News for September 2011

Pirates May Not Be Pirates

The Fourth Circuit heard arguments today in United States v. Abdi Dire, an appeal of the first piracy conviction in a U.S. courtroom in nearly 200 years.  Kevin Walsh has an excellent synopsis of the oral arguments, available here.  The defendants, five Somali pirates, were convicted for their attack on the U.S.S. Nicholas in in April, 2010.  The Nicholas was in the Indian Ocean north of the Seychelles Islands.  Three pirates approached in a skiff, fired rocket-propelled grenades in the air and raked the ship with AK-47 fire, but did not board the ship. No sailors were injured in the attack.

In short, the pirates’  position is that their actions did not constitute piracy, in the legal sense, because they did not board the ship or rob it.  They argued that the Supreme Court has been clear about a key element of piracy: “It is robbery at sea.” But the government said Congress has embraced a broader definition of piracy based on international policy and a common understanding of the term.  Under the government’s definition, piracy includes “violent attacks on the high seas” and does not require actual robbery.

The Nicholas was part of an international flotilla combating piracy in the seas off Africa.  The Somalis mistook it for a merchant ship because the Navy used a lighting array to disguise the 453-foot warship and attract pirates.  The pirates also argued that they were not read their Miranda rights once they were captured by the crew of the Nicholas.

The Nicholas ruling could have an impact beyond that case. Last August, a judge in Norfolk dismissed piracy counts against five defendants accused in an attack on another Navy ship, the USS Ashland. In attack on the Ashland, a 610-foot dock landing ship, the ship’s 25mm cannons destroyed a skiff, killing one Somali man and injuring several others.  The judge concluded that since the men had not taken control or robbed the ship their actions did not rise to the nearly 200-year-old U.S. Supreme Court definition of piracy.  The government appealed the Ashland ruling, but the Fourth Circuit set that aside until they heard the  Nicholas case.  The last U.S. conviction for piracy was in 1819, and involved a foreign vessel. U.S. piracy law was based on that case.



Posted: September 22nd, 2011
Categories: Pirates
Comments: No Comments.

Eleventh Circuit Rules for Spain in Shipwreck Treasure Case

In 2007, a band of American explorers recovered 17 tons of gold coins from a sunken Spanish galleon off the coast of ——.  Today, the Eleventh Circuit ruled that the men surrender the treasure to Spain.  For the opinion, go here.

Posted: September 22nd, 2011
Categories: Pirates, Property
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Open season on the underwolves

On August 25, 2011, the Ninth Circuit denied an emergency motion for an injunction pending appeal to re-instate Endangered Species Act protections for gray wolves in Montana, Idaho, Oregon, Washington, and Utah. For the order, go here. Environmental groups appealed the case to the Ninth Circuit on August 13, after a federal district court upheld legislation directing the U.S. Fish & Wildlife Service to reissue a 2009 rule that removed ESA restrictions on the gray wolf.  Decision here. The same rule was determined by a district court to be illegal in 2010, here.

The environmental groups asserted, among other things, that the legislation violated separation-of-powers doctrine because Congress had ordered an outcome in ongoing litigation without amending the underlying law, thereby blocking judicial review. Brief here.  The Service asserted that the environmental groups were not likely to succeed on the merits given controlling case law, and that no evidence had been produced showing that the viability of the gray wolf population would be irreparably harmed by the transfer of management authority over the wolves to the states. Opposition brief here.

The Court set an expedited briefing schedule for the merits of the appeal, and expects to hear the case in November 2011. In the meantime, Idaho opened its wolf-hunting season on August 30, 2011 and Montana is scheduled to open its season on September 30, 2011.

Posted: September 21st, 2011
Categories: Endangered Species Act, Wolves!
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Court v. ACA

The Supreme Court appears headed for its most dramatic foray into partisan politics since Bush v. Gore. Challenges to President Obama’s health care law have started to work their way toward the Court and have been sustained by two Republican-appointed district judges.

The constitutional objections are silly. However, because constitutional law is abstract and technical and because almost no one reads Supreme Court opinions, the conservative majority on the Court may feel emboldened to adopt these silly objections in order to crush the most important progressive legislation in decades. One lesson of Bush v. Gore, which did no harm at all to the Court’s prestige in the eyes of the public,is that if there are any limits to the Justices’ power, those limits are political: absent a likelihood of public outrage, they can do anything they want. So the fate of health care reform may depend on the constitutional issues being understood at least well enough for shame to have some effect on the Court.

The Patient Protection and Affordable Care Act (PPACA) includes a so-called “individual mandate,” which is actually a tax that must be paid by individuals who fail to meet a minimum level of health insurance coverage.This mandate is the focus of challenges to the law. Without the mandate, the law’s protection of people with preexisting conditions would mean that healthy people could wait until they get sick to buy insurance. Because insurance pools rely on cross-subsidization of sick people by healthy participants, this would bankrupt the entire health insurance system. The individual mandate charges those people for at least some of the costs they impose on their fellow citizens. Massachusetts, acting a few years before the federal law, combined its guarantee of coverage with a mandate, but seven other states tried to protect people with preexisting conditions without mandating coverage for everyone. The results in those states ranged from huge premium increases to the complete collapse of the market.

Two federal district judges have declared this provision unconstitutional. The novel approach to constitutional law that they propose would misread the Constitution, betray the intentions of the Framers, and cripple the nation’s ability to address one of its most pressing problems.

The correct legal analysis is simple. Congress has the authority to solve problems that the states cannot separately solve. It can choose any reasonable means to do that.

