Topic: Regulatory Studies

Getting Class Action Rules Right Makes Markets More Efficient

Getting the rules governing class actions right means balancing the need to keep the courthouse door open for legal claims not lucrative enough to pursue individually with the need to prevent wholesale extortion by opportunistic would-be plaintiffs (and their lawyers) who know that the settlement values of class actions are generally much larger than those of individual lawsuits.

In its recent (2011) decision in Wal-Mart v. Dukes, the Supreme Court reiterated that when considering whether to certify a lawsuit as a class action (which aggregates presumptive claims from a national “class” of plaintiffs), a trial court must conduct a “rigorous analysis” to determine that the putative plaintiffs satisfy the key requirements of Federal Rule of Civil Procedure 23: (1) the class is so large that each potential plaintiff can’t join the suit individually (“numerosity”); (2) questions of law or fact are common to the class (“commonality”); and (3) the claims/defenses of the plaintiff representatives are typical of the class as a whole (“typicality”). Despite Dukes, many courts have fallen back on a misinterpretation of an earlier Supreme Court decision, Eisen v. Carlisle & Jacquelin, to hold that a court can’t consider at the class-certification stage any issue that will overlap with the merits of the case.

In Comcast v. Behrend, the Philadelphia-based U.S. Court of Appeals for the Third Circuit affirmed the district court’s certification of a class of nearly two million past and present Comcast cable customers in an antitrust action against the company. In certifying the class, the district court refused to evaluate the admissibility of testimony presented by plaintiffs’ expert witness regarding the ability to calculate class-wide damages, considering such an inquiry to go to the merits of the case. The court thus failed to conduct “rigorous analysis” with respect to that issue, and so the Supreme Court decided to review whether a class can be certified without first determining, as part of the Dukes analysis, whether a plaintiff’s methodology for calculating damages is admissible.

Cato has filed an amicus brief urging the Court to clarify that what it meant in Dukes was that a full inquiry into the reliability and admissibility of expert testimony (a so-called Daubert inquiry) is required at the class-certification stage. A lower standard would obviously prejudice defendants because class certification “magnifies and strengthens the number of unmeritorious claims” and creates “insurmountable pressure on defendants to settle.” But it would also prejudice absent class members because certification based on inadmissible evidence may distort their perception of the likelihood of success and encourage the members to stay in the class. Since all class members who don’t opt out of the class are ultimately bound by a class action judgment, there’s a large potential for harm to these potentially valid claims as well.

The only way to sufficiently protect the interests of defendants and absent class members, as well as to stay faithful to the basic commonality requirement of Rule 23 — which balances the overall social interests described above — is for the Supreme Court to reverse the Third Circuit and clarify that the Daubert standard applies at the class-certification stage, not just at trial.

The Supreme Court will hear the case of Comcast v. Behrend on November 5.

Court: Telecommuting May Be Reasonable Accommodation Under ADA

Not that long ago, reflecting the views of labor unions, the federal government regarded telecommuting as something deeply suspect, even when (or especially when) both an employer and an employee were enthusiastic about it. As late as the Reagan era, as I recounted in this Reason piece a way back, the AFL-CIO had called for a moratorium on the practice, while the president of the Communications Workers of America warned in 1992 that allowing at-home employment was dangerous “particularly if that worker wants to work at home.” (A dispersed workforce, of course, can make it harder to organize unions.)

How times change. Now the ever-expanding scope of the Americans with Disabilities Act (ADA) is opening up the possibility that employers may be legally obliged to accept at-home work arrangements even when they see them as a bad idea. As Jon Hyman explains at Lexis/Nexis Employment Law and Mike Underwood at Employer Law Report, the federal court for the Southern District of Ohio has ruled that it is a question for a jury whether an employer improperly failed to accommodate a worker when it denied her request to work from home, based on asthma and chemical sensitivity to the perfumes of co-workers. Previous Sixth Circuit precedent had rejected any employer obligation to accept telecommuting other than in “very extraordinary” circumstances, but the court said that precedent needed to be revisited in light of the advance of time and technology, which has rendered telecommuting less “burdensome or untenable” to employers. The case is Core v. Champaign County Board of County Commissioners (PDF).

Notice the pattern? Views of telecommuting change, but what remains constant is the idea that the government should impose the result, rather than defer to the results of actual free contract between the two parties.

