For many years, the traditional law and economics literature advocated strongly against legal transition relief. Led most prominently by Louis Kaplow, scholars argued that we should treat legal transitions no differently from other types of transitions faced by societal actors, for which the government does not provide relief. Recent commentary, however, questions the scope of Kaplow’s claim. Scholars have pointed out that considerations of efficiency, incentives for socially desirable investments, governmental legitimacy, and fairness might justify legal transition relief.

Assuming then that transition relief is appropriate under at least some circumstances, we identify two centrally important questions for which scholars have yet to find satisfactory answers. First, while societal actors often hedge against transitions in technology and the economy by obtaining insurance in the private market, such a market does not exist with respect to legal transitions. We attempt to explain its puzzling absence. Second, commentators who advocate transition relief in limited circumstances do not confront the critical question of what institutional structure is best designed to ensure that transition relief is meted out only where justified and in an appropriately limited form. We suggest a framework for allocating authority over transition relief within the government.

First, there exists no meaningful market for regulatory insurance in the United States—not even a market for insurance against government takings (which would appear to be a much simpler endeavor). In attempting to explain this gap in the market, scholars have pinned the blame on a variety of the usual economic culprits: moral hazard, adverse selection, and the difficulty of finding uncorrelated risks. But we do not believe that these effects, or any combination of them, can explain the lack of a private market.

Moral hazard problems exist when an insured party engages in behavior—particularly as a consequence of purchasing insurance—that the insurer has not priced into the contract. So long as coverage is based upon a firm’s current business rather than hypothetical developments and new product lines, the insurer should be able to accurately price the firm’s behavior. A fixed-payment insurance contract that provided a lump-sum payout in the event of regulation, rather than one that protected a firm against its full losses, would protect the insurer against threats of moral hazard. Similarly, insurers would need to protect themselves against lobbying that increased the likelihood of regulation. Insurers should again be able to cure these moral hazard problems through contract. The parties simply could write regulatory insurance contracts to ban any lobbying activities by insured firms (and to force them to take no public position on relevant regulatory action). And it should not be difficult for insurers to monitor this type of activity. Thus, it seems unlikely that private insurance markets have failed to arise due to unavoidable moral hazard problems.

Several scholars have suggested that adverse selection problems are likely to plague systems designed to insure against takings or regulation. For instance, homeowners who know that they are more likely to be subject to takings will opt into insurance plans at higher rates. Like threats of moral hazard, however, adverse selection problems depend at their core on information asymmetries. If all relevant information is public, insurers can price contracts accurately, and higher-risk private parties who wish to opt in will be able to do so only at elevated rates. Information asymmetries may be present in the context of takings of real property, but they are unlikely to plague more general regulatory insurance. The key to the adverse selection problem for takings insurance is that both the vast majority of the relevant governmental action and the potential insured parties are local, while the principal insurers are not. It is this geographic and political divide that gives rise to the necessary informational asymmetries. The types of economic regulation that concern us here, by contrast, are rarely local; they are almost always created by state and federal governmental entities. There is negligible private information about these types of regulation (except the information held by the government actors themselves), and so regulated firms possess essentially no informational advantage over their putative insurers. Without such an asymmetry, there can be no problem of adverse selection.

Finally, state and national regulation can have potent and widespread effects, particularly if it comes from a populous, highly industrialized state such as California or New York. The difficulty in assembling a portfolio of truly uncorrelated risk positions in the face of such widespread single-event threats might be preventing a robust market for regulatory insurance from forming. We do not, however, believe that this is the case. Well-conceived regulatory insurance would cover only one (or a finite number) of the potential business risks to a firm. A potential insurer could select which of these many available risks it is willing to assume, knowing that any individual regulation would lead only to a partial decrease in firm value—not the complete destruction of the firm. In a competitive marketplace of multiple insurers, any given firm should be able to find one or more insurers willing to take on some slice of risk. Thus, a fear of correlated risks cannot account for the complete absence of a market for regulatory insurance.

Rather, we believe that the major impediment to a private market for legal transition insurance is the chore of pricing. In comparison to typical accidents, significant regulatory acts occur extremely infrequently, usually numbering just below one thousand per year nationally. Even this description overstates their quantity in the same way that a reporting of all fires, floods, automobile accidents, and illnesses would overstate the effective number of insurance claims (and thus the number of useful data points) in a given year. Each federal agency issues no more than a handful of regulations each year, and thus any given regulatory field is altered only rarely. Without a broader pool of data to draw upon, an insurance firm cannot reliably estimate the hazards presented by any given regulation. In addition, unlike traffic accidents or house fires, regulatory acts are effectively one-off, nonstochastic events. An individual fitting a given demographic profile in 2005 is, for the most part, equally likely to have an automobile accident as a similarly situated individual in 2006; what variation exists is captured by the easily obtainable demographic information that insurers collect. Accordingly, data from 2005 are useful in predicting 2006 outcomes, data from 2004 are useful in predicting both 2005 and 2006, and so on. The likelihood of a particular regulation, on the other hand, depends upon a wide variety of factors, the impact of which is often unobservable or unpredictable. A shift in agency leadership or political priorities, a transfer of governmental power, a change in membership or chairmanship on a key committee, or even new developments in science or technology (or even culture) can affect the probability of any given regulation in any particular field in unforeseeable ways.

Worse still, regulation in one period is not necessarily a good proxy for regulation in another period. The fact that the EPA has acted once to regulate the level of arsenic in drinking water has ambiguous effects on the likelihood that the agency will act again, either to raise or lower allowable levels. It may indicate that a similarly situated EPA will tighten the arsenic standard; it may lead the EPA to learn that the current level of protection is needlessly high and prompt a relaxation of those limits; or it may simply indicate that the EPA already has selected a near-optimal level of regulation and that the status quo is likely to persist. Based on available quantitative data alone, an outside observer has almost no capacity to select among these possibilities. Even the meaning of potential explanatory variables can change over time, and often rapidly. Democrats in Georgia in 1972 were very different than Democrats in Georgia in 1992, who were in turn very different than Democrats in Georgia in 2006.

These pricing difficulties imply that government efforts to foster a private market in insurance will be ultimately unsuccessful; the informational difficulties are too great, and the government lacks a means of surmounting them. In addition, even more exotic options such as information markets and regulatory derivatives will not serve as workable substitutes. The same pricing problems that inhibit private insurance will prevent firms from investing in regulatory derivatives in quantities necessary to make them a useful hedge.

In the absence of a private market for transition relief, government-provided relief remains a viable option. The key to our solution is the disaggregation of transition relief into various steps and the allocation of individual duties based on institutional competency. We proceed in three stages. First, we unbundle the various steps that compose transition relief, and we explain how the decisions or decisionmaking involved in some of those steps differ from those involved in other steps (and from decisions and decisionmaking in the ordinary regulatory context). Some decisions regarding transition relief are more akin to plenary lawmaking. These decisions affect numerous societal actors and draw their resolution from broad societal values. Here, one might think of the broad decision of whether transition relief is warranted in the first instance. Other decisions are more in the nature of applications of an existing legal structure to particular private actors. Numerous issues that arise in transition relief settings are highly technocratic (as opposed to value-laden) in this sense: for instance, whether a modification of an existing building should subject the structure to regulation as if it were new construction; whether a transaction was consummated before or after the advent of a new legal regime; and how to allocate limited funds or grandfathering rights.

Second, consider the role of expertise in making these narrow, technocratic decisions. To be sure, expertise in the particular area of law at issue is of some value. But that kind of expertise is often exceeded in value by more general expertise in meting out transition relief. Questions that arise in these decisions transcend particular areas of law. The question of whether a modification should be treated as a new construction arises in environmental law, land use law, and disabilities law, to name just a few areas. The question of whether a transaction should be deemed consummated before or after a legal change takes effect arises in tax law and bankruptcy law. And the question of how to distribute limited funds or grandfathering rights arises in environmental law and natural resources law. This strongly suggests that a single government agency could accumulate considerable relevant expertise were it charged with handling such transition relief decisions across various legal specialties.

Finally, we observe that private actors will naturally be willing to invest money and time to obtain transition relief, and government actors will face an incentive to mete it out in return for private benefits. A government actor that is charged with distributing transition relief—even in accordance with some set legal scheme—likely will enjoy some discretion in making those decisions. The less that a government body is subject to lobbying by outside influences, the less it will fall prey to private rent-seeking in the allocation of transition relief. Accordingly, we conclude that an independent agency might be best situated to make some decisions related to the provision and application of transition relief.

Acknowledgments:

Copyright © 2010 NYU Law Review.

Jonathan Masur is a professor at the University of Chicago Law School.

Jonathan Nash is a professor at Emory University Law School.

As a descriptive matter, I take Cuéllar to be identifying a paradox in both the modern and historical task of homeland security.  The need for security is perceived to involve strong and serious legislative delegations; a check on that security tends to come not from the courts, nor from the usual strictures of administrative process, but from Congress itself.  And so, he observes, a massive reorganization of the security bureaucracy tends to result in a massive increase in congressional oversight.  But the paradox lies not only in the strange balance between broad delegations and close supervision.  The problem, it seems to me, also involves questions of institutional competence.   Congress is not adept at the mundane task of agency supervision—at least not always so; proof of this lies in its willingness to delegate a great deal of day-to-day supervision to the courts and the public, through notice and comment and “fire alarm” notifications, as McNollgast has explained.² Even when Congress does get involved, the expansive legal powers granted to these security superagencies can give Congress less of an angle for the kind of close supervision it perceives as necessary (though this problem is less severe for Congress than it is for the courts, who must defer to broad legal delegations).

I also understand Cuéllar to be identifying a trap for an unwary Congress in broad delegations that Presidents go on to define—sometimes aggressively, as Franklin D. Roosevelt began to do with the FSA and as George W. Bush did with DHS.  Congress, in Cuéllar’s view, needs to think carefully about the decision to create a broad delegation, given that missions of such agencies have a way of evolving.

Second, Cuéllar is arguing that the technique of bureaucratic reorganization can, in fact, serve a purpose.  At least from Roosevelt’s perspective, the creation of FSA served policy goals; by combining the agencies, Cuéllar argues, the Roosevelt administration could better control them.   To this end, the FSA is an interesting data point, but the usefulness of central control is still not clear.  After all, following Hurricane Katrina, President Bush was criticized for having placed FEMA in DHS.³ In my view (and in the view of others), the reorganization distracted FEMA’s attention from national disaster preparation, making the agency’s response to the hurricane less effective.  Centralizing many bureaucratic functions in one agency can make the agency unwieldy and impossible to supervise, rather than docile and responsive to political oversight.  The example of an agency that did not groan under its own weight is some evidence to the contrary—but the FSA did not enjoy a long life.⁴  Rather than winning the day on this matter, then, I think that Cuéllar has opened an avenue for future research.

Third, Cuéllar observes that security can—and did—serve as an organizational principle for both the Department of Homeland Security and the old FSA.  Yet he notes that much of the political advantage of big security agencies lies in the malleability of the term “security.”

That “security” confers power is not new, but Cuéllar’s article usefully delves into some of the reasons why it is important.  Using the example of the FSA, he argues that claims of security can shape public perception and motivate legislators to support an administration’s priorities.

But I would like to spend the most time in this Essay worrying about Cuéllar’s final critical point.  That point involves the redefinition of security that comes with a reorganization.  As Cuéllar explains, the Roosevelt administration spent significant capital on the FSA because it believed that the agency could, by defining security expansively, contribute to health, education, and public welfare as well as to domestic and international security.  The modern-day DHS, by reaching so broadly into state, local, and national law enforcement and by integrating immigration, customs, counterterrorism, and drug enforcement, among many other things, also contains more than a whiff of the suggestion of total war.  And total wars are worth fighting only if absolutely necessary.  I think that actual domestic security almost always involves more bureaucratic slicing and dicing than it does consolidation.  And in the same vein, although security and social welfare are linked in grand theory, the best practice, endorsed by most modern bureaucracies under most conditions, is to keep social programs separated from the national defense.⁵

I think this separation is generally a good idea, and I think that it is an idea that was challenged by the FSA and continues to be challenged by DHS and the War on Terror, to little good end.  Today, considering the psychic space that terrorism occupies and the large budget appropriations available to agencies that can develop a War on Terror–based strategy, it is unsurprising that almost every agency has taken up the antiterrorism task.  None more so than DHS, of course, but the point here is that modern agencies are mimicking DHS rather than separating their goals from its goals.  In addition to creating a modern counterpart to Roosevelt’s security superagency, the Bush administration and Congress have reimagined existing agencies in terms of their roles in securing Americans against terror.  And so environmental protection has developed an antiterror component, as has the provision of housing services.  These new regulatory responsibilities have been difficult for agencies to handle, suggesting that a sober reevaluation of the involvement of civilian agencies in counterterrorism would be a good thing.

I think there are three reasons why agencies often fail at dealing with national security when they have otherwise been tasked with handling other questions of economic security and personal well-being.  First, there is a problem of fit—that is, the problem of using civil rules to find and deter terrorists, perhaps the quintessential uncivil actors.  Agencies often deal with economic security by extending benefits, but on conditions, such as granting licenses to financial institutions in return for voluntary compliance with reporting requirements.  But this typical mode of action is ill suited to reach terrorists who can opt out of regimes that depend on voluntary participation and who comprise a tiny segment of the public as a whole.   In Cuéllar’s terms, agencies like financial regulators may be good at one type of security (financial), but bad at another (national).

Second, these security-based antiterrorist measures diminish administrative effectiveness by going to extraordinary lengths to privilege agency discretion, thereby reducing agency accountability and, predictably, resulting in increasingly arbitrary, unreviewable agency action—a problem of overdiscretion.  It is a maxim of administrative law that the authority delegated to administrative agencies should be paired with safeguards on the abuse of that authority.  Accordingly, administrative agencies have traditionally operated publicly and openly, and usually pursuant to a tested and established framework of rules.  Agency rulemaking is governed by requirements for public notice and comment,⁶ while agency adjudication is subject to judicial review or, at a minimum, supervision by senior executive branch officials.⁷ But the administrative initiatives against terror use security concerns to justify changes from what have traditionally been participatory, reviewable rulemaking or adjudicatory processes to singular acts of discretion that are often undertaken in secret and thus effectively insulated from public view and from judicial or even supervisory review.  Furthermore, these measures often place this decisionmaking authority in the hands of midlevel or even street-level bureaucrats, such as office directors in the Department of the Treasury in the case of the terrorist-financing programs.  The allocation of discretion down to bureaucrats all but insulated from oversight has, at least in the case of antiterrorism regulation, become a license for arbitrariness.

Third, security concerns have led to the expansion of agency powers to regulate beyond areas of agency expertise.  Since 9/11, our bureaucracy has folded new industries into its regulatory purview and has adopted new investigative and rulemaking responsibilities—often responsibilities that are difficult to distinguish from criminal law enforcement.  Max Weber posited that bureaucracies would develop rational and task-specific expertise.⁸ But the new antiterrorism responsibilities of agencies have ignored this Weberian maxim.  Instead, agencies have been tasked with uncharacteristic, noncivil responsibilities, and have been told to fulfill those responsibilities without supervision.  The result has been predictably inexpert.  Security concerns may give agencies more power, but they do not guarantee that an agency will be able to use this power effectively.

As a result of these problems of fit, overdiscretion, and inexpertise, civil agencies have produced initiatives that burden proxy groups—most often the industries they regulate, but not terrorists.  This proxy problem means that the administrative war on terror overwhelmingly burdens law abiders who willingly participate in civil administrative schemes.⁹ Agency experience with regulation justified by national security confirms Cuéllar’s fears about its possible abuse.   Arguments of security seem to make it easier for agencies and executives to justify overreach, but the end result may be both inefficient and undesirable.