Part I of this Essay presents a brief explanation of why Congress has the power to enact this law. Part II rebuts the constitutional objections. Part III offers what the law’s opponents have demanded: an account of the limits of congressional power. Part IV explains why federal action was necessary in this case. Part V critiques the radical libertarianism that underlies the constitutional case against the law, a case that is encapsulated in the notorious “Broccoli Objection.” Part VI concludes.

I. The Obvious Constitutionality

The mandate is within Congress’s power under Article I, Section 8 of the Constitution to “regulate Commerce . . . among the several states.” Under settled present law, some of it nearly two hundred years old, Congress may regulate activity that has a substantial effect on interstate commerce. As recently as 2005, the Supreme Court held that Congress may regulate local noneconomic behavior when such regulation is an “‘essential part[] of a larger regulation of economic activity, in which the regulatory scheme could be undercut unless the intrastate activity were regulated.’” The Court thus upheld a federal ban on growing marijuana for personal consumption.

The power to regulate insurance markets is part of the commerce power. The Supreme Court declared in 1944: “Perhaps no modern commercial enterprise directly affects so many persons in all walks of life as does the insurance business. Insurance touches the home, the family, and the occupation or the business of almost every person in the United States.” So Congress has the power to impose regulations to make sure that huge numbers of Americans do not go uninsured.

The problem of insuring those with preexisting conditions could be addressed with a single-payer insurance system of the kind that exists in Canada, France, England, the Netherlands, and Australia. In such systems,everyone gets insurance provided by the government, funded by general taxation. The American government already forces you to buy single-payer insurance against poverty in your old age: Social Security. A similar single-payer system of medical care makes a great deal of sense, but too many powerful interests were arrayed against it for it to have any hope of enactment. Political obstacles aside, Congress is entitled to decide that a government monopoly of health provision would be inefficient and that insurance is best provided by the private sector. In that case, the only way to guarantee health insurance for everyone is to require the healthy to purchase private insurance. The remedy tightly fits the problem.

Congress has discretion to decide the best way to exercise its authority. The list of congressional powers in Article I ends with an authorization to “make all Laws which shall be necessary and proper” to carry out its responsibilities. The interpretation of this provision was settled in 1819 by Chief Justice John Marshall inMcCulloch v. Maryland. The central question in McCulloch was whether Congress had the power to charter the Bank of the United States, the precursor of today’s Federal Reserve Bank. The Constitution does not enumerate any power to create corporations. The State of Maryland, which was trying to tax the Bank out of existence, argued that the “necessary and proper” language permitted Congress only to choose means that were absolutely necessary to carry out those powers. Marshall rejected this reading, which would make the government “incompetent to its great objects.” The federal government must collect and spend revenue throughout the United States, Marshall observed, and so must quickly transfer funds across hundreds of miles.“Is that construction of the constitution to be preferred which would render these operations hazardous, difficult, and expensive?” Without implied powers, Congress’s power “to establish post offices” could not entail the ability to punish mail robbers and might not even entail the power to carry letters from one post office to another. “It may be said, with some plausibility, that the right to carry the mail, and to punish those who rob it, is not indispensably necessary to the establishment of a post office and post road.” He concluded that Congress could choose any convenient means for carrying out its enumerated powers.

The basic rule of McCulloch was reaffirmed by the Court as recently as May 2010 in United States v. Comstock.In deciding whether Congress is appropriately exercising its powers under the Necessary and Proper Clause, the question is “whether the statute constitutes a means that is rationally related to the implementation of a constitutionally enumerated power.” The choice of means is left

“primarily . . . to the judgment of Congress. If it can be seen that the means adopted are really calculated to attain the end, the degree of their necessity, the extent to which they conduce to the end, the closeness of the relationship between the means adopted and the end to be attained, are matters for congressional determination alone.”

Thus, for example, even though the Constitution mentions no federal crimes other than counterfeiting, treason, and piracy, Congress has broad authority to enact criminal statutes. The Constitution does not mention the individual mandate either, but Congress nonetheless has broad authority to impose monetary costs on those who choose to go without insurance.

II. The Purported Constitutional Limitations

Now that I have laid out the simple case for the bill’s constitutionality, I will take up the objections that claim to complicate that case.

A. The Commerce Power

The principal complaint about the mandate is that Congress should only be able to regulate economic activity, and the mandate is not a regulation of any activity. David Rivkin and Lee Casey object that it will “apply to every American simply because they exist.” But for reasons already explained, unless free riders are brought into the system, there is no way to insure everyone else. The Virginia judge, Henry Hudson, nonetheless declared that in order to be subject to regulation by Congress, an individual had to engage in “some type of self-initiated action.” The Florida judge, Roger Vinson, similarly argued that failure to purchase health insurance is “inactivity” and that Congress cannot regulate inactivity.

Vinson acknowledged that there is no authority for the activity/inactivity distinction but cited United States v. Lopez for the proposition that, unless the commerce power is somehow limited, it would be “difficult to perceive any limitation on federal power.” If Congress can regulate inactivity, Vinson declared, it “could do almost anything it wanted,” and “we would have a Constitution in name only.” Lopez itself, however, imposed limits on federal power, even though the law it struck down (a ban on possessing handguns near schools) did not regulate inactivity. Lopez constrains Congressional power without relying on the activity/inactivity distinction. The authority on which Vinson relies undermines the point he is trying to make.

