremacy Clause says absolutely nothing about
the hierarchical ordering among sources of law other than the five sources
specifically named in the provision.[8] That is, most of the key premises about the text and structure of the Supremacy
Clause that drive his argument are correct. Mitchell is fundamentally wrong,
however, to identify the Supremacy Clause as “the very provision that the
textualist critics [most notably including yours truly] invoke for their
attacks”[9] on precedent-or
at least he is wrong that such critics must invoke or rely upon the Supremacy Clause. Because his defense of precedent is
rooted in the Supremacy Clause, it is actually tangential rather than
responsive to the primary originalist case against precedent.

The Supremacy Clause is a very thin reed on which to base
much of anything regarding the application of the Constitution. Indeed, if one
actually tries to construct a general theory of precedent out of the Supremacy
Clause, as Mitchell assumes that originalist critics of precedent try to do,
one encounters problems even more basic than those identified by Mitchell.
First, while the initial phrase in the Supremacy Clause, which identifies a
hierarchy among certain state and federal legal sources, is perfectly general
and is therefore addressed to all constitutional interpreters, the second
phrase, which prescribes a legal effect for the preceding phrase, binds only
“the Judges in every State.” That latter term is an obvious reference to state
court judges, which means that the pure text of the Supremacy Clause does not issue
legal commands to federal judges at all, much less to federal or state
legislative or executive officials (or jurors, or citizens). Accordingly, it
would be absurd to construct a universal theory of precedent that binds federal
officials  out of a clause that does not
appear to speak to those officials. Even if one stretches the term “Judges” to
include federal and not just state judges, the clause would not appear to apply
to judges in federal territories or the District of Columbia, since such “Judges”
are not “in” any particular “State.” Supreme Court Justices, for example, would
be bound by the clause only when “riding circuit” in a specific state. And
there is no way to stretch the term “Judges” to include other officials. Thus,
a pure textualist analysis of the Supremacy Clause yields far too narrow a
scope to let it serve as the basis for a grand (much less a Grand) theory of
precedent.

Second, the clause elevates the three named sources of
federal law only above state constitutions and state laws. It says nothing
about the hierarchical status of state court decisions, state administrative
regulations, or state jury decisions. Does that mean that those other exercises
of state legal authority are not necessarily subordinated to supreme federal
law? If the only constitutional
source of conflict-of-laws principles is the text of the Supremacy Clause, an
affirmative answer seems difficult to avoid.

These problems with using the Supremacy Clause as the sole
basis for a broad theory of precedent stem from trying to read the Supremacy
Clause as more than it is. The Supremacy Clause is a provision that deals with
one specific set of conflicts among sources of law that would predictably arise
once the Constitution was ratified. It does not purport to exhaust the universe
of conflict-of-laws principles, nor does it even necessarily establish a new
principle that would not otherwise exist in its absence. Many constitutional
provisions exist solely or primarily for emphasis or clarification;[10] it would be neither odd nor poor drafting for the Supremacy Clause to serve
that function. It is clear that the Supremacy Clause cannot serve as the foundation
for a comprehensive conflict-of-laws theory, and because precedent is a
particular species of conflict-of-laws problems, the Supremacy Clause cannot
serve as the foundation for a comprehensive theory of precedent.

II. Reconstructing Constitutional Supremacy

So if the case against precedent does not rest on the
Supremacy Clause, on what does it rest? It rests, as I argued (albeit with
regrettable ambiguity) almost two decades ago,[11] on exactly the same foundation as the case in favor of judicial review. It
rests on the supremacy of the Constitution over all competing sources of law, including the other sources identified by the Supremacy Clause as themselves supreme over
state laws and constitutions. This constitutional supremacy does not derive
textually from the Supremacy Clause. One can perhaps invoke the sequencing of
sources of law within the Supremacy Clause (the Constitution, then federal
laws, then federal treaties) as some modest evidence in favor of the
Constitution’s place at the top of the legal food chain, which is precisely how
Chief Justice Marshall invoked it more than two centuries ago in Marbury v. Madison.[12] But the supremacy of the Constitution logically precedes the Supremacy Clause. Indeed, it is the supremacy of the
Constitution that makes the Supremacy Clause itself supreme over contrary
statements in state laws or constitutions.

The case for constitutional supremacy set out in Marbury v. Madison remains today as good
as anything that has followed it. The case flows from a series of mutually
reinforcing arguments, none of which specifically invokes the Supremacy Clause.
First, the very nature of a written constitution that creates a new government
and sets forth its powers and limitations, in a pure and original act of legal
creativity, implies that the constitution is hierarchically superior to the
laws and other institutions that spring from it. As Chief Justice Marshall
explained:

That the people have an original right to establish,
for their future government, such principles as, in their opinion, shall most
conduce to their own happiness, is the basis, on which the whole American
fabric has been erected . . . . The principles, therefore, so
established, are deemed fundamental. And as the authority, from which they
proceed, is supreme, and can seldom act, they are designed to be permanent.[13]

Marshall’s point is implicit in the Preamble, which
declares that “We the People of the United States . . . do ordain and
establish this Constitution for the United States of America.”[14]

To be sure, it is not logically impossible to have a
constitution that is hierarchically equivalent to, or even subordinate to, other
sources of law such as ordinary legislation. The founding generation was quite
familiar with constitutions that could be changed by ordinary legislation.[15] But the federal Constitution, as a self-conscious act of political creation, is
best understood as holding itself out, by its very nature, as supreme law.[16]

Second, on a purely textual level, the Constitution
specifically prescribes that officials swear oaths to uphold it. A provision of
Article VI other than the Supremacy Clause declares that “[t]he Senators and
Representatives before mentioned, and the Members of the several State
Legislatures, and all executive and judicial Officers, both of the United
States and of the several States, shall be bound by Oath or Affirmation, to
support this Constitution . . . .” Article II prescribes that the president
give the following oath, before taking office: “I do solemnly swear (or affirm)
that I will faithfully execute the Office of President of the United States,
and will to the best of my Ability, preserve, protect and defend the
Constitution of the United States.” Government officials are not
constitutionally mandated to swear equivalent oaths to uphold laws, treaties,
judicial decisions, or other legal instruments.

Third, the particular terms and structure of the
Constitution, which contains some very specific provisions regulating the
composition, character, and scope of the national government (and to a lesser
extent state governments) suggest, as Chief Justice Marshall argued more than
two centuries ago,[17] that the Constitution is meant to control, and therefore be superior to, these
other sources of law.

While there is no deductively airtight case for
constitutional supremacy, on balance it seems more plausible to suppose that
the Constitution is hierarchically superior to all other sources of law than to
suppose the contrary. That is why Chief Justice Marshall was right in principle
in Marbury to subordinate
congressional statutes to the supreme Constitution (though he may have been
wrong in practice about the meaning of both the relevant constitutional
provision and the relevant statute in that case).[18]

And once the supremacy of the Constitution is established-a
supremacy that can be established without use of the Supremacy Clause-the
prima facie case against precedent is set. The “judicial Power” is the power to
decide cases in accordance with governing law. If the Constitution conflicts
with any other potentially applicable source of law, such as statutes or prior
judicial decisions (and I am granting that prior judicial decisions can indeed
count as law in some meaningful sense), the Constitution must prevail. Accordingly,
the power and duty to decide in accordance with law includes the power and duty
to decide in accordance with the Constitution, even when prior congresses,
prior presidents, prior courts, prior state officials, and prior scholars have
said otherwise.

Mitchell’s strict textualist analysis of the Supremacy
Clause does not rebut the constitutional case against precedent because the
analysis rests on the false premise that the Constitution does not place itself
hierarchically above all competing sources of law. It is true that the raw text
of the Supremacy Clause makes no such direct and explicit claim to
constitutional supremacy, but that does not mean that no such constitutional
claim is made. As Vasan Kesavan has aptly noted, “It is unnecessary for the
Constitution to specify that it is superior to other law because it is higher
law made by We the People-and the only such law.”[19]

III.  Un-constructing Constitutional
Deference

Of course, as a practical matter, the theoretical case
against precedent only has bite if the power and duty to decide in accordance
with the Constitution includes the power and duty to decide in accordance with
the decisionmaker’s own best judgment about the meaning of the Constitution. If the Constitution permits judges to
defer to the constitutional views of Congress or the president, it is hard to
see why it would not also permit them to defer to the constitutional views of
prior judges. Such a practice of deference-and precedent is unquestionably
a subspecies of deference-would not involve “subordinating” the Constitution
to other sources of law but simply “subordinating” one’s own view of the
Constitution to that of others. While this is not the main line of Mitchell’s
defense of precedent,[20] it is implicit in his suggestion that relying on precedent, at least to uphold
the constitutionality of federal statutes, is akin to deferring to the
political departments. As Mitchell says, “On this view, stare decisis is no
different from a tacit expansion of the political-questions doctrine, a ruling
that grows the domain of interpretive questions to be resolved authoritatively
by the national political branches.”[21]

I have elsewhere argued at some length that, with a few
notable exceptions,[22] federal courts generally are not
constitutionally required to defer to
the constitutional views of other actors.[23] But are they allowed to do so? Of
course they are-provided that such deference is a reasonable attempt to decide cases in accordance with
governing law. There are many instances in which the views of someone other
than the judge deciding the case are likely to be more in accordance with the
Constitution than the judge’s own views. In such instances, the judge is not
merely permitted but required to defer. The same is true with
respect to deference to the constitutional views of prior judges: reliance on
“precedent” in this epistemological sense is not merely permissible but mandatory when
it is the best available means of determining the right answer to
constitutional questions.

What federal judges are not permitted to do is defer to the views of other actors for
reasons other than good faith attempts to get the right answer, such as theories
of democracy, concerns about efficiency or decisionmaking costs, or
considerations of stability or reliance. That is because the sole constitutional
power of the federal judge is “[t]he judicial Power,” which is quintessentially
the power to decide cases in accordance with governing law. Unless the
Constitution itself says otherwise, anything that involves deciding cases in
accordance with something other than
governing law-and the Constitution is supreme governing law when
it applies-is
outside the constitutionally granted power of the federal judge and is
therefore impermissible. To be sure, the optimal determination of what counts
as governing law does not always require the judge to determine every matter
from scratch; indeed, on some occasions that kind of lone wolf approach would
be affirmatively forbidden by the primary obligation to get the right answer.
But any reliance on other actors must be justified, directly or indirectly, by its ability to facilitate
decisionmaking according to law. Any reliance on precedent that does not
ultimately trace to getting the right answer to constitutional questions
exceeds the boundaries of the judiciary’s authority and is itself
unconstitutional. [24]

Does that mean that the political questions doctrine is a
mistake-and
that, derivatively, expanding it through precedent would also be a mistake? In
many, and perhaps even most, instances, probably yes.[25] There are limited circumstances in which the Constitution effectively
prescribes decisionmaking authority over certain matters to actors other than
judges. When faced with this kind of “textually demonstrable constitutional commitment
of the issue to a coordinate political department,”[26] one must obey the Constitution’s allocation of interpretative authority. But in
the absence of such a specification, there is no warrant for deferring to the
views of other actors except a good
faith judgment that those other actors are better situated than is the judge to
determine the right answer.

In short, with respect to interpretative authority, the
constitutional rule really is: That which is not forbidden is required and that
which is not required is forbidden. Reliance on precedent for any reason other
than epistemological reliability is forbidden.

IV. Constructing Constitutional Proof

We can now see why Mitchell’s four-part schema does not
accurately describe the constitutional rules regarding precedent.

With respect to the use of precedent to uphold the
constitutionality of federal statutes, Mitchell posits a constitutional equivalence
between the Constitution and statutes enacted pursuant to the Constitution.
There is no such equivalence. The Constitution is supreme-not
because the text of the Supremacy Clause says so (it does not) but because the
nature and structure of the federal Constitution gives rise to that inference.
With respect to the use of precedent to invalidate federal statutes, Mitchell’s
conclusion that such use is improper is right, but for the wrong reason. It is
not because the Constitution is mentioned in the Supremacy Clause while court
decisions are not, but simply because the Constitution is hierarchically
superior to court decisions-and would be hierarchically superior even in the
absence of the Supremacy Clause. The same is true with respect to Mitchell’s conclusion
that courts may not use precedent to uphold state laws against federal
constitutional challenges: the conclusion is right, but that conclusion does
not depend upon the particular wording of the Supremacy Clause. And with
respect to the use of precedent to invalidate state laws, Mitchell is at least
partly wrong. Where the best understanding of the Constitution is that the
state law is invalid, one must invalidate the state law.

But what if there were a judicial precedent that one
believed was not the best understanding of the Constitution, and the state law
would not be in conflict with the Constitution on that best understanding, but
the state law would be in conflict with the judicial precedent? Could a court
nonetheless invalidate the state law as inconsistent with precedent? I have no
view on that matter. That would require establishing a conflict-of-laws
hierarchy with respect to state laws and federal judicial decisions (and
perhaps the “general law” on which those decisions are based). My argument establishes
only that the federal Constitution trumps everything else. I have nothing
interesting to say about the hierarchy below that level, involving things like
state laws, general law, international law, and so forth.[27]

But surely it cannot be the case that federal courts (and
other legal actors[28])
must determine the right answers to constitutional questions no matter the cost
in terms of time and money. After all, wouldn’t spending just a bit more time
studying a problem always make it marginally more likely that one would reach
the correct answer, so that it would never be proper to issue a decision
without thinking about it some more? Doesn’t there have to be some kind of
decisionmaking heuristic, or at least a proxy, that decisionmakers can employ
to bring their inquiries to an end?[29]

Yes, there does, but it is not precedent (or any other
consideration that tries to substitute itself for the right answer). The trick
lies in defining what counts as a “right” answer. It turns out that “right” answers
for ivory tower scholars are not necessarily the same things as “right” answers
for real-world decisionmakers, even if all of those persons are employing
essentially the same interpretative methodology. Real-world decisions always
take place in a context in which someone has a burden of proof with respect to the relevant legal question and a standard of proof that he must meet in order
to establish his claim. It is proper for a judge to make a legal decision when
a party has satisfied (or failed to satisfy) the applicable burdens and
standards of proof-and that can happen well before infinity.

The Constitution implicitly allocates burdens of proof,
and it does so in precisely the opposite fashion advocated by Mitchell and, at
least implicitly, by much of modern law. Mitchell argues that federal statutes
come with a presumption of constitutionality while state statutes do not.[30] That may very well be a good description of modern practice, and it may very
well be a good description of the regime that Mitchell derives from the Supremacy
Clause. But as a matter of original meaning, federal statutes come with a
presumption of unconstitutionality,
because the burden of proof initially lies with whoever claims that the federal
government has the enumerated power to enact the statute in question. He who
asserts must prove, and all claims of federal power logically begin with the
assertion that the enumerated powers of the federal government permit the
action in question. The presumption is precisely the opposite with respect to
state laws. As far as the federal Constitution is concerned, state governments
are limited in power only by specific provisions in the Constitution denying
them certain powers; states do not need to trace their actions to affirmative
authorizations in the Constitution. Thus, the burden of proof must lie on
whoever raises a federal constitutional challenge to state authority. If the
answer to a constitutional question seems indeterminate, then the legal ruling
must go against federal power and in favor of state power.[31]

The real question is how much evidence of constitutional
meaning one must adduce in order to meet or overcome the relevant burdens of
proof. The real question, in other words, is what standard of proof claimants must satisfy in order to win
constitutional cases.

I raised this issue in preliminary fashion two decades ago[32] and have said very little about the subject since that time. The reasons for
that long silence have not changed. I have no answer to that question. But it
is the question that one must answer.

I have not even touched on many aspects of Mitchell’s
argument that should attract the attention of scholars in widely varying fields
for years to come. Mitchell has given us all a very rich vein to mine. At the
end of the day, however, precedent is still mostly unconstitutional-for
reasons having little if anything to do with the Supremacy Clause.

         *     Professor of Law and Michaels Faculty
Research Scholar, Boston University School of Law.

              [1].       Jonathan F. Mitchell, Stare Decisis and Constitutional Text,
110 Mich. L. Rev. 1 (2011).

              [2].       As Mitchell points out, defenses
of precedent are almost always instrumentally rather than constitutionally
grounded. The rare exceptions to that rule have tended to focus the discussion
of precedent on deference or history rather than the constitutional text.  See,
e.g., Thomas Healy, Stare Decisis and
the Constitution: Four Questions and Answers, 83 Notre Dame L. Rev. 1173 (2008) (discussing precedent
in terms of deference); Lee J. Strang, An
Originalist Theory of Precedent: Originalism, Nonoriginalist Precedent, and the
Common Good, 36 N.M. L. Rev. 419
(2006) (discussing history).

              [3].       Henceforth, when I use the term
“precedent,” I will use it to refer only to horizontal precedent in federal
constitutional cases.

              [4].       An uncharitable reader might
suspect that the word “ambiguities” is a polite euphemism for “blunders.”

              [5].       See, e.g, Gary Lawson, Mostly
Unconstitutional: The Case Against Precedent Revisited, 5 Ave Maria L. Rev. 1, 6 (2007).

              [6].       Supra note 1, at 6.

              [7].       Id. at 5.

              [8].       Id. at 40.

              [9].       Id. at 24.

            [10].       See Gary Lawson & Guy Seidman, The Jeffersonian Treaty Clause, 2006 U.
Ill. L. Rev. 1, 29-32 (2006).

            [11].       See Gary Lawson, The
Constitutional Case Against Precedent, 17 Harv.
J.L. & Pub. Pol’y 23 (1994).

            [12].       See 5 U.S. (1 Cranch) 137, 180 (1803).

            [13].       Id. at 176.

            [14].       U.S.
Const. Preamble.

            [15].       See Akhil Reed Amar, Of
Sovereignty and Federalism, 96 Yale
L.J. 1425, 1431-32 (1987).

            [16].       So that there is no mistake, I am
not making any kind of normative claim about the moral authority or superiority
of the Constitution over statutes, natural law, judicial decisions, or anything
else. I am simply describing the best account of the Constitution’s legal
relationship to other sources of law within the American political order.

            [17].       See 5 U.S. (1 Cranch) at 176-77.

            [18].       See Michael Stokes
Paulsen et. al., The Constitution of the United States 175-76 (2010).

            [19].       Vasan Kesavan, The Three Tiers of Federal Law, 100 N.W. U. L. Rev. 1479, 1499 n.99
(2006).

            [20].       It is, however, one of the main
lines advanced by Professor Thomas Healy in a characteristically engaging
article. See Healy, supra note 2, at 1184-88. Professor Healy deserves a longer
response than I am providing here, and I might even provide one in the near
future.

            [21].       Mitchell, supra note 1, at 34.

            [22].       Most obviously, to avoid so-called
“double jeopardy” issues, federal courts are required to defer conclusively to
the constitutional views of juries when those views result in acquittals in
criminal cases.  Less obviously, there is
an argument that federal courts are constitutionally obliged to defer
conclusively to the constitutional views of the
parties to litigation when those parties all agree about constitutional
meaning. Suppose that all of the parties to a case agree that the Constitution,
for example, restricts the ability of state governments to regulate abortions,
while the judge is firmly convinced that the Constitution contains no such
restriction. Must the court prefer the Constitution as it really is to the fake
“Constitution” about which the parties have chosen to argue? The question is
actually trickier than it might seem. Article III does not grant federal courts
a freestanding power to interpret the Constitution. It grants them the power to
decide cases in accordance with governing law, which includes as a necessary
incident the power to determine the governing law. But the principal power is
the power to decide cases. What is a case? Is it the operative set of facts
that give rise to the dispute among the parties, or is it the set of
propositions about which the parties are arguing? If it is the latter, and if
the parties agree on propositions about constitutional meaning, then those
propositions are simply not part of the dispute before the court and are
therefore not within the court’s constitutional power to adjudicate-even
if those propositions are objectively false. I have begun a preliminary
exploration of these issues in the pages of this journal. See Gary Lawson, Stipulating
the Law, 109 Mich. L. Rev.
1191 (2011). A full treatment of the application of those issues to Article III
requires a separate article, which I hope to produce in the not-too-distant
future.

            [23].       See Gary Lawson & Christopher D. Moore, The Executive Power of Constitutional Interpretation, 81 Iowa L. Rev. 1267, 1272-79
(1996).

            [24].       As noted earlier, this may not be
true if the parties to the case all agree that the court should rely upon
precedent. See supra note 22,

            [25].       I am not the only person to be
deeply skeptical about much of the political questions doctrine. See, e.g., Martin H. Redish, The Federal Courts in the Political Order
111-36
(1991).

            [26].       Baker v. Carr, 369 U.S. 186, 217
(1962).

            [27].       I am prepared to say that Vasan
Kesavan makes a good case for the priority of federal statutes over federal
treaties, see Kesavan, supra note 19, but further the deponent saith not.

            [28].       Everything that is true of the
interpretative responsibilities of federal courts is also true of the
interpretative responsibilities of the president and Congress. No federal
institution has a monopoly on, or even a preferred status with regard to,
constitutional interpretation. This means that presidents do indeed “violate
the Constitution or their Oath of Office if they choose to enforce and defend
all Acts of Congress-even when they sincerely believe that a statute contravenes
the Constitution.” Mitchell, supra note 1, at 32. That “[t]he power to disregard a federal statute on
constitutional grounds is a[n] . . . implied power” does not mean that it is a “discretionary” power. Id. Far from making the Constitution a
“suicide pact,” id., this dispersion
of interpretative authority is a perfectly sensible device for preserving
liberty-just
as is the dispersion of other governmental powers. See Gary Lawson, Interpretative
Equality As a Structural Imperative (or “Pucker Up and Settle This!”), 20 Const.
Commentary 379 (2003). As for the expectations and demands of federal
courts “that their decisions be enforced and obeyed, no matter how strongly the
political branches disapprove of their constitutional reasoning,” Mitchell, supra note 1, at 29, there is a
presumption of enforceability that accompanies judgments in specific cases. But
that presumption is rebuttable if the president or Congress is firmly convinced
that the courts are wrong; and there is no presumption of
 correctness-or at least no
presumption not grounded in sound epistemological considerations-for
the reasoning accompanying those judgments. See Lawson & Moore, supra note 23, at
1313-29.
If the federal courts have stronger expectations, those expectations have no
constitutional grounding.

            [29].       See Mitchell, supra note
1, at 22.

            [30].       See id. at 57-58.

            [31].       I have laid out the constitutional
and epistemological case for these presumptions in Gary Lawson, Legal Indeterminacy: Its Cause and Cure,
19 Harv. J.L. & Pub. Pol’y
411 (1996).

            [32].       See Gary Lawson, Proving the
Law, 86 Nw. U.L. Rev.
859 (1992).

Introduction

The recently enacted Leahy-Smith America Invents Act (“AIA”) represents the most significant legislative event affecting patent law and practice in more than half a century. In addressing the AIA, scholars and policymakers have focused with an almost laser-like exclusivity on the AIA’s imposition of a first-to-file-or-first-to-publicly-disclose system, which replaces an over 200-year-old first-to-invent tradition. This myopia, we suggest, overlooks a part of the AIA that could hold a substantially greater potential to jeopardize American innovation, job creation, and economic competitiveness: the imposition of a mechanism for supplemental examination.

I. A Patent Amnesty Program

Section 12 of the AIA details a new procedure that allows patent owners to “request supplemental examination of a patent in the [United States Patent and Trademark] Office to consider, reconsider, or correct information believed to be relevant to the patent.”[1] After receiving the request, the patent office (through the Director) must assess whether the information presented in the request “raises a substantial new question of patentability.”[2] If it does not, the Director issues a certificate to that effect. If it does, a reexamination is ordered that proceeds along the same lines as an initial examination.[3]

The effect of either form of resolution of a request for supplemental examination is to effectively eliminate nearly all related claims of inequitable conduct; inequitable conduct being the judicially crafted doctrine that serves the policy purpose of protecting the integrity of the patent system. This is so even when there is no reexamination of the patent. In the words of the AIA: “A patent shall not be held unenforceable on the basis of conduct relating to information that had not been considered, was inadequately considered, or was incorrect in a prior examination of the patent if the information was considered, reconsidered, or corrected during a supplemental examination of the patent.”[4]

New § 257 is thus a patent amnesty program. It encourages patent applicants to use any number of strategies that would never have been countenanced under pre-AIA law to obtain patents, and it offers to cure all but the most extreme through filing a supplemental examination request. For example, potential descriptions of a claimed invention in a prior art printed publication, or possible instances of prior patenting of the claimed invention by another,[5] that are known to a patent applicant, and that might have a high probability of barring a patent or limiting claim scope, may not be disclosed during the initial examination. Similarly, sales and public uses[6] that are known to a patent applicant and that may have a high probability of barring the patentability of a claimed invention may be withheld at least until supplemental examination if the applicant likes (and perhaps longer depending on an applicant’s risk tolerance). Even the use of false data to obtain the patent in the initial examination can be exonerated by filing a supplemental examination request, which by the statutorily required process can be expected to produce a director’s certificate within three months.[7]

The AIA offers two exceptions to this broad patent amnesty program. But the exceptions are largely within the control of the patentee, and thus are not likely to offer an effective counterincentive to the incentives provided by the supplemental examination process. First, the prohibition against finding patents unenforceable when the patentee seeks the shelter of supplemental examination does not apply when the allegation of inequitable conduct is pled with particularity in a civil action, if that pleading occurs before a patentee has filed a supplemental examination request concerning the information that forms the basis of the patent challenger’s allegation.[8] As uncovering most forms of inequitable conduct requires a searching analysis of the candor of the applicant’s behavior during a secret ex parte process, it seems improbable that patent challengers will learn of relevant conduct before discovery. A similar analysis applies to the related exception that arises when the allegation is pled in the context of so-called “paragraph iv” notices, special procedural devices that are relevant to only a small fraction of patents. In the overwhelming number of cases that likely means that patentees are in control and can choose to immunize themselves before a patent challenger ever has an opportunity to learn about the conduct.

A second exception involves actions commenced by the patent holder under § 281 of the Patent Act or actions brought under section 337(a) of the Tariff Act, which prohibits unfair methods of competition and other unfair acts in the importation of goods into the United States. This exception differs from the first exception in that, for the patent holder to immunize its conduct, it needs the director’s certificate and any reexamination ordered therein to be completed before bringing an action.[9] Here, too, because the decision to commence an action ordinarily lies in the hands of the patent holder, the patent holder will usually have control over its exposure to claims that could render its patent unenforceable.

As a catchall for the most extreme cases of misconduct, Congress also added a mechanism to allow for criminal prosecution. Section 257(e) states that if the Director of the patent office becomes aware during the supplemental examination or reexamination “that a material fraud on the Office may have been committed in connection with the patent that is the subject of the supplemental examination . . . the Director shall also refer the matter to the Attorney General for such further action as the Attorney General may deem appropriate.”[10]

While certainly intimidating, this provision is likely to be of no serious consequence, absent a significant policy change by the Director. The Director has long had the power to encourage the prosecution of those who engage in material misconduct,[11] but it is rarely used. There are probably very good reasons why, as the extreme conduct that seems to be contemplated by the provision is likely to be uncommon. In addition, assuming that the main avenue of criminal proceedings would be through 18 U.S.C. § 1001, which establishes liability for false statements in matters involving the government of the United States, probably few who commit material fraud need to worry. The statute of limitations is five years from the false statement, so-barring a creative interpretation of the running of the statutory period-statements made to effect material fraud may simply be too old by the time the patent gets scrutinized (if it ever does) in a supplemental examination or reexamination proceeding.

Under the AIA, therefore, a patent owner may now obtain a patent through the ex parte examination process despite conduct that would be abhorrent under traditional understandings of a patent applicant’s obligation to be equitable in dealing with the public. The owner may then immunize the conduct using supplemental examination should litigation appear on the horizon (or terminally disclaim or covenant not to sue at a time convenient to the patentee). In practical terms, the supplemental examination mechanism thus provides amnesty to issued patents that were obtained inequitably.  It additionally provides amnesty to any other patent that, if it had been examined in view of information relevant to the patentability of the claimed invention reasonably available during the initial examination, might not have issued at all, or if it had issued, might have issued with claims of significantly narrower scope. Moreover, the patent amnesty program is administered using a patent office administrative function-supplemental examination. It is therefore subject to well recognized externalities that cause the patent office to have a more favorable view of patentability than courts, competitors, and the public.[12]

II. What’s Wrong with Patent Amnesty?

In a nutshell, the problem with patent amnesty is that it jeopardizes American innovation, job creation, and economic competitiveness. As this Part explains, it does so by potentially increasing the cost of competition, making research and development more expensive, and making market entry more difficult and risky. At the same time, and somewhat perversely, it creates an environment in which organizing capital around a patent or modestly sized patent portfolio might make less sense than it did before the AIA.

A. Patent Law and Information

It is dogma that the public obtains its optimum benefit from the patent system when the patent law is properly applied. Put slightly differently, the benefits and competitive costs of the patent system are believed to be most efficiently balanced when patents issue for inventions that satisfy the law’s requirements for patenting and when patents do not issue for “inventions” that do not satisfy the requirements. 

Implicit in this dogma is a theoretical purity that is not matched by reality. It is therefore equally dogmatic that the idea of a patent system in which patentability decisions are always correctly made-by either the patent office or by the courts-is a complete and utter fantasy. A primary explanation for this is the cost of information. It would be expensive beyond imagination to operate a patent system that correctly determines the patentability of all claims with which it is presented, and in any event, the benefits of such a patent system would be overwhelmed by the costs of its administration.

Taken together, these dogmas help reveal that an important purpose of patent law is to improve the efficiency of information gathering, recordation, and application-tasks necessary for an accurate assessment of patentability. The patent law seeks to increase efficiency in various ways, one of which is by allocating the cost of providing information. Typically the law seeks to place this cost on the party for whom the relevant information is least expensive. Further, the law requires that the party burdened with the cost provide only such information as it can obtain and disclose at a reasonable cost. Thus, for example, the law requires patent applicants to disclose a specification of their invention that describes the invention in such a way that a person of skill in the art-not any person off the street-is enabled to make and use it. The applicant is also required to include claims defining the exclusive rights sought. The applicant is not, however, required to take on the cost of making the words of the claim “clear and unequivocal;” instead the law requires only that the applicant choose words that are not “insolubly ambiguous.”[13]

Besides the kinds of information described above, the law also demands that patent applicants bear the reasonable costs of providing information that relates to issues of novelty and obviousness. The underlying philosophy is the same: patent applicants are more knowledgeable about their inventions, and how those inventions situate in the body of existing knowledge, than a patent examiner or subsequent reader could ever hope to be. Moreover, there is some information pertinent to the patentability of the claims an applicant seeks that may be uniquely within the control of the patent applicant. The cost of contributing such information to the patent creation process might be very low or even trivial for a patent applicant, but it may in practical terms be infinitely expensive for the patent office to provide during the ex parte process of patent prosecution.

Thus where the cost of having the patent applicant provide information is relatively low, and particularly where the cost to the patent office of providing information is prohibitively high, the law allocates the cost of the information to the party seeking the exclusive rights. Two examples of this can be found in patent office regulations.

In the first example, rule 1.105 authorizes the patent office to request information “reasonably necessary to properly examine or treat the matter [of a pending or abandoned application].”[14] Moreover, under this rule it is a complete reply to the patent office’s request for information for an applicant to state that the information requested is “unknown to or is not readily available to the party or parties from which it was requested.”

The second example is rule 1.56, which allocates a portion of the cost of providing information material to patentability (e.g., prior art patents and printed publications, and information about sales and public uses before the critical date) to the patent applicant. This allocation of cost to patent applicants is mitigated by at least three features of the law. First, the law has attempted to improve the certainty of the application of the statutory bars[15], and has sought predictability in the determination of what is or is not a printed publication.[16] Thus, patent applicants can more cheaply determine what needs to be disclosed. Second, the applicant is relieved of the cost of providing this sort of information if the office has already associated the relevant information with the patent application. Third, the applicant is additionally relieved of the cost of providing this sort of information if the information is unknown to the applicant. Thus, for example, assuming it is unaware of the information, an applicant does not have to take on the cost of providing information about obscure theses in foreign university libraries, or third party sales, or public uses of the invention claimed in a patent application. Indeed, it is another patent law dogma that patent applicants have no duty to spend any resources searching for information material to patentability.[17]

B. A Balancing Act

The prior Section explains that an important purpose of the patent laws is to improve the efficiency of information in the patent system. This Section elaborates on why.

One way of understanding the information functions of the patent laws is to recognize that they balance the cost of administering “correct” ex ante decisions about patentability, against the benefits the public is thought to receive from giving patents and the costs to competition that flow from granting patents. As noted above, patent law seeks to achieve this balance by being savvy about where it gets information. Normally, this means seeking information from the cheapest cost provider, and ordinarily that is the patent applicant. Historically it has also generally meant requiring the patent applicant to contribute information before granting a patent. There is a very important reason for this.

Conventional estimates hold that while perhaps less than 1 percent of all patents are ever litigated, as many as 5 to 29 percent of patents may be licensed. An additional fraction of patents work an economic impact, although they are never litigated or licensed, by deterring market entry and competition.[18] When summed with litigated and licensed patents, this amounts to perhaps half of all issued patents. Accordingly, the overwhelming majority of patents that are monetized, are capable of being monetized, or have a “monetizing” effect (because they deter competition and improve the pricing position of a patentee) are not litigated patents.

The empirical “reality” anticipated by these estimates suggests that the patent office plays a crucial role in ensuring that the balance of the benefits and costs imposed by the patent system tip in the proper direction. This is because the patent office is the agency that determines whether patents should issue and makes this determination by attempting to properly apply the law of patentability. Because the economic impact of most patents will be due to the patent office’s decision to issue the patent, and not a court’s decision to uphold the patent’s claims, how “right enough” the patent office is in its decisionmaking is important.

This observation puts into sharp relief the role that patent laws play in improving the efficiency of information in the patent system. They have been built to impose reasonable costs on patent applicants early in the patent granting process because the legal determination most important to the economic significance of most patents is the one the patent office makes.

C. The Problem of Patent Amnesty

Once we realize that for most patents that will impact the marketplace the only formal legal determination ever made about whether they satisfy the requirements for patentability is made by the patent office, we can begin to appreciate the jeopardy of the AIA’s patent amnesty program.  The risk is that the incentives of the program will reduce the quality of information available to the patent office when it makes its decision to issue a patent. The patent office will be “right enough” marginally less often than before, and more low-quality patents, defined as those that do not meet the requirements for patentability, should be expected to issue.

When securing a patent, applicants have options. A first is to take on the cost of disclosing information relevant to patentability during the initial examination. The marginal consequences of the first option can be expected to include a longer, more costly prosecution and narrower claims allowed. A second option is not to take on the cost of disclosing information relevant to patentability in the initial examination. The marginal consequences of the second option can be expected to include a less expensive, shorter prosecution and broader claims allowed. One of the chief reasons for the difference in consequences between the two options is that applicants who choose the second option shift the cost of information about patentability and patent scope from themselves to higher cost providers like the patent office, courts, and competitors.

The clearest tool of pre-AIA patent law to discourage option two behavior was the inequitable conduct doctrine, which imposed a low probability but high cost sanction on applicants that were caught electing option two. The AIA has largely obviated the influence of inequitable conduct. Specifically, under the AIA, patent applicants may choose not to disclose information relevant to patentability of which they are aware during the initial examination, obtain a patent that perhaps should not have issued, and then, by disclosing the information at a later time if strategy dictates, play a “get out of jail free card” as Representative Waxman put it in his statement to Congress on June 24, 2011. To be sure, there remains the possibility of a criminal sanction, but as we observed above there is reason to be skeptical of the effectiveness of this provision.

The AIA thus reduces the risk in electing option two, and thereby makes this strategy more valuable to the patent applicant. If after monetizing its broader claims for a time using the mechanisms by which most patents are monetized (licensing, deterrence of competition, and vague threats to enforce), the patentee comes upon the competitor who prefers to take the matter to court, the patentee can preemptively invoke supplemental examination. This technique offers a triple benefit. First, it allows a patentee to cleanse a patent applicant‘s conduct undertaken during the initial examination, and in so doing remove a theory for challenging the patent-this step strengthens the patent by improving the probability that it will not be determined unenforceable. Second, it allows a patentee to put more challenging art into the file before litigation and thus benefit from patent office externalities that favor the allowance of claims; and, by getting the art in the file, it allows the patentee to benefit from judicial norms that express a reluctance to invalidate claims based on art that the patent office considered in connection with the patent. Finally, no competitor will know which path a patent applicant chose, so the ability of a competitor to respond strategically is compromised. In addition, if competitors cannot distinguish option one from option two patents, then option one patentees are unlikely to get the benefit of the cost incurred by choosing option one.

It therefore seems to us that the AIA presents a very real risk of increasing the number of low-quality patents. The relationship between low-quality patents and competition are well established, and we see no reason to repeat in depth what is well known. The literature has made clear that low-quality patents can make competition more expensive because competitors may have to pay supramarginal cost prices due to patents that never should have issued. Similarly the literature has made clear that low-quality patents can increase the cost of research and development because future innovators may be forced to pay rents on patents that never should have issued. Finally, the literature is clear that low-quality patents can make market entry more difficult and expensive because new entrants may (1) have to pay rents for patents that never should have issued, or (2) be forced to defend nuisance suits-to the tune of four to five million dollars for middle of the road cases-based on patents that never should have issued.

And while the literature is less clear on this, it seem logical that low-quality patents could reduce capital investment based on a patent or a small number of patents. This is so because in a system with supplemental examination all patents should be perceived as marginally less likely to be successfully enforced-because they are marginally more likely to be perceived as invalid-unless and until they have gone through supplemental examination. Thus, the value of a patent, or a small portfolio, such as a small business or a start-up might own, is worth marginally less in a world of supplemental examination than it is in a world without. Investors should accordingly be willing to pay less for it.

The same is, however, less likely to be true for firms that hold large portfolios of patents. While their portfolios may be marginally less valuable when comprised mostly of patents obtained after supplemental examination goes into effect, as long as the portfolios remain large, there should be an adequate probability of enforcement of relevant patents. Thus, large firms should be able to get cheaper patents and should be able to enforce more of them. The law might thus have the effect of preferring large firms over small businesses and start-ups trying to enter a market.

Conclusion

The purpose of this Essay is to reveal and discuss the AIA’s imposition of a mechanism for supplemental examination. It must be recognized that the analysis provided here relates to the marginal effects of a supplemental examination system. It is not a complete analysis of the benefits and costs of the AIA. Thus, policymakers might conclude that other provisions of the AIA (perhaps, for example, prior user rights) provide benefits that meet or exceed the risk of the costs illuminated in this analysis. Similarly, if they were to consider it, policymakers might be able to conclude that the economic costs implicated by an increase in low-quality patents are outweighed by a decrease in the costs of administering patent examination. Because the innovation risks of the supplemental examination mechanism implicate some very basic patent economics, however, it is somewhat surprising that these concerns have not received more attention from policymakers and patent scholars. We hope that the analysis provided in this Essay can contribute to a more comprehensive analysis of the AIA, which will no doubt be forthcoming as policymakers and scholars begin to better understand its implications.

 Suggested citation: Jason Rantanen and Lee Petherbridge, Commentary, Toward a System of Invention Registration: The Leahy-Smith America Invents Act, 110 Mich. L. Rev. First Impressions 24 (2011), http://www.michiganlawreview.org/assets/fi/110/rantanenpetherbridge.pdf.

Jason Rantanen, Associate Professor, University of Iowa College of Law.

Lee Petherbridge, Professor of Law and Richard A. Vachon, S.J. Fellow, Loyola Law School Los Angeles.

[1]. Leahy-Smith America Invents Act, Pub. L. No. 112-29, 125 Stat. 284, 325 (2011) (to be codified at 35 U.S.C. § 257).

[2]. Id. (to be codified at 35 U.S.C. § 257(a)).

[3]. Id. (to be codified at 35 U.S.C. § 257(b)).

[4]. Id. (to be codified at 35 U.S.C. § 257(c)(1)).

[5]. See 35 U.S.C. § 102(a) (2006).

[6]. See id.§ 102(b).

[7].  AIA § 12 (to be codified at 35 U.S.C. § 257(a)).

[8]. Id. (to be codified at 35 U.S.C. § 257(c)(2)(A)).

[9]. Id. (to be codified at 35 U.S.C. § 257(c)(2)(B)).

[10]. Id. (to be codified at 35 U.S.C. § 257(e)).

[11]. See United States v. Markham, 537 F.2d 187 (5th Cir. 1976) (affirming a conviction under 18 U.S.C. § 1001 based on the act of attempting to conceal from the patent office the true inventor of the process for which a patent was sought).

[12]. R. Polk Wagner, Understanding Patent-Quality Mechanisms, 157 U. Pa. L. Rev. 2135, 2153 (2009).

[13]. Exxon Research & Eng’g Co. v. United States, 265 F.3d 1371, 1375 (Fed. Cir. 2001).

[14]. 37 C.F.R. § 1.105 (2011) (emphasis added).

[15]. Pfaff v. Wells, 525 U.S 55, 66 (1998).

[16]. Accord In Re Klopfenstein, 380 F.3d 1345, 1349 (Fed. Cir. 2004).

[17]. See Am. Hoist & Derrick Co. v. Sowa & Sons, Inc., 725 F.2d 1350, 1362 (Fed. Cir. 1984).

[18]. See Ted Sichelman, Commercializing Patents, 62 Stan L. Rev. 341, 362-63 & n.121 (2010).

The so-called free-rider problem arises when a person who
is not insured receives free medical treatment. Under the prior regime, the
uninsured themselves paid for more than one-third of the medical costs they
incurred,[1] and less than one-third of those costs were obtained by charging higher prices
to those who paid for their care.[2] In our prior article, we posited that many of the uninsured who did not pay for
their medical care were persons who could not afford insurance.[3] We contended that, in the public debate, the term “free rider” should not be
used to describe such persons because the lay public’s understanding of that
term would make its use misleading and prejudicial.[4] The professors countered by adopting the definition of a free rider that is
employed by economists: “A free rider is a person who receives the benefit of a
good but avoids paying for it.”[5]

The public’s understanding of a term that has a special
meaning within a profession may be quite different from the understanding of
the profession. For example, a lawyer knows that a homicide committed in the
“heat of passion” is not first degree murder; but the lay person’s
understanding of the crime constituting “heat of passion” homicide likely will
be very different from a lawyer’s. Another example is the word “gift,” which
not only has an artistic meaning to a tax lawyer but also has a different
meaning for purposes of the income, estate, and gift taxes.

While an economist might include persons who cannot afford
medical care or insurance in the term free rider, he would understand that they
occupy a very different position from other free riders. He would not be misled
by the use of the term. That is not true for members of the lay public. Most of
them will have a different and pejorative understanding of that term. They
likely will view “free riders” as parasites who could have afforded to purchase
medical insurance but chose instead to pass their medical costs to the rest of
society when they received free medical care.[6] It seems to us that the term was deliberately adopted to mislead the public and
to slant the debate in favor of the adoption of the Act.

A person who could not afford insurance did not
voluntarily shift his medical expenses to anyone else. Since society decrees
that such persons receive medical care when needed, there will necessarily be a
shifting of cost; but the uninsured’s illness, rather than his action,
initiated that shift. The image created in the mind of the lay public is that
the Act was needed to end a widespread, parasitic practice of taking advantage
of the public’s benevolence. Those who cannot afford insurance simply do not
belong in that category. Indeed, there likely are relatively few persons who
fit that category.

The professors state that regardless of whether we call it
a “free-rider” problem, the “cost shifting [that occurs] is still a problem –
and a massive one at that.”[7] We pointed out in our piece that the Act does not prevent cost shifting,
although it does change the identity of those who bear that cost. By raising
the free-rider problem as a justification for the Act, an erroneous inference
was implanted that cost shifting would be eliminated by the Act. While
acknowledging that the Act requires cost shifting, the professors contend that
the method of shifting employed by the Act is more desirable than the method
employed under the prior system. We discuss that issue in Part IV.

