In March, concurrent with the historic three-day oral argument before the Supreme Court considering the constitutionality of the 2010 Patient Protection and Affordable Care Act, we hosted a discussion of the issues in play, including Erwin Chemerinsky, Richard Epstein, Orin Kerr, Gillian Metzger, Michael Rosman, and Nadine Strossen. With the Court announcing its decision today, we've invited these guests back to share their opinions, if they wish, alongside those of the Manhattan Institute's own scholars.
]]>I'm not quite glass-half-full on the ObamaCare decision, but it does have its silver linings. I agree with the dissenters on all points, including the point that Roberts' re-characterization of the "penalty" provision as a tax is essentially an activist decision, for reasons I'll get to below.
On the good news front, the Court struck down (for the first time) a scheme of conditional federal grants as being unduly coercive against the states -- that would be ACA's Medicaid expansion which threatened to pull the plug on all Medicaid dollars for states that don't march in lockstep with the feds.
Also good -- very good -- is the fact that the Court rejected the administrations two primary arguments: that the individual mandate is justified under the Commerce Clause and the Necessary and Proper Clause. So now we know: Congress cannot use its regulatory power to compel activity. There must be some pre-existing activity (and it has to be of an "economic" nature) for Congress to be able to regulate.
But then the bad -- very bad -- news: Roberts accepted the validity of the mandate as a "tax" imposed to promote the "general welfare." As a matter of original meaning, this conclusion is incoherent. Everything we know about the original understanding of the text tells us that it was not meant to authorize Congress to use its taxing power to achieve ends that it could not do under its enumerated powers. Unfortunately, however, that conclusion is supported by precedent going back to the 1937 Helvering v. Davis. It is the Hamiltonian view of "general welfare." I don't buy it, but it was not likely that the Court was going to revive the Madisonian (correct) view of general welfare at this date.
So, Congress cannot compel you to enter into commerce, but it can tax you if you refuse to enter into commerce. What are the limits to this doctrine? As far as I can tell they are:
The dangerous part of his decision is not that he expanded the scope of the "taxing power" (as I explain above, existing precedents already did that) but he greatly expanded the Court's power to reclassify a regulatory measure as a "tax." Roberts relies on the principle that if courts are faced with differing interpretations of a law, they should choose the interpretation that upholds the law. But that assumes that the competing interpretations are plausible. Here, Congress was absolutely crystal clear in categorizing the "shared responsibility payment" as a "penalty," i.e., a means to enforce a regulatory command, and not a tax. The President who signed the law emphatically denied it was a tax.
A Court re-writing a statute to achieve a certain result is the very definition of judicial acitivism. For the Court to rewrite a law so as to impose a tax is doubly disturbing. As the dissenters say: "Imposing a tax through judicial legislation inverts the constitutional scheme, and places the power to tax in the branch of government least accountable to the citizenry."
The second-silliest reactions coming from today's ACA opinion are the conservatives comparing Bush II's nomination of Roberts to Bush I's nomination of Souter. This is hardly fair. Roberts has been a sound fifth conservative vote on critically important First and Second Amendment issues; he's consistently refused to abuse the Eighth Amendment to strike down legitimate exercises of state legislative power in criminal law; he's consistently enforced Congress's limitations on habeas relief. And today, he signed onto both the broadest restrictions of Congress's Commerce Clause power in decades and the first teeth in South Dakota v. Dole, limiting the ability of the federal government to bully the states. (The silliest reaction? The retroactive wishes for Justice Harriet Miers—which would be objectively silly even if it wasn't for the historical fact that Miers was nominated for Alito's seat, not Roberts's.)
One can be dismayed about the broad scope of the taxing power implicated by today's decision, but that is not anything new; for example, you've been paying extra taxes for failing to buy an electric car since at least the 2001 tax year, and extra taxes for not having a residential mortgage for even longer. (These are called tax credits, rather than penalties or taxes, but they're economically indistinguishable at the margin or otherwise, somewhat refuting Richard Epstein's complaint.)
The complaint is perhaps whether the "penalty" should be called a "tax" when Congress refused to call it a "tax"; the dissent would hold Congress to its language, while Roberts, alone, looks purely at the economics of the matter. Both arguments are colorable: after all, the Court has previously characterized "taxes" as "penalties" when they held the character of penalties, so why not vice versa? To which the Scalia dissent responds that this is the first time the Court has done so, and it is the finest of hair-splitting to say that a penalty isn't a tax for purposes of the Anti-Injunction Act, but is for purposes of the Taxing Power inquiry.
I've previously been unhappy with Roberts's tendencies to blue-line rewrite statutes to avoid tough constitutional questions; the canon of constitutional avoidance is one thing, but creating non-existent text to fix problems just seems to me outside the Article III power. We saw this in Free Enterprise Fund, NAMUDNO, and Wisconsin Right to Life. With it happening again today both in the construction of the penalty as a tax and the rewrite of the Medicaid penalties to the states, we can officially note an unhappy trend in the Chief Justice Roberts jurisprudence.
ACA opponents have an out in the Roberts opinion: it remains prohibited for the taxing power to be excessively punitive, a matter not well raised in the briefs. "Because the tax at hand is within even those strict limits, we need not here decide the precise point at which an exaction becomes so punitive that the taxing power does not authorize it" (slip op. 43). But ACA imposes marginal income "taxes" of over 100% on certain members of the middle class who are in a particular donut-hole of income. Expect to see a new challenge in the future on this, and on other aspects of ACA.
Update: Typos in the Scalia dissent—which repeatedly refer to the "Ginsburg dissent"—show that it was originally meant as a majority opinion? [DeLong; see also Bernstein @ Volokh] One hopes very much that the Roberts flip was a sincere decision consistent with his previous overbroad canon of constitutional avoidance, rather than a "switch in time to save nine" prompted by the offensive degree of lobbying and attacks on the Court's integrity by the Obama administration and its allies.
]]>The Court's decision is hard to summarize in a simple headline because of its multiple holdings, which were supported by majority votes comprised of differing subsets of the Justices. To be sure, the bottom-line result of the Court's central holding was to sustain Congressional power to enact the Affordable Care Act's minimum coverage requirement. However, the Court's overall analysis and multiple subsidiary holdings, viewed as a whole, actually endorse a notable reining-in of the federal government's power in several respects. This was underscored by the partial dissent that Justice Ginsburg authored on behalf of the Court's four more "liberal" Justices, objecting to these holdings.
The decision's cutbacks on federal power were reflected in the following holdings, which were supported by the Court's more "conservative" Justices:
Nor are these power-restricting holdings likely to be offset, in terms of federal power in future contexts, by the Court's holding that the minimum coverage provision was authorized by Congress's taxing power. That's because the Court framed this holding extremely narrowly in several ways, including by anchoring it to the specific facts of this unique case.
In short, while the Court did uphold federal power in this case, its specific rationales may well have a net impact of limiting federal power in future contexts.
There are many oddities in the decision of the United States Supreme Court, but there is one trend that seems clearly to have been strengthened by the split decision in National Federation of Independent Business v. Sebelius. On the one hand it looks as though the ability of the federal government to impose direct regulations on individuals has been increased by the decision. There is nothing in the case that cuts back on the scope of Wickard v. Filburn that deals with the ability of the government to regulate all sorts of activities, no matter how small, that have some substantial effect on commerce in the aggregate. That power is the source of great mischief because it permits the federal government to organize cartels in agriculture that the states themselves could never put together.
Yet at the same time, this new found tax is an expansion of the taxing power to cover an odd set of activities including not buying health care insurance. So add the two points together, and there is more direct power in the federal government over individuals than before the case, or at least there is not less.
Yet the Court also struck down the Medicaid extension as coercive against the states. That decision rested on the view that it is not permissible to take away all Medicaid money from states that do not choose to agree to the Medicaid expansion. What it suggests is that the exercise of federal power in commandeering the states is now more limited than we had previously expected. After all, every lower court rejected the challenge that was accepted 7 to 2.
It will take a long time to sort out the relative strength of the two decisions. But make no mistake about it, knocking down a multi-billion dollar initiative is no small potatoes.
]]>Today's decision demonstrates how both difficult and fascinating enumerated powers cases can be. Much can be said, but I would like to address one brief issue. Was there a holding today that the Individual Mandate was not a proper exercise of Congress's Commerce Clause and Necessary and Proper ("N&P") Clause powers?
The Chief claimed that there was, and he did so in Part III-C, which was designated as part of the Opinion of the Court (joined by Ginsburg, et al). Roberts Op. at 41-42 ("The Court today holds that our Constitution protects us from federal regulation under the Commerce Clause so long as we abstain from the regulated activity.") (emphasis added). Really? It is true that five Justices concluded that the Individual Mandate could not be justified under that constitutional power (and the N&P Clause), but four of them (Scalia, Alito, Kennedy, and Thomas) were in dissent (at least as to the constitutionality of the Individual Mandate issue). In United States v. Morrison, the Court specifically rejected the proposition that the conclusion of six Justices in United States v. Guest -- three in a concurrence and three in dissent - that Congress could reach private conduct under Section 5 of the Fourteenth Amendment, was a binding holding of the Court. U.S. v. Morrison, 529 U.S. 598, 624 (2000) ("This is simply not the way that reasoned constitutional adjudication proceeds.").
Today, Justice Ginsburg chided the Chief for even reaching the Commerce Clause question, which she thought was unnecessary given his opinion on the Tax Power. (She was right, of course, but the same thing could have been said about her own opinion.) Did she, and those joining her opinion, nonetheless think that the Court had held that the Individual Mandate was unconstitutional under the Commerce and N&P Clauses, as Part III-C of the Chief's opinion (for the Court, remember, joined by Ginsburg, et al.) says? Isn't unnecessary legal analysis what we call dicta? Curious, then, that the Reporter of Decision, in the summary of the decision, does not identify Part III-A of the Chief's opinion (in which he discusses the Commerce and N&P Clauses) as part of the opinion for the Court. Nor does the heading above the Chief's opinion (parts of which say "Opinion of the Court" and other parts of which say "Opinion of Roberts, C.J.").
So, was there a Commerce Clause holding? Maybe, but I doubt any subsequent Court that wants to ignore it will have difficulty doing so.
Now that the anticipation is over and the decision has been read (all 193 pages), attention must focus on how, if at all, the Court's decision has changed the law. There were three major conclusions to the Court's decision.
First, the individual mandate is within the scope of Congress taxing power. This, unquestionably, is the most important aspect of the Court's decision and it doesn't change the law at all. The Court's conclusion that the individual mandate is a tax breaks no new ground. The Supreme Court previously had said that the label used in not determinative. Nor is it at all surprising that this was treated as a tax. It is in every way functionally a tax: it is collected by the IRS, it is calculated by a percentage of income (or a flat rate), and it generates revenue for the federal government. Not one federal tax has been declared unconstitutional since 1937 and so upholding this one is not remarkable in terms of the law.
Second, five justices said that the individual mandate is outside the scope of the commerce power. From one perspective, this is just dicta because the Court upheld the individual mandate on other grounds. But Chief Justice Roberts said that he needed to decide this in order to justify interpreting the individual mandate as a tax. That seems a dubious justification for his addressing the commerce power or making his discussion a holding. But putting that aside, five justices said that Congress cannot regulate inactivity. This seems highly questionable as applied here because everyone is engaged in activity with regard to health care; they are either purchasing health insurance or self-insuring. Congress was regulating the latter. Still, it is not clear how much this will matter in the future since it is rare for Congress to require activity.
The third holding is the most important in changing the law: the Supreme Court said that the burden on the states with regard to Medicaid funding exceeded the scope of Congress's spending power because it was too coercive. This is the first time in American history that conditions on federal spending have been declared unconstitutional as being unduly coercive. Many federal spending programs impose conditions on states taking federal money. There likely will be many challenges after the Court's decision. But the Court did not give any criteria as to how to decide when conditions are so coercive as to violate the Constitution.
Overall, the decision must be seen as following 75 years of Supreme Court decisions upholding federal social welfare legislation. If the Court had done anything else, that would have been a very dramatic change in the law.
In my estimation, the most significant part of yesterday's Obamacare ruling was not its handling of the individual mandate but its limitation on Congress's power to coerce states through federal funding--a holding that will become critical as the health-care law is implemented and in many other cases in the future.
To uphold the ACA's "individual mandate" and its private-insurance reforms, the Chief Justice somewhat brazenly rewrote a regulatory penalty as a tax - a reading his opinion itself admitted was not the most common-sense reading of the statutory language. The Chief's reading was hardly a model of statutory construction, but it was motivated by the conservative doctrine of "constitutional avoidance": the principle, first embraced by Chief Justice Marshall in the 1833 case Ex parte Randolph, that given the "delicacy" of the courts overturning the acts of coordinate branches (and the difficulty of amending the constitution), "a just respect for the legislature requires, that the obligation of its laws should not be unnecessarily and wantonly assailed" through the judiciary's application of the constitutional power of judicial review.
The Chief Justice was very likely motivated by institutional concerns, as outlined persuasively by Charles Krauthammer. As Krauthammer notes, as Chief Justice, Roberts wears "dual hats," and in his role as "custodian of the court" he is "acutely aware that the judiciary's arrogation of power has eroded the esteem in which it was once held." Krauthammer is right that most of this arrogation occurred during the liberal era of Earl Warren and William Brennan, but also that the Court's decision in Bush v. Gore to halt the recount in Florida in a presidential election--however necessary to avoid a constitutional crisis being engendered by an irresponsible Florida judiciary--substantially eroded the Court's public perception, particularly given that case's 5-4 ideological split. The president had already shown an unhealthy willingness to demagogue the Court over its Citizens United decision and had signaled an intention to do the same should the Court overturn his administration's signature legislative accomplishment on constitutional grounds. Roberts was almost certainly haunted by the specter of Schechter Poultry, in which the Court in 1935 overturned the National Industrial Recovery Act (a signature of Roosevelt's New Deal, however misguided), and proceeded to provoke a showdown with the president that culminated in FDR's threat to "pack the Court" with new appointees.
Thus, the Chief Justice turned to perhaps disingenuous statutory construction to uphold the law in question. In the process, however, he labored to lay out some conservative markers that set boundaries on Congressional power and signal that the federal government is not one of unlimited powers under the constitution. To be sure, the taxing power is broad, but as Ted Frank suggested, that was already the law of the land before yesterday. (As I noted in my instant reaction to the case over at NRO, "Congress already can and does penalize us for acting or not acting in hosts of areas, including such sacred realms as getting married or having children.") But Nadine Strossen is right (in her analysis if not its normative framing): when you look at this decision in terms of constitutional interpretation, rather than statutory construction, you see a Court sketching out definitive limits on the application of Congressional power through the Commerce Clause, Necessary and Proper Clause, and Spending Clause.
Indeed, like Jay Cost, I see echoes of Chief Justice Marshall in Roberts's gambit here. In Marbury v. Madison, Marshall gave Jefferson what he wanted (he refused to order that Jefferson issue mandates to the remaining Federalist judges appointed under the Judiciary Act of 1801) even as he laid down the principle of judicial review. That decision paved the way for Fletcher v. Peck--when the Court assumed the power of judicial review over states--as well as the Court's broader readings of the Commerce Clause (Gibbons v. Ogden) and Necessary and Proper Clause (McCullough v. Maryland) that were to come. While yesterday's rulings didn't get us all the way back to Gibbons and McCullough, they clearly insisted that there's an outer bound to what Congress can do under those grants of power.
More significant still is the Court's decision to place limits on Congress's ability to coerce states to act through conditional use of the federal spending power. The 1987 case South Dakota v. Dole left a gaping hole that ran through the 1990s federalism decisions that kept Congress from applying the Commerce Clause to non-economic activity (Lopez and Morrison), kept Congress from applying the Commerce Clause to create private rights of action against states (Seminole Tribe and Alden), and prohibited Congress from "commandeering" states to act according to federal dictate (New York and Printz): what's the functional point of prohibiting Congress from "commandeering the states" if they can effectively coerce/induce the states to conform to Congress's will through the virtually untrammeled grants of federal money? While Dole suggested that there was a theoretical limit to Congress's ability to influence states through the Spending Clause--in which "inducement" became "coercion"--neither the Supreme Court nor lower courts had ever found an occasion to do so.
Until yesterday. Richard Epstein noted the importance of the Spending Clause question, but most other analysts ignored it, as did the lower courts, in keeping with post-Dole jurisprudence. But if it's not "plainly coercive" to condition state receipt of Medicaid funds on state compliance with Congressional dictates--noting that Medicaid is second only to education spending in most state budgets--then when would it ever be? In the minds of Justices Ginsburg and Sotomayor, the answer is essentially never, but the real constitutional problem under the Spending Clause is laid bare by the fact that the conservatives on the Court were joined in this part of the case by Justice Kagan, President Obama's former solicitor general, and Justice Breyer, Senator Ted Kennedy's former staffer.
Yes, the Court permitted Congress to condition the Medicaid expansions on state compliance--thus making this holding an outer bound rather than a major check on Congressional influence over the states through the Spending Clause. But expect more litigation in the future. At a minimum, Congress will have to check itself when it invokes the Spending Clause.
And although Obamacare survives, the ability for states to opt out of the Medicaid provisions is the greatest prospect for reining in the statute's excesses if it isn't repealed. As my colleagues Avik Roy and Paul Howard noted in our panel discussion of the decision last night (around minute 33- of the videotaped program), there is the real prospect that some states could shift costs onto the federal government by opting out, so that even if most states won't do so (and they won't), the threat of exit could increase state bargaining power to negotiate waivers of some of the new law's most overreaching provisions.
At a minimum, through this decision, the Court holds onto the premise that the federal government (at least outside the taxing power) is one of limited, enumerated powers--and in the process reifies and amplifies its 1990s federalism decisions. From a constitutional law standpoint, there's something in there for conservatives to cheer.
To be sure, it's only the outer bounds that come into play in such constitutional judgments--because constitutional law is largely about boundary limits (which is why it's a bit odd that so many legal thinkers focus on it so obsessively--at the expense of the nitty-gritty questions of civil litigation, criminal prosecution, and corporate governance that we primarily concern ourselves with at the Center for Legal Policy, where real outcomes are at play). As Alex Bickel understood, in a democratic republic, elected majorities will ultimately get their way; and we're unlikely to see a return to the era in which the Progressive and New Deal courts turned back the tide of popular opinion. (We may or may not one day be able to get rid of Wickard v. Filburn, but we won't get rid of Helvering v. Davis or bring back Panama Refining v. Ryan and Schechter Poultry, and therein lie the heart of the welfare and regulatory state.) Elections matter--and that's where the fate of Obamacare will ultimately rest.
On Wednesday, February 27, the Supreme Court will hear oral arguments in American Express v. Italian Colors, the latest in a string of recent cases in which the Court tackles arbitration and the class action device. To preview, react to, and assess the argument, we are happy to welcome Cardozo law professor Myriam Gilles alongside our own Ted Frank.
Italian Colors involves an asserted antitrust claim filed by a class of vendors against American Express, alleging that the AmEx "accept all cards" policy constitutes an illegal "tying arrangement" by linking the card company's less-desirable credit-card customers with its more desirable charge-card clientele. The Second Circuit determined that AmEx could not invoke its contractual arbitration clause because individual arbitrations would make the expert witness necessary to assert the antitrust claim cost-ineffective--in the court's view, denying the plaintiffs the ability to vindicate a federal statutory remedy. Five judges dissented from the denial of a rehearing in banc, led by Chief Judge Jacobs's blistering dissent, joined by Judges Cabranes and Livingston, which accused the panel of substituting its public-policy preferences for Supreme Court precedents on the enforceability of arbitration clauses' waiver of class-action remedies, most recently in AT&T Mobility v. Concepcion.
Professor Gilles--who teaches torts, advanced torts, class actions, and aggregate litigation--has criticized Concepcion, warning that "most class cases will not survive the impending tsunami of class action waivers" in the decision's wake. In contrast, Frank--the founder of the Center for Class Action Fairness as well as a Manhattan Institute adjunct fellow and editor of Point of Law--has argued that such concerns are "overwrought," and that post-Concepcion, "many forms of class action lawsuits will continue, and those that are replaced by individual arbitration will generally lead to greater consumer protection, not less." It is my pleasure to welcome Professor Gilles, and I trust that her discussion with Ted will prove illuminating.
]]>After seven years of appellate litigation, including three rounds at the Second Circuit and two trips to the Supreme Court, in the final footnote of its Reply Brief, American Express has abandoned - stunningly - its primary policy argument. Amex has consistently argued that a ruling for the merchants would open the floodgates to a torrent of challenges to its and other companies' arbitration clauses, and that an "Amex exception" would swallow the "Concepcion rule." The merchants, meanwhile, have said "No, the floodgates are already slamming shut as companies enact liberal, vindication-enabling arbitration agreements - and especially, agreements that allow prevailing arbitral claimants to shift the cost of expert witnesses."
Now, in footnote 8 of Amex's Reply Brief on the merits, comes the bombshell: Amex has just recently promulgated a new version of its merchant agreement with an arbitration provision that shifts the costs of expert witnesses in favor of a prevailing arbitral claimant. Never again can a merchant complain (as the merchants here do) that the unavailability of both collective action and cost-shifting, combined with proscriptions against sharing information across arbitrations, precludes them from being able to vindicate their rights in arbitration. While footnote 8 makes clear that "Petitioners do not rely on this amendment in their challenge to the decision below," the fact is that in future cases the Amex clause will allow cost-shifting. The merchants' proffered test is whether the proven non-recoupable costs exceed the recovery sought. If all costs are recoupable, the inquiry is over before it starts. For this corporate defendant, the floodgate is closed.
]]> The Amex amendment shows that companies always have their hands on the floodgate-closing switch, and it makes clear that the vindication-of-rights doctrine has had the effect of causing companies to write arbitration agreements that actually allow (or at least, do a better job of allowing) purchasers, employees and other counterparties to vindicate rights in the arbitral forum. Vindication-enabling clauses promote arbitration and further the purposes of the FAA, while vindication-disabling clauses do the opposite. Is that seriously in doubt?To be fair, when I say that Amex has conceded, I am referring only to the policy side of the argument. The concession is that the vindication-of-rights doctrine promotes vindication-enabling clauses, promotes arbitration, and entails no "floodgate" risk. What Amex does not concede is that the vindication-of-rights doctrine exists at all. And while that's a subject for another post, one thing should be crystal clear: if the Supreme Court were to hold that there is no effective-vindication rule, we will not see any more agreements shifting expert costs to prevailing parties, and companies will have an unprecedented and clear incentive to write agreements that ensure arbitrations never take place.
]]>This might be a short debate! From the beginning, I've defended Concepcion because I believe nothing in Concepcion precluded consumers from vindicating their rights. American Express's briefing, however, has focused on a theory that they can do with an arbitration clause what it would be plainly impossible to do with any other contractual clause. AmEx couldn't have a "tying arrangement" waiver clause; it couldn't even have a procedural clause to agree to restrict the use of expert witnesses in antitrust disputes. And—theoretically at least—a monopolist would not face the market competition that would force it to pass along the savings from arbitration to consumers, making the argument for where to draw the line to force arbitration weaker in antitrust cases than other cases. The Federal Arbitration Act says that arbitration clauses are not to be disfavored, not that they get special treatment from the courts.
The Second Circuit, however, did disfavor AmEx's arbitration clause, and thus failed to correctly apply the Federal Arbitration Act. They did that by giving the record and the arbitration clause a cribbed reading to reach its preferred result. The Supreme Court should correct that kind of abuse, or judges will be able to undo the FAA with the sort of rulings that the Court criticized in Concepcion, but just classify them as "vindication" decisions rather than "unconscionability" decisions.
]]> Pages 19-23 of the American Express reply brief give a roadmap for reversing the erroneous Second Circuit decision: the Second Circuit adopted a view of arbitration and of the arbitration clause that was just entirely fictional. Nothing in arbitration or the AmEx arbitration clause inherently precludes arbitration of antitrust disputes. The fact that that argument is restricted to the last five pages of AmEx's brief makes me fear that the American Express attorneys will continue to insist that Mitsubishi provides only token protection for parties subject to an arbitration agreement and focus on an argument that the Court is likely to reject 8-0. The oral argument will be telling: will AmEx quickly retreat to its strong ground and hope for a narrow ruling?The problem with the Mitsubishi exception is, as Judge Jacobs noted in his Second Circuit dissental, that disingenuous plaintiffs' lawyers will always make vindication arguments against an arbitration clause. Footnote 8 then simply . It merely clarifies the arbitration agreement to make it harder for judges to do what the Second Circuit did here: create an imaginary set of facts and then rule upon that set of facts. Unfortunately for American Express, Paul Clement has cleverly tailored respondents' brief to rest upon that narrow argument, and the Supreme Court might never reach the decisive issue, because "interpretation of an arbitration agreement" or sussing out the record is the sort of "error-correction" that the Supreme Court deigns itself above.
This will be an injustice. The underlying antitrust claim is bogus. American Express plainly does not have monopoly power that would permit it to use a tying arrangement to harm its merchants; the merchants suffer no conceivable harm from the challenged practice. This is a class action to impose litigation costs upon AmEx in the hopes that they'll pay Danegeld to the attorneys to get out from under it. That hurts consumers by raising their prices, and hurts income inequality by transferring wealth from productive sectors of the economy to rent-seekers in the 1%. As we see from the DOJ litigation against Amazon for lowering book prices, the problem with public enforcement of the antitrust laws is not that it's insufficiently overaggressive; outside of the special case of actual price-fixing arrangements, it's hard to see what private antitrust enforcement adds in the way of net social good. Even if the Supreme Court surprises me and strikes down or narrows the vindication doctrine, it's hard to see consumers being injured on net. But that would be a kluge hiding the real public-policy problem.
How do we solve the problem that Judge Jacobs identifies? Unfortunately, it might take a few years of iteration of litigation over arbitration clauses before we can get a clean set of procedures that precludes trial lawyers from destroying the cost-savings of arbitration clauses with bogus litigation claiming that vindication is impossible under the arbitration clause. That's why I hope the Supreme Court steps in to save this arbitration with a narrow ruling, and makes it clear that lower courts' distaste for arbitration does not excuse wrongful stretches of contractual language any more than it excuses wrongful stretches of unconscionability doctrine. One certainly understands why AmEx and the business community would prefer to cut the Gordian knot and just eliminate the vindication doctrine and why they're swinging for the fences here. I worry that that would be bad for arbitration in the long run, and encourage overreaction by a Congress that already has to be restrained from undoing consumer choice.
In a perfect world free from special-interest pressure, we could have legislation or regulation that sets out the bounds of arbitration agreements to create bright-line rules of what would vindicate rights. The fact that Obama administration regulators have been hacking at arbitration agreements with a cleaver, however, demonstrates regulatory capture by the trial bar; as a political matter, we need to rely upon the courts, but the courts have been less than consistent in applying Concepcion. But the same problem is true in Rule 23(e) fairness hearings and PSLRA protections against abusive class actions.
Professor, maybe we can find some grounds for debate anyway. Would you agree that if AmEx is correct that its arbitration clause does not preclude a merchant from bringing antitrust litigation that its arbitration clause should have been enforced by the Second Circuit? Do you disagree with anything in my white paper?
]]>Ted Frank's posting starts off on an agreeable enough note: it turns out we concur that the vindication-of-rights doctrine does, in fact, exist, and that Amex's lead argument rejecting the doctrine is "extreme." Sad times that we celebrate agreement on such a basic concept. Assuming Frank acknowledges that the earth is round, there are now at least two things that we agree upon.
But these are sad times at the Supreme Court. Having sat through the rough and nasty argument in the Voting Rights Act case - where the conservative Justices seemed flummoxed by the suggestion that egregious acts of discrimination in voting were still an especial problem in the South, and where Justice Scalia characterized legislative protection of the franchise "a racial entitlement in perpetuity" - I was prepared for just about anything. So I rejoiced that the Justices appeared to agree that the vindication-of-rights doctrine is alive and well - Justice Breyer described the doctrine as "well-established," and no other Justice seemed to question is basic premises. Whew! The earth is round.
Beyond that basic agreement, however, the argument was a mess. Justices Kennedy and Breyer wondered why it would be prohibitively expensive for small merchants to engage economic experts to opine on issues such as relevant market definition or anticompetitive effects - despite the fact that this Court's own antitrust jurisprudence has exponentially increased the costs of lodging antitrust claims. When the merchants' lawyer, Paul Clement, observed that antitrust guru Herbert Hovenkamp submitted an amicus brief arguing that expensive expert testimony is indispensable, Justice Breyer countered that if Professor Hovenkamp or Justice Breyer were the arbitrator, then no experts at all would be required. (I wonder what Justice Breyer's day rate would be).
But the biggest source of confusion - and the issue that might ultimately cause the Court to dismiss certiorari as improvidently granted or possibly remand for further elucidation - involved Amex's late-in-the-game assertion that its air-tight confidentiality clause did not actually bar Respondents from freely sharing information across arbitral proceedings, such that merchants could "share an expert between multiple plaintiffs." Justice Kagan specifically and repeatedly asked Mr. Kellogg, Amex's lawyer, whether Respondents would "violate the confidentiality agreement of this clause" if they all decided to "get together and produce one report." And each time, Kellogg answered that Amex's confidentiality clause did not bar Respondents from doing so.
This is new, and possibly changes things. It's new because when the confidentiality clause came up at the Second Circuit, Amex did not make this concession. Rather, the company stood by its clause, which broadly provides that "all testimony, filings, documents and any information relating to or presented during the arbitration proceedings shall be deemed to be confidential information not to be disclosed to any other party." Based on this, the panel below correctly ruled that Amex's "confidentiality provision effectively block[ed]" claimants from sharing information such that they could develop (and informally pass the hat to pay for) one, single expert report that could be used in multiple arbitrations.
And this late-breaking concession that the confidentiality clause doesn't mean what it says possibly changes things because perhaps Respondents can now seek to vindicate their rights via individual arbitrations of their antitrust claims - hundreds and hundreds of individual arbitrations, using the same expert report, that over time, create a momentum that might match or surpass traditional notions of collateral estoppel in the arbitral fora.
It may be a while before we get to witness any such activity, though, because my guess is the Court will remand the case, as it seems awfully late in the day for Amex to suddenly make this important concession. As Malcolm Stewart of the Solicitor General's office argued on Respondents' behalf, Amex seems to have engaged in certiorari bait-and-switch, seeking Supreme Court review "on the important legal question whether the inefficacy of arbitration procedures is a basis for invalidating the agreement," but then once before the Court, arguing that "it would, in fact, have been feasible to pursue these claims through individualized arbitration." These facts about the violability of the confidentiality provision were simply not in the record, and for that reason alone, the case may prove difficult to decide.
[And, to be clear, Frank and I agree on little else. I think it begs reality to assert Amex's arbitration clause doesn't completely preclude the vindication of federal antitrust claims. If Respondents cannot share information, shift the extremely high costs of an expert report, or do both via a class action in court, they simply cannot bring their Sherman Act claims. Even less rooted in reality is Frank's floodgates argument - i.e., that droves of displaced class claimants will scale the arbitration barricades and overwhelm the citadel proclaiming their inability to vindicate statutory rights. If the only question is whether non-recoupable costs exceed the recovery sought, it should be clear that few camels will make it through the eye of this needle.
And I won't take the time to address the uninformed views on the underlying antitrust claim. After all, the Amex case hasn't even gotten to the merits stage because of 8 years of litigation over the arbitration clause. But it should suffice to note that the Justice Department has filed suit against Amex on similar grounds, and that Visa/Mastercard recently settled a related antitrust case for $7.25 billion dollars (a settlement in which Frank and his cohort have not lodged their typical objections).]