It is an interesting semantic question whether the decision to free ride on the health care system without paying for insurance is economic activity. It is an economic decision with economic consequences, but it still may not be economic activity, and a great deal of ink has been spilled on that question. But it does not matter. Under the Necessary and Proper Clause, it is enough that there is a national problem that only Congress can solve, and that “‘the means chosen are reasonably adapted to the attainment of a legitimate end.’”

Opponents of the mandate claim that, even if Congress can regulate health care, it cannot demand that you purchase private insurance. “Congress has never before mandated that a citizen enter into an economic transaction with a private company,” writes Professor Randy Barnett, “so there can be no judicial precedent for such a law.” But when Congress chartered the Bank of the United States, it had never done that before either. The underlying principle behind the individual mandate is not novel at all. The Court declared it inMcCulloch: a government that has the right to do an act—here, to regulate health care—“must, according to the dictates of reason, be allowed to select the means.”

B. The Necessary and Proper Clause

Judges Hudson and Vinson both supposed that the commerce power is somehow a limit on Congress’s power to choose appropriate means.

“If a person’s decision not to purchase health insurance at a particular time does not constitute the type of economic activity subject to regulation under the Commerce Clause,” Judge Hudson declared, “then logically, an attempt to enforce such provision under the Necessary and Proper Clause is equally offensive to the Constitution.” By the same “logic,” if I cannot pick up a pencil with my brain, then it follows that I cannot do it with my hand either. This reads the Necessary and Proper Clause out of the Constitution completely, and it inverts the fundamental McCulloch principle. Try this reasoning in a few other constitutional contexts. If locking up mail robbers is no part of the operation of a post office, then an attempt to do that under the Necessary and Proper Clause is equally offensive to the Constitution. If growing marijuana for one’s own consumption is not regulable economic activity, then it too is immune from federal law.

Judge Vinson acknowledged, and even quoted, Chief Justice Marshall’s declaration in McCulloch that if “‘the end be legitimate,’” then “‘all means which are appropriate, which are plainly adapted to that end . . . are constitutional.’” He then admitted that, under the settled meaning of the commerce power, which he did not question, “regulating the health care insurance industry (including preventing insurers from excluding or charging higher rates to people with pre-existing conditions)” is a legitimate end. But, three sentences later, he declared, “The Necessary and Proper Clause cannot be utilized to ‘pass laws for the accomplishment of objects’ that are not within Congress’s enumerated powers.” Did he so quickly forget that he had just admitted that the object was within Congress’s enumerated powers?

Judge Vinson noted that the government has “asserted again and again that the individual mandate is absolutely ‘necessary’ and ‘essential’ for the Act to operate as it was intended by Congress. I accept that it is.”Indeed, because the mandate was so necessary to the legislative scheme, he declared it nonseverable and invalidated the entire law. This stipulated necessity implies that even if McCulloch had come out the other way—even if Marshall had accepted Maryland’s claim that any Congressional action must be absolutelynecessary to the exercise of an enumerated power—the mandate would be authorized by the Necessary and Proper Clause.

Vinson did suggest a more definite limitation on Congressional power: the Necessary and Proper Clause cannot be invoked if the problem Congress is trying to address is Congress’s own fault. Here is the argument:

[R]ather than being used to implement or facilitate enforcement of the Act’s insurance industry reforms, the individual mandate is actually being used as the means to avoid the adverse consequences of the Act itself. Such an application of the Necessary and Proper Clause would have the perverse effect of enabling Congress to pass ill-conceived, or economically disruptive statutes, secure in the knowledge that the more dysfunctional the results of the statute are, the more essential or “necessary” the statutory fix would be. Under such a rationale, the more harm the statute does, the more power Congress could assume for itself under the Necessary and Proper Clause. This result would, of course, expand the Necessary and Proper Clause far beyond its original meaning.

If, however, Congress has no power to address negative consequences that follow from its own statutory scheme, then Chief Justice Marshall was wrong about mail robbery after all. Mail robbery is an adverse consequence of Congress’s decision to establish a post office: had it not done that, all those valuable documents would not be gathered together in one place. But, you might say, That is crazy; of course Congress can decide that it’s worth having a post office, even if establishing one creates negative side effects, which then must be addressed. If, as Judge Vinson admitted, Congress can also decide that people with preexisting conditions can be protected, then these cases are indistinguishable.

C. The Taxing Power

Even if you somehow suppose that the health care mandate exceeds the commerce power, it would be valid anyway as an exercise of the power to tax. Congress has a general power to “collect Taxes” to provide for the “general Welfare of the United States.” The taxing power is not limited to objects of interstate commerce. A tax, the Court held in 1950, does not become unconstitutional “because it touches on activities which Congress might not otherwise regulate.” A claim that the tax is a “direct tax”—forbidden by Article I, Section 9—is even stranger, since the mandate is neither a general tax on individuals nor a tax on real estate, the original targets of this obscure and now rarely invoked provision.

Judges Hudson and Vinson declared that the mandate is not a tax because some of the law’s sponsors sometimes claimed that it was not and because the statute declared that it was based on the commerce power. This reasoning would create two remarkable new doctrines: federal courts have authority to police the public statements of politicians, and Congress must expressly invoke all possible constitutional bases for legislation. It is, however, long-settled doctrine that federal statutes are presumed to be constitutional and that—as the Supreme Court said in 1948—“[t]he question of the constitutionality of action taken by Congress does not depend on recitals of the power which it undertakes to exercise.” Judge Vinson also repeatedly suggested that whenever Congress does something it has not done before, its action is presumptively unconstitutional. These new rules would, if consistently applied, randomly blow up large parts of the U.S. Code. This is constitutional interpretation undertaken in the spirit of a saboteur in wartime.

