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Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

For much of the 20th century, the steady growth of the administrative state led to increased calls for the codification of a legal and regulatory framework through which people and industries could be provided a degree of certainty in the course of their day-to-day activities. In the past few years, the scope of change in this field has accelerated, with executive aggrandizement at the center of the discussion. From a constitutional standpoint, the ongoing question remains to what extent the executive branch can increase its power while remaining within the strictures of the separation of powers.

To that end, the Supreme Court recently held 6-2 in Environmental Protection Agency v. EME Homer City Generation, L.P. that the EPA's Cross-State Pollution Rule as interpreted was valid, overturning the D.C. Court of Appeals.

Legally speaking, the reach of the EPA under the Rule turned on the meaning of the phrase "contribute significantly." Section 110(a)(2)(D)(i)(I), dubbed the "good neighbor" provision, says that states must prohibit emissions in amounts that "contribute significantly to nonattainment, or interfere with maintenance by, any other State with respect to any such national primary or secondary ambient air quality standard."

The EPA claimed that, because the statute was ambiguous as to what factors could be used to determine what constitutes "significant," the EPA should have the right to fill the gap with their own cost-benefit analysis; specifically, they wished to use the nature of the technology a given state employed to determine whether the state is meeting its obligations under the good neighbor provision. For example, if a state was using EPA-approved technology to mitigate its pollution, it would be more likely to be deemed to be complying with the good neighbor provision.

The petitioners, which included states and some private companies, claimed that "significant" could not be interpreted this way, because the Clean Air Act only mandates that emissions are to not interfere with other states, and says nothing about the means used to achieve that goal. Therefore, the Rule allowing the EPA to factor in the technological means of emissions reduction would stretch agency authority in violation of the language of the statute.

From a policy perspective, the Court siding with the EPA on a statutory vagueness issue portends other potentially nefarious applications of agency aggrandizement. As the Wall Street Journal notes, the case deals with a novel approach to administrative regulation:

No one disputes the EPA's authority to regulate air pollution across state lines, but for the first time the EPA imposed its standards without giving states a chance to offer their own plans. Also for the first time, the agency imposed a uniform compliance standard regardless of an individual state's contribution to cross-state pollution. This is aimed at Texas and other states that have large coal-fired electric plants and forces higher reductions in emissions than states might otherwise have to implement. It is part of the Administration's agenda of imposing via regulation what it can't get through Congress, even a Democratic Senate.

By favoring certain types of emissions-prevention technologies, the EPA would be able to impose politically-favored regulations on the states in circumvention of individual state legislatures and principles of federalism, all under the guise of an "ambiguity" in a statute when the agency does not agree with the statutorily-stated words. The danger ultimately lies in the precedent being laid out; namely, that an agency is presumptively deemed to be in the best position to resolve statutory ambiguities, and should be allowed to proffer rules to resolve those ambiguities. The safer presumption would lie in placing the benefit of the doubt with the politically-accountable Congress, i.e. assuming that Congress did not include the technology analysis in the statute because it did not wish to do so. Within this approach, Congress could change the statute if it so chose, and the nexus of the policy-making decision would still remain in its rightful place. Moreover, it would prevent agency aggrandizement from potentially spreading to other agencies and becoming a systemic problem.

If the country is to retain its constitutional balance, the separation-of-powers doctrine must be respected as a guiding force, even in the midst of the changing needs and obligations of a modern government.

Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

In a general, political sense, people tend to characterize "populism" as a movement against corporate marauders who are perpetually searching for a way to fleece the unsuspecting average citizen. In order to curtail this supposed abuse, government should step into various facets of the corporate/individual relationship to make sure that there remains what it considers a proper balance of interests.

In a larger, economic sense though, populism is better characterized as a movement of capital from government to government-favored enterprises. The latest example comes to us from Maryland. Steve H. Hanke, professor of applied economics at Johns Hopkins University, and Stephen Walters, a fellow at JHU's Institute for Applied Economics, Global Health, and the Study of American Business, have written an op-ed examining the manner in which the Maryland government is misallocating capital by dispersing it amongst projects that it believes will become profitable, rather than allowing that capital to remain in the market and flow to its most productive uses. As a result, those entities or people that are closely connected to the government would naturally have more influence in determining how the money would be allocated. Hanke and Walters highlight a recent example:

A small but telling example is in Towson, a thriving suburb of Baltimore, where the proprietors of a sports-themed chain restaurant called the Greene Turtle recently built a rooftop bar so patrons could imbibe at altitude. Just good old American enterprise at work, except for the fact that, according to the Baltimore Sun, $505,000 of the $890,000 cost came out of taxpayers' hides as low-interest government loans, much of which will be forgiven if the enterprise meets modest "employees added" targets and stays open five years.
At the grand opening on Jan. 2. Maryland's First Lady, Katie O'Malley, presented a governor's citation to the bar's proprietors, who happened to be childhood friends. It's remarkable how often development dollars trickle first to cronies or political donors.

Besides the obvious ethical conundrums involved in these sorts of deals, the economic impact is ultimately devastating. As this money flows to government-favored projects, the importance of economic viability studies and projections concomitantly lessens. Instead, the judgment of the executive and legislative branches replaces any institutionalized process. The ad hoc nature of this routine ultimately leads to ad hoc results:

In 2006, Martin O'Malley --then Baltimore's mayor, now the state's governor and a presidential aspirant--decided that the Baltimore Convention Center needed an adjoining hotel. Private investors disagreed, so City Hall "invested" $300 million to enter the hospitality industry. Since opening its doors in August 2008, the Hilton Baltimore--city-owned but managed by the global hotelier--has recorded more than $50 million in operating losses.

Baltimore's relentless and much-applauded campaign of subsidized development along its waterfront provides another example. Tax breaks of more than $200 million for a $1 billion project on a former industrial site called Harbor Point--justified with the usual claims that this will create thousands of jobs--have provoked demonstrations by citizens who now realize that these promises are empty. Since 2001, the city has bled 49,000 jobs.

As the failure of these projects begins to increase in frequency, the government will be forced to either cut spending, raise taxes, or increase borrowing to make up for the revenue shortfall. As Hanke and Walters note, Maryland has opted for the second one, raising taxes on personal and corporate income, while adding a slew of excise taxes to the mix. Even still, Maryland faces a structural deficit of $166 million over the next two years, while dealing with the exodus of 66,000 residents and $5.5 billion in taxable income from 2000-10. Consequently, the government will have to increase taxes again to make up for the shrinking of the tax base. This vicious cycle of tax-and-spend will continue until Maryland realizes that economic viability must be the primary criterion utilized when making investments, and that the market is in the best position to make consistent, wise investments.

Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

The Manhattan Institute's Center for Legal Policy has just released a new report detailing the expanded use of deferred and non-prosecution agreements by the federal government against various companies, entitled "The Shadow Lengthens: The Continuing Threat of Regulation by Prosecution." The report can be found here.

While the federal government justifies the increased use of DPAs and NPAs by pointing out that they allow a company to re-shape its corporate structure without formal charges being filed against them, this contention ignores the fact that the lack of transparency behind the pre-charge agreements can breed governmental abuse by allowing the government to utilize their leverage in crafting the agreement to create desired outcomes.

For example, if a company is threatened with federal charges by the government, it will naturally find it more desirable to enter a DPA or NPA to stave off bankruptcy, avoid radical corporate structure changes, and the bad PR that comes with being charged with wrongdoing. If the government, however, has unmitigated authority to craft DPAs or NPAs as it wishes, the company would have no choice but to accept the agreement in whatever form it may come, or risk formal charges. Ultimately, there needs to be a premise of fairness behind these agreements, i.e. companies having some way to make sure prosecutors do not go too far. Otherwise, it appears that too much power is being left in the hands of prosecutors to determine the corporate shape of entire industries.

Opposing FCPA Overcriminalization
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Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

As the overcriminalization problem has garnered more and more attention, the calls for reform have become increasingly audible in various aspects of federal, state, and local governments. The latest example comes to us from the Texas Public Policy Foundation. Vikrant Reddy, TPPF's Senior Policy Analyst for the Center for Effective Justice, has just released a report detailing salient changes that should be made to the Foreign Corrupt Practices Act to make it more reliable and efficient. Ostensibly, the purpose of the statute is to minimize U.S. complicity in international corruption, but its ancillary effects tend to stifle any beneficial effects of the additional regulation:

The act is emblematic of all the worst aspects of creeping federal overcriminalization, the tendency of Congress to use criminal law to regulate behavior not traditionally considered criminal. The FCPA's most important terms are vague and provide limited guidance for potential defendants; it is enforced in a way that limits critical mens rea protections; and the law does not provide for a "compliance defense" that would allow corporations to demonstrate that violations were a result of rogue employees, rather than inadequate compliance regimes.

The general problem stems from the fact that the premise of the legislation does not account for the creation of a skewed incentive structure. In theory, the FCPA will deter U.S. corporations from using potentially illegitimate means to court business in countries that are deemed "high risk" by using the threat of exorbitant fines and penalties. In order for this linear-style logic to hold, legislators either did not consider the negative externalities involved, or simply deemed them minimal in relation to the benefits of the legislation. Either way, the FCPA has proven to cause significant problems in terms of increasing the uncertainty involved in a given investment, and thus diverting U.S. resources from economically and socially productive uses:

Ironically, in fact, there is evidence that the FCPA has had the counter-productive effect of discouraging American firms from investing in impoverished nations. There is also evidence that the FCPA has stunted the growth of U.S. companies by forcing them to maintain costly compliance regimes. Ironically, these regimes may not even be useful becasue prosecution ultimately depends on how a particular U.S. Attorney will choose to interpret a particular term.

An improved piece of legislation would take into account these proven negative effects, while maintaining the core corruption-preventing purpose of the FCPA.

In other overcrim news, the Manhattan Institute's Center for Legal Policy will soon be releasing a report detailing the changing nature of Deferred and Non-Prosecution Agreements, especially in relation to the increasing number of agreements being utilized by the DOJ and, recently, the SEC. It will also examine the scope and adequacy of judicial review over these agreements.

Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

The purpose of allowing the people to petition their government for a redress of grievances is to ensure that those who have been wronged have the means to obtain compensation for the harm caused. Within this context, the debate over what constitutes "fair" compensation generally turns on two general considerations; namely, 1) whether the plaintiffs who seek a redress have legitimate claims and 2) if so, whether their accrued compensation is justified on the facts and circumstances of the case. Increasingly, the legislative and judicial systems have experienced burgeoning problems in dealing with the legitimacy of both factors.

To this end, Mark Behrens, Cary Silverman, and Christopher Appel of the legal firm Shook, Hardy, & Bacon L.L.P. have authored two important pieces. In terms of whether plaintiffs have legitimate claims, Behrens and Appel write in an op-ed for the National Law Journal that medical monitoring claims have increasingly been utilized by plaintiffs to try and obtain redress without the requisite injury-in-fact necessary to have standing. They laud courts that have attempted to restrict payments for injuries that may or may not occur, often at the expense of those truly harmed:

Suppose you have been exposed to a product that may increase your risk of a disease. You presently have no injury, but you are concerned that you could develop a disease in the future. Should the person who created the situation or made the product associated with the risk pay for you to obtain periodic medical testing?

Courts have come to different conclusions. Most courts over the past 20 years have said no to medical monitoring claims. Since 2000, these include the Supreme Courts of Alabama, Kentucky, Michigan, Mississippi, Nevada and Oregon. A few courts, however, recently have allowed medical monitoring claims in some situations, including the highest courts of Missouri in 2007, Massachusetts in 2009 and Maryland last year.

To the surprise of many in the plaintiffs' bar, a majority of New York's highest court recently joined the list of courts that have said no to medical monitoring for asymptomatic claimants. The New York Court of Appeals said that awarding medical monitoring to those individuals can threaten recoveries for the truly sick and lead to administrative nightmares and public policy judgments that are better left to the legislature.

The New York Court of Appeals reached the right conclusion. For over 200 years, one of the fundamental principles of tort law has been that a plaintiff cannot recover without proof of a physical injury. This bright-line rule may seem harsh in some cases, but it is the best filter courts have developed to prevent a flood of claims, provide faster access to courts for those with reliable and serious claims, and ensure that the sick will not have to compete with the nonsick for compensation.

As to the legitimacy of accrued compensation, Behrens, Silverman, and Appel write in the Wake Forest Law Review that courts are misrepresenting the ratio of actual or potential damage to punitive damages by including extra-compensatory damages that skew the ratio downwards, ostensibly making it seem valid:

Whether extracompensatory damages are considered in the ratio calculation has constitutional and practical significance. For example, if a jury awards a modest $50,000 in actual damages but $1 million in punitive damages, the resulting 20:1 ratio would far exceed the presumptive single-digit ratio limit expressed by the U.S. Supreme Court. But, if the court adds an additional $200,000 in attorney fees to the compensatory damages denominator, the double-digit ratio drops to 4:1 and is less constitutionally suspicious. Inclusion of prejudgment interest, which is set at statutory rates in some states that far exceed inflation, can have an even more significant effect on the constitutional calculus. For example, an Oklahoma appellate court upheld a $53.6 million punitive damage award where actual damages were $750,000; the award included $12.5 million in prejudgment interest to reach a 4:1 ratio. Without prejudgment interest, the 70:1 ratio between the punitive and actual harm damages should have led to a different result.

They theorize that the true ratios (minus the extra-compensatory damages) may be a presumptive violation of due process. If we accept these issues as inherently dangerous to the health of the judicial system, then there needs to be action taken in terms of mitigating the potential damage to defendants. If no action is taken, the chances of truly-deserving plaintiffs receiving compensation goes down and the administrative costs on the court and defendants go up. If defendants are then unable to cover the cost of legitimate claims, the result is no redress for the plaintiff and significant financial harm or bankruptcy for the defendant. It becomes self-evident, then, that if the scales of justice tip increasingly in favor of one party, both parties ultimately suffer.

Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

One frequently cited problem of 401(k) plans is that the volatility of the market puts workers at risk of losing their retirement savings at a moment's notice. In order to hedge against this problem, lawmakers tend to argue that safer alternatives, such as defined-benefit plans or 401(k) plans with limited exposure, should be the industry norm. In terms of both approaches, the argument is that the little to no market exposure will ensure worker returns upon retirement. An oft-overlooked consideration, however, is whether the extent of these returns is sufficient to ensure a stable retirement. Generally, safe investments mean lower yields, which in turn must outpace inflation to allow workers to reap even minimal rewards.

In order to offset this problem, another alternative is to utilize 401(k) plans that take on greater risk, but are able to hedge against this risk by diversifying portfolios to allow for investments with longer time-horizons to counter the effects of short-term volatility and provide returns much greater than the rate of inflation. Scott Higbee, a partner at the global private markets firm Partners Group, argues in today's Wall Street Journal for just such an approach:

Meanwhile, more than 50 million Americans rely on 401(k) plans for their retirement that typically are self-managed and restricted to a combination of traditional assets of stocks, bonds and cash. These defined-contribution plans generally don't provide investors with the opportunity to add a range of alternative assets to the mix. Given the current dismal yields on mainstream fixed-income securities, they should.

Some self-directed retirement savings vehicles such as IRAs allow investors typically with a net worth in excess of $2 million (excluding their primary residence) to invest in alternative assets such as private equity and real estate. But most 401(k) participants don't meet these thresholds and most plans are not designed with portability and liquidity in mind.

By opening up the alternative asset option for all investors, the government would allow 401(k) workers a better chance at securing a stable retirement, while minimizing the concomitant risk of such an approach. If this shift in policy were accompanied by a shift in the regulatory scheme to allow fund trustees a certain degree of immunity from alternative-asset related litigation, while preventing these trustees from aggregating risk in a small number of assets, the incentive to diversify into alternative-assets would certainly be extant. If this scheme proved successful, it could provide an impetus for the reconsideration of the defined-benefit system as well, which would save the government billions in public worker costs. Within the confines of a wise regulatory framework, this is an experiment that seems worth any potential costs.

Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

Broadly speaking, our justice system tends to utilize two main frameworks of punishment: Deterrence and Proportionality. While individual states make individual choices as to which framework best represents the wishes of their citizenry, extreme application of either of these two theories will ultimately serve to cast aspersions on the effectiveness of the other. Two recent cases demonstrate this concept in the context of extreme applications of deterrence.

Evan Bernick of the Heritage Foundation's The Foundry website has recently written about a case out of Alaska in which a man is being charged with the misdemeanor of illegally feeding moose that wandered onto his property. The penalty for the charge is up to $10,000 in fines and a year in jail. Based on the severity of the penalties, it seems reasonable to presume that they are so harsh because they are meant to make it so personally detrimental to feed animals who wander onto someone's property that people would refrain from ever engaging in such activity. Therefore, it seems fair to categorize the theory being utilized as extreme deterrence. From a normative standpoint, the idea of potentially incarcerating someone for a year because they feed animals that wander on their property seems to destroy any sense of proportionality in the law. While there is a place for deterrence as a preventative measure, the extreme application of it serves to render proportionality defunct, and therefore skews the underlying fairness aspect of our justice system.

As another example of this injustice, Brian Doherty of Reason.com's Hit and Run blog has written about how cops are conducting undercover sting operations to catch unlicensed rickshaw drivers who are conducting "illegal tours" in the city of Charleston, South Carolina. The penalty can be more than $1,000 for such an "egregious" act. Besides the potential entrapment issues, the crime of giving tours of the city without a license does not really seem to warrant such a high penalty. If we assume fairness is an important metric by which we judge justice, then this law seems fundamentally unjust. Once again, the deterrence aspect of the law is undercutting the proportional fairness of it.

In order to stem this sort of routine overreaction to seemingly minor infractions, states should strive to reassess the place of fairness in their justice systems.

Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

In the midst of the myriad political battles going on in Washington, there is some good news:

On Wednesday, November 13th, the Furthering Asbestos Claim Transparency (FACT) Act, H.R. 982, was passed by the U.S. House of Representatives on a 221-199 vote. The FACT Act is designed to curb fraud and abuse in asbestos litigation by addressing the problem of false and/or inconsistent claims submitted to asbestos bankruptcy trusts and in the civil justice system.

The legislation would amend federal bankruptcy law to require asbestos bankruptcy trusts to submit quarterly reports to the overseeing bankruptcy court which detail each demand made against the trust by a claimant. The Act would, therefore, provide a link between the separate personal injury compensation systems of the bankruptcy trusts and the civil justice system.

The House's passage of the bill serves as an admirable first step in redirecting trust funds to those who are rightfully entitled to them. The Senate should take this signal from the House and pass the bill with all deliberate speed. The interests of the plaintiffs' bar cannot take precedence over justice for aggrieved individuals with legitimate claims. The interests of commerce and the worker are in perfect alignment. The only loser here would be those lawyers who can no longer make fraudulent claims and get away with it.

Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

One of our fundamental rights as citizens is the ability to seek redress of our grievances. Over time, this practice spread from government to private industry, as workers' rights against their employers in abusive or harmful situations were codified in legislation.

The establishment of the asbestos bankruptcy trust was meant to offer a compromise path through which employees could achieve restitution for their asbestos-related injuries, and employers could avoid cost overruns and premature bankruptcies.

However, the surreptitious manner in which the trusts have been run has allowed for opportunistic lawyers to take advantage of them by submitting frivolous, fraud-riddled claims.

The goal of the trusts stand as the fulfillment of just compensation for injured workers, but the main beneficiaries are turning out to be lawyers who make claims on behalf of "clients."

To remedy this injustice, the FACT Act was meant to mandate quarterly reporting of claims made on the trust, as well as allow for more compliance with third-party discovery requests made on the trust.

Because there are no compliance costs or other significant burdens associated with the law's passage, we can assume the asbestos industry's opposition to the FACT Act stems from a desire to lessen transparency. If there is no transparency, the industry can continue to make baseless claims and reap fraudulent profits.

Lisa A. Rickard, president of the U.S. Chamber Institute for Legal Reform, has written an op-ed detailing the reasons for the asbestos industry's continued obfuscation.

Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

Ever so often, the Supreme Court hears a case that has ramifications for our very constitutional structure.These cases reach into the heart of our government to see what strictures remain between the founding generation and our own.

The Court is currently hearing oral arguments in Bond v. United States, a case dealing with fundamental issues of federalism and separation of powers. Specifically, the issue deals with the extent to which Congress can abrogate state police powers pursuant to the mandates of Congress's treaty obligations.

But in a larger sense, this case speaks to the validity of the framework of analysis the Court has employed since its inception. The presumption of constitutional analysis has always begun on the side of federalism and separation of powers; that is, the Constitution created certain enumerated powers to delegate to the federal government and left the majority to the states, so we begin our analysis from where the nexus of the power was meant to lie. In other words, our underlying premise is always to begin with federalism, and inch towards increasing federal power as circumstances might necessitate.

The Bond court has a chance to take another step towards maintaining the presumption of our Constitution by reaffirming the states' role in criminal prosecutions.

The Wall Street Journal has further details on the salient issues here, and the New York Times has more on the oral arguments here.







Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.