Archives: 02/2011

Cato’s First Brief in a Patent Case — On Constitutional Grounds

Recognizing an opportunity to make quick and easy money, private attorneys have been suing companies under the False Marking Statute, 35 U.S.C. § 292.  This law allows any person to sue to enforce a federal criminal statute that prohibits anyone from labeling an unpatented product with a patent number or to advertise a product with a patent number that is not actually patented. 

The penalty for violating this law is $500 per offense, which has been interpreted to mean each and every product falsely marked.  For instance, if a business is charged with falsely marking 100,000 products, it could be liable for $50 million.  Private attorneys suing under this statute seek massive amounts in damages and then try to settle with the defendant for a fraction of that cost (still a large amount of money).  Companies often settle even if the case against them has little merit because they do not want to risk such a massive amount in damages.

The longtime toy manufacturer Wham-O, however, successfully defended such a lawsuit in court, provoking the plaintiffs’ lawyers to appeal to the Federal Circuit (the only appellate court below the Supreme Court that can hear patent cases).  Cato, along with my colleague, Walter Olson — who has studied these patent marking cases — filed an amicus brief supporting Wham-O on constitutional grounds.  We argue that the False Marking Statute fails to give the executive branch, through the attorney general, control over the enforcement actions brought at its behest.  By allowing any person to sue and then receive half of the damages, the law abrogates the executive power to enforce the law and places it in the exclusive hands of the private attorney. 

There is clear precedent for this argument:  In the 1988 case of Morrison v. Olson, the Supreme Court upheld the independent counsel statute because it gave the attorney general “sufficient control” over the counsel’s hiring, firing, and investigative scope.  Other courts have held that for a private person to prosecute what is called a “qui tam” action under the False Claims Act — essentially stepping into the shoes of the government — the government must maintain “sufficient control” over the litigation.  The False Marking Statute does not provide sufficient control, or any control, and therefore violates Article II’s “Take Care Clause,” the font of the executive branch’s enforcement duties.

Ultimately, the separation of powers, the foundation for the governmental structure created by the Framers, ensures that laws are enforced by someone accountable to the people, the Executive. The False Marking Statute divests the president of this authority, so the Federal Circuit should strike it down as violating the Constitution’s separation-of-powers structure.

The Federal Circuit will hear FLFMC, LCC v. Wham-O, Inc. this spring.

The Value-Added Tax Must Be Stopped - Unless We Want America to Become Greece

Sooner or later, there will be a giant battle in Washington over the value-added tax. The people who want bigger government (and the people who are willing to surrender to big government) understand that a new source of tax revenue is needed to turn the United States into a European-style social welfare state. But that’s exactly why the VAT is a terrible idea.

I explain why in a column for Reuters. The entire thing is worth reading, but here’s an excerpt of some key points.

Many Washington insiders are claiming that America needs a value-added tax (VAT) to get rid of red ink. …And President Obama says that a VAT is “something that has worked for other countries.” Every single one of these assertions is demonstrably false. …One of the many problems with a VAT is that it is a hidden levy. …VATs are imposed at each stage of the production process and thus get embedded in the price of goods. And because the VAT is hidden from consumers, politicians find they are an easy source of new revenue – which is one reason why the average VAT rate in Europe is now more than 20 percent! …Western European nations first began imposing VATs about 40 years ago, and the result has been bigger government, permanent deficits and more debt. According to the Economist Intelligence Unit, public debt is equal to 74 percent of GDP in Western Europe, compared to 64 percent of GDP in the United States (and the gap was much bigger before the Bush-Obama spending spree doubled America’s debt burden). The most important comparison is not debt, but rather the burden of government spending. …you don’t cure an alcoholic by giving him keys to a liquor store, you don’t promote fiscal responsibility by giving government a new source of revenue. …To be sure, we would have a better tax system if proponents got rid of the income tax and replaced it with a VAT. But that’s not what’s being discussed. At best, some proponents claim we could reduce other taxes in exchange for a VAT. Once again, though, the evidence from Europe shows this is a naive hope. The tax burden on personal and corporate income is much higher today than it was in the pre-VAT era. …When President Obama said the VAT is “something that has worked for other countries,” he should have specified that the tax is good for the politicians of those nations, but not for the people. The political elite got more money that they use to buy votes, and they got a new tax code, enabling them to auction off loopholes to special interest groups.

You can see some amusing – but also painfully accurate – cartoons about the VAT by clicking here, here, and here.

For further information on why the VAT is a horrible proposal, including lots of specific numbers and comparisons between the United States and Western Europe, here’s a video from the Center for Freedom and Prosperity.

Is Madison More Like Cairo or Athens?

At the Britannica Blog I declare the college town – and state capital – Madison, Wisconsin, “the Athens of the West.”

College towns used to call themselves “the Athens of the West.” In Nashville, home of my alma mater Vanderbilt University, they built a full-scale replica of the Parthenon. But these days Madison, Wisconsin, has the best claim to the title.

Lots of national media have been comparing the protests against Gov. Scott Walker in Madison to the protests that ended Egyptian dictator Hosni Mubarak‘s 30-year reign….

The Greek journalist Takis Michas told a Washington audience last summer that the Greek political economy

is a form of capitalism where the bureaucracy and its allies consider the state their property, and use its mechanisms for personal enrichment.

In Greece, the fundamental principle that has been dictating economic and political development since the creation of the Greek state in the 19th century is political clientelism.

This is a system in which political support is provided in exchange for benefits.

In this situation, rent-seeking — the attempt by various groups and individuals to influence the location of political benefits — becomes paramount.

That sounds a lot like the relationship between government employee unions and state governments. In Wisconsin, the state that first gave government unions the right to bargain collectively, the Greek disease has reached crisis levels. Wisconsin faces a deficit estimated at $2.2 billion or more. Wisconsin and Greece have both used accounting gimmicks and fiddled statistics to conceal the state’s real fiscal condition, though Greece’s fraud reached stratospheric levels.

The protests in Tunisia, Egypt, and Libya are against tyrannical governments; the protesters seek freedom and democracy. The protests in Athens and Madison are against the long-suffering taxpayers; the protesters seek to continue a political system that allows them privileged access to the public fisc.

Eat your heart out, Nashville and Lexington and Berkeley. Madison, Wisconsin, is truly the Athens of the West.

One Step Forward, One Step Back

This weekend I opened The Washington Post to find the editors arguing that Congress should cut federal subsidies to the Corporation for Public Broadcasting, the Institute of Peace, and the National Endowment of the Arts, and George F. Will arguing that Congress should preserve federal subsidies to Teach for America.

Weird.

This Week in Government Failure

Over at Downsizing Government, we focused on the following issues this week:

  • On getting out of Afghanistan.
  • $61 billion in spending cuts amounts to less than a third of what taxpayers will pay in interest on the debt alone this year.
  • The political stakes in the latest debt ceiling game are high. The consequences of failing to use it as an opportunity to start reining in the federal government are even higher.
  • The IRS is handing out “free” candy.
  • New data from the Federal Aviation Administration shows that reported air traffic control errors have increased by 81 percent since 2007.

How Best to Amend the Constitution

I’ve written before about how we have little to fear and much to gain from state-called conventions to amend the Constitution.  Even setting aside the legal and historical points about how such conventions can be limited and are the ultimate guarantors of state and popular sovereignty, the “runaway convention” idea is a red herring for one practical reason: Any proposed constitutional amendment emerging from the convention requires ratification by 38 states.  That’s at least 75 houses (counting Nebraska’s unicameralism)!  There is no way that an amendment constitutionalizing socialism (or whatever) would be ratified.  So I sleep easy.

But to add further scholarly guidance to these arguments and procedures, see Rob Natelson’s final paper in the Goldwater Institute’s three-part series on the subject.  From the executive summary:

This report provides crucial practical drafting guidance for exercising the states’ constitutional authority. In essence, it recommends that state legislators draft their Article V applications and delegate commissions with an eye to targeting specific subject matters, while still giving state delegates a meaningful level of deliberative independence to ensure that the amendments convention can serve its consensus-building and problem-solving purpose. The key is to regard an amendments convention as a modern-day “task force”—a representative body that is limited to a specific agenda but expected to exercise judgment on accomplishing that agenda.

For the previous two papers, and other materials regarding amendment conventions, see Goldwater’s invaluable Artivle V resource page.

Boeing’s Tanker Win Is a Small Taxpayer Win

The Defense Department announced yesterday that it is awarding its aerial refueling tanker contract to Boeing. We’ll pay them $3.5 billion for the first 18 tankers and $35 billion if all the planned 179 tankers get built. These are essentially gas stations in the sky that extend the range of bomber and fighter aircraft.

The decision is causing great consternation in Alabama, where EADS, the losing bidder, would have located most of the manufacturing for the deal. Governor Robert Bentley compared the loss of federal spending to a “death in family.” I’ll leave it to others to speculate as to what that says about his priorities and just point that the decision is good for Americans generally.*

From a military perspective, both aircraft likely would have performed well. Tanker technology is not cutting edge these days, so technical risks in development are relatively low. And given that the Pentagon knows that its decision will come under great scrutiny, it is reasonable to accept its judgment that Boeing’s offer is better.  

The main reason why taxpayers come out ahead here is, however, one that the Pentagon is not allowed to consider when weighing bids: how the award affects future political pressure for spending.  I explained these politics in 2008, before EADS took over the bid of its Airbus subsidiary:

The political problem with the Airbus deal is that it opens a production facility in Alabama to make conventional aircraft assembled elsewhere into tankers, but will not close Boeing’s similar plant in Wichita, Kansas. This means taxpayers have a new mouth to feed. Because they create concentrated interests, US military production facilities are nearly impossible to close. In the private sector, sellers make money by cutting costs and delivering products more efficiently. In defense contracting, companies succeed by keeping production lines open and relying on local Congressman, workers and lobbyists to get them work. That’s why the US has twice the number of shipyards it needs despite consolidation in the shipbuilding industry. It would have been better to keep all the production in Europe, preventing new domestic lobbies from forming, or more realistically, accomplish the same thing by making Airbus lease Boeing’s plant.

*It’s worth asking whether 179 is excessive, given that precision munitions are vastly increasing the striking power of each aircraft. Today we can destroy exponentially more targets with the same forces relative to twenty years ago, and we continue to grow that ratio.