III. The Real Constitutional Limits

Steven Lubet has offered an elegant summary of the constitutional claim against the federal health insurance mandate: “(1) There must be some limit on federal power; (2) I can’t think of another one; and therefore, (3) the limit must preclude the individual mandate.”

There may be no need for judicially imposed limits on Congressional power. There were practically no such limits between the 1930s and the 1990s, yet the federal government did not take over all state functions: tort law, contract law, criminal law, and education remained dominated by state law. Lopez imposed a new restriction, though its contours remain uncertain. The Lopez Court thought it relevant that Congress was trying to regulate noneconomic activity, and the Court later suggested in United States v. Morrison that Congress has broad authority over the economy. This economic/noneconomic test supports the 1944 holding that Congress can regulate insurance.

There is, however, reason to doubt the soundness of the economic/noneconomic line. While it makes sense to say that Congress can regulate any economic transaction, the Court’s language suggests that this might be the test, not only for what is included in the commerce power, but also for what is excluded. If that were the rule,then Congress would be deprived of authority over such nontrivial matters as the spoliation of the environment or the spread of contagious diseases across state lines. The Court has already suggested on this basis that Congress may not have the power to regulate wetlands that are wholly within a single state.

A better rule would implement the line that the Framers of the Constitution drew—a line that has nothing to do with the activity/inactivity distinction, although it supports congressional regulation of the economy. This line also supports the mandate.

At Philadelphia in 1787, the Convention resolved that Congress could “legislate in all cases . . . to which the States are separately incompetent, or in which the harmony of the United States may be interrupted by the exercise of individual legislation.” This was then translated by the Committee of Detail into the present enumeration of powers in Article I, Section 8, which was accepted as a functional equivalent by the Convention without much discussion. Article I, Section 8 includes the commerce and “necessary and proper” provisions.

Did the Committee of Detail botch its job, limiting congressional power more than the Convention intended and creating a regime in which Congress could not legislate in cases the separate states were incompetent to address? Did the Convention not notice the massive change? No. “[T]he purpose of enumeration,” Jack Balkin observes, “was not to displace the principle but to enact it.” This language was accepted without objection for good reasons. Balkin shows that the word “commerce” at the time of the framing referred to all interaction between people, and so “the commerce power authorizes Congress to regulate problems or activities that produce spillover effects between states or generate collective action problems that concern more than one state.” If health care markets involve such effects or problems, then the mandate presents, once more, an easy case. The Framers’ most important decision was to replace the weak Articles of Confederation with a central government strong enough to address common problems. This is not a recipe for unlimited power: grandstanding statutes that horn in on matters that are purely local, such as the federal ban on the possession of handguns near schools that the Supreme Court struck down in Lopez, exceed the commerce power. But the national health care insurance market is not a purely local matter.

This approach justifies congressional authority over the economy, even in its local incidents, because the United States in fact has a single unified economy. You may, however, wonder whether health care reform happens to be another unnecessary centralization of an area that states were handling perfectly well. If it is, this might raise doubts about the Court’s decision—which, I emphasize, is settled law—to concede to Congress’s broad economic authority, and perhaps would even justify a reshaping of settled law to put a stop to this centralization. I now address this concern.

IV. Why Congressional Action Was Necessary

One thing that the Framers did not anticipate was the spectacular advances of the past two hundred years in our capacity to treat disease, prolong life, and ameliorate congenital illness. Many of these innovations are expensive. So with modern medicine comes a new kind of moral horror: the patient with a treatable disease who cannot afford to pay for the treatment.

The spillover effects are clear. Individuals with preexisting conditions are deterred from pursuing new opportunities in states where insurers are allowed to deny them coverage. Those with preexisting conditions whose jobs provide insurance are locked into those jobs: they are afraid to move to a different employer or to start their own businesses. Both of these effects burden the American economy as a whole.

Health insurance regulation also presents a collective action problem. The reform of the American health care system to ensure that no one would be uninsurable or bankrupted by illness was too big a task for the states to address individually. It requires more regulatory skill than most states can muster.

How can we know that collective action problems are the reasons why states have not undertaken massive health care reform? Could it not rather be evidence that local preferences are different in different places and that federalism has enabled variation of a benign sort?

It is difficult to know for certain why legislation does not get enacted. But there are several pieces of information that can be the basis of reasonable inferences. One of these is that, according to a February 2011 Kaiser poll, an overwhelming majority of Americans—72 percent—supported guaranteed insurance for people with preexisting conditions. Yet only Massachusetts managed to implement it. If states are not delivering guaranteed insurance, it is not because the electorate likes that state of affairs. Contrast the law at issue inLopez: it was obvious that nothing prevented states from banning handguns near schools, because more than forty of them already had such laws.

Massachusetts is the only state that managed to expand health insurance in the way that the new federal statute does. It has been very successful: less than 3 percent of the state’s population was uninsured by 2008, compared with 14 percent before implementation. The state embarked on that project with some unusual advantages. The number of uninsured persons was relatively low when the policy was adopted. Many of the uninsured were eligible for Medicaid. The percentage of the population carrying employer-sponsored coverage, along with per capita income, was unusually high, creating a larger tax pool. The level of insurance was already quite good, and so the transition was not an enormous lurch. A recent study describes the comparative obstacles faced elsewhere:

Other states will start with very different baseline benefits generally available. For example, some states have a high penetration of high-deductible plans; others are dominated by one or two insurers with a particular set of benefits; and still others have a range of insurance products with significant differences in benefit levels. Requiring comprehensive benefits similar to Massachusetts in these states would likely entail requiring many who currently have insurance to change or upgrade their plans in order to comply. Employers would have to consider upgrading plans at great expense. This could ultimately jeopardize broader support for a reform program. Conversely, setting the [minimal level of coverage] at the least common denominator plan may leave many without adequate coverage and underinsured.