At bottom, Cuéllar contends that there is an implication from this contingent use of the security term.  He argues that we need a definition of security in the modern nation-state.¹⁰ But, even if we should worry about repurposing civilian agencies as parts of the security apparatus, perhaps what we really need is not a definition, but recognition that we need to pay closer attention to the many definitions of security.  It may be that defining the term is impossible—agencies like the Committee for Foreign Investments in the United States have found it impossible to define terms like national or essential security with any precision.¹¹ We must be careful that legal ideas designed to apply to narrowly defined problems of security are not applied to legal problems using broader definitions—or applications—of the same term.

Acknowledgments:

Copyright © 2010 University of Chicago Law Review.

David Zaring is an Assistant Professor of Legal Studies at the University of Pennsylvania.

Few legal scholars have embraced Schmitt’s theory of emergencies with the enthusiasm and sophistication of Adrian Vermeule, the John H. Watson, Jr. Professor of Law at Harvard Law School.  In an article published recently in the Harvard Law Review, Vermeule argues that American administrative law is fundamentally “Schmittian” in the sense that it permits federal agencies to operate outside the constraints of administrative procedure and meaningful judicial review during emergencies.3 Vermeule contends that the federal Administrative Procedure Act (APA) is replete with procedural exceptions, which generate “black holes”—zones where federal agencies are free to act outside the constraints of legal order.  In addition, he suggests that federal courts manipulate flexible legal standards to accord heightened deference to federal agencies during national crises, transforming standards such as “reasonableness” and “good cause” into “grey holes”—legal devices which preserve the façade, but not the reality, of the rule of law.  Far from criticizing these gaps in federal administrative law, Vermeule accepts black and grey holes as institutional inevitabilities, and dismisses proposals to extend the rule of law to all administrative action as a “hopeless fantasy.”

Vermeule makes a compelling case for his observation that statutory loopholes and anemic judicial review have diminished administrative law’s salience during national emergencies.  But his broader argument, that black holes and grey holes cannot be eradicated, is unpersuasive and deeply troubling.  In reality, Congress could eliminate the APA’s procedural loopholes without compromising agencies’ capacity to act during emergencies if it would simply discard the APA’s rule-based categorical exceptions in favor of a more nuanced, standard-based derogation regime.  Likewise, federal courts could easily eliminate grey holes by treating legal standards in administrative law as vehicles for promoting robust public justification of administrative action.  The primary obstacle to these reforms is not “institutional,” as Vermeule asserts, but rather cultural: too many legislators and judges view administrative law in static positivist terms as a means for allocating decision making authority among public institutions, rather than in dynamic relational terms as establishing a regime in which public officials must justify all exercises of administrative powers according to public-regarding factors.

To show how our administrative law might be reformed to promote a “culture of justification,” this essay advances a relational theory of the rule of law based on the principle that public officials and agencies serve as fiduciaries for the public.  Whereas Vermeule’s article explores the current limits of our administrative law, the relational theory suggests practical steps for refining our legal system to ground emergency administration more firmly in the rule of law.

I.  Is Schmittian Administrative Law Inevitable?

In defending his Schmittian theory of administrative law, Vermeule takes aim at legal scholars such as David Dyzenhaus who “praise the rule of law and aspire to extend law’s empire to encompass even emergency policymaking by the executive.”4 The aspiration to apply administrative law in emergencies is “hopelessly utopian,” Vermeule argues, because Congress and the courts lack the institutional resolve necessary to subject the Executive Branch to the “thick” rule of law.  Although Vermeule concedes that “one could imagine a system of administrative law that is minimally Schmittian or even not Schmittian at all,”5 he contends that such a system is not feasible in practice because Congress will never agree to close the APA’s procedural loopholes and because courts will inevitably dial down the APA’s flexible standards to maximize executive discretion in emergencies.  For these reasons, “[t]he exception cannot, realistically, be banished from administrative law; exceptions are necessarily built into its fabric.”6

Few would dispute Vermeule’s observation that the APA’s procedural provisions are littered with loopholes, and I will not belabor this point.  To the extent that the APA’s categorical exceptions and definitional quirks punch holes in administrative law’s fabric, thereby allowing public officials to operate outside the constraints of ordinary administrative procedure, Vermeule might be right to characterize our administrative law as Schmittian in a minimalist sense.

Vermeule’s more ambitious claim that black holes cannot be purged from our administrative law is less persuasive.  Even if we accept Vermeule’s assertion that Congress lacks the requisite institutional incentives to impose ordinary procedural requirements on agencies during emergencies, it does not follow that Congress could not redesign the APA’s emergency regime to eliminate black holes.  If ordinary administrative law is too burdensome, Congress could design malleable procedural requirements to accommodate agencies’ legitimate concerns for speed and efficiency without abandoning procedural restraints altogether during national crises.  Or Congress could require agencies to develop their own ad hoc administrative procedures for emergencies, subject to broad congressional standards and judicial review.  Such measures would eliminate the procedural loopholes Vermeule identifies without sacrificing agencies’ operational flexibility.  The fact that such procedures do not currently exist reflects a lack of initiative and imagination within the broader legal community rather than a fatal flaw in Congress’s institutional structure.

Just as Vermeule fails to demonstrate that Congress lacks the institutional capacity to eliminate the APA’s black holes, he does not make a persuasive case that federal courts are institutionally predestined to convert the APA’s flexible standards into grey holes.  To be sure, experience suggests that federal judges on both sides of the political spectrum tend to accord administrative agencies heightened deference when applying flexible legal standards during emergencies.  In most cases, however, heightened deference to public officials during national emergencies is consistent with the application of substantive legal standards such as “reasonableness” and “good cause.”  If the Executive provides a reasonable justification for its approach to a crisis, judicial deference to that choice of approach is a far cry from the type of de facto abstention that would render judicial review a farce.

While this distinction between heightened judicial deference and de facto abstention is admittedly slippery, it is remarkable that virtually every case Vermeule cites in his discussion of grey holes follows a path of reasoned deference rather than de facto abstention.  Far from simply taking agencies’ legal and factual assessments at face value, lower courts in the post-9/11 cases Vermeule identifies undertook a robust review of agency actions, identifying substantial evidence supporting the agency’s position and articulating a detailed explanation for upholding the agency’s decision.  None of these courts withheld meaningful review, generating the type of invidious grey holes that Dyzenhaus and others have criticized as anathema to the rule of law.

Of course, one need not accept Vermeule’s characterization of particular judicial decisions as “grey holes” to appreciate the intense political pressures federal judges experience as guardians of legal order during emergencies.  As long as our administrative law depends upon flexible legal standards, courts will be tempted to distort those standards during emergencies in deference to the Executive Branch.  Eliminating black holes and placing greater reliance upon broad legal standards might only increase the opportunities and political pressures for judicial abstention, an insight Vermeule attributes to Schmitt.  In this respect, the Schmittian challenge to our administrative law will always be with us.  Yet numerous post-9/11 decisions suggest that rigorous judicial review of agency action is not “institutionally impossible” and that the public need not necessarily resign itself to the inevitability of executive and judicial lawlessness during national crises.  The critical question is not whether black holes or grey holes are unavoidable (they are not), but rather how administrative law can best advance the rule of law project prospectively.

While Vermeule endeavors to map the institutional limits of administrative law, in the end his article speaks most forcefully to the limits of positivist accounts of the rule of law.  For lawyers like Schmitt and Vermeule, who view administrative law in purely positivist terms, black and grey holes serve primarily to allocate legal authority among governmental institutions and are jurisprudentially problematic only insofar as their mechanics and systemic repercussions are poorly understood.  This impoverished conception of administrative law lacks the resources necessary to explain what the rule of law is, or should be, in our republic.  To answer this question, we need a more robust vision of the rule of law than Vermeule’s Schmittian theory can supply.

II.  Common-Law Constitutionalism Revisited

Vermeule properly identifies Dyzenhaus’s account of “common-law constitutionalism” as the most rigorous alternative to Schmitt’s emergency theory.  Dyzenhaus argues that law should govern emergency administration, and that the rule of law should be understood as “a rule of fundamental constitutional principles which protect individuals from arbitrary action by the state.”7 These principles include both procedural norms, such as the right to notice and a hearing before public power is wielded to affect private interests and substantive values such as non-arbitrariness.  Such principles are “constitutional” in the sense that they are constitutive of legal order itself, and are thus necessary for any legal system that claims to satisfy the rule of law.  Public officials and institutions cannot violate the rule of law’s constitutive principles in emergencies without undermining their own claim to moral and legal authority.  Authority might make law, as positivists assert, but the rule of law’s constraints make authority.

Public justification plays a central role in Dyzenhaus’s common-law constitutionalism.  Building on the work of the late South African jurist Etienne Mureinik, Dyzenhaus argues that the “the constraints of legality are the constraints of adequate justification.”  The rule of law dictates that public officials must provide reasons for their actions during emergencies, and these reasons must be consistent with the fundamental principles of legal order.

On this account, administrative law serves as the rule of law’s handmaid, laying the groundwork for meaningful public justification by cultivating governmental deliberation, transparency, fairness, reasonableness, and integrity.  Traditional administrative procedures such as notice-and-comment rulemaking facilitate public justification by compelling agencies to articulate objectively reasonable, public-regarding justifications for their policy choices.  Upon judicial review, agencies must also persuade courts that their actions have a reasonable legal and factual basis, and courts, in turn, must publicly justify their own rulings based on relevant legal principles.  By ensuring that those who exercise public powers satisfy the rule of law’s constraints, the practice of public justification serves as both the currency of public legitimacy and the guardian of legality within the administrative state.

Critics have argued that Dyzenhaus’s conception of the rule of law is too nebulous to guide public officials during emergencies.  In one recent article, for instance, Thomas Poole has rejected Dyzenhaus’s project as an “exercise in wish fulfillment.”8 Although Poole admits feeling drawn to the idea that the common law contains “deep, transcendental values,” he laments that “when we look for [these values], we do not quite know where to find them.”9 The common law tradition is a poor foundation for the rule of law, Poole argues, because “[i]t is the capaciousness of common law, its normative ‘give,’ that is paradigmatic, not the solid core of relatively unchanged normativity the common law constitutionalists imagine.”10 In short, even if we accept Dyzenhaus’s conception of the rule of law as a rule of reasons, the common law tradition arguably lacks the normative clarity needed to specify which reasons are adequate to justify state action.

One promising approach for shoring up the normative foundations of common-law constitutionalism focuses on the fiduciary character of public administration.  By virtue of their legally entrusted authority, all public agencies and officials stand in a trust-like relationship toward persons subject to their administrative powers.  Just as the common law places trustees and other fiduciaries under legal obligations to honor their beneficiaries’ legitimate interests, those who wield powers of public administration likewise bear fiduciary obligations to treat their subjects fairly, reasonably, and non-arbitrarily for public-regarding purposes.  Where feasible, public administrators must also engage in deliberative decision-making, and they must be ready to provide reasons for their actions that are consistent with their fiduciary role.  These basic fiduciary obligations of public service are legal obligations because they are rooted in and constitutive of the state-subject fiduciary relation, and because fiduciary duties are legal duties.

Fiduciary duties are legal duties within the common law not by historical accident but instead because, in Kantian terms, they embody persons’ moral capacity to place state actors under legal obligations.  Evan Fox-Decent and I have argued that Kant’s legal conception of fiduciary relations offers a sound theoretical foundation for attributing fiduciary obligations to state actors.  According to Kant, when parents unilaterally create a person utterly dependent upon them for survival, they also assume fiduciary obligations to protect and care for their children.  Recognition of a child’s equal freedom as a “citizen of the world,” coupled with the child’s practical or legal inability to consent to the relationship of dependence, places parents under moral and legal duties to provide for their child’s basic security by making “the child content with his condition so far as they can.”11 By the same reasoning, public officials bear fiduciary duties toward persons subject to their administrative powers because public powers are entrusted solely to the state by law, leaving the public vulnerable to the abuse of administrative power.  To ensure that such persons are not subject to domination or instrumentalization, the fiduciary principle dictates that all agents and instrumentalities of the state bear legal obligations to discharge their responsibilities fairly and reasonably in the public interest.

This relational account of common-law constitutionalism explains why the rule of law is a rule of reasons, and it clarifies what kinds of reasons count in public justification.  To satisfy their demands of legality on Kant’s theory—establishing a regime of secure and equal freedom for all persons—public officials must demonstrate that their actions are consistent with their fiduciary obligations and are not reflective of domination or instrumentalization.  Where practicable, administrative agencies should employ deliberative decision-making procedures to minimize the risk of arbitrariness, and they should open their decisions to public contestation.  Even when such measures are not practical due to circumstances of extreme exigency, administrative agencies should justify their actions to the public and the courts, explaining how their actions are consistent with the fiduciary obligations of purposefulness, integrity, solicitude, fairness, reasonableness, and transparency.  All public officials must satisfy these principles if persons subject to their administrative powers are to be taken seriously as free and equal autonomous agents, not merely as objects of state domination or instrumentalization.  The relational fiduciary theory thus disarms Schmitt’s critique of legal liberalism and Poole’s critique of common-law constitutionalism and offers a blueprint for promoting the rule of law in emergencies.

III.  Mending Holes in the Rule of (Administrative) Law

By cataloguing the various Schmittian features of our administrative law, Vermeule indirectly outlines an agenda for common-law constitutionalism in the twenty-first century.  To establish the rule of law, legislators and judges must work together to mend the black holes and grey holes Vermeule identifies, developing new strategies to reconcile the demands of state necessity with the rule of law in emergencies.

On the relational theory of common-law constitutionalism, federal agencies must satisfy the rule of law in emergencies because arbitrary state action in emergencies undermines the fiduciary character of state legal authority.  This does not necessarily mean that Congress and the courts must fill black holes with ordinary administrative procedure, as some commentators have suggested.  Far from promoting the rule of law, slavish adherence to ordinary administrative procedures could compromise the state-subject fiduciary relation by preventing agencies from acting swiftly and effectively to safeguard subjects’ secure and equal freedom.  What the relational account of the rule of law does require, on the other hand, is that Congress and the courts establish a legal regime for emergencies that compels federal agencies to justify their derogations from ordinary administrative law—not by reference to crude categorical rules, but instead by reference to relational principles such as necessity, proportionality, fairness, reasonableness, and transparency.  Such an approach would preserve administrative flexibility during national crises while holding agencies to account for their fundamental fiduciary obligations.

The APA’s “good cause” exception for notice-and-comment rulemaking provides a rudimentary model for the relational approach to administrative procedure, but Congress and the courts should specify the principles that govern derogation from ordinary administrative procedure more clearly.  For example, when agencies elect to abandon traditional notice-and-comment rulemaking procedures, the APA could require that they give the public contemporaneous notice, explaining why procedural derogation is necessary and why their preferred decision making procedure is narrowly tailored to the perceived emergency.  Emergency regulations should also be accompanied by a public statement explaining how the agency’s substantive regulation satisfies existing law, is proportional to the perceived emergency, and promotes the public interest. Congress should also require agencies to subject emergency regulations to more robust deliberative procedures as soon as practicable after the crisis has passed, ensuring that emergency regulations adopted under conditions of uncertainty do not become ossified in ordinary administrative law.  In addition, Congress should expand federal courts’ jurisdiction to ensure that they are able to consider whether agencies have satisfied their fiduciary obligations at each stage of the decision making process.  Within this new regime, courts could still accord substantial deference to an agency’s assessment of an emergency and the agency’s choice of means to address it, but the courts would nonetheless consider whether the agency’s explanations are objectively reasonable and consistent with the state’s fiduciary role.  Measures such as these would preserve the Executive Branch’s ability to respond to emergencies quickly and effectively, without entrenching emergency regulations in ordinary administrative law or sacrificing the rule of law on the altar of state necessity.  Equally important, these reforms are fully within Congress’s institutional capacity.

The relational approach to emergency administration carries its own risks, of course.  If Congress were to develop a more sophisticated standard-based derogation regime for administrative procedure, it might eliminate black holes only to find that judges distort those standards to create a new generation of grey holes.  To the extent that our administrative law draws on common-law constitutionalism to reconcile emergency administration with the rule of law, courts may be tempted to subvert the rule of law by refusing to hold public officials accountable for their abuse of power.