Canadian Wheat Board Loses Monopoly Powers

Reform has finally caught up with one of North America’s longest-entrenched socialist institutions, the Canadian Wheat Board. From the 1940s down through the first of this month, farmers in western Canada were legally forbidden to sell their wheat and barley other than through the official board, which by abolishing competition between farmers was supposed to assure fairer and higher prices. (Technically the Board enjoyed a “monopsony,” which is what economists call a monopoly over buying something as distinct from selling it.) Farmers have complained for years that the board not only behaved arbitrarily and was hard to deal with but also that it often paid less for grain than farmers in nearby American states like North Dakota were getting. The board continues to exist, but stripped of its compulsory powers it will need to persuade growers to trade with it voluntarily. Economist David Henderson, who lived in a Manitoba farm community as a kid, has more.

The battle to free the farmers was long and fierce – the left-leaning New Democratic Party (NDP) and National Farmers Union greeted the August 1 decontrol with undisguised bitterness – and no one played a more central role in the victory, or put more political capital on the line, than Canadian Prime Minister Stephen Harper. Per the CBC,

Harper has a long history of supporting the farmers who fought the wheat board. In 2001, he wrote a review of a book on that battle, calling the wheat board an “oppressive monopoly” that used “legal bullying” against farmers.

Harper and Agriculture Minister Gerry Ritz were at the farm to mark the first official day in which prairie wheat and barley farmers can sell their products to whomever they choose.

Harper is also pardoning a group of farmers arrested under the old law. Last fall, I had the chance to meet Saskatchewan Premier Brad Wall, another key backer of the reform, and a couple of his aides at a free- market gathering out West. When he heard I was with the Cato Institute, Wall said he’d long been a warm admirer of the Institute’s work. With good ideas as with other good things: “first the blade, then the ear, then the full grain in the ear.”

Written Testimony on the Illegal IRS Rule to Increase Taxes & Spending under Obamacare

The written testimony that Jonathan Adler and I submitted for the House Oversight Committee hearing on the Internal Revenue Service’s unlawful attempt to increase taxes and spending under Obamacare is now online. An excerpt:

Contrary to the clear language of the statute and congressional intent, this [IRS] rule issues tax credits in health insurance “exchanges” established by the federal government. It thus triggers a $2,000-per-employee tax on employers and appropriates billions of dollars to private health insurance companies in states with a federal Exchange, also contrary to the clear language of the statute and congressional intent. Since those illegal expenditures will exceed the revenues raised by the illegal tax on employers, this rule also increases the federal deficit by potentially hundreds of billions of dollars, again contrary to the clear language of the statute and congressional intent.

The rule is therefore illegal. It lacks any statutory authority. It is contrary to both the clear language of the PPACA and congressional intent. It cannot be justified on other legal grounds.

On balance, this rule is a large net tax increase. For every $2 of unauthorized tax reduction, it imposes $1 of unauthorized taxes on employers, and commits taxpayers to pay for $8 of unauthorized subsidies to private insurance companies. Because this rule imposes an illegal tax on employers and obligates taxpayers to pay for illegal appropriations, it is quite literally taxation without representation.

Three remedies exist. The IRS should rescind this rule before it takes effect in 2014. Alternatively, Congress and the president could stop it with a resolution of disapproval under the Congressional Review Act. Finally, since this rule imposes an illegal tax on employers in states that opt not to create a health insurance “exchange,” those employers and possibly those states could file suit to block this rule in federal court.

Requiring the IRS to operate within its statutory authority will not increase health insurance costs by a single penny. It will merely prevent the IRS from unlawfully shifting those costs to taxpayers.

Related: here is the video of my opening statement, and Adler’s and my forthcoming Health Matrix article, “Taxation without Representation: the Illegal IRS Rule to Expand Tax Credits under the PPACA.”

Air Traffic Control Screwups

The Washington Post today describes the latest near-miss disaster at National Airport, apparently the result of screw-ups by our government-run air traffic control (ATC) system. The Post notes that this near-accident is one of many troubling incidents in recent years:

…the near-collision was another among several thousand recorded errors by air traffic controllers nationwide in recent years. National has been the site of some of the most notable incidents, including one revealed last year in which the lone controller supervisor on duty was asleep and didn’t respond when regional controllers sought to hand off planes to National for the final approach.

News of the sleeping controller at National last year led to the revelation that controllers on overnight shifts at several other airports were napping on the job.

Is our ATC system is so troubled because it is

  • a government bureaucracy,
  • a monopoly that doesn’t face competitive pressures to improve quality, or
  • a union-dominated organization?