All of these factors are substantial obstacles to replicating what Massachusetts has done, even if another state’s citizens want to do so.

There is also the problem of adverse selection. Any state that mandates insurance for preexisting conditions risks attracting sick people and driving away healthy ones. The magnitude of this effect is uncertain, but its effect on states’ incentives is plain. There is not much evidence for the notion that high levels of public support are “welfare magnets” that attract the poor across state lines, but fear of creating such magnets has made it hard to ameliorate poverty. A similar dynamic is likely at work here. How great is the danger, really? It is hard to say. People make residence decisions based on a wide range of factors, including the availability of benefits. In the health insurance case, the answer probably varies from one place to another, depending on the costs of moving. For example, the heavy burdens borne by Tennessee’s health care system may be related to the fact that its most populous city, Memphis, is bordered by Mississippi and Arkansas, which offer much lower benefits. TennCare insurers are also concerned that patients from other states may be establishing residency in Tennessee in order to obtain coverage for organ transplants. There is no data available on this question, but it is hard to believe that no one responds to incentives when failure to do so is literally suicidal. Whatever the facts are, the political obstacle is a powerful one. States are reluctant to legislate because they worry that they will lose the race to the bottom. These collective action problems mean that most states cannot reform health insurance even if they all would prefer to. It is a matter in which the states are separately incompetent. Congress has the power to regulate insurance, the Court noted in 1944, because it has power “to govern affairs which the individual states, with their limited territorial jurisdictions, are not fully capable of governing.”

Compare the case of child labor. When Congress acted in 1916 to ban the interstate shipment of the products of child labor, the government warned that, absent such a law, “[t]he shipment of child-made goods outside of one State directly induces similar employment of children in competing States.” The collective action problem weighed heavily on state policymakers. The Supreme Court’s invalidation of the law astounded even those who had most strenuously opposed enactment and provoked a wave of national revulsion and the rapid enactment of a second law—a tax on products of child labor—which the Court also invalidated. Jonathan Adler,a prominent defender of Judge Hudson’s decision, does not believe the race-to-the-bottom argument in this context either, noting that at the time every state already had a law restricting child labor. This, however, ignores the enormous variation in child labor policy: some laws were weak; others were ineffectively enforced. Interstate competition kept them weak.

The precise uncertainty that drives the objection—that it is hard to know when a race to the bottom is happening—is part of the collective action problem. States do not know whether they will be disadvantaged in interstate competition by having welfare-promoting legislation. This deters them from enacting it. Congress does not have this problem.

As noted earlier, because there is a unified national economy, courts do not and should not demand proof of collective action problems before sustaining economic regulations such as the mandate. With respect to noneconomic regulations, such as environmental laws, all that it makes sense for courts to ask for is (1) a plausible description of a collective action problem and (2) evidence of the failure of states to solve it. As we have already seen, neither (1) nor (2) was available in Lopez. Both are present in the health care context.

V. The Broccoli Revolution

If the limitations they demand are not accepted, Rivkin and Casey warn, Congress will have the power to do absolutely anything it likes, and “the whole concept of the federal government being a government of enumerated and limited powers goes out the window.” Judge Vinson worried that “Congress could require that people buy and consume broccoli at regular intervals.”

They understand perfectly well that the law is permissible under presently prevailing interpretations of the Constitution. What they really want is, not to invoke settled law, but to replace the constitutional law we now have with something radically different. They claim originalist credentials, but, as we have seen, these are bogus. Their proposed reinterpretation of the Constitution would mean that the problem of preexisting conditions cannot be solved at all. A regime in which major national problems cannot be solved by anyone is what the Framers were attempting to replace.

The Broccoli Objection, as I will call it, rests on several mistakes. One of these is mushing two claims together, so that the weaker one sneakily borrows support from the stronger, but less relevant, one. Yes, government cannot make you eat broccoli. That would violate the constitutional right to bodily integrity that supports, for example, the right to refuse unwanted medical treatment. But there is no such right to economic liberty. The economic claim collapses once it is decoupled from the bodily integrity claim. If Congress has broad authority over the economy, then it can make you buy broccoli.

How scary is that? It is hard to see how such a law could be justified. It would be an abuse of Congress’s broad authority under Morrison, because the law would not be addressing any collective action problem. But this hypothetical is not an objection to the mandate that Congress actually enacted. There are manifest differences between broccoli and health insurance: no one unavoidably needs broccoli; it is not unpredictable when one will need broccoli; broccoli is not expensive; providers are permitted by law to refuse it; and there is no significant cost-shifting in the way it is provided.