Although grey holes are neither conceptually unavoidable nor institutionally inevitable, they may be difficult to eradicate in practice because they reflect a powerful tradition within our legal culture that emphasizes the thin “rule by law” rather than the thick “rule of law.”  Efforts to mend these holes expose a deep tension within our legal culture “between lawyers who think that the job of law is done when decisions are made by officials wielding authority and lawyers who think that the law should strive for decisions that are justified.”12 While positivist accounts of administrative law such as Vermeule’s Schmittian theory permit the Executive Branch to take extra-legal action during emergencies, the relational account espoused by Dyzenhaus, Mureinik, and other common-law constitutionalists “lead[s] to a culture of justification—a culture in which every exercise of power is expected to be justified.”13 The black and grey holes Vermeule identifies thus require more than technocratic legal reform; they call for a fundamental reorientation of our legal culture away from a focus on formal authority and toward a more vigorous practice of public justification.

To be sure, the relational theory of common-law constitutionalism is aspirational insofar as it relies on federal judges to apply legal standards as vehicles for promoting public justification.  Vermeule goes too far, however, when he characterizes the aspiration toward a culture of justification as “fantas[tical]” or “hopelessly utopian.”  Guided by the fiduciary character of public administration, common-law constitutionalism offers a practical, realistic roadmap for overcoming Vermeule’s Schmittian challenge and establishing the rule of (administrative) law during emergencies.

Acknowledgments:

Copyright © 2010 Northwestern University

Evan J. Criddle is an Assistant Professor at Syracuse University College of Law.

Many thanks to Dana Brusca, Anika Criddle, David Driesen, David Dyzenhaus, Evan Fox-Decent, and Jon Michaels for helpful comments.

This Legal Workshop Editorial is based on the following Colloquy: Evan J. Criddle, Mending Holes in the Rule of (Administrative) Law , 104 NW. L. REV. COLLOQUY 309 (2010).

Americans listening to one of President Franklin Roosevelt’s fireside chats on a cabinet-sized radio in the late 1930s could not have imagined the eventual birth of the Internet technology used to disseminate this Article. They would have been hard pressed to imagine the spectacular growth of East Asian economies, or perhaps even the fall of the Soviet Union. They might have been just as surprised, however, at what remains the same in the early twenty-first century. For all that has changed over the course of six or seven decades, in many respects Americans today share a common reality with their forebears from the late 1930s. First, their lives play out against a backdrop of insecurity: financial instability, natural disasters such as Hurricane Katrina, and potential external threats. Second, their government is characterized by the competition to secure control over the organizations that implement the laws that regulate markets and public health, provide services, manage security risks, and otherwise shape people’s lives. How these two dynamics affect each other remains central to the future of American public law.

President Franklin Roosevelt was perhaps bolder than most leaders of his day in recognizing that the modern nation-state was—and continues to be—in the business of providing security to its citizens. In the face of pronounced crises engendering a profound sense of insecurity among the public, the administration pursued a sprawling strategy of enacting financial, pension, health, and ultimately national defense policies aimed at reducing the risks that Americans faced in their lives.1 It also reshaped the federal government in far-reaching ways that, as we shall see, continue to affect America in the twenty-first century.

Twenty-first century America remains concerned about security—and rightly so. From the Sacramento River Delta to the electric power grid, our national infrastructure remains too vulnerable to terrorist attacks and natural disasters.2 A deliberate attack or a serious accident at any one of over a hundred chemical facilities could unleash a cloud of toxic gas harming over a million people.3 The International Atomic Energy Agency recorded over one hundred incidents of nuclear smuggling between 1993 and 2006.4 These threats reflect not only structural vulnerabilities forcing us to confront persistent risks, but also the fact that we face determined adversaries eager to do us harm. Though less commonly remarked upon in a post–Cold War world, geostrategic threats of a more conventional nature also remain a challenge, just as they were throughout the twentieth century. Russia’s military action in Georgia, which produced approximately 100,000 refugees,5 and the continuing conflict between drug cartels and the Mexican government, which killed over 5,000 people last year,6 are just two examples of developments with the potential to affect American interests. Domestic and international efforts to grapple with these problems sometimes raise important legal and policy questions in agencies such as the Department of Homeland Security (DHS) and the Department of Justice, and many such questions have received sustained attention in recent years.

Just as important are some questions lingering since Roosevelt’s day that have received far less scrutiny and lie at the fertile intersection of public law, organizational theory, and national security. How, for example, does security get defined, and what happens if the concept encompasses a range of disparate missions—as with terrorism prevention and natural disaster response in the case of DHS—that prove difficult to harmonize? How does organizational design affect the work of agencies charged with keeping us safe? And how is the evolution of the executive branch, playing out against the backdrop of political competition and legal questions about separation of powers, affected by debates about the nation’s responsibility to secure its citizens? These questions obviously mattered in recent history, as made plain by the already difficult history of the DHS. But unbeknownst to many Americans, our history foreshadowed many of the same dilemmas during an episode worthy of closer attention.

To see why, we must return to Roosevelt’s time and appreciate the following irony. During the 1930s, the Roosevelt administration spurred major growth in the federal state by stressing government’s role as guarantor of the nation’s security.7 With security as a lodestar, administration priorities led to now-familiar statutory changes catalyzing financial regulation, retirement and unemployment benefits, food safety policies, and energy rules. As the New Deal matured, security-related rationales taking subtly distinct forms—emphasizing international, geostrategic concerns—also bolstered the case for expansive federal power and even blended with the more expansive domestic risk-reduction ideas in the period before World War II. In 1939, for example, the administration wove together multiple strands of its security trope while using a sliver of legal authority for executive reorganization to forge a colossal new Federal Security Agency (FSA). It then proceeded to justify the executive branch’s new legal architecture by arguing that the ability to face international threats depended on the strengthened domestic capacity, provided by the FSA, to implement the law effectively in domains such as health and education.8

But for all its success reconstructing the national agenda around an expansive conception of security, by the late 1930s the administration was losing capacity to secure its own control of the outsized federal state it had created. In Humphrey’s Executor v United States,9 the Supreme Court refused to let the President fire a Federal Trade Commission official whose term had been fixed by Congress, thereby eviscerating presidential power over an ever-multiplying empire of independent commissions and opening the door to even greater congressionally imposed limits on presidential power.10 In the process, the Court rejected the view that proper presidential supervision of the executive branch under Article II depended on the power to fire senior officials, an idea central to the Court’s prior conception of executive power articulated a few years before in Myers v United States.11 Meanwhile, Congress was increasingly designing the structure of agencies like the Social Security Board to disrupt presidential control,12 independent of any executive department.”).] blocking White House staff expansion, and refusing to grant reorganization authority the Roosevelt administration considered essential to securing control of a rapidly growing federal state.13

It turns out that these security problems—the control politicians seek to secure over agencies with expansive legal powers, and the security that modern nation-states promise citizens when justifying why public bureaucracies must be given such powers in the first place—intersect. Time and again, whether the subject is the Roosevelt-era FSA or the Bush-era DHS, these two security problems turn out to be deeply enmeshed within the web of federal regulatory power. Bureaucratic control helps executive branch officials and their lawyers promote a particular definition of security through legal interpretations, public communications, legislative initiatives, and discretionary decisions. Security concerns, meanwhile, shore up public justifications for organizational changes affecting political control over law’s implementation. By understanding how these two problems intersect, we can grasp underappreciated tensions coursing through public law—such as how agencies shape public perceptions about the laws they implement, how the definition of “security” has changed as the architecture of the executive branch has evolved, and how to understand the consequences of forging a modern-day DHS.

The history of the FSA nicely illustrates how politicians exploit reorganizations, particularly during or in anticipation of national security emergencies, to reshape agencies’ legal mandates by controlling their bureaucratic power. Although the FSA has been all but forgotten, even cursory scrutiny reveals it to be among the more important bureaucracies created in twentieth-century America. The FSA was the gangly and occasionally brash adolescent—equal parts wartime soldier and audacious dreamer—that matured into the federal government’s sprawling health, welfare, and civil defense apparatus. The agency was born amidst a tangle of administrative changes enshrined in statutes as the New Deal morphed into the American response to World War II. Its litany of statutory responsibilities at once confirms what has today become a familiar picture of federal functions—encompassing medical research, civil defense, social security, federal education assistance, weapons development, and food and drug regulation. But the list also scrambles modern sensibilities about the line dividing conventional national security functions from domestic regulatory activities.

President Roosevelt began blurring that line nearly two and a half years before the Pearl Harbor attacks.14 On April 25, 1939, he delivered a long-expected announcement about his plans to reshape the architecture of the executive branch. The change in architecture had been on the President’s agenda for over twenty-four months, but the specific changes he had in mind had only become possible after Congress grudgingly gave the President limited reorganization powers three weeks earlier. Thwarted in an ambitious effort to create a cabinet-level Department of Public Welfare the previous year, the Roosevelt White House nonetheless announced in April that it would use its more modest reorganization power to unify a half-dozen bureaus involved in health regulation, economic security, and education in a new subcabinet Federal Security Agency. From then on, the FSA expanded steadily. By 1943, the FSA’s bureaus included the Public Health Service (PHS), the Social Security Board, the Office of Education, the Food and Drug Administration, the Office of Community War Services, a War Research Service, and nearly a dozen other organizations. By 1953, the agency had become the Department of Health, Education, and Welfare (HEW). And by the 1970s, HEW’s budget accounted for nearly half of federal nondefense expenditures, dwarfing the national budget of every country except Soviet Russia.15

To observers situated in the early twenty-first century, however, the name of the Federal Security Agency foreshadows DHS more than it does a welfare agency. Legal history readily demonstrates that the meaning of “security” is versatile, with the term eliciting concepts of economic risk reduction more easily in the 1930s than today. Some aspects of the FSA’s work, however, nonetheless fit readily with more modern applications of the term, presaging its subsequent evolution. It was the FSA that facilitated the resettlement of Japanese Americans. It was the FSA that laundered White House funds and funneled them into secret biological weapons research even when the United States had signed a treaty that should have raised, at a minimum, serious concerns about such activity.16 FSA officials presided over the rapid growth of a national system to train workers for war-related occupations. They set up recordkeeping systems to assist a national military draft. The agency’s inspectors prevented food contamination while insisting their mission was essential to the performance of the military, and they sought to limit the spread of sexually transmitted diseases among military personnel. And the agency performed these tasks while it continued—and expanded—its role of paying social security benefit checks, providing medical services to underserved American communities, screening new drugs, and printing books for the blind.17

As the FSA’s origins recede into history, however, scholars too have remained blind to certain puzzles about its birth, which shed further light on the intersection between organizational choices, legal implementation, and debates about the scope of national security. Why, for instance, did President Roosevelt create the FSA at all, particularly when doing so involved such an expenditure of scarce political capital, and resulted in the removal of some bureaus from agencies where they were already supervised by trusted political lieutenants? The meager scholarly literature on the subject, much of it written at the time of the merger or shortly thereafter, speculates that the President’s interest was in more “efficient” government without defining the concept or considering the more directly political implications of the White House move. Why did the agency so pervasively mix social welfare, regulatory, and national security functions years before World War II embroiled the United States? Indeed, what was meant by the reference to “security” used to justify expansive legal powers in the early years of the FSA? And how did the FSA’s creation impact the work of its bureaus?18 In one of the few scholarly references that are relevant to the subject, political scientist James Q. Wilson downplays the importance of the creation of HEW for the behavior of its component bureaus. But he does nothing to investigate the potential significance of the time those bureaus spent within the FSA, or the broader legacy of that agency.19

The answers to these puzzles implicate not only separation of powers and national security law, but also organization theory and the history of the administrative state. The key to understanding the importance of the FSA’s creation—as with DHS decades later—is recognizing that organizational changes can exert powerful, underappreciated influence on law’s implementation. First, public health bureaucrats work differently when buried in a Treasury Department dominated by fiscal concerns than when operating in an agency prioritizing health and economic security. Because organization is not neutral, the redistribution of authority within the executive branch can shape the law by facilitating a symbiotic burst of agency capacity-building coupled with presidential power to control that new capacity. Roosevelt’s creation of the FSA had major practical effects, and those effects went far beyond political symbolism. Archival records, news coverage, and White House memos describe how the new agency created a layer of bureaucratic appointees, allowing the President to have more control over important administrative agencies at a time when the FSA’s staff was meager and the agencies were previously either independent (as was the Social Security Board) or stuck in departments unsympathetic to their missions (as was the PHS under the Treasury). Roosevelt wanted the new agency to make it easier for him to control the flow of grant funds to states and local governments.20 The new layer of political appointees and lawyers allowed the administration to wring the maximum benefit out of broad legal authorities, to monitor developments in the bureaus, to harness the bureaus’ analytical capacities in the service of further legislative changes, and to ensure that they spoke with a more consistent voice to promote favorable public perceptions. In short, reorganization gave the White House more control, and more to control.

Second, agency architecture can help reshape public perceptions of the government’s legal responsibilities. Aware of the looming possibility of war, Roosevelt used his new degree of control over bureaucratic functions to frame discussion about the concept of “security”—defining it broadly enough to blur the distinctions between social services, economic security, health regulation, and geostrategic national security. Doing so served a political goal by giving moderate legislators skeptical of social programs but supportive of defense a new reason to support the FSA bureaus, and by reinforcing associations among many voters between national security goals and regulatory and social programs. With its new political and legal staff, its two-edged “security” mandate, and its relentless efforts to explain the essential importance of its work to the public, the FSA seemed to prosper during and after the war: it was able to keep and even grow its budget during a wartime period when other domestic agencies faced cuts in their budgets; it achieved expansions in its responsibilities (particularly in social security and health research) at a time when Congress was often hostile to the administration; and the public increasingly supported the transformation of the organization into a cabinet agency.

In retrospect, it may not seem remarkable to observe that the FSA’s creation allowed the administration to engage in an epistemic process of “framing” policy priorities by emphasizing their role in achieving the widely desired goal of “security.” In particular, developments regarding the FSA suggest the importance of two specific mechanisms—identified earlier in our discussion of refining existing theories—through which the blurring of the security concept could enhance the FSA’s prospects: one involves shaping the perceptions of the mass public about the meaning of security; the other involves the separate enlargement of legislative coalitions supporting agency functions by ambiguating the extent to which a vote for the FSA also constitutes a vote for national security or war-related efforts.

Both of these strategies depend heavily on demonstrating to legislators, organized interests, and the public at large that the legal mandates the FSA was implementing were inextricably connected to national defense and the war effort. Regardless of whether the Roosevelt administration wanted to enter the war at the time the FSA was created, the White House was increasingly cognizant of a foreign policy crisis that could further complicate its domestic political goals. As one historian observed recently, it was by March 15, 1939—just over a month before the reorganization creating the FSA was publicly proclaimed—that “foreign affairs achieved the absolute dominance over domestic affairs that they were destined ever after to retain in [Roosevelt’s] mind.”21 The impending foreign policy problems made the President increasingly anticipate that the nation could find itself embroiled in war:

The experience was, for him, not dissimilar in some essentials to that of the spring of 1933 when, amid universal ruin and collapse, he had presided over the birth of the New Deal . . . . (“Never in my life have I seen things moving in the world with more cross currents or greater velocity,” he wrote in a personal letter on March 25, 1939).22

Nor was the President alone, as some legislators began to favor repealing federal neutrality laws to facilitate American involvement in the European theater.23

The administration’s goal of emphasizing the connection between the work of the FSA and national defense became easier to achieve because of the importance to the military of the new agency’s activities. The FSA’s functions not only contributed to an expansive conception of security that encompassed ordinary health, education, and public welfare activities, but also served ends specifically connected to domestic and international security in the conventional sense. These included the relocation of Japanese-Americans, technical assistance to law enforcement agencies engaged in police work against juvenile delinquents, the aforementioned research programs in biological weapons and related areas, an antiprostitution enforcement program designed particularly to protect the armed forces, and the development of disaster assistance programs to be deployed in case of war-related attacks against civilians. In addition, the FSA emphasized the defense-related import of a host of other activities, ranging from vocational education to nutrition. Together, these presidentially driven choices afforded the administration with an opportunity to affect how the public understood the concept of security and how legislators understood the payoffs of supporting the FSA as the nation prepared for war.24

If it is true that injecting a substantial national defense ingredient into the mix of “security” bureaus could serve the President’s goals, why did the White House wait to pursue this strategy until it could order a bureaucratic reorganization? Although the type of rebranding Roosevelt sought to pull off by melding domestic policy and national defense through an expansive “security” metaphor may not have been impossible without reorganization authority, it would have proven far more difficult. Imagine, for instance, how much more trying it would have been for FDR to discuss his expansive version of security during fireside chats if the agencies carrying out that work were scattered bits and pieces across the government (for example, the PHS at Treasury, the FDA at Agriculture, and the Office of Education at Interior). In effect, the reorganization delivered three things that redounded to the benefit of the rebranding. First, the administration gained a high profile opportunity to announce changes and make a case to the nation about its conception of security. The newspaper coverage of the reorganization announcement was intense. Roosevelt’s “warning to dictators” when he reorganized was widely disseminated.25 Second, the administration put in place a structure—consisting of appointees to oversee bureaus with the legal authority to control what they did—to better monitor bureau activities, anticipate threats, and coordinate actions to advance the “expansive” security message. Finally, the administration gained a staff whose job was in part to promote what the bureaus were doing across the country, build alliances, and manage external relationships in a manner that promoted the desired conception of security.

Third, the story of the FSA shows the malleability of the “security” concept in relation to law.26 Parallel to the aforementioned developments, the Roosevelt administration’s melding of functions within the FSA proved a harbinger for a conception of security that became increasingly identified with the military and national defense, to the point where that powerful association swallowed up the more flexible conception that Roosevelt first championed. In effect, Roosevelt’s reorganization set in motion a process showcasing the connections between three dynamics: public debates about “security” as a metaphor for the responsibilities of the modern nation-state, changes in organizational structure to bolster a particular understanding of “security,” and political strategies to control the law’s implementation. Such contestation belies the idea of security as an unambiguous prescriptive rationale for legal changes, raising often-neglected questions about the scope of national security law. As presidents, lawmakers, courts, and the public struggle with those questions, the fight over “federal” security in the Truman years provides a provocative reminder that the notion of security—in part because of its deep connections to the underlying origins of the nation-state itself—should be subject to as much contestation as conceptions of democracy or citizenship.

Indeed, the current concerns with homeland security have increasingly come to encompass infrastructures and public health mechanisms easily framed by some lawmakers or scholarly observers as critical to national life. Although the creation of a Department of Homeland Security appears to have fomented cuts in domestic regulatory mandates, such a development does not necessarily signal the demise of “security” as an organizing principle for promoting domestic regulatory and administrative activity. It is worth noting that both the rhetoric and the underlying substantive concerns advanced by some observers and policy entrepreneurs in the homeland security arena bear more than a passing resemblance to the FSA’s mandates more than six decades ago. Their basic message is as simple as it is reminiscent of McNutt’s and Roosevelt’s speeches: a narrow focus on violent, manmade, geostrategic threats is a poor recipe for security, and even when the focus remains on those more conventional threats to national defense, success depends heavily on the nation’s human and regulatory infrastructure. Public health, education, and infrastructure protection can be seen as central to the nation’s security even if one is focused on the narrower, geostrategic version of the concept. In the national experience with the FSA, policy entrepreneurs may find hints about the viability of political coalitions supporting the development of bureaucratic capacity to achieve a blend of regulatory, redistributive, and more conventionally understood geostrategic national security goals.27

Yet despite the legal stakes of defining security in contexts ranging from application of the Homeland Security Act to the scope of deference to the executive, scholars of national security law rarely address or even recognize the fundamental question of how to define security in the modern nation-state.

Fourth, the problem of regulating organizational structure permeates—and perhaps inevitably defines—modern separation of powers.28 Presidential control of agency architecture—including who runs the agency, what bureaus are within it, how the public views those bureaus, and who (other than the President) runs the bureaus—can substitute for direct presidential power to command subordinate officials. The consequences of structural innovation, moreover, show robust “presidential administration” to be in fact a longstanding phenomenon, one that courts should regulate when policing the border between legislative and executive authority.

As certain courts and policymakers have realized over the years, many problems in the separation of powers doctrine involve questions about the amount of actual control a president can exercise over the bureaucracy. By the time of the Sierra Club v Costle29 decision, for example, courts routinely approached separation of powers questions by trying to calibrate precisely the extent of presidential power over internal agency matters.  In Costle, the court simultaneously acknowledged the value of judicial oversight of the President-agency relationship while recognizing that such oversight could also adversely impact the bureaucracy. Indeed, right after Humphrey’s Executor,30 the stage was already set for the rise of a more functionalist paradigm in separation of powers law. With its decision in Humphrey’s Executor, the Court simultaneously denied the White House a major instrument of control and ratified legislative experimentation with structures insulated from presidential control (for example, independent commissions).31

The White House responded to such constraints through a determined effort to gain the executive reorganization authority that eventually led to the creation of the FSA. Despite the difficulties created by decisions such as Humphrey’s Executor, the swelling size of the federal government relative to the size of the White House staff, and basic problems obtaining information across government, greater presidential success in achieving structural goals is likely to be associated with greater power to affect what federal bureaus actually do. Indeed, Presidents’ relative successes in achieving structural goals such as the creation of the FSA or DHS further blur a distinction—quite central to some otherwise cogent accounts of separation of powers—between presidential “oversight” and “directive authority.”32 True, directive authority implies that the president holds a special power to legally compel a decision from a subordinate, whereas oversight implies a power to force consultation and the production of information—something short of a specific decision. But in the absence of such explicit “directive” authority, presidential power to reorganize who holds directive authority within organizations (as Roosevelt did when he placed the Social Security Board inside the FSA), to appoint loyal political supervisors to bureaus, and to control the flow of information to and from bureaus can limit the significance of formal distinctions between “oversight” and “directive authority.”

Even if some subordinate executive branch officials let their responses to presidential requests turn on the distinction between oversight and directive authority, it is far from obvious that all or even most employees would be so passionately invested in the distinction. Structural changes can therefore help a president limit the significance of formal distinctions between oversight and directive authority. Accordingly, because separation of powers doctrine only makes sense if it encompasses some limits on presidential power, and structural arrangements are a key determinant of such power, courts should (other things being equal) closely scrutinize structural changes pursued by the White House. In fact, courts genuinely concerned with policing the extent of executive power will be left with little choice but to scrutinize the extent of structural power the president in fact has been able to accrue, rather than merely relying on a formal examination of whether the president has made claims of authority that improperly violate the distinction between oversight and directive authority.33

* * *

Regardless of how courts resolve the tensions inherent in supervising presidential control over the structure of the executive branch, Americans should appreciate how much the debates about the scope of national security end up affecting that structure. On June 7, 2002, President George W. Bush announced a major initiative reshaping the architecture of the federal government to promote greater security for the American people.34 DHS was the result. Unmistakable parallels link that initiative to Roosevelt’s creation of the FSA sixty-three years earlier. Like Roosevelt, President Bush faced a national electorate growing increasingly concerned about international threats. The early twenty-first century White House, like its predecessor in the 1930s, harbored an ambitious domestic policy agenda that would be affected by the reorganization. Both administrations faced hostility over their accumulation of presidential power,35 and nonetheless sought to use reorganization to enhance their control over how laws are implemented in a sprawling regulatory state. Both ultimately succeeded in achieving their respective reorganizations.

Where each administration differed sharply is in how it defined the concept of security that the newly strengthened legal architecture of government was supposed to serve. In Bush’s case, the reference to security primarily implicated the management of risks from terrorism or geostrategic threats, a narrowly focused mandate sharply conflicting with transferred bureaus’ broader missions and helping to create conditions making DHS perennially troubled.36 In Roosevelt’s case, the term security was meant to evoke a flexible conception of risk reduction that spread—as the FSA’s jurisdiction eventually did—across the now-segregated domains of public health regulation, social welfare policy, and national defense. Against that backdrop, early FSA officials managed to create an environment supporting their bureaus’ legal functions and adding to their resources rather than one calling for drastic reforms in agency priorities amid sharp resource constraints.37 Even after Roosevelt’s death, FSA Administrator Oscar Ewing continued articulating the same notion of security as “a sure knowledge that we shall not want for the basic necessities of life, no matter what Fate may have in store,”38 one that eerily parallels the views of some observers who criticize DHS for not being more steadily focused on the full range of risks facing Americans today.39

Today’s world of elaborate infrastructure problems, global nonstate actors, and mature regulatory agencies renders the historical context different from what prevailed when Roosevelt’s fireside chats were heard on cabinet-sized radios. The Bush administration’s narrow substantive definition of security, with implications that tend to cut against expansive regulatory activity in domains such as environmental protection or federal involvement in providing health services, is also different.40 But the cycle epitomizing fundamental conflicts over the architecture of law is not. Policymakers mold law by defining security, and then seek to command law’s implementation by securing control over public organizations. To assume that the idea of national security carries within it a set of self-evident priorities, free of strategic agendas or fraught disputes about separation of powers, is to ignore the history and shared questions that bind us to the Americans of the late 1930s.

Acknowledgments:

Copyright © 2010 University of Chicago Law Review.

Mariano-Florentino Cuéllar is a Professor of Law and Deane F. Johnson Faculty Scholar at Stanford Law School.

Consider the iPhone: Apple’s wildly successful device is simultaneously an Internet-access device, a handheld computer, a Global Positioning System location sensor, a digital music and video player, and a platform for tens of thousands of third-party software applications.  It is also, as the name suggests, a phone.  And that, from a public policy standpoint, ought to make all the difference.  Yet, as the Internet has transformed the communications world, the regulatory system has failed to keep up.

The iPhone and devices like it are endpoints of communications networks.  Such networks have been regulated for more than a century to safeguard the public interest, and those regulations remain in effect.  As telecommunications and media converge into the Internet, however, networks are becoming a vast legal grey area.  For example, whether the FCC can apply its rules mandating open interconnection and non-discrimination to the broadband platforms supporting the iPhone ecosystem is unclear.  The same analysis applies to any device or service connecting to the Internet—which is, increasingly, all of them.

This is not a new problem.  A well-developed body of case law and academic literature addresses many aspects of Internet regulation, and the FCC itself has been wrestling with Internet policy issues for more than a decade.  However, no one has yet provided the essential legal analysis to ground open Internet rules in the statutory framework of communications regulation.  In the Communications Act of 1934,¹ Congress delegated legal authority to the FCC to oversee communications networks.  The central question is how Internet-based services fit within the contours of that legislation, as amended by the Telecommunications Act of 1996.

Without a coherent theory for Internet regulation, both competition and user interests are imperiled.  Uncertainty about whether FCC rules apply will chill innovation and investment, and disputes about the proper treatment of services will consume excessive resources and encourage regulatory gamesmanship.  Additionally, the public interest commitment to open networks that has governed communications for nearly a century may be lost, even as its importance remains undiminished.

The dominant perspectives in contemporary communications and cyberlaw scholarship support a limited role for the FCC, either because the FCC cannot be trusted to regulate wisely or because the FCC’s legal authority over the Internet is narrow.  A careful reading of the Communications Act, however, gives a different answer—that the FCC has expansive jurisdiction over Internet-based services.  Perhaps unsurprisingly, this conclusion tracks the FCC’s recent pronouncements about its legal authority.  However, the FCC and most commentators base this outcome on the wrong sections of the statute.  The FCC’s current legal theory rests on an unstable foundation, making it likely that courts will overturn it.  Moreover, the FCC’s approach provides insufficient guidance for future actions.  An alternate theory based on the core public interest mandates of Title II of the Communications Act provides a better basis for Internet policy.

I.
The FCC and the Internet

The Communications Act makes a distinction between “telecommunications” and “information services.”  “Telecommunications” means “transmission, between or among points specified by the user, of information of the user’s choosing, without change in the form or content of the information as sent and received.”² In other words, telecommunications involves an unaltered communications pipe, analogous to traditional voice telephone service.  “Information service” means “the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications . . . .”³ In other words, it involves some computer processing that acts upon the content transmitted across the network.

Generally speaking, the regulatory commands of Title II of the Act apply to providers of telecommunications services.  The statute defines information services, but it imposes no particular mandates on them.  The FCC has interpreted the statutory provisions as a mandate to continue its prior practice of treating information service providers as unregulated users of the network.  The initial issue that came before the Commission was whether it could find that an information service provider engaged in telecommunications.  Some information services, such as voice over Internet protocol (VoIP) calling, closely resemble regulated telecommunications services.  In general, the FCC refused calls to impose its existing rules on these services, which it saw as nascent services offering the potential for innovation that excessive regulation might stymie.

And then, something funny happened: the biggest providers of regulated telecommunications services became the biggest providers of unregulated broadband Internet access.  The major regulated communications operators largely missed the initial wave of the Internet, ceding the leading position in the dial-up Internet-access market to standalone Internet-service providers (ISPs), such as AOL and Earthlink.  Dial-up Internet traffic passes through the telephone network like voice or fax calls.  High-speed broadband connections, on the other hand, involve end-to-end data transmission.  The cable industry was the first to deploy broadband aggressively. Cable was not subject to the requirements of Title II, and it developed its cable modem networks as closed systems, rejecting calls to offer access to independent ISPs.  Telephone companies, however, initially had to offer unbundled access to their competing digital subscriber line (DSL) networks under the infrastructure sharing rules of the 1996 Act.  This produced an unsustainable regulatory asymmetry.

Faced with a choice between expanding the scope of open-access mandates and reducing it, the Republican-led FCC during the Bush Administration chose to cut back on regulation.  It determined that broadband offerings of both cable and DSL providers, as well as other similar services, were indivisible information services.  The FCC rejected the claim that network operators should always have to provide a regulated telecommunications service as distinct from the higher-level information service that they offered to their customers.  From that point on, network operators providing broadband access would be information service providers.  The Supreme Court ratified the FCC’s decision in National Cable & Telecommunications Association v. Brand X Internet Services.⁴

The FCC and the Supreme Court both asserted that information services were not wholly outside the scope of regulation.  The FCC, they both declared, could adopt necessary rules governing information services.  Unfortunately, the FCC’s initial foray in this direction was deeply flawed.

II.
The FCC’s Flawed “Section 230″ Approach

In a landmark August 2008 decision, the FCC sanctioned Comcast for discriminating against peer-to-peer file-sharing applications on its broadband access network.⁵  This was the agency’s first major action to enforce the principle of Internet openness (or “network neutrality”).  For several years, commentators have argued that broadband Internet-access providers will function as gatekeepers, restricting innovation by providers of applications, content, and devices.  In 2005, the FCC adopted an Internet Policy Statement incorporating four principles for preservation of the open Internet, but the policy statement was explicitly non-binding.  The Comcast Order was the agency’s step to put those principles into practice.

To justify its authority to take such actions, the FCC relied on the bold, but unfounded, discovery of a Congressional “national Internet policy” in Section 230(b) of the Communications Act.⁶ That provision, added by the Telecommunications Act of 1996, begins:

It is the policy of the United States—

(1) to promote the continued development of the Internet and other interactive computer services and other interactive media;

(2) to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by Federal or State regulation;

(3) to encourage the development of technologies which maximize user control over what information is received by individuals, families, and schools who use the Internet and other interactive computer services.⁷

The FCC concluded that it had a “responsibility for overseeing and enforcing the ‘national Internet policy’ Congress had established,” and that the non-binding Internet Policy Statement merely “clarified the contours” of this statutory federal policy.⁸ Based on that legal authority, the FCC found that Comcast’s network management practices were unreasonable and discriminatory.  It ordered the company to cease and desist, required it to file detailed information about its technical practices, and ordered it to implement a new non-discriminatory system for traffic management.  Although the FCC structured the Comcast Order as an adjudication governing a single company, it made clear its intent to take action in other cases where it found similar violations.

The central problem with the FCC’s argument in the Comcast Order is that it involves an implausible reading of the Communications Act.  The legislative history of Section 230 makes clear that Congress did not intend Section 230 to be a broad directive to promote Internet openness.

Section 230 began as a freestanding bill, the Internet Freedom and Family Empowerment Act,⁹ which Representatives Christopher Cox and Ron Wyden introduced in 1995.  The House–Senate conference committee incorporated it into the 1996 Telecommunications Act as an amendment.  At the time, the Congressional debate about Internet regulation and its relationship to the FCC involved government regulation of online content.  Senator James Exon of Nebraska had introduced the controversial Communications Decency Act (CDA),¹⁰ which would have barred indecent speech on the Internet.  Under the CDA, the government would have policed online indecency in much the same manner as it regulates indecency on broadcast television and radio.  The legislation was intensely controversial.  Free speech advocates protested the extension of speech regulation to the new medium of the Internet, and business interests expressed alarm that filtering indecent content would itself expose online service providers to liability.

The Cox–Wyden legislation was introduced in response to these fears about the CDA.  The bulk of its sections offered a specific alternative to the CDA’s private censorship: a safe harbor for online service providers for content over which they had no control, and protection for affirmative steps taken to remove unauthorized or illegal material.  The title of the Cox–Wyden amendment was “Online Family Empowerment,”¹¹ and, as codified, section 230 is titled “Protection for private blocking and screening of offensive material.”¹² In other words, the “national Internet policy” of Section 230(b) was merely a rhetorical lead-in to the substantive safe harbor provisions.  It cannot justify as significant a step as the FCC took.  Perhaps that is why the agency, in its prior decisions regarding Internet-based services, never before described the “national Internet policy” that was central to the Comcast Order.

There were several other problems with the FCC’s approach.  The agency fused elements of rulemaking and adjudication in a manner that satisfied the Administrative Procedure Act¹³ requirements for neither.  It failed to reconcile the internal inconsistency in Section 230 between promotion of an open Internet and a mandate to keep the Internet “unfettered by Federal or State regulation.”¹⁴ And it pointed to no limiting principles in the statutory language that would cabin agency decision making, as required under the non-delegation doctrine in administrative law.

The FCC’s jurisdictional theory may have been fatally flawed, but the need it addressed remains important.  If Section 230 does not give the agency jurisdiction over Internet-based services, what does?

III.
A New Theory of Ancillary Jurisdiction

Fortunately, the answer lies within the Communications Act, but not where everyone has been looking.  The FCC has expansive authority to regulate broadband Internet access, as such authority is necessary as ancillary to its obligations under Sections 251 and 256 of Title II of the Communications Act.  In the new converged world, the FCC can only effectuate these statutory provisions, mandating open interconnection and standards-based interoperability, by extending FCC authority to certain information services.

United States v. Southwestern Cable Co.,¹⁵ a 1968 decision of the Supreme Court, established the concept of ancillary jurisdiction under the Communications Act.  In Southwestern Cable, the FCC sought to regulate cable television service, which fit neither the common-carrier definitions of Title II of the Act, nor the broadcast definitions of Title III, despite obviously having attributes of both.  Even though it was then a small industry, cable had the potential to significantly alter the market for video programming, which the FCC had regulated under its public interest standard since the dawn of television.

In Southwestern Cable, the FCC used a two-step process to assert jurisdiction.  First, the Commission found that cable was within its primary statutory grant of authority to regulate “all interstate and foreign communication by wire or radio . . . .”¹⁶ Second, the FCC invoked Section 303(r) of the Act, which allows the Commission to issue “such rules and regulations and prescribe such restrictions and conditions, not inconsistent with law,”¹⁷ as “public convenience, interest, or necessity requires.”¹⁸ It also referenced section 4(i), that “the Commission may perform any and all acts, make such rules and regulations, and issue such orders, not inconsistent with [the Communications Act], as may be necessary in the execution of its functions.”¹⁹

As affirmed by the Supreme Court in Southwestern Cable, these provisions give the FCC authority to take steps “reasonably ancillary to the effective performance of the Commission’s various responsibilities . . . .”²⁰ The Supreme Court deemed that regulation of cable was reasonably ancillary to the statutorily defined regulation of broadcasting, because an unregulated cable industry could prevent effective achievement of those statutory mandates.

This analysis maps directly onto the problem of Internet jurisdiction today.  Internet-based services clearly satisfy the first prong of Southwestern Cable.  They are “communication[s] by wire or radio”²¹ that cross state lines.  The second prong is met as well.  In Southwestern Cable, the problem was that a new unregulated service (cable) could mimic, and therefore competitively undermine, a regulated service (broadcasting).  FCC exercise of ancillary authority was deemed necessary to preserve the statutory public interest mandates on broadcasters.  The analogous issue today is whether new unregulated broadband Internet services would have the same effect.  The answer is unquestionably yes.

The rise of broadband Internet services and content threaten FCC statutory obligations in two ways.  First, unregulated services can mimic and compete with regulated telecommunications services.  Simultaneously, those regulated services can either escape regulation or harm competition in the markets higher up.  Either outcome would belie Congressional objectives.  The FCC cannot carry out its statutory duties for telecommunications service providers if information services remain a contentless regulatory grey area.  For example, if Verizon or Cablevision refused to allow independent application and content providers to reach customers through their pipes, or discriminated against unaffiliated providers on their platform, it would ultimately make the substantive provisions of Title II of the Act meaningless.

The final question is to what provisions of the Communications Act potential Internet-access regulations are ancillary.  As noted, Section 230 is too thin a reed.  A better basis is the two core mandates of the statute that would be in jeopardy if Internet-communications services were not subject to ancillary jurisdiction: Sections 251 and 256.

Section 251 requires telecommunications carriers to interconnect “directly or indirectly” with other carriers.²² This broad mandate, the first substantive provision Congress added to the Communications Act in 1996, demonstrates a recognition of the centrality of interconnection for competition in telecommunications.  Without effective interconnection, network effects crowd out smaller players.  Interconnection becomes even more important with the rise of packet data networks, such as the Internet, built on an assumption that traffic may flow between multiple networks dynamically to reach its destination.  Requiring a broadband access provider such as Comcast to offer effective interconnection with other networks, and with application providers, is the contemporary analogue of interconnection between telephone companies.

Interconnection-like open-access requirements on broadband access services, of the kind the FCC proposed in the Policy Statement, would be a distinct and appropriate means to achieve the statutory goal.  It was only after the emergence of the broadband Internet, and the FCC’s decision to treat broadband access as an indivisible information service, that telecommunications carriers such as AT&T and Verizon were viewed as interconnecting to the same degree as information service providers.  Just as the FCC in the 1960s saw the growth of unregulated cable television service potentially making its rules promoting local broadcast content irrelevant, the FCC today could argue that unregulated broadband access networks would make its rules promoting interconnection irrelevant. 

Section 256 concerns the FCC’s involvement in network management and standards-development activities.  It expresses a desire “to promote nondiscriminatory accessibility by the broadest number of users and vendors of communications products and services,”²³ and directs the Commission to establish procedures “for the effective and efficient interconnection”²⁴ of networks.  As the Comcast case showed, technical standards for network management and interconnection can have great economic significance.  In a world where traditional public telecommunications networks and newer Internet data transmission networks are pervasively interconnected, precluding the FCC’s interoperability efforts from affecting information services makes no sense.

The FCC can therefore regulate Internet-based services such as broadband access to promote interconnection and interoperability.  Whether and how it does so in any particular case is for the agency to determine within its discretion.

IV.
The Need for a Clear Legal Framework

Some might object that a broad interpretation of FCC authority will hinder, rather than promote, Internet development.  Such a view is shortsighted.  The Internet was once on the periphery of the communications industry; it is now at the core.  It should not be subject to outdated regulatory restraints, but neither should it forfeit the protections that an administrative agency affords.  Without a legal basis for the FCC to regulate Internet services, network operators will have the power to limit innovation that might challenge their traditional business models.  Those who control chokepoints will be able to pervert market forces that would otherwise promote competition.  And we will miss the opportunity for new communications and media channels to reinvigorate democratic discourse.  The network of networks that we call the Internet is more fragile than it seems.

Such problems will only become worse.  As new platforms such as social networks and smart mobile devices become significant, no forum will be able to address the competitive dynamics of standards or the proper limits on exploitation of user information.  We cannot know what Facebook and YouTube and Skype and Twitter will become, but clearly they and their ilk are what AT&T and radio broadcasters were at the beginning of the 20th century: the emerging infrastructure of communication and community for a changing society.  Neither Congress nor the courts are likely to address all the critical issues that these children of broadband networks pose.

The arrival of a new Presidential Administration gives new importance to these questions.  President Obama stated during the campaign that he “will ensure that these critical communications pathways [of the Internet] remain accessible to all Americans . . . .”²⁵ Both he and the new Chairman of the FCC support non-discrimination rules for broadband.  Already, the economic stimulus package that Congress enacted in February 2009 includes seven billion dollars of funding for broadband infrastructure, subject to open-access requirements to be developed in concert with the FCC.  Congress also tied grants for health care, education, energy and the environment to network-based services.  Classic communications policy issues of interconnection, universal access, competition, pricing, and discrimination are bound to arise.  Uncertainty about the scope of FCC authority will only produce unnecessary conflict and delay.

The regulatory structure for communications has not kept up with the times.  The FCC can salvage its role as the guardian of the public interest in communications, but only if it re-examines that mission for a new century.  Promoting competition and innovation in telecommunications today is tantamount to promoting competition and innovation on the Internet.  The FCC must assert its authority under the Communications Act to address this objective.

Acknowledgments:

Copyright © 2010 Cornell Law Review.

Kevin Werbach is an Assistant Professor of Legal Studies and Business Ethics at the Wharton School, University of Pennsylvania.

I.
Theory of Financial Institution Failure

In recent years, it has become apparent that the failure of large, interconnected nonbank financial institutions, such as hedge funds and investment banks, can create substantial systemic risk and thereby impose external costs on the financial markets and economy.² Because no financial institution has the incentive to limit its own systemic risk,³ and because collective action by market participants to prevent systemic risk is unlikely,⁴ some regulation is needed to minimize the external costs produced by the failure of “too big to fail” (TBTF) institutions. Any remedial regulation should (1) prevent overly risky behavior by a TBTF institution that could cause it to fail and create contagion,⁵ and (2) prevent the panic among investors that can precipitate an institutional failure.

Regulation to avert systemic risk, however, can also create moral hazard and uncertainty. One way of reducing systemic risk is by “bailing out” TBTF institutions—guaranteeing their agreements with creditors and counterparties—which reduces the chances of their failure by preventing runs on the institutions. The problem with this approach, however, is that while loss-fearing counterparties and creditors normally exert market discipline to prevent institutions from taking on excessive risk, parties that come to expect future bailouts reduce their discipline accordingly. A policy of “constructive ambiguity”—only bailing out some creditors and counterparties so that none can count on a bailout ex ante—reduces this moral hazard. But constructive ambiguity also creates uncertainty in financial markets, leading panicked investors to withdraw their funds en masse from other financial institutions, which can increase systemic risk. The benefits of constructive ambiguity in reducing moral hazard will be produced most effectively through a discretionary and transparent process that retains uncertainty over the outcome of regulatory decision-making with regard to bailouts, but involves less ambiguity over the rules and process informing such decision-making. Creating clear procedures but preserving uncertainty over the outcome of a regulatory decision produces a better balance between uncertainty and moral hazard: Clear procedures will calm panicky investors, while uncertain outcomes will curb moral hazard.

II.
Evaluating Our Current Regulatory System

Our current regulatory system is suboptimal in both its ex ante and ex post regulation of systemic risk. Ex ante, the system fails to reduce the external costs caused by the overly risky behavior of nonbank financial institutions. Prudential regulations to curb such behavior are either insufficient, as with the Securities and Exchange Commission’s regulation of investment banks through the Consolidated Supervised Entities program, or nonexistent with respect to certain financial institutions, such as hedge funds. Ex post, the system does not sufficiently reduce the systemic risk caused by the failure of nonbank financial institutions and does an inadequate job of limiting the moral hazard and uncertainty that regulation creates. Under our current regulatory framework, when a large nonbank financial institution is on the verge of failure, regulators have two options: either undertake last minute, ad hoc actions to rescue the institution or permit the institution to file for bankruptcy. The problem is that this ad hoc approach can result in (1) bankruptcy filings by TBTF institutions that will likely cause contagion, as exemplified by the failure of Lehman Brothers, and (2) uncertainty in regulators’ decision-making processes that can create panic and worsen an ongoing financial crisis, also apparent during the aftermath of Lehman Brothers’ bankruptcy filing.

III.
The Obama Administration’s Framework for Regulatory Reform

The Obama administration’s proposed legislation would establish rules by which the Federal Reserve would designate certain financial institutions as TBTF—or Tier 1 financial holding companies (Tier 1 FHCs)—which would become subject to more stringent ex ante prudential regulations. The determination of whether an institution should be deemed a Tier 1 FHC would not depend upon the legal status of the institution, such as whether it is legally a bank, a hedge fund, or an investment bank, but rather on the extent to which a failure would be likely to impose external costs on financial markets and the economy. The Obama administration’s proposal retains the current bankruptcy process but adds a resolution regime that governs the failure of Tier 1 FHCs in some circumstances in order “to efficiently and equitably resolve the claims of creditors and other stakeholders”⁶ through a legal process similar to bankruptcy. Although the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) must approve a decision to invoke the resolution regime by a two-thirds vote, the Treasury would ultimately decide whether to invoke the regime upon consultation with the President.

The Obama administration’s proposal improves upon our current regulatory system, but it could do more to avert the systemic risk that could result from the failure of a Tier 1 FHC. Although the proposed framework instructs the regulatory agencies to consider “serious adverse effects” on the financial system and economy when deciding whether to invoke the resolution authority, the procedures for reaching such a determination are so stringent—requiring near consensus among numerous regulatory agencies—that it seems likely that at least some financial institutions whose failure will cause systemic risk will not be bailed out. The proposed legislation also leaves open the possibility that regulators, at the eleventh hour, might elevate moral hazard concerns above concerns about systemic risk. Furthermore, giving the Treasury—an agency firmly within the Executive branch—the ultimate authority to invoke the resolution regime overly politicizes what should be a technical decision based on an assessment of the expected systemic cost.

I also contend that the proposal fails to sufficiently reduce uncertainty in policymaking decisions, which could trigger panic and contribute to an environment where short-term creditors are likely to run a Tier 1 FHC. First, because the proposal leaves open the possibility of bankruptcy, creditors and counterparties of the institution now must worry about their ability to recover if the institution fails under both bankruptcy law and resolution rules. Second, the legislation does not require regulators to disclose the basis for the decision of whether an institution’s failure creates “serious adverse effects.” Without transparency in this crucial determination, ambiguity over the decision-making process remains, creating additional uncertainty for investors.

IV.
An Alternative Regulatory Reform Framework

While the Obama administration’s proposal has clear benefits, I suggest modifying the proposal’s ex post process for resolving the failure of TBTF financial institutions in order to prevent systemic risk more effectively and to reduce uncertainty. I propose that the Federal Reserve be given unilateral power to authorize the FDIC to seize a failing institution and place a value on the expected cost to the financial system and the economy of the institution’s failure. A cost-benefit provision in the new statute would then require the FDIC to provide the institution with financing only up to the cost of the systemic risk created by that institution’s failure.⁷ This will ensure that the expected cost of any bailout is less than the expected cost of systemic effects. Under my proposal, institutions deemed to be Tier 1 FHCs would not be subject to the bankruptcy process.

This alternative regulatory framework will improve upon the administration’s proposal in three ways. First, it will prevent systemic risk more reliably without worsening moral hazard. The cost-benefit provision of the resolution process ensures that systemic risk is properly considered and prioritized ex post in resolving a Tier 1 FHC failure. Under my proposal, regulators would not be permitted to elevate concern about creating moral hazard above the problem of systemic risk when deciding whether to allow a failed institution to liquidate. Furthermore, even though it is more likely under my proposal than under the administration’s proposal that Tier 1 FHCs will be rescued to some extent, any moral hazard will be limited because only short-term creditors with high-priority claims against an institution, not long-term subordinated creditors, are likely to recover fully in a resolution process.

Second, the Federal Reserve, as a regulatory agency with substantial prior experience regulating large, complex financial institutions and as the agency that would be responsible for monitoring and regulating Tier 1 FHCs ex ante, would have the most expertise and independence to make sound technical determinations about whether the systemic risk exception should be invoked.

Third, this framework reduces the additional harm and contagion caused by uncertainty in regulatory behavior without losing the benefit of reduced moral hazard. By removing the possibility of bankruptcy, the framework I propose eliminates a layer of legal uncertainty that could contribute to panic and trigger a run on financial institutions. Requiring transparency in the Federal Reserve’s methodology for making a systemic risk determination also reduces the ambiguity in decision-making procedures that can exacerbate a financial crisis.

Acknowledgments:

Copyright © 2010 New York University Law Review.

Alison M. Hashmall is a J.D. Candidate at New York University School of Law.

This Editorial introduces and is an abbreviated version of Alison M. Hashmall, Note, After the Fall: A New Framework To Regulate “Too Big to Fail” Nonbank Financial Institutions, 85 N.Y.U. L. Rev. (forthcoming June 2010).

 
I.
The Common Law of Interpretation

Such interpretive rules of thumb are judge-made.  I argue, therefore, that the common law should be understood to encompass interpretive methodology in addition to the traditional substantive common law subjects, such as the law of torts.  Judge-made rules of interpretation develop because methods of legal reasoning attach to results and weakly constrain judges in future cases.  Thus, the canons form a body of interpretive common law that legitimizes sources and methods of legal reasoning, all with an eye toward how the legislature would want its intent to be effectuated.  The common law canons do more to limit the sources of legal reasoning than they do to order them with precision: resorting to context is fine, resorting to statutory purpose is fine, but employing outlandish extrinsic sources of meaning is not.  However, the common law of interpretation has no prevailing rules for when an interpretation based on statutory purpose should trump a conflicting interpretation based on context.  In this sense, though the “canons of construction are no more than rules of thumb that help courts determine the meaning of legislation,”¹ they do, in fact, constrain and direct interpretive approaches to statutory construction, albeit weakly.

Judges, however, are not the only players in the development and ordering of canons of construction.  When a legislature enacts statutes, its members have certain ideas about how those words convey meaning.  To economize language and the legislative process, the legislature may rely on prevailing rules of interpretation extrinsic to that particular statute.  Legislatures may even prescribe rules and methods by which they wish their statutes to be construed.  Scholars and commentators often discuss “legislative preferences,” as expressed in statutes, with respect to particular policies.² But “legislative preferences,” as expressed in statutes, with respect to interpretive method remains an uncharted subject.

 
II.
The Codified Canons

Every legislature in the United States has codified canons—interpretive rules of thumb—to guide statutory interpretation, but these codifications have received virtually no attention in the academy.  By comparing the code-wide interpretive preferences of each legislature in the United States with the common law canons,³ I ask whether the common law canons, and the dominant theories of statutory interpretation underlying them, are consistent with how legislatures want their statutes to be interpreted.

I have classified common law canons as codified or rejected by a particular statute.  The principle I have used to determine whether there is a codification or rejection is whether a codification forecloses or endorses the use or nonuse of a particular canon.  These classifications should be treated as signposts to the common law canons rather than fully textured enactments.  It is crucial to consult the source codification because whenever complicated and diverse rules are forced into simplified boxes, resolution is lost; as is clear from the large variety of codifications quoted in the full paper, the rules are complex and multifarious.  This is what the catalog of general interpretive directives looks like: http://www.georgetownlawjournal.org/issues/pdf/98-2/Scott_AppendixB_FullColor.pdf.⁴

 
III.
Interpretive Methodology in an Age of Codified Canons

These legislative interpretive directives, however, are not expressed in a vacuum—the enactments often ratify or reject judge-made canons of construction.  Because the canons are nothing more than methodological common law, legislative enactments that repudiate or support canons should not only be included in any conversation about the canons, but also considered important and controlling.

The codified canons, therefore, provide a measure against which a particular common law canon can be compared.  The three dominant theories of how statutes should be interpreted—new textualism, intentionalism, and pragmatism—are each comprised of a collection of assertions about which interpretive rules are appropriate or legitimate sources of meaning.  Each theory claims individually to be the most appropriate method for construing statutes in a democracy.  Just as the legitimacy of a particular common law canon is tied to each theory’s normative claim that it is the most appropriate method for construing statutes in a democracy, conversely, the legitimacy of each theory depends on whether legislatures have ratified or rejected the interpretive rules upon which the theory relies.  Because the three dominant theories of statutory interpretation are comprised of particular rules (and in some cases a hierarchy of those rules), the codification patterns permit conclusions to be drawn about the extent to which each of the three major theories can vindicate their claim of being the most appropriate interpretive method for democratically enacted statutes.

The codifications suggest that the prevailing interpretive toolbox should be revised and recalibrated, and that the three currently dominant theories of statutory construction—and their claims to being the most appropriate approach for construing statutes in a democracy—should be re-evaluated in light of legislative choices. In short, legislative preferences (1) validate intentionalism despite critical concern about what constitutes dispositive legislative intent, (2) vindicate textualism’s commitments to plain meaning, context, integrity, and coherence, but not textualism’s embargo on extratextual sources, which runs contrary to the law of many jurisdictions, and (3) support pragmatic theory’s elevation of concrete methods of reasoning over abstract methods and its organization of sources of meaning in a hierarchical fashion (for example, statutory text, legislative purpose, specific and general legislative history, the evolution of the statute, and finally, current policy), but legislative preferences do little to create a finely variegated list of which canons trump each other.

These general conclusions, however, should not obscure the fact that interpretive method is jurisdictional; it depends on how the jurisdiction’s legislature directs its statutes to be construed.  In jurisdictions where there are no codified canons and no relevant constitutional provisions, the common law canons—insofar as those baseline rules can be identified—prevail.  But in the absence of legislative or constitutional directives, the common law of interpretation should at least be informed by prevailing legislative preferences.  In the development of the common law generally, courts will look to other jurisdictions for new developments.  As a result, when a judge approaches the common law of interpretation, the interpretive rules of similar jurisdictions should matter in some degree.  Even though “such legislative expressions may not be directly applicable or binding,” in the exercise of their common law jurisdiction “courts should be responsive” to canons codified elsewhere as expressive of legislative interpretive preferences, which “can serve to shape and add content to the common law.”⁵ This is especially so where some codification patterns shake the underlying assumption of common law canons: that they reflect legislative interpretive preferences.  Each time a judge deploys a common law canon, the selected interpretive method should be carefully scrutinized to determine whether it is sound.  The common law judge can either dismiss a canon codified elsewhere as foolish or ill advised—legislatures, after all, can be wrong—or conclude that the codified canon is a sensible aid to statutory interpretation. But legislative preferences in this area should not simply be ignored or ruled out of bounds.

Therefore, interpreters in jurisdictions where common law canons have not been displaced by interpretive statutes or constitutional directives should note the pattern of codifications.  They should resist interpreting statutes in ways that have been widely rejected by legislatures (such as strict constructionism).  Where a canon has been uniformly rejected, even if by only a few legislatures (such as the last antecedent rule or expressio unius), or is fraught by disagreement between jurisdictions that have spoken on the issue (such as the difference between “and” and “or”), an interpreter must do more work to justify its use.

Conversely, interpreters in jurisdictions without interpretive codifications should more freely rely on common law canons that have been vindicated by legislative preferences (such as reference to context, construing statutes liberally, interpreting ambiguous statutes so as to best carry out their purposes, and using legislative history).  Reliance, however, does not mean blind and dispositive acceptance.  The eclecticism reflected in the codifications demands that interpreters evaluate many sources of statutory meaning before settling on the most plausible interpretation.  A legislature should get the type of interpretation it wants, subject to constitutional limitations.  The particular interpretive philosophy of individual judges may matter less where legislatures have codified the methodology they prefer.

Finally, the high degree of legislative activity seeking to control both interpretive method and sources of meaning exposes the lurking constitutional question of whether legislative control over judicial interpretive methodology is consistent with a jurisdiction’s constitution.  The power struggle between courts and legislatures over interpretive methodology is already, in some jurisdictions, a live issue.⁶ At all events, the mass of legislative preferences should play a role in statutory interpretation unless and until courts declare that legislative activity in this area is unconstitutional.

Acknowledgments:

Copyright © 2010 Georgetown Law Journal.

Jacob Scott is an associate in the Boston office of Ropes & Gray LLP.

This Legal Workshop Editorial is based on the following Article: Jacob Scott, Codified Canons and the Common Law of Interpretation, 98 GEO. L.J. 341 (2010).

This Article is also about the United States asylum adjudication system. Asylum challenges the national conscience in distinctive ways. It generates hard questions about our moral responsibilities to fellow humans in distress; the recognition of human rights and our willingness to give them practical effect; the extent of our obligations to those who are not U.S. citizens; U.S. legal and moral obligations to the international community; the roles of state sovereignty and borders; foreign relations; allocation of finite national resources; and racial, religious, linguistic, and ideological pluralism.

Into this emotional and political fray, one often better known for polemic than for hard data, recently ventured Professors Jaya Ramji-Nogales, Andrew Schoenholtz, and Philip Schrag. Through painstaking and thoughtful empirical research, they collected massive data from several different federal bureaucracies and shed important light on the results asylum adjudicators reach. Their impressive study, Refugee Roulette: Disparities in Asylum Adjudication (Asylum Study), highlights the striking disparities in asylum approval rates from one adjudicator to another at various stages of the process.¹ As the authors convincingly demonstrate, asylum outcomes often depend as much on the luck of the draw as on the merits of the case.

The present Article has two aims. The first, which is asylum-specific, addresses the “so what” question. What are the normative implications of the findings reached in the Asylum Study? What problems have the sharp disparities in asylum approval rates caused, and what, if anything, should we do about them? To answer those questions, the Article sets a second objective—to examine, more generically, the role that consistency should play in any justice system. What, exactly, is the relationship between consistency and justice? What forces influence consistency? What instruments might enhance it? And what trade-offs do those instruments present?

Many readers will find the patterns revealed by the Asylum Study shocking. One’s visceral reaction might be that we need to “rein in” the adjudicators. Perhaps, one might think, the answers lie in terminating or demoting the outliers, or subjecting all adjudicators to performance evaluations, or making vastly increased use of agency head review of adjudicators’ decisions, or even imposing mandatory minimum and maximum approval rates.

I argue here that these impulses should be resisted. There are times when we simply have to learn to live with unequal justice because the alternatives are worse. Disparities in asylum approval rates just might be one of those instances. As long as adjudicators are flesh-and-blood human beings, as long as the subject matter is ideologically and emotionally volatile, and as long as limits to the human imagination constrain the capacity of legislatures to prescribe specific results for every conceivable fact situation, there will be large disparities in adjudicative outcomes and justice will depend, in substantial part, on the luck of the draw.

This is not to suggest that inconsistent outcomes are harmless; they impede justice in several ways.  Consistency is a reasonably good proxy for accuracy. If, for example, sixty percent of a group of decisions go one way and the remaining forty percent the opposite way, and the facts are similar enough that the two sets of outcomes cannot be reconciled, it seems likely that at least forty percent of the decisions—and perhaps sixty percent—were wrong.  That conclusion is not inevitable, because not all issues lend themselves to uniquely correct results, and because, even for those issues that do, sometimes the forty percent are right and the sixty percent are wrong.  Still, rational human choice is more likely than random selection to produce correct outcomes. On that assumption, a high degree of consensus makes the hypothesis of the majority being right more likely than the hypothesis of the majority being wrong. There is some reason, therefore, to assume that consistency correlates positively with accuracy.

Probably the most intuitive benefit of consistency, however, is the principle of equal treatment—the notion that inconsistent outcomes are substantively unfair. When two people are situated identically in all legally relevant respects, the law should treat them the same. To the extent reasonably avoidable, the outcomes should not hinge on the biases of whichever adjudicator the individual had the good or bad luck to draw.

Certainty, and the predictability that it brings, are commonly cited as a third set of reasons to strive for consistent adjudication.  Conflicting results breed uncertainty in two ways. They do so directly, by preventing the parties from predicting how their dispute is likely to be resolved. Consistency might also contribute to certainty and predictability indirectly, by enhancing the stability of the law.  Conflicts among equally authoritative bodies have ways of being reconciled eventually, either by gradual evolution or by pronouncements from above. The mere presence of a momentary conflict, therefore, can create at least the perception of imminent change, leaving affected sectors of the population uncertain how to plan for the future. Consistency reduces this uncertainty.

Inconsistency can also impair efficiency. The very fact that two decisions are inconsistent means that the second adjudicator had to revisit the analytical efforts of the first one rather than simply adopt the first adjudicator’s reasoning and result. It also means that, at some point, some government actor will have to step in to resolve the issue definitively. Moreover, the resulting uncertainty leaves the parties with less incentive to accept the first ruling in their case and more incentive to appeal it. The fact that they cannot predict the result might also discourage future parties from settling. Apart from conserving judicial and administrative resources, encouraging litigation and appeals rather than settlements and acceptance of initial decisions prolongs the waiting times—a key consideration for both the applicant and the government in asylum cases.

A final benefit of consistency is acceptability to both the parties and the general public, a central concern of every adjudication process. The public has a direct interest in consistency, since uncertainty can be problematic for the reasons already given. In addition, there is ample evidence that the public simply perceives inconsistent outcomes to be unfair. As the authors of the Asylum Study observe, we inscribe the equal justice admonition at the entrance to the Supreme Court building, follow stare decisis, promulgate uniform federal sentencing guidelines, employ pattern jury instructions, and allow judges to modify civil verdicts that veer too far from the norm.

All else equal, therefore, it is hard to be against consistency. Indeed, fidelity to the rule of law demands attention to consistency. But all else is seldom equal. Since strategies that enhance consistency can have costs, the real question is how much cost should be accepted in return for whatever amount of increased consistency it will purchase. For one thing, conflicts can have positive effects of their own. As others have observed, a judicial conversation that includes differing views expressed over a reasonable time period can be part of a healthy maturation process that ultimately aids the thoughtful resolution of a difficult issue. In addition, even when the net impact of conflicts is negative (as I assume to be the norm), some solutions might be too costly. Strategies like reductions in adjudicators’ decisional independence, broader or more frequent agency head review of adjudicators’ decisions, heightened judicial deference to administrative tribunals, or even elimination of judicial review of the decisions by centralized tribunals, for example, might well enhance consistency, but at a price that I argue would be excessive.

I offer two caveats: First, balance is not the same as, and does not promote, consistency. At best, balance prevents asymmetric inconsistency. An immigration judge corps that comprises one hundred anti-immigrant zealots and one hundred pro-immigrant zealots would be “balanced” in some sense, but in such a corps the outcomes would be more likely to diverge, not less. Second, inconsistency is a two-edged sword. It can result in an outcome favorable to the asylum seeker when another adjudicator would have reached a different result, or vice-versa. Consequently, neither one’s general ideology nor one’s specific preferences on immigration or asylum should drive one’s degree of tolerance for inconsistent outcomes.

It is useful, therefore to identify the determinants of consistency. I suggest there are at least fifteen, which the full version of this article considers in more detail. Some of those determinants relate to numbers—the number of people who decide each case, the total number of adjudicators or panels in the entire system, and the number of cases. Some of the other determinants relate to the attributes of the adjudicators, including the criteria and procedures for appointing them and their post-appointment training and guidance. Still others relate to the adjudicators’ roles—their degree of independence, the level of deference they are expected to give to other decision-makers, and their obligations with respect to the preparation of reasoned opinions and the use of stare decisis. Finally, I suggest that the level of consistency reflects the nature of the subject matter—in particular, how specialized, complex, dynamic, ideologically charged, and determinate the concepts are.

Of these variables, which ones might account for the disparate outcomes observed in the asylum setting? Given the persistence of large variances at all levels, the elimination of country of origin as an explanatory factor, and the adjudicator-specific patterns revealed by the authors of the Asylum Study, it seems easy to identify the principal contributors. They include the adjudicators’ differing ideologies and attitudes, which affect their preexisting inclinations to grant or deny asylum, and the subject matter, which is indeterminate enough, complex enough, and dynamic enough to give adjudicators relatively broad freedom to reach the outcomes they desire. The attitudes that asylum adjudicators inevitably bring to their work include not only their general philosophies about asylum or immigration, but also their normative conceptions of the adjudicative role, their levels of suspicion about the credibility of the applicants, and the weights they attach to erring on the side of either the individual or the government.

That is unequal justice to be sure, but my basic thesis is that for the most part we shall have to live with it. Unless the adjudicators can be made ideologically homogeneous—a goal I find neither desirable nor achievable—there will always be substantial asylum approval rate disparities and many outcomes will reflect the luck of the draw.

This is not, however, a call for complacency. Consistency is a positive virtue for all the reasons I have acknowledged, and I suggest steps that might enhance it at the margins. The key is to aim low and to settle for treating the symptoms.

Some worthwhile steps could achieve modest gains at the margins.  More detail could be added to the statutes, regulations, and subordinate legislation on such issues as what constitutes “persecution,” though it would be hard to anticipate every conceivable means of persecution from which the law should afford protection.  More adjudicators might complicate the task of achieving consistency, but the increased attention that an enlarged judge corps would allow an adjudicator to devote to each case might well generate a higher degree of consistency. Larger decisional units—for example through the restoration of three-member Board of Immigration Appeals panels in greater numbers of cases and increased use of en banc decisions on recurring issues—could enhance the Board’s internal consistency.  Strengthening the support staff could have the same effect.  So, too, could the provision of counsel to indigent asylum seekers at government expense—at least in cases in which the applicant has cleared some specified threshold requirement of  meritoriousness.  New quality controls for the hiring of asylum adjudicators seem warranted as well.  While personal ideology will always be part of what an asylum adjudicator brings to the job or at least soon develops, the process might more consciously avoid affirmatively factoring a candidate’s ideology into the hiring decision.  Enhancement of the various programs for professional development, the internal and perhaps even the public dissemination of each adjudicator’s asylum approval rates, expanding the Board of Immigration Appeals’ (BIA) scope of review over fact questions (from “clearly erroneous” review to de novo review, for example), and the broader use of reasoned and binding opinions carry additional potential for modest gains in consistency.

Other possible policy responses, while potentially enhancing consistency, are bad ideas nonetheless.  The Attorney General, for example, may review any BIA decision that he or she wishes. This is not an unusual arrangement; Congress often authorizes agency heads to review adjudicative decisions that fall within their domains. To reduce the approval rate disparities identified in the Asylum Study, one might be tempted to urge more frequent Attorney General review of BIA decisions.  Agency head review is often extolled as a means for agency heads to assure inter-decisional consistency and to maintain control over basic policy at the same time.  But agency head review is not essential to either goal. When there is a designated appellate authority such as the BIA, an en banc decision of that tribunal can yield the same consistency as agency head review. Congress could even authorize the agency head to require the appellate tribunal to go en banc in a particular case if there is a concern that an overworked adjudicative tribunal would not do so on its own.

The need for agency primacy over policy matters can be conceded, but again, agency head review is not essential to agency policy primacy. Rulemaking and other policy mechanisms are also available. The multiple experts from whom the agency head can distill advice and perspectives will be just as available in a rulemaking proceeding as they are in agency head review of adjudication. The agency head will be just as capable of asserting agency policy primacy via rulemaking as he or she would be via review of adjudication. And rulemaking will be just as effective in promoting agency policy coherence as review of an adjudicative decision would have been—more so, if anything, since the facts of a particular case will not constrain the reach of the rule. In the asylum context, the arguments based on agency policy coherence are particularly inapt, since the immigration judges and the BIA are within the Department of Justice while the analogous policymaking agencies are now located within the Department of Homeland Security. Agency policy coherence, therefore, is simply not an issue in this context. Moreover, as Jeffrey Lubbers has observed, there is normally a lessened need for political control in “high-volume, fact-based” adjudication processes and those in which benefits are sought.  Asylum fits both descriptions.

While I acknowledge that even adjudicative decisions will often require policy judgments—particularly if the decisions are designated as precedential—the basic functions of the adjudicators are, after all, to find facts, interpret law, and exercise specific statutory discretionary authority. Even when a case presents an important policy question, the agency head can supersede the decision by issuing a generally applicable regulation if he or she wishes—provided, of course, that Congress has delegated the relevant rulemaking authority to the agency head. If Congress has not done so, then Congress’s inaction is itself a policy decision that requires respect.

Further, as the consultants’ report for a leading Administrative Conference study acknowledges, rulemaking has tremendous advantages over adjudication as a vehicle for policy formation.² These advantages include broader public input, notice to Congress, avoidance of adjudicative hearings to resolve issues of legislative fact, avoidance of litigating the same issues repeatedly, more enforceable rules, clearer advance notice of allowable and prohibited conduct, fairer applicability of the rules to similarly situated individuals at different points in time, and the opportunity for affected individuals to make policy submissions before the rule is adopted.  To be sure, notice-and-comment rulemaking can be slow and cumbersome.  But if on a given issue the agency feels that the notice-and-comment procedure would be too onerous, interpretative rules might be an alternative method of influencing adjudicative outcomes in ways that promote the agency’s policy agenda. Interpretative rules do not bind the public, and it is not clear whether they can bind the adjudicators, but they can be issued quickly and without the fiscal cost of notice-and-comment machinery. And when, “for good cause,” an agency feels that the notice and comment procedure would be “impracticable, unnecessary, or contrary to the public interest,” such as when the timing is urgent, the agency can issue an interim regulation. For all these reasons, the need for agency head review is seldom pressing.

Moreover, the central rationale for agency head review—the agency’s political accountability—is also precisely what makes agency head review affirmatively troublesome. The agency head and any subordinates to whom he or she delegates the review function are subject to popular and political pressures. On matters of policy that reality is not problematic; consideration of the public’s preferences is at home in democratic theory. But the essence of the adjudicative function is to find facts and interpret the law, not to please the public. While policy admittedly is implicated in a certain number of cases, the adjudicative function generally requires independence, not political accountability, as discussed below.

Agency head review has other costs as well. It permits a dangerous concentration of power in the hands of a single individual. When the decision being reviewed was rendered by a multi-member panel, agency head review entails the substitution of one person’s judgment for the collective judgment of several adjudicators. And the probability that a strong ideological bias will influence the result is greater when one person is deciding than when the decision is rendered by a randomly selected multi-member panel.

To sum up: There is little need for agency head review. Decisional consistency can be achieved through a combination of the administrative appellate process, legislative rules (including interim rules when necessary), and interpretative rules. Rulemaking and other powers can also preserve agency policy primacy and agency policy coherence. Moreover, agency head review poses inherent dangers to the dispensation of justice, including especially the substitution of a political outcome for one based on an independent adjudicative tribunal’s honest reading of the evidence and the law. All of these considerations have special force in the asylum context, where the stakes are high and the potential for inappropriate political and ideological influence has been amply demonstrated.

Restrictions on judicial review might also be perceived as a way to increase consistency, since the twelve general courts of appeals collectively have far more decisional units than the one BIA.  But the courts are already forbidden to review at least two important categories of asylum denials—those reached in expedited removal proceedings and those based on findings that failure to file the claim within the one-year deadline was not attributable to changed or extraordinary circumstances.³ Still, for the ostensible purpose of reducing disparities in the asylum approval rates, some might be tempted to advocate further restrictions on judicial review of asylum denials. Those restrictions could conceivably include barring judicial review of other selected subcategories of asylum cases, making judicial review discretionary, or narrowing the scope of review.

Admittedly too, there are other costs of judicial review of administrative decisions. They include judges’ lack of political accountability, the risk of error when nonexperts review the decisions of experts, the fiscal expense, and the delays.

In my view, however, the benefits of judicial review overwhelm its costs, particularly in the asylum context. Those benefits too have been explored elsewhere and need only be summarized here.⁴ Probably the most obvious are the independence that judges bring to their work and the corresponding appearance of justice. Judicial independence, in turn, is beneficial for several reasons that are explored below and assumes special importance in asylum cases because of the recent threats to the independence of the immigration judges and the BIA members. Judicial review also adds the perspective of generalist judges to the existing perspectives of the specialists whose decisions are being reviewed. It provides a regime in which legal doctrine can evolve gradually, step by step, informed by the judicial conversation that multiple courts of appeals can supply. And the mere prospect of judicial review should add an incentive for the original decision makers to reach their conclusions thoughtfully and explain them carefully. Given all the recent criticism of the haste with which asylum claims are denied, any sobering effect of judicial review on the administrative adjudicators should be savored.

Despite the inconsistencies that judicial review of asylum claims inevitably introduces, and despite its other costs, therefore, any calls for further restrictions on judicial review of asylum claims should be vigorously resisted. To the contrary, the existing restrictions should be repealed. The Asylum Study demonstrates beyond doubt that ideology explains a large part, if not most, of the striking disparities in asylum adjudication. There is simply no reason to assume that the same biases are strangely absent when the asylum decisions are rendered in expedited removal proceedings or on the basis of no “changed circumstances” or no “extraordinary circumstances.” Nor is there any reason to assume that in these cases the consequences of error are any less grave.

By the same token, there is no convincing reason to narrow the scope of review. It is narrow enough already. As in other removal cases, the court may set aside a finding of fact only if “any reasonable adjudicator would be compelled to conclude to the contrary.”⁵

Replacing review by the general courts of appeals with review by a specialized tribunal might possibly enhance the consistency of the ultimate outcomes, since specialization reduces the total number of different adjudicators who will be needed to handle a given caseload.  Specialization also heightens the adjudicators’ familiarity with analogous decisions. But that strategy too would come at a price—the loss of the generalist perspective, which enables judges to draw guidance from other subject areas and to approach the specialty area with fewer preconceptions or biases. A diet of specialized cases might also make the positions less attractive to potential adjudicators and staff, thus hampering both recruitment and retention of the most talented personnel. Specialization might render the appointment process more susceptible to lobbying pressures, and it might cause the adjudicators to become too cozy with the litigators who appear before them regularly.

Still other policy prescriptions carry the potential for greater gains in consistency but in my view would be especially bad ideas.  Quotas or other direct controls on outcomes would undoubtedly reduce the disparities in asylum approval rates, but as the authors of the Asylum Study point out, there is no way to locate either the “right” percentages or the “right” range; any figures would be arbitrary. Besides, they observe, rapid changes in human rights conditions would render the announced percentages continually obsolete. In addition, most source countries have too few asylum applicants to provide a statistically significant sample.

Other objections might be added. The argument that statistically reliable percentages would be too hard to fashion for many countries assumes a system in which each source country is allotted a different approval rate range. That feature would itself be problematic, reminiscent of the discredited national origins quota system in place from 1921 to 1965.⁶ Yet, without such differentiation, the combination of drastically different human rights conditions from one source country to another and different mixes of cases by source country from one asylum office or immigration court to another would cause outcomes to hinge needlessly on the particular office or court in which the cases are filed. The end result would be less consistency, not more. Finally, numerical controls would require adjudicators to rank asylum claims. There is no uniquely correct way to do so. Some might base their rankings on the probability of persecution, others on the severity of the alleged persecution, still others on the quality of the nexus between the persecution and one of the protected groups. The range of choices would introduce another element of inconsistency, as different adjudicators would attach different weights to different factors and might even misuse that freedom to reintroduce ideology.

I have saved my most serious worry for last. Given the glaring disparities in the asylum approval rates from one adjudicator to another, one temptation might be to “rein them in.” This could be done by taking wayward adjudicators aside, quietly “encouraging” them to increase or decrease their approval rates, and then, after a decent interval, terminating or reassigning those who remain recalcitrant. Performance reviews that take approval rates into account and serve as a criterion for retention or promotion might be another device for eliminating adjudicators who veer too far from the mean.

Any of these strategies might well reduce the disparities in asylum approval rates. But threats to adjudicators’ job security inherently compromise their decisional independence. The actions of attorneys general in the recent past have already dangerously sapped the independence of the immigration judges and the BIA.

In a previous article I explored the implications of decisional independence more generally;⁷ here, they will be just briefly recounted. Decisional independence has costs that have to be acknowledged. Probably the most controversial cost is that, by definition, decisional independence eliminates the adjudicator’s political accountability. When the decision has broader policy implications, as is especially likely when it is designated as binding precedent, that consequence can be viewed as a cost to the democratic process. It is a cost that we readily accept when courts interpret an entrenched Constitution, use judgment in interpreting ambiguous statutory language, or make common law. It is a cost nonetheless.

Some might feel that decisional independence erodes agency policy primacy. The earlier discussion on agency head review of adjudicative decisions, however, showed how agency policy primacy can be preserved through rulemaking and other devices. The admittedly substantial logistical constraints can be minimized. But whether or not one shares that assessment, the point here is that even a passionate advocate of agency head review can applaud decisional independence. Precisely that combination—adjudicator independence in reaching the decision but agency head authority to reverse it—lies at the heart of the compromise philosophy enshrined in the Administrative Procedure Act.⁸

In the administrative context, a further cost, many would argue, is the kind of decisional inconsistency exposed by the Asylum Study. Earlier discussion suggested that decisional independence might have mixed effects on decisional consistency, but let us assume arguendo that the net effect is negative. There is also the related problem of assuring that adjudicative decisions cohere with other expressions of agency policy.

Decisional independence might also impair good faith measures to boost adjudicators’ productivity. While there might be ways for agencies to impart productivity expectations to adjudicators without threatening their independence, the key variable is the consequence of failure to meet those expectations. If the consequences are significant enough to alter the adjudicators’ behavior—and communicating expectations would be useless if they are not—then they will necessarily give adjudicators an incentive to trade off care and quality for quantity, since only the latter can be statistically compiled. For that reason, independence and productivity will always be in tension.

In an adjudicative setting, my view is that decisional independence, despite these potential costs, is critical to the rule of law and to the dispensation of justice. The most familiar benefit of decisional independence is procedural fairness—minimizing adjudicative bias. An adjudicator should decide each case based on his or her honest reading of the evidence, interpretation of relevant legal sources, and exercise of any delegated discretion—not by choosing whichever outcome seems most likely to please the officials who will control his or her professional future. Decisional independence can also discourage what I have called “defensive judging”—playing it safe by avoiding rulings that might prove controversial. Decisional independence can be a vital safeguard for unpopular individuals, minorities, and political viewpoints, and it is crucial to safeguarding constitutional rights against transient majoritarian preferences. And decisional independence is integral to at least the U.S. version of separation of powers.

Apart from those rationales, which I have argued all derive ultimately from fidelity to the rule of law, decisional independence has important side benefits. They include maintaining public confidence in the integrity of the justice system, avoiding “reverse social Darwinism” in which the weakest adjudicators are the ones most likely to survive ideological purges, attracting and retaining adjudicator candidates, and facilitating the continuity of adjudicative outcomes from one administration to its successor.

For all those reasons, further assaults on the decisional independence of the immigration judges and the members of the BIA would be regrettable. To the contrary, their prior decisional independence should be restored and further safeguarded despite any possible negative effects on either decisional consistency or agency policy coherence.

The hobgoblin of little minds it might well be, but consistency matters. The moral imperative of equal justice, the needs for certainty and predictability, the benefits of efficiency, and the objective of public acceptability all demand attention to consistency in any adjudicative framework. The Asylum Study—the product of a prodigious and highly successful effort by Professors Ramji-Nogales, Schoenholtz, and Schrag—has brought home the extraordinary extent to which the outcome of an asylum claim hinges on the particular adjudicators who are assigned the case.

But the forces that generate inconsistent adjudicative outcomes are not easy to constrain, at least not without costly trade-offs. In asylum cases, the unavoidable abstractness, complexity, and dynamism of the relevant legal language make it inevitable that the human adjudicators will bring their diverse emotions and personal values to bear on their decisions. Under those circumstances, we should not expect anything but the sorts of disparate outcomes that the Asylum Study has documented.

There are ways to reduce the inconsistencies at the margins, to be sure. These have been noted. But any strategies that would shrink the inconsistencies more dramatically—and some that would not do even that—have costs that I argue are unacceptably high. These include more frequent agency head review of BIA decisions, additional restrictions on judicial review, transferring review to a specialized court, and punishing wayward adjudicators. Each of those devices would either severely compromise decisional independence or impose other excessive costs.

In the end, we shall have to learn to live with some measure of unequal justice. It is not ideal, but, as they say, it beats the alternatives.

Acknowledgments:

Copyright © 2009 Stanford Law Review.

Stephen H. Legomsky is the John S. Lehmann University Professor at Washington University School of Law.

This Legal Workshop Editorial is based on the following full-length Article:   Stephen H. Legomsky, Learning to Live with Unequal Justice: Asylum and the Limits to Consistency, 60 STAN. L. REV. 413 (2007).

The state secrets privilege is a common-law privilege that allows the federal government to withhold evidence in civil cases if revelation of such evidence would threaten national security.  Many scholars and advocates assert that this privilege is often abused by government officials who use it to cover up misconduct or prevent embarrassment.¹ Furthermore, its extensive use by the Bush administration and its continuing use by the Obama administration in high-profile cases has brought the issue under scrutiny in the mainstream press.  The question of how to reform the privilege is now a prominent public debate.

I.
History of the State Secrets Privilege

The Supreme Court first recognized the state secrets privilege in United States v. Reynolds,² a case in which the government claimed that revelation of an accident report regarding a military plane crash would threaten national security.  In Reynolds, the Supreme Court allowed the government to withhold the report without permitting a judge to review its content in camera.  Decades later, when the document was released, its contents revealed that there had been no threat to national security and that the government had withheld the document to prevent embarrassment.  In recent years, the state secrets privilege has been used to quash civil cases regarding employment discrimination, retaliation against whistleblowers, and torture.

II.
Recent Calls for Reform

Calls for reform of the state secrets privilege have largely focused on what went wrong in Reynolds:  Had the judge simply been allowed to review the document, the argument goes, the false claim of state secrets would have been prevented.  Drawing from this logic and from many scholarly articles advocating reform, Congress is considering a bill that would require substantive judicial review of the privilege.³ Under this bill, if the government invokes the privilege, a judge would be required to review each document and determine for herself whether its revelation would harm national security.

The Obama administration, on the other hand, recently announced that it would implement new administrative mechanisms within the executive branch to reform the privilege instead of relying on judicial review.⁴ This announcement has been met with criticism from congressional leaders and civil liberties advocates who argue that any meaningful reform of the privilege would require external oversight by the judiciary.⁵

III.
Problems with Recently Proposed Solutions

My upcoming Note⁶ argues that judicial review alone is unlikely to reform the state secrets privilege effectively because it cannot address the underlying incentives that encourage abuse by the executive branch.  Prior to the new rules issued by the Obama administration, invoking the privilege was extremely easy and had few consequences for the executive branch.  While judicial scrutiny might create some disincentive for invoking the privilege frivolously, it is unlikely to completely deter abuse for two related reasons.  First, a risk-averse judiciary is unlikely to challenge the government’s assertions of grave harm to national security except in the most blatant cases of abuse.  Second, most abuses of the privilege are unlikely to be as blatant as in the Reynolds case.  Instead, they would likely involve close calls regarding the degree to which releasing information might harm national security or the extent to which certain information—for example, how many (or how few) Arabic-speaking employees work at the FBI—might be a matter of national security.

IV.
A Better Reform of the State Secrets Privilege

My Note builds the case that administrative law-based reforms, like the ones proposed by the Obama administration, will deter executive branch abuse more effectively than judicial review alone by discouraging invocation of the privilege in the first place.  I argue that administrative law mechanisms have been used effectively in other areas of national security law to deter abuse.  By making invocation of the privilege more administratively burdensome and by putting the professional credibility of officials who will not benefit personally from the invocation of the privilege on the line, the reforms proposed in my Note would more effectively discourage over-reaching in the state secrets privilege context.

This argument does not compel the conclusion that the Obama administration’s proposal is sufficiently comprehensive to deter all abuse of the state secrets privilege.  Legislation mandating (and expanding upon) the new administrative requirements still may be necessary in order to prevent the next administration from rescinding such requirements if they become inconvenient.  My Note simply makes the case that advocates who seek to reform the privilege should build upon internal administrative law mechanisms designed to balance incentives rather than solely rely on the judiciary to police the privilege.

Acknowledgments:

Copyright © 2009 New York University Law Review.

Beth George is a J.D. Candidate at New York University School of Law.

This Editorial introduces and is an abbreviated version of her full-length Student Note: Beth George, Note, An Administrative Law Approach to Reforming the State Secrets Privilege, 84 N.Y.U. L. REV. 1691 (2009).

Environmental law scholars argue that federal ceiling preemption has pernicious effects.¹ These scholars fail, however, to adequately address the risk that states may adopt tough environmental regulations because they can externalize costs to other states, which may allow large pro-regulatory states like California to effectively dictate suboptimally stringent national standards.  Cost externalization—an inevitable byproduct of dividing the nation into fifty geographic zones—refers to instances where states and their residents do not bear the full cost of the regulations they pass because significant costs are borne by out-of-state consumers and producers.  This Editorial contends that the case for federal ceiling preemption in the area of environmental law based on cost-externalization arguments is weak.  It does so through a case study of California’s regulations of greenhouse gas emissions from motor vehicles.

California’s emissions regulations were initially preempted under the Clean Air Act by the Bush administration’s decision to deny its waiver request.  The Obama administration has reversed this denial and has also taken steps to combine California’s emissions regulations with the federal corporate average fuel economy program.² If the program succeeds, it will again impose a single national fuel economy standard.  Yet the history of motor vehicle regulation strongly suggests that any equipoise between federal and state regulations may be temporary, and that California (and states that choose to follow California) might again impose motor vehicle regulations that outpace the rest of the nation.  This Editorial addresses the costs consumers and producers in other states face from such leadership.

This Editorial argues that state regulations that provide manufacturers with sufficient flexibility to meet standards without disrupting economies of scale can largely avoid externalizing costs to out-of-state consumers, and that states often also have to consider, at least indirectly, the interests of out-of-state producers when issuing regulations.

 
I.
State Environmental Regulation and Federal Ceiling Preemption

States have developed innovative environmental policies.  Perhaps most prominently, every state has now taken some action to address climate change, adopting strategies ranging from targeted measures to increase energy efficiency and promote alternative energy to far broader proposals to cap greenhouse gas emissions across entire state economies.

California has also led an effort to regulate greenhouse gas emissions from motor vehicles, relying on its unique authority under the Clean Air Act.  The Clean Air Act preempts states from enforcing their own motor vehicle emissions standards, but makes an exception for California, which may petition the Administrator of the Environmental Protection Agency (EPA) for a preemption waiver.  In 2002, California’s legislature passed the nation’s first law to regulate motor vehicle greenhouse gas emissions, and the California Air Resources Board (CARB) subsequently promulgated regulations in 2004 establishing specific greenhouse gas reduction standards.  While other states cannot adopt their own emissions standards, they can opt into California’s program, and sixteen states have chosen to do so to regulate greenhouse gases.

Before California’s emissions regulations can become effective, the EPA must approve California’s waiver petition.  In December 2007, under the Bush administration, the EPA denied California’s waiver petition—the first time it had done so in decades and the only waiver request it ever denied in full.  Upon taking office, the Obama administration immediately decided to review this determination, and the new EPA Administrator granted California’s petition after completing formal reconsideration.³ The Obama administration also plans—through joint action of the EPA and Department of Transportation—to increase federal fuel economy standards, and harmonize them with California’s stricter standards.⁴

For now, then, it seems that those favoring more stringent regulation of motor vehicles to help combat global warming have won.  But the gains may be temporary and they do not resolve the structural question of the proper role for the states in environmental regulation.  As exemplified by the initial denial of California’s waiver petition, federal ceiling preemption in environmental law threatens state regulatory activity.  Over the past decade, federal ceiling preemption has expanded in environmental law as the result of broad interpretations of existing statutes by courts and agencies, as well as the enactment of new legislation by Congress.  Even presuming a Democratic Congress and presidential administration will be more interested in preserving the states’ ability to adopt stringent environmental regulations, questions about the proper scope of federal ceiling preemption are sure to arise.  For instance, business leaders have argued that preemptive federal policies are necessary to address climate change, while state leaders have supported federal action but have lobbied against federal ceiling preemption that would disable the many state, regional, and local programs under development.  In fact, a provision in the Waxman-Markey Bill, a leading climate change and energy bill that passed the House on June 26, 2009,⁵ imposes a five-year moratorium on state cap-and-trade programs for greenhouse gas reduction.⁶ Properly analyzing such questions requires precision about the tradeoffs involved in either permitting or preempting more stringent state environmental policies.

 
II.
Cost Externalization and Federal Preemption

Federal ceiling preemption has costs, but preemption may be justified when state regulation externalizes costs.  Cost externalization is undesirable because it distorts the incentives of state governments and regulators, leading them to enact stringent environmental regulations to gain benefits like environmental protection for their constituents at the expense of others.  Federal ceiling preemption is proffered as a solution to this problem, as it allows the federal government to consider and balance all of the costs and benefits of regulation.

A principled argument against the use of federal ceiling preemption in environmental law must therefore address whether and when state environmental regulations externalize costs.  Proponents of the extensive use of federal ceiling preemption suggest state regulations may often externalize costs, particularly when states regulate products with national markets and economies of scale in production.  California’s regulation of motor vehicle emissions is referenced as a paradigm example.  These regulations, the argument goes, may externalize costs to both out-of-state consumers and out-of-state producers.  Consumers are adversely affected if the regulations increase the cost of motor vehicles in their state, either by reducing economies of scale and increasing marginal production costs, or by forcing manufacturers to adapt vehicles to meet more expensive California standards nationally.  Producers and their workers may be harmed if the regulations make automobiles more expensive, which could decrease sales, reduce profits, and negatively affect employment rates.

This Editorial’s case study of California’s regulations suggests, however, that these fears may be overblown.  California’s regulations are designed in a way that minimizes disruption to economies of scale and mitigates cost externalization, and the argument that California is insulated from the costs it imposes on producers beyond its borders seems exaggerated.

 
III.
California’s Greenhouse Gas Regulations for Vehicle Emissions

California’s regulations under Assembly Bill 1493 (A.B. 1493),⁷ which limits tailpipe emission of greenhouse gases, grew out of the state’s preexisting Low Emission Vehicle Program (LEV).  Following the model of prior LEV regulations, the A.B. 1493 regulations set emissions standards for two different categories of new vehicles sold within the state (determined by vehicle weight) based on grams of carbon dioxide emitted per mile driven (calculated on a fleet-average basis).  The regulations do not directly impose fuel economy standards—and indeed, legally they may not under the federal Energy Policy and Conservation Act⁸—but the majority of emissions reductions are accomplished through enhanced fuel economy, and greenhouse gas emissions standards can be converted to approximate miles-per-gallon requirements.

As discussed above, in 2007 the EPA denied California’s Clean Air Act waiver request, preventing, at the time, the implementation of California’s vehicle emissions regulations.  In 2009, the EPA pivoted, as it withdrew its earlier denial and granted the waiver.  Assuming that both actions were within the EPA’s legal discretion, which is the better policy?  The answer ultimately turns, at least in part, on whether the initial waiver denial can be justified on cost-externalization grounds.  In other words, do California’s greenhouse gas emissions regulations enable it, as a single large state, to impose substantial costs to consumers and producers beyond its borders and effectively dictate national policy?

Looking first at the regulation’s potential impact on out-of-state consumers, the vehicle emissions standards’ reliance on fleet-wide averages—rather than vehicle-specific mandates—allow manufacturers to meet California standards without having to make modifications across product lines, minimizing the impact on out-of-state consumers.  Manufacturers do not have to build new “California cars.”  Instead, they can comply by altering the mix of car models sold in a jurisdiction.  Even for 2009 model-year cars—2009 being the first model year to which California’s regulations were scheduled to apply—most leading automobile manufacturers had at least some vehicle models in their fleet that comply with California’s standards.  California’s regulations admittedly may increase the cost of less fuel efficient vehicles by altering patterns of production and diminishing economies of scale.  However, they should also correspondingly increase the market for high fuel efficiency vehicles, creating additional economies of scale for these vehicles and making them less expensive both in California and in other states.

The car industry has actually recognized the possibility that California’s regulations could be satisfied by adjusting in-state sales.  In Green Mountain Chrysler Plymouth Dodge Jeep v. Crombie⁹—a case brought in federal district court by members of the car industry to enjoin on preemption grounds Vermont’s adoption of California’s standards—a General Motors executive director testified that the company might have to gradually restrict products offered in jurisdictions like Vermont that adopted the more stringent emissions regulations.  While this prediction was offered as an argument against the state regulations, the case for preemption is thin when states primarily restrict the consumption options of their own constituents.  If state residents become dissatisfied with their consumer options or come to believe the regulations are ineffective,¹⁰ they can pressure their state government officials to change them.

Commentators have also suggested that California’s greenhouse gas regulations will negatively affect out-of-state producers.  It is reasonable to presume that the regulations will impose initial additional costs on the already struggling car industry, though the regulations might also benefit the industry in the long term.¹¹ In any case, the fact that California’s regulations may affect Michigan’s economy does not establish that the regulations are suboptimally stringent, and it is not sufficient to justify federal ceiling preemption.  The key issue is whether stringent regulations result from cost externalization or whether state regulators and politicians properly consider the interests of other states.

To this end, the argument that California voters have little incentive to protect Michigan’s interests is appealing in the abstract, but the case is overstated.  First, California voters do bear some of the costs of their more stringent vehicle emissions regulations in the form of increased prices and possibly reduced consumer options. If producers can pass on their increased production costs to consumers within the jurisdiction, then the cost of the regulation will be at least partly internalized. Second, the notion of a complete “free lunch” for legislators is rather idealized.  Out-of-state interests often lobby state governments, and they may have the support of in-state groups with whom their interests align, such as car dealerships supporting automobile manufacturers.  Additionally, the line between in-state and out-of-state interests is blurred by the widely dispersed ownership of large public companies like Ford Motor Company.

 
Conclusion

Despite broad suggestions to the contrary, the scope of cost externalization for particular state environmental regulations may turn out to be fairly minimal.  As the magnitude of any regulatory cost externalization decreases, it becomes increasingly doubtful that federal ceiling preemption is desirable in light of the benefits of state-based environmental regulation, including the value of tailoring standards to local preferences and conditions, the importance of state-level experiment for technology development, and the desirability of decentralized democratic decisionmaking.  Policy makers should therefore look closely at the realities of cost externalization before determining whether federal ceiling preemption is appropriate.

Acknowledgments:

Copyright © 2009 New York University Law Review.

Brian T. Burgess is a Law Clerk for Judge Guido Calabresi. He wrote this piece while he was a J.D. Candidate at New York University School of Law.

This Legal Workshop Editorial is based on the following Student Note: Brian T. Burgess, Limiting Preemption in Environmental Law: An Analysis of the Cost-Externalization Argument and California Assembly Bill 1493, 84 N.Y.U. L. REV. 258 (2009).