Monthly Archives: May 2013

Back to the Future

May 31, 2013 Sergio J. Campos

Ian Ayres and Joe Bankman begin one of their articles with a Dilbert cartoon (reproduced below). They use the cartoon to show that firm insiders may use nonpublic information to trade not only their own company stock, but the stock of competitors, rivals, and suppliers. Ayres and Bankman ultimately conclude that insider trading of such stock substitutes is inefficient and should be prohibited, but they acknowledge the argument that insider trading may “produce more accurate stock prices.” Presumably one could learn a lot about a company by paying attention to how its insiders treat substitutes for the company’s stock.

DILBERT ©1996 Scott Adams. Used By permission of UNIVERSAL UCLICK. All rights reserved.

Robert L. Jones has written an excellent article that examines one insider’s views of a substitute for judicial review under the Constitution–James Madison, who is arguably the “father” of the Constitution. (P. 5.) The substitute was a proposed Council of Revision, endorsed by Madison as part of the Virginia Plan. It was ultimately rejected at the Constitutional Convention, but Jones argues that one can learn a great deal about our current practice of judicial review by examining the reasons Madison preferred it over the type of judicial review we have today.

As proposed, the Council of Revision granted a qualified veto over all legislation passed by Congress to the President and “a convenient number of the National Judiciary,” who would all come from the Supreme Court. (P. 28.) The veto was qualified because a supermajority of Congress could override it. A Council of Revision was by no means unprecedented. New York had established one at the time of the Convention, and the proposed Council was most likely modeled on the British Privy Council. (P. 28 n.105.) The proposed Council was not limited to reviewing the constitutionality of enacted legislation; as Jones makes clear, Madison contemplated that it would veto legislation on both policy and constitutional grounds.

Why did Madison prefer a Council of Revision to judicial review? Here Jones notes the distinction that Madison made between “democratic legitimacy on the one hand and rationality and deliberation on the other.” (P. 20.) Like his contemporaries, Madison was concerned with the costs of rule by popular sentiment. In his view, the main defect of the Articles of Confederation was that it allowed the states to engage in conduct that, while popular, produced self-defeating results. Thus, he included and endorsed features in the Constitution that checked popular sentiment, such as establishing a representative government where the representatives would, ideally, “lead and shape, rather than simply slavishly follow, popular sentiment.” (Id.) Moreover, and as made famous by Federalist No. 10, Madison believed that the vast extent of the United States would make it hard for any one faction to come to power and subordinate the interests of others.

Nevertheless, Madison was concerned with the “vortex” of power that Congress could become, and he was skeptical that a veto by the president alone would ever be exercised. He thus concluded that granting a qualified veto to two branches – the executive and some portion of the judiciary – would make it easier for both together to wield a veto that would be seen as legitimate by the people.

When the Constitutional Convention ultimately rejected the Council, Madison threw his support behind a Bill of Rights to supplement judicial review. This seems odd because Madison had previously opposed a Bill of Rights out of a fear that the Rights would be unduly narrowed through judicial interpretation.

Why did he change his mind? There are a number of cynical reasons proposed by historians – to circumvent more radical changes proposed by the antifederalists or to win a Congressional seat. But Jones argues that Madison saw the Bill of Rights as a way to lend popular support to judicial review. Madison surmised that a Bill of Rights would be internalized by the people, who would then view the judiciary as “the guardian of those rights.” (P. 99.) Although Madison did not believe that judicial review coupled with a Bill of Rights would gain the same popular support as a Council of Revision, he was enough of a pragmatist to realize that it was the best he could do.

This is a wonderful article and a joy to read. Its best feature, in my view, is how Jones uses this history of Madison’s failed attempt to enact a Council of Revision. One could imagine a legal scholar using this history to support an originalist argument about the nature of judicial review. But Jones avoids this trap, perhaps recognizing that the view of one founding father (no matter how important) is probably too slender a reed to rest any inferences about what all the founding fathers intended.

Instead, Jones considers the normative lessons of Madison’s failed attempt. Jones suggests that we could learn a great deal from Madison’s pragmatic concerns about democracy. The biggest lesson is that we should not equate democracy with majoritarian rule. Madison’s proposed Council of Revision, which would have been able to veto legislation on policy grounds, demonstrates that Madison did not view the judiciary as providing an antidemocratic check. Instead, he viewed the judiciary as performing a crucial democratic function by introducing deliberation and rationality to lawmaking, separated from the passions that drive normal politics. The judiciary was the superego to the legislature’s id. In fact, Madison envisioned that the id still could trump the superego because the Council’s veto could be overturned by a supermajority in Congress.