Here we come to the Broccoli Objection’s second mistake: treating a slippery slope argument as a logical one, when in fact it is an empirical one. Frederick Schauer showed over twenty-five years ago that any slippery slope argument depends on a prediction that doing the right thing in the instant case will, in fact, increase the likelihood of doing the wrong thing in the danger case. If there is no danger, then the fact that there logically could be has no weight. For instance, the federal taxing power theoretically empowers the government to tax incomes at 100 percent, thereby wrecking the economy. Relax! It will not happen. John Hart Ely defended his rejection of substantive due process against the objection that Congress could then ban the removal of diseased gall bladders by noting that such a law could not possibly pass. What he wrote then is remarkably pertinent: “[I]t can only deform our constitutional jurisprudence to tailor it to laws that couldn’t be enacted, since constitutional law appropriately exists for those situations where representative government cannot be trusted, not for those where we know it can.”

Similarly with the Broccoli Objection. The fear rests on one real problem: there are lots of private producers, including many in agriculture, who will lobby to use the coercive power of the federal government to transfer funds from your pockets into theirs. The last thing they want to do, however, is impose duties on individuals, because then the individuals will know that they have been burdened. There are too many other ways to get special favors from the government in a less visible way. So Congress is never going to try to make you eat your broccoli.

On the other hand, you are probably already consuming more high-fructose corn syrup than is good for you. Subsidies for the production of corn have produced huge surpluses of the syrup, which in turn becomes a cheap ingredient for mass-produced food and turns up in a remarkable amount of what you eat. So consumers have to face obesity, diabetes, and dental caries, but no mandate! You and I are paying for this travesty, and it is happening in such a low-visibility way that many of us never realize that Dracula has been paying regular visits. The Broccoli Objection thus distracts attention from the real problem, one that will not be addressed by the action/inaction distinction. If the Supreme Court is going to invent new limits on the legislature, it should do so in a way that has a real chance of preventing actual abuses. Otherwise it is hamstringing the legislature for no good reason.

In the context of federalism, slippery slope arguments have an unpleasant history. When it struck down the first child labor law in 1918, the Supreme Court declared—in tones reminiscent of the Broccoli Objection—that if it upheld the law, “all freedom of commerce will be at an end, and the power of the States over local matters may be eliminated, and, thus, our system of government be practically destroyed.” The decision was overruled in 1941. Our system of government was not destroyed. The real lesson of this episode is that the desire to rein in government power can create a slippery slope of its own, to a state of affairs in which collective action problems go unsolved. What the Court actually accomplished in 1918 was to thwart democracy and consign large numbers of children to the textile mills for two decades. Health care is another context in which the Court is at serious risk of ravaging the lives of large numbers of actual people. In both the child labor and health care contexts, opponents of reform flee from illusory dangers into the jaws of real ones.

If the law’s critics are right, we have an obligation to replace the well-functioning constitutional system we have inherited with one that is radically defective. Marshall was right. A construction that denied Congress the power to choose the most sensible method for carrying out its lawful purposes would be “so pernicious in its operation that we shall be compelled to discard it.”

What really drives the constitutional claims against the bill is not arguments about the commerce power or the taxing power but an implicit libertarianism which focuses on the burden a law imposes on individuals and pays no attention at all to legitimate state interests. A Heritage Foundation paper warns: “Mandating that all private citizens enter into a contract with a private company to purchase a good or service, or be punished by a fine labeled a ‘tax,’ is unprecedented in American history.” The Florida Attorney General argued for a substantive constitutional right “to make personal healthcare decisions without governmental interference.” Near the end of his opinion, in a dictum that evidently reveals what is really bothering him, Judge Hudson writes: “At its core, this dispute is not simply about regulating the business of insurance–or crafting a system of universal health insurance coverage–it is about an individual’s right to choose to participate.”

The Supreme Court rejected the purported “inherent right of every freeman to care for his own body and health in such way as to him seems best” in 1905, in Jacobson v. Massachusetts. The claimant there asserted that mandatory smallpox vaccination violated his rights. It is true that vaccination is an imposition on one’s liberty. Dying of smallpox is also an imposition on one’s liberty.

Jacobson was decided the same year as the infamous Lochner v. New York, in which the Court invented a right of employers to be free from maximum hours laws. Many in the legal community have regarded the constitutional objection to the mandate as a return to Lochner, but the “right” that the mandate is supposed to violate was too much even for the Lochner Court. Was Jacobson wrong? Does the Constitution protect the smallpox virus?

This implicit libertarianism is pervasive in these arguments against the law, but it is intellectually incoherent, because the argument purports to apply only against the federal government, not the states. It has not been explained where this individual right is supposed to come from—it happens not to be mentioned in the text of the Constitution—or why it does not also invalidate anything that the states might do to force people into insurance pools.


What will the Supreme Court do? There is no nice way to say this: the silliness of the constitutional objectionsmay not be enough to stop these Justices from relying on them to strike down the law. The Republican Party, increasingly, is the party of urban legends: that tax cuts for the rich always pay for themselves, that government spending does not create jobs, that government overregulation of banks caused the crash of 2008, that global warming is not happening. The unconstitutionality of health care reform is another of those legends, legitimated in American culture by frequent repetition.

If the Constitution were as defective as the bill’s opponents claim it is, a regime in which national problems must remain permanently unsolved, why would it deserve our allegiance? The sensible thing to do would be to try to get free of it, to try—by amendment or judicial construction—to nullify its limits so that we can live in a humanly habitable world. To continue to live with such a perverse Constitution would be mindless ancestor worship.

But the opponents of reform have been unfair to the Framers. Chief Justice Marshall was right when he said that the Constitution does not “attempt to provide, by immutable rules, for exigencies which, if foreseen at all, must have been seen dimly, and which can be best provided for as they occur.” Instead, it provides a structure for us to govern ourselves. That is what Congress did when, at long last, it took on the spectacularly broken American system of health care delivery.