I don’t know the answer; maybe it’s all three. But news stories like the one today usually don’t mention the role of the unions, and newspaper readers may just conclude that the fault is simply one of a bumbling Federal Aviation Administration (FAA) bureaucracy.

However, I coincidentally received a letter in the mail today from an anonymous FAA official who points to some of the problems caused by the militant National Air Traffic Controllers Association (NATCA). He or she says that the “NATCA union holds the FAA management hostage and little is done to correct the problems … The NATCA union is too powerful and management is too intimidated to do their jobs.”

The letter writer may or may not have all his or her facts straight–the letter is here [PDF] so you can judge for yourself. However, I do think that the media could do a better job probing the role of unionization in the FAA’s substandard performance. People remember Ronald Reagan’s battle with the air traffic controllers, but that was just a blip in a much longer story. Unions have been creating problems for the ATC system since the 1960s, as I mention in this essay.

Government Can’t Censor Book Promotion

This blogpost was co-authored by Cato legal associate Kathleen Hunker.

There’s a fine line between protecting the public from fraud and censoring unorthodox opinions—a line across which the government often stumbles. That was the case in September 2007, when the Federal Trade Commission filed a contempt motion against Kevin Trudeau, author of the best-selling book The Weight Loss Cure “They” Don’t Want You to Know About.

The FTC alleged that Trudeau had misrepresented the contents of his book in several “infomercials” by describing it as “easy” and claiming that dieters, by the end of the regimen, could eat anything they wanted without gaining weight. Despite the fact that Trudeau merely quoted the book when making these statements, the district court upheld the FTC’s findings and smacked Trudeau with a staggering $37.6 million fine. The court also imposed a rare “prior restraint” on speech, demanding that Trudeau post a $2 million bond before running any future infomercials.

The district court imposed these sanctions even though the FTC never proved that Trudeau misled a single consumer or violated any part of the FTC Act. On appeal, the Seventh Circuit affirmed the district court’s decision and ruled that Trudeau’s book promotion constituted misleading commercial speech and was therefore not entitled to any constitutional protection. If left unchallenged, the Seventh Circuit’s ruling would have a dire chilling effect on authors trying to promote their work and could give government officials broad censorial power, in effect permitting the FTC to tax fine through the backdoor what it could never regulate directly (sound familiar?).

Cato has thus filed an amicus brief supporting Trudeau’s request that the Supreme Court take the case and establish a constitutional standard that allows the FTC to protect consumers from fraud while respecting the First Amendment. We argue that courts should apply strict scrutiny to any government actions that restrict or punish advertisements that merely quote and summarize parts of a book (which enjoys full constitutional protection), as Trudeau’s infomercials did.

We note that the Supreme Court has held that commercial speech inextricably intertwined with otherwise protected speech deserves a high degree of First Amendment protection. Moreover, it is well-established that falsity alone may not remove speech from the shelter of the First Amendment.

Free speech loses its vitality when confronted with overzealous regulation; strict scrutiny of would-be government censors would give authors the necessary “breathing space” to publicize their work without the threat of exorbitant fines.

The Supreme Court will decide this fall whether to take the case of Trudeau v. FTC.

Obama’s Right—in a Perverse Way—about Government Playing an Important Role for Small Businesses

President Obama recently got himself in hot water with his “you didn’t build that” remark, which trivialized the hard work of entrepreneurs.

But he is right—in a perverse way—about government playing a big role in the life of small businesses. Thanks to a maze of regulations, the government is an unwelcome silent partner for every entrepreneur. And we’re not talking small numbers.

But sometimes an image helps to make things easy to understand. Here’s a chart from the Joint Economic Committee, which maps out the web of regulation imposed by Washington:

This chart does more than just show sources of red tape coming from Washington. It shows that “Washington” is really several entities, such as Congress, the executive branch, the courts, and so-called independent regulatory agencies. These entities then impose regulatory burdens in various fields, such as labor, finance, tax, and environment.

Keep in mind, by the way, that each small pink circle actually represents an entire field of regulation. So when you see, for instance, the “Obamacare” circle (below), what you’re really seeing is the nightmarish image of regulatory complexity.

And don’t forget the role of state and local government.

Last but not least, remember that each regulatory bureaucracy is capable of making individual decisions that … well, you judge for yourself:

Gee, it’s almost enough to make you think regulation might be the problem and not the solution.