The professors decry that so much attention has been
focused on the so-called free-rider problem when they consider so many other
matters to be of greater importance.[8] We agree. Indeed, that point was a significant part of our article. Proponents
of the Act are the root cause; they advanced the free-rider problem as a major
justification for the Act. Their assertion of the free-rider problem and
exaggeration of its significance have diverted attention from the actual goals
of the Act and minimized the public debate regarding more meaningful questions.
The proponents’ use of the free-rider issue is akin to a magician’s use of
misdirection: he focuses the audience’s attention on a meaningless act so that
they do not notice what is actually taking place.

II. The Act’s Departure From an Insurance Program

While the Act contains an insurance feature, a significant
part of the Act is a social welfare program that is implemented through
insurance.

A. The Purpose of Health Insurance

The function of any insurance program is to spread risks
among a larger pool of persons so that no single person bears the full brunt of
the cost of the insured event.[9] Consider life insurance, for example.

One thousand people of age X each have a $10,000 obligation to pay at the end of a year. Each
member of the group who is alive at the end of that year will have earned
enough to pay his $10,000 debt. But anyone in the group who should die before
the year is over will not have had time to earn the $10,000 needed to pay his
debt. Thus, all 1,000 persons want to purchase life insurance that will pay
$10,000 to their estate if they should die within the year. The actuarial
figures show that 1 percent of the people of age X will die within the next year. Consequently, it is
likely that 10 of the 1,000 people will die during the year, and the aggregate
amount paid to those decedent’s estates will be $100,000 if everyone purchases
$10,000 of insurance. To have sufficient funds to pay $100,000 to the estates
of the ten decedents, each of the 1,000 persons who purchases insurance will be
required to pay a premium of $100.[10]

In effect, by accepting a set amount of cost ($100), each
member of the pool has shifted the risk of not being able to earn the
additional $9,900 to others in the pool.

Insurance operates by charging a premium that relates to
the dollar amount at risk and the likelihood that the event that is the subject
of the insurance will occur. While the program adopted by the Act is partly an
insurance program, the part that redistributes wealth for social welfare purposes
is not insurance.

Insurers set the premiums for an age group by taking into
account the health of those who comprise that group. They determine the medical
expenses incurred by members of the same age group, including those with poor
health. The actuarially determined cost for an age group with more unhealthy
individuals will therefore be much higher.

Older individuals have larger medical expenses than young
persons and have a higher incidence of illness. Accordingly, the premiums for
older persons would be much greater if their age group were charged its
actuarial cost, especially since the group will include unhealthy individuals.
The Act, however, prohibits an insurer from charging anyone a premium that is
greater than three times the lowest premium charged any adult; and so an
elderly person’s premium will be substantially less than the actuarial cost of
his or her coverage. The insurers will make up that shortfall by charging the
young a significantly larger premium than the actuarial cost of their coverage.
The young will thus subsidize the coverage of their elders.

The professors note that once an individual reaches
sixty-five, he is covered by Medicare, and so they conclude that he will no
longer be subsidized.[11] Even if that were so, it would not eliminate the subsidy; it would merely limit
it to those under the age of sixty-five. However, many individuals who are
covered by Medicare purchase supplementary medical insurance and thereby will
benefit from the subsidy since their premiums will be less than their actuarial
cost.

The professors contend that we have overstated the
subsidization of the elderly and the unhealthy. They point out that the program
does permit a limited amount of variance in premiums because of age.[12] But as noted above, in light of the ceiling imposed on the amount of variance,
the Act does not even come close to preventing a massive subsidy of the
elderly.

The professors also note that the Act expands Medicaid and
provides governmental subsidies for persons with lower incomes to help them purchase
insurance. The professors claim that those provisions will channel tax dollars
from the elderly to the young and will effectively offset the subsidy from the
young to the elderly. But to what extent is that so? Income taxes are not
collected exclusively from the elderly. Medicaid coverage is determined by
income levels rather than by age. Moreover, Medicaid covers a relatively small
percentage of the population, and many states have recently cut Medicaid
payments.[13] Government
subsidies for insurance premiums are given to persons with incomes that do not
exceed four times the poverty level regardless of their age.

The professors contend that the Act cuts Medicare to
finance subsidies to lower income individuals and that these subsidies will
constitute a transfer of wealth from the elderly to the young. This claim is
tainted by the widely held skepticism that those cuts will ever take place as
well as by the question of whether the recipients of that largesse will
predominantly be young.

While conceding that the Act will require the young to
subsidize the elderly, the professors respond that this is only a temporary
circumstance.[14] In
time, the young will age and then be subsidized by the youth of the next era.
Perhaps this argument will convince some youths: they should be pleased to
subsidize the elderly because some years in the future they might be subsidized.
But there are counterconsiderations. A youth may not live to become eligible
for a subsidy or may not become seriously ill before attaining age sixty-five
and becoming eligible for Medicare. There is a risk that the program will be
discontinued or altered before the youth becomes eligible. The public
opposition to the program and its potential burden on the economy raise the
risk that it either will not survive or will be significantly modified.
Moreover, there is the matter of time value of money. Even if a person later
receives an equal amount of subsidy to what he paid, the current value of
future dollars must be discounted. Also, a person’s economic status affects how
he values his dollars. The dollars that a youth pays may be more precious to
him than dollars he might receive when
he is older and possibly more prosperous. But all those considerations go to
the question of whether the public will buy into the program; they do not alter
the fact that the program rests on a subsidization of the elderly. If the facts
are clearly divulged, the young can decide whether they think the Act is a good
bargain.

The professors’ suggestion that the young’s subsidy of the
old is mitigated by the likelihood that the medicines that the young will
receive in their golden years will be better than today’s[15] is perplexing. The quality of medicine that will be available will be the
same regardless of whether the Act’s program is in effect.

B. Variance Limitation

The professors describe the provisions prohibiting the
taking of an individual’s health into account as “community rating” as
contrasted with “individual risk rating.”[16] In that regard, the system superficially appears similar to group medical
insurance programs—that is, the rating is based on the treatment of the entire
community (separated only by age) rather than on the treatment of individual
applicants. But that is not all that occurs under the Act. The insurer is not
permitted to use accurate actuarial figures for the medical expenses of elderly
groups because of the variance limitation.

The variance limitation and resulting wealth
redistribution are not elements of an insurance program. They represent a
social welfare program to secure proper medical care for everyone. The
additional cost borne by the young is a kind of tax that the government has
imposed to provide universal access to health care. Much of the professors’
reply makes a case for the need for such a social welfare program. Like any
social welfare program, it should have to pass a cost-benefit analysis. The
professors spell out the benefits of the program, but give little attention to
its costs.

III. Disclosure of Redistribution

The professors reject our complaint that the
redistributive aspect of the Act has received too little publicity. They
believe that it has been discussed at length in Congress and in the public
domain. We do not claim that the redistributive purposes of the Act were
ignored entirely or were hidden. We do say that the free-rider issue has
dominated the public discussion of the Act and has distracted attention form
the real issues. To their credit, the professors have fleshed out many of the
real issues and have made their case for them.

IV. Surreptitious Cost Shifting and Progressivity

The professors criticize the hidden aspect of the prior
system’s shifting of the cost of unpaid medical services to those who paid for
their own care. Much of the payment for medical care is made by insurance
provided by employers. Most employees do not realize that they bear the burden
of paying for that insurance through lower wages.

The professors claim that the Act’s shifting of the burden
of some of the medical costs to the government (through the subsidization of
premiums for low-income individuals) will make it more transparent because
taxpayers will understand that the funds come from tax collections.[17] There is reason to doubt that taxpayers take notice of the extent to which
their tax dollars participate in specific governmental expenditures, but even
apart from that question, the Act’s cost shifting is just as surreptitious.
Much of the Act’s redistribution is to shift the elderly’s cost to the young.
Many of the young are employed, and their medical insurance is provided by
their employers. Consequently, the cost shifted to the young will be paid by
the employers, who will pass it on to employees in the same surreptitious
manner that occurred under the prior regime.

The professors note that many who paid for their medical
care under the current system were unaware that they were bearing the cost of
those who did not pay. Under the Act’s program, many of the young will be
unaware that they are subsidizing the elderly, and so the Act does nothing to
cure that problem.

The professors contend that the prior system’s shifting of
costs to paying patients was regressive because the amounts charged were not
dependent on the patients’ income levels. They claim that shifting costs to the
government will be progressive because of the graduated income tax rates.[18] Much of the Act’s redistribution is to shift costs from the elderly to the
young, and there is no progressivity in that significant part of the Act. As to
the prior regime, it is plausible that paying patients with higher incomes
would choose more expensive care and would thereby incur a higher percentage of
the indigents’ costs. It is doubtful that the Act does much to improve
progressivity; but even if it does, that likely played no part in the
motivation for adopting the program.

V. Reduction of Health Costs

The most disappointing feature of the Act is that it does
so little to reduce the costs of health care.[19] Costs are skyrocketing, and that makes health care unaffordable to many.
Moreover, it is strangling the economy.[20] Increasing the number of persons insured is likely to cause an increase
in the demand for medical services, which will cause an increase in the cost of
those services. Not only does the Act fail to deal with rising costs, it compounds
the problem. There is reason to fear that the health care system in this
country is in crisis; but the Act does not adequately address the core
problems. Rather, it deals with only one aspect (albeit an important aspect) of
the problem and, in doing so, exacerbates the national deficit problem that
looms so ominously at this time.

Conclusion

The professors have described the meritorious benefits of
the Act. There also are negative considerations, and we lack the space to
discuss some of those. The question of the retention of the program rests
heavily on a cost-benefit analysis. In that regard, there are three important
questions: whether the economy can bear the cost; whether the benefits are
worth that cost; and whether the cost will be borne by appropriate persons.
Time will tell how those questions are answered.

Introduction

This Term, the Supreme Court was presented with a prime
opportunity to provide some much-needed clarification on a “backdrop” issue of
law-one of many topics that arises in a variety of legal contexts, but is
rarely analyzed on its own terms. In J.D.B.
v. North Carolina,[1] the Court considered whether age was a relevant factor in determining if a
suspect is “in custody” for Miranda purposes, and thus must have her rights read to her before being questioned by
the police. Miranda, like dozens of
other areas of law, employs a reasonable person test on the custodial question:
it asks whether a reasonable person would, given the circumstances, believe
that she is free to leave.[2] The issue posed by J.D.B., then, was
whether age counts as part of a suspect’s “circumstances” for Miranda purposes. Unfortunately, the
Court’s June opinion managed only to compound the confusion and, in an ironic
twist, did so while extolling the virtue of providing “clear guidance to the
police.”[3] This Essay critically examines the J.D.B. opinion, using it as a lens to both critique the traditional
objective/subjective distinction and articulate a more honest interpretation of
the reasonable person test-one based on the uncomfortable truth that the test
is, at its core, arbitrary.

I. The Case

The facts in the case are straightforward. J.D.B. was a
thirteen-year-old special education student whom the police suspected of
breaking into a neighbor’s home and stealing several items, including a digital
camera. While in school, J.D.B. was removed from his social studies class by a
uniformed police officer, told the police wanted to talk to him, and escorted
into a conference room with a police officer, the school’s assistant principal,
and the assistant principal’s intern. The police officer began questioning the
suspect about the burglary;

before the officer read him his Miranda rights, he confessed. Two
juvenile petitions were filed, and J.D.B. was eventually found delinquent.

In Miranda v.
Arizona, the Supreme Court held that if a suspect is in custody, she must
be informed of her Fifth Amendment rights before being interrogated.[4] “In custody” covers more than an arrest: it includes any “restraint on freedom
of movement of the degree associated with a formal arrest.”[5] In determining whether this standard is satisfied, the police must apply an
objective test and ask whether a reasonable person in the suspect’s situation
would “have felt he or she was not at liberty to terminate the interrogation
and leave.”[6] In J.D.B.,
the issue was whether age is a relevant circumstance to that question. The
Court answered in the affirmative, holding in a 5-4 decision by Justice
Sotomayor that “[s]o long as the child’s age was known to the officer at the
time of police questioning, or would have been objectively apparent to a
reasonable officer, its inclusion in the custody analysis is consistent with
the objective nature of that test.”[7]

II. Relevant Circumstances

The reasonable person test comes up in dozens of different
areas of law, from Miranda‘s
in-custody analysis to negligence suits to criminal law self-defense claims.
And whenever this test is applied, the courts must determine which factors are
relevant-that is, which facts about the situation they should include in the
reasonable person inquiry. Factors like the physical location of the incident are
intuitively relevant; the individual’s particular beliefs or desires, on the
other hand, are not. And other considerations-like a person’s age-occupy a gray
area, not falling easily into either camp. Unfortunately, there is no
principled way to deal with these middle-of-the-road factors.

In my attempt to try to prove a negative, let’s start by
considering the way the Court and most commentators have tried to solve the
problem: by appealing to the distinction between “objective” and “subjective”
factors. In J.D.B., the Justices wrote,
“As we have repeatedly emphasized, whether a suspect is ‘in custody’ is an
objective inquiry.”[8] The benefit
of employing this objective test, they argue, is that “limiting analysis to the
objective circumstances of the interrogation . . . avoids burdening
the police.” with cumbersome rules that are difficult to apply.[9]

There are several reasons why
this distinction will not work. To begin with, the kinds of factors that we
might want to label subjective, and thus irrelevant to the reasonable person
inquiry, are actually objective, in the sense that there’s a fact of the matter
about them. There is, for example, a matter of fact about what kinds of
experiences a person had in the past and what effect they have on her
reasoning; we could incorporate these facts into an objective test by asking
what a reasonable person with those
particular experiences would do. But including all of the objective facts
about a person (her age, past experiences, psychological makeup, mental states,
physical characteristics, reactive attitudes, etc.) would collapse the test
into an investigation of what that particular person in that particular case
would do-precisely the outcome we want to avoid. And so, consistent with this
reasoning, the Court has rejected a number of objective factors in applying the
reasonable person test, including, in Alvarado, mental states and past
interrogation history (though it incorrectly refused to call them objective
factors). The word “subjective” is similarly unavailing. We might first think that
“subjective” means something like “the person’s beliefs.” But that definition is
underinclusive: there are a host of characteristics besides a person’s beliefs
that we want to screen out of the reasonable person test, including her past
experiences, desires, behavioral dispositions, and reactive attitudes.

Perhaps the objective/subjective
distinction is meant instead to track something like physical facts vs.
psychological facts. “Psychological facts” seems to work better than the term
“beliefs” because it can capture those irrelevant characteristics I just
mentioned (past experiences, desires, etc.). But this alternative doesn’t do
any better in the long run. First, on a wider view, the distinction between
physical and psychological collapses in on itself: the reason why a person has
a particular mental state is just because of certain physical facts that
pertain-in particular, physical facts about that person’s brain. But
it’s a fair point that as a matter of folk psychology, at least, we’re
intuitively able to draw this distinction in a way that looks nonarbitrary, and
this may provide us with guidance in distinguishing relevant factors from
irrelevant ones under Miranda. Unfortunately,
there are a number of factors we would readily categorize as psychological-and
thus supposedly irrelevant to Miranda-that
the Court would be compelled to include in the reasonable person test. Take
language. To the extent a person’s language skills have to be classified as
either physical or psychological, it seems clear they would fit into the
latter: they have to do with the mental states that flow from a person’s
hearing certain sounds, and they don’t keep good company with physical descriptors
like height, weight, and eye color. But the Court would find it impossible to
exclude facts about the language a suspect speaks in determining whether she is
in custody. Consider a case where the police say, in Italian, “We are the
police. We have placed you under arrest, and we are backed by the power of the
State. If you try to leave, we will shoot you with our guns.” If the suspect
speaks Italian, the Court couldn’t seriously argue that he wasn’t in custody
because a reasonable, English-speaking person wouldn’t understand the threat.
And the reverse is true as well: a suspect who doesn’t understand Italian
couldn’t claim his Miranda rights
were violated because a reasonable Italian-speaking person would believe he was
in custody. The language abilities of the particular suspect must be taken into
account, and as a result, the objective/subjective distinction relied on by the
J.D.B. majority must be rejected.

The dissenting Justices in J.D.B. are well aware of these problems,
but do not offer a compelling alternative. Justice Alito’s dissent has it right
when he argues that the majority has backed itself into a corner: it must limit
its decision by “arbitrarily distinguishing a suspect’s age from other personal
characteristics . . . that may also correlate with susceptibility to
coercive pressures,” or else turn Miranda into a “highly fact-intensive standard” that considers every personal trait of
each defendant.[10] Alito would instead have deemed relevant only the
“external” circumstances of the interrogation, by which he means to exclude any
fact about the suspect that we might think of as internal to her. He relies on
the Court’s 2004 decision in Alvarado,
which said, “Once the scene is set and the players’ lines and actions are
reconstructed, the court must apply an objective test and resolve the ultimate
inquiry . . . .”[11] Alito’s argument is deceptively persuasive: it
neatly avoids tough line-drawing questions by screening out all of the suspect’s
individual characteristics and considering only “where
the questioning occurred, how long it lasted, what was said, any physical restraints  . . . and whether the suspect
was allowed to leave when the questioning was through.”[12] But adopting such a cramped view of Miranda would force the lower courts to
ignore essential background facts. Take the suspect’s language ability, as I
discussed above. That the defendant speaks Italian certainly isn’t a fact about
the physical setting of the interrogation; it’s a fact internal to her and thus
off the table under the dissent’s view. Or consider blindness, another specific
(and thus internal) characteristic of the suspect that even the dissent admits is
relevant to Miranda. Justice Alito,
calling such a case a “far-fetched hypothetical,” writes that it “presumably”
would only arise where the police give a blind person “a typed document
advising him he [is] free to leave.”[13]According
to Alito, “[F]urnishing this advice in a form calculated to be unintelligible
to the suspect would be tantamount to failing to provide the advice at all.” This
is an accurate statement, but it is accurate precisely because blindness constitutes part of the reasonable
person’s circumstances-the tension between the footnote and the dissent’s
larger position is palpable. Alito goes on to claim that “advice by the police
that a suspect is or is not free to leave at will has always been regarded as a
circumstance” that must be taken into account. But
that isn’t right. A statement by the police that a suspect is free to go
wouldn’t be relevant if the statement were given on the other side of a
soundproof wall. The existence of the soundproof wall-a relevant
circumstance-compels this conclusion. And it is only by assuming that blindness
is also a relevant circumstance that we may draw a similar inference.

III. Where We Go from Here

If there is no principled way to determine which
circumstances are relevant under Miranda‘s
reasonable person test, it is worth asking what the Court should base its
decisions on. My aim is to sketch a few possibilities in the hope of generating
further discussion.

I start with four suggestions alluded to by the Court. I
want to begin by noting a significant tension in the opinion: if J.D.B. is meant to track the
objective/subjection distinction, it isn’t clear why the Court quickly ran
through a few policy arguments. And if these arguments are meant to be the real
justification for the holding, the Court throws them in much too cavalierly. In
any case, the majority begins by noting that “in some
circumstances, a child’s age would have affected how a reasonable person in the
suspect’s position would perceive his or her freedom to leave.”[14] While accurate, this reasoning applies equally well to
other factors the Court has ruled are irrelevant: it would be just as correct
to say, for example, that the suspect’s past interrogation history will affect
how a reasonable person would perceive the situation.[15]

The majority is also worried about
administrability concerns, emphasizing the importance of “provid[ing]
clear guidance to the police” about whom to Mirandize.[16] There are two reasons why administrability gets much more airtime in the
Court’s opinions than it should. First, ease of application isn’t exactly the
driving force in the Court’s Miranda jurisprudence. After all, we could make the test easy to apply by saying the
police must always inform the suspect of her rights. Second, it’s a very rare
case where ease of application will make a practical difference. We would have
to face a situation where the outcome of the case did in fact turn on the
officer making the “correct” decision about whether to give a Miranda warning. This could only occur
in a case where a police officer gave a Miranda warning when he wasn’t obligated to do so; the officer would have chosen not to give the warnings if the
interrogation test were easier to apply; and the fact that he did give the
warning when he wasn’t obligated to do so actually affected the outcome of the
case. That’s a lot of assumptions, and my hunch is that such a case is quite
rare.

The Court also observes that “the
law has historically reflected the . . . assumption that children
characteristically lack the capacity to exercise mature judgment and possess
only an incomplete ability to understand the world around them,”[17] and gives several examples. This line of argument has
promise, but much more needs to be said. As it stands, the Court’s analysis
doesn’t go very far in explaining why age is a relevant circumstance in the Miranda context in particular: the law
has traditionally treated insane people differently in any number of ways, but
the Court has already decided that “the frailties and idiosyncrasies” of
a suspect aren’t relevant.

Finally, Sotomayor makes the curious
claim that “the custody analysis would be nonsensical absent some consideration
of the suspect’s age.”[18] How, the Court asks, could a court evaluate how a
reasonable person would react to “objective circumstances that, by their very
nature, are specific to children[,] without accounting for the age of the child
subjected to those circumstances”?[19] But it is perfectly sensible to make this evaluation: a
court would simply ask what an adult would think if she were sitting in a
seventh-grade class, told to go to the principal’s office, and then questioned.
And if the Court is suggesting (as I think it is) that the inquiry is
nonsensical because an adult can’t make sense of what it’s like for a child to
be pulled from his seventh-grade class and questioned without referencing age,
then it is assuming the conclusion it set out to prove: by asking what a child would think in that
situation, the Court has already incorporated age into the test. A similar
argument could be made about a person who is interrogated by the police in a
mental hospital while she is suffering from a severe psychosis: how, I could
ask, can a court evaluate how a reasonable person would react to objective
circumstances that are, by their very nature, specific to psychotics?

Apart from what we can squeeze out of the J.D.B. opinion itself, there are other
ways we might distinguish relevant from irrelevant circumstances. First, the
Court could base its decisions on a concern about coerced confessions.  This is, after all, the primary focus
of Miranda, rooted as it is in the
Fifth Amendment right against self-incrimination. But as the J.D.B. dissent pointed out, even if the
police were not obligated to give Miranda warnings in a particular case, the defendant could always argue that his
confession was involuntary. Miranda warnings, the J.D.B. court
reiterated, are a prophylactic measure. Miranda,
then, could only make a practical difference in two ways: First, we would have
to have a case where a confession was given; the confession was coerced; the trial
court incorrectly found the confession was not coerced; the police weren’t
obligated to give Miranda warnings;
and if the police had given Miranda warnings, the suspect would not have confessed. Second, it would make a
difference if the constitutional requirement that police give Miranda warnings in certain situations
somehow reduces, ex ante, the number of confessions police coerce and then use
against the suspect. Again, I would think such situations are rather rare. There
may be arguments to the contrary-advocates may be able to create and analyze
data that show Miranda makes a
significant practical difference-but now the debate has shifted firmly into
empirical territory, and the issue should be discussed on those terms, rather
than having the Supreme Court declare by fiat that Miranda has a particular effect.

A few other suggestions-ones I only point out for further
thought-include ensuring consistent application of Fifth Amendment
jurisprudence by different courts; protecting against the violation of human
dignity that occurs when state actors interrogate innocent suspects; and
putting a greater emphasis on either positive or negative freedom (and with
that, a concomitant focus on psychological or physical coercion). Miranda scholars have opinions about the
purposes of that famous decision, and those opinions can inform the way we
distinguish relevant from irrelevant circumstances. Or, we might decide that
application of the reasonable person test shouldn’t vary depending on the area
of law, and base our decisions on issues not specific to the Fifth Amendment. My
only point here is that the answers to these issues are not obvious: the Court
and academic commentators should tackle them head-on, rather than dressing up
poorly constructed distinctions like the supposed differences between objective
v. subjective or external v. internal facts.

Conclusion

The reasonable person test shows up again and again in
dozens of areas of law, and yet the Supreme Court’s most recent decision on the
subject only further obfuscated its use and application, making an arbitrary
distinction about which circumstances are relevant to the inquiry. The Court
should instead defend these distinctions on alternative grounds-grounds that
are articulated and defended on their own terms.

Christopher Jackson is a Law Clerk to The
Honorable Roger L. Gregory, U.S. Court of Appeals for the Fourth Circuit.

Suggested
citation: Christopher
Jackson, Commentary, J.D.B.
v. North Carolina and the Reasonable
Person, 110 Mich. L. Rev. First
Impressions 9 (2011),
http://www.
michiganlawreview.org/assets/fi/110/jackson.pdf.

[1]. No. 09-11121, slip op. (U.S. June
16, 2011).

[2]. See Thompson v. Keohane, 516 U.S. 99, 112 (1995).

[3]. J.D.B., 09-11121, slip op. at 8 (quoting Yarborough v. Alvarado,
541 U.S. 652, 668 (2004)).

[4]. Miranda v. Arizona, 483 U.S. 436, 478-79 (1966).

[5]. Alvarado, 541 U.S. at 667.

[6]. Id.; see also Thompson, 516 U.S. at 112.

[7]. J.D.B., slip op. at 14.

[8]. Id. at 7.

[9]. Id. at 8.

[10]. Id. at 3 (Alito, J., dissenting).

[11]. Alvarado, 541 U.S. at 662-63 (citation omitted).

[12]. J.D.B., slip op. at 6 (Alito, J., dissenting).

[13]. Id. at 16 n.16. I can think of a number of other situations where
blindness would be relevant: where the police point a gun at the suspect; where
the police quietly lock the door in front of the suspect; where the police show
photos of a crime scene during the interrogation; and so on.

[14]. Id. at 8 (majority opinion) (citations omitted).

[15]. See Alvarado, 541 U.S. at
668-69 (rejecting past interrogation
history as a relevant circumstance).

[16]. J.D.B., slip op. at 8 (citing Alvarado, 541 U.S. at 668).

[17]. Id. at 10.

[18]. Id. at 12.

[19]. Id. at 13.

Introduction

This Term, the Supreme Court was presented with a prime
opportunity to provide some much-needed clarification on a “backdrop” issue of
law-one of many topics that arises in a variety of legal contexts, but is
rarely analyzed on its own terms. In J.D.B.
v. North Carolina,[1] the Court considered whether age was a relevant factor in determining if a
suspect is “in custody” for Miranda purposes, and thus must have her rights read to her before being questioned by
the police. Miranda, like dozens of
other areas of law, employs a reasonable person test on the custodial question:
it asks whether a reasonable person would, given the circumstances, believe
that she is free to leave.[2] The issue posed by J.D.B., then, was
whether age counts as part of a suspect’s “circumstances” for Miranda purposes. Unfortunately, the
Court’s June opinion managed only to compound the confusion and, in an ironic
twist, did so while extolling the virtue of providing “clear guidance to the
police.”[3] This Essay critically examines the J.D.B. opinion, using it as a lens to both critique the traditional
objective/subjective distinction and articulate a more honest interpretation of
the reasonable person test-one based on the uncomfortable truth that the test
is, at its core, arbitrary.

I. The Case

The facts in the case are straightforward. J.D.B. was a
thirteen-year-old special education student whom the police suspected of
breaking into a neighbor’s home and stealing several items, including a digital
camera. While in school, J.D.B. was removed from his social studies class by a
uniformed police officer, told the police wanted to talk to him, and escorted
into a conference room with a police officer, the school’s assistant principal,
and the assistant principal’s intern. The police officer began questioning the
suspect about the burglary; before the officer read him his Miranda rights, he confessed. Two
juvenile petitions were filed, and J.D.B. was eventually found delinquent.

In Miranda v.
Arizona, the Supreme Court held that if a suspect is in custody, she must
be informed of her Fifth Amendment rights before being interrogated.[4] “In custody” covers more than an arrest: it includes any “restraint on freedom
of movement of the degree associated with a formal arrest.”[5] In determining whether this standard is satisfied, the police must apply an
objective test and ask whether a reasonable person in the suspect’s situation
would “have felt he or she was not at liberty to terminate the interrogation
and leave.”[6] In J.D.B.,
the issue was whether age is a relevant circumstance to that question. The
Court answered in the affirmative, holding in a 5-4 decision by Justice
Sotomayor that “[s]o long as the child’s age was known to the officer at the
time of police questioning, or would have been objectively apparent to a
reasonable officer, its inclusion in the custody analysis is consistent with
the objective nature of that test.”[7]

II. Relevant Circumstances

The reasonable person test comes up in dozens of different
areas of law, from Miranda‘s
in-custody analysis to negligence suits to criminal law self-defense claims.
And whenever this test is applied, the courts must determine which factors are
relevant-that is, which facts about the situation they should include in the
reasonable person inquiry. Factors like the physical location of the incident are
intuitively relevant; the individual’s particular beliefs or desires, on the
other hand, are not. And other considerations-like a person’s age-occupy a gray
area, not falling easily into either camp. Unfortunately, there is no
principled way to deal with these middle-of-the-road factors.

In my attempt to try to prove a negative, let’s start by
considering the way the Court and most commentators have tried to solve the
problem: by appealing to the distinction between “objective” and “subjective”
factors. In J.D.B., the Justices wrote,
“As we have repeatedly emphasized, whether a suspect is ‘in custody’ is an
objective inquiry.”[8] The benefit
of employing this objective test, they argue, is that “limiting analysis to the
objective circumstances of the interrogation . . . avoids burdening
the police.” with cumbersome rules that are difficult to apply.[9]

There are several reasons why
this distinction will not work. To begin with, the kinds of factors that we
might want to label subjective, and thus irrelevant to the reasonable person
inquiry, are actually objective, in the sense that there’s a fact of the matter
about them. There is, for example, a matter of fact about what kinds of
experiences a person had in the past and what effect they have on her
reasoning; we could incorporate these facts into an objective test by asking
what a reasonable person with those
particular experiences would do. But including all of the objective facts
about a person (her age, past experiences, psychological makeup, mental states,
physical characteristics, reactive attitudes, etc.) would collapse the test
into an investigation of what that particular person in that particular case
would do-precisely the outcome we want to avoid. And so, consistent with this
reasoning, the Court has rejected a number of objective factors in applying the
reasonable person test, including, in Alvarado, mental states and past
interrogation history (though it incorrectly refused to call them objective
factors). The word “subjective” is similarly unavailing. We might first think that
“subjective” means something like “the person’s beliefs.” But that definition is
underinclusive: there are a host of characteristics besides a person’s beliefs
that we want to screen out of the reasonable person test, including her past
experiences, desires, behavioral dispositions, and reactive attitudes.

Perhaps the objective/subjective
distinction is meant instead to track something like physical facts vs.
psychological facts. “Psychological facts” seems to work better than the term
“beliefs” because it can capture those irrelevant characteristics I just
mentioned (past experiences, desires, etc.). But this alternative doesn’t do
any better in the long run. First, on a wider view, the distinction between
physical and psychological collapses in on itself: the reason why a person has
a particular mental state is just because of certain physical facts that
pertain-in particular, physical facts about that person’s brain. But
it’s a fair point that as a matter of folk psychology, at least, we’re
intuitively able to draw this distinction in a way that looks nonarbitrary, and
this may provide us with guidance in distinguishing relevant factors from
irrelevant ones under Miranda. Unfortunately,
there are a number of factors we would readily categorize as psychological-and
thus supposedly irrelevant to Miranda-that
the Court would be compelled to include in the reasonable person test. Take
language. To the extent a person’s language skills have to be classified as
either physical or psychological, it seems clear they would fit into the
latter: they have to do with the mental states that flow from a person’s
hearing certain sounds, and they don’t keep good company with physical descriptors
like height, weight, and eye color. But the Court would find it impossible to
exclude facts about the language a suspect speaks in determining whether she is
in custody. Consider a case where the police say, in Italian, “We are the
police. We have placed you under arrest, and we are backed by the power of the
State. If you try to leave, we will shoot you with our guns.” If the suspect
speaks Italian, the Court couldn’t seriously argue that he wasn’t in custody
because a reasonable, English-speaking person wouldn’t understand the threat.
And the reverse is true as well: a suspect who doesn’t understand Italian
couldn’t claim his Miranda rights
were violated because a reasonable Italian-speaking person would believe he was
in custody. The language abilities of the particular suspect must be taken into
account, and as a result, the objective/subjective distinction relied on by the
J.D.B. majority must be rejected.

The dissenting Justices in J.D.B. are well aware of these problems,
but do not offer a compelling alternative. Justice Alito’s dissent has it right
when he argues that the majority has backed itself into a corner: it must limit
its decision by “arbitrarily distinguishing a suspect’s age from other personal
characteristics . . . that may also correlate with susceptibility to
coercive pressures,” or else turn Miranda into a “highly fact-intensive standard” that considers every personal trait of
each defendant.[10] Alito would instead have deemed relevant only the
“external” circumstances of the interrogation, by which he means to exclude any
fact about the suspect that we might think of as internal to her. He relies on
the Court’s 2004 decision in Alvarado,
which said, “Once the scene is set and the players’ lines and actions are
reconstructed, the court must apply an objective test and resolve the ultimate
inquiry . . . .”[11] Alito’s argument is deceptively persuasive: it
neatly avoids tough line-drawing questions by screening out all of the suspect’s
individual characteristics and considering only “where
the questioning occurred, how long it lasted, what was said, any physical restraints  . . . and whether the suspect
was allowed to leave when the questioning was through.”[12] But adopting such a cramped view of Miranda would force the lower courts to
ignore essential background facts. Take the suspect’s language ability, as I
discussed above. That the defendant speaks Italian certainly isn’t a fact about
the physical setting of the interrogation; it’s a fact internal to her and thus
off the table under the dissent’s view. Or consider blindness, another specific
(and thus internal) characteristic of the suspect that even the dissent admits is
relevant to Miranda. Justice Alito,
calling such a case a “far-fetched hypothetical,” writes that it “presumably”
would only arise where the police give a blind person “a typed document
advising him he [is] free to leave.”[13] According
to Alito, “[F]urnishing this advice in a form calculated to be unintelligible
to the suspect would be tantamount to failing to provide the advice at all.” This
is an accurate statement, but it is accurate precisely because blindness constitutes part of the reasonable
person’s circumstances-the tension between the footnote and the dissent’s
larger position is palpable. Alito goes on to claim that “advice by the police
that a suspect is or is not free to leave at will has always been regarded as a
circumstance” that must be taken into account. But
that isn’t right. A statement by the police that a suspect is free to go
wouldn’t be relevant if the statement were given on the other side of a
soundproof wall. The existence of the soundproof wall-a relevant
circumstance-compels this conclusion. And it is only by assuming that blindness
is also a relevant circumstance that we may draw a similar inference.

III. Where We Go from Here

If there is no principled way to determine which
circumstances are relevant under Miranda‘s
reasonable person test, it is worth asking what the Court should base its
decisions on. My aim is to sketch a few possibilities in the hope of generating
further discussion.

I start with four suggestions alluded to by the Court. I
want to begin by noting a significant tension in the opinion: if J.D.B. is meant to track the
objective/subjective distinction, it isn’t clear why the Court quickly ran
through a few policy arguments. And if these arguments are meant to be the real
justification for the holding, the Court throws them in much too cavalierly. In
any case, the majority begins by noting that “in some
circumstances, a child’s age would have affected how a reasonable person in the
suspect’s position would perceive his or her freedom to leave.”[14] While accurate, this reasoning applies equally well to
other factors the Court has ruled are irrelevant: it would be just as correct
to say, for example, that the suspect’s past interrogation history will affect
how a reasonable person would perceive the situation.[15]

The majority is also worried about
administrability concerns, emphasizing the importance of “provid[ing]
clear guidance to the police” about whom to Mirandize.[16] There are two reasons why administrability gets much more airtime in the
Court’s opinions than it should. First, ease of application isn’t exactly the
driving force in the Court’s Miranda jurisprudence. After all, we could make the test easy to apply by saying the
police must always inform the suspect of her rights. Second, it’s a very rare
case where ease of application will make a practical difference. We would have
to face a situation where the outcome of the case did in fact turn on the
officer making the “correct” decision about whether to give a Miranda warning. This could only occur
in a case where a police officer gave a Miranda warning when he wasn’t obligated to do so; the officer would have chosen not to give the warnings if the
interrogation test were easier to apply; and the fact that he did give the
warning when he wasn’t obligated to do so actually affected the outcome of the
case. That’s a lot of assumptions, and my hunch is that such a case is quite
rare.

The Court also observes that “the
law has historically reflected the . . . assumption that children
characteristically lack the capacity to exercise mature judgment and possess
only an incomplete ability to understand the world around them,”[17] and gives several examples. This line of argument has
promise, but much more needs to be said. As it stands, the Court’s analysis
doesn’t go very far in explaining why age is a relevant circumstance in the Miranda context in particular: the law
has traditionally treated insane people differently in any number of ways, but
the Court has already decided that “the frailties and idiosyncrasies” of
a suspect aren’t relevant.

Finally, Sotomayor makes the curious
claim that “the custody analysis would be nonsensical absent some consideration
of the suspect’s age.”[18] How, the Court asks, could a court evaluate how a
reasonable person would react to “objective circumstances that, by their very
nature, are specific to children[,] without accounting for the age of the child
subjected to those circumstances”?[19] But it is perfectly sensible to make this evaluation: a
court would simply ask what an adult would think if she were sitting in a
seventh-grade class, told to go to the principal’s office, and then questioned.
And if the Court is suggesting (as I think it is) that the inquiry is
nonsensical because an adult can’t make sense of what it’s like for a child to
be pulled from his seventh-grade class and questioned without referencing age,
then it is assuming the conclusion it set out to prove: by asking what a child would think in that
situation, the Court has already incorporated age into the test. A similar
argument could be made about a person who is interrogated by the police in a
mental hospital while she is suffering from a severe psychosis: how, I could
ask, can a court evaluate how a reasonable person would react to objective
circumstances that are, by their very nature, specific to psychotics?

Apart from what we can squeeze out of the J.D.B. opinion itself, there are other
ways we might distinguish relevant from irrelevant circumstances. First, the
Court could base its decisions on a concern about coerced confessions.  This is, after all, the primary focus
of Miranda, rooted as it is in the
Fifth Amendment right against self-incrimination. But as the J.D.B. dissent pointed out, even if the
police were not obligated to give Miranda warnings in a particular case, the defendant could always argue that his
confession was involuntary. Miranda warnings, the J.D.B. court
reiterated, are a prophylactic measure. Miranda,
then, could only make a practical difference in two ways: First, we would have
to have a case where a confession was given; the confession was coerced; the trial
court incorrectly found the confession was not coerced; the police weren’t
obligated to give Miranda warnings;
and if the police had given Miranda warnings, the suspect would not have confessed. Second, it would make a
difference if the constitutional requirement that police give Miranda warnings in certain situations
somehow reduces, ex ante, the number of confessions police coerce and then use
against the suspect. Again, I would think such situations are rather rare. There
may be arguments to the contrary-advocates may be able to create and analyze
data that show Miranda makes a
significant practical difference-but now the debate has shifted firmly into
empirical territory, and the issue should be discussed on those terms, rather
than having the Supreme Court declare by fiat that Miranda has a particular effect.

A few other suggestions-ones I only point out for further
thought-include ensuring consistent application of Fifth Amendment
jurisprudence by different courts; protecting against the violation of human
dignity that occurs when state actors interrogate innocent suspects; and
putting a greater emphasis on either positive or negative freedom (and with
that, a concomitant focus on psychological or physical coercion). Miranda scholars have opinions about the
purposes of that famous decision, and those opinions can inform the way we
distinguish relevant from irrelevant circumstances. Or, we might decide that
application of the reasonable person test shouldn’t vary depending on the area
of law, and base our decisions on issues not specific to the Fifth Amendment. My
only point here is that the answers to these issues are not obvious: the Court
and academic commentators should tackle them head-on, rather than dressing up
poorly constructed distinctions like the supposed differences between objective
v. subjective or external v. internal facts.

Conclusion

The reasonable person test shows up again and again in
dozens of areas of law, and yet the Supreme Court’s most recent decision on the
subject only further obfuscated its use and application, making an arbitrary
distinction about which circumstances are relevant to the inquiry. The Court
should instead defend these distinctions on alternative grounds-grounds that
are articulated and defended on their own terms.

Christopher Jackson is a Law Clerk to The
Honorable Roger L. Gregory, U.S. Court of Appeals for the Fourth Circuit.

Suggested
citation: Christopher
Jackson, Commentary, J.D.B.
v. North Carolina and the Reasonable
Person, 110 Mich. L. Rev. First
Impressions 9 (2011),

http://www.michiganlawreview.org/assets/fi/110/jackson.pdf.

[1]. No. 09-11121, slip op. (U.S. June
16, 2011).

[2]. See Thompson v. Keohane, 516 U.S. 99, 112 (1995).

[3]. J.D.B., 09-11121, slip op. at 8 (quoting Yarborough v. Alvarado,
541 U.S. 652, 668 (2004)).

[4]. Miranda v. Arizona, 483 U.S. 436, 478-79 (1966)

[5]. Alvarado, 541 U.S. at 667.

[6]. Id.; see also Thompson, 516 U.S. at 112.

[7]. J.D.B., slip op. at 14.

[8]. Id. at 7.

[9]. Id. at 8.

[10]. Id. at 3 (Alito, J., dissenting).

[11]. Alvarado, 541 U.S. at 662-63 (citation omitted).

[12]. J.D.B., slip op. at 6 (Alito, J., dissenting).

[13]. Id. at 16 n.16. I can think of a number of other situations where
blindness would be relevant: where the police point a gun at the suspect; where
the police quietly lock the door in front of the suspect; where the police show
photos of a crime scene during the interrogation; and so on.

[14]. Id. at 8 (majority opinion) (citations omitted).

[15]. See Alvarado,
541 U.S. at 668-69 (rejecting past
interrogation history as a relevant circumstance).

[16]. J.D.B., slip op. at 8 (citing Alvarado, 541 U.S. at 668).

[17]. Id. at 10.

[18]. Id. at 12.

[19]. Id. at 13.

Nonetheless, the individual mandate is the legal hook upon
which many have hung their constitutional challenges to the ACA. In a recent
essay, our colleague Professor Douglas Kahn joins with Professor Jeffrey Kahn
to take issue with one of several justifications for the mandate: that it
solves the free-rider problem that arises when an uninsured individual receives
care without paying for it, thus forcing providers to raise costs for paying
(typically insured) patients. Kahn and Kahn claim that the free-rider problem
has been exaggerated. Even if it
were a meaningful problem, they argue,
the ACA only resolves it by shifting the burden of uncompensated care from
insured patients to taxpayers, thus substituting one type of free riding for
another. Finally, they suggest
that the free-rider trope hijacked the political debate and distracted from the
ACA’s redistributive consequences.[4]

These claims are unconvincing. Kahn and Kahn can maintain
that the free-rider prob

lem has been exaggerated only because they define “free rider” to mean something it does not.
Although their claim that the ACA substitutes provider-subsidized free riding
for taxpayer-subsidized insurance is accurate, Kahn and Kahn fail to appreciate
the overwhelming strength of the latter approach. And their belief that the
free-rider argument somehow prevented
debate about the ACA’s
distributional consequences is, as an empirical matter, simply false.

Notwithstanding their studied agnosticism about the policy
wisdom of the ACA, Kahn and Kahn exhibit
deep discomfort with the ACA’s requirement that private insurers ignore
beneficiary health

status in setting premiums and the attendant mandate to
purchase insurance. Yet they never acknowledge that achieving near-universal
coverage through the private market depends on these interventions. If insurers
could set premiums based on individual risk, those most in need of insurance would
be unable to afford it. And if healthy people could opt out of risk poo

ls, the
resulting premium increases for those who remained would likely put insurance
out of reach for millions. The ACA’s redistribution
is thus tied up with questions relating to the level of risk-rating that is
acceptable in a decent society, the purpose of health insurance, and the moral
urgency of covering the uninsured. Perhaps Kahn and Kahn prefer the status quo;
their apparent unhappiness with the ACA suggests they do. But although they
would have preferred the public debate to
have focused more intently on
redistribution, it’s no surprise that debate over health-care reform has
ranged more broadly.

I. A Free Rider by Any Other Name

Kahn and Kahn deny that a substantial free-rider problem
exists in the medical marketplace. In their view, the uninsured who cannot afford care are not really free
riders because they have no meaningful choice but to go to the emergency room
when they fall ill.

We’ll cheerfully stipulate that an uninsured,
poverty-stricken person who, say, breaks her arm, will seek and receive
treatment. (That’s why, contrary to those bringing constitutional challenges to
the individual mandate, someone who chooses not to buy health insurance will
nonetheless someday participate in the interstate health-care market. She can
credibly exempt herself from the market for ordinary consumer goods like cars
or broccoli; not so for health care.) Someone has to pay for her treatment,
however. If she can’t pay-and the hospital, having tried to collect, can’t get
her to pay-then the hospital must cover the loss. How does the hospital do
this? By increasing prices for paying patients, including those with insurance
(or, more worryingly, by providing profitable treatments to well-insured
patients who don’t need them). In other words, those who can pay for medical
care also pay for those who can’t. And that makes our friend with the broken
arm a free rider.[5]

Kahn and Kahn resist calling her a free rider because they
dislike the term’s negative connotations. They think she’s done nothing wrong in seeking uncompensated
medical care. We agree. But the strength of her justification for seeking
medical attention shouldn’t obscure its economic consequences. She’s still
forcing someone else to foot the bill. And she can do so only because of the
deeply felt social commitment, embedded in various state and federal laws,
including the Emergency Medical Treatment and Active Labor Act, to provide
emergency medical care even to those who can’t pay. This social commitment
transforms emergency medical care into a nonexcludable,
quasi-public good, which allows our broken-armed patient to fob the costs of
her care onto paying patients.

At bottom, Kahn and Kahn’s argument rests on a semantic
dispute over the term “free rider.” They accept that providers shift costs from
non-paying to paying patients. They don’t contest the scale of this
cost-shifting: $43 billion in 2008, leading to an average increase of $1,000 in
a family’s annual insurance premium.^[6] They even acknowledge that the broken-armed patient “may be [a free rider]
within the economist’s use of the term.”[7] Called a free-rider problem or not, this cost-shifting is still a problem-and a
massive one at that.

II. Robin Hood and the ACA

Which brings us to Kahn and Kahn’s second point. They object to those politicians and
advocates who, in using the term free rider, hoodwinked the public into
thinking that the ACA requires citizens to accept personal responsibility for
their own health expenses. In
their view, this rhetoric was
misleading. Shifting costs from non-paying to paying patients, they point out,
is a form of wealth transfer. Of course, the ACA also transfers wealth, albeit
through the tax system. It expands Medicaid to cover anyone up to 133% of the poverty line and subsidizes the
purchase of private insurance for those between 133% and 400% of the poverty
line. In so doing, Kahn and Kahn argue, the ACA merely institutionalizes a new
kind of
cost-shifting by asking
taxpayers to pick up the insurance bill for lower-income Americans.

To begin with, it seems well within the bounds of fair
debate to accurately describe those
uninsured who receive uncompensated care as free riders. But more importantly,
Kahn and Kahn’s critique only begs the question: Which kind of distribution is
better? Should we finance health care
for the medically indigent through provider cost-shifting or through the tax system? On this, Kahn
and Kahn decline to engage. Had they done so, they would have found at least
five straightforward reasons why provider cost-shifting is much more damaging
than taxpayer-driven redistribution under the ACA.

First, provider cost-shifting operates as a highly
regressive tax on paying patients. The reason is simple: because providers
don’t charge higher-income patients more for their medical care than
lower-income patients, increased medical costs-usually seen in higher insurance
premiums-are shared by all paying customers alike. The inflated cost of medical
care occasioned by provider cost-shifting thus eats up a larger fraction of the
income of a lower-income person than a higher-income person. “This regressive
pattern contrasts sharply with the progressive profile of effective federal
income tax rates.”[8]

Second, provider cost-shifting is surreptitious. Most
people have no idea that uncompensated care inflates health-insurance premiums.
Even if they do, those with employer-sponsored insurance probably don’t know
that insurance coverage is part of compensation and that ever-rising premiums
lead to reductions in take-home pay.[9] (This typically happens not through wage cuts, but rather through slower wage
growth.) In contrast, subsidizing
insurance for the disadvantaged through the tax system exposes the costs
of the commitment to near-universal insurance and lends democratic legitimacy
to the determination of how to distribute those costs.

Third, medical debts don’t painlessly get wiped away. Like
other creditors, health-care providers demand to get paid. Attempting to
satisfy those demands not only imposes hardship on individuals and families,
but it frequently sends the uninsured into a financial tailspin-which is why
medical debt contributes to about half of all bankruptcies.[10] Requiring the purchase of subsidized health insurance eliminates that source of
financial instability.

Fourth, uninsured patients receive worse medical care than
those with insurance. Uncompensated care is typically acute care, provided in a
hospital emergency room, often to address conditions that could have been
prevented if detected earlier. And this
kind of care is much more expensive than equivalent care provided on an
outpatient basis. By expanding insurance coverage, the ACA encourages patients
and providers to favor inexpensive primary care over expensive emergency care.

Fifth, and relatedly, the uninsured regularly defer
necessary care until turning sixty-five,
only to run up needlessly large medical expenses when they finally become
eligible for Medicare.[11] By providing near-universal insurance coverage, the ACA discourages this
wait-until-sixty-five approach
and increases the likelihood that those who previously lacked insurance will
secure cheap preventive care prior to entering Medicare. The ACA thus directs
taxpayer dollars that would otherwise have gone to cover inefficient,
late-in-the-day care toward timely and more efficient medical care.

In short, using the tax system to extend health insurance
to 38 million additional people is more progressive, transparent, humane, and
efficient than the redistribution caused by provider cost-shifting. We do not
dispute Kahn and Kahn’s observation that the ACA replaces the covert redistribution
of provider cost-shifting with overt redistribution via the tax system, and
that both involve redistribution. But we do dispute that minimizing uncompensated
care by extending comprehensive health insurance was some sort of shell game.

III. Free Riders Hijacking the Debate

Kahn and Kahn spend the balance of their piece objecting
to a different kind of redistribution they believe went unappreciated in the
debate over the ACA. Here the redistribution they have in mind is a function of
the ACA’s imposition of community rating, under which insurers are prohibited
from considering the health status of insurance applicants.[12] The annual premiums of younger and healthier members of a community-rated risk
pool thus subsidize the care of the older and sicker members. In Kahn and Kahn’s
view, “the advancement of the free-rider justification has prevented the debate
over the merits of the program from focusing on the critical question whether a
redistribution of wealth from the young to the old and from the healthy to the
unhealthy is an appropriate and desirable goal.”[13]

This political process complaint is unpersuasive. For
starters, the redistributive effects of the ACA as a whole are not as clear-cut
as Kahn and Kahn suggest. Medicare already covers those sixty-five and older, so any redistribution that occurs on the
exchange doesn’t involve the elderly. The ACA also imposes sharp cuts on Medicare to finance the Medicaid expansion
and the exchange subsidies, channeling tax dollars previously claimed by the
elderly to younger individuals. To mitigate concerns about intergenerational
transfers, the ACA permits exchange plans to vary premiums up to three times
based on age. And the ACA endeavors to make health care more affordable for
everyone-including the young and healthy-by eliminating medical underwriting
and promoting managed competition on the exchanges.

But let’s
assume Kahn and Kahn are right. As they frame the matter, debate over the ACA
should have focused on the choice between individual and community risk-rating. This framing obscures the stakes of
that choice, however. As it stands, and until the ACA’s coverage provisions go
into effect, private insurers in the individual and small-group markets may, in
most states, individually risk rate. The result is that millions of Americans
can’t afford health insurance-especially those with preexisting conditions or
ill-omened risk profiles. Because of insufficient risk-pooling, the market for
those in greatest need of health insurance has unraveled. Achieving
near-universal coverage through the private market thus depends on some form of
community rating, meaning that the choice between community rating and
individual risk-rating is tantamount to the choice between near-universal
coverage and the exclusion of tens of millions from the insurance market.
Against this backdrop, it’s unremarkable that political debate over the ACA was
more than a clinical discussion of the redistributive effects of community
rating.

Or look at it another way: Kahn and Kahn have trained
their attention on the dollar
flows from the young and healthy to the old and unhealthy. But to gauge the
overall redistributive consequences of a public welfare program, it’s not
enough to observe that the wealthy pay more in taxes and finance the bulk of
expenditures. Among other things, you also have to tally the value of the good provided to beneficiaries via that
redistribution, which in this context includes the value of insurance to those
who previously couldn’t secure it on the private market. Because insurance both
prevents financial shocks and improves health, that value turns out to be quite
large. With respect to Medicare, for example, the benefits of coverage accrue
so broadly that beneficiaries at every level of income come out ahead in terms
of overall welfare.[14] The distributional consequences of
the ACA may or may not be as rosy. But it would have been strange for the
public debate to focus on wealth transfers from young to old without
considering the value of insurance to those who otherwise would go without.

Still, Kahn and Kahn are right that, taking just a
one-year snapshot of premiums and outlays, the younger members of a
community-rated risk pool subsidize the older. But looking at the problem this way betrays an assumption that a calendar year provides the
proper frame of reference for thinking about health insurance. That’s not
obviously so. All of us have been young, and almost all of us will grow old. If
one widens the lens to consider lifetime health risks (or, more accurately,
health risks prior to qualifying for Medicare), a young person’s higher premium
isn’t an intergenerational transfer at all. It’s an intertemporal transfer.
She’s putting a down payment on health insurance for her older self. And that
health insurance will buy tomorrow’s medicine, which likely will be better than
today’s. Understood from this perspective, debate over intergenerational wealth
distribution becomes considerably less urgent.

Kahn and Kahn also assert that a group of prominent
economists, in defending the ACA from constitutional challenge in an amicus
filing, characterized the uptick in premiums that occurs when the young and
healthy exit risk pools as an “externality.” In discussing risk pooling, however,
the economists didn’t make any claim about externalities.[15] That was deliberate. When a young, healthy
individual opts out of a community-rated risk pool, the resulting premium
increase is a price signal that allows those remaining in the risk pool to
decide whether they value insurance at more than its going price. Opting out in
this way doesn’t necessarily give rise to the sort of allocational inefficiency to which we normally attach the label
“externality” (although we might still worry about the efficient
distribution of health goods given how hard it is to make an adequately
informed choice about the need for health insurance). To the extent insurance is an ordinary market good, opting out
instead gives rise to a pecuniary externality-a price effect arising out of a choice to buy or not to buy a good
in a competitive market. Economists do not
typically worry about pecuniary externalities; they applaud them. Kahn and Kahn
thus need not worry that the
economists’ defense of the ACA would also stand as a defense of a government
mandate to purchase a car in order to keep car prices high and prop up the auto
industry. And in any event, nothing turns on the externality label
because-externality or not-the point stands that sustaining a health-insurance
market for higher-risk populations depends on some form of community rating.

On their central point, Kahn and Kahn are just wrong on
the facts. The fairness of compelling healthy individuals to participate in
community-rated risk pools was a core feature of the political debate. For just
a few examples drawn from late 2009: A former Secretary of the Department of
Health and Human Services published an op-ed in the Wall Street Journal deploring the “massively unfair form of income
redistribution” that would occur when “younger, healthier, lower-income earners
would be forced to subsidize older, sicker, higher-income earners.”[16] A large insurer opposed to health-care reform released a study, widely covered
by the press, showing that, under the ACA, “prices would trend much higher for healthy people,” particularly
for younger customers, but that “[o]lder, sicker individuals would tend to see
cost decreases.”[17] And members
of Congress hotly debated the fairness of community rating on the floor of both
the House and Senate.[18] We could go on.

Nor did the public debate ignore the ACA’s broader
distributional consequences. At a hearing, Senator Cornyn characterized the ACA’s “subsidies, fee and taxes” as “a
huge income redistribution.”[19] Senator Ben Nelson thought the tax-and-transfer provisions amounted to “class
warfare.”[20] And the day after President Obama signed the ACA, the New York Times ran a front-page story declaring it “the federal
government’s biggest attack on economic inequality since inequality began
rising more than three decades ago.”[21] If the ACA’s distributional effects were hidden, they were not hidden well.

*
* *

Although Kahn and Kahn focus on the individual mandate,
the broader goals of the act-and the question of how to pay to achieve
them-were subjected to lengthy, rigorous, and rancorous public debate. Indeed,
the battle over the ACA was the culmination of a war over universal coverage
that has raged for nearly one hundred years. Having heard exhaustive arguments
about wealth distribution, the democratically elected Congress still determined
that a status quo in which 52 million people lacked insurance in 2010 and
millions more would lose insurance in ensuing years was unacceptable. As the
economists with whom Kahn and Kahn disagree succinctly put it in their amicus
filing, “This tradition of
assuring the availability of some minimal level of treatment to all Americans
without regard to ability to pay reflects a collective decision that we are, as
a Nation, generally unwilling to see others come to great harm for lack of
access to medical care.”[22] Amen.

Suggested citation: Nicholas Bagley and Jill R.
Horwitz, Commentary, Why It’s Called the
Affordable Care Act, 110 Mich. L. Rev.
First Impressions 1 (2011),

http://www.michiganlawreview.org/assets/fi/110/bagleyhorwitz.pdf.

Nicholas Bagley is an Assistant Professor of Law at the University of
Michigan Law School.

Jill R. Horwitz is a Professor of Law at the University of Michigan Law School.
The authors thank David Cutler, Kristina Daugirdas, Jeffrey Kahn, Julian
Mortenson, Edward Parson, and especially Doug Kahn.

[1]. Patient Protection and Affordable Care Act, Pub. Law No. 111-148, 124 Stat. 119 (2010), as amended by the Health Care and Education Reconciliation Act of 2010, Pub. Law No. 111-152, 124 Stat. 1029 (2010) (amending §5000A of the Internal Revenue Code of 1986) [hereinafter "ACA"].

[2]. National Health Expenditures 2009 Highlights, Centers for Medicaid & Medicare Services, www.cms.gov/NationalHealthExpendData/downloads/highlights.pdf (last visited Aug. 4, 2011).

[3]. Help on the Horizon, The Commonwealth Fund, at ix (2011), www.commonwealthfund.org/Content/Surveys/2011/Mar/2010-Biennial-Health-Insurance-Survey.aspx (report accessible through hyperlink).

[4]. See
generally Douglas A. Kahn & Jeffrey H. Kahn, Commentary, Free Rider: A Justification for Mandatory
Medical Insurance Under Health Care Reform?, 109 Mich. L. Rev. First Impressions 78, 81, 84-85 (2011), www.michiganlawreview.org/assets/fi/
109/kahn.pdf.

[5]. See N. Gregory Mankiw, Principles of
Microeconomics 222 (1998) (“A free rider is a person who receives the
benefit of a good but avoids paying for it.”).

[6]. ACA, § 10106(a) (amending
§ 1501(a)(2)(F) of the ACA).

[7]. Kahn & Kahn, supra note 4, at 82.

[8]. See Robert A. Carolina & M. Gregg Bloche, Paying
for Uncompensated Medical Care: The Regressive Profile of a “Hidden Tax”, 2
Health Matrix 141, 158 (1992).

[9]. See Katherine Baicker & Amitabh Chandra, The Labor Market Effects Of Rising Health Insurance Premiums, 24 J. Labor Econ. 609 (2006).

[10]. See David Himmelstein et al., Illness and
Injury as Contributors to Bankruptcy, Health
Affairs W5-63 (Feb. 2005).

[11]. See J. Michael McWilliams et al., Use of Health Services by Previously
Uninsured Medicare Beneficiaries, 357 New
Eng. J. Med. 143 (2007).

[12]. ACA § 1201 (amending
§ 2701(a)(1)(A)(iii) of the Public Health Service Act).

[13]. Kahn & Kahn, supra note 4, at 80.

[14]. Mark McClellan & Jonathan Skinner, The Incidence of Medicare, 90 J. Pub. Econ. 257, 258, 270 (2006).

[15]. See Brief for Economic Scholars in Support of Appellees as Amici Curiae, Thomas
More Law Center v. Barack Hussein Obama, at 13-14 (6th Cir. 2011) (No. 10-2388)
(describing the cost escalation arising from adverse selection without calling
it an externality) [hereinafter Economists' Br.].

[16]. Michael O. Leavitt et al., Health “Reform” Is Income Redistribution,
Wall St. J., Sept. 28, 2009, at
A21.

[17]. Avery Johnson, WellPoint Attacks Health Legislation, Wall St. J., Oct. 22, 2009.

[18]. Compare 155 Cong. R. S10745-46 (daily ed. Oct. 27, 2009) (statement of Sen. Enzi); 155
Cong. R. H12450 (daily ed. Nov. 5, 2009) (statement of Rep. Gingrey), with 155 Cong. H6144 (daily ed. June 3,
2009) (statement of Rep. Schwartz).

[19]. Robert Pear & Jackie Calmes, Senate Panel Softening Insurance Penalties,
N.Y. Times, Oct. 1, 2009.

[20]. Michael O’Brien, Nelson: CBO Analysis ‘Devastating’ to Health Reform; Slams House Bill
as “Class Warfare”, The Hill’s Blog
Briefing Room, July 17, 2009, thehill.com/blogs/blog-briefing-room/news/lawmaker-news/50657-nelson-cbo-analysis-devastating-to-health-reform-slams-house-bill-as-class-warfare.

[21]. David Leonhardt, In Health Bill, Obama Attacks Wealth Inequality, N.Y. Times, Mar. 23, 2010.

[22]. Economists’ Br., supra note 15, at 10.

Limited access to financial services is a significant difficulty for low- and middle-income families in the United States. Traditional depositary institutions are reluctant or unable to offer financial services to low-balance customers, forcing many to use high-cost alternative financial services providers such as payday lenders and check cashers. These costs are a material drain on the take-home pay and savings of the poor, perpetuating financial instability and, ultimately, aggravating income inequality.

Microfinance can play a vital role in breaking this cycle of financial vulnerability. Microfinance providers offer financial services, most often small unsecured loans, with the aim of poverty alleviation. Although microfinance’s best-known examples come from the developing world, according to a keynote speech delivered by Federal Reserve Board Chairman Ben Bernanke on November 6, 2007, a “lively network of programs” operates in the United States today. These programs have achieved some success in delivering credit and offering business-skills education to entrepreneurs in low-income areas, who would ordinarily be excluded from the mainstream banking system.

Though it is uncontroversial that microfinance can be a useful tool in fighting poverty, debate continues as to the appropriate role of profit motive in microfinance. Muhammad Yunus, Grameen Bank founder, pioneer of microfinance, and recipient of the 2006 Nobel Peace Prize, stated in a New York Times op-ed on January 15, 2011, that microfinance providers must operate as not-for-profit, as the ever-increasing pressure for returns leads for-profit lenders to eventually raise fees and interest rates to the same oppressive levels as high-cost alternative financial services providers. Others believe that the differing needs of American microfinance customers (for example, training in business regulatory compliance), and the increased costs of serving those needs, make the American microfinance industry structurally less profitable than markets abroad. This lower profitability obliges not-for-profit programs to rely on donors to stay in business.[1]

State governments can effectively promote domestic entrepreneurship in low-income communities and simultaneously fulfill their duties as conservators of unclaimed property, by lending unclaimed financial assets-in-trust at preferential interest rates to in-state microfinance providers. This plan presents an alternative to charitable contributions, though it does not resolve the tension between for-profit and not-for-profit microfinance providers. Such a scheme could be a significant funding source for many microfinance operations in the United States today. Even a small portion of the yearly intake of unclaimed assets would be substantial enough to support fully most microfinance loan portfolios. Also, reinvestment of unclaimed financial assets into the consumer financial system, rather than fiscal redeployment or traditional public fund investment, correctly counterbalances the contraction in consumer credit supply that occurs when these assets leave the balance sheets of financial institutions. Implementation of such a scheme may be accomplished by minor changes to current unclaimed property law.

I. Defining the Opportunity

Every year, states take custody of millions of dollars in unclaimed financial assets, such as dormant bank deposits, unclaimed traveler’s checks and money orders, and other unpaid payment instruments. This transfer of custody from holders of unclaimed property, usually banks, to the state administrator is governed in all states by unclaimed property or “escheat” statutes. Under the Uniform Unclaimed Property Acts of 1981 and 1995, adopted by thirty-seven states and the District of Columbia, title in unclaimed property does not fully vest in the state as real property would under traditional escheat doctrine. The state instead acts as custodian of the property and honors claims of original owners or heirs in perpetuity.[2]

Although no states take complete title to unclaimed assets,, the Supreme Court has acknowledged that, subject to constitutional limitations, states have wide discretion over the disposal of unclaimed property “[a]s a broad principle of jurisprudence.”[3]  States use unclaimed property receipts either as general income or as funding for various public projects. The District of Columbia and a majority of states deposit almost all unclaimed property in the state treasury, retaining a nominal amount (fixed at $100,000 in the Uniform Unclaimed Property Act) in a separate fund for the satisfaction of claims. A minority of states hold unclaimed property receipts in an unclaimed property fund, and these monies are either invested on behalf of original owners or used to fund public interest programs. Eighteen states have statutes that allocate some or all unclaimed property receipts for specific purposes such as education (Florida, Nebraska, North Carolina, North Dakota, Oregon, Utah, Vermont, Virginia, West Virginia, and Wisconsin); health care access (Colorado and Tennessee); campaign finance (Connecticut); pensions (Illinois); transportation (Louisiana); legal services (Maryland); historic building preservation (Mississippi); and air cargo hub development (North Carolina).[4] Ohio deploys unclaimed property to promote both home ownership and minority-owned businesses.

Available figures show that the amount of unclaimed financial assets taken in and retained by states is significant. In 1991, states together took custody of $1.2 billion in unclaimed property. Recently, Oregon reported that it acquires $50 million in unclaimed property every year. It is likely that a significant portion of this total flows from unclaimed financial assets. Moreover, in spite of efforts by states and private companies to locate original owners, only a small portion of unclaimed financial assets are returned. Using overall unclaimed property return rates as a proxy for financial asset return rates, returns over a given year equal only 25 to 30 percent of the amount of new unclaimed property transferred to state custody.

These factors together make unclaimed financial assets a lucrative source of state revenue and, in turn, represent a significant funding opportunity for microfinance providers. Even a portion of these receipts would be enough to underwrite the portfolios of most U.S. microfinance providers. For example, ACCIÓN Texas and Louisiana, the largest microfinance provider in the United States, had a total active portfolio of $20.3 million as of year-end 2009. Lending even a small percentage of this total to microfinance providers could reduce these lenders’ overall dependence on donations and free up resources for expansion into new areas or additional non-lending programs, such as basic business training.

II. The Unintended Consequences of Financial Asset Escheat

The current custodial system of unclaimed property disposal imposes economic costs on consumers by constricting the supply of credit. These costs come about as states convert unc

laimed financial assets into other forms of property upon transfer. The effect of this constriction weighs disproportionately on the poor, and the unclaimed property programs of most states do little to mitigate or compensate for these adverse effects. By distributing a portion of these resources to microfinance initiatives, states can begin to meaningfully address financial access issues that breed financial instability among low- and middle-income families.

Most banks use customer deposits as the raw materials for lending. Low- or non-interest bearing deposits, such as demand deposits and savings deposits, are particularly important to lenders due to their low cost. The more low- or non-interest bearing deposits held by a bank, the higher the bank’s flexibility to either lend to higher-risk customers or reduce customer lending rates. Additionally, banks are attracted to consumer-held savings and demand deposits because they are stable. Absent a bank run, these deposits are unlikely to be withdrawn all at once, allowing banks with large balances of such deposits to expand lending to more customers at lower interest rates. However, these low- or non-interest bearing deposits are also the financial assets most commonly forgotten or lost by consumers, and therefore are among the most common assets to end up in administration by state governments. Once assets are transferred, banks may no longer use these monies for lending, which both constricts the supply of credit and increases the banks’ average cost of funds.

The negative effects of this credit reduction fall disproportionately on borrowers who either lack collateral or earn income that is insufficient or too irregular for traditional borrowing. When bank profitability falls, the first customers to feel the effects are low-income customers that in most cases offer the lowest marginal revenue-few banks are willing to upset high-balance, higher-value customers through increased fees or cutbacks in customer reward programs. Not only are the poor most likely to suffer from a reduction in credit supply, but they also  feel the effects of higher interest rates and fees most acutely, as such costs represent a larger proportion of their income. This combination of factors drives many low- and middle-income customers away from the traditional banking system to high-cost alternative financial services providers, such as payday lenders and check cashers.

Among the states that use unclaimed property receipts as a general source of income, few states take steps to counteract this policy’s negative effects on the poor. One method to restore credit supply is to redeploy unclaimed property into the financial system. Only Ohio has a program that uses unclaimed property proceeds to extend credit; however, this program offers bonding guarantees to qualifying minority-owned businesses and does not, as such, reach businesses or entrepreneurs excluded from the traditional banking system. [5] A second method to alleviate the effects of credit tightening is to compensate lower-income families with social benefits. Although some states set aside a portion of unclaimed property receipts for projects that indirectly benefit low-income families, most states do not.

Credit-tightening also affects the minority of states that retain, rather than spend, unclaimed property receipts.  In these states, unclaimed property does, in some sense, return to the financial system: fund administrators may invest in securities and may reinvest or spend any investment income. However, in most states, statutes restrict the investment of public funds to low-risk asset classes such as federal, state, and local debt; investment-grade, commercial fixed income; and bank certificates of deposit.[6] Investments in public-sector and commercial debt do not balance the localized contraction in consumer credit supply that results from unclaimed financial asset transfer to the state. Even investments in bank certificates of deposit, which would theoretically restore liabilities to bank balance sheets, do not adequately replace lost consumer deposits. This is for three reasons. First, the size of these placements is often limited by state statutes requiring that all investments in certificates of deposit be either covered by federal deposit insurance (currently capped at $250,000) or secured by collateral.[7] Second, these deposits are held at a much higher cost than comparable consumer-held demand and savings accounts, since unclaimed property fund administrators must invest at or near the highest available rates of return or face potential scrutiny from state inspectors general and other auditors.  Finally, these deposits are a less stable source of funding, as they are vulnerable to rate undercutting by competitors.

III. Employing Unclaimed Financial Assets
to Promote Microfinance

To support microfinance, state governments should create separately managed funds of unclaimed financial assets. States would then lend the monies held in these funds to microfinance lenders that agree to conditions designed to promote in-state financial access, such as minimum lending levels to in-state customers. By lending to private operations rather than establishing government-administered direct lending programs, states can avoid the inefficiencies and potential conflicts of interest arising from state-controlled lending. Also, unlike direct lending schemes, states would be insulated from individual credit losses; states would instead assume the credit risk of the overall microfinance institution. In return, states can expect some nominal direct return as interest, as well as secondary benefits from increased domestic economic activity, job growth, and decreased reliance on public benefit systems. States unable to find enough microfinance providers to lend the entire balance could simply invest any surplus in traditional assets, just as they would invest unspent revenue in the state general fund.

States have two options to create a microfinance promotion fund using unclaimed financial assets. The best option for a particular state will depend on whether unclaimed property receipts are held in an unclaimed property fund or have been transferred to the general fund. States that already transfer most unclaimed property to the state general fund may amend their respective unclaimed property laws to allocate a portion of yearly unclaimed property receipts, for example the first five million dollars in receipts, to a separate microfinance promotion fund. A larger transfer in the first year of operation could seed the fund and build enough capital to attract microfinance lenders. In many respects, this approach is similar to the one already used by several states to support the public projects mentioned in Part I. A drawback of this method is that the expansion of financial access may compete with other domestic interests for unclaimed property receipts, which could politically complicate passage of the proposal. The minority of states that hold unclaimed property in a fund, rather than transfer the balance to the state general fund, have an additional option. They can amend the laws governing the unclaimed property fund administrator (usually the state treasurer) and permit investment of a portion of the fund, for example, up to 5 percent, in debt issued by in-state microfinance providers. This method is less likely to face resistance from any existing political interests, as the unclaimed property fund has not been generally available due to the various statutory restrictions on investment described in Part II. In 2005, a similar amendment was passed in North Carolina, which opened 20 percent of the state unclaimed property fund to several additional asset classes, including equities, investment trusts, and private placements.[8] Although the North Carolina amendment did not specifically set aside money for redeployment in low-income communities, the possibility of such a use has been recognized.[9]

Conclusion

States have much to gain by promoting microfinance and expanding financial access. Microfinance extends affordable financial services to low- and middle-income communities and fosters entrepreneurship, lessening the financial vulnerability that afflicts many low-income families. States gain these benefits at low cost. Substantial microfinance portfolios may be fully supported with only a modest allocation from a state’s yearly unclaimed financial-asset receipts or with equally modest amendments to the asset allocation policy of a state’s unclaimed property funds. This use respects the role of low-cost deposits in fueling lending and redeploys credit to those most affected by constrained credit supply. Through the promotion of microfinance, states can contribute to a larger national effort to expand financial access, combat poverty, and eradicate income disparity.

The author is a J.D. Candidate, May 2013, at the University of Michigan Law School.

Suggested citation: Andrew W. Hartlage, Commentary, Unclaimed Financial Assets and the Promotion of Microfinance, 109 Mich. L. Rev. First Impressions 99 (2011), http://www.michiganlawreview.org/assets/fi/109/hartlage.pdf

[1]. See Mark Schreiner & Jonathan Morduch, Opportunities and Challenges for Microfinance in the United States, in Replicating Microfinance in the United States 19, 22 (James H. Carr & Zhong Yi Tong eds., 2002).

[2]. See Unif. Unclaimed Prop. Act prefatory note (amended 1995), 8C U.L.A. 88 (2001).

[3]. Standard Oil Co. v. New Jersey, 341 U.S. 428, 435-36 (1951).

[4]. Fifty-one jurisdiction survey on file with author.

[5]. See Ohio Rev. Code Ann. §§ 122.71-.941, 169.05 (LexisNexis 2007 & Supp. 2010).

[6]. See, e.g., Va. Code Ann. §§ 2.2-4501 to -4518, 22.1-145, 55-210.19 (2006).

[7]. See, e.g., N.C. Gen. Stat. § 147-69.1(c)(5) (2009).

[8]. See Act of July 27, 2005, Sess. L. No. 2005-252, 2005 N.C. Sess. Laws 591 (codified at N.C. Gen. Stat. § 147-69.2(b) (2009)).

[9]. See Michael A. Stegman, An Overlooked Source of Domestic Market Capital: Can Anyone Spell Escheats?, Cmty. Dev. Inv. Rev. (Fed. Reserve Bank of S.F.), Jul. 2007, at 85, available at http://www.frbsf.org/publications/community/review/062007/stegman.pdf.

Judge Richard A. Posner’s recent critique (The Bluebook Blues)[1] of the maddening hypertrophy of The
Bluebook is surely a refreshing voice of sanity
for the multitudes of law students and legal professionals who have had
occasion to consult it. Even at Harvard Law School, the home of its founding
institutional sponsor, The Bluebook’s labyrinthine rules annually aggravate a fresh crop of otherwise remarkably
stoic future lawyers. But while many of Posner’s observations regarding The
Bluebook are astute, we posit that both
form and uniformity are important
for citations, and we suggest citation-formatting software as a means of
maximizing the utility of legal citations while minimizing the burden of
creating them.

I. The Costs of Rigid Bluebook Adherence: Time, Money, and Clarity

Posner is right that The Bluebook has become “a monstrous growth,” and that
“‘bluebooking’ involves an expenditure of time that would be better devoted to
legal education or practice.” If Posner himself does not use The
Bluebook for his academic writings,
however, it is because he does not have to-that job falls on the weary
shoulders of first-year law students who sacrifice their precious little free
time to subcite[2] for their
institution’s academic journals. Every year legions of first-year subciters
descend upon volumes of publication-bound manuscripts to scrupulously ensure
that every citation in every manuscript precisely conforms to The
Bluebook’s arcane and convoluted rules of
form. Like hundreds of Bob Cratchits slaving away for an ungrateful master, at The
Bluebook’s command they pour over such
menial issues as whether Alaska should be abbreviated AK, Alas., or not at all,[3] or whether the period in “id.” should or should not be italicized.[4] These students would do better to spend their time preparing for their Property
or Contracts classes, or honing their skills for the next moot court
competition. And for law professors and others who edit their own works’
citations, the detailed complexity of Bluebook citation formatting is a distraction from the much
more important task of attending to the work’s substance.

The Bluebook is not
only unjustifiably time consuming, but also troublingly expensive: if each of
the 44,000 J.D. students who graduate annually purchase a hardcopy of The
Bluebook for $32 (or a subscription to the
new online version, which is pricier still), the aggregate financial cost of
such fastidious formatting is in the range of $1.4 to $2.2 million per year.[5] Of course, the cost is almost certainly greater, since, as The
Bluebook notes, the book is relied on not
only by law students but also by “lawyers, scholars, judges, and other legal
professionals” who may purchase several copies over the course of a career and
who absorb the financial costs of time spent formatting citations or pass them
on to clients, benefactors, taxpayers, or others.

We further agree with Posner that The Bluebook devotes far too much attention to abbreviations.
Based on a review of the index, they are treated on nearly three-quarters of The
Bluebook’s pages,[6] suggesting that they are responsible for much of its bloat. Moreover, too many
of these abbreviations defy easy recognition. What percentage of the relevant
audience, for example, would be able to correctly explain the abbreviations
“WPNR,” “Haw.,” or “BB”?[7] (Hint: BB is not an abbreviation for The Bluebook.) If, as Posner says and we agree, the primary
functions of a citation are (1) to indicate to the reader the significance of a
reference and (2) to enable the reader to find the source, then it seems
counterproductive to obfuscate a citation with confounding abbreviations. Large
costs in clarity are traded for small savings in space. We find it doubtful,
for example, that abbreviating “Policy” to “Pol’y” to save one character space,
as Table T13 demands, or using the abbreviation “Pres.” to represent “Preserve”
(not “President” or “Presentation”), as required by Table T6, are worth the
cost in clarity.

This is even more the case as the printed page
increasingly gives way to electronic media, where the need to economize on
space weighs much less heavily in the functional calculus. Longer footnotes in
electronic media do not cost the publisher more, and to the extent longer
footnotes are distracting to the reader, electronic media can offer the option
of presenting them to the reader only upon the reader’s interactive request
(such as by moving the cursor over the footnote location). We therefore agree
with Judge Posner that abbreviations are one area in which The Bluebook could benefit from considerable simplification.

II. Uniformity and Abbreviations as a Matter of Value

Posner, however, does not go far enough either in
eradicating unhelpful abbreviations or even in following his own function-based
formatting    principles:
(1) ease of use for the writer; (2) economy of both space and readers’ time;
(3) informative value of citations to the reader; and (4) minimization of
distraction.[8] We doubt, for example, that a
majority of current law students would be able to quickly comprehend the
meaning of the Posner-endorsed abbreviation “Ry.”[9] And while we agree with Posner and The Bluebook that “In re [case name]”
is shorter and therefore preferable to “In the Matter of [case name],” we think that for authors to concern themselves
with this choice strikes the wrong functional balance, since doing so is both
distracting and pedantic from the perspective of the writer and contributes no
additional information to the reader.

Another questionable space-saving device endorsed by both The
Bluebook (Rule 4.2) and Posner is the use of only author last
names with the “supra” short citation form. Although author names may
convey meaningful information to the reader for very well known authors with
relatively uncommon last names, such as “Posner,” it is often more important to
remind the reader of journal title, article title, or date. For example, a mere
author’s name in a “supra”
citation could obscure the fact that a putatively authoritative source is in
fact a hastily drafted blog post, an outdated book, or the work of a biased
organization. Expecting readers to search upward (or downward, in the case of “infra“) for such information is unreasonably optimistic in
the context of modern scholarly legal writing, where articles containing 300 or
more footnotes and spanning many dozens of pages are not uncommon.

Posner also downplays the value of universal consistency,
which we and other commentators believe is important.[10] In Goodbye to the Bluebook, he decries The
Bluebook for cultivating “a most dismal
sameness of style,” yet a citation’s dual functions of indicating authority and
reducing search costs are both furthered by a sameness-not a variety-of style.
Consider Posner’s consistent prescription from both The Bluebook
Blues and Goodbye to the Bluebook that dates should be omitted from statutory
citations for laws currently in force, a prescription that is in direct
conflict with The Bluebook’s directive in Rule 12. How are readers to know whether a date’s absence
indicates a current statute or an editorial oversight, or conversely, whether a
date’s presence indicates an abrogated law or simply adherence to Bluebook form? Context sometimes helps, but context is not as
robust as uniformity of convention.

The common practice of cutting and pasting citations into
electronic searches also requires some degree of uniformity. Although Westlaw
properly processed most of Posner’s Bluebook-defying citation forms, it choked on some seemingly reasonable
abbreviations that we postulated. For example, abbreviating the word
“Technology” as “Tech.” in “13 Albany Law Journal of Science and Tech. 751″
resulted in a Westlaw error message.[11] In any event, Posner seems to recognize the value of uniformity of style for
aesthetic reasons even where functional concerns are largely absent, as when he
instructs his clerks to add a space to the Westlaw-generated citation “7th
Cir.2000″ to produce “7th Cir. 2000.” We believe functional and aesthetic
concerns such as these provide the motivation for what The Bluebook seeks to accomplish: maximization of reader value
through a uniform system of citation.

Nevertheless, The Bluebook pursues these meritorious ends through cumbersome means. Posner is
correct in his claim that “[e]fforts to impose uniformity . . .
encounter rapidly diminishing returns.” He aptly notes that the core problem
with The Bluebook is that it is
unwieldy. It still applies a twentieth-century method in a much larger, twenty-first
century world. What worked for The Bluebook with twenty-six pages in 1926 does not scale well to
its current 511 pages and beyond. The Bluebook is now offered in an
electronic format, with full-text search capabilities and a few other enhancements
that titillate the senses of those legal writers with a formatting fetish.
These capabilities, however, do not go far enough to address the fundamental
unwieldiness and lack of scalability that so frustrate Posner and many others
on the supply side of legal writing. If, as Posner indicates, not all legal
publishers use The Bluebook,[12] it is not because there is no advantage to uniformity but because, at least in
the eyes of the nonconforming publishers, the advantage is slight relative
to the burden. This is an important
qualification that Posner glosses over, but one that clarifies the required
solution: a system of citation that maximizes the value to the reader through
uniformity while simultaneously minimizing the burden on the writer (and our
nation’s law students) through ease of use. We see promise for this solution in
citation-formatting software.

III. The Promise of Computer-Generated Citations

Citation-formatting software could significantly ease the
burden on writers of producing uniform citations by internalizing much of the
tedium that accompanies manual use of The Bluebook. With its 511 pages of detailed conditions, tables,
and internal cross-references, The Bluebook reads much like the U.S. Tax Code, and just as
TurboTax and other tax software packages have expedited use of the Tax Code,
software could streamline use of The Bluebook’s intricate rules.

An example is illustrative. Suppose an author wishes to
cite to the U.S. Supreme Court case of Southern Pacific Co. v. Jensen.[13] The author might select “Case” from a short list of options and then “U.S.
Supreme Court.” The software would then present the author with a template in
which to input all the required information, such as case name, reporter name
(the software could provide guidance in selecting the preferred reporter), volume,
start page, pin cite, date, and signal. After entering all the required
information, the author would simply hit “Enter,” and the software would return
a properly formatted citation. There would be no need for the author to look up
Bluebook Rule 10.2,
cross-reference Rules 2 and 6.1(b), and consult Tables T1 and T6, nor would the
author have to worry about recalling the order in which information should
appear, the typeface for a case name (or for adjacent characters such as
commas), or the prescribed abbreviation for names like “Southern Pacific
Company.” In short, there would be no need for the author to wade through a
mire of conditions, lists, and exceptions-or even remember them-since they
would be either internalized or summarily presented during the short dialog
with the software.

By making it easier for writers to produce uniform
citations, such software would benefit those on both sides of legal writing and
improve the efficiency of the system. We are not, however, advocating for a
blind codification of everything in The Bluebook, or worse, building up an even larger rule base just because software
reduces the cost of rules to the writer. As we mentioned previously, every rule
should somehow benefit the reader, and we join Posner in questioning the extent
to which some of The Bluebook’s prescriptions impart such a benefit. Moreover, some rules may not be easily
incorporated into a computer algorithm or even presented to the writer as
succinct, context-dependent guidelines. Such rules in particular will require
careful thinking about the benefits and burdens of their adoption. But because
software creation forces creators to carefully consider not only how each rule
relates to each other rule but also how to implement each rule in the software, creating software in
conjunction with the rules should result in greater consideration of the
tradeoffs associated with each rule. This, in turn, should result in a better
set of rules for the legal community as a whole.

Given the benefits of citation-formatting software, it is
not surprising that a number of software products have already entered this
competitive space, though all have shortcomings. Programs such as RefWorks[14] and CiteIt[15] claim to
accommodate The Bluebook, but because
they are designed as comprehensive research tools they can be cumbersome to use
and do not integrate easily enough with Microsoft Word. Somewhat more promising
is Citrus, a Microsoft Word plugin designed to allow users to quickly and easily
put their citations in Bluebook format.[16] Although seemingly simple to use (based on its online video tutorial), the
software is unfortunately geared toward legal practitioners and does not
support law review format (for example, Citrus does not provide support for the
“supra” form). Moreover, its
exorbitant price of nearly $1000 per commercial user per year further exaggerates
the importance of form over substance beyond what is already implied by The
Bluebook’s oversized volume, thereby
discouraging its widespread adoption. Word 2010, the latest iteration of
Microsoft Word itself, costs $140 for the entire word-processing program and
contains a citation-formatting function remarkably similar to what we recommend
that could eventually provide an effective solution. Currently, however, Word
does not include The Bluebook among its supported formats.

Once a simple and effective software solution is created,
we believe maintenance costs would be vastly lower than the costs associated
with printing and distributing hardcopies of The Bluebook’s ever-larger tome, which, at current rates of
accretion, may require two volumes by 2050. Free, bundled, or attractively
priced software would compound the benefits to writers of using it and thereby
help tip network effects in favor of efficiency rather than against it. This
would reverse the current state of affairs in which, according to Posner,
network effects have contributed to the legal citation system spiraling into
disutility. In addition to saving writers substantial time and money each year,
widespread replacement of The Bluebook with formatting software would also benefit readers by producing
greater uniformity,[17] which is, after all, the objective stated on The Bluebook’s own cover.

It is possible, perhaps even likely, that incumbent
inertia may constrain The Bluebook’s big
four Ivy League sponsors-the flagship law reviews of Columbia, Harvard,
Pennsylvania, and Yale-from promoting or developing such a beneficial tool. Yet
if prestige is indeed an advantage as Posner suggests, then perhaps Stanford’s
Center for Computers and Law (CodeX), whose self-declared mission is “to
explore ways in which information technology can be used to enhance the quality
and efficiency of our legal system while decreasing its cost,”[18] or some other such high-prestige venture, may wish to take up the banner of
moving our system of legal citation into a new age of efficiency that is long
overdue.

† Suggested citation: Stephen M. Darrow &
Jonathan J. Darrow, Beating the Bluebook Blues: A Response to Judge Posner,  109 Mich. L. Rev. First Impressions 92 (2011),

http://www.michiganlawreview.org/firstimpressions/vol109/Darrow&Darrow.pdf.

* Stephen
M. Darrow holds a J.D. from Harvard Law School and an M.S. in Computer Science
from the Thomas J. Watson School of Engineering and Applied Science at the
State University of New York at Binghamton.

** Jonathan
J. Darrow is an S.J.D. candidate at Harvard Law School and previously served as
Assistant Professor of Business Law at Plymouth State University. He holds an
M.B.A. from Boston College and a J.D. from Duke University. He completed the
LL.M. program at Harvard Law School in 2009.

[1]. Richard A. Posner, The
Bluebook Blues, 120 Yale L.J. 850 (2011), available at http://www.yalelawjournal.org/images/pdfs/940.pdf
[hereinafter Posner, The Bluebook Blues].

[2]. The word “subciting” is not found
in standard English dictionaries. However, one online dictionary offers these
trenchant definitions:

1. A cruel and unusual punishment for masochistic
first-year law students interested in furthering their competitive instincts in
another academic venue. 2. The method by which egomaniacal law professors can
get away with lazy academic work and/or inattention to detail. Law reviews and
student law journals feast on first-years willing to put in the requisite hours
to subcite.

Subciting, Urban Dictionary,
http://www.urbandictionary.com/define.php?term=subciting (last visited Mar. 20,
2011).

[3]. Do not abbreviate “Alaska”-ever. See The Bluebook: A
Uniform System of Citation 436 tbl.T.10.1 (Columbia Law Review Ass’n et
al. eds., 19th ed. 2010) [hereinafter The
Bluebook (19th ed.)].

[4]. The period at the end of “id.” should, of course, always be italicized. See
id. R. 4.1, at 172.

[5]. Law Sch. Admissions Council &
Am. Bar Ass’n, Official Guide to
ABA-Approved Law Schools 870 (2011) (indicating that 44,004 J.D.
students graduated in 2009); Purchase Bluebook Products, The
Bluebook, http://www.legalbluebook.com/Purchase/Products.aspx?op=Book
(last visited Mar. 18, 2011) (offering the most recent edition of The
Bluebook for $32 plus shipping, or a
three-year subscription to The Bluebook Online for $50).

[6]. The “Abbreviations” entry in the
index references 371 of The Bluebook’s 511 pages, or 72.6 percent. See The Bluebook (19th ed.), supra note 3, at 475-76.

[7]. Id. at 368, 437, 367-68, respectively. The latter pages indicate that “BB”
can be used to represent at least two different publications.

[8]. Posner, The Bluebook Blues, supra note 1, at 852. See also Richard A. Posner, Goodbye to the Bluebook, 53 U.
Chi. L. Rev. 1343, 1344 (1986) [hereinafter Posner, Goodbye to the
Bluebook].

[9]. Posner, The Bluebook Blues, supra note 1, at 855. See also The
Bluebook (19th ed.), supra note 3, at 431 tbl.T.6 (noting that “Railway” should be
abbreviated “Ry.”).

[10]. See, e.g., James D. Gordon III, Oh No! A New
Bluebook!,” 90 Mich. L. Rev. 1698, 1702 (1992)
(“[C]itations should be consistent enough to permit immediate
comprehension . . . .”).

[11]. Entry of the specified citation
as abbreviated into the Westlaw box entitled “Find this document by citation”
on Mar. 21, 2011 produced the following error message: “We cannot process this
FIND request because this citation may contain incorrect information or because
the document is not available on Westlaw.” A similar search on the same date
using the citation format approved by The Bluebook, and another using the journal’s full name without
any abbreviation, each produced the desired document.

[12]. Posner, The Bluebook Blues, supra note 1, at 859.

[13]. 244 U.S. 205 (1917).

[14]. RefWorks,
http://www.refworks.com/ (last visited Mar. 23, 2011).

[15]. CiteIt!,
http://www.citeit.com/ (last visited Mar. 23, 2011). See also Zotero, http://www.zotero.org/
(last visited Mar. 23, 2011) (offering free, university-produced, donor-funded
software that integrates with the Firefox browser); CiteGenie, http://www.citegenie.com/ (last visited Mar. 23,
2011) (“CiteGenie^TM will create citations in
Bluebook . . . format[].”); EndNote,
http://www.endnote.com/ (last visited Mar. 23, 2011); WestlawNext, http://west.thomson.com/
westlawnext/seeit/ebook/pdf/L-353624.pdf (“[P]aste text into your work product
with the official citations-including The Bluebook . . . format[].”).

[16]. Citations Made Simple, Citrus,
http://www.cit-r-us.com/index.html (last visited Mar. 23. 2011).

[17]. Under the current state of
affairs, for example, even after rigorous editing at top law schools, citations to the “Harvard Business Review”
exhibit variety in punctuation, abbreviation, and order of information. See,
e.g., Jeffrey M. Lipshaw, The
Venn Diagram of Business Lawyering Judgments: Toward a Theory of Practical
Metadisciplinarity, 41 Seton
Hall L. Rev. 1, 26 n.77 (2011) (“88 Harv. Bus. Rev. 44 (Sept. 2010)”);
Scott J. Davis, Would Changes in the Rules for Director Selection and
Liability Help Public Companies Gain Some of Private Equity’s Advantages?, 76 U.
Chi. L. Rev. 83, 90 n.30 (2009) (“85 Harv Bus Rev 18, 19 (July/Aug
2007)”); Kenneth M. Siegel, Protecting the Most Valuable Corporate Asset:
Electronic Data, Identity Theft, Personal Information, and the Role of Data
Security in the Information Age, 111 Penn St. L. Rev. 779, 814 n.379 (2007)
(“Harvard Bus. Rev., Oct. 2005, at 96″). We thank Robert Bird for alerting us
to this example.

[18]. Overview, Codex:
Stanford Center for Computers and Law, http://codex.stanford.
edu/ (last visited Mar. 17, 2011).

I. Introduction

Nearly half a century ago, Congress adopted the Investment
Company Act because of its concern with the potential for agency conflicts in
investment funds, including mutual funds. The Act gave shareholders the right
to vote on adviser fees and directors, thereby opening the door to governance
through the use of voice. Shareholder activism in mutual funds nevertheless
remains uncommon, which is widely attributed to collective action problems. Because
shareholders in mutual funds are typically household investors, their stakes
are said to be too small to make activism worthwhile. In a recent article, John
Morley and Quinn Curtis offer a deeper explanation for fund shareholders’
passivity, arguing that the use of voice is discouraged by the easy
availability of exit-the ability to redeem one’s shares in the fund.[1] This argument is based on Albert Hirschman’s
influential book, Exit, Voice and Loyalty,[2] yet it fails to fully capture the
subtle implications of Hirschman’s work. After all, the easy availability of
exit may also encourage voice. This Essay explains
how the easy availability of exit from mutual funds encourages shareholder
voice, at least in theory. By analyzing the responsibility of 401(k) plan
fiduciaries to prudently select investment options that plan participants can
choose from, this Essay also explains why mutual fund governance might work in
practice.

Before getting to the heart of the matter, it is
useful to clarify the meaning of “voice” in the context of fund governance.
Hirschman defined voice as any attempt “to change, rather than to escape from,
an objectionable state of affairs, whether through individual or collective
petition to the management directly in charge, through appeal to a higher
authority with the intention of forcing a change in management, or through
various types of actions and protests.”[3] Morley and
Curtis apply a similarly broad definition that encompasses both voting to lower
fees or change managers, as well as putting pressure on the fund’s directors (“lobbying”).
Their analysis focuses on voting, and shows that mutual fund shareholders can
be expected to consistently prefer exit to voting. By contrast, the act of
putting pressure on the fund’s directors-or directly on the fund adviser-features
less prominently in the analysis. As we will see, it is this informal use of
voice that holds promise as a tool of fund governance.

II.
The Interaction Between Exit and Voice

Clearly, the easy availability of exit may
discourage voice: If one can easily exit, why bother to use voice? The notion
that the easy availability of exit may encourage voice therefore seems counterintuitive at first. However, as
Hirschman explains, “The chances for voice to function effectively as a
recuperation mechanism are appreciably strengthened if voice is backed up by
the threat of exit, whether it is made openly or whether the possibility of
exit is merely well understood to be an element in the situation by all concerned.”
As a result, while “the willingness to develop and use the voice mechanism is
reduced by exit, [the] ability to use it
with effect is increased by it.” The probability that the use of voice will
be effective obviously plays an important role in deciding whether to exit or
use voice. If exit is easily available, this makes the threat of exit more
credible; this in turn results in a higher probability that the use of voice
will be effective. Viewed this way, easy availability of exit makes voice more
attractive.

As an example of this peculiar interaction between exit
and voice, consider the dilemma faced by a corporate shareholder who is
dissatisfied with the way her portfolio firm compensates its executives. Such a
shareholder can either exit or use voice. The formal way to use voice is by
voting; the recent Dodd-Frank Act grants shareholders say-on-pay, albeit the
outcome of the vote is not legally binding. The informal way to use voice is by
communicating concerns directly to management, a real option to institutional
shareholders: studies have found that as many as 55 percent of institutional
investors are willing to engage directly in discussions with the firm’s executives.[4] In both cases, management will have
discretion in deciding whether or not to take measures alleviating the
shareholder’s concerns. The probability that management will do so, that is the
probability that the use of voice will be effective, depends in part on how
credible the threat of exit is. Management will generally want to prevent
dissatisfied shareholders from exiting, given the downward pressure on the
share price this may cause. A decrease in the share price, after all,
negatively affects the variable compensation many executives receive.[5] Moreover, a decrease in the share price increases the probability of a hostile
takeover.[6]

At first glance, the threat of exit appears credible given
how easily investors can sell their corporate shares in liquid markets.
However, a significant downside to exiting (or “switching” from one portfolio
firm to another) is that the cash amount that a shareholder receives for selling
her shares in the market may not suffice, and is indeed unlikely to suffice, to
purchase a substitute share that is expected to yield higher returns. This mitigates
the threat of exit and therefore makes it easier for management to ignore the
shareholder’s concerns. The fact that sale prices in corporations reflect
expected returns thus lowers the probability that the use of voice will be
effective and, all else being equal, makes voice less attractive.

III. The Threat of Exit in Mutual Funds

Sale prices in mutual funds, by contrast, do not reflect expected returns. Rather
than selling their shares on the market, shareholders in mutual funds who are
dissatisfied with the fund advisor’s compensation level can redeem their shares
and receive a cash amount equal to a pro rata share of the fund’s assets (after
debts and liabilities), which is called the net asset value per share (“NAV”).
This cash amount should suffice to
buy a substitute share in a different mutual fund with the same NAV but with
higher expected returns because of lower fees. As a result, shareholders whose
concerns are ignored do not face a similar barrier to exiting as shareholders
in corporations do, and the threat of exit is very credible. Fund advisors will
generally want to prevent dissatisfied shareholders from exiting, as their
compensation is usually tied to the amount of assets under management. All else
being equal, this should make fund advisors more responsive to shareholders’
concerns, and this, in turn, makes voice more attractive.

Importantly, the significance of a dissatisfied
shareholder’s threat of exit depends not only on how credible the threat is,
but also on the number of shares that the shareholder would redeem. Given that
shareholders in mutual funds are typically household investors, this number is
generally low. The fund advisor, therefore, would not need to bother when a shareholder
informally voices concerns, unless of course there is reason to believe that
the concerns are tacitly shared by a wider group of shareholders. Thus, share-ownership
dispersion acts as a double-edged sword: it discourages voice not only by
creating collective action problems, but also by diluting the threat of exit
and hence the likelihood that voice will be effective.

IV. Why Governance Might Work in Mutual Funds

Even if fund managers may be inclined to ignore the voice
of individual investors, they can be expected to heed the voice of 401(k) plan
fiduciaries. By 2009, no less than 68 percent of mutual fund investors owned
funds inside an employer-sponsored pension plan.[7] The employer typically appoints a fiduciary who has a duty under the Employee Retirement
Income Security Act of 1974 “to prudently select and monitor” investment
options that participants in the plan can choose from. Under existing law, this
duty does not require fiduciaries to minimize fees associated with investment
options.[8] However, the issue is high on the agenda of the U.S. Department of Labor, which
has repeatedly stated that fiduciaries should monitor fees[9] and has recently adopted a rule requiring fiduciaries to disclose information
regarding fees.[10] While
these disclosures are intended to enable plan participants to make their own
investment decisions, they are likely to increase scrutiny of plan fiduciaries’
selection of investment options.[11] This may cause plan fiduciaries to pay more attention to fees and to oppose fee
increases through the informal use of voice, backed by the significant threat
of removing the fund from the plan’s menu of investment options and replacing
it with another mutual fund or a different type of fund altogether.[12]

In fact, 401(k) plan fiduciaries may already be opposing fee increases through the informal use of voice-we
simply don’t know. After all, when plan fiduciaries voice their concerns by
communicating directly with the fund’s directors or with the fund adviser,
their activism remains unknown to the public. “Behind the scenes” activism by
plan fiduciaries thus is an interesting avenue for future research, especially
in light of mounting evidence of behind the scenes activism by corporate
shareholders.[13]

V. Conclusion

As the Supreme Court’s recent decision in Jones v. Harris Associates L.P. reminds
us, agency conflicts in mutual funds are potentially significant.[14] The question of whether fund governance through the use of voice works therefore
is an important one. Activism in mutual funds appears to be uncommon, which
scholars have sought to explain by pointing to collective action problems and
the easy availability of exit. However, as the preceding analysis has shown,
the easy availability of exit may actually encourage voice, at least when it is expressed through informal channels. To complete the
explanation of shareholders’ passivity, one needs to take into account the fact
that the high degree of fund-ownership dispersion discourages shareholder voice
not only by creating collective action problems but also by diluting the threat
of exit and, consequently, the likelihood that the use of voice will be effective.

By focusing on the threat of exit, it also becomes
clear that whereas the use of voice by individual shareholders is unlikely to
be effective, the use of voice by 401(k) plan fiduciaries is much more likely
to be effective. While such fiduciaries do not hold shares themselves (and
therefore are not entitled to vote), they are responsible for selecting investment
options that plan participants can choose from, and for doing so in a prudent
manner. This means they have the ability to, and may even be obliged to, remove
from their menu of investment options any mutual fund whose advisor ignores concerns
about excessive fees. The implicit or explicit threat of such removal is what
makes the informal use of voice by plan fiduciaries a powerful governance
mechanism, the full potential of which is yet to be unleashed. Governance in mutual
funds, then, might wo

         [1].    John Morley & Quinn Curtis, Taking Exit Rights Seriously: Why
Governance and Fee Litigation Don’t Work in Mutual Funds, 120 Yale L.J. 84, 106 (2010).

         [2].    Albert
O. Hirschman, Exit, Voice And Loyalty: Responses To Decline In Firms, Organizations,
And States (1970).

         [3].    Id. at 30.

         [4].    See Joseph
A. McCahery, Laura T. Starks & Zacharias Sautner, Behind the Scenes: The Corporate Governance Preferences of
Institutional Investors, at 13 (2010). AFA 2011 Denver Meetings Paper, available at http://ssrn.com/abstract=1571046.

         [5].    See Anat
R. Admati & Paul Pfleiderer, The
“Wall Street Walk” and Shareholder Activism: Exit as a Form of Voice, 22 Rev. Fin. Stud. 2245 (2009)
(developing a theoretical model that shows that the threat of exit by a large
shareholder, via its potential negative effect on executive compensation,
generally discourages executives from taking actions that are undesirable from
the shareholders’ perspective).

         [6].    See Henry
G. Manne, Mergers and the Market for
Corporate Control, 73 J. Pol.
Econ. 110 (1965) (discussing the market for corporate control);
Radhakrishnan Gopalan, Institutional
Stock Sales and Takeovers: The Disciplinary Role of Voting with Your Feet (2008) (finding that block sales increase the probability of a takeover).

         [7].    Investment
Company Fact Book 84 (2010).

         [8].    See Hecker v. Deere & Co., 556 F.3d 575, 578-79 (7th Cir. 2009) (stating that “nothing
in ERISA requires every fiduciary to scour the market to find and offer the
cheapest possible fund”); see also John M. Vine, Prudent Investing, 38 Tax
Mgmt. Comp. Planning J. 1, 5 (2010) (stating that “ERISA does not
require a fiduciary to make the best or most profitable investment decisions”);
Jill E. Fisch, Rethinking the Regulation
of Securities Intermediaries, 158 U.
Pa. L. Rev. 1961, 1985 (2010) (stating that “[e]xisting law does not
require an employer or plan provider to maximize returns or minimize fees”).

         [9].    See U.S. Dept. of Labor, Understanding
retirement Plan Fees and Expenses 2 (2004) (stating that “evaluating
plan fees and expenses associated with . . .  investment options . . . are an
important part of a fiduciary’s responsibility” and that this responsibility is
ongoing); id. at 3 (stating that
“employers should pay attention to [fees for investment managers, such as
mutual fund managers]“); see also U.S. Dept. of Labor, A Look at 401(k) Plan Fees 3 (2010) (stating
that employers must “monitor investment alternatives . . . once
selected to see that they continue to be appropriate choices”).

       [10].    29 CFR § 2550.404a-5(d)(1)(iv).

       [11].    See John F. Wasik, Pump Up a 401(k) by
Lowering the Fees, N.Y. Times
(Sept. 15, 2010) (suggesting that the Department of Labor’s new rules should
enable plan participants to compare fees and hold employers accountable for
their selection of investment options).

       [12].    See Jane Hodges, Cheaper Choice in 401(k)s,
Wall St. J. (Aug. 2, 2010)
(describing how plans are increasingly offering collective trust funds, which
typically have lower expenses than mutual funds); see also Deloitte
Consulting LLP & The International Society of Certified Employee Benefit
Specialists, 401 (k)
Benchmarking Survey 28 (2009) (finding that 72 percent of plan sponsors
who responded to the survey handle underperforming funds by replacing them and
that 39 percent replaced a fund due to poor performance within the last year).

       [13].    See
e.g., Joseph A. McCahery, Laura
T. Starks & Zacharias Sautner, Behind
the Scenes: The Corporate Governance Preferences of Institutional Investors (2010); AFA 2011 Denver Meetings Paper, available
at http://ssrn.com/abstract=1571046; Institutional
Shareholder Services, The State of Engagement between U.S. Corporations and
Shareholders (2011); M. Weisbach, W. Carleton & J. Nelson, The Influence of Institutions on Corporate
Governance through Private Negotiations: Evidence from TIAA-CREF, 53 J. Fin. 1335 (1998).

       [14].    Jones v. Harris Assocs., 130 S. Ct. 1418
(2010) (addressing the issue of fund advisors’ liability for charging excessive
fees).

Section 1501 of the Patient Protection and Affordable Care Act[1] added section 5000A to the Internal Revenue Code to require most individuals[2] in the United States, beginning in the year 2014, to purchase an established minimum level of medical insurance. This requirement, which is enforced by a penalty imposed on those who fail to comply, is sometimes referred to as the “individual mandate.” The individual mandate is one element of a vast change to the provision of medical care that Congress implemented in 2010. The individual mandate has proved to be controversial and has been the subject of a number of lawsuits contending that it is unconstitutional. It is not our purpose in this article to discuss its constitutionality. Rather, this piece focuses on the viability of one of the justifications that often is put forth for the adoption of the individual mandate: the “free-rider” problem.

I. A Cure for the Free-Rider Problem

A frequently stated defense of the individual mandate is that many persons do not purchase medical insurance, even if they have the resources to do so, and then obtain free medical care when the need arises. The individual mandate will require those persons (often referred to as “free riders”) to pay their share. For example, after the state of Massachusetts adopted a similar medical welfare program, Governor Mitt Romney defended the inclusion of an individual mandate by saying, “[S]omeone has to pay for the health care that must, by law, be provided: Either the individual pays or the taxpayers pay. A free ride on the government is not libertarian.”[3] By “taxpayers,” Governor Romney means that the government pays when the individual does not. That is a bit of an overstatement. As we will see, the government pays only a small portion of the cost that is not borne by uninsured individuals. This same justification has been advanced in briefs in defense of the program and is often advanced in discussion of the program’s merits. For example, according to an Amici Curiae Brief written in defense of the program, “The only economic solution to [the free-rider problem] is to ensure broad participation in insurance pools by all people. The minimum coverage requirement is one way to do this.”[4]

Given that only those without resources will qualify for free medical services when the need arises, we question the extent to which the free-rider problem exists. We conclude that the free-rider problem, if it exists at all, likely is of minor significance and can hardly be said to justify the adoption of an intrusive and expensive health care program. The actual congressional reason for adopting the program seems to rest on entirely different purposes (i.e., universal health coverage and the redistribution of wealth), and the debate over the desirability of the program should focus on the merits of those other purposes. Since universal health coverage cannot be achieved unless there is a redistribution of wealth, the latter objective is the focal point of the program.

II. The Medical Welfare Program’s Viability Depends on an
Individual Mandate or a Comparable Provision

The medical welfare program that Congress adopted is not viable unless it includes an individual mandate or some comparable provision. The defense of the individual mandate therefore is indirectly a defense of the entire program. It is worth considering whether the free-rider defense for the individual mandate is valid since it bears on the determination of the merits of the entire program. Let us see why the individual mandate is essential to the 2010 Act.

First, section 2705 of the 2010 Act prohibits an insurer from denying insurance coverage to an applicant because of poor health. That provision creates an adverse selection problem, which, if unabated, would result in the pool of insured patients (“insureds”) consisting primarily of individuals who currently need medical services. If there were no individual mandate, many people would not purchase insurance until they had a medical condition. That adverse selection would make the premium cost of insurance prohibitive because otherwise virtually all of the insureds would be receiving payments from the insurer that exceed their premiums. The program would fail either because large numbers of persons could not afford the insurance or because the insurance companies would exit the market.

In addition to the adverse selection problem created by the 2010 Act, the individual mandate is also necessary to make insurance affordable for the elderly. If the elderly were charged the actuarially determined cost[5] of insuring them, the insurance would be too expensive for many to afford. To reduce this cost, healthy, young people must buy insurance and pay premiums in excess of the actuarial cost of their coverage to subsidize the elderly. It is this redistribution of wealth that appears to be the actual purpose of the act. Thus, the advancement of the free-rider justification has prevented the debate over the merits of the program from focusing on the critical question of whether a redistribution of wealth from the young to the old and from the healthy to the unhealthy is an appropriate and desirable goal.

In a commentary, Gregg D. Polsky proposed an alternative to the individual mandate. [6] While it is beyond the scope of this piece to comment on that proposal, we will make one observation. Professor Polsky bases his proposal on the view that the purpose of the health reform program is not to require individuals to purchase insurance but rather is to prevent insurers from denying coverage to unhealthy applicants or to charge them higher premiums. To the contrary, insurers cannot afford to ignore the poor health of insured patients (“the insured”) in setting their premiums unless a large number of healthy individuals buy insurance and pay larger premiums than the value they receive. Consequently, an important purpose of the program is to force healthy individuals to be insured and thereby subsidize the coverage of the unhealthy.

III. The Exaggeration of the Free-Rider Problem

The free-rider defense appears convincing until one examines it closely. According to the Economic Scholars’ Brief mentioned above, there were approximately forty million persons in the United States who were uninsured in 2007. Fifty-seven percent of those uninsured persons used medical services that year. The Economic Scholars’ Brief cites a survey stating that, on average, the medical care costs of uninsured persons (“the uninsured”) amounts to about $2,000 per person each year, and over one-third of those costs are paid by the uninsured out of their own finances. How is the rest of that cost financed? The Economic Scholars’ Brief states that 32 percent of the overall cost of the uninsured’s medical services is obtained through an increase in the price of medical services. Consequently, patients who pay for their treatment-insured patients and those uninsured who pay completely for their own treatment-bear that portion of the shortfall. That accounts for about one-half of the cost that the uninsured do not pay.

The Economic Scholars’ Brief states that 14 percent of th

e cost of the uninsured is borne by the government through Medicare, Medicaid, Veterans Affairs services, TriCare (medical insurance for the military and their families), and workers’ compensation. That statement needs some refinement: except for Medicaid, those are programs designed for specific purposes that have naught to do with whether the covered individuals would otherwise have private insurance. Indeed, it is unclear why people in those programs would be described as uninsured. If the government bears a portion of the medical costs of the uninsured, it is only through any additional price that the providers impose on all who purchase medical services. This is merely one aspect of a medical provider’s shifting of costs to those who pay for medical treatment. As to Medicaid, the recipients are persons who could not afford to purchase insurance; the government is not picking up the tab for shirkers who have failed to pay their share of medical expenses.

The image left by those who advance the free-rider defense is that the uninsured are parasites who choose to pass on their own medical costs to the rest of society by obtaining medical care without paying for it. That image does not reflect reality.

Federal law requires that hospitals that take Medicare treat patients

who come to their emergency rooms with emergency conditions regardless of whether those patients can pay for their treatment.[7] The hospitals are not required to provide free treatment if the patients have the means to pay for it. The hospitals can and do collect from those with the means. As previously noted, more than one-third of the cost of treatment provided to uninsured patients is paid for by the uninsured patients themselves. It would seem that there are two likely reasons why the medical providers do not collect the remaining two-thirds of that cost. One reason is that many of the patients do not have the means to make the payments. The other reason is attributable to the collection methods employed by the medical providers. As to why the medical providers sometimes do not enforce collection from those who have the means but do not pay, it is likely that in most cases the amount involved is too small to justify the cost of pursuing collection. Those uninsured persons who can afford to pay for their medical services and do not do so should be relatively few if the medical providers are diligent in collecting debts owed to them.

Many people who cannot afford their medical costs also cannot afford to pay medical insurance premiums. As noted, the average cost of medical treatment to the uninsured is about $2,000 per person. Some will incur a larger expense, some a smaller expense, and some no expense at all. The cost of insurance likely exceeds $2,000 per year. In a letter to Senator Olivia Snow on January 11, 2010, the Director of the Congressional Budget Office (“CBO”) stated that the CBO estimates that in 2016 the annual premiums for a bronze level plan under a health insurance exchange program-the subsidized insurance program that is part of the 2010 Act-will average between $4,500 and $5,000 for an individual and between $12,000 and $12,500 for a family policy. The program will provide four progressively more expensive levels of insurance coverage-the “bronze,” “silver,” “gold,” and “platinum” levels. The bronze level will have the lowest premium available in the exchange program. Thus, a significant percentage of those who cannot pay for their medical costs now will not be able to afford to purchase insurance at more than twice the cost. To a lay reader, the characterization of a person as a free rider suggests that the person has voluntarily taken an action or inaction that imposes costs on others. Those who cannot afford insurance do not choose to be in this predicament; thus the term is inappropriate to use in common parlance even if it may be within the economist’s use of the term.

IV. Those Who Cannot Afford Insurance Continue to Rely
on Others to Pay Their Medical Costs

Moreover, even if one is willing to describe those who cannot afford insurance as free riders, their reliance on outside help is not eliminated by the adoption of the 2010 Act. For taxable years after 2013, certain low- and moderate-income individuals who purchase insurance under a health insurance exchange that the states are required to create will receive a refundable credit that subsidizes their purchase of that insurance.[8] To qualify, the household income of an individual (the aggregate of the modified adjusted gross incomes of that individual and of all individuals for whom the taxpayer is allowed a dependent-exemption deduction and who are required to file a federal income tax return) must at least equal the poverty level and must not exceed four times the poverty level for a family of the size involved.[9] According to the Social Security Administration, the current poverty level for a single individual is $10,830; thus a single individual can have household income of as much as $43,320 and still qualify to have his insurance cost subsidized by the government. For a family of four, the current poverty level is $22,050; such a family can have household income as large as $88,200 and still qualify for a subsidy. Since the poverty-level figures are adjusted each year to reflect inflation, the allowable-income figures will be even higher in 2014 when these provisions first become effective. This scheme suggests that Congress believes that most of the persons with eligible incomes would not purchase insurance without a subsidy because they could not afford it. It is likely, therefore, that persons who are currently using medical services that are paid by others will continue to be subsidized under the new regime.

Persons with low- and moderate-income levels may have fairly high income and still qualify for government subsidies through the grant of refundable tax credits and by paying part of their co-payments. If such persons would be considered free riders before the passage of the 2010 Act, they would seem to still fit that term after the passage of the act. Moreover, many of the persons who cannot afford to purchase insurance are exempted from the individual mandate and so are not required to be insured.[10] Thus, the 2010 Act does not alter the fact that medical expenses of such persons will be borne by others (i.e., the taxpayers). If, contrary to their financial incentives, medical providers are not diligent in collecting payments from uninsured patients who actually can pay, the proper cure is for providers to improve their collection process rather than for the government to adopt an expensive and intrusive new medical care program.

V. Redistribution of Wealth

It seems then that the pre-2010 free-rider problem is of minor consequence and played a very small part, if any, in the decision to adopt the insurance mandate. Congress adopted the insurance mandate for two reasons: (1) to deal with the adverse selection problem created by the 2010 Act’s requirement that insurers provide insurance regardless of an applicant’s health, and (2) to subsidize lower premiums for older or unhealthy insured persons. Congress facilitates the latter goal by requiring healthy, young persons to purchase insurance at a premium in excess of the actuarial cost of that coverage-meaning they pay more than the value they receive. Note, however, that some unmarried persons under the age of twenty-six are covered by their parents’ group insurance, and so they need not purchase insurance until they cease to be covered by their parents’ plan. It is ironic that the supporters of the insurance mandate complain that the current uninsured are passing on their medical costs to those who are insured when the health care program that supposedly cures that situation rests on allowing the elderly and unhealthy to pass on a portion of the cost of their insurance coverage to the young and healthy. To quote a venerable adage, it would seem that what is sauce for the goose would be sauce for the gander.

The insurance mandate requires young, healthy people who are not covered by their parents’ insurance to purchase insurance at a cost that is greater than the value they receive. Although the 2010 Act permits insurers, in setting rates, to take age into account, the act provides that the rates cannot vary by more than three to one for adults.[11] The insurer also cannot take the health of the insured into account in setting a rate.[12] The restriction on variance allowed and exclusion of health considerations mean that the insurance mandate requires young, healthy people who are not covered by their parents’ insurance to purchase insurance at a cost that is greater than the value they receive.

The Economic Scholars’ Brief contends that even the uninsured who do not incur medical expenses increase the cost of health insurance for those who purchase it. While that contention is intended to show that there is an externality that affects interstate commerce, it is also advanced as a justification for requiring nearly universal health insurance coverage. The brief makes two points that purportedly demonstrate the correctness of that contention. Under scrutiny, neither of those points holds up well.

First, the Economic Scholars’ Brief argues that by not purchasing insurance, which would increase the size of the pool of insureds, the uninsured raise the cost of insurance for those who purchase it. The only reason that the uninsured’s acquisition of insurance would lower the premium cost of those who already purchase insurance is for the premiums charged to the uninsured to be greater than the actuarial cost of their insurance. The healthy are deemed to have caused an externality because they chose not to subsidize the medical expenses of the unhealthy. It seems a strained characterization of that consequence to call it an externality; but, if it is one, it is very different from the types of costs inflicted on others that the term ordinarily refers to. A common example of an externality is the cost of factory pollutants on surrounding neighbors. The latter group must involuntarily bear the cost of sickness, decrease in property values, and other negative consequences so that the factory can continue its production for profit.

By way of comparison, consider the case of a group of persons who decide not to purchase automobiles and instead rely on public transportation. If those persons had purchased automobiles, there would have been more workers employed by automobile manufacturers and dealers. It seems more than strange to say that their failure to buy an automobile imposed an externality on those workers who were thereby deprived of employment. Yet, that is the essential thrust of the contention that the failure of the healthy to purchase insurance imposes a cost on those who do purchase it. The circumstance of the healthy who do not purchase insurance is even further removed from causing an externality since the price of an automobile does not include a subsidy for others.

Moreover, the increase of persons who are insured may cause an increase in the demand for medical services-that is, an insured person is more likely to seek medical services than is an uninsured person. Economic principles suggest that an increase in demand that is not matched by an increase in the available supply will cause a rise in the price charged for medical services. That increase in price may offset some of the reduction obtained by having a larger pool of insureds.

Second, the brief argues that, based on empirical studies, when people who once refrained from buying insurance subsequently purchase it, they tend to incur larger medical care expenses than those who were insured earlier in life. The suggested reason for this is that the uninsured do not use preventive medical care that would lower their future medical costs. It would seem that the proper response to that situation is to permit the insurer to charge a larger premium to those who were previously uninsured. If there is an externality here, it is caused by the failure of the insurer to charge the previously uninsured an actuarially accurate premium rather than by the uninsured’s decision not to purchase unneeded insurance.

VI. The Debate over the Merits of the 2010 Act Should
Focus on the Merits of Redistribution

In conclusion, the 2010 Act is designed to redistribute wealth from the young and healthy to the elderly and ill. There are many governmental activities and requirements that cause a redistribution of wealth. There is much to be said in favor of the 2010 Act’s redistribution and much to be said against it. Those discussing the merits and negatives of the health program would more likely respond to each other’s points and thereby reach a sound conclusion if the program were characterized honestly as a redistributive venture rather than as a solution to a free-rider problem that has little or no significance.

The redistribution adopted in the 2010 Act is unusual in that it transfers wealth from the young to the old and from the healthy to the ill, whereas a traditional redistribution would seek to transfer wealth from those with money to the poor. In fact, the redistribution in the 2010 Act disregards the income or wealth of either party except that the poor are excluded from both sides of the transfer. While there is nothing improper about that type of redistribution, its unusual nature may have caused the proponents of the new welfare program to be fearful of declaring that redistribution is the actual primary purpose and function of the program.

Douglas A. Kahn is the Paul G. Kauper Professor of Law at the University of Michigan Law School.

Jeffrey H. Kahn is a professor of law at Washington and Lee University School of Law. The authors would like to thank Professors Jill Horwitz, Nick Bagley, James Hines, Kyle Logue, and John Lopatka for their helpful comments and criticisms of this article.

Suggested citation: Douglas A. Kahn & Jeffrey H. Kahn, Commentary, Free Rider: A Justification for Mandatory Medical Insurance Under Health Care Reform?, 109 Mich. L. Rev. First Impressions 78 (2011), http://www.michiganlawreview.org/assets/fi/109/kahn.pdf.

[1]. Pub. Law No. 111-148, 124 Stat. 119 (2010), as amended by the Health Care and Education Reconciliation Act of 2010, Pub. Law No. 111-152, 124 Stat. 1029 (2010) [hereinafter "2010 Act"].

[2]. There are a number of categories of persons who are exempted from this mandate. I.R.C. § 5000A(d)(2)-(4), (e) (West Supp. 2010).

[3]. Mitt Romney, Health Care for Everyone? We Found a Way, Wall St. J., April 11, 2006, at A16.

[4]. Brief for Economic Scholars in Support of Appellees as Amici Curiae, Thomas More Law Center v. Barack Hussein Obama, 16 (6th Cir. 2011) (No. 10-2388) [hereinafter "Economic Scholars' Brief"].

[5]. The “actuarially determined cost” refers to the amount that accurately reflects the risk that the insured will incur a certain amount of medical expenses in the year of coverage. For example, if data shows that 1 percent of individuals of X age and Y health will incur medical expenses of $10,000 in the year of coverage, then the actuarial cost for one year’s medical coverage for an individual of that age and health will be 1 percent x $10,000 = $100. That figure does not take into account administrative expenses that the premium also must cover.

[6]. Gregg D. Polsky, Commentary, Reconstructing the Individual Mandate As an Escrow Account, 109 Mich. L. Rev. First Impressions 73 (2011), http://www.michiganlawreview.org/
assets/fi/109/Polsky.pdf.

[7]. 42 U.S.C. § 1395dd (2006).

[8]. I.R.C. § 36B (West Supp. 2010).

[9]. § 36B(c)(1)(A). There are additional requirements that must be satisfied.

[10]. I.R.C. § 5000A(e)(1), (2), (5).

[11]. § 2701(a)(1)(A)(iii).

[12]. See § 2701(a). 

Introduction

The recent health care reform law’s most
controversial provision is the individual mandate, which imposes a fine on individuals
who fail to obtain a minimum level of health insurance coverage. Many object to
this policy, arguing that the government shouldn’t force individuals to
purchase health insurance. Others believe that the mandate is a necessary
component to health care reform. What has been missed in the discussion is that
Congress could restructure the individual mandate to avoid the requirement that
individuals purchase health insurance while still fulfilling its principal
function.

The principal purpose of the mandate is not
to require individuals to purchase health insurance. Rather it is to prevent individuals
from gaming a system that prevents insurers from excluding people with
preexisting conditions and from fully differentiating prices for those with
different levels of health. Proponents of the health care law do not care very
much whether someone chooses to insure against future health costs or to
self-insure against those future costs. But they do worry that individuals who
decide to self-insure will ultimately renege on this decision when they require
significant medical care. Self-insurers can renege either by not paying for
medical services they receive or by buying into the insurance system after they
have become sick.

I. The Proposal

Once it becomes clear that the primary
purpose of the mandate is not to require individuals to purchase insurance but
rather to protect against the failure of self-insurers to fully perform, a
solution emerges. In many contexts when parties make important promises on
which others rely, they are required to fund an escrow account or post a surety
bond to ensure that they perform. If those parties fail to perform, these
security devices compensate those who are harmed by the failure. Likewise,
Congress could restructure the individual mandate as an escrow account. If an individual
decided to self-insure against her future medical costs, then this proposed law
would require her to make annual escrow contributions in the same amount as the
penalty under the current mandate.

Once the individual fully performed, the
federal government would return the contributed amounts, with interest at the
market rate for lending money to the government. Ordinarily, full performance would
be assured once the individual reached Medicare age. At that point, if the individual
had remained out of the insurance pool and owed no outstanding medical bills,
then the government would return her money. If an individual died before
reaching Medicare age, then her estate would get the money back, so long as she
had fully performed.

Under this proposal, the government would use
the money contributed to the escrow account in the same manner that the
individual mandate revenue is to be used. The right of the account holder to
redemption upon full performance would therefore constitute an unfunded
contingent obligation of the government to repay the contributions plus
interest.

By reconstructing the mandate as an escrow
account, there would no longer be a financial penalty for self-insuring future
medical costs. Because a performing self-insurer would receive the market rate
of interest for lending to the government, she would be no worse off. While it
is true that a self-insurer would effectively be forced to lend money to the
government, the self-insurer could easily adjust a balanced investment
portfolio to account for this by buying fewer U.S. debt securities. Some might
object that those who lack sufficient liquidity would be unable to make the
required escrow contributions. But those lacking sufficient liquidity to make
the contributions would surely be unable to effectively self-insure, because
self-insuring requires significant liquidity to pay for any medical emergencies
that may arise. Furthermore, the health care reform law provides people with
significant liquidity issues (i.e., poor and lower-middle class people) free
insurance coverage or substantial subsidies to purchase insurance, thereby
reducing the likelihood that they would elect to self-insure in the first
place.

Restructuring the mandate as an escrow
account should be palatable to legislators
who object to the government forcing people to buy health insurance, but who
favor opening up the insurance system to those with preexisting conditions. The
escrow structure would allow people to choose to self-fund without penalty,
while providing protection against those who try to game the system. Furthermore,
reconstructing the mandate as an escrow account would be relatively simple to
implement. Everything in the current health care law could remain the same,
except that fully performing self-insurers would now be entitled to a refund of
their penalties with interest.

II. Possible Objections

A. Too Many Healthy
People Would Opt Out of Health Insurance

By reconstructing the penalty as an escrow
account, this proposal would appear to substantially reduce the cost of
self-insuring. If it did, larger numbers of healthy people might choose to opt
out of the insurance system, which would diminish the average health level of
the insurance pool, requiring an increase in premiums to provide the same level
of coverage.

On first glance, it might appear that the
proposal would substantially reduce the cost of choosing to self-insure. While
a penalty is a sunk cost, the cost of funding the escrow account would be
negligible. The only apparent cost would be that a self-insurer might be
required to over-invest (relative to her preferences) in government debt; but
as mentioned earlier, even this cost would be lower than it might appear
because a self-insurer could adjust her portfolio to account for this forced
investment. If this were in fact the only cost, then self-insuring would become
significantly more attractive than it is 
under the current penalty regime.

But the cost of choosing to self-insure under
the escrow proposal is actually significantly larger than it might appear. Recall
that to receive the escrow payout, the self-insurer must remain out of the
insurance pool until the relevant date (i.e., either upon reaching Medicare age
or upon dying, whichever happens first). Thus, only people who have a very high
degree of confidence that they would want to remain out of the insurance pool
until the relevant date might be influenced by the escrow proposal. Younger people
would have difficulty predicting both their future medical needs and the
evolution of the health care market over several decades, so they would
typically not be motivated by the proposal to opt out of the insurance market. Older
people, who face a much shorter “prediction horizon,” would typically not
choose to opt out because buying insurance (in the reformed insurance market) would
generally be a good deal for them after the new law is implemented. For
example, the new health care law will prohibit insurers from price
discrimination based on preexisting conditions, which older people are more likely
to have. Additionally, the law prohibits insurance companies from charging
older people premiums that are higher than three times the amount charged to
younger people; this aspect of the law does not fully reflect the additional
health care costs of older people. In short, it is likely that relatively few
people would be motivated to opt out of the insurance market as a result of
reconstructing the individual mandate as an escrow account.

B. It’s Too Complex

Turning
the mandate into an escrow account would add some administrative complexity
because the government would have to issue refunds when self-insurers fully
performed. But this marginal administrative burden would be minimal because, as
discussed above, the number of self-insurers who actually performed through the
relevant date would likely be very low. Where self-insurers failed to perform
fully, the system would operate just like the current penalty regime, because
the government would not be obligated to repay the funds it had collected. Only
in those cases where self-insurers fully performed would refunds need to be
processed.

In addition, refund processing in these very
few cases would not be especially onerous. When a self-insurer reached Medicare
age, or if she died before that date, in order to receive a refund, she (or her
estate) would need to show that (i) she owed no outstanding medical bills, (ii)
she had paid in full all of her previous
medical bills, and (iii) she had never obtained insurance coverage. The
self-insurer would attest under penalties of perjury that she satisfied these
requirements. The government could then substantiate these facts by making
inquiries to credit reporting agencies and insurers. If the facts were
verified, the government would issue a refund with interest, just like it does
when taxpayers file claims for refunds for overpaid federal taxes.

C. It Does Nearly
Nothing

The responses to the first two objections
have essentially been that the proposal should operate, as a practical matter,
almost exactly like the current individual mandate system. This similarity
means that nearly the same number of people would opt into the insurance pool
and that the marginal administrative burden of the proposed reform would be
low. Given the similarity, one might object to the proposal on the ground that
it appears to do nothing or, at most, very little.

Though the practical significance of the
proposal would likely be minimal, it still does serve an important purpose. This
proposed reform clarifies that the government’s objective is not to require the
purchase of health insurance but rather to open up the insurance market while
preventing strategic behavior that undermines this goal. Under the proposal,
the government would not punish those who wish to self-insure, but would prevent
individuals from selectively participating in the insurance market only when
they are ill. The fact that few would actually choose to self-insure under the
proposal does not mean that the proposal would not be worthwhile.

D. It Does Not Solve
the Constitutional Problem

Whether restructuring the mandate as an
escrow account bolsters the argument that the health care law is constitutional
is unclear. Those who feel that the Constitution forbids the federal government
from penalizing the nonpurchase of health insurance might conclude that
requiring an escrow contribution is likewise prohibited. Other skeptics of the
current mandate may be swayed, believing that the absence of a financial
punishment (in present value terms) is constitutionally significant.

Regardless, the argument made here is a
policy argument, not a constitutional one. It is targeted at policymakers who
like the idea of opening up the insurance market but are offended by the notion
that the government is requiring the purchase of health insurance. A pure
constitutional solution (if one is necessary) is easy to envision, but it would
not in any way address the concerns of those who object to the mandate on
normative grounds. For example, the mandate could easily be restructured as a
tax credit for purchasing insurance. This could be accomplished by increasing
the income tax liability of everyone through a 100 percent tax on the first specified
amount of taxable income, and then giving a tax credit in the same amount to
everyone who purchases insurance. While this sort of restructuring would solve
the constitutional problem, it would not ameliorate the concerns of those who
object to the mandate on the ground that the government should not require the
purchase of a health insurance plan. Reconstructing the mandate as an escrow
account, however, is responsive to this concern.

Conclusion

Turning the mandate into an escrow account would
remove the financial penalty that would be imposed on self-insurers under the
health care law. At the same time, it would protect the insurance system from
the gamesmanship that would take place without a mandate or security device. Furthermore,
changing the mandate to an escrow account would technically be very easy, as
the practical effect of the change would be minimal. The entire health care law
would remain the same, except that fully performing self-insurers would be
entitled to a refund of their “penalties” with interest.

Gregg D. Polsky is the Willie
Person Mangum Professor of Law at the University of North Carolina School of Law. He would like to thank Al Brophy, John Coyle, Brant Hellwig, Joan Krause, Andrew Lund, and Richard
Saver for helpful conversations about this idea.

The Court’s opinion also ably demonstrates the inadequacy of [requiring] “justice . . . sit supinely by” and be flouted in case after case before a remedy is available. . . . The decision today will not end the racial discrimination that peremptories inject into the jury-selection process. That goal can be accomplished only by eliminating peremptory challenges entirely.

When lawyers select a jury for an upcoming criminal trial, they have two mechanisms to remove prospective jurors from the jury pool: cause challenges and peremptory strikes. Jurors can be removed for cause because they lack the ability to remain fair and impartial. For example, a person whose sibling works for the district attorney’s office may be excludable for cause; similarly, a person who indicates that she would never credit a police officer’s testimony could similarly be challenged for cause. Both prosecutors and defense lawyers have an unlimited number of cause challenges because no biased jurors should be seated. Additionally, most states provide the two parties with a certain number of peremptory strikes (typically twelve for each party selecting jurors for a twelve-person jury). The lawyers can use these strikes to exclude anyone they wish, for almost any reason. A party’s decision to remove a prospective juror with a peremptory strike, however, cannot be motivated by race.

In Batson v. Kentucky, the Supreme Court revisited its decision in Swain v. Alabama,[2] in which the Court imposed a “crippling burden of proof” on those who argued that prosecutors discriminated against African American jurors in jury selection. Swain essentially demanded that defendants prove that prosecutors eliminated African Americans from juries in case after case before an equal protection claim would have any chance to prevail. Batson removed this requirement and established a three-step process to decide claims that a party used its peremptory challenges to intentionally discriminate on the basis of race. First, the party making the allegation must establish a prima facie case to support the claim. The burden is not a high one.[3] Second, if the trial court finds a prima facie case has been made, the other party (whose peremptory strikes are in question) must supply a race-neutral explanation for the strike. Third, assuming the supplied reasons are actually race-neutral, the trial court must then determine whether it finds them credible and legitimate. If it does, the strike is allowed and the juror is excluded from the jury pool. If the court finds the reasons given for the strike to be illegitimate, implausible, or non-race-neutral, the peremptory strike is prohibited and the juror is allowed to serve on the jury.

Although every Supreme Court pronouncement raises some complicated questions at the margins, the Batson framework provides reasonable guidance. Nonetheless, judges have demonstrated that they are either unable or unwilling to enforce it to ferret out racism in their courtrooms. According to Illegal Racial Discrimination in Jury Selection: A Continuing Legacy, a recent report published by the Equal Justice Initiative, “Racially biased use of peremptory strikes and illegal racial discrimination in jury selection remains widespread, particularly in serious criminal cases and capital cases.” In other words, when the stakes are highest, the state is most willing to play fast and loose with prospective jurors’ equal protection rights. And in these cases, courts have often refused to intercede. Trial courts, intermediate appellate courts, and even state supreme courts have shirked their duty to take seriously these recurring claims of racial discrimination. Although the U.S. Supreme Court reassured us in Purkett v. Elem that “implausible or fantastic justifications may (and probably will) be found to be pretexts for purposeful discrimination,” that statement appears now to be aspirational, not descriptive. Some recent eye-opening examples reflect the problem’s magnitude.

In 2004-in one of the many trials in the saga of the State’s highly publicized prosecution against Curtis Flowers-the trial court found no discrimination where the prosecutors used all fifteen of its peremptory strikes against African Americans and held that the prosecutors could rely on things that other jurors said to justify the strike of an African American.[4] The trial court’s clearly erroneous Batson rulings led to an enormous drain on resources, as the Mississippi Supreme Court rightly ordered a new trial three years later.

In the recent 2009 second-degree murder trial of rap artist Corey Miller, the state singled out African American jurors to find out if they ever listened to rap music. Then, when making a peremptory strike that triggered one of the defense lawyer’s Batson objections, the prosecutor provided as a “race-neutral” explanation that the stricken juror was not removed because of her race, but because of her enjoyment of “the rap music.” Nonetheless, the trial court failed to identify the pretext.

These are just two examples of judicial intransigence among hundreds that have arisen in trial courts across the country in the past few years, but they demonstrate how the judiciary can render a Supreme Court opinion hollow in practice. Even the Supreme Court’s 2005 opinion in Miller-El v. Dretke, which gave a new trial to a man convicted of murder in the 1980s, has not done enough to protect Batson from judicial evisceration.

The Mississippi Supreme Court’s 2007 decision in Flowers v. State provides some weight to the counter-argument that appellate courts play a corrective role when trial courts falter, but the reality is that they too have been reluctant to enforce Batson. For example, in Dressner, a case with a petition for certiorari currently pending before the U.S. Supreme Court, the Louisiana Supreme Court botched its Batson analysis.[5] Although the defendant expended significant time and effort briefing its discrimination claim, the court buried the issue in an “unpublished appendix” to the opinion.[6] Moreover, the court approved of all of the state’s peremptory strikes even though seven of nine were used to exclude African Americans; the prosecutor used contradictory reasons to explain the strikes; the prosecutor mischaracterized jurors’ answers; and the prosecutor repeatedly claimed that he struck African Americans because they gave answers indicating they would favor the state. Corey Miller’s case is on appeal in Louisiana, and the Louisiana Supreme Court’s opinion in Dressner raises the possibility that the court may hold that an African-American juror’s like of “the rap music” is as credible a reason as the prosecutor’s astonishing claim that he removed an African American juror because she was likely to ignore the defense attorney’s plea for mercy to spare the defendant from the death penalty.

The U.S. Supreme Court’s recent ruling in Thaler v. Haynes-which apparently limited the force of previous cases favorable to criminal defendants-has exacerbated appellate courts’ unwillingness to find Batson violations.[7] Indeed, in Dressner, the Louisiana Supreme Court, which had been reversed by the U.S. Supreme Court in Snyder v. Louisiana, expressly noted that Haynes proved that Snyder “left [the Batson] landscape completely unchanged.” Other courts have relied on Haynes to deny relief in federal habeas and state post-conviction proceedings.

Every case presents unique facts and considerations. However, the dearth of recent cases in which courts have actually found racial discrimination in jury selection suggests not that such discrimination doesn’t occur, but that the judiciary has failed to identify and remedy it. As the Mississippi Supreme Court observed in Flowers, “[R]acially motivated jury selection is still prevalent twenty years after Batson was handed down.” Statistics collected in jurisdictions across the South and compiled in A Continuing Legacy suggest that prosecutors still disproportionately strike prospective African American jurors-sometimes at an alarming 80 percent clip. The statistics are so powerful that they simply cannot be fully explained on grounds that exclude race.

It seems that we may be slipping back into the Swain era, when in practice prosecutors were never prevented from eliminating African Americans from the jury pool. As the Batson Court put it, the Swain era was one in which “prosecutors’ peremptory challenges [were] largely immune from constitutional scrutiny.” Where trial courts defer to prosecutors, no matter how implausible the justification for a strike, and where appellate courts ignore startling statistics and the differential treatment of white jurors, Batson becomes toothless.

Discrimination in jury selection touches on two recurring themes in the continued struggle for equal justice: (1) the exclusion of African Americans from integral parts of our democracy and (2) judicial indifference to the Equal Protection Clause’s demands. Today’s battle may not be as public as the hard-fought struggles to guarantee African Americans access to the ballot box and integrated classrooms, but it is just as important. If the courts continue to allow state actors to remove 70%, 80%, or even 90% of qualified African American jurors without scrutiny, the system’s legitimacy will be called into question. We may be left with no choice but to acknowledge that Justice Marshall’s warning was correct, not because Batson itself failed, but because we failed Batson.

Bidish Sarma is a staff attorney at the Capital Appeals Project in New Orleans, Louisiana. The views expressed by the author do not necessarily represent those of the Capital Appeals Project.

Suggested citation: Bidish Sarma, Commentary, When Will Race No Longer Matter in Jury Selection?, 109 Mich. L. Rev. First Impressions 69 (2011), http://www.michiganlawreview.org/assets/fi/109/sarma2.pdf.

[1]. See Batson v. Kentucky, 476 U.S. 79 (1986).

[2]. Swain v. Alabama, 380 U.S. 202 (1965).

[3]. See Johnson v. California, 545 U.S. 162, 170 (2005).

[4]. See Flowers v. State, 947 So. 2d 910, 925-26 (Miss. 2007).

[5]. Bidish Sarma and the Capital Appeals Project represent Mr. Dressner on his appeals.

[6]. State v. Dressner, 45 So. 3d 127 (La. 2010).

[7]. Thaler v. Haynes, 130 S.Ct. 1171 (2010) (per curiam).

In anticipation of proxy season-the springtime ritual
where companies prepare and deliver proxy statements in preparation for annual
shareholder meetings-U.S. public companies typically reexamine their corporate
governance structures and policies. Many corporate governance structures that
were acceptable ten years ago are now considered outmoded or even evidence of
managerial entrenchment. For example, consider the classified board of directors.
In recent years, many companies have shifted from a classified board of
directors to an annually elected board. A company might adopt an
annually-elected board structure for a number of reasons. A classified board
can serve as an entrenchment device, for instance, and so the company may hope
to increase the accountability to shareholders that such a structure entails.
Likewise, there may be legitimate reasons to retain a classified board of
directors, such as the negotiating leverage a classified structure provides the
board in the context of a hostile takeover. As a company considers such a
change, however, high-minded considerations of the optimal governance structure
do not always, and probably do not regularly, drive the discussion. Instead,
the primary consideration is often that Institutional Shareholder Services
(“ISS”) or another proxy advisor is opposed to classified boards, and the firm
feels compelled to make the change in order to improve its corporate governance
rating even though the change may have no beneficial effect on the firm’s
corporate governance or performance.

I have heard a number of similar tail-wagging-the-dog
stories repeated by corporate counsel and public company officers and
directors, usually expressed with frustration over some proxy advisors’
approach to governance-particularly with respect to those firms adopting what
seems to be a one-size-fits-all methodology for evaluating corporate
governance. The role of proxy advisors has increasing relevance because the
Securities and Exchange Commission has recently undertaken a review of the
mechanisms of proxy voting-less gracefully but perhaps aptly described as
“proxy plumbing”-and the role of proxy advisors in that process. Commentators
have identified a number of concerns with proxy advisors and the corporate governance
industry in which they operate. One is the inherent conflict of interest in the
business model of many of these firms-providing governance advice to corporate
clients while also providing voting advice to investor clients-which gives
reason to doubt the accuracy of their ratings and advice.[1] Compounding this problem is the fact that figuring out exactly what matters in
corporate governance is quite difficult.

I. The Value of Proxy Advisors

We have some evidence that some metrics used by ratings
firms can meaningfully predict performance, but at least some of these studies
were commissioned by the subject ratings firms themselves.[2] Other independent work suggests that the ratings used by various firms do not accurately
predict firm performance.[3] To emphasize the obvious, these firms are, after all, businesses. They must
have something of value to offer their clients, and they must differentiate
their products. It would be problematic for these firms if something basic-for
example, share ownership by independent directors, as Professors Bhagat, Bolton,
and Romano suggest-is a more reliable predictor of performance than the rating
firms’ multitude of metrics. A simple, single metric could be produced by the
clients-institutional investors-relatively cheaply. Instead, ratings firms
offer a profusion of proprietary rating systems, each constantly tweaked and
recalibrated-a process that could be described as “methodology churn”. No two
are alike, although the ratings are often offered as though there were a single
grand unified theory of corporate governance, perfectly expressed by their
proprietary methodology. Even Professor Bebchuk, whom I think it is fair to say
is allied with governance ratings firms in the general goal of promoting shareholder
empowerment, has argued that ratings that try to impose a great number of “good
governance” metrics on firms are less useful predictors than simply keying on a
few problematic entrenchment devices such as poison pills. In other words, it
seems easier to spot “bad governance” structures than it is to effectively
prescribe “good governance” structures.[4]

If we doubt at least some of firms’ ability to make useful
firm performance predictions, the interesting question then is why anyone buys
what they are selling. Scholars and other observers have offered several
non-exclusive reasons. First, investors buy ratings simply to obtain the underlying
data. This seems plausible, since it is indeed costly for individual investors
to collect data on firms, and governance ratings firms provide this very useful
service more efficiently.[5]Second, firms buy ratings as protection against future claims of breach of
fiduciary duty, or even merely as, in the words of Professor Ribstein,
“criticism insurance.”[6]I agree that this is an important, and perhaps the primary, reason why firms
buy the ratings. In response to concerns that managers were too powerful and
imposed high agency costs on firms, academics and regulators in the 1980′s and
1990′s increasingly pushed the idea that dedicated institutional investors
could reduce these costs by better monitoring. However, monitoring is costly,
and few institutional investors other than CalPERS were willing to expend resources
on monitoring from which they could only expect to extract a small, pro-rata
gain. Regulators incentivized institutional investors to dedicate resources to
monitoring efforts by underscoring that proxy voting is a fiduciary duty. As a
market response, the corporate governance ratings industry developed into the
force we are discussing today.

A third possibility is that independent researchers are
wrong, and that at least some ratings firms do have accurate models and
metrics. Even without the benefit of research on particular ratings models, we
know that some of them must be wrong because they often do not agree on whether
a particular firm has “good” governance. Over the long term hopefully we will
see that ratings produced by firms that engage in detailed, company-specific research
will outperform ratings that apply a one-size-fits-all approach to ratings. Finally,
Professors Calomiris and Mason also suggest in a recent paper that
institutional investors may prefer a distracting and “noisy” signal[7]because “low-quality ratings make it harder to hold them accountable for poor
decision making or poor outcomes associated with those investment decisions.”[8]

Let me offer another possible reason, perhaps related to
the “noise” hypothesis, why some institutional investors might value corporate
governance ratings even if they have little or no value in predicting firm
performance. This reason should inform not just potential regulation of proxy
advisory firms, but also rulemaking that empowers shareholders. In recent
years, the corporate governance ratings industry has eroded directorial and
managerial power and enhanced shareholder power. Even if ISS, for example, is
wrong that a particular firm should have an annually elected board, as a
general matter institutional investors (at least those that tend to be activist
shareholders, such as some pension funds) have an interest in a powerful
ratings industry that is allied with institutional investor power. It is no
coincidence that aggressive, activist investors are affecting corporate
decisions with increasing success in recent years-the rise of the corporate
governance industry has made such activity inevitable. Although the initial
goal of the shareholder empowerment movement-to reduce wasteful agency costs by
shirking managers and directors-appears benign, the crucial issue is whether
such enhanced shareholder power is being used to support long-term prosperity
or is instead focused on short term gains. I fear that it is often being used
for short term gains. And powerful shareholders may use their influence to extract
gains at the expense of less powerful, less activist shareholders, such as
retail investors. Rather than ultimately reducing agency costs from management
shirking, we instead have a new set of agency costs borne by small investors and
perhaps also by the beneficial owners of the activist funds that do not share
in the particular gains enjoyed by the fund’s management.

II. Encouraging Better-Quality
Ratings by Proxy Advisors

The corporate governance ratings industry itself is a
market response: firms effectively resolve the collective action problem faced
by institutional investors who have a fiduciary duty to vote proxies in the
best interests of their beneficiaries. But the market for governance ratings is
not working as it should: ratings firms produce poor-quality ratings whose
validity cannot be tested because the underlying metrics are proprietary and
are not disclosed. Even if they were disclosed, it is likely that we would end
up merely assuring ourselves that none of them are very useful.

Arguably, increased competition will encourage users of
ratings to “vote with their feet.” My first inclination is that a purely
market-driven response is preferable; again, depending on the availability
data, firms producing one-size-fits-all ratings (which almost surely benefit
from cheaply producing poor quality ratings) may be shown to underperform based
on empirically sound company and issue-specific analysis. Firms that produce
poor-quality ratings will be exposed and investors will vote with their feet. However, market pressures may not be as
robust as we might like, because a significant portion of investors may be
either (1) hiring a corporate governance ratings firm merely as a kind of
insurance against fiduciary breach claims or criticism (which would probably
support hiring the market leader: if a majority of funds hires ISS, ISS appears
to be the safest choice, which perpetuates their advantage); or (2) the
investors are indifferent to whether the advice results in better long term financial
performance, but instead are interested in acquiring more leverage against
boards and management in order to pursue short term or private gains.

If the market indeed is resistant to change through normal
competitive pressures, we should then turn to other pressure points in the
market. Perhaps potential liability for ratings firms could protect against
poor quality ratings. Potential liability could take the form of SEC rules
governing disclosure of methodologies of governance ratings firms, similar to
the new rules applicable to credit ratings agencies. I also assume that poor
quality should be more easily detected with enhanced disclosure of methodology
even if, as with the credit rating agency rules, only a “sufficiently detailed”
description of the methodology is produced. The danger with SEC regulation of
corporate governance ratings is that, similar to what happened with the
Nationally Recognized Statistical Rating Organizations, the SEC risks simply entrenching
market leadership. The SEC could reduce this risk by taking the position that
one-size-fits-all methodologies are not appropriate, of course, but that seems
out of step with current regulatory trends.

Another pressure point is the institutional investor
client of corporate governance ratings firms. If these investors do indeed have
a fiduciary duty to their beneficiaries, that duty should not be assumed to
have been met by a casual acceptance of a proxy recommendation without some
assurance that the mechanisms that produced the recommendation are both
reliable and free of conflict. The SEC has spoken to the conflicts issue in a
pair of letters to ISS and Egan-Jones. The ISS letter states:

Consistent with its fiduciary duty, an investment
adviser should take reasonable steps to ensure that, among other things, the
[proxy advisory firm] can make recommendations for voting proxies in an
impartial manner and in the best interests of the adviser’s clients. Those steps may include a
case by case evaluation of the proxy voting firm’s
relationships with Issuers, a thorough [emphasis added] review of the proxy voting firm’s
conflict procedures and the effectiveness of their implementation, and/or other
means reasonably designed to ensure the integrity of the proxy voting process .
. . When reviewing a proxy voting firm’s
conflict procedures, an investment adviser should assess the adequacy of those
procedures in light of the particular conflicts of interest that the firm faces
in making voting recommendations. An investment adviser should have a thorough
understanding of the proxy voting firm’s
business and the nature of the conflicts of interest that the business
presents, and should assess whether the firm’s
conflict procedures negate the conflicts. The investment adviser should also
assess whether the proxy voting firm has fully implemented the conflict
procedures.[9]

There is anecdotal evidence that some large public funds
left ISS for other ratings firms because of ISS’s potential for conflicts.
However, ISS’s efforts to develop a firewall between its corporate and investor
advisory groups has likely reassured many investors, as suggested by the 2007
GAO report on proxy advisors, which stated:

All of the institutional investors-both large and
small-we spoke with that subscribe to ISS’s services said that they are
satisfied with the steps that ISS has taken to mitigate its potential
conflicts. Most institutional investors also reported conducting due diligence
to obtain reasonable assurance that ISS or any other proxy advisory firm is
independent and free from conflicts of interest. As part of this process, many
of these institutional investors said they review ISS’s conflict policies and
periodically meet with ISS representatives to discuss these policies and any
changes to ISS’s business that could create additional conflicts.[10]

I suspect that some-maybe most-of these investors conduct
due diligence on conflicts by merely reading ISS’s statement that it is free
from conflicts created by its corporate and investor advisory businesses. If
that is true, then those firms do not appear to be complying with the guidance
offered by the SEC. Furthermore, as the GAO’s report points out, the possible
conflict between a proxy advisor’s corporate and investor advisory businesses
is just one of several potential conflicts. According to the GAO, other
possible conflicts include:

1. Owners or executives of proxy advisory firms may have a significant
ownership interest in or serve on the board of directors of corporations that
have proposals on which the firms are offering vote recommendations.

2. Institutional
investors may submit shareholder proposals to be voted on at corporate
shareholder meetings. This raises a concern that proxy advisory firms will make
favorable recommendations to other institutional investor clients on such
proposals in order to maintain the business of the investor clients that
submitted these proposals.

3. Several proxy
advisory firms are owned by companies that offer other financial services to
various types of clients, as is common in the financial services industry.[11]

Given the voting power of active institutional investors,
the SEC has focused relatively little attention on enforcing the fiduciary
duties created by its proxy voting rules. To give the SEC some credit, in 2009
it brought a case alleging breach of fiduciary duty with respect to proxy
voting against INTECH, a registered investment adviser.[12]INTECH engaged ISS to vote proxies in accordance with AFL-CIO proxy voting
recommendations. According to the SEC, INTECH
followed the AFL-CIO recommendations because it was participating in the annual
AFL-CIO key votes survey that ranked investment advisers based on their
adherence to the AFL-CIO’s recommendations. INTECH hoped that improving its
ranking in the AFL-CIO survey would help it maintain existing union clients and
recruit new ones. INTECH failed to note in its disclosures the material
conflict of interest between INTECH and its clients who did not share the
AFL-CIO’s voting policies. Indeed, in its proxy voting policies INTECH noted that
because it relied on ISS, it did not “expect[] that any conflicts w[ould] arise
in the proxy voting process.”[13]

In the end, despite guidance such as the ISS letter, I
think the SEC has not adequately encouraged investors to scrutinize not just
potential conflicts of interest, but also the content of the advice they
receive from corporate governance raters and proxy advisors. Unless the SEC
provides better guidance on what such scrutiny should entail and undertakes a
sustained enforcement program to detect and discipline fiduciaries who fail to
meet their duties, the beneficiaries of the funds these institutional investors
manage will suffer.

Finally,
poor quality ratings by corporate governance ratings firms have serious
consequences not just for the investors who purchase deficient ratings and
advice, but also for the economy as a whole. Capital is allocated and crucial
corporate governance decisions are often driven on the basis of these ratings
and advice. An executive of a corporate governance ratings firm once described
advising institutional investors as akin to herding cats. While that may often
be true (and let us hope that it is, because it suggests that at least some are
not blindly accepting ratings and advice), these firms still wield significant
influence over institutional investors, as proxy solicitors and corporate
secretaries assert. This influence is not always evident in proxy voting;
indeed, the traces of the influence are probably more likely to appear in the
corporate governance choices of public companies from year to year.. It is not
a stretch to say that corporate governance ratings firms serve as a de facto regulator, with some firms
offering a set of one-size-fits-all best practices that directors and
executives ignore at their peril.

Paul Rose is Assistant Professor of Law, Ohio State University, Moritz College of Law.

[1]. RiskMetrics’
2009 annual report acknowledges this problem, stating that the “perceived
conflict of interest between the services we provide to institutional clients
and the services, including our Compensation Advisory Services, provided to
certain corporate clients” must be managed. RiskMetrics Group, Inc., Annual Report (Form 10-K), at 22 (2010), available at http://www.sec.gov/Archives/edgar/data/1295172/000104746910001246/a2196648z10-k.htm.
It admits that “in the event that we fail to
adequately manage these perceived conflicts of interest, we could incur
reputational damage.” Id.

[2]. E.g., Sanjai Bhagat et al., The
Promise and Peril of Corporate Governance Indices, 108 Colum. L.
Rev. 1803 (2008).

[3]. Robert Daines, et al., Rating the Ratings: How Good are Commercial
Governance Ratings? (Stan. Law & Econ., Working Paper No. 360, 2010), available at http://ssrn.com/

abstract=1152093.

[4]. Lucien Bebchuk et al., What Matters in Corporate Governance?,
22 Rev. of Fin.
Studies 783, (2009), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=593423.

[5]. This conclusion is also supported with
evidence supplied by Stephen Choi, Jil Fisch and Marcel Kahan in Director Elections and the Role of Proxy
Advisors, 82 S. Cal. L. Rev. 649 (2009), available at http://weblaw.usc.edu/why/students/orgs/lawreview/documents/ChoiforWebsite.pdf.

[6]. Larry Ribstein, Larry Ribstein on The Corporate
Governance Industry, The Conglomerate,
June 12, 2006, http://www.theconglomerate.org/2006/06/the_corporate_g.html.

[7]. Charles
W. Calomiris & Joseph R. Mason, Conflicts
of Interest, Low Quality Ratings, and Meaningful Reform of Credit and Corporate
Governance Ratings, e21, Apr. 19, 2010, at 7, available at http://economics21.org/files/pdfs/commentary/04_19_2010_calomiris_mason_governance.pdf.

[8]. Id. at 12.

[9]. Institutional Shareholder
Services, Inc., SEC No-Action Letter (Sept. 14, 2004), available at http://www.sec.gov/divisions/investment/noaction/iss091504.htm.

[10]. Gov’t Accountability Office,
GAO-07-76, Report to Congressional Requesters: Issues Relating to Firms That
Advise Institutional Investors on Proxy Voting (June 2007), at 11, available at http://www.gao.gov/new.items/d07765.pdf.

[11]. Id. at 11-12.

[12]. Press Release, Securities and
Exchange Commission, SEC Charges Investment Adviser for Proxy Voting Rule
Violations (May 8, 2009), available at http://www.sec.gov/news/press/2009/2009-105.htm.

[13]. Id.

John P. Bringewatt’s recent note makes several important
observations about the Supreme Court’s opinion in Snyder v. Louisiana.[1] Although he provides reasonable support for the claim that Snyder represents a sea change in Batson jurisprudence, the US Supreme Court’s fresh opinion in Thaler v. Haynes[2](rendered on February 22, 2010) reads
the Snyder majority opinion narrowly
and suggests the possibility that Snyder is
not as potent as it should be. The Haynes per curiam’s guarded reading of Snyder signals the need for courts to continue to conduct the bird’s-eye
cumulative analysis that the Court performed in Miller-El v. Dretke[3][hereinafter Miller-El II]. If lawyers challenging discriminatory peremptory
strikes and trial courts replicate Snyder‘s
single-juror approach but ignore concomitant Miller-El circumstantial evidence of intentional discrimination, Snyder may (counterintuitively) sap Miller-El II of its on-the-ground
transformative potential. In other words, lawyers should not rely too much on
the “more individualized focus” observed and applauded by the author because a
narrow framing of a Batson challenge
in the Snyder opinion’s image (rather
than a wider framing with a focus on the Miller-El factors) may fail in front of courts that view Snyder differently than does Bringewatt. A slightly different
interpretation of the historical arc of the relevant cases and a critical reconsideration of Snyder‘s circumstances foreshadow the outcome in Haynes and reveal nuances that suggest
problems with Bringewatt’s theory.

Bringewatt correctly describes several landmark decisions
in the Supreme Court’s jurisprudence on race discrimination in jury selection,
including Strauder v. West Virginia,[4]  Swain v. Alabama,[5] and Batson v. Kentucky.[6]  However, his analysis is incomplete.
While he persuasively demonstrates that the nature of the judicial inquiry into
discrimination has changed over time, the historical trend has not always been
“in favor of stronger Equal
Protection considerations.”[7]  Rather than charting a neat trajectory, the Court’s
decisions reflect staggered progress in an on-and-off effort to eradicate race
discrimination in jury selection. Bringewatt acknowledges that “Hernandez and Purkett seem to disrupt [the] pattern,” but other cases litter the
path as well.[8]  After Strauder, for example, other Supreme Court cases-including Neal v. Delaware[9] and Bush v. Kentucky[10]-
substantially undercut the progress. These cases presumed state compliance with
the Fourteenth Amendment and ignored the history of discrimination that preceded
the finding that racially exclusionary statutes were unconstitutional. While it
is true that the inquiry into discrimination in jury selection has evolved from
a review of blanket statutory exclusions of minorities (in cases like Strauder) to case-specific intent-based assessments (required by Batson), the Court has not always made
enforcement easier or the protection of the Fourteenth Amendment stronger. The
history is a bit more erratic than Bringewatt presumes.

This history is important because it shows that the Court
has sometimes weakened rather than strengthened mechanisms originally designed
to enforce the constitutional mandate. In this context, the question is whether
Snyder really makes it easier for
courts to enforce Batson. Although
Bringewatt argues Snyder was “an
effort to create a more enforceable standard,” the more individualized focus may
actually encumber litigants who allege that opposing counsel is purposely
discriminating against prospective jurors on the basis of race.[11]  This perverse effect-that Snyder could work against those seeking
to redress racial discrimination-arises from the Court’s framing of Snyder and its opinion in Haynes.

Snyder could
plausibly be read in either of two ways: as a strong holding that made “significant
change[s] to the standard of review for Batson objections;” or, conversely, as a weak holding-a fact-specific anomaly to be
distinguished away in the vast majority of Batson cases. As a matter of interpretation, Bringewatt persuasively argues that a
“remarkable paragraph 
. . . alters the Batson standard”
because its “conclusion is at odds with the deference paid by the Court earlier
in the opinion to trial judges’ unique capability to decide Batson issues.” The author is right: the
Court’s conclusion would be unsupportable if it truly provided the deference
due under a traditional Batson analysis.
If it deferred, the Court would not have stated that it “cannot presume that
the trial court credited the prosecutor’s assertion that Mr. Brooks [the
African American juror] was nervous.” Remarkably, the majority was unwilling to
acknowledge the significance of this decision to not credit the claim that Mr.
Brooks was nervous. Because Bringewatt notes that the Court did not “explicitly
claim to create a new legal standard,” the weaker reading seems poised to
prevail, even though it is analytically unconvincing.

But there is good reason to attribute a strong holding to Snyder. On its face, the case is
unprecedented: the Supreme Court overruled the judgments of a state trial court
and supreme court to find a Batson violation
where a single African American juror’s response to a single question sufficed
to render him similarly situated to white jurors who gave similar responses.
This was enough to support a finding of intentional discrimination.[12] If Snyder means that a single point
of agreement between a black juror and a white juror combined with a single
instance of disparate treatment between those jurors is sufficient to require a
Batson reversal on appeal, it is the
most potent holding in the entire line of jury discrimination cases.

The Snyder holding
is paradoxical because the quality that conceivably makes it potent-that it
turned on a single explanation that the Court found implausible-also makes it
distinguishable, and possibly detrimental to those who seek to rectify racial
discrimination in jury selection. Early in the opinion, the majority skirts the
Miller-El cumulative analysis and
positions itself as a one-juror case: “[b]ecause we find that the trial court
committed clear error in overruling petitioner’s Batson objection with respect to Mr. Brooks, we have no need to
consider petitioner’s claim regarding Ms. Scott.” The opinion also reaffirms
the notion that trial court determinations deserve deference, but then disposes
of the trial court’s ruling on the demeanor-based explanation for the strike
against juror Brooks. By writing the opinion in this manner, the Court left
open the possibility that lower courts could distinguish the case away-which is
what Bringewatt indicates that most courts have done.[13]  The tension between Snyder‘s potential force and its potentially
limited application calls into question its precedential value. As a result,
although the Snyder Court “ultimately
applied a nondeferential standard of review,” it also effectively ensured that
lower courts would not follow suit.

On February 22, 2010, the Supreme Court issued an opinion
in Thaler v. Haynes that suggests how
the highest Court itself views Snyder.
Bringewatt accurately outlines the available options:

It is possible that Snyder means that trial judges must explain the basis for their decisions on every Batson objection. It is also possible
that such an explanation is only required if the reason proffered by the
prosecutor in support of a peremptory challenge is not supported elsewhere in
the record. Finally, it is possible that the standard only applies under
identical circumstances to Snyder,
where one of the prosecutor’s explanations for a peremptory challenge is not
accepted absent an explanation by the trial judge if another proffered explanation
is found to be pretext for racially-motivated challenges.[14]

Haynes suggests that the Court will adopt the last view.

Haynes was
decided on federal habeas review. The Fifth Circuit determined that the Texas
Court of Criminal Appeals opinion denying the defendant Batson relief “was contrary to, or involved an unreasonable application
of, clearly established federal law.”[15] Therefore, the question presented to the Supreme Court was limited to whether
the relevant federal law under Batson and
Snyder met the high standard of being
“clearly established.”

Nonetheless, Haynes strongly
hinted that the Supreme Court will read Snyder to be restrained, not revolutionary. First, the Court stated that Snyder does not demand that trial judges
explain the basis for their rulings on every explanation offered by the
striking party: “Batson plainly did
not go further and hold that a demeanor-based explanation must be rejected if
the judge did not observe or cannot recall the juror’s demeanor. Nor did we
establish such a rule in Snyder.” The
Court then elaborated:

The part of Snyder on which the Court of Appeals relied concerned a very different problem. The
prosecutor in that case asserted that he had exercised a peremptory challenge
for two reasons, one of which was based on demeanor (i.e., that the juror had
appeared to be nervous), and the trial judge overruled the Batson objection without explanation. We concluded that the record
refuted the explanation that was not based on demeanor and, in light of the particular circumstances of
the case, we held that the peremptory challenge could not be sustained on
the demeanor-based ground, which might not have figured in the trial judge’s
unexplained ruling. Nothing in this
analysis supports the blanket rule on
which the decision below appears to rest.”[16]

The Court’s language speaks for itself, and indicates
that, in Bringewatt’s words, “the standard only applies under identical
circumstances to Snyder.”

Snyder‘s
procedural history and the change in the composition of the Court contextualize
that opinion and may shed light on why the Court embraced a weak reading in Thaler v. Haynes. The Supreme Court
remanded Snyder in light of Miller-El II in June of 2005. Miller-El II was a 6-3 decision, with Justice
O’Connor in the majority and Chief Justice Rehnquist joining the dissent. When Snyder came back to the Supreme Court
after the initial remand, Justice Alito and Chief Justice Roberts had replaced
O’Connor and Rehnquist, respectively. Even if both Alito and Roberts had
preferred to deny Snyder relief, they
would have been unable to impact the outcome, assuming that the five remaining
justices from the Miller-El II majority
would grant relief in any case. By joining the majority, Chief Justice Roberts
seized the authority to assign the duty to write the opinion.[17] He gave that responsibility to the Justice most likely to write a weak
holding-Justice Alito.[18] These circumstances help account for the outcome in Haynes.

The Court’s opinion in Thaler
v. Haynes chips away at the claim that Snyder made Batson more enforceable. It also
exposes an important flaw in Bringewatt’s general theory that a more
individualized Batson analysis will
uniformly benefit those who oppose discrimination. Miller-El II helps illustrate the point that a too-individualized
analysis can undermine Batson. In Miller-El II, the Court emphasized the
need to consult “all relevant circumstances” of discrimination. Though it
didn’t alter Batson‘s framework, Miller-El II left no doubt about what
had allowed racial discrimination in jury selection to continue in the decades
since Batson: courts had been conducting
too narrow an inquiry. Where courts
simply looked at the race neutrality of the striking party’s explanations and
validated them, they failed to uncover the most significant and damning
evidence of discrimination.[19] As the Court wrote, “Batson‘s
individualized focus came with a weakness of its own owing to its very emphasis
on the particular reasons a prosecutor might give.” By expanding the
review-looking at historical evidence, statistical evidence, other evidence of
discrimination contained in the record, and the striking party’s treatment of
similarly situated nonminority jurors-Miller-El
II actually moved the jurisprudence a step back from the individualized
assessment. In this sense, “increased scrutiny” does not necessarily entail a
more individualized focus. Miller-El II called
courts to increase the level of scrutiny, but that did not mean a mere analysis
of one juror at a time. Instead, it meant considering voir dire as a whole, as
well as all other relevant circumstances that illuminate the striking party’s
intent.

Thus, an important consequence of the Snyder‘s single-juror approach is that lower courts may incorrectly
read it to narrow the Batson analysis.
If the judicial inquiry into discrimination in jury selection becomes too individualized,
courts may overlook highly probative evidence of discrimination. Indeed, Snyder itself failed to even mention
that the trial prosecutor compared the defendant to O.J. Simpson when
delivering his argument to the all-white jury.[20] Moreover, courts may fall victim to the bunk notion that every juror’s
uniqueness means that a side-by-side analysis cannot illuminate the striking
party’s intent absent perfect symmetry between minority and nonminority jurors.
The Court in Miller-El II noted that
requiring “an exactly identical white juror would leave Batson inoperable.” If courts looked for perfect or near-perfect
symmetry between jurors, they would gut Batson and ensure that discrimination would run rampant but remain undetected. In
short, a hyper-individualized focus could cultivate myopia in lower courts;
litigants must beware, and should proffer as much circumstantial and
atmospheric evidence of racism as possible to bolster their claims of
discrimination.

Although
Snyder certainly stands out as an
important victory for opponents of race discrimination, its long-term effect
cannot be foreseen. The Court’s narrow single-juror approach-which ignores
circumstantial evidence of discrimination-and its refusal to require trial courts
to rule on each proffered race-neutral explanation to trigger appellate
deference obscure the signals sent. If relied upon, Snyder could trap unwary litigants who anticipate that lower courts
or the Supreme Court will view the case as a robust pillar against race
discrimination. There is no doubt that Bringewatt was right to state that
“[t]he persistence of [race discrimination in jury selection] over time
suggests that is has been difficult to find a lasting solution to the problem.”
Snyder very well could be, and should
be, a step in the right direction. Yet, history, context, and Haynes should give pause. Litigants must
remember that Swain‘s “net was not
entirely consigned to history;” circumstantial evidence is critical.[21]  If courts (including the Supreme Court)
continue to distinguish and minimize Snyder,
opponents of discrimination who overlooked persuasive circumstantial evidence
of discriminatory intent will curse their misfortune, and regret misreading Batson‘s tea leaves.

____________________________________________________________________________

Bidish J. Sarma is a staff attorney at the Capital Appeals Project in New Orleans, Lousiana. Allen Snyder is a client of the Capital Appeals Project. The views expressed by the author do not necessarily represent those of the Capital Appeals project.

Suggested citation: Bidish J. Sarma, Commentary, Reponse to “Snyder v. Louisiana: Continuing the Historical Trend Toward Increased Scrutiny of Peremptory Challenges,” 109 Mich. L. Rev. First Impressions 42 (2010), http://www.michiganlawreview.org/assets/fi/109/sarma.pdf.

[1]. Snyder v. Louisiana, 552 U.S. 472
(2008).

[2]. Thaler v. Haynes, 130 S. Ct. 1171
(2010).

[3]. Miller-El v. Dretke, 545 U.S. 231
(2005).

[4]. Strauder v. West Virginia, 100 U.S. 303
(1880).

[5]. Swain v. Alabama, 380 U.S. 202 (1965).

[6]. Batson v. Kentucky, 476 U.S. 79 (1986).

[7]. John P. Bringewatt, Note, Snyder v.
Louisiana: Continuing the Historical
Trend Towards Increased Scrutiny of Peremptory Challenges, 108 Mich. L. Rev.
1283, 1283 (2010) (emphasis added) [hereinafter ‘Increased Scrutiny'].

[8]. Id. at 1294.

[9]. Neal v. Delaware, 103 U.S. 370 (1880).

[10]. Bush v. Kentucky, 107 U.S. 110 (1883).

[11]. Increased
Scrutiny, supra note 7 at 1286.

[12]. See
Snyder, 552 U.S. at 483 (“The implausibility of this explanation is
reinforced by the prosecutor’s acceptance of white jurors who disclosed
conflicting obligations that appear to have been at least as serious as Mr.
Brooks’.”); id. at 483-85 (comparing
juror Brooks’s response to those given by Roland Laws and John Donnes).

[13]. See Bringewatt, supra note 7 at 1305-06 (discussing Smulls v. Roper, 535 F.3d 853
(8th Cir. 2008) (en banc); United States v. Prather, 279 F. App’x 761 (11th
Cir. 2008) (per curiam); United States v. Reed, 277 F. App’x 357 (5th Cir.
2008) (per curiam)).

[14]. Id. at 1304.

[15]. 28 U.S.C. § 2254(d)(1)

[16]. Id. at 1174-75 (emphasis added).

[17]. The Chief Justice has the pivotal power
to assign the opinion when he sits in the majority. See, e.g., Paul J. Wahlbeck, Symposium: The Chief Justice and the
Institutional Judiciary: Strategy and Constraints on Supreme Court Opinion
Assignment, 154 U.
Pa. L. Rev. 1729, 1730 (2006) (“The power to assign authorship of the
Court’s opinion provides the Chief with the capacity to direct the Court’s
policy-making agenda. This assignment power is unique among the Chief’s duties
in its ability to shape the development of the law.”).

[18]. Justice Alito’s record as a judge on the
Third Circuit indicated that he had not been receptive to defendants’ claims
that the prosecution intentionally discriminated against minorities in jury
selection.  See, e.g., Riley v. Taylor, 237 F.3d 300 (3d Cir. 2001), vacated
and reh’g en banc granted, 237 F.3d 348 (3d Cir. 2001), rev’d, 277 F.3d 261 (3d
Cir. 2001) (the initial panel opinion by Alito denying relief on Batson claim
was later reversed by en banc Third Circuit; Alito dissented from the en banc
opinion); Pemberthy v. Beyer, 19 F.3d 857 (3d Cir. 1994) (opinion by Alito
reversing a federal district court ruling that granted Batson relief).

[19]. Bringewatt acknowledges this problem
when he notes that Purkett v. Elem required
a “low standard for a prosecutor’s explanation.”  Bringewatt, supra note
7 at 1294.

[20]. The Court’s failure to discuss the
prosecutor’s O.J. Simpson references at trial led one commentator to criticize
the opinion. See, e.g., Camille A. Nelson, Batson, O.J., and Snyder: Lessons from an Intersecting Trilogy, 93 Iowa L. Rev. 1687, 1722 (2008) (“Oddly . . . the Court . . . failed to
undertake the expansive contextual analysis to which it purportedly subscribes.
This was a tremendous missed opportunity. It is remarkable that the Court in
assessing the Batson challenges in Snyder did not even mention the O.J.
Simpson case.”). The failure was especially notable given the amount of
attention the O.J. Simpson references received during oral argument. See Posting of Lyle Denniston to
SCOTUSblog, Commentary: Trial judges on
trial?, http://www.scotusblog.com/2007/12/commentary-trial-judges-on-trial/
(Dec. 4, 2007, 2:24pm) (“The case of Snyder
v. Louisiana (06-10119) may live in history as a case about using O.J. Simpson’s
legal troubles as a way to ‘play the race card’ before an all-white jury trying
a black man. The Supreme Court, in a hearing on Tuesday, showed some
fascination with that part of the case.”).

[21]. Miller-El
II, 545 U.S. at 239.

Guest (tied and trussed): You said you were having me over for dinner. You didn’t say that I was the dinner.

Host: Right. I said I was having you over for dinner. Obviously, you didn’t consider all the possible meanings of my words.

* * * *

No stronger proof could be given of the distress under which these writers labor for objections, than their stooping to such a misconstruction.

-James Madison, reacting to claims
of congressional omnipotence.[1]

The Constitution’s original meaning is its meaning to those ratifying the document during a discrete time period: from its adoption by the Constitutional Convention in late 1787 until Rhode Island’s ratification on May 29, 1790.[2] Reconstructing it requires historical skills, including a comprehensive approach to sources. Jack Balkin’s article Commerce[3] fails to consider the full range of evidence and thereby attributes to the Constitution’s Commerce Clause a scope that virtually no one in the Founding Era believed it had.

In his first sentence, Balkin reveals the principal reason for his error: “A good test for the plausibility of any theory of constitutional interpretation,” he writes, “is how well it handles the doctrinal transformations of the New Deal period.”[4] Otherwise, “we could not have a federal government that provides all of the social services and statutory rights guarantees that Americans have come to expect. The government could neither act to protect the environment nor rescue the national economy in times of crisis.”

No. The original meaning of the Constitution does not depend on whether it comports with Jack Balkin’s policy preferences on the welfare state any more than whether it comports with John Yoo’s policy preferences on habeas corpus or John McCain’s policy preferences on campaign speech. Balkin’s piece suffers from the vice he attributes to others: “view[ing] the commerce power through modern eyes.”

The foundation of Balkin’s thesis is that during the Founding Era, the word “commerce” sometimes included not only mercantile trade and certain incidents, but other social relationships as well. We agree. However, we dispute Balkin’s claim that “commerce” in the Commerce Clause also includes those other relationships.

During the Founding Era, the meaning of a word in a legal document was presumed to be its ordinary, common meaning.[5] There is little question that the ordinary and common meaning of “commerce,” both in common discourse and in legal language, was mercantile trade and traditionally associated activities. The social, religious, and sexual meanings of “commerce,” while sometimes employed, were figurative or metaphorical, derived from the mercantile meaning.

This is clear from a more complete survey of the contemporaneous dictionaries than Balkin produces. He goes no further than an entry for “commerce” in a 1785 edition of Samuel Johnson’s Dictionary. That entry begins with the word “intercourse” and references religious and social denotations. Balkin seems unaware that relying exclusively on Johnson’s Dictionary can be risky: while deservedly celebrated, Johnson’s work is sometimes idiosyncratic, and its compiler’s zest for comprehensiveness can mislead. Many of Johnson’s examples were seldom-used archaisms from long-dead writers like Richard Hooker and William Shakespeare. Indeed, the mere fact that this edition’s first example of “commerce” was the interaction between God and humans (from Hooker) should raise doubts, since during the ratification debates the Federalists specifically denied that Congress would have power to regulate religious relationships.

In fact, there were many editions of Johnson’s Dictionary, and not all included the subsidiary definitions Balkin relies on. The first edition, in 1756, and the eighth, published in 1786 (the year before the ratification process began), included only a mercantile definition of the noun “commerce”: “Exchange of one thing for another; trade; traffick.” Nor was Johnson’s the only Founding Era dictionary. The dictionaries by Sheridan and Donaldson limited their definitions to the mercantile meaning.[6] Those of Allen, Ash, and Bailey included the social definition, but relegated it to secondary importance.[7] Barlow’s dictionary acknowledged the social meaning at the end of this entry on the subject, but described it as figurative.[8]  Thus, a more complete survey of the dictionaries in use at the time of the Founding Era strongly suggests that the mercantile meaning of commerce was the most natural meaning in ordinary discourse, with the social and sexual denotations much less common.

Another way to determine how the Constitution uses a word is to sample contemporaneous use directly. Professor Randy Barnett did so in two empirical studies, one compiling dozens of references to “commerce” in the constitutional debates[9] and the other cataloguing 1,594 appearances of the word in newspaper usage.[10] He found the mercantile meaning of commerce to be overwhelmingly dominant. Balkin regrettably does not consider those studies worth citation or rebuttal, although he does discuss another of Barnett’s works.

Balkin also overlooks yet another potential source of meaning: the pre-Revolutionary debate over the proper allocation of power between London and the colonies within the British Empire. The British government argued for unlimited parliamentary supremacy over the colonies. Most Americans conceded to London the regulation of commercial trade among units of the empire, but contended that other activities in America should be regulated only by colonial assemblies. The balance of power between the states and the federal government in the Constitution largely tracked the balance the Americans had sought within the British Empire.[11]

Just as telling as the dominant use of “commerce” in common speech is its dominant use in legal discourse. The Constitution was, after all, a legal document. It was drafted by a convention consisting primarily of lawyers and others knowledgeable in law, and was explained primarily by lawyers to a public audience that, by comparison with today’s public, was superbly literate in legal matters.[12]

In 2006, one of us published a survey of the word “commerce” in Anglo-American legal sources commonly consulted during the Founding Era.[13] Included in the sample were popular Founding Era treatises, digests, law dictionaries, and other legal materials. Also included were all English cases reported between about 1550 and 1799 and all American cases reported until 1790. The cases alone provided over 470 references to “commerce” and its Latin analogue, commercium. The key finding was that lawyers used “commerce” almost exclusively in a mercantile sense-as the exchange of commodities, and  certain closely connected activities, such as navigation and commercial paper. Two definitions in the 1762 edition of Giles Jacob’s popular law dictionary (a frequent holding in American libraries) exemplify the legal usage:

Commerce, (Commercium) Traffick, Trade or Merchandise in Buying and Selling of Goods. See Merchant.

Merchant, (Mercator) is one that buys and trades in any Thing . . . But every one that buys and sells is not . . . a Merchant; only those who traffick in the Way of Commerce . . . . Those that buy Goods, to reduce them by their own Art or Industry . . . are Artificers and not Merchants . . .[14]

Balkin does acknowledge this study in a footnote, but dismisses it by saying that the author “does not recognize that all of his examples are united by the general concept of ‘intercourse.’ ” Unfortunately, this response is simply inaccurate: the author does provide examples inconsistent with wider meaning, and indeed, offers them specifically to show their inconsistency.[15]

Because of the legal nature of the Constitution, contemporaneous legal definitions, concepts, and doctrines can be key to understanding the original meaning. What the legal sources tell us about “regulating commerce” is that it was well understood as a bounded concept. It encompassed governmental trade restrictions, the law merchant, and certain closely related areas, such as navigation and commercial paper. Areas of law outside that realm were not part of “regulating commerce,” even if closely connected to commerce. One example was governance over the immigration and emigration of free persons, which Balkin several times erroneously attributes exclusively to the commerce power, but which the Constitution granted to Congress as part of its authority to “define and punish . . . Offenses against the Law of Nations.”[16]

Balkin entirely fails to address a decisive historical fact: during the ratification debates, the Constitution’s advocates repeatedly and clearly represented to the general public many areas over which the new government would have no power at all, at least within state boundaries. Their lists included education, social services, real estate transactions, inheritance, religion, manufacturing, agriculture and other land use, business licensing, most road building, civil justice within states, local government, and control of personal property outside mercantile commerce. All of these are within Balkin’s broad definition of “commerce,” but control over all, the Federalists informed the public, were outside federal authority. Those enumerations have been in the modern legal literature since one of us republished them in 2003;[17] more have been added since.[18]

Balkin points out that “fidelity to original meaning does not require fidelity to the original expected applications of text and principle.” However, most of the Federalist representations about the limited scope of federal power were not merely statements of expectation. They were specific representations of constitutional meaning. Moreover, although fidelity to original meaning does not always and invariably require honoring every expectation about how a power would be applied, expectations can be valuable evidence of underlying meaning.

We have space only to address briefly a few of Balkin’s other points:

The Indian Intercourse Act. Plentiful Founding-Era evidence, including enactments of the Confederation Congress and state legislatures, show that “Commerce with the Indian tribes” referred to mercantile trade with the Indians and certain tightly related activities, such as the licensing of and control over the behavior of merchants.[19]

Balkin enlists the Indian Intercourse Act of 1790 as exemplifying a broad meaning of the Indian Commerce Clause. Because the 1790 act included some criminal provisions (as trade regulations often did), Balkin argues that the meaning of “commerce” extended far beyond trade.

The Indian Intercourse Act was adopted after the Constitution had been ratified, and, like the Sedition Act a few years later, is not necessarily a correct guide to public understanding of the Constitution at the time of ratification. However, if the act had been adopted pursuant to the commerce power, and  before the holdouts of North Carolina and Rhode Island had ratified the Constitution, the act would help the Balkin thesis very little, for the law’s criminal provisions were typical of contemporaneous trade regulation-designed to protect trade by punishing merchants who entered Indian territory without authorization.[20]

In fact, however, the law was an exertion of the treaty power, not the commerce power. It was adopted on the recommendation of President Washington “for extending a trade to [the Indians] agreeably to the treaties of Hopewell.”[21] Several years ago, one of us discussed this background, including an explanation for why the law extended beyond the signatory tribes.[22]

James Wilson’s Statement. Balkin quotes James Wilson’s comment during the ratification debates to the effect that the federal government would have power over matters that affected more than one state. In isolation, the statement appears more persuasive than it does in context. Not only were comments of that sort relatively rare, but they were contradicted by other Federalist representations-including representations from Wilson himself. Despite the statement Balkin cites, Wilson went out of his way to identify particular activities outside congressional control, even though they had interstate implications. Among those activities was the newspaper industry.[23] Wilson surely knew that newspapers exercised interstate influence and that papers in one state often printed stories from papers in other states. The interstate exchange of ideas via the press is certainly a form of intercourse. Yet Wilson argued strongly that the federal government would have no power over the subject, even though the First Amendment did not yet exist.

Earlier Drafts of the Constitution. Although Balkin tries to attribute the broad power grants in an early draft of the Constitution to the enumeration in the final draft, the wording and approaches of the two drafts are very different. The change was made by the convention’s Committee of Detail, perhaps amid a general recognition that the ratifying public would never accept a national government with plenary powers-a recognition that proved prescient during the ratification process.

It is not quite true, as Balkin argues, that no one objected to the change, for later in the convention several delegates assayed to strengthen congressional power.[24]

Interdependence or Lack Thereof. Finally, one should not assume that the founders limited federal power because they believed activities reserved for state regulation did not affect other states. They well understood that such activities could affect other states; this is one reason they permitted states to compact with each other with congressional consent.[25] But as the ratification record makes abundantly clear, the founders ultimately decided to sacrifice comprehensiveness for freedom: for them, a purpose more important than maximizing the efficiency of a central government was minimizing the risk of tyranny.[26]

Many today would not make the same choice regarding the scope of the federal government’s power. But the constitution they might write for us is not the same as the Constitution bequeathed by the founders.

Robert G. Natelson is Senior Fellow in Constitutional Jurisprudence, Independence Institute and Professor of Law (ret.), University of Montana.

David Kopel is Research Director, Independence Institute and Adjunct Professor of Advanced Constitutional Law, Denver University, Sturm College of Law.

Suggested citation: Robert G. Natelson & David Kopel, Commentary, Commerce in the Commerce Clause: A Response to Jack Balkin, 109 Mich. L. Rev. First Impressions 55 (2010), http://www.michiganlawreview.org/assets/fi/109/natelsonkopel.pdf.

[1]. The Federalist No. 41 (James Madison).

[2]. Evidence from shortly after ratification may be useful for shining a light back to the period before May 29, 1790. Such evidence must be used with great caution, however, because once the Constitution was ratified by the requisite number of states, advocates of vast federal power had much less incentive against making the kind of broad claims that might have led to the Constitution’s rejection during the ratification debate.

[3]. Jack M. Balkin, Commerce, 109 Mich. L. Rev. 1 (2010).

[4]. Id. at 2.

[5]. Timothy Branch, Principia Legis et Aequitatis 73 (1753) (reporting the maxim Nunquam decurritur ad extraordinarium sed ubi deficit ordinarium, or “Resort is never made to the extraordinary but when the ordinary fails”).

[6]. Thomas Sheridan, A Complete Dictionary of the English Language (1789) (unpaginated) (defining “commerce” as “Exchange of one thing for another, trade, traffick”); Alexander Donaldson, A Universal Dictionary of the English Language (1763) (unpaginated) (same definition).

[7]. Frances Allen, A Complete English Dictionary (1765) (unpaginated) (“[T]he exchange of commodities, or the buying and selling merchandize both at home and abroad; intercourse of any kind.”); 1 John Ash,  The New and Complete Dictionary of the English Language (1775) (unpaginated) (defining commerce as “the exchange of commodities, or the buying and selling merchandize both at home and abroad,” and adding as a second definition, “intercourse of any kind”); Nathaniel Bailey, An University Etymological Dictionary (1783) (unpaginated) (“[T]rade or traffick; also converse, correspondence.”).

[8]. 1 Frederick Barlow,  The Complete English Dictionary, or General Repository of the English Language (1772-73) (adding, “[c]ommerce is used figuratively for intercourse, or connection of any kind” after giving a purely mercantile definition).

[9]. Randy E. Barnett, The Original Meaning of the Commerce Clause, 68 U. Chi. L. Rev. 101 (2001).

[10]. Randy E. Barnett, New Evidence of the Original Meaning of the Commerce Clause, 55 Ark. L. Rev. 847 (2003).

[11]. Robert G. Natelson, The Legal Meaning of “Commerce” In the Commerce Clause, 80 St. John’s L. Rev. 789, 836-39 (2006).

[12]. Robert G. Natelson, Judicial Review of Special Interest Spending: The General Welfare Clause and the Fiduciary Law of the Founders, 11 Tex. Rev. L. & Pol. 239, 247-48 (2007) (explaining the high level of legal knowledge among the ratifying public).

[13]. Natelson, Commerce, supra note 11.

[14]. Giles Jacob, A New Law-Dictionary (1762) (unpaginated).

[15]. Natelson, Commerce, supra note 11, at 811-12. The study was directed at either validating or disproving a hypothesis that “commerce” included all gainful economic activity. In excluding that hypothesis, it necessarily excluded the even broader definition Balkin advocates.

[16]. See Emer de Vattel, The Law of Nations 220-27 (Knud Haakonssen, ed. 2008) (originally published 1758) (discussing emigration and immigration as a division of international law).  Vattel’s work was the most important book on international law during the Founding Era.

[17]. Robert G. Natelson, The Enumerated Powers of States, 3 Nev. L. J. 469 (2003).

[18]. E.g., Natelson, supra note 11, at 840 n.252.

[19]. See generally, Robert G. Natelson, The Original Meaning of the Indian Commerce Clause, 85 Denver U.L. Rev. 201 (2007).

[20]. Id. at 253-54.

[21]. 1 Annals of Cong. 68 (Joseph Gales ed., 1834).

[22]. On the latter point, see Natelson, supra note 19, at 255-56 (explaining that the Hopewell treaties were the first in a series of treaties which were being negotiated with a variety of tribes).

[23]. E.g., 2 Jonathan Elliot, The Debates in the Several State Conventions of the Adoption of the Federal Constitution 449 (2d ed. 1836). Elliot quoted Wilson as stating, at the Pennsylvania ratifying convention, “on the subject of the press . . . this Constitution says nothing with regard to that subject, nor was it necessary; because it will be found that there is given to the general government no power whatsoever concerning it; and no law, in pursuance of the Constitution, can possibly be enacted to destroy that liberty” Wilson’s comment came, of course, prior to adoption of the First Amendment.

[24]. 2 The Records of the Federal Convention of 1787, at 324-33 (Max Farrand ed., 1937) (recording debate at the constitutional convention over adding further powers for Congress). Balkin’s argument that the final draft should be presumed to mean the same as the earlier drafts runs contrary to a rule of statutory construction that is also sensible in constitutional construction: “[f]ew principles of statutory construction are more compelling than the proposition that Congress does not intend sub silentio to enact statutory language that it has earlier discarded in favor of other language.’ ” INS v. Cardoza-Fonseca, 480 U.S. 421, 442 (1987).

[25]. U.S. Const., art. I, §10, cl. 3 (“No State shall, without the Consent of Congress . . . enter into any Agreement or Compact with another State . . .”).

Another illustration of both the Founders’ relatively narrower interpretation of “commerce” and their understanding of how it affected other activities is this passage from a 1784 congressional committee report: “The fortune of every Citizen is interested in the fate of commerce: for it is the constant source of industry and wealth; and the value of our produce and our land must ever rise or fall in proportion to the prosperous or adverse state of trade.”  26 J. Cont. Cong. 269 (April 22, 1784).  Note the identification of “commerce” with “trade” and how other activities affected by it are identified separately.  The committee members were Elbridge Gerry, Jacob Read, Hugh Williamson, Jeremiah Townley Chase, and Thomas Jefferson.

[26]. Cf. Rebecca L. Brown, Accountability, Liberty, and the Constitution, 98 Colum. L. Rev. 531, 565 (1998) (“The accountability provisions do not establish a preference-maximizing constitution. They create a tyranny-minimizing constitution.”).

Introduction

The quote in the
title of this Essay comes from Justice Breyer, expressing his frustration with
the language of section 22(b)(1) of the National Childhood Vaccine
Injury Act. Justice Breyer made this
comment during the October 12, 2010, oral argument in Bruesewitz v. Wyeth, Inc.,[1] a case about the availability of state tort claims based on vaccine design
defects. The question before the Court was
whether that section expressly preempts such claims against vaccine
manufacturers “if the injury or death resulted from side effects that were
unavoidable even though the vaccine was properly prepared and was accompanied
by proper directions and warnings.”[2] The answer depends on whether, as the Supreme Court of Georgia held, a court
must make a case-by-case determination whether a side effect was “unavoidable”
before a claim is preempted,[3] or whether, as the Third Circuit held, Congress made a categorical
determination that all side effects occurring despite proper preparation and
labeling are “unavoidable,” and that claims deriving from them are therefore preempted,
eliminating all such design defect claims against vaccine manufacturers.[4]

Every court that has confronted
this issue has found the language drafted by Congress to be, as Justice
Ginsburg said, “certainly, to say the least, confusing.” This Essay seeks to
clear up some of that confusion, arguing that the language of § 22(b)(1),
when closely analyzed, calls for the categorical approach adopted by the Third
Circuit. Rather than anticipating a case-by-case analysis of unavoidability,
the statute employs the word “unavoidable” as a term of art that establishes
premises that when satisfied make a vaccine injury inherently “unavoidable.” This
Essay argues Congress has demonstrated that it is willing to adopt this kind of
categorical approach regarding the issue of unavoidability in other statutes.
This Essay further argues that the text of § 22(b)(1), although muddled,
supports a categorical approach, because it defines the premises that must be
true in order for the conclusion of unavoidability to be reached.

I. The Problem

The Act created a
National Vaccine Injury Compensation Program to handle claims against
manufacturers for vaccine-related injuries. This program involves a no-fault
scheme where claimants seek compensation from a “vaccine court.” If the
claimant rejects the judgment of the vaccine court, she may pursue certain
limited claims in state or federal court. The primary limit on such tort claims
is that a claimant may not pursue a tort claim “if the injury or death resulted
from side effects that were unavoidable even though the vaccine was properly prepared and was accompanied by proper
directions and warnings.” But what makes a side effect unavoidable? Looming in
the background of this inquiry are thousands of potential lawsuits by parents
of children with autism. These parents blame childhood vaccines for causing the
disorder, but so far they have been turned away by the vaccine court because
the court found the evidence linking vaccines to autism legally insufficient to
establish causation.[5]

At the outset, it certainly seems that the statute’s
failure to define the word “unavoidable” is an invitation for case-by-case
analysis. The conclusion that an event is unavoidable can never be proven
absolutely and is more properly labeled a judgment call. Judgment calls lend
themselves very well to the close examination of circumstance. In the absence
of a statutory definition, courts must examine the facts and circumstances of
each case and consider the sum of nondecisive reasons in favor of an ad hoc
conclusion as to whether a death was “unavoidable.” A court’s role is more
limited, however, if the statute lists the premises that must be true in order
to reach the conclusion at issue; in such a case, the court only determines
whether those conditions are satisfied.  

The inquiry then becomes whether § 22(b)(1) adopted
such a categorical approach to the question of unavoidability. The Bruesewitz
family argued before the Court that a categorical interpretation would “render[]
the entire concept of unavoidability surplusage” because Congress could have
left out the term and just said that claims based on design defects were
preempted if the vaccine was properly manufactured and contained proper
warnings. Both Justice Scalia and Justice Alito responded that this reading would
in turn render the words following “unavoidable”-”even though the vaccine was
properly prepared and was accompanied by proper directions and warnings”-mere
surplusage. But both the word “unavoidable” and the words following it do serve a purpose: “unavoidable” is a
term of art in tort law for damages that are noncompensable.[6] When it passed the Act, Congress employed this term of art to define which
claims could not be brought outside of the vaccine court-i.e., those that were
preempted. Furthermore, as discussed below, the words following “unavoidable”
are premises that establish when an injury will be categorized as unavoidable.

The court below in Bruesewitz did little to help the resolution of this problem when it unnecessarily
complicated the issue. Rather than taking the language of the statute head-on,
the Third Circuit held that the term “unavoidable” is not defined anywhere in
the Act, and instead justified its conclusion that § 22(b)(1) is a
categorical exclusion by referencing the Act’s structure, purpose, and
legislative history. The Act’s structure and purpose are indeterminate, however,
as noted in oral argument: the Act can be seen as designed to compensate those
injured by vaccines, whose claims were largely denied in courts prior to the
Act; and it can also be viewed as enacting a policy choice to protect
manufacturers from large, uncertain tort liability, thereby keeping prices low
and keeping manufacturers in the market. The legislative history is also of
little guidance. One committee report suggests a categorical approach,[7] while another suggests a case-by-case approach.[8] Such conflicting aids to interpretation are in fact no aid at all.

Fortunately, logic and context allow a textual analysis of
§ 22(b)(1) to “stand[] on its own, without need of (or indeed any
assistance from)” these interpretive devices.[9] Congress set the conditions that must be true · proper preparation,
warnings, and directions-in order to reach the conclusion of unavoidability.
This categorical proposition precludes a case-by-case approach.

II. The Logic of Unavoidability

“Unavoidable”
describes an absolute state. This absolute state is a legal conclusion that can
only be reached through logical reasoning. Three contrasting types of reasoning
could lead to a conclusion of unavoidability. The first-reasoning from observation-is
precluded because unavoidability, being in the form of a negative, requires an
inordinate amount of observation before one can even come close to reaching an
acceptable level of probable accuracy. This is what Kathleen Sullivan, attorney
for Wyeth, described in oral argument as “shadowboxing against an infinite
number of theories about how there could have been a safer vaccine.” Anyone who
has been asked to prove a negative understands this difficulty.

Alternatively, the conclusion of unavoidability could be
reached the same way that the conclusion of liability is reached: a court could
look at facts, and then decide based on some legal standard whether some occurrence
was unavoidable. This is classic case-by-case analysis; the approach which the
Bruesewitz family asked the Court to adopt. A final way to reach this
conclusion is to construct premises that, when true, definitionally yield the
conclusion. This creates a shortcut around the time consuming, case-by-case
analysis: legislators make the judgment that if a, b, and c are true, conclusion
x necessarily follows. Whether that proposition is accurate in the absolute
sense is of no consequence. It is accurate in the legal sense-because it passed
both houses of Congress, was signed by the president, and is not unconstitutional.
This truth in the legal sense is what matters. A court need only determine if
the premises are true. This is the classic categorical approach-the approach
sought by Wyeth, and the approach Congress adopted in § 22(b)(1): all events
(injuries from side effects) that result from administration of any vaccine and
satisfies the premises of the Act (proper preparation, proper directions, and
proper warnings) are categorically “unavoidable.”

III. Congress Is Comfortable Defining the Term “Unavoidable”

Although finding
that something is unavoidable may seem like a judgment call naturally made by
courts, Congress and agencies are comfortable making the categorical
determination that when certain premises are true, events will be categorized
as “unavoidable.” For example, an animal cruelty statute called the “28-hour
law,” which was drafted in a similarly poor and redundant fashion, allowed
animals in transport to be confined for more than 28 hours only if off-loading
was “prevented by storm or by other accidental or unavoidable causes which cannot be anticipated or avoided by the exercise
of due diligence and foresight.”[10] Courts interpreting this language have held that when a transporter meets the
specified conditions that follow the term “unavoidable,” he is within the
defined universe of “unavoidable” and therefore exempt from the requirement.[11] In other words, when the premises (exercise of due diligence and foresight) are
true, the conclusion (excess confinement was unavoidable) follows. When the
premises are not true, the conclusion does not follow.[12] The statute called for and the courts applied a categorical approach. There was
no need for case-by-case analysis, and none was used. This situation is similar
to the proper analysis of “unavoidable” under the Vaccine Act: when facts
establish that a vaccine was properly prepared and was accompanied by proper
directions and warnings (like establishing due diligence under the 28-hour
law), there is no further inquiry needed as to whether the resulting outcome
was unavoidable.

Agencies, using power delegated from Congress, also define
premises that lead to the conclusion that an event is “unavoidable.” One patent
statute, for example, says, “[t]he Director may accept the payment of any
maintenance fee . . . at any time after the six-month grace period if the delay is shown to the
satisfaction of the Director to have been
unavoidable.”[13] The regulation interpreting this statute requires a patentee to show “that the
delay was unavoidable since reasonable
care was taken to ensure that the maintenance fee would be paid timely. . . .”[14] This regulation has been applied in a categorical fashion by courts: if the
premise (reasonable care taken) is true, the conclusion (delay was unavoidable)
will follow, and vice versa. In Ray v.
Lehman, for example, the court noted, “the standard is unavoidable delay. . . .
[I]n order to satisfy this standard, one must show that he exercised the due
care of a reasonably prudent person.”[15] Thus, in applying the phrase “unavoidable since reasonable care was taken,” the
court only looks to see whether the premise is true. There are many other
examples like this of agencies defining the premises that must be true for the
conclusion of unavoidability to be reached.[16]

IV. “Even Though” Has a Special Meaning

when Used with “Unavoidable”

The primary difficulty
of a textual analysis in this case arises because of the use of “even though”
in § 22(b)(1). “Even though” is a subordinating conjunction. A
subordinating conjunction joins a subordinate clause to a main clause and is
used to indicate the relationship between the two clauses. Different
subordinating conjunctions show different relationships. For example, they can
be used to show cause or manner, indicate concession, fix a time, etc.[17] In § 22(b)(1), as noted by the Third Circuit in Bruesewitz, “even though” connects the main clause, “side effects
that were unavoidable”-which, were it not for the second clause, could stand
alone as a complete thought-to the subordinate clause, “the vaccine was
properly prepared and was accompanied by proper directions and warnings.” As
discussed above, when congressional drafters choose a categorical approach,
they do so by constructing premises that when true yield the conclusion: finding
the truth of the premises leads to acceptance of the conclusion. Thus, for
§ 22(b)(1) to be categorical, one must show that “even though” connects
the conclusion (in the main clause) to the premises (in the subordinate clause)
in a relationship of causation; in other words, proper preparation, directions,
and warnings leads to the conclusion
that the side effect was unavoidable.

The problem is that “even though” is not usually used as a
subordinating conjunction to show cause. The most appropriate subordinating conjunctions
to show cause are words like “because,” “as,” and “since,”[18] as was the case with the patent regulation discussed above (“unavoidable since“). The subordinating conjunction “even
though,” on the other hand, is most properly used to indicate a relationship of
concession between a main and a subordinate clause: the subordinate clause
acknowledges something as true that makes the main clause appear to be an
unexpected result. For example, the conjunction often appears in a definition
that is conceded to be counterintuitive: “A veteran shall be considered as
living with a spouse, even though they reside apart. . . .”[19] The conjunction also often appears where there is a fact that is conceded to be
relevant but should nonetheless be ignored: “Amounts received in respect of the
services of a child shall be included in his gross income and not in the gross
income of the parent, even though such amounts are not received by the child.”[20] Thus, the choice of the conjunction “even though” in § 22(b)(1) must be explained
if a textual argument for a categorical approach is to be convincing.

This strange use of “even though” can be explained,
however, and it rests on the special nature of unavoidability. The premises put
forward for a conclusion of unavoidability usually involve required precautions
and an undesired event. When the premises are true-the required precautions
have been taken-and the undesired event still occurs, the conclusion of unavoidability
follows. Thus, the relationship between the premises and the conclusion of
unavoidability is in the form of a concession: the required precautions have
been taken and nonetheless the event occurs. The precautions taken make the
occurrence of the undesired event a surprise; it is because the occurrence of
the event, in the face of precautions, is
a surprise that the label “unavoidable” is used in the first place. This
inherent concession in reaching the conclusion that an event was “unavoidable” (the
surprise that the undesired event occurred after precautions had been taken)
explains the usage of “even though,” a concessionary subordinating conjunction,
in § 22(b)(1). An injury or death from a vaccine side effect occurring
after proper preparation, directions, and warnings is a surprise, and it is
because such injury or death is not expected that the injury or death is
categorically labeled “unavoidable.”

This explanation is confirmed by other instances where “even
though” and “unavoidable” are juxtaposed. For example, under fish and wildlife
regulations, a permit for programmatic (i.e., ongoing) eagle take (i.e.,
disturbance) will be granted when “the take is unavoidable even though advanced conservation practices are being
implemented.”[21] While no court has yet interpreted this regulation, the Department of the Interior
has explained, in describing this rule, that the “even though” conjunction was
used to show that the truth of the premises in the subordinating clause (“advanced
conservation practices are being implemented”) causes the conclusion in the main clause (“take is unavoidable”), and
hence a permit may be issued. The Department interpreted the statute allowing
programmatic permits to be issued when “take is unavoidable even though advanced
conservation practices are being implemented” to mean “[w]e can issue
programmatic permits . . . based on implementation of ‘advanced
conservation practices.’ “[22] Thus, the implementation of “advanced conservation practices” causes the take
to fall under the umbrella of “unavoidable.” The “even though” language was
used to show that the truth of the premises causes the conclusion, just as was
done in § 22(b)(1).

This usage of “even though” can
also be found in the context of motor vehicle tort law. Many states label a
motor vehicle accident “unavoidable” if it occurs even though ordinary care was
used or no one was at fault. That is, the truth of the premise (ordinary care
was used) causes the conclusion (the accident was unavoidable). In Batts v. Capps, for example, the
Virginia Supreme Court analyzed a jury instruction defining the unavoidable
accident doctrine: “the law recognizes that a collision between vehicles may be
unavoidable even though the drivers
are lawfully, properly and without negligence operating the same.”[23] It is the concession that due care was used (premise true), and still the
accident happened, that causes the conclusion (accident unavoidable). In
describing the law under which the above jury instruction was formulated, the
court in Batts confirmed the
concessionary nature of the analysis and the causative nature of “even though”:
“Where there is a reasonable theory of the evidence under which the parties
involved may be held to have exercised due care notwithstanding that the
accident occurred, an unavoidable accident instruction is proper and should be submitted
to the jury.”[24]

Conclusion

The distinction
between a categorical and case-by-case approach turns on the freedom given to
courts. If a conclusion in the form of an ambiguous term such as “unavoidable”
is left undefined, then it is up to courts to reason to conclusion by the
gathering and aggregating of facts on a case-by-case basis. On the other hand, when
Congress has outlined an approach by defining premises that, if true, will
necessarily lead to the conclusion, courts are left only to apply that
categorical proposition: they must determine if the premises are true; if they
are, the conclusion follows. Congress has shown itself willing to set the
premises of unavoidability and other instances of the phrase “unavoidable even
though” show that it is used to set such premises. Once the somewhat muddled
language of § 22(b)(1) is placed in this proper context, we can see that
it creates just such a categorical proposition. When the premises defined by
Congress are true-proper preparation, directions, and warnings-the conclusion
must therefore follow-the side effect is unavoidable.

Jason LaFond, J.D., graduated magna cum laude from the University of Michigan Law School. Mr. LaFond is currently clerking at the United States District Court for the Southern District of New York; in 2011, he will begin a clerkship at the United States Court of Appeals for the Fourth Circuit.

Suggested citation: Jason LaFond, Commentary, “What Do I Do About This Word, ‘Un-avoidable’?”: Resolving Textual Ambiguity in the National Childhood Vaccine Injury Act, 109 Mich. L. Rev. First Impressions 48 (2010), http://www.michiganlawreview.org/assets/fi/109/lafond.pdf.

[1]. Oral Argument at p.
46, Bruesewitz v. Wyeth, Inc., No. 09-152, available
at http://
www.supremecourt.gov/oral_arguments/argument_transcripts/09-152.pdf

[2]. 42 U.S.C. § 300aa-22(b)(1).

[3]. Am. Home Prods.
Corp. v. Ferrari, 668 S.E.2d 236, 140 (Ga. 2008).

[4]. Bruesewitz v. Wyeth,
Inc., 561 F.3d 233, 245-46 (3d Cir. 2009), cert.
granted, 130 S. Ct. 1734 (March 8, 2010).

[5]. See, e.g., Cedillo v. Sec’y of Health and Human Servs., No.
98-916V, 2009 WL 331968 (Fed. Cl. Feb. 12, 2009), aff’d, 89 Fed. Cl. 158 (2009), aff’d,
617 F.3d 1328 (Fed. Cir. 2010).

[6]. See Restatement
(Second) of Torts § 402A cmt. k (1965).

[7]. H.R. Rep. No.
99-908, pt. 1, at 26 (1986).

[8]. H.R. Rep. No.
100-391, pt. 1, at 691 (1987).

[9]. Jerman v. Carlisle,
McNellie, Rini, Kramer & Ulrich LPA, 130 S. Ct. 1605 (2010) (Scalia, J.,
concurring).

[10]. Pub. L. No. 59-340, 34
Stat. 607-08 (codified as amended at 49 U.S.C. § 80502) (emphasis added).

[11]. See, e.g., United States v. Boston & Maine R.R., 99 F.2d 635,
637 (1st Cir. 1938); Chicago, Burlington & Quincy R.R. Co. v. United
States, 194 F. 342, 345 (8th Cir. 1912).

[12]. See Boston & Maine R.R., 117 F.2d at 427.

[13]. 35 U.S.C. § 41(c)(1)
(emphasis added).

[14]. 37 C.F.R. § 1.378(b)(3)
(2010) (emphasis added).

[15]. 55 F.3d 606, 609 (Fed.
Cir. 1995).

[16]. See, e.g., 21 C.F.R. § 70.20; 7 C.F.R. § 457.167(11)(a);
50 C.F.R. § 22.26(a)(2).

[17]. See Margaret Shertzer,
The Elements of Grammar 46 (2001).

[18]. Id.

[19]. 38 U.S.C. § 1521(h)(2)
(emphasis added).

[20]. 26 U.S.C. § 73(a)
(emphasis added).

[21]. 50 C.F.R. § 22.26(a)(2)
(2010) (emphasis added).

[22]. 74 Fed. Reg. 46,841
(2009).

[23]. 191 S.E.2d 227, 228
(Va. 1972) (emphasis added).

[24]. Id.; see also Sears v.
Frost’s Administrator, 279 S.W.2d 776, 779 (Ky. 1955).

The high profile cases Bilski
v. Kappos[1] and Association for Molecular Pathology v.
United States Patent and Trademark Office[2] have renewed public debate about the proper scope of patentable subject matter.
The subject matter inquiry has traditionally been treated as a threshold
inquiry in patent law, serving a gate-keeping function by defining the types of
inventions that are eligible for patent protection. The Patent Office and
courts have approached the subject matter inquiry both by determining whether
an invention falls into a statutory category-processes, machines, manufactures,
or compositions of matter-as well as by determining whether an invention falls
into a category excluded from subject matter eligibility-often described in
recent decades as laws of nature, natural phenomena, and abstract ideas.

The exclusions from patentable subject matter developed in
the courts and have never been codified in the Patent Act. Although some
commentators have argued that the exclusions are Constitutionally mandated, the
Supreme Court and lower courts have consistently regarded them as judicial
interpretation of statutory subject matter requirements. Courts and commentators
have rationalized the exclusions as protecting the “basic tools” of scientific
and technological research necessary for innovation. Because of the role of the
subject matter inquiry in conditioning patent eligibility-a role perceived as
critical to encouraging innovation-landmark subject matter cases have often
arisen during times of technological change and economic upheaval.

The patents at issue in Association for Molecular Pathology cover isolated and purified
forms of the human BRCA1 and BRCA2 genes responsible for heightened risk of
breast and ovarian cancer, as well as methods for determining whether the
sequence is present in clinical samples submitted by patients for testing. Like
many other important subject matter cases, Association
for Molecular Pathology raises the policy question of whether the patents
at issue and other similar patents “cause more harm than good to society and
technological development.”[3] The plaintiffs prevailed in the district court. If the decision is affirmed by
the Federal Circuit, although gene patents would not be broadly invalidated, a
new avenue would be opened for challenging patent validity.

The litigation is noteworthy not only for the legal and
policy questions it raises, but also because two public interest groups, the
American Civil Liberties Union (ACLU) and the Public Patent Foundation
(PUBPAT), are serving as plaintiffs’ counsel. Association for Molecular Pathology is a rare instance of impact
litigation in patent law, which has remained relatively untouched by
conventional cause lawyering until recent years. The public policies championed
by ACLU and PUBPAT are undoubtedly compelling. They include the salutary goals
of making genetic testing more widely and inexpensively available, and encouraging
scientific research. We question, however, whether judicial interpretation
alone of 35 U.S.C. § 101, the eligible subject matter provision of the Patent
Act, can provide the legal framework necessary to properly effectuate these
policies.

In this Essay, we suggest that by focusing solely on shaping
judicial interpretation of the exclusions from patentable subject matter,
proponents of an expanded public domain fail to consider the possibility that
states will expand what we term “interstitial exclusivities”-state-based legal
rules, such as trade secret law and unfair competition law, that grant certain
market exclusivities in inventions and that are not subject to federal
constitutional limits on their duration. We argue that the expansion of existing
interstitial exclusivities and the creation of new ones would alter existing
incentive structures of intellectual property law, potentially provoking serious
negative unintended consequences such as increased uncertainty surrounding
patent validity, increased business costs, and increased secrecy in scientific
research. We suggest instead that the creation of a public domain envisioned by
ACLU and PUBPAT may be best achieved through concurrent efforts to enact
legislative change, which would explicitly dedicate such inventions to a public
domain.

I. Interstitial Exclusivities

The problematic but incomplete overlap of federal and
state intellectual property law has allowed for the creation of state-law
exclusivities in inventions. We refer to these laws as “interstitial
exclusivities” because they arise in the gaps where courts have concluded that
federal patent law does not preempt state law.

The relationship between state and federal intellectual
property protections-particularly with respect to the role of patent
protection-is complicated. The federal and state regimes overlap and are
similar in some respects, but differ significantly in others. Congress’s patent
and copyright authority derives from the Progress Clause of the Constitution,
which enumerates the power to legislate along with a concurrent restriction
requiring the exclusive rights to be granted by the federal government only for
“limited times.”[4] However,
trademark, unfair competition, and trade secret law are free from these
durational limitations.[5] Therefore, tensions have arisen where trademark, unfair competition, and trade
secret protections partially overlap with patent or copyright rights,
effectively extending elements of patent-like or copyright-like coverage for
unlimited times.[6]

Under existing application of preemption principles,
states may craft intellectual property laws conveying exclusivities in
inventions without running afoul of the Patent Act. When state-based
intellectual property laws are challenged because of perceived conflict with
the Patent Act, courts review these statutes using implied conflict preemption
principles-the Patent Act contains no express preemption provisions, and courts
have not applied field preemption principles to intellectual property law.  Conflict preemption is a notoriously
muddled area of law,[7] and courts
have struggled to apply these principles consistently to state intellectual
property laws.[8] Beginning in 1973, the Supreme Court
affirmed states’ rights to legislate in the intellectual property field absent
direct conflict, despite dicta in earlier cases suggesting broad federal
preemption of state intellectual property laws.[9] Similarly, it is unlikely that courts will find that state intellectual
property protections impermissibly burden interstate commerce in all but the
most extreme circumstances.[10] Accordingly, when a litigant raises a preemption argument, courts will generally
engage in a very limited conflict analysis by looking to the stated purpose and
legal elements of the state-based protection.[11] State lawmakers are left with room to create exclusivities in inventions.

Naturally, business firms game the legal overlap and
interplay to gain valuable market exclusivities in their products. The
correspondence between state trade secret and unfair competition laws and
federal patent law is not one-to-one, nor could it be under existing law. For
example, the exclusivity conveyed by trade secret law does not generally
protect against independent development or reverse engineering, and secrecy
requirements in some jurisdictions can be relatively difficult and onerous to
maintain. Likewise, unfair competition laws in some jurisdictions require
elements such as proof of intent to establish violations. Neither trade secret
nor unfair competition laws are perfect substitutes for patent protection, but
they still convey valuable elements of market exclusivity, often through
liability rather than property rules. Recognizing this, businesses have adopted
sophisticated exclusivity strategies that consciously engage federal, state,
and private law to maximize market exclusivity.

Against this backdrop, we suggest that ACLU, PUBPAT, and
their supporters consider the possibility that state lawmakers could extend
additional or strengthened state-law protections over inventions excluded from
federal protection because of narrowed subject matter eligibility. States have
continued to make and develop intellectual property law. For example, some
jurisdictions have recently revived the once disfavored “inevitable disclosure”
doctrine in trade secret law, a legal fiction that assumes an employee who has
certain knowledge will disclose it to a new employer.[12] Similarly, a recent Seventh Circuit case upheld an exclusive license of trade
secrets between companies, explaining that trade secrets may be bought, sold,
and licensed regardless of the fact that to do so requires their disclosure.[13] And in an emerging area of intellectual property law, Utah recently passed the
Utah Bioprospecting Act, which allows for regulation of bioprospecting
activities, including the removal from state lands of naturally occurring microorganisms,
plants, or fungi or information about the same for a commercial or research
purpose.[14] The legislation also mandates a royalty to the state resulting from commercialization
of the results of bioprospecting and criminal penalties for noncompliance.

Although increased state activity in this area is not a
certainty, it is a distinct possibility in light of the potential value of the
inventions at issue. Simply put, there is nothing to stop state lawmakers from
drawing even closer to patent law while still avoiding federal preemption, and
very little reason to believe that state lawmakers would hesitate to do so.

II. The Law of Unintended
Consequences

If the district court decision is upheld on appeal, it
will be a Pyrrhic victory for proponents of an expanded public domain.
Inventions that have already been disclosed to the public as part of the patent
bargain-which requires disclosure in exchange for the strong exclusivity
protections conferred by patent law-would begin to create an expanded public
domain.[15] For example, the inventions at issue in Association
for Molecular Pathology would become a part of the public domain because
they were disclosed in the patents. But inventors and their assignees could
keep future inventions out of that public domain by strategically gaming the
protections of federal, state, and private law. A judicial narrowing of
patentable subject matter through a broadened interpretation of the exclusions
would radically alter the incentives provided by the web of state and federal
intellectual property protections. Businesses may increasingly opt for
secrecy-based protections for certain gene and biotech inventions if patent
protection, along with its strict disclosure requirements, is no longer
available. This could have far-reaching unintended consequences on commercial
and inventive activity, including increased secrecy, increased litigation,[16] and increased uncertainty throughout the system, which is already complicated
by non-uniformity of state trade secret and unfair competition laws.[17]

Perhaps more
importantly, narrowing the scope of patentable subject matter through
interpretation of the exclusions could dramatically affect the way research and
development are practiced. In addition to harming those who have developed and
invested in gene patents in reliance on settled law, a narrowing of patentable
subject matter may also chill the openness that patent protection fosters
regardless of additional state action in the area if businesses tend toward
secrecy-based intellectual property protections over the disclosure-based
federal patent system. It could easily limit industry-university
relations such as industry sponsored research, important biological material
transfers between industry and universities, clinical trials, and other collaborations.
Such collaborations are necessary for university researchers to have access to
compounds, animals, and other research resources in cutting edge areas of
science where industrial research and development is ongoing. Moreover, it may
deter scientists from publishing and cause businesses to further limit
publication by their scientists. It almost certainly would limit out-licensing
opportunities for universities because of the strong culture of publication
within universities. It would likely cause businesses to seek restrictive
covenants with their employees more frequently, and to enforce such covenants more
aggressively. Finally, it may greatly inhibit the movement of scientists and
specialists between academia and industry and between competing companies.

As one of us has argued elsewhere, alteration of the
patentable subject matter inquiry is best left to Congress because of the
importance of subject matter eligibility to public policy goals, and because of
Congress’ institutional competency in addressing complex public policy
concerns.[18] With Association for Molecular Pathology,
the process has already started in the courts, but it should not end there. Litigation
alone has been widely recognized as, at best, an incomplete tool in achieving
public policy goals. Impact litigation can be an effective means of placing
pressure on the other branches of government and of publicizing policy issues,
but courts are not as effective as the other branches of government at crafting
and implementing long-term solutions that adequately account for costs and
second order consequences.[19] Those who seek to secure public rights in gene patents and other technologies
should learn from past examples of litigation aimed at enacting social change,
which benefited greatly from concurrent political efforts to enact legislative
solutions.

Given the gaps that already exist in intellectual property
law and the state-based exclusivities that can and do fill them, proponents of
a narrow subject matter inquiry should concurrently seek legislative change.
The legislative process is riddled with inefficiencies and interest group
influence, but we think legislative reform is achievable. ACLU and PUBPAT have
successfully leveraged impact litigation in the areas where it is most
effective-bringing the debate to the public sphere and placing pressure on the
other branches of government. Even a cursory review of the media coverage of
the case demonstrates ACLU and PUBPAT’s success at bringing the issues to the
public’s attention. Other related efforts are also receiving media attention,
such as the recent empirical study by Duke University researchers suggesting
that gene patents stifle innovation,[20] as well as executive branch review of the issue.[21] Additionally, the likely appeal of
this case to the Federal Circuit may pressure the executive and legislative
branches to act prior to a precedential appellate decision. ACLU and PUBPAT’s
challenge now is to channel the successes of impact litigation into effective
legislative reform to lower costs and increase access to gene patents and other
important technologies.

Unfortunately, the legislative solutions proposed thus far
would not solve the problems created by existing and potentially expanded
interstitial exclusivities. The NIH committee charged with evaluating gene
patents recently proposed to create two exemptions from infringement
liability-for gene patents used in patient care and for gene patents used in
academic research.[22] Even
without the added complication of the pending litigation, the exemptions
advocated by NIH would alter the incentive structure of intellectual property
law, creating incentives for businesses to take advantage of existing
interstitial exclusivities such as state trade secret law rather than seeking
patent protection, and for states to expand or create new ones.

We believe the legislative solution that would come
closest to creating the public domain ACLU and PUBPAT envision would preempt
states from acting in these areas by including express language both defining
the exclusions from patentable subject matter and committing them to the public
domain. In order for a public domain to be created to cover the exclusions, it
must keep them within the purview of the federal patent system while simultaneously
shielding them from state-based exclusivities that lack durational limitations
and allow or require the secrecy of inventions.

We recognize that such legislation would need to be
carefully crafted. Notably, partial preemption of state-based intellectual
property protections could cause jurisdictional uncertainty concerning whether
and under what circumstances federal courts would have subject matter
jurisdiction over state-based claims implicating the exclusions.[23] However, Congress is the governmental body best suited to weigh options
intended to reduce cost and improve access to technologies-whether it be
through amendment of the Patent Act or through other legislative reforms such
as the creation of health care subsidies.

Proponents of a narrowed patentable subject matter portray
themselves as champions of a public domain. Yet the public domain they seek to
create through impact litigation is at best elusive and at worst unreachable
through litigation alone. The patentable subject matter inquiry is a complex
issue requiring careful consideration by Congress to craft nuanced legal
solutions that properly mind the gaps of federal intellectual property
protection.

________________________________________________________________________________

Mary Mitchell is a law clerk to the Hon. Anthony J. Scirica, United States Court of Appeals for the Third Circuit. Dana A. Remus is a Professor of Law at the University of New Hampshire Law School.

Suggested citation: Mary Mitchell & Dana A. Remus, Commentary, Interstitial Exclusivities After Association for Molecular Pathology, 109 Mich. L. Rev. First Impressions 34 (2010), http://www.michiganlawreview.org/assets/fi/109/mitchellremus.pdf.

[1]. See Bilski v. Kappos, 130 S. Ct. 3218 (2010).

[2]. No. 09 Civ. 4515,
2010 WL 1233416 (S.D.N.Y. Mar. 29, 2010).

[3]. See Memorandum of Law in Further Support of Plaintiffs’ Motion for
Summary Judgment at 3, Ass’n for
Molecular Pathology v. U.S. Patent & Trademark Off., No. 09 Civ. 4515,
2010 WL 1233416 (S.D.N.Y. Jan. 20, 2010).

[4]. U.S. Const. art. I, § 8, cl. 8.

[5]. Federal trademark and unfair competition
law is promulgated under the Commerce Clause. Trade secret law is state-based
excepting two federal statutes, promulgated under the Commerce Clause-the
Economic Espionage Act of 1996, which criminalizes trade secret
misappropriation, 18 U.S.C. §§ 1831-1839, and the Computer Fraud and Abuse
Act, 18 U.S.C. § 1030, which criminalizes the misappropriation of certain
information contained on computers. We leave aside debates over whether
trademark, trade secret, and unfair competition law are properly considered
under the rubric of intellectual property.

[6]. IP overlap has been
treated extensively in scholarly literature as well as case-law. See, e.g., Bonito Boats, Inc. v Thunder
Craft Boats, Inc., 489 U.S. 141 (1989); Wal-Mart Stores, Inc. v. Samara Bros.,
Inc., 529 U.S. 205 (2000); Dastar Corp. v. Twentieth Century Fox  Film Corp., 539 U.S. 23 (2003); Viva R.
Moffat, Mutant Copyrights and Backdoor Patents: The Problem of Overlapping
Intellectual Property Protection, 19 Berkeley Tech. L.J. 1473 (2004). We leave for
another day issues of problematic overlap among federal intellectual property
rights.

[7]. Compare Wyeth v. Levine, 129 S. Ct. 1187 (2009) with Geier v. American Honda Motor Co., 529 U.S. 861 (2000); see Wyeth, 129 S. Ct. at
1227 (Alito, J., dissenting) (explaining that the majority’s conclusion “requires
turning yesterday’s dissent into today’s majority opinion”).

[8]. See Arthur Miller, Common Law Protection
for Products of the Mind: An “Idea” Whose Time Has Come, 119 Harv. L. Rev.
705, 745-46 (2006).

[9]. Compare Goldstein v. California, 412 U.S. 470 (1973) (upholding a California
criminal piracy law concerning sound recordings), and Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974) (upholding
state-based trade secret laws), and
Bonito Boats, 489 U.S. 165, with Sears Roebuck & Co. v. Stiffel Co., 376 U.S. 225 (1964) (invalidating a
state unfair competition law that prohibited copying), and Compco Corp. v. Day Bright Lighting, Inc., 376 U.S. 234 (1964)
(same).

[10]. See
Goldstein, 412 U.S. at 558-59; see
also Miller, supra note 8, at 750.

[11]. See,
e.g., Bonito Boats, 489 U.S. at
165-67 (examining the intent behind and legal structure of state trade secret
and trademark protections and explaining they do not conflict with federal
intellectual property law); Kohler Co. v. Moen Inc., 12 F.3d 632, 642-43 (7th
Cir. 1993) (using this analytical structure and declining to find conflict
between federal trademark and design patent protection).

[12]. Int’l Bus. Machines Corp. v. Papermaster,
No. 08-CV-09078, 2008 WL 4974508 
(S.D.N.Y. Nov. 21, 2008).

[13]. Am. Family Mut. Ins. Co. v. Roth, 485
F.3d 930 (7th Cir. 2007).

[14]. Utah Code Ann. § 2:65A-14-102.

[15]. See Bonito Boats, 489 U.S. at 156-57. In Bonito Boats, as in Association
for Molecular Pathology, the invention at issue had already been disclosed
to the public. The Court explained:

A state law that substantially interferes with the
enjoyment of an unpatented utilitarian or design conception which has been
freely disclosed by its author to the public at large impermissibly contravenes
the ultimate goal of public disclosure and use which is the centerpiece of
federal patent policy.

Id.

[16]. ACLU has actually stated that it seeks
to encourage more litigation over patent validity. See Stephen Albaini-Jenei, Bulletproof:
Interview with ACLU Attorney Chris Hansen Over Gene Patents, Patent Baristas Blog, Nov. 12, 2009, available at http://www.patentbaristas.com/archives/2009/11/12/.

[17]. See David S. Almeling, Four Reasons to Enact a Federal Trade
Secrets Act, 19 Fordham
Intell. Prop. Media & Ent. L.J. 769, 776-77, 781 (2009) (noting
investigation and litigation costs associated with nonuniformity of state law
and noting choice of law and jurisdictional complications). Although forty-six
states adopted the Uniform Trade Secret Act, interpretation varies widely, and
states have often amended its provisions.

[18]. See Dana Remus Irwin, Paradise Lost in the
Patent Law? Changing Visions of Technology in the Subject Matter Inquiry,
60 Fla. L. Rev.
775 (2008).

[19]. See Donald L.
Horowitz, The Courts and Social Policy 262 (1977).

[20]. See Robert Cook-Deegan & Christopher Heaney, Patently Complicated: Case Studies on the Impact of Patenting and
Licensing on Clinical Access to Genetic Testing in the United States, Genetics in Med.,
Apr. 2010 Supp. at 4.

[21]. For example, the Office of Biotech
Activities within the Office of Science Policy of the National Institutes of
Health recently issued a white paper on gene patents advocating legislative
reform. See Secretary’s Advisory
Committee on Genetics, Health, and Society, Revised Draft Report on Gene
Patents and Licensing Practices and Their Impact on Patient Access to Genetic
Tests, available at, http://oba.od.nih.gov/SACGHS/sacghs_documents.html#GHSDOC_011
[hereinafter SACGHS Whitepaper].
Similarly, the Office of Science and Technology Policy and the National
Economic Council recently issued a call for information on how to improve
university commercialization of technology. See Commercialization of University Research: Request for Information, 75 Fed. Reg.
57 (Mar. 25, 2010).

[22]. See
SACGHS Whitepaper, supra note 21, at 90-91.

[23]. See Christianson v. Colt Indus., 486 U.S. 800 (1988) (holding that when patent
law is not a required element of a properly pleaded complaint, federal subject
matter jurisdiction is limited to cases where the relief sought requires
adjudication of a patent issue); cf. Holmes
Group, Inc. v. Vornado Air Circulation Sys., Inc., 535 U.S. 826 (2002) (holding
Federal Circuit jurisdiction does not extend over cases where a patent-based
cause of action is asserted in a counterclaim).

The severe sentences imposed on possessors of child pornography in federal courts have inspired an ongoing debate. Critics feel the U.S. Sentencing Guidelines are too harsh on first time offenders. In addition, calculation of an offender’s Guidelines range can seem arbitrary, as his sentence is partially dependent on the number of depictions he possessed, and whether or not a computer was used.

On the other hand, psychological studies suggest a strong correlation between those who seek out child pornography and those who would be diagnosed as pedophiles. Studies also suggest that most pedophiles are unable to control their strong sexual urges. They are likely to seek out sexual relationships with children if they are not incapacitated in some way. Yet, research has shown that incarceration and social shame are unlikely to rehabilitate sex offenders. Therefore, the lengthy prison terms imposed by the Sentencing Guidelines are only a temporary solution to the bigger problem that criminal pedophiles pose. Some studies have shown that medical treatment, such as castration, provides the only effective means of changing pedophilic behavior. Sentencing for possession of child pornography should involve a more comprehensive approach that incorporates treatment through medical and pharmacological means in addition to temporary incapacitation through prison sentences.

I. Possession of Child Pornography and Hands-on Abuse

Recent research has suggested that child pornography offenses have brought child molesters into the criminal justice system that otherwise would have gone undetected. In 2000, Andres E. Hernandez, director of the Sex Offender Treatment Program (“SOTP”) at the Federal Correctional
Institution in Butner, North Carolina presented an eye-opening study.[1] Hernandez studied clinical charts of former participants in the SOTP, hoping to discover the incidence of sexual contact crimes committed by program participants, including those who had only been convicted of noncontact crimes-such as possession of child pornography. The subjects in the study were ninety imprisoned males divided into three groups: (1) those convicted of sexual crimes not involving actual contact with children; (2) those convicted of crimes involving sexual abuse, molestation, or assault; and (3) those convicted of other federal, nonsexual offenses.

During their participation in the SOTP, subjects across all three of the groups reported additional sexual crimes that had not been detected by law enforcement. Sixty-two percent of the men convicted of noncontact sexual offenses (such as possession of child pornography) admitted to having committed undetected contact offenses in the past. The presentencing reports of these men revealed fifty-five prior sex offenses involving contact, but this study revealed an additional 1,379 sex crimes that had never been detected by the criminal justice system

Figure 1
Number of Offenders Disclosing Hands-On
Offenses Before and After Treatment[2]

Hernandez and Michael L. Bourke recently expanded on the 2000 Butner study findings in a subsequent study with results similar to the first. In this study, 155 men who had been convicted of child pornography offenses were analyzed. Before the study, seventy-four percent of the subjects had no documented history of sexual abuse, but at the end of treatment, eighty-five percent admitted to having committed at least one hands-on sexual offense. The subjects who had no known history of hands-on crimes ultimately disclosed an average of 8.7 victims each. Hernandez and Bourke argued that the “dramatic increase (2,369%) in the number of contact sexual offenses acknowledged by the treatment participants challenges the often-repeated assertion that child pornography offenders are ‘only’ involved with ‘pictures.’ ” Instead, these studies suggest that pedophilia and an interest in child pornography can be valid indicators of more serious offenses that may go undetected by the criminal justice system.

II. Problems with the Guidelines’ Current Approach

High rates of recidivism among child molesters have shown that the threat of incarceration is not a significant deterrent in itself. The relatively low detection rate of child exploitation offenses (as shown in the number of hands-on crimes that were not reported in the Butner study pre-sentencing reports) contributes to the insufficiency of the current sentencing regime. Additionally, incarceration alone will not deter criminal pedophiles because they “are not economically rational actors who weigh the cost of their actions-incarceration-against their benefits, the realization of their sexual fantasies. These individuals are compelled to commit sex offenses in order to fulfill their incessant sexual fantasies.”[3] Imprisonment utterly fails to rehabilitate pedophilic offenders, because incarceration does nothing to reduce the pedophile’s sexual attraction toward children nor to increase the ability of an offender to control his impulses.

The Sentencing Guidelines for child pornography offenses often seem disconcertingly arbitrary. The Sentencing Commission did not use empirical evidence in fashioning the Guidelines. Instead, the recently heightened sentences resulted from politically driven legislation, like the Sex Crimes Against Children Prevention Act of 1995 and the PROTECT Act of 2003. Moreover, random elements of the offense, such as whether or not a computer was used in the offense, may dramatically affect the sentencing range. Use of a computer typically increases an offender’s sentencing range by about twenty-five percent. However, because today nearly all child pornography cases involve a defendant who used a computer in committing the offense, the enhancement has little value. Sentences also increase depending on the number of images the offender possessed, with no rationale in the Guidelines for the values used as the cut-offs. Because the internet makes it easy for an offender to acquire hundreds of images, the number of images possessed is not always a reliable way to distinguish between more and less dangerous offenders.

III. Proposed Treatment of Criminal Pedophiles

When crafting a sentence, district court judges are instructed to consider the factors set forth in 18 U.S.C. § 3553(a), which allow for the creation of an appropriate individualized sentence, one that might vary from the recommended Guidelines range. Courts are directed to consider whether the sentence will: (1) reflect the seriousness of the offense; (2) promote respect for the law; (3) provide just punishment for the offense; (4) afford adequate deterrence to criminal conduct; (5) protect the public from further crimes of the defendant; and (6) provide the defendant with needed educational or vocational training, medical care, or other correctional treatment in the most effective manner. Merely incarcerating a child pornography offender for the length of his Guidelines recommendation does not serve all the purposes outlined in the statute. While a harsh prison sentence will reflect the seriousness of the offense, it will not adequately deter future conduct or provide the defendant with much needed treatment. A lengthy sentence may provide just punishment for the offense, but it will not protect the public from further crimes or promote respect for the law.

To effectively deter future crimes, possessors of child pornography should routinely be given more comprehensive sentences imposing both punishment and treatment. The severity of punishment and the intrusiveness of treatment should depend on the offender’s criminal history and likelihood to reoffend. In the case of a first time offender, whether or not his prison sentence is within the Guidelines range should depend on the defendant’s likelihood of recidivism compared with his ability for rehabilitation. This can be shown through psychological tests, like the Screening Scale for Pedophilic Interests, which has been shown to reliably predict the likelihood that child molesters will reoffend.[4] In addition, I would recommend several conditions of probation following the first time offender’s prison sentence. Conditions found reasonable by courts include: sex-offender treatment, a prohibition on accessing the Internet, and a term of supervised release.

If the offender is a repeat child pornography offender, or has other sex offenses on his record, courts should impose harsher punishment and a more intrusive treatment method. After a ter

m of imprisonment, the repeat sex offender should be subject to a lifetime of supervised probation with hormonal treatments administered weekly as a condition of probation. Anti-androgen treatments, such as the administration of hormones that reduce an offender’s testosterone levels and diminish his sex drive, have been shown to be the most effective means of preventing recidivism of repeat offenders upon release.

European countries have had success in treating sex offenders through surgical castration. Surgical castration involves removal of the testes, which produce testosterone, resulting in a diminished ability to respond to sexual stimuli. In Denmark, Georg Sturup studied a group of 900 castrated sex offenders over thirty years. He found less than a three percent recidivism rate among castrated offenders. Studies in Holland, Sweden, and Switzerland have resulted in similar findings. A Swiss study documented a 5.8 percent recidivism rate among castrated men and a fifty-two percent recidivism rate in the non-castrated control group.[5]

In the United States, state court cases suggest that a sentence imposing surgical castration would likely violate the Eighth Amendment prohibition aga

inst cruel and unusual punishment. For example, a Nevada statute providing for vasectomy of rapists was deemed “cruel and unusual punishment.” In State v. Brown, the Supreme Court of South Carolina held that surgical castration is a form of mutilation, and is therefore an unconstitutional punishment.[6] Yet some American states, including California and Florida, have successfully imposed chemical castration as an element of repeat sex offenders’ sentences. Although the issue of chemical castration has yet to reach the Supreme Court, it would likely withstand constitutional scrutiny.

“Chemical castration” is a bit of a misnomer, as the procedure does not involve “castration” at all, and is completely reversible. The procedure involves the administration of weekly intramuscular injections of Depo-Provera (a type of birth control). The drug binds to the recipient’s muscle and reduces testosterone levels by curbing the release of luteinizing hormones from the pituitary gland. The drug reduces the subject’s sex drive by reducing the production of testosterone. The dosage can be adjusted so that the offender is not completely impotent, but does not experience intrusive deviant impulses. Patients undergoing chemical castration do not have spontaneous erections, but are able to have an erection when stimulated by a partner. Additionally, Depo-Provera is not feminizing, and while it does cause decreased sperm production, it does not cause sterilization.

While Depo-Provera treatment has proven to be effective in treating pedophilia, administration of the drug may also result in adverse side effects. The most common side effects that have been observed include weight gain, headaches, insomnia, nightmares, reduction in the size of the testes, reduction in sperm count, and nausea. While these side effects are not insignificant, the demonstrated efficacy of chemical castration in curbing deviant sexual urges seems to outweigh its drawbacks, especially because most of these side effects are exceptionally rare. Moreover, the majority of these side effects disappear after treatment.

Administration of Depo-Provera for sex offenders has been controversial. In 1984, a Michigan judge sentenced a convicted rapist, Roger Gauntlett, to one year in prison and five years probation conditional on his receipt of weekly injections of Depo-Provera. Gauntlett appealed his sentence, and the court of appeals found the trial court had imposed an illegal condition of probation.[7] The court emphasized that Depo-Provera was not widely accepted in the medical field for treatment of sex offenders, and that it was still considered an experimental drug. These concerns carry little weight today. The FDA approved Depo-Provera in 1992 (after the Gauntlett case was decided) for use as a birth control. It is no longer considered an experimental drug, and it can be prescribed by any physician under the Food and Drug Administration Guidelines relating to the “use of approved drugs for unlabeled indications.” In addition, subsequent to this decision, a number of studies have indicated that chemical castration is an effective treatment for pedophilia, and the procedure has been incorporated into sentencing statutes in a number of states, including Georgia, Oregon, Montana, Wisconsin, California, Florida, Iowa, and Louisiana.

The ACLU has opposed chemical castration as a punishment, calling it cruel and unusual. In determining whether a punishment violates the Eighth Amendment, courts ask three questions: (1) whether the punishment is inherently cruel or excessive; (2) whether the punishment is proportional to the crime; and (3) whether the state could achieve its goal through less intrusive means. Based on this analysis, the imposition of chemical castration should not be considered an Eighth Amendment violation. First, the use of anti-androgens is not inherently cruel, but actually benefits the offender by freeing him from intrusive deviant urges that may lead him to commit future crimes. Second, a treatment regimen of chemical injections is not excessive when balanced against the harm the repeat child pornography offender has committed against children and society. Lastly, studies have revealed that chemical castration is the most effective and least intrusive method of treating criminal pedophiles. It is clearly less intrusive than surgical castration or a lifetime of incarceration. In addition, when the safety of children is at stake, the Supreme Court is more likely to allow government regulation that would otherwise be considered unconstitutional. For these reasons, a sentence imposing chemical castration on a repeat child pornography offender should pass constitutional muster.

Conclusion

The threat that possessors of child pornography pose to society is a large and still growing problem. While some argue that the harsh sentences recommended by U.S. Sentencing Commission are unduly harsh, they seem at least partially justified by research showing that most possessors of child pornography are not passive onlookers. Instead, most are sexually deviant pedophiles, highly likely to commit a hands-on act of child abuse. Yet, incarceration of these offenders may not be the most effective means of punishment. Simply incarcerating criminal pedophiles for a lengthy period of time before letting them back into society will not alleviate the danger they pose upon release. Instead, the sentences imposed upon criminal pedophiles that possess child pornography should incorporate a longer treatment regimen. For first time offenders, this may involve a period of supervised release along with conditions of probation, including mandatory psychological treatment. Repeat offenders who have been diagnosed as pedophiles should be required to undergo chemical castration therapy as a condition of probation, coupled with psychotherapy. This comprehensive approach, which will eliminate the criminal pedophile’s deviant urges, can allow offenders to return to society sooner, and with less likelihood of committing further crimes.

______________________________________________________________________________

Kristin Carlson is a May 2011 J.D. candidate at the University of Michigan Law School.

Suggested citation: Kristin Carlson, Commentary, Strong Medicine: Toward Effective Sentencing of Child Pornography Offenders, 109 MICH. L. REV. FIRST IMPRESSIONS 27 (2010), http://www.michiganlawreview.org/assets/fi/109/carlson.pdf.

 [1]. Andres E. Hernandez, Self-Reported Contact Sexual Offenses by Participants in the Federal Bureau of Prisons’ Sex Offender Treatment Program: Implications for Internet Sex Offenders (Nov. 2000) (unpublished manuscript, on file with author).

 [2]. Id. at 4.

 [3]. Edward A. Fitzgerald, Chemical Castration, 18 Am. J. Crim. L. 1, 55 (1991).

 [4]. Michael C. Seto et al., The Screening Scale for Pedophilic Interests Predicts Recidivism Among Sex Offenders With Child Victims, 33 Archives Sexual Behav. 455 (2004).

 [5]. Linda E. Weinberger et al., The Impact of Surgical Castration on Sexual Recidivism Risk Among Sexually Violent Predatory Offenders, 33 J. Am. Acad. Psychiatry & L. 16 (2005).

 [6]. 236 S.E.2d 410 (S.C. 1985).

 [7]. People v. Gauntlett, 352 N.W.2d 310 (Mich. Ct. App. 1984).

In 1986, the 99th Congress passed the GST Tax in order to supplement the federal estate and gift taxes. When private wealth shifts from generation to generation or bypasses a generation without incurring federal estate or gift taxes, the GST Tax fills that void.

The 99th Congress included a provision known as the GST Exemption when it passed the GST Tax.[3] The GST Exemption allows trust settlors to create trusts without incurring GST Tax. The maximum amount originally exempted was $1 million (or $2 million for a married couple), but over time Congress increased the maximum to $3.5 million (or $7 million for a married couple).

When the 99th Congress fashioned the GST Exemption, state perpetuity law controlled the duration of private trusts. State perpetuity law was then undergoing reform, but the reforms retained the basic durational limit that has been part of Anglo-American law for centuries. Presumably relying on the states to honor that tradition, the 99th Congress did not impose a federal durational limit on trusts that qualify for the GST Exemption.

As part of the 2010 tax bill, Congress should put a halt to the tax exemption for perpetual trusts. With federal law currently providing no limit, only state perpetuity law precluded a tax exemption for perpetual trusts, but that obstacle soon crumbled. As a result of interstate competition for trust business, the state law perpetuity landscape changed dramatically. The absence of a durational limit on the GST Exemption spawned a movement in the states to repeal or modify state perpetuity rules to allow trust settlors to create trusts that can last forever[4] or for several centuries.[5] An empirical study published in 2005 established that the wealthy are creating GST-exempt perpetual or near-perpetual trusts in large numbers in these trust-friendly states.[6] Considerable private wealth is pouring into GST-exempt trusts from out-of-state settlors, thereby escaping federal transfer taxation for centuries and in some cases forever. The loss of tax revenue will only become more acute as time passes.

Although a GST-exempt trust of a few million dollars represents a small portion of the net worth of the very wealthy, the exemption can be leveraged so that the amount exempted significantly exceeds the exemption’s cap by utilizing various estate planning techniques. For example, the trustee can be authorized to purchase or retain assets such as second-to-die life insurance, start-up businesses, and minority interests in existing family businesses at discounted values. The trustee can also be authorized to purchase or retain property such as vacation homes and private airplanes for the use of the beneficiaries. In addition, the trustee, which can be a family trust company, can be authorized to hire sophisticated investment managers and invest in assets not traded in the public securities markets, assets such as hedge funds, private equity, venture capital funds, and real estate. Finally, generation after generation can have their interests insulated from creditors through the use of spendthrift clauses. The perpetual or near-perpetual trust movement might lead over time to large concentrations of wealth within a relatively small number of family dynasties and financial institutions,[7] contrary to a longstanding goal of federal tax policy.[8]

Also, over time-long after the settlor and the attorney responsible for proposing and drafting the trust have passed away-the trust will become unwieldy as the number of beneficiary descendants increases geometrically.[9] One hundred fifty years after creation, a GST-exempt perpetual or near-perpetual trust could have 450 beneficiaries; after 250 years, over 7,000 beneficiaries; after 350 years, 114,500 beneficiaries. Sports fans can get a visual image of the scale of the problem by taking note that 350 years after creation, the 114,500 beneficiaries could not even squeeze into Michigan Stadium or the Rose Bowl for a college football game.

As the trust drifts deeper and deeper into its second and third centuries and beyond, the beneficiaries will, to be sure, share a common ancestor, but their common ancestor will be very remote and they will have branched into multiple families basically unknown to each other. If Samuel Hinckley, who died in Massachusetts in 1662, had created a perpetual or near-perpetual trust for his descendants, the more-than-100,000 beneficiaries living in 2010 would include President Barack Obama and his descendants and President George H.W. Bush and his descendants (including former President George W. Bush). Likewise, if Mareen Duvall, who died in Maryland in 1694, had created a perpetual or near-perpetual trust for her descendants, the more-than-100,000 beneficiaries living in 2010 would include President Obama and his descendants and former Vice President Richard Cheney and his descendants.

Four hundred fifty years after a GST-exempt perpetual trust is created, the number of living beneficiaries of that one trust could rise to 1.8 million-yes, 1.8 million beneficiaries of a single trust, each with standing to bring a lawsuit against the trustee for violation of any of the trustee’s fiduciary duties, including the duty of impartiality. The Restatement of Trusts states that the duty of impartiality may require the trustee “to consult with beneficiaries and obtain information from them concerning their financial needs and circumstances.” How can the trustee of a 1.8-million-beneficiary trust hope to fulfill that duty? When the 99th Congress failed to impose a durational limit on the GST Exemption, I doubt that it foresaw that the effect would be to subsidize the creation of tax-exempt trusts lasting hundreds of years and having beneficiaries in astronomical numbers.

What can be done now about the matter? A few years ago, the staff of the Joint Committee on Taxation foresaw the tax-revenue leakage and handed Congress a perfect solution. The staff proposed a two-generation limit on the GST Exemption.[10] The Staff Report first identified the problem:

Perpetual dynasty trusts are inconsistent with the uniform structure of the estate and gift taxes to impose a transfer tax once every generation. In addition, perpetual dynasty trusts deny equal treatment of all taxpayers because such trusts can only be established in the States that have repealed the mandatory rule against perpetuities.

The Staff Report then identified a solution:

The proposal prohibits the allocation of the generation skipping tax exemption to a “perpetual dynasty trust,” except to the extent that the trust provides for distribution to beneficiaries in the generations of the transferor’s children or grandchildren. Under the proposal, the generation-skipping tax exemption effectively is limited to an exemption of a skip of one generation. A “perpetual dynasty trust” is defined as a trust whose situs (place of creation) is a State that either (1) has repealed the rule against perpetuities, (2) allows the creator of a trust to elect to be exempt from the rule against perpetuities and the creator so elects, or (3) has modified its rule against perpetuities to permit creation of interests for individuals more than three generations younger than the interest’s creator. If the situs of a trust is moved from a State that has retained the rule against perpetuities to a State that has repealed the rule against perpetuities, its inclusion ratio thereafter will be changed to one.

In a recent op-ed in the New York Times, Ray Madoff also urged Congress to “limit[] the  generation-skipping-transfer exemption to trusts that last no longer than two generations.”[11]

A rule that curbs excessive dead-hand control is deeply rooted in this nation’s history and tradition. At the 2010 annual meeting of the American Law Institute (“ALI” or “Institute”), the Institute honored that tradition by taking the position that the perpetual-trust movement is ill advised. The Institute also proposed a new approach to perpetuities, one that would impose a two-generation limit on dead-hand control. Under the ALI’s perpetuity rule, a trust would be required to terminate no later than the death of the youngest beneficiary who is no more than two generations younger than the trust settlor.

If Congress were to impose a two-generation limit on the GST Exemption, the GST Exemption and the ALI perpetuity rule would be in complete agreement and mutually supportive. I would then expect the Uniform Law Commission to act quickly to revise the 1986 Uniform Statutory Rule Against Perpetuities by replacing its now rather dated 90-year limit with a two-generation limit consistent with the ALI proposal. None of this will happen, however, so long as the GST Exemption remains in its present form. Trust settlors will continue to pour private wealth into GST-exempt perpetual or near-perpetual trusts, more and more states will modify their perpetuity rule to encourage them to do so, and more and more trust companies will move to or open offices in perpetual-trust-friendly states in order to offer and promote such trusts. GST-exempt perpetual trusts will increasingly undermine the integrity of the GST Tax and the federal transfer tax system as a whole. Only Congress can put a stop to it.

The 111th Congress now has an opportunity to close the loophole in the GST Exemption. The 2010 tax bill is not yet finalized. Congress should adopt a durational limit that is calibrated to the generations-based policy of the GST Tax. The staff of the Joint Committee on Taxation wisely proposed a two-generation limit. Under the Staff proposal, a trust would not qualify for the exemption if it can continue beyond the death of the youngest beneficiary who is no more than two generations younger than the trust settlor. A less intrusive approach, but one that would delay raising revenue, would provide that a trust initially qualifies for the exemption but loses its exemption once the youngest beneficiary who is no more than two generations younger than the trust settlor passes away. Either approach would halt the ill-advised perpetual or near-perpetual trust movement and the unwarranted loss of tax revenue that is now occurring.

[1].     I.R.C. § 2210.

[2].     I.R.C. §§ 2601-2663.

[3].     I.R.C. § 2631.

[4].     For example, Alaska, Delaware, the District of Columbia, Idaho, Illinois, Maine, Maryland, Missouri, Nebraska, New Hampshire, New Jersey, North Carolina, Ohio, Pennsylvania, Rhode Island, South Dakota, Virginia, and Wisconsin.

[5].     For example, 1000 years in Colorado, Utah, and Wyoming; 500 years in Arizona; 365 years in Nevada; 360 years in Florida, Michigan, and Tennessee.

[6].     See Robert H. Sitkoff & Max M. Schanzenbach, Jurisdictional Competition for Trust Funds: An Empirical Analysis of Perpetuities and Taxes, 115 Yale L.J. 356, 410 (2005). The study found that roughly $100 billion in trust assets had flowed into the states that allow perpetual or near-perpetual trusts and that impose no state income tax on trust income produced by funds originating from out of state.

[7].     See Ray D. Madoff, Immortality and the Law: The Rising Power of the American Dead 76-85 (2010).

[8].     See S. Rep. No. 144, 97th Cong., 1st Sess. 124 (1981), reprinted in 1981 U.S.C.C.A.N. 105, 226, 1981 WL 21359 (“Historically, one of the principal reasons for estate and gift taxes was to break up large concentrations of wealth”).

[9].     See Restatement (Third) of Property: Wills and Other Donative Transfers 119-20 (Tent. Draft No. 6, Approved 2010); Lawrence W. Waggoner, Curtailing Dead-Hand  Control: The American Law Institute Declares the Perpetual-Trust Movement Ill Advised, University of Michigan Public Law Working Paper No. 199 (2010), available at http://ssrn.com/abstract=1614934.

[10].   See Staff Report of Joint Committee on Taxation, Options to Improve Tax Compliance and Reform Tax Expenditures 393, available at http://www.house.gov/jct/s-2-05.pdf.

[11].   See Ray D. Madoff, America Builds an Aristocracy, N.Y. Times, July 12, 2010, at A19.

Introduction

Although Citizens
United[1] has been roundly criticized for its potential effect on elections and its
display of judicial immodesty (or “activism”), the effect of the case which may
be both most profound and perhaps most pernicious is its effect on the
commercial speech doctrine. This is an aspect of the case which has been
largely overlooked. Most people seem to be unaware of any connection between
election law and the commercial speech doctrine-except, that is, those who have
been working long and hard to accomplish the change it foreshadows. They are
keenly aware of its implications.

The opinion in Citizens
United is replete with rhetoric identifying corporations as “citizens,” as
if they were real persons. This characterization bolsters arguments for
treating commercial speech like fully protected speech because it trains the
analysis on the speaker instead of the listener. The majority of the Court is
sympathetic to the argument for more protection for commercial speech and Citizens United reflects that sympathy.
It suggests that with the proper case, there is an increased likelihood the Supreme
Court will either do away with the commercial speech doctrine altogether and declare
that commercial speech should be treated as fully protected speech, or it will
nominally retain the doctrine but apply strict scrutiny review. Either
development (and they are really the same) would likely strangle in their
infancy recent and proposed regulatory reforms such as the new tobacco
regulation,[2] the financial reform act which includes changes intended to protect consumers
from abusive or misleading credit marketing
practices[3] and the Interagency Agency Working Group on Foods
Marketed to Children[4] proposing minimal nutritional standards for foods
marketed to children, to name just a few. If that claim seems somewhat
alarmist, it isn’t. If you cannot regulate commercial speech, you cannot
regulate commerce. Period.

I. The Connection Between Commercial and Corporate Speech

To the uninitiated, commercial speech law and campaign
finance reform law seem unrelated. Yet the two are closely linked. The
commercial speech doctrine was established in 1976 by Virginia Pharmacy.[5] It provided for limited protection of truthful commercial speech (a category
previously not protected at all) on the grounds that truthful commercial speech
was important to consumers and thus critical to market function. Only two years
later the Supreme Court decided First
National Bank of Boston v. Bellotti.[6] Bellotti involved a law prohibiting
certain types of corporate political advertising. The Court struck down the
Massachusetts law at issue and in so doing announced, “The
inherent worth of the speech in terms of its capacity for informing the public does not depend upon the identity of its
source, whether corporation, association, union, or individual.”[7] It was not long before this language (and similar
formulations) in Bellotti began
appearing in arguments in favor of full First Amendment protection for
commercial speech, including the 2003 Nike
v. Kasky case.[8]

Use of the Bellotti rhetoric, with its focus on the speaker and antidiscrimination principles,
turns the commercial speech doctrine on its head. The doctrine started as a
modest extension of First Amendment protection for some commercial speech due to
its value to consumers and listeners. It was accompanied by deferential
judicial review. But over the years the doctrine has been subtly  refashioned, with allusions to Bellotti, as protection for commercial
speech based on its intrinsic value as “speech.” As this framing gained ground
it was accompanied by increased judicial skepticism toward regulation. In just
a few decades, governmental regulation of commercial speech has gone from an
unremarkable aspect of Congress’s power to regulate commerce to an almost
presumptively illegitimate abridgment of freedom of expression, with regulators
on the defensive against aggressive First Amendment attacks. This shift is of a
piece with the embrace of deregulation generally in the latter part of the
twentieth century. In the wake of spectacular corporate failures and
malfeasance, deregulation is less appealing today. There is renewed interest in
greater governmental oversight with respect to areas like food and product
safety, securities and banking, the environment, and others where the
unfettered market appears to be  inadequate
to protect the public interest. Yet the intellectual and legal apparatus that
created the commercial speech doctrine and led to Citizens United may prop up the laissez-faire approach to
regulation even as its shortcomings become manifest.

II. Origins

Virginia Pharmacy,
the decision which created the commercial speech doctrine, was issued after
Justice Powell joined the Court. Powell
had served as legal counsel to some of America’s largest businesses. He felt
strongly that the free enterprise system in America was under assault. In his
view this assault required a coordinated defense. To this end, in 1971 he wrote
a memo to the chairman of the educational committee of the U.S. Chamber of
Commerce entitled “Confidential Memorandum: Attack on American Free Enterprise
System.”[9] In the memo Powell outlined a multipronged
plan by which American business could improve its standing with society. He advised
industry to fund research, lobby, sponsor discussions in university settings,
shape the representations of business in the media through public relations,
fund strategic litigation, and offer proposed drafts of legislation which would
be more hospitable to business.

Now, almost forty years later, it seems that industry
followed all of Powell’s recommendations. Certainly cases like Nike v. Kasky illustrate this strategy
in full flower. In Nike, numerous
amicus briefs were submitted by industry lobbying organizations like the
Association of National Advertising and the National Association of
Manufacturers, as well as by some of the world’s largest corporations like
Exxon-Mobil and Microsoft. They all cited Bellotti.
Similarly, many of the scholarly articles arguing for more protection for
commercial speech were written by practicing lawyers, suggesting that in some
cases, firms have underwritten the cost in attorney billable hours needed to
write these articles to advance clients’ strategic interests. Alas, there are
fewer clients paying for advocacy on behalf of the public. And those which
exist (except the government itself) have far fewer resources.

These efforts have “moved the ball,” making freedom of
commercial expression seem both inevitable and necessary when it is neither.
Perhaps because Virginia Pharmacy was
a case brought by a consumer group, its holding seemed “proconsumer” and the doctrine’s
enormous benefits to business were not so apparent. They are today. The
commercial speech doctrine gave constitutional cover to a wealth of commercial
propaganda that cannot sensibly be described as “informational,” even as it purported
to protect the government’s power to regulate commercial speech for its truth.
Consumers have much to fear from misleading or false commercial speech. Yet
under the onslaught of the antidiscrimination rhetoric, government power to
protect them from it has been slowly eroded.

III. The Corporation as Speaker

Some of commercial speech’s defenders argue that
intermediate scrutiny of commercial speech represents viewpoint discrimination.
But this claim turns the rationale for extending protection on its head. Virginia Pharmacy focused on listeners’
interest in the information, not the speaker’s desire to communicate it. In
contrast, the viewpoint discrimination argument foregrounds the speaker; it
presumes, albeit indirectly, a human subject who as a moral actor should be
protected from discriminatory suppression of his or her self-expression. It treats
the speech rights as “belonging” to the speaker-not
as protected on behalf of the listener.

Viewpoints don’t matter in a vacuum. There are only two
reasons to be concerned about regulation of content or viewpoint. One is that
the content is valuable to listeners. The other is that suppression offends the
dignity of the speaker. If content is harmful to the listener, protection
cannot be justified by reference to the listener’s interests. And if the
speaker is not a moral subject, protection cannot be justified on the grounds
of his (its) expressive interests. Yet this is a consequence of the
sleight-of-hand involved in focusing on content-it treats the corporate speaker
as if it were a moral subject which possesses rights as an attribute of
personhood, and it frames restrictions on communication based on the speaker’s identity
as invidious discrimination.

While the Court has not yet explicitly grounded protection
for commercial speech in the speaker’s rights, it has gotten perilously close
in Bellotti and again in Citizens United, with the suggestion
that distinctions between corporations and persons (or between different types
of corporations) are discriminatory. But if a for-profit corporation is
entitled to full First Amendment protection when it engages in political speech-speech
which is in some sense peripheral to its existence-then it would seem full
protection for its core expressive
activity should follow. The core expressive activity of a for-profit
corporation is commercial speech. If the Court wants to avoid distinguishing
between high- and low-value speech, and is inclined to treat for-profit
corporations as speakers with full First Amendment rights, then full protection
for commercial speech seems virtually inevitable.

IV. Tobacco Litigation and Regulation

Predictably, Citizens
United has already cropped up in some commercial speech cases. In United States v. Philip Morris USA, Inc.,[10] the government sued several tobacco companies, alleging a pattern of
racketeering based on activities taken in concert to conceal information about
the health consequences of smoking, secondhand smoke, and the addictive
properties of nicotine; deceptive marketing practices; marketing to children;
and several other deceptive, fraudulent or harmful practices. After a long
bench trial the judge issued a lengthy opinion, containing exhaustively
documented findings of fact and conclusions of law, largely in favor of the
government. The decision was affirmed in 2009.[11]

The defendants unsuccessfully petitioned the Supreme Court
for review claiming, among other things, that the prosecution violated the
companies’ First Amendment rights. The gist of their argument, as echoed in an amicus
brief filed by the Washington Legal Foundation,[12] was that much of the misleading speech at issue was released in the form of
editorials, op-eds, and press releases. These are forms of expression which  are traditionally protected by the First
Amendment, and, because they involved issues of “public concern,” the tobacco
companies argued that the statements should be treated as fully protected
speech. Citizens United was cited as
support for the proposition that the government could not “discriminate”
against corporate speakers.

Consider what this means. The government alleged and the
trial court found that much of this “information” was knowingly false and
misleading. The press releases and other so-called informational pamphlets (some
of which were sent to schoolchildren), purported to educate the public about
the “debate” on the health consequences of smoking. In fact they did no such
thing. They were disseminated  to manufacture a controversy. There is scientific consensus about the premise that
smoking causes serious health problems. The defendants’ strategy in attacking
this premise, succinctly captured in one internal memo, was to sow doubt and
confusion, rather than to educate and inform: “Doubt is our product since it is the best means of competing with
the ‘body of fact’ that exists in the mind of the general public.”[13] In short, the tobacco companies asserted a constitutional right to obfuscate public information about a
product for which there is no safe level of use. It is difficult to conceive of
a construction by which the right to sow confusion about such a product is
founded on the interests of the listeners.

Although the Supreme Court denied review of this case, the
issue will arise again in litigation over the new law giving the Food and Drug
Administration (“FDA”) jurisdiction over tobacco.[14] For example, in Commonwealth Brands v. FDA,[15] several tobacco companies (and related businesses) challenged the law, claiming
its restrictions on tobacco advertising and packaging violated the First
Amendment. The district court held that the law’s ban on color and graphics in
packaging and advertisements, and on references to the FDA (which might imply
governmental assurances of safety), did violate the First Amendment because they were overbroad. Citizens United and the judicial philosophy toward corporate
interests which it reflects will undoubtedly be invoked in subsequent appeals
of this ruling and in future cases involving other products which may present a
hazard to the public, such as soft drinks, junk food, pharmaceuticals, and
alcohol. Tobacco is a product which wreaks havoc on public health, particularly
when advertising is either aimed at or peripherally affects children, but that
does not mean that prohibition is the right response. Nevertheless, it does not
follow from a rejection of prohibition that we are compelled to permit completely
unrestrained promotion of dangerous products.

V. The Consequences of Strict Scrutiny

As the Commonwealth case demonstrates, even under the current intermediate scrutiny test for
commercial speech, a great deal of advertising which is arguably of little, or
even negative, informational value will be protected. And some claim that
increasing First Amendment protection for commercial speech will not affect the
government’s ability to regulate false speech. But this is not true for two reasons. First, many advertisements do not
offer factual claims that may be tested for their truth, but they may still be
misleading-for example,  when cigarette
ads portray smokers as uniformly young, attractive, and healthy. The government
has a legitimate interest in regulating misleading as well as false commercial
speech. Second, high procedural and evidentiary barriers, like those imposed in
New York Times v. Sullivan,[16] will likely leave the government with a theoretical power to regulate, backed up by little in the way of practical ability to litigate. As prominent First Amendment scholar
Fred Schauer recently observed, facts matter in the First Amendment. But where
judges are hostile to the general proposition of regulation, facts are also
susceptible to being dismissed or minimized. This happened in Citizens United when the Court rejected
the argument about the appearance of corruption of the electoral process, where
multinational corporations are permitted to participate on the same terms as
individual citizens.[17]

Conclusion

The Citizens United opinion, with its rhetorical framing of corporations as “citizens,” provides
ammunition for those arguing that commercial speech ought to receive full First
Amendment protection. The antidiscrimination rhetoric is troubling because it provides cover
for the Court’s use of its countermajoritarian power on behalf of the
powerful rather than against them. Full protection for commercial speech would threaten
many of the regulatory initiatives of the last couple of years.

Given the disastrous corporate collapses of the last few
years, it is evident the market cannot always be relied upon to protect the
public. False and misleading commercial speech poisons the informational
environment. Like an out-of-control oil well, large corporate interests inject
vast amounts of “noise” (false and misleading speech) into the public sphere,
every day, virtually unchecked. As we have seen with tobacco, this
informational pollution can have significant negative consequences for public
health, safety, and economic stability. Full First Amendment protection of this
speech seems likely to make things worse. Can it really be the case that respect
for freedom of expression makes the government powerless to combat informational
pollution? In another First Amendment case, Justice Jackson famously warned the
Court not to turn the Bill of Rights into “a suicide pact.” But constitutional
protection for commercial speech might do just that.

Tamara R. Piety is Associate Dean of Faculty Development and Professor of Law at the University of Tulsa College of Law. This work was supported by a University of Tulsa College of Law Summer Research Grant.

Suggested citation: Tamara R. Piety, Commentary, Citizens United and the Threat to the Regulatory State, 109 Mich. L. Rev. First Impressions 16 (2010), http://www.michiganlawreview.org/assets/fi/109/piety.pdf.

[1]. Citizens United v. Federal
Election Comm’n, 130 S. Ct. 876 (2010).

[2]. Family Smoking Prevention and
Tobacco Control Act, Pub. L. 111-31, 123 Stat. 1776 (2009).

[3]. See H.R. Rep. No. 111-517, Title X, § 1031.

[4]. The interagency group is made up
of the Federal Trade Commission (“FTC”), Centers for Disease Control and
Prevention (“CDCP”), Food and Drug Administration (“FDA”), and U.S. Department
of Agriculture (“USDA”). Interagency
Working Group on Food Marketed to Children, Tentative Proposed Nutrition Standards (2009), http://ftc.gov/bcp/workshops/
sizingup/SNAC_PAC.pdf.

[5]. Va. State Bd. of Pharmacy v. Va.
Citizens Consumer Council, 425 U.S.
748 (1976).

[6]. First Nat’l Bank of Boston v.
Bellotti, 435 U.S. 765 (1978).

[7]. Id. at 777 (emphasis added).

[8]. Brief of Amicus Curiae Center for
Individual Freedom in Support of Petitioners at 23, 539 U.S. 654 (2003) (No.
02-575 ) (per curiam), 2003 WL 835292.

[9]. Robert A.G. Monks, Corpocracy: How
CEOs and The Business Roundtable Hijacked the World’s Greatest Wealth
Machine-and How to Get it Back 43-54 (2008); see also The Powell Memo:
Text and Analysis, ReclaimDemocracy.org,
Apr. 23, 2004, http://reclaimdemocracy.org/
corporate_accountability/powell_memo_lewis.html.

[10]. 449 F. Supp. 2d 1 (D.D.C. 2006).

[11]. United States v. Philip Morris
USA, Inc., 566 F.3d 1095 (D.C. Cir.
2009), cert. denied, 78 U.S.L.W.
3501, 78 U.S.L.W. 3759 & 78 U.S.L.W. 3762 (U.S. 2010).

[12]. Brief of Washington Legal Foundation and
National Association of Manufacturers as Amici Curiae in Support of
Petitioners, Philip Morris USA, Inc. v. United States, 78 U.S.L.W. 3501, 78
U.S.L.W. 3759 & 78 U.S.L.W. 3762 (U.S. 2010) (Nos. 09-976, 09-977, 09-1012),
2010 WL 1130087.

[13]. Phillip Morris, 449 F. Supp. 2d at 191-92, ¶ 726 (D.D.C. 2006) (emphasis
added) (quoting internal Brown & Williamson document).

[14]. Family Smoking Prevention and
Tobacco Control Act, Pub. L. 111-31, 123 Stat. 1776 (2009).

[15]. Commonwealth Brands, Inc. v. FDA,
678 F. Supp. 2d 512 (W.D. Ky. 2010).

[16]. 376 U.S. 254 (1964).

[17]. This decision is in some tension
with the Court’s holding in Caperton v.
A.T. Massey Coal Co., that millions of dollars in campaign contributions
from a litigant required a judge to recuse himself because “the probability of
actual bias” rose to an unconstitutional level. 129 S. Ct. 2252 (2010).

The Supreme Court recently handed down its decision in Graham
v. Florida.[1] The case involved a juvenile, Graham, who
was sentenced to life in prison after being convicted as an adult of a nonhomicidal
crime. The offense, a home invasion robbery, was his second; the first was
attempted robbery. Due to Florida’s abolition of parole, the judge’s imposition
of a life sentence meant that Graham was constructively sentenced to life
without parole for a nonhomicide crime. Graham challenged this sentence as unconstitutional
under the Eighth Amendment.

Somewhat surprisingly, the Supreme Court invalidated
Graham’s sentence by a 6-3 majority. By a 5-4 majority, the Court declared the
practice of sentencing juveniles to life without parole for nonhomicide crimes
categorically unconstitutional under the Eighth Amendment’s Cruel and Unusual
Punishment Clause. Chief Justice Roberts was the lone crossover vote; he agreed
that the sentence in Graham’s particular case violated the Eighth Amendment,
but was unwilling to declare such sentences categorically unconstitutional. Otherwise,
the case was split along the traditional ideological lines, with Justice
Kennedy playing his usual role as the swing vote. What makes the result in this
case unusual is that the Court seems to have made a significant break from its
past jurisprudence on sentencing. In fact, Graham may have completely altered the landscape of the Court’s Eighth Amendment
jurisprudence. While the old approach was summed up by the adage “death is
different,” the new approach may be that “kids are different.” In addition, the
Court may have exposed itself to a whole host of difficult sentencing issues
down the line.

I. The Traditional Approach: “Death is Different”

Until Graham, the
Court generally adopted a bifurcated approach to sentencing, with different
lines of precedent for death penalty and non-death penalty cases. When it came to
the death penalty, the Court was willing to address issues categorically, not
concerning itself solely with the facts of the case at bar. For example, in Roper
v. Simmons[2] the
Court declared the application of the death penalty to juveniles unconstitutional
regardless of the underlying facts. But when it assessed nondeath sentences in
the Eighth Amendment context, the Court was typically far more deferential to
the states. It had only been willing to invalidate sentences individually, and
only then where the sentences failed an ambiguous “proportionality” standard.[3] So, for example, while the Court invalidated one sentence of life without
parole for an offender’s seventh nonviolent crime in Solem v. Helm,[4] it also upheld a life sentence for possession of a large quantity of cocaine in Harmelin v. Michigan. In Graham,
though, the Court was faced with, and upheld, a challenge that merged these two
doctrines: “a categorical challenge to a term-of-years sentence.”

Justice Thomas, filing the primary dissent in Graham, argued that the majority’s decision was a
significant break in the Court’s jurisprudence, a break which he believed to be
problematic. Among his other arguments, Justice Thomas claimed that the adage “death
is different” (that the death penalty was treated differently by the Court than
terms of years or other, less harsh sentences), which held favor with the Court
at least until Graham, is itself now dead.

The fact that death was treated differently by the Court stemmed
from its severity. As recently as Roper, the Court has noted that
“[b]ecause the death penalty is the most severe punishment, the Eighth
Amendment applies to it with special force.” Accordingly, a broad range of
substantive and procedural rights apply to capital defendants that do not apply
to other defendants, even those accused or convicted of homicide. The
dissenters’ main fear going forward appears to be that the Court’s death
penalty jurisprudence is no longer isolated from the rest of criminal
procedure, and that one regime may slowly spill over into the other.

II. Ideological Difficulties After Graham

The question now seems to be whether death is indeed still
different. Let us for the sake of argument assume that the Court in its current
make-up is willing to approach the death penalty and term-of-years sentences
identically, or at the very least more similarly. Such an approach would be
likely to have serious repercussions in its sentencing jurisprudence. By
treating death and nondeath sentences similarly, the Court could go in one of two
directions. First, it could start backpedaling on its recent decisions restricting
the use of the death penalty, reserving categorical decisions for only the most
barbaric of punishments (say, drawing and quartering). After all, if death is
no longer different, the Court may see little reason to approach it with the more
skeptical eye that it has in the recent past. This result would actually be a
boon to the conservative wing of the Court, as it would allow the Court to
return control over such decisions to the states and bring the Court’s interpretation
of the Eighth Amendment closer in line with what they believe is its original
meaning. It could mean the reversal of decisions such as Roper and Atkins
v. Virginia.[5]

Of course, this is an unlikely scenario. The Court’s
decisions categorically restricting the death penalty, such as Roper and
Atkins, have been decidedly fairly recently. The ideological makeup of
the Court, even with the recent appointments of Justices Sotomayor and Kagan,
appears unlikely to change on this issue. Furthermore, the Graham decision was, if anything, a logical extension of Roper, so to believe that
it would lead down the path to overruling decisions such as Roper is illogical.
The Graham opinion cited significant language from Roper discussing the developmental issues juveniles face which are not present with
adult offenders. It presented evidence that juvenile offenders still have
significant amounts of psychological development ahead of them, and that
therefore the prospect of rehabilitation is much more realistic than it is with
adult offenders. The Graham Court also noted that juveniles are less
likely to understand the true effects and consequences of their crimes than are
adults, and that therefore the retributive value of such sentences is much
lower than it is with adult offenders. Finally, the Court recognized that the
mental calculus of juveniles who contemplate criminal activity is too
incomplete to fully comprehend the potential consequences of such crimes. To
that end, the deterrent effect of life sentences without parole adds little to
the general deterrent effect of imprisonment.

It is more likely, then, that Graham will lead to
the categorical approach used in Roper and Atkins being taken in
other non-death penalty cases. This is what the conservative wing of the Court
fears. For example, one logical extension of Graham may be to
categorically invalidate life without parole for all nonhomicidal
offenders, including adults. Despite the Court’s reliance on the differences
between juvenile offenders and adult offenders, it would not be too much of a
stretch to envision the Court citing the rehabilitative goals of imprisonment
in nullifying such a practice, particularly in light of the fact that those
imprisoned for life without parole are typically excluded from many of the
rehabilitative activities provided, such as psychological therapy and
education.

Graham may also lead to the Court taking a more
liberal approach to the death penalty as a practice. Granted, the logical
extensions are not as clear. But Graham could be one step in a slow shift towards mandating less and less severe
sentences for certain classes of offenders. More prohibitions to the death
penalty along the lines of Roper and Atkins, as well as more restrictions on
harsh sentencing such as Graham, could
be added until the death penalty is so restricted that it is nearly impossible
to impose. This could eventually lead the Court to decide that the death
penalty itself is archaic, unproductive, and contrary to the Eighth Amendment.

The slippery slope argument that follows is obvious. If I
were a conservative leader developing talking points, I would say that the road
that began with Roper and continued with Graham could lead not
only to the abolition of the death penalty altogether but to the Supreme Court
(an unelected body drawn from the intellectual elite, I would remind the
public) determining the appropriate sentences for every crime on the books in
every state. But slippery slope arguments, effective oratorical devices though
they may be, rarely have any basis in reality. It is difficult to foresee any
circumstance in which the Court would wish to engage in any sort of term-of-years
sentencing assessments aside from the most severe or disproportionate cases.

Still, Graham may not signal an end to the Court’s
willingness to categorically invalidate nondeath sentences, especially with regard
to nonhomicidal crimes. There are two potential philosophical approaches that
the Court could take that would indicate this might be the case, but neither
one of them sound in what Justice Thomas sees as the eradication of the “death
is different” approach to sentencing.

The first approach that the Court could take would be to
maintain that “death is different”-just not necessarily the death of the
defendant. Perhaps, instead, it is the death of the victim that makes a case
“different,” or the fact that the death of either the defendant or the victim
is at issue. After all, Graham invalidated life without parole for non-homicidal
cases. The Court said nothing about invalidating juvenile life without parole
for homicide offenses. This approach could be easily extended to the realm of
adult offenders. Were the Court to adopt this extension of “death is
different,” it would provide a clear line at which categorical inquiries would
end and only “narrow proportionality” inquiries would exist.

Another approach is that death is still different in the
traditional sense, but that the Court now recognizes that kids are different as
well. The Court could try to maintain separate jurisprudences for adult and
juvenile sentencing. For adult offenders, “death is different” could be the
same as it was before the Graham decision, and now, after Graham,
juvenile offenders may be subject to an entirely different sentencing approach.
While juvenile sentencing is generally at most as harsh as adult
sentencing, the Court could choose to vary it in several areas to demand even less
harsh sentences. The Court has already taken two steps down this path with Graham and Roper.

Given the language used in the majority opinion in Graham,
“kids are different” seems to be the more likely approach. In fact, Justice
Kennedy seemed to be fighting against the idea that the approach in Graham should be extended to adult offenders. He quoted numerous studies to support
the notion that juvenile offenders are psychologically different from adult offenders
and that different levels and methods of incapacitation, deterrence, and
rehabilitation are appropriate for juveniles and adults. If the Court wanted
to, it could have easily taken the opportunity presented in Graham to
invalidate all sentences of life without parole for nonhomicidal offenders
regardless of age. The fact that the Court did not do so suggests that the
Court intends to treat juvenile sentencing differently from adult sentencing.

Having separate approaches for adult and juvenile
sentencing would also mesh with the Court’s general Eighth Amendment
jurisprudence, which looks to evolving social standards when assessing whether
a punishment is constitutional. As we learn more about juvenile psychology, it
stands to reason that we will learn more about the appropriate punishments and
treatments for juveniles. This may lead to our societal standards of decency
evolving more quickly towards less harsh sentences for juveniles than for
adults, especially if there is no corresponding evidence that adult offenders
would benefit from the same types of punishment as juveniles.

III. Practical Difficulties After Graham

For most states, the result in Graham is simple to
follow: they can simply offer the possibility of parole to any juvenile who
receives a life sentence. But there would still remain a whole host of
potential practical issues involved in nearly any sentencing scheme.

One such practical question arises in states like Florida,
which has entirely abolished the practice of parole. This means that unlike
other states which maintain their parole systems, states like Florida are
categorically barred from sentencing a juvenile to life imprisonment. The only
way the state could now give such sentences would be to reinstitute some sort
of parole system to handle those juveniles given life sentences for nonhomicide
crimes. This could be a viable option, especially in light of the fact that
such sentences are relatively rare, leaving administrative costs relatively
low.

What seems more likely is that states like Florida will
simply assign lengthy term-of-years sentences to such offenders. Technically, a
sentence of one hundred years’ imprisonment without the possibility of parole
to a sixteen-year-old nonhomicidal offender does not violate the Eighth
Amendment under the letter of Graham. As Justice Alito noted in his
brief dissent, “[n]othing in the [Graham]
opinion affects the imposition of a sentence to a term of years without the
possibility of parole.” Certainly, though, such a sentence would violate the spirit
of the decision. After all, a one hundred year sentence is effectively a life
sentence, yet a judge in any state would seem to be permitted to give juveniles
one hundred year sentences without the possibility of parole. This is a glaring
loophole. The Court will at some point be forced to address the
constitutionality of juvenile sentences of less than life, with no possibility
of parole, especially where the term of years is so long that it is practically
a life sentence.

It will be interesting to see what happens at Graham’s
resentencing. If he is given a term of years sentence that is effectively a
life sentence, that sentence will almost certainly be challenged; Graham could find
his case back in the Supreme Court. Regardless of whether Graham is the
particular defendant, a challenge of this nature is practically inevitable. The
Court must have known this when it handed down its decision in Graham,
and one would like to think that it has a plan for such a scenario.

Here, if anywhere, is where the slippery slope argument is
best applied. On the one hand, it is highly unlikely that the Court would
render its own opinion in Graham toothless by upholding a one hundred year
sentence without the possibility of parole to a nonhomicidal juvenile simply
because the sentence was not styled as a life sentence. On the other hand, it
is also difficult to see the Court engaging in the analysis necessary to
enforce Graham if the states decide to try to circumvent it. The Court
would have to establish some sort of numerical ceiling on the length of
sentences that could be given to juveniles convicted of nonhomicide crimes
where there is no possibility of parole. This kind of analysis is not one that
the Court engages in either routinely or eagerly.

Another potential practical issue involves the actual
likelihood of being paroled. If a state had parole on the books but never
released anyone on parole, then that state could also give sentences which are
essentially life without parole to juveniles convicted of nonhomicide crimes. These
sentences, much like a one hundred year sentence with no possibility of parole,
would be in line with Graham in the
most technical sense only. If the Court wished to prevent such sentences from being
imposed, it would be forced to determine how often or under what circumstances a
state must release prisoners on parole in order for the parole system to be
considered viable. Again, this is not the type of analysis that the Court is well
equipped to undertake.

Even if a state did have a viable parole system, a
sentence could be structured to make parole virtually unattainable. Florida,
for instance, could reinstitute parole for juveniles, but declare that it would
only be available after the first hundred years of a life sentence. By
reinstituting parole, Florida would be technically in line with Graham,
but by only allowing parole after such a long period of time, it would again go
against the spirit of the decision. If the Court wanted to prevent this, it would
again be forced to engage in some sort of line-drawing, determining how many
years of a sentence can be served before a meaningful opportunity for parole is
presented to the juvenile offender.

This practice of the Court engaging in such low-level
policy determinations could result in peculiar and inconsistent applications of
the law. For example, if the Court decided that the maximum sentence for
juveniles where there is no possibility of parole was forty years, then an odd
result would arise. States with no possibility of parole, which presumably
intended the lack of parole to make sentences harsher, would actually have less
severe maximum sentences for juveniles convicted of nonhomicide crimes than
states with parole systems, if parole is unlikely to ever be granted.

Ultimately, it will be up to the states and their judges
to decide how hard the practical issues raised by Graham will be pressed. They could decide to comply with the spirit
of Graham across the board. But it
will take only one rogue judge to force the Court’s hand and require it to
render a difficult decision that will seem unsatisfying no matter what the
outcome.

Conclusion

The Graham decision may have created as many problems as it solved. The Court now faces an
ideological battle as well as complex practical issues going forward. Ideologically,
the Court must decide whether it intends to create a bifurcated jurisprudence
for juvenile and adult offenders. It also must determine whether its
traditional bifurcated approach to death and nondeath sentences remains viable.
Practically, the Court may have opened the door to a whole host of problems. Should
the states choose to try to circumvent Graham,
for example by assessing term of years sentences so long as to be practically
life sentences without the possibility of parole, the Court will either have to
begin to assign a number to the otherwise generic term “life sentence” or
develop a creative new approach that will allow it to avoid engaging in such difficult,
low-level determinations.

Unfortunately, there is no simple answer to any of these problems,
at least from the Court’s perspective. Based on the language used in the majority
opinion in Graham, the Court is at
least willing to have separate approaches to adult and juvenile sentencing. Whether
or not “death is different” still applies remains to be seen. It seems safe to
assume, though, that the Court now recognizes that kids are different. Given
the mounting evidence pointing to the psychological differences between adult
and juvenile offenders, this is a welcome addition to the Court’s sentencing
approach, in spite of the practical difficulties it may have raised.

Stephen St. Vincent is a member of the University of Michigan Law School class of 2011 and Executive Technology Editor of the Michigan Law Review.

Suggested citation: Stephen St.Vincent, Commentary, Kids Are Different, 109 Mich. L. Rev. First Impressions 9 (2010), http://www.michiganlawreview.org/assets/fi/109/stvincent.pdf.

[1]. 130 S. Ct. 2011 (2010).

[2]. 543 U.S. 551 (2005).

[3]. See Harmelin v. Michigan, 501 U.S. 957, 996 (1991) (Kennedy, J., concurring)
(noting that the Eighth Amendment requires a “narrow proportionality”
principle).

[4]. 463 U.S. 277 (1983), abrogated in part by Harmelin, 501 U.S. 957.

[5]. 536 U.S. 304 (2002) (holding categorically
that the execution of mentally retarded persons is cruel and unusual under the
Eighth Amendment).

Introduction

The Lacey Act was first enacted in 1900 as a narrow
measure for domestic bird preservation and agriculture protection. It was
significantly amended in 1981[1] and 1988[2] to prohibit trafficking in fish and wildlife “taken, possessed, transported, or
sold” in violation of state and foreign laws.[3] For the past three decades, the amended statute has provided the federal
government with a powerful tool for regulating imports of fish and wildlife. In
2008 Congress expanded its reach still further, responding to widespread
concern about the effects of illegal logging on local governance, the
environment, and American business by extending the Act’s protections to imported
plants.[4]

The Lacey Act’s penalty provision imposes both civil and
criminal liability for wildlife trafficking. At its most stringent, the Act
imposes felony liability on those who “knowingly” import fish and wildlife harvested
in violation of foreign laws. Importers and subsequent purchasers of imports
who fail to exercise “due care” in determining whether their products are legal
may be subject to misdemeanor liability or civil penalties.[5] The due care standard, which originated in the 1981 amendments, is now almost
three decades old, yet key differences exist between companies in the timber
market and the business enterprises whose operations were traditionally regulated
under the Lacey Act’s fish and wildlife provisions. These differences limit the
applicability of the few existing precedents that have interpreted and applied
this standard.

This Essay proposes a set of criteria to guide enforcement
in the context of illegal timber imports. Part I explains the significance of
the due care standard. Part II argues that because of the fact-driven nature of
Lacey Act cases, fish and wildlife precedents do not provide enough guidance
for importers attempting to comply with the Act. The Department of Justice
(“DoJ”) should emphasize distinctive features of the timber market to inform
prosecutors’ understanding of due care.

I. The Significance of Due Care

This Part presents the limited range of Lacey Act case law
on due care as part of a broader development in environmental law and explains
why a clear understanding of due care is important for distinguishing among the
responsibilities of different actors in a complicated supply chain. Next, it
argues that more than a generalized objective standard of care is needed to
produce successful enforcement of the 2008 amendments.

A. The Global Enforcement Trend

The Lacey Act’s incorporation of foreign law violations
can be viewed as part of a broader “emerging trend” toward global enforcement,
which represents a dramatic departure from conventional priorities.[6] Whereas conventional investigations involved physical tracking of items from
one site to another and ensuing direct action against transporters, the government
must now increasingly look at the supply chain history of products entering the
United States. Importers are difficult to track and supply chains are hard to
monitor. It therefore takes time for the government to develop effective information-gathering
methods for policing different kinds of regulated parties.

As the government learns what should be expected from
different actors in the supply chain, the problem of defining “due care” has
become especially pressing for the timber industry. The 2008 amendments extended
the Lacey Act’s reach to a much larger range of corporate actors: the United
States is the world’s largest wood products consumer and one of the top importers
of tropical hardwoods. A high percentage of these imported products comes from
regions known to have widespread illegal logging problems. Thus, many companies
are likely to be subject to the new legislation.

B. Insufficiency of Existing
Precedent

The need to prove due care provides timber importers with
an incentive to ask questions of their suppliers, thus sending demand-side
signals with the potential to “ripple down the chain.”[7] The success of the incentive depends on two factors, however. First, the
government must be able to prove statutory violations in a sufficient range of
cases. A low risk of prosecution may fail to produce the intended deterrent
effect, transforming compliance efforts into a mere cost of doing business. In
fact, it was concern about the feasibility of enforcement that originally led
the EU to conclude that a Lacey Act-like ban on the possession and sale of
illegal wood products would pose “significant difficulties in . . . implementation.”[8] The EU accordingly proposed a due diligence regulation that clearly outlines
measures companies must take to ensure the legality of their product. The
European Parliament appears to have overcome its qualms, however, having passed
legislation including both the due diligence requirements and a ban on illegally
sourced timber in early July.[9] The European Council has informally agreed to the legislation and is expected
soon to pass it into law.

Second, industry must view compliance as a feasible goal.
While insufficient understanding of due care on the government’s part might
lead to underenforcement, insufficient understanding on industry’s part might
produce inefficient overcompliance. For example, a common piece of compliance advice
under the 2008 amendments is that companies should simply avoid sourcing from
countries with high risks of illegal logging. Such country-based sourcing
decisions would effect a dramatic and unnecessary change in business practices.

Existing case law is not sufficient to define
responsibilities under the 2008 amendments. The modern Lacey Act has been in
place for almost three decades, yet there is relatively little case law under
the statute[10] and even less on the issue of due
care.[11] This means there are few precedents
upon which the government may draw or industry may rely. More importantly, the
fact-driven nature of Lacey Act prosecutions limits the precedential value of
fish and wildlife cases. Although the cases continue to provide some guidance, existing
standards are not enough to define due care.

A couple of broadly applicable principles from existing
cases are worth identifying. First, courts have emphasized the defendant’s
level of experience in the industry in determining whether he sought information
pertinent to a shipment’s legality. For example, in United States v. Proceeds from Sale of Approximately 15,538 Panulirus
Argus Lobster Tails, the court emphasized that the defendant had been in
the business “for years.”[12] In United States v. 2,507 Live Canary
Winged Parakeets,[13] the court gave great weight to an importer’s failure to take “affirmative action”
to make sure that the species he was importing could be lawfully exported from
the country of origin.

Inquiring into the defendant’s experience and engagement
in information-seeking activities is a good starting point in many cases.
Nevertheless, both the legislative history of the 1981 statute and existing
federal case law emphasize the importance of determining what constitutes due
care on a case-by-case basis. The Ninth Circuit, which has decided more cases
involving questions of due care under the Lacey Act than any other federal
court,[14] has issued a pattern jury instruction for Lacey Act offenses that presents due
care as an objective standard, constituting “that degree of care which a reasonably
prudent person would exercise under the same or similar circumstances.”[15] This fact-based negligence standard indicates the importance of determining
what is reasonable for individual defendants. Because certain circumstances are
consistent within the timber industry, however, under the 2008 amendments the
government should first consider what is reasonable for timber defendants
collectively.

II. Developing a Due Care Standard for the Timber Industry

This Part identifies three features of the timber industry
that distinguish it from fish and wildlife importation and explains how each
should give rise to distinct responsibilities for that industry. It accordingly
advocates interpreting the traditional “reasonably prudent person” test to incorporate
specific factors the government should emphasize when prosecuting timber
companies for Lacey Act violations.

It might be argued in response that clarifying the due
care standard will actually reduce the incentive for businesses to develop
improved best practices over time. This Part takes account of such a concern by
emphasizing broadly articulated factors such as industry custom whose specific
qualities may evolve as companies become more knowledgeable about how to monitor
supply chains. It might also be argued that emphasizing a clear set of factors
will hinder enforcement efforts by unnecessarily constraining the ability of
federal prosecutors to develop an informed standard over time. Identifying
common traits of timber industry defendants and corresponding responsibilities,
however, is unlikely to cause ossification of prosecutorial methods as long as
the government weighs in its analysis the extent to which individual defendants
express those traits. Small businesses that import in low quantities and have
unique business plans, for example, should be less subject to a presumption of
knowledge about well-known industry standards.

Inquiries into individual circumstances will ensure that
methods remain fair in specific cases. Yet the need to be sensitive to
exceptions does not reduce the need to emphasize specific factors for the
industry. Because the timber industry is a broad market with many large
corporate entities, a more specific standard is likely to be helpful in many
cases. A clear test will therefore provide the government with a useful
analytical starting point when deciding whom to prosecute and what level of offense
to charge.

A. Efforts to Comply with Industry
Custom

Many prospective defendants in timber cases not only
participate in a large market, but also are likely to conduct large-scale
operations. The wood flooring market provides a good example. In 2006, U.S.
consumption of wood flooring reached $3.1 billion. Imported products accounted
for 36.4 percent of the market.[16] Of 155 total firms, the 5 largest manufacturers accounted for almost 60 percent
of the overall U.S. production. Such companies present a stark contrast to
defendants in key Lacey Act precedents. In Lobster
Tails, the individual defendant was present in the country of origin at the
time of the purchase; he was the company’s sole employee; and he ran the
importing business from his home. Although the fishing industry does involve
large corporate players, it remains that existing federal cases have not tended
to deal with these defendants. Whereas personal experience has usually been considered highly probative in fish and wildlife
cases, large-scale industries usually have the benefit of established industry
custom that supplies them with guidance about what constitutes responsible
behavior.

The unique situation of commercial defendants under the
Lacey Act has been established by the National Oceanic and Atmospheric Administration
(“NOAA”),[17] which
has consistently held that the duty of care is “high in a commercial context.”[18] When establishing what constitutes due care in a particular commercial context,
prosecutors should identify the kinds of knowledge a responsible participant in
a particular part of the industry would be likely to have or to seek. In In re Duong Vo, the ALJ deciding the case for NOAA reasoned that a group
of commercial fishermen who had imported fish harvested illegally in Mexican
waters had not exercised due care because they should have known, simply from
being in the profession, that they were “responsible for knowing their vessel
location . . . and . . . having adequate navigational
equipment aboard to ascertain their location.”[19]

Private sector initiatives to guide procurement, green
building rating systems, and well known voluntary certification programs such
as the Forest Stewardship Council and the Sustainable Forestry Initiative alert
industry members to the kind of behavior viewed by others in the business as
environmentally responsible and thus likely to effect compliance with legal
obligations. In addition to these initiatives, specialized industry
publications provide more targeted information about what certain kinds of
producers should do to fulfill their legal duties.

In products liability suits, compliance with trade or
industry custom often provides meaningful evidence for a party defending
against a negligence claim. Similarly, compliance with procurement standards,
rating systems, or certification programs intended to address illegal logging
should provide meaningful evidence of due care under the Lacey Act. As in tort
law, compliance with commercial standards should not be an absolute defense.[20] Prosecutors may nevertheless draw on such standards to obtain information about
measures a defendant might have taken to exercise due care.

B. Responsiveness to Legality
Standards and Conservation Hot Spots

Another distinctive characteristic of the timber market is
the complicated set of foreign laws to which it is subject. Laws governing
timber and logging often include forest management schemes that can be difficult
for foreign companies to monitor. Indonesia, for example, has over nine hundred
laws, regulations, and decrees that govern timber exploitation, transportation,
and trade. The difficulty of determining one’s legal duties suggests that a
prosecutor charging a due care violation, rather than focusing narrowly on the
defendant company’s noncompliance with the foreign law at issue, should assess
whether it was responsive to available information about “legality standards”
issued by the government in the country of origin and conservation “hot spots.”

Importers especially should attempt to comply with the
“legality standards” that some countries have begun to issue in an attempt to
help foreign companies comply with domestic laws. Indonesia has issued a
legality standard to help buyers differentiate between legal and illegal wood.
The standard consists of seven principles, each supported by several indicators
linking it to existing legislation; in addition, the government has issued
guidance notes to assist auditors in verifying compliance with each indicator.
Evidence of audits or good-faith attempts to assess relevant indicators should
help a defendant establish due care.

Although in some cases it may be difficult for importers
and purchasers to discover exactly where a product originated, companies that
sell timber products should be careful to construct supply chains that avoid
known problem areas. Some regions are widely known to face illegal logging problems
or to pose conservation concerns. Timber sourced from these regions is
particularly likely to implicate the Lacey Act’s provisions. The International
Paper Company has emphasized the important role of Conservation International-identified
“hot spots” in the company’s decision making about where to conduct logging
operations. The Floor Covering Institute has warned the industry to be careful
about sourcing from the Chinese-Russian border, where much of the timber is
illegally harvested. When companies do source from these regions, they should
be careful to monitor their trading partners through careful contracting and
site visits.

C. Good-Faith Efforts to Monitor the
Supply Chain

A final distinctive factor is an often a complex supply
chain. Timber products, unlike lobster tails or parakeets,[21] often go through many intermediaries, making it increasingly difficult to
recognize a particular product or to keep track of its origin. Even companies
recognized as industry leaders in promoting sustainable wood harvesting may
wind up using illegally harvested wood, as demonstrated by the recent government
raid on the Gibson guitar factory in Nashville, Tennessee.

In deciding whether to prosecute timber cases, prosecutors
should focus on whether defendants engaged in particular kinds of
information-seeking activities. As the former Deputy Assistant Attorney General
for the DoJ’s Environment and Natural Resources Division emphasized during
hearings in the House, purchasers should be expected to verify certifications
before purchasing products or visit harvest areas in order to understand their
supply chains. The American Hardwood Federation has also recommended that
companies must be sure to question suppliers thoroughly and review published
information on the concerns particular to timber markets in each country of
origin.

Conclusion

Timber companies complain that they are left in a state of
uncertainty about how to comply with their obligations under the Lacey Act Amendments
of 2008. Prosecutors should help dispel this uncertainty by emphasizing the
importance of the following three factors: compliance with industry custom;
responsiveness to legality standards and conservation hot spots; and evidence
of good-faith efforts to monitor the supply chain.

In products liability law, compliance with standards is
not an absolute defense to liability but nevertheless provides evidence of
reasonable care. Judicial attention to nongovernment standards allows industry
to innovate effectively while changing safety standards over time. If Lacey Act
enforcement authorities were similarly responsive to the factors listed above,
timber companies would be less likely to engage in inefficient overcompliance
and more likely to continue to develop effective best practices.

Rachel Saltzman is a member of the Yale Law School class of 2011. The author thanks Andrea Johnson at the Environmental Investigation Agency for her thoughtful review of this article.

Suggested citation: Rachel Saltzman, Establishing a “Due Care” Standard Under the Lacey Act Amendments of 2008, 109 Mich. L. Rev. First Impressions 1 (2010), http://www.michiganlawreview.org/assets/fi/109/saltzman.pdf.

[1]. Pub. L. No. 97-79, 95 Stat. 1074
(1981).

[2]. Pub. L. No. 100-653, 102 Stat.
3825 (1988).

[3]. 16 U.S.C. § 3372(a)(2)(A).

[4]. Food, Conservation, and Energy Act
of 2008, Pub. L. No. 110-234, § 8204, 122 Stat. 923 (to be codified at 16
U.S.C. § 3372).

[5]. 16 U.S.C. § 3373(d)(2).

[6]. See, e.g., The New Frontier
of Cross-Border Enforcement, 40 Envtl.
L. Rep. News and Analysis 10127, 10132-34 (2010).

[7]. Hearing on H.R. 1497 Before the H. Subcomm. on Fisheries, Wildlife and
Oceans, Comm. on Natural Resources, 110th Cong. 27 (2007) (testimony of
Alexander von Bismarck, Environmental Investigation Agency, Inc.).

[8]. Commission Proposal for a Regulation of the European Parliament and of
the Council Laying Down the Obligations of Operators Who Place Timber and
Timber Products on the Market, at 6, COM (2008) 644/3.

[9]. See Press Release, European Parliament, MEPs Vote To Cut Illegal
Timber Out of the EU Market (July 7, 2010), available
at http://www.europarl.europa.eu.

[10]. A Westlaw search in the ALLFEDS
database for “lacey act,” limited to 1981 and after, yielded 223 cases.

[11]. Searching for the phrase “due
care” within the results described above limited the pool of relevant cases to
twenty-three.

[12]. 34 F. Supp. 385, 392 (S.D Fla.
1993).

[13]. 689 F. Supp. 1106 (S.D. Fla.
1988).

[14]. Of the twenty-three cases
addressing “due care” identified above, ten were in the 9th Circuit.

[15]. Model Crim. Jury Instr. 9th Cir.
9.11 (2003).

[16]. U.S.
Int’l Trade Comm’n, Wood Flooring and Hardwood Plywood: Competitive Conditions
Affecting the U.S. Industries, 3-11 tbl.3.5 (2008).

[17]. It should be noted that the
standard of care imposed in administrative proceedings, where less is at stake
in terms of penalties, cannot be readily imported into federal courts, particularly
where the court is considering criminal sanctions. Accordingly, this Section
does not advocate importing an administrative law standard; rather, it looks to
administrative cases to develop the standard of care for a particular type of
defendant.

[18]. See, e.g., In re Brooks,
6 O.R.W. 535 (N.O.A.A. 1991); In re Albert,
5 O.R.W. 374 (N.O.A.A. 1988); In re Brownsville
Shrimp Cases, 3 O.R.W. 828 (N.O.A.A. 1984).

[19]. Nos. SE990435FM, SE990436FM, 2002
WL 31742934 (N.O.A.A. Oct. 22, 2002) (citing Brownsville Shrimp, 3 O.R.W. at 841).

[20]. See 57A Am. Jur. 2d Negligence § 165 (2010).

[21]. United States v. 2,507 Live Canary
Winged Parakeets, 689 F. Supp. 1106 (S.D. Fla. 1988).

Introduction

To establish liability under § 10(b) and Rule 10b-5,
a plaintiff must prove that the defendant acted with scienter, “a mental state
embracing intent to deceive, manipulate, or defraud.”[1] A plaintiff is required to allege at the pleading stage facts creating a
“strong inference” of scienter, which must then be proven by a “preponderance
of the evidence.”[2] This
endeavor is relatively straightforward when the defendant is an individual. The
analysis becomes more complicated when a corporate defendant is involved, however,
because a corporation, though a “person” under the law, can only act through
its agents. A corporation has no “single mind of its own,”[3] so “its scienter is necessarily derived from its employees.”[4] Reflecting this complexity, courts have evolved three different approaches to
address corporate scienter in the securities fraud context: strong-form
corporate scienter, weak-form corporate scienter, and semi-strong-form
corporate scienter.

The most rigorous of the three standards is strong-form corporate scienter, which requires plaintiffs to show that the
same agent who made a misrepresentation on a company’s behalf also possessed
the requisite scienter. At the other end of the spectrum lies weak-form corporate scienter. The
weak-form approach does not require the agent who made a misstatement on the
company’s behalf to have acted with scienter. Moreover, no individual agent is
required to possess scienter. Instead, courts may aggregate the knowledge of
multiple corporate agents, none of whom possesses scienter individually, to
establish collective corporate scienter. There is no requirement that any of
these agents be connected to the misstatement. Semi-strong-form corporate scienter occupies the middle ground. The
semi-strong-form standard requires proof that one agent committed a reprehensible
act with scienter in connection with a misrepresentation, but does not demand
that the agent possessing scienter be the maker of the misstatement.

This Essay argues that semi-strong-form corporate scienter
provides the best approach, because it strikes a balance between several
countervailing public policy concerns.

I. Strong-Form Corporate Scienter

The Northern District of California best articulated the
theory of strong-form corporate scienter in Apple
Computer.[5] The plaintiffs
brought claims against Apple and its CEO Steve Jobs, alleging that Jobs made
material misrepresentations regarding sales projections for a new product.
Apple was unable to meet the projections because of production problems. The
plaintiffs presented evidence establishing that other Apple agents were aware
of the problems. They did not, however, present sufficient evidence that Jobs
himself, the maker of the misstatements, had knowledge of the production
problems when he made the misrepresentations. Accordingly, the court held that
the plaintiffs’ allegations were insufficient to create an inference that Jobs
acted with scienter. In refusing to aggregate Jobs’ misstatements with the
knowledge of other Apple agents, the court further determined that Apple could
not have acted with scienter:

It is not enough to establish fraud on the part of a
corporation that one corporate officer makes a false statement that another
officer knows to be false. A defendant corporation is deemed to have the
requisite scienter for fraud only if the individual corporate officer making
the statement has the requisite level of scienter, i.e., knows that the statement is false, or is at least
deliberately reckless as to its falsity, at the time that he or she makes the
statement.

The Ninth Circuit affirmed the Northern District’s
dismissal of claims against Jobs and Apple, holding in regard to Apple: “A corporation
is deemed to have the requisite scienter for fraud only if the individual corporate
officer making the statement has the requisite level of scienter at the time
that he or she makes the statement.”[6]

Courts have also employed strong-form corporate scienter
at the summary judgment stage to extinguish claims against corporate
defendants. In Tyson Foods, the
plaintiffs asserted claims based on alleged misrepresentations in a press
release regarding Tyson’s termination of its plans to merge with another entity.[7] The trial court granted summary judgment in favor of the individual defendants
and Tyson, stating:

For a corporation to have primary liability under §
10(b) and Rule 10b-5, scienter must be present with respect to at least one of
the officers or agents who made a false or misleading statement. Having
concluded that each of the individual defendants is entitled to summary
judgment under § 10(b) and Rule 10b-5, as a matter of law, Tyson Foods can not
be primarily liable and is entitled to summary judgment.

The Third Circuit affirmed this decision: “Having
concluded that there is no primary liability on the part of any of the
individual officers, the District Court properly held that Tyson Foods could
not itself be primarily liable under the facts of this case.”[8]

At first glance, public policy appears to support the
theory of strong-form scienter, because its use curbs abusive litigation. Congress
enacted the Private Securities Litigation Reform Act to check perceived abuses
of private § 10(b) securities litigation, including “nuisance filings,
targeting of deep-pocket defendants, vexatious discovery requests and manipulation
by class action lawyers.”[9] Limiting private securities fraud actions to only those instances where
plaintiffs can show that an agent who made a misrepresentation on behalf of a
company possessed scienter would help to ensure that only the strongest claims
are brought.

Unfortunately, while furthering the goal of preventing
strike suits, the strong-form theory also allows malfeasant corporations to
skirt securities laws by simply compartmentalizing information, i.e., by separating the “mouth” of the
operation from the “brain.” Under this approach, a company wishing to commit
fraud could escape liability by shielding agents who speak on its behalf from
knowledge of facts contradicting their public statements. Such tactics could
result in a company clearly and intentionally misleading its investors, yet
allowing the investors no legal recourse because they are unable to tie
evidence of scienter to a specific agent who made a misstatement on its behalf.

II. Weak-Form Corporate Scienter

In Bridgestone,
the Sixth Circuit endorsed the use of weak-form corporate scienter at the
pleading stage.[10] The
plaintiffs brought claims under § 10(b) and Rule 10b-5 against Bridgestone, its
subsidiary Firestone, Bridgestone’s former CEO Yoichiro Kaizaki, and Masatoshi
Ono, Bridgestone’s former Executive VP and Firestone’s former CEO. Although the
court upheld the dismissal of claims against the individual defendants Kaizaki
and Ono, it allowed claims to proceed against the corporate defendants: “[W]e
conclude under the totality of the circumstances that the facts argued collectively
give rise to a strong inference of at least recklessness.” Thus, the
Bridgestone court held that scienter can be pled against a corporate defendant
by looking to its collective knowledge, regardless of whether scienter is
alleged against an individual agent.

Likewise, the Southern District of New York relied on
weak-form scienter to deny a corporate defendant’s motion for summary judgment
in WorldCom.[11] The defendant accounting firm Arthur Andersen argued that it was entitled to
summary judgment because the plaintiffs “failed to demonstrate that a
particular Andersen auditor acted with scienter.” The court disagreed: “To
carry their burden of showing that a corporate defendant acted with scienter,
plaintiffs in securities fraud cases need not prove that any one individual
employee of a corporate defendant also acted with scienter. Proof of a
corporation’s collective knowledge and intent is sufficient.” As such, the
court held that the plaintiffs were “entitled to show reckless misconduct
through a cumulative pattern of decisions and inaction by several Andersen
auditors,” i.e., that “Andersen as a
firm was reckless.” The court, relying on the First Circuit’s analysis in Bank of New England, reasoned that
modern corporate structure necessitated the use of this approach. As the First
Circuit aptly stated:

Corporations compartmentalize knowledge, subdividing
the elements of specific duties and operations into smaller components. The
aggregate of those components constitutes the corporation’s knowledge of a
particular operation. It is irrelevant whether employees administering one
component of an operation know the specific activities of employees
administering another aspect of the operation: A corporation cannot plead
innocence by asserting that the information obtained by several employees was
not acquired by any one individual who then would have comprehended its full
import. Rather the corporation is considered to have acquired the collective
knowledge of its employees and is held responsible for their failure to act
accordingly.[12]

Allowing claims founded on weak-form corporate scienter
does prevent delinquent companies from avoiding liability by compartmentalizing
knowledge. Yet any positive influence the use of weak-form scienter might have
on corporate policy is drastically overshadowed by its inconsistency with the
federal securities laws, the inefficient incentives it creates, and its
negative impact on the dissemination of information.

The weak-form approach, which pegs liability to a
corporate entity’s failure to parse together the knowledge of its agents, is
akin to a negligence standard.[13]  Moreover,
this theory is clearly at odds with Congress’ intention to discourage
unmeritorious litigation under the PSLRA. Weak-form scienter makes it
exceedingly easy for overzealous plaintiffs to advance past the motion to
dismiss stage, at which point they can use the leverage of discovery to extort
settlements from corporate defendants.

Reliance on
weak-form scienter would also cause the inefficient allocation of
corporate resources and stymie communications. Under this approach, a
risk-averse corporation would have to spend undue amounts of human and monetary
capital to determine that each piece of information communicated to investors
had been thoroughly vetted to ensure that none of the corporation’s agents
possesses any information which, in combination with information possessed by
other agents, could be construed as being inconsistent with the company’s
public statements. These costs would be substantial. It is doubtful that even
the most earnest companies could comply with this unduly burdensome
requirement, which would dampen communications between companies and their investors,
a primary objective of the Securities Exchange Act of 1934.[14]