Posted: September 21st, 2011
Categories: Blog, Health Care
Comments: No Comments.

Consider the Alternative

The Bureau of Land Management (BLM) and United States Forest Service (USFS) recently considered four alternatives for a drilling proposal in the Pinedale Resource Area of the Wyoming Range. In the Draft Environmental Impact Statement (DEIS), BLM rejected two alternatives as unreasonable. The remaining two alternatives – including the alternative selected by BLM – were substantially identical. None of the alternatives included what I would consider reasonable environmental protection for watersheds and habitat.

BLM has the authority — and, according its own guidance documents, a duty —  to consider an alternatives that impose stringent environmental protections.  This position has ample support in the case law interpreting an agency’s responsibility to “objectively evaluate all reasonable alternatives” under the National Environmental Policy Act (NEPA).

The purpose and scope of a project define the range of alternatives that must be considered in an EIS. BLM is required to “take environmental values into account” in carrying out its regulatory functions for oil and gas development. It also has a substantive duty to “minimize damage to . . . fish and wildlife habitat and otherwise protect the environment.” Given that the rights granted in an oil or gas lease are explicitly “subject to” BLM’s right to condition development for its environmental purposes, measures to protect watersheds and fish are consistent with the purpose and scope of any proposal to drill on a lease. Therefore, to the extent that these measures are feasible and effective, they are reasonable alternatives and should be fully analyzed in the EIS.

I. The Alternatives Requirement

BLM must “rigorously explore and objectively evaluate all reasonable alternatives” when formulating a DEIS so that reviewers may evaluate their comparative merits. The alternatives section must also include a discussion of appropriate mitigation measures. While NEPA does not require the agency to analyze alternatives it has in good faith rejected as too remote, speculative, impractical, or ineffective, it does require the development of information sufficient to permit reasoned choice of environmental protections. Accordingly, the existence of a reasonable, but unexamined, alternative renders the EIS inadequate.

TU’s desired alternative would likely be considered a “reasonable” alternative. An alternative is “reasonable” only if it falls within the agency’s statutory purposes. For BLM, the alternative must fall within its duties under the Mineral Leasing Act (MLA) and Federal Land and Policy Management Act (FLMPA). The FLPMA\ directs BLM to “minimize damage to . . . fish and wildlife habitat and otherwise protect the environment.” The MLA requires BLM to “regulate all surface-disturbing activities conducted pursuant to any lease . . . in the interest of conservation of surface resources.” Thus, an alternative that would impose strict protections for watersheds and fish habitat is reasonable because it is consistent with BLM’s responsibilities under these statutes.



II. Seminal Cases Discussing the Alternatives Requirement


A. Methow Valley – Duty to discuss mitigation measures


The Supreme Court confirmed an agency’s duty to consider adequate mitigation measures under NEPA in Robertson v. Methow Valley Citizens Council. in Methow Valley, the plaintiffs challenged a Forest Service permit for a ski resort in a national forest. The Court held that the requirement that an agency consider mitigation measures is implicit in “NEPA’s demand” and CEQ regulations. The omission of a “reasonably complete discussion” of mitigation measures would undermine NEPA’ s action-forcing function. Without such a discussion, the Court added, neither the agency nor other interested groups or individuals could properly evaluate the severity of the adverse effects of the action.

NEPA’s requirement to discuss mitigation, however, ends with the discussion. There is no substantive requirement that a complete mitigation plan be actually formulated or adopted. Methow Valley rejected the Ninth Circuit decision that the Forest Service had the duty to develop necessary mitigation measures before it could issue a permit for the ski resort.

Despite this holding, Methow Valley’s emphasis on the need to discuss mitigation measures in impact statements reinforces the importance of mitigation in the NEPA process, and supports TU’s desire to require BLM to consider environmental alternatives in the future. Indeed, lower federal courts now give discussion of mitigation measures careful attention. Methow Valley’s reliance on CEQ’s interpretation of the Act also strengthens the role of CEQ in defining the impact statement process and what it should contain, including discussion of adequate mitigation measures.


B. Calvert Cliffs – NEPA’s Alternatives Requirements

NEPA actually contains two provisions requiring a discussion of alternatives. The provision requiring the preparation of impact statements requires a discussion of “alternatives to the proposed action.” Another provision, § 102(2)(E), requires agencies to “study, develop, and describe appropriate alternatives to recommended courses of action in any proposal which involves unresolved conflicts concerning alternative uses of available resources.”

The importance of both alternatives requirements was emphasized in the first landmark case on NEPA, Calvert Cliffs’ Coordinating Committee, Inc. v. Atomic Energy Commission. The court noted that the alternatives requirements seek—


to ensure that each agency . . . takes into proper account all possible approaches to a particular project . . . which would alter the environmental impact and the cost-benefit analysis. Only in that fashion is it likely that the most intelligent, optimally beneficial decision will ultimately be made.


Courts have held that agencies must comply with the alternatives requirement in § 102(2)(E) even when they do not have to prepare an impact statement. Although the alternatives requirement in § 102(2)(E) imposes somewhat different responsibilities and may be more rigorous than the requirement to discuss alternatives in an impact statement, courts often view the two alternatives requirements as interchangeable. Nonetheless, Calvert Cliffs lends further support to TU’s desire for the BLM to consider environmental alternatives in the future by recognizing the purpose and importance of both alternatives requirements.


C. California v. Block – Inadequate Range of Alternatives

The opinion in State of California v. Block contains an extension discussion of the duty to consider an adequate range of alternatives. In Block, the Plaintiffs challenged the EIS informing the Forest Service’s decision over which portions of a 62 million-acre national forest should remain roadless and designated wilderness. The Service considered 11 alternatives, ranging from the extremes of all wilderness to no wilderness. In between the extremes, however, none of the alternatives considered allocating more than 33% of the roadless area to wilderness. In holding that this was inadequate, the Ninth Circuit emphasized that an agency need not consider every alternative or alternatives that are unlikely to be implemented for legitimate reasons, but, equally, it must not ignore important alternatives or bias in its evaluation by arbitrarily narrowing the range of options considered.

The Block court held the Service should have considered the alternative of allocating more than one-third of the land to the wilderness category. It noted that the agency’s failure to consider this alternative was “puzzling,” especially as all 62 million acres of the forest met the criteria for wilderness. The court was also troubled that the agency’s selection of alternatives dictated an “end result” in which nonwilderness designations exceeded wilderness designations by a substantial margin.

The Service claimed the range of alternatives selected was adequate because the decisional criteria used to evaluate alternatives were diverse. The court disagreed. It held that the numerical values used to apply the criteria were not explained, that the cutoff points for designation varied from one alternative to the other, and that the agency could not emphasize decisional criteria over the actual results they generated. Other cases have similarly held an agency may not skew its alternatives in favor of a certain result.


D. Legacy Parkway – Failure to evaluate alternatives to protect habitat

The Great Salt Lake (“GSL”) and the wetlands surrounding its shoreline provide critical habitat for migratory birds. The Legacy Parkway, the first segment of a much longer proposed road extending along Utah’s Wasatch Front, would traverse fourteen miles along the GSL shoreline. Commenters urged the lead agencies to consider alternative means of meeting regional travel demand, including other highway alignments, mass transit, and land use planning, that could have lessened the parkway’s destruction of bird habitat. The Army Corps of Engineers refused to evaluate these alternatives in the EIS, apparently because they would have increased the cost of the project.

The EIS recommended as the preferred alternative a freeway design that would erase 114 acres of GSL wetlands. This was less than the 188 acres under the most damaging proposed route, but still more than under the least damaging alternative identified in the EIS. The Tenth Circuit found the EIS inadequate on three main grounds: (1) failure to consider a narrower right-of-way for the proposed road, which would have reduced wetland impacts; (2) failure to consider a proposed light rail as a less damaging practicable alternative; and (3) failure to evaluate wildlife impacts properly.

The litigation ended with a settlement between the environmental plaintiffs and the agencies. The road was redesigned to meander around wetlands and other sensitive areas, to prohibit most trucks, and to have a speed limit of fifty-five miles per hour. Slower speeds and the absence of trucks will reduce highway noise dramatically, reducing disturbance to birds in the GSL habitats.


III. The purpose and need of lease development on federal lands, generally


A. BLM’s environmental purpose

BLM should also examine TU’s environmental alternative because it is required to examine methods of protecting the environment by its enabling legislation.” While BLM’s authorities direct the agency to maximize oil and gas recovery, development is not its sole purpose. The MLA and FLPMA establish policy and requirements to protect the natural environment. These include the policy that the public lands be managed to protect ecological and water resources, provide habitat for fish, and to provide for outdoor recreation. Specifically, the MLA directs BLM to “regulate all surface-disturbing activities conducted pursuant to any lease . . . and determine reclamation and other actions as required in the interest of conservation of surface resources.” Moreover, the FLPMA requires that BLM, in managing the public lands, “take any action necessary to prevent unnecessary or undue degradation (UUD) of the lands.” Thus, the agency must take any action needed to prevent any activities, even if the activities are necessary for extracting minerals, that would unduly harm the public land.


B. The rights granted in an O&G lease are subject to BLM’s environmental purpose

Oil and gas leases grant the lessee the right to extract any oil or natural gas that may be found on the lease. However, an oil and gas lease does not grant an unqualified right to development. Under the standard modern O&G lease (post-1984) and BLM’s § 3101.1-2 regulation (1988), BLM has made any development of the lease or the removal of oil or gas “subject to” a number of provisions that allow BLM to protect the natural environment.

Many of these retained rights are grounded in BLM’s mandatory environmental protection obligations. The lease provides that the holder’s extraction right is subject to the agency’s need to comply with its responsibilities under FLPMA and MLA, any other applicable laws, regulations, and formal orders in effect when the lease is issued. The § 3101.1-2 regulation further makes the lease subject to any “reasonable measures” the BLM might impose to reduce the adverse environmental impacts of development. BLM’s “reasonable measures” authority is specifically reserved by section 6 of the modern lease. BLM can use this authority to condition its approval of drilling projects on reasonable environmental protections. Conditions for protecting watersheds and habitat may include regulating the timing of operations and the siting and design of facilities, as well as specification of the rates of oil and gas development and production. BLM can even prohibit development if the environmental impacts are substantially different or greater than normal. In short, BLM has ample authority to regulate the time, place, and manner of drilling activities.

If BLM fully exercised that authority, it could considerably reduce the harms of mineral extraction on watersheds and habitat. It could dictate the pace of development, require directional drilling and “closed-loop” fluid systems, confine operations to prescribed areas, or even suspend lease development in the interest of conserving these resources.


IV. Recent Cases


A. Otero Mesa (10th Cir. 2009) – closing entire grassland to lease development

The 10th Circuit held that the BLM was required to analyze an alternative that imposed strict environmental protