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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

Recently, the Manhattan Institute released its latest Trial Lawyers, Inc. publication on patent "trolling," a practice that involves companies accumulating the rights to large patent portfolios and suing those who engage in unlicensed usage. One of the major problems with this practice has been that these so-called Patent Assertion Entities have been able to acquire patents on some of the most basic technological innovations, and thus stifle the ability of others in the industry to innovate and improve upon the technology.

Now, Congress itself is in danger of stifling technological innovation. Derek Khanna, in an article for Slate Magazine, has discussed a proposed change to Section 230 of the Communications Decency Act. This change, signed on to by 47 state attorneys general, would amend Section 230 to grant state criminal statutes immunity from the federal mandates of the section. Ostensibly, this proposed alteration would allow states to hold host websites liable if user-generated content propagated illicit activity, like ads for sex trafficking on Craigslist.

The problem is that this amendment would allow state attorneys general the broad power to prosecute the host website owners for user-generated content. This would in turn make website owners wary of allowing users to post on their sites, and therefore effectively remove potentially important dialogue and feedback from being placed on the site. Moreover, the national scope of many Internet companies compounds the fear of being potentially prosecuted under 50 different penal codes.

Khanna offers a telling example of the benefits of Section 230 in its current form:

Let's say Section 230 was never implemented, and Reddit's future founders arranged a meeting with their members of Congress to propose changing the law to facilitate their market model for a message board on the Internet. Assuming they didn't ask the member of Congress who referred to the Internet as "a series of tubes," it is likely that the politicians would respond, "This is such a small market, and a silly idea, so why would we bother changing the law for you?" And yet, today Reddit is a billion-dollar company and according, to one study, 6 percent of adults on the Internet are Reddit users (including me).

Section 230 is simple and intuitive to entrepreneurs, and it doesn't require a lawyer to implement. It's essentially a permission slip telling the Internet: "Go innovate." And entrepreneurs, such as Alexis Ohanian, co-founder of Reddit, responded by launching a diverse array of websites with user-generated content. Facebook--which currently has 1.2 billion users, or one-eighth of the world's population--would have been impossible without Section 230. Ben Huh, CEO of the Section 230-enabled Cheezburger Network, told me: "Section 230 is one of the hidden pillars of the free speech of the Internet."

If Section 230 is opened up to state criminal sanctions, the entire innovation-enhancing purpose behind the section's enactment will be destroyed. While the regulation of user-generated illicit activity is an important end, the means presented by the state attorneys general are not narrowly-tailored enough to prevent the creation of a considerable disincentive for Internet companies to grow and expand, as well as a disincentive to allow public forums in which users can offer suggestions as to how the company can improve its products and services.

Congress needs to maintain a free public sphere in which companies can feel comfortable in allowing user-generated content on their websites. Anything else would constitute a stifling of those animal spirits of innovation which have allowed the Internet to be placed at the vanguard of societal progress.

On December 8, 2011, after Senate Republicans blocked the confirmation of Richard Cordray, former Ohio attorney general nominated to serve as the first director of the Consumer Financial Protection Bureau, President Obama vowed that his administration would not give up on the appointment. On Wednesday, the President followed through on his pledge with a recess appointment of Cordray, officially expanding the authority of the CFPB over non-bank institutions/lenders that can offer loans to consumers.

While there was an expected partisan response to the President's strategy from both sides of the aisle, a serious and legitimate legal issue was identified by constitutional scholars. The issue is whether the President has the authority to make recess appointments while the Senate is hosting "pro forma" sessions for the purpose of blocking those appointments.

The White House argues that the President does indeed have such authority:

The Constitution gives the President the authority to make temporary recess appointments to fill vacant positions when the Senate is in recess, a power all recent Presidents have exercised. The Senate has effectively been in recess for weeks, and is expected to remain in recess for weeks. In an overt attempt to prevent the President from exercising his authority during this period, Republican Senators insisted on using a gimmick called "pro forma" sessions, which are sessions during which no Senate business is conducted and instead one or two Senators simply gavel in and out of session in a matter of seconds. But gimmicks do not override the President's constitutional authority to make appointments to keep the government running. Legal experts agree. In fact, the lawyers who advised President Bush on recess appointments wrote that the Senate cannot use sham "pro forma" sessions to prevent the President from exercising a constitutional power.