Professor Gilles's last parenthetical confuses me. What is my "typical" objection? For that matter, who is my cohort? I always thought of myself as sui generis.
I honestly haven't paid a lot of attention to the Visa/Mastercard settlement because (1) no class member has asked for my help and (2) there are several competing class-action attorneys who have already (if clumsily) objected, and, thus, there doesn't seem to be a need for my non-profit to get involved to vindicate class members' interests, because for-profit entities with the proper incentives seem to already be on the case. But if one side or another wants to offer me a suitcase of money to consult on the litigation and possible objections as a private attorney, I'll be happy to consider the possibility and try and get permission from CCAF to do so.
Not that I think Visa/Mastercard tells us a lot about AmEx. I can think of exactly one American brick & mortar merchant with more than $100,000 in annual sales that I dealt with in the last five years that wouldn't take my Visa card, and it just went out of business. The case for Visa monopoly power is a different one than that for AmEx, where enough merchants don't do business with AmEx to show that when AmEx makes a take-it-or-leave-it offer that the merchant doesn't like, AmEx doesn't get the business. And DOJ has cried wolf often enough in the antitrust context in the Clinton and Obama administrations that a complaint over a tying arrangement doesn't have a lot of credibility with me: it's at least as likely to be the result of special-interest rent-seeking as consumer protection. In any event, that the Justice Department sued AmEx sort of undercuts the idea that we need a private class action to bring AmEx to heel.
Separately, since I've been critical of the AmEx Italian Colors litigation strategy through now, let me give credit where credit is due to Mr. Kellogg's excellent oral argument--which as Professor Gilles suggests, performed as I hoped and retreated to AmEx's stronger arguments. At oral argument, AmEx disputed the claim that it had not challenged certain factual contentions in the record. I'll note that the dispute exists without attempting to resolve the quibble, since the underlying public-policy question that I'm interested in doesn't turn on how well AmEx litigated its case in the lower courts. I do note that I've certainly been the victim of court opinions that chose to assert that I had not made an argument that I made rather than reach the questions my argument raised.
It's not clear to me why Professor Gilles is upset that a possible consequence of this argument would be dismissal of certiorari as improvidently granted; that result would very much be perceived as a victory by the array of special interests opposing the freedom to contract for arbitration clauses, leaving the broad Second Circuit exception to Concepcion intact.
Does it beg "reality to assert AmEx's arbitration clause doesn't completely preclude vindication of federal antitrust claims"? The Andy Pincus's amicus brief for the Chamber and other business entities suggests numerous ways arbitration proceedings could be aggregated to spread the costs of an expert witness (though I think their reliance on the Honda small-claims-court movement is overstated). It's just that the resulting aggregate litigation would be opt-in rather than opt-out--as it was in American courts during the first several decades of the Sherman Act. And, as Justice Breyer notes, why do we assume that the streamlined and informal procedures of arbitration require the same disastrous litigation expenses of court proceedings? There's certainly nothing in the record about that.
Professor Gilles complains that my floodgates argument isn't "rooted in reality," but my contention is hardly hypothetical: we see it in the Italian Colors case itself. As Justice Breyer noted at oral argument, plaintiffs' expert report about vindication was perfunctory, and didn't even mention arbitration. Yet it was sufficient to put American Express through what must be to date seven digits of litigation expenses, and may even eventually be successful in nullifying AmEx's contractual rights. Anyone who doesn't think it won't be easy to invest a few thousand dollars in a hired-gun expert to create a factual dispute over whether an arbitration clause makes vindication of a cause of action possible hasn't seen how little adverse consequence attaches to attorneys and parties who hire experts to make fantastic claims.
Speaking of vindication, I find it fascinating how often class action advocates speak of the importance of the class action in vindicating rights but how little they speak of vindication when it comes to the class actions themselves. Friday, I was in court watching class counsel argue that it was okay to freeze small shareholders out of a securities settlement because of the administrative expense in paying their claims; in the pending Fraley v. Facebook settlement, I expect to see class counsel argue that it is fair, reasonable, and adequate to pay the class zero cash because there are too many class members who want to be compensated. I find these arguments remarkable: if the class action has such high administrative expenses that after paying for notice and attorneys' fees, the class cannot be paid at all, why are these classes being certified under Rule 23(b)(3) in the first place? Doesn't that rule require a demonstration "that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy"? What makes a class action "superior" in the (b)(3) sense, much less the "vindication" sense, when class counsel takes the position that the class can't be compensated?
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