Moreover, and as Jones discusses, Madison’s proposal suggests that the countermajoritarian difficulty should mean something different entirely. Madison did not believe that the judiciary lacked a democratic justification to make decisions that countered the majority because, again, he did not equate democracy with majoritarian rule. Instead, he was concerned with the all-too-human side of judging – that a judge will be too weak-willed to stand up to public sentiment, no matter how wrongheaded that sentiment may be. For Madison, the difficulty was setting up a governmental structure in which the majority will not riot when judges do their job. This difficulty is not unlike the difficulty of getting yourself to stick to a diet when confronted with a donut. Self-governance, both at an individual level and at a societal level, requires one to think of clever ways to get oneself to do the right thing.

Certainly some of Madison’s views have not survived the test of time. Congress is the least popular branch, not the most popular. But Madison was probably right about the problem of getting the American people to eat their vegetables, so to speak, and it would be wise for us to take these concerns more seriously. If anything, Jones’ article reminds us of the importance of listening to our elders. They know a thing or two.

Celebrating Federal Civil Rulemaking

May 15, 2013 Brooke D. Coleman

The Federal Rules of Civil Procedure are 75 years old this year. Imagine a fete thrown in their honor-mini rule books as party favors, balloons emblazoned with Rule numbers 1-86, and a cake decorated with the words “Just, Speedy, and Inexpensive.”  If there ever where such a party, Lonny Hoffman’s article, Rulemaking in the Age of Twombly and Iqbal, should be the opening toast.  No, his article does not begin with a pithy joke; although, that might be fun. What it does is address the federal civil rulemaking process, an important — but often less discussed — aspect of the civil rules.

Hoffman’s article uses Rule 8’s pleading standard and the Supreme Court’s decisions in Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal as an entry point for his discussion of the federal civil rulemaking process.  First, he provides a thorough historical account of Rule 8.  He relies on primary source material and weaves a rich recounting of the original rulemakers’ Rule 8 deliberations.  The original civil rulemaking committee made a choice in Rule 8 by using the word “claim” in the text as opposed to “fact.”  It chose this language for maximum flexibility and minimum technical wrangling.  This much we already knew. But Hoffman’s account reminds us of Rule 8’s origin before summarizing how the civil rulemaking committee treated Rule 8 over time.  What his account tells us is that the rulemakers had multiple occasions to reconsider the policy choices made in the original Rule 8.  He documents how rulemakers confirmed Rule 8 again and again from the 1970s until just before Twombly was decided in 2007.  While the reasoning of each committee varied a bit — some citing the practical difficulty of amending the rule, some questioning the empirical basis for changing the rule, and some arguing that heightened pleading would be antithetical to the rule’s purpose — it is safe to say that, overall, the rulemakers actively decided to keep Rule 8 as it was.

This all changed when Twombly and Iqbal entered the picture.  This is where Hoffman makes a key contribution.  In contrast to the rulemakers’ deliberative rejection of proposed changes to Rule 8 in the pre-Twombly/Iqbal world, Hoffman’s account shows a rulemaking body whose recent behavior is quite different.  He describes three overlapping cycles of response.  First, the rulemakers proceeded with caution because there was little information about how these cases would affect practice.  Second, along with this initial caution, the rulemakers articulated their belief that Twombly and Iqbal would not have much of a practical impact.  Empirical research conducted by the committee and the Federal Judicial Center further girded this status-quo reaction.  Finally, the rulemakers repeatedly stated that even if rule change was warranted, any such change would be futile.  After all, the Supreme Court decided Twombly and Iqbal.  It seemed unlikely that the Court would approve any rule change to the contrary.

Hoffman takes each of these responses in turn.  He agrees that the committee needed to wait and study before making any changes to the rules.  However, once those studies were conducted, Hoffman challenges how the rulemakers understood the information being presented to them.  Hoffman provides an overview of the major FJC study relied on by the committee.  Building on his earlier critique of the study, Hoffman essentially argues that the results of this study were misunderstood — perhaps even over-understood — by the rulemakers.  Hoffman is not flippant in this assessment, nor is he arguing that the rulemakers were not thoughtful and careful.  Hoffman’s point is that the information presented to the committee had its limitations, and it is not clear from the deliberations that the rulemakers appreciated these limits.  For example, the study stated that there was no “statistically significant” increase in the likelihood that a motion to dismiss would be granted after Iqbal.  Hoffman argues that this statement, without the proper context, could be misunderstood by rulemakers as proving that Twombly and Iqbal were not responsible for the notable increase in grant rates.  Without a background in statistics or the proper context and training for the study’s findings, Hoffman argues that the rulemakers were not equipped to fully appreciate the results.

These statistical blind spots affect policy decisions.  Hoffman argues that if the rulemakers worked directly with the FJC (and other researchers) to frame the research, it would force the rulemakers to carefully focus on the normative implications of both the study and its results.  For instance, if the rulemakers knew that the Twombly/Iqbal study had the potential for producing a false positive error — showing that Twombly and Iqbal were not responsible for the higher dismissal rates when in fact they might have been — the rulemakers might have made a different decision in light of this information.  Given the committee’s pre-Twombly/Iqbal policy of concern that heightened pleading would negatively impact access to justice, rulemakers might have understood the study as showing the cases were possibly responsible for the increase in dismissal rates.  Hoffman’s point is that the research and policy trade-offs should not be isolated from one another.

All of this leads to Hoffman’s final argument.  If the rulemakers approached the empirical findings properly and if they continued to hold their past judgment that Rule 8 was fine as it was, then they might be compelled to amend Rule 8 to overrule Twombly/Iqbal.  Hoffman contends that the rulemakers’ concern about futility — while a fair one — should not stop them from trying to change the rule.  There is value in the process, and if the Supreme Court stops a change to Rule 8, then that signals something to the public and to Congress.  The chance that the Court will not like a change, Hoffman argues, should not prevent rulemakers from doing what they think is appropriate.  And to the extent that the Court’s involvement in the process creates a barrier to reform, Hoffman argues that perhaps the time has come to take the Supreme Court completely out of the process and let the Judicial Conference be the sole stop-gap between the rules committee and Congress.  Either way, Hoffman asserts that the committee should act.  Even if it does not get an amendment passed, the committee would still serve its laudable purpose by trying.

In all, Hoffman’s account of federal civil rulemaking is reminiscent of a best friend toasting at his buddy’s anniversary bash.  There are equal parts celebration, reflection, and optimism.  He celebrates the rulemaking process for standing the test of time.  Yet he delicately, but frankly, articulates the bumps in the road.  Hoffman gives advice about how the process might improve and closes his toast with an inspiring call to action.  After reading his article, we should all lift a glass, wish the civil rulemaking process well, and take a celebratory sip of champagne.

Adequacy and the Attorney General

May 1, 2013 Jay Tidmarsh1 comment

Maggie Lemos’s valuable article tackles one of the hot issues in aggregate litigation: a government (typically acting through its attorney general) using parens patriae suits to vindicate the rights of its citizens.  As I described in my last Jotwell post, access to justice in a mass society is the central civil-justice issue of our day.  Individual litigation of mass-injury claims is a luxury that neither litigants nor the court system can typically afford.  Class actions are shriveling as a realistic alternative in many instances.  Non-class aggregate litigation is infected with its own problems, as the ALI’s recent Principles of the Law of Aggregation shows.  And contracts of adhesion increasingly shunt victims into individual arbitration processes that provide little realistic opportunity for relief — and no opportunity for judicial resolution.

Into this harsh landscape enters the parens patriae action, which has emerged as the newest academic darling with the potential to provide victims of mass injury a measure of justice.  In these actions, the attorney general sues on behalf of those citizens allegedly injured by the defendants’ conduct.  Such a suit ensures a measure of deterrence.  If the recovery occurs and the attorney general establishes a fund against which injured citizens can claim, the suit also results in a modicum of compensation.  Because the suits are controlled by a public official, they also (in theory) come closer to achieving the optimal level of regulatory response, while avoiding the large fees, blackmail settlements, and other agency costs that so often give class-action and other aggregate litigation a bad name.

Sounds great, right?  Not so fast.  Turning the critiques of other forms of aggregate litigation around on parens patriae litigation, Lemos shows that the picture is not as rosy as it seems.  With a strong command of the class-action and aggregate-litigation literature, she explores the various agency costs traditionally associated with private mass litigation, and then demonstrates that these problems (conflicts of interest, lack of client monitoring and control, asymmetric stakes and resources, and inadequate settlements) also infect cases brought by attorneys general.  Attorneys general have their own political interests in prosecuting the claims; their offices are often underfunded; the citizens have little realistic control over litigation decisions; and inadequate settlements can therefore be expected.

Given the risk of imperfect representation, Lemos connects parens patriae litigation brought by attorneys general and class actions brought by class representatives.  In particular, she argues that a parens patriae suit should have preclusive effect only when the attorney general is an adequate representative of her citizens.  With Hansberry v. Lee and its progeny, the Supreme Court established adequate representation as the constitutional floor required to accord preclusive effect in class actions.  By analogy, Lemos argues that giving preclusive effect to a parens patriae judgment or settlement is unconstitutional unless the attorney general meets the same due-process minimum.  This fairly unassailable logic leads to one of two conclusions: either a class-action-style guarantee of adequate representation must be imported into the law of parens patriae litigation, or citizens must be free to pursue private litigation (whether individual, class-wide, or aggregate) without being bound by the result achieved by the attorney general on their behalf.

Lemos prefers the latter solution because it better accommodates the government’s interest in suing to vindicate regulatory and political objectives with victims’ distinct interests in pressing their own claims.  She recognizes that this solution is not ideal, in part because it exposes defendants to “double dip” liability should they first pay some money to the attorney general and then pay more to the victims.  But, as she notes correctly, double dipping is unlikely to be a significant problem for many of the small-stakes cases in which parens patriae actions are filed. And in any event, the court can avoid the issue by finding (in appropriate cases) that the attorney general is an adequate representative, and then allowing citizens who are disappointed with a proposed parens patriae settlement to opt out of the case.

For anyone wishing to engage the issues fully, Deborah Hensler’s short online response also merits close reading. Hensler points out that “[u]sing private litigation to achieve public policy goals raises a fundamental question about the proper balance between public and private law in democratic societies.”  She raises the importance of empirical data and case studies, with which Lemos’s more theoretical piece does not engage, in evaluating both proposals to change parens patriae practice and claims about the adequacy of an attorney general’s representation.  And Hensler suggests that any critique of the present state of parens patriae actions should account for the bleak reality that no method of delivering justice to large numbers of relatively powerless victims — whether a class action, a traditional parens patriae action, or a parens patriae action reformed along the lines that Lemos suggests — is, in the immortal words of Goldilocks, “just right.”  We must still do the best we can to cobble together some combination of concededly imperfect mechanisms to keep the metaphorical bears in check.

Lemos is correct to critique state and lower federal court decisions suggesting that parens patriae actions can bar separate claims by citizens without regard to the quality of the attorney general’s representation.  That case law must be crazy.  Anyone who has read the line of cases from Hansberry through Martin v. Wilks, to Taylor v. Sturgell, knows that no court today could so hold and get away with it.  Parens patriae actions do not have a binding effect on citizens whose attorney general does not adequately represent them.  End of story.  Because these parens patriae actions lack binding effect, attorneys general are not agents of their citizens.  Therefore, Lemos’s concern about the agency costs of parens patriae actions in which representation is inadequate strikes me as misplaced.

The real concern is double dipping.  Because a parens patriae suit in which the representation is inadequate does not bind citizens in subsequent litigation, a defendant might in theory end up paying both the government and the victims for the same harm.  That problem is not unique to parens patriae litigation; it also arises in other situations.  For instance, a class member who fails to receive adequate compensation in one forum may bring suit in a foreign forum.  To the extent that double dipping is an observed phenomenon (and here Hensler’s call for empirical evidence is especially salient), it is far more controllable in the domestic than in the transnational context: parens patriae and private suits can be consolidated, or the amounts paid to a claimant in the parens patriae suit can be deducted from that claimant’s award in the private litigation.  That said, crafting simple and workable solutions to prevent double dipping is a challenge that merits attention as we cobble together a mélange of imperfect responses to mass injury.

A deeper question is the meaning of “adequacy of representation” in the parens patriae context.  If individual litigation is a fond luxury, especially in small-claim consumer cases that have been the traditional grist for the parens patriae mill, we need to accept the reality that the delivery of justice to victims of mass injury inevitably requires some class-action, aggregate, or representative process(es).  (The only alternative, as Hensler aptly puts it, is to “leave the marketplace to the bears.”)  In assembling individual claims into a larger group, however, conflicts among individuals in the group are inevitable.  Hansberry famously held that a class representative could not adequately represent class members whose interests were in conflict.  That “conflict of interest” trope has dominated our discussion of inadequate representation ever since.  It’s time to change our thinking.  We cannot simultaneously maintain both a “conflict of interest” view of inadequate representation and a belief that a class-wide or representative process can ever bind absent plaintiffs.  Something has to give.  If we care about the delivery of justice to victims whose economic reality is the impossibility of individual suit, we must come to a different understanding of adequate representation.

In parens patriae suits, therefore, the important question is not whether we can tolerate conflicts between the attorney general and the represented citizens, but how great the disparity in interest must be before the parens patriae suit loses its preclusive effect.  The answer to that question is complicated, dependent in part on the other realistic options that victims have for enforcing their rights.  Admitting that there are significant agency costs when attorneys general represent citizens is the starting point of the analysis, not the conclusion.  Due process is often sensitive to context, and sometimes even a quarter of a loaf is better than none.