In response, Andrew Grossman, visiting legal fellow in The Heritage Foundation's Center for Legal and Judicial Studies and litigator at Baker & Hostetler, points to contradictions that could occur as a result of executive authority in deciding whether the Senate is functionally in session or not.

...on December 17, the Senate agreed to an order instituting "pro forma" sessions, of the kind the President now claims are actually recess. (See the PDF of the Congressional Record here.) But it was at one of those sessions, on December 23, that the Senate passed the payroll tax cut extension that the President signed into law later that day. (Again, see the Congressional Record entry.)

Of course, if the Senate was actually on recess that day, it couldn't have passed the bill, and the President couldn't have signed it into law. (The President has not claimed--at least, not yet--that he can enact laws that have not passed Congress.) But in that case, the President chose to respect the Senate's own view as to whether it was open for business.

As Andrew also notes, the Constitution vests the Senate with the express authority to "determine the rules of its proceedings."

Professor Richard Epstein and Professor John Yoo both identify the danger in the recognition of executive authority to determine whether the Senate is in session. Professor Epstein then articulates a strong textual argument in the interpretation of Article II, Section 2 of the Constitution concluding that Cordray's confirmation does not fall within the scope of the President's recess appointment authority. The U.S. Chamber of Commerce echoed that sentiment in their sharp admonition of the President's recess appointment calling it "unprecedented, constitutionally questionable, and puts the authority of the director and the validity of the bureau's work in legal jeopardy."

Among the many viewpoints expressed, we can probably all agree that this appointment is not likely to go unchallenged.

In an interview with Jim Blasingame of The Small Business Advocate radio program, Jim Copland, director of Manhattan Institute's Center for Legal Policy, addressed the Consumer Financial Protection Bureau in light of the Senate's recent rejection of an up-or-down vote for Richard Cordray's confirmation as the director of the CFPB.

In one of several segments, Jim tackled the question, "How will the CFPB affect small business? He replied:

Credit has really dried up for small businesses. This is really the lifeline for small business; small banks making small loans to small businesses to go and invest. Of course, some of these small businesses are going to keep going, individuals will take out their personal credit lines, their credit cards. People running small businesses will find ways to get credit. But, the unavailability of low-cost credit for small businesses is one of the biggest, if not the biggest, problem right now in the economy.

The concern the Republicans have is that this bureau, while in concept defensible, was written into this law where there is basically no check on the power of the person running the bureau.

...And this person can effectively make unilateral decisions. No question that person is going think that these are intended to help consumers, but, they also might have massive implications for the broader economy, the ability to generate credit and the ability to generate financing mechanisms. This could have dramatic ripple through effects on the broader economy.

So I think that their concerns are well founded and what they're basically saying is, before we take one of these up for a vote, we've got to restructure this so that it is structured more like most of these federal agencies. Where there is some congressional oversight, some sort of bi-partisan commission, something so that you don't have one individual acting basically as a czar for the country's consumer finance because that's very, very dangerous if you get the wrong person in there. And I'd argue that Richard Cordray is exactly the person you have to worry about.

Jim wrote an op-ed piece published in the Washington Examiner on this topic months before the rejection of Cordray's confirmation, expressing similar views with a focus on Cordray's record as Ohio's Attorney General.

PointofLaw returns to its coverage of the Richard Cordray confirmation standoff. In a 53-45 vote, Senate Republicans effectively blocked the confirmation of Richard Cordray, former Ohio attorney general, nominated to serve as the first director of the Consumer Financial Protection Bureau. While the CFPB can currently regulate the nation's banks, without a director, the new agency cannot assume its arguably most important role of regulating non-bank institutions that can offer loans to consumers.

In a subsequent press conference, President Obama pledged that this was not the end of the road and that, "we are not giving up on this... we are going to keep at it." Some Senate Democrats are urging the President to make a recess appointment of Cordray when the Senate adjourns as expected at the end of the month. The President has not ruled that option out. Republicans however, can avert such appointments by preventing the Senate from adjourning and holding short sessions during the vacation periods. Such a stalemate, we would hope, will force the Senate to engage in a real and honest debate focused on the structure and regulatory authority of the CFPB.

In the meantime, both parties will appeal to the public by accusing each other of unprecedented partisanship; the Senate Democrats pointing to the first time in Senate history that a candidate of an agency has been blocked because of opposition to the agency itself and Senate Republicans citing an unparalleled grant of absolute unchecked authority to a regulatory agency.

Neither party has questioned Cordray's qualifications which are at issue in Jim Copland's op-ed in the Washington Examiner and Manhattan Institute's Trial Lawyers Inc.: Attorneys General report.

Since it first opened its doors in July, the Consumer Financial Protection Bureau has been unable to exercise its full authority as promulgated under Dodd-Frank. Without a confirmed director, the CFPB cannot extend its oversight to non-bank consumer lenders, arguably the most essential to its intended role.

The White House's greatest obstacle has been trying to convince a block of 44 Senate Republicans who have written a letter pledging to filibuster the confirmation of Obama's nominee, former Ohio Attorney General, Richard Cordray. Despite Cordray's alarming record as Ohio's AG, more specifically his contracts with private attorneys on a contingency-fee basis to handle the state's lawsuits, Senate Republicans refuse to confirm Cordray because of concerns about the CFPB's leadership structure, authority and funding.

In response, the Obama administration has decided to take its message to the people via media, public appearances and an information campaign targeting seven states in particular: Alaska, Indiana, Iowa, Maine, Nevada, Tennessee and Utah. The goal is to lobby the Senators deemed most likely to change their minds by encouraging public pressure from constituents.

Simultaneously, state AGs and other officials have already joined the effort to gain the 60 votes necessary for a vote that may come as early as Thursday. Even Republican Attorney General Mark Shurtleff of Utah has come forward to support Cordray in this effort.

Coincidentally, both Democrat Cordray and Republican Shurtleff are among the eight "leaders" of state AGs recognized for their unsavory alliances with trial lawyers. The White House seeks to frame this confirmation debate as a choice between either protecting the financial industry or the middle class however, Cordray's record as Ohio's AG and the broad authority delegated to the CFPB director and State AGs by Dodd-Frank may paint a different picture.

Prescription drug maker Merck Sharp & Dohme Corp. filed an action against Kentucky Attorney General Jack Conway challenging the legality and fairness of the arrangement in which a state attorney general hires private attorneys on a contingency fee basis to handle suits on behalf of the state.

Merck's attorneys argue,

Such suits can only be prosecuted by the Kentucky Attorney General and only when penalties would be in the public interest. Nonetheless, Conway has effectively transferred his enforcement authority to private outside counsel. And unlike the Kentucky AG, whose compensation is fixed and independent of success or failure in litigation, the arrangement with the private outside counsel in this case gives them a significant stake in the outcome: the more penalties they pursue, the bigger their potential take.

Conway filed a motion to dismiss responding,

Merck has offered no case law that supports the notion that litigation by outside counsel, directed by a state attorney general, violates a civil defendant's constitutional rights. In fact, such a finding would upend centuries of precedent permitting such arrangements between states and outside counsel.

Unfortunately, as John O'Brien of LegalNewsline.com points out, other companies have unsuccessfully made similar arguments across a wide range of jurisdictions.

In some states however, there has been significant progress made in instituting reform legislatively as Jim Copland of PointofLaw and head of Manhattan Institute's Center for Legal Policy cites in Trial Lawyers Inc.: Attorneys General, a report focused on this very topic.

As Connecticut's attorney general, Richard Blumenthal used to be able to get his shot of publicity by filing populist, anti-business lawsuits. Now as a junior member of the U.S. Senate, he's forced to seek publicity in other ways, introducing outrageous charges of possible criminality in his campaign against the oil industry. From The Hill, "Grand jury floated to probe gas prices":

Sen. Richard Blumenthal (D-Conn.) on Sunday called for an aggressive federal probe - including a possible grand jury - into whether rising gasoline prices stem from illegal manipulation of energy markets....

Blumenthal, Connecticut's former attorney general, said on CBS' "Face the Nation" that federal officials need to play hardball.

"I commend and applaud the president for focusing on this issue but I think there really needs to be an investigation involving, for example, subpoenas and compulsory process which I used as attorney general in similar investigations. There needs to be very possibly a grand jury to uncover the potential wrongdoing," said Blumenthal, who was elected to the Senate last year.

Blumenthal is a member of the Senate Judiciary Committee, and you would expect Chairman Patrick Leahy to hold hearings to attack "Big Oil" soon enough.

The political posturing that historically accompanies rising gas prices has gotten even more twisted this year than in the past. Last week President Obama announced that Attorney General Eric Holder would lead a task force, as described in his Saturday radio address, "with just one job: rooting out cases of fraud or manipulation in the oil markets that might affect gas prices, including any illegal activity by traders and speculators." Holder touted his effort at the White House blog and promoted it at the dispassionately named web site, StopFraud.gov.

Why turn to the Department of Justice when the Federal Trade Commission already has the expertise in investigating oil pricing and speculation? A reasonable conclusion is that the White House wants a political document with pre-ordained conclusion, because factual studies have previously disproved allegations of speculation. Here's what the FTC concluded in its study of pricing in the wake of Hurricane Katrina, a report released in May 2006.

In its investigation, the FTC found no instances of illegal market manipulation that led to higher prices during the relevant time periods but found 15 examples of pricing at the refining, wholesale, or retail level that fit the relevant legislation's definition of evidence of "price gouging." Other factors such as regional or local market trends, however, appeared to explain these firms' prices in nearly all cases. Further, the report reiterated the FTC's position that federal gasoline price gouging legislation, in addition to being difficult to enforce, could cause more problems for consumers than it solves, and that competitive market forces should be allowed to determine the price of gasoline drivers pay at the pump.

A separate study in 2008 by the Commodity Futures Trading Commission found that financial trading had not driven price moves in the oil market. (See Wall Street Journal editorial, Sept. 15, 2008, "See You Later, Speculator.")

From the American Tort Reform Association, a news release, "National Study Documents Abuse In Contracting Practices of Certain State Attorneys General":

WASHINGTON, Dec. 2, 2010 /PRNewswire-USNewswire/ -- Today the American Tort Reform Association (ATRA) released a study documenting inappropriate uses of contracts between certain state attorneys general and political campaign contributors who stand to make millions by being selected to litigate cases on behalf of state governments. Some state attorneys general, in contrast, operate at the highest ethical standards, according to the report's research by ATRA's AG Agenda Watch project.

The study, entitled Beyond Reproach? Fostering Integrity and Public Trust in the Offices of State Attorneys General, examines ethical, fairness and conflict issues related to state attorneys general hiring private attorneys. It reports the findings of campaign finance research linking large donations by plaintiffs' firms and lawyers to some attorneys general who subsequently handed out state contracts potentially worth millions of dollars in fees to those same lawyers.

The study highlights Alabama, Louisiana, Mississippi, New Mexico, New York and West Virginia. As ATRA's adviser, former Virginia Attorney General Jerry Kilgore, says, ""At the top of the 'to-do' list for attorneys general should be setting policies that engender stronger public confidence in the office of the attorney general - particularly in those special circumstances when the hiring of private lawyers to litigate on behalf of the state is justified. In those cases it should be done on a competitive, transparent, accountable and value-driven basis."

Sherman "Tiger" Joyce, ATRA's president, also gives a post-election rundown on civil justice issues in The Metropolitan Corporate Counsel, "Trial Lawyer Lobby's Focus Likely To Shift To Executive Branch In 2011-2012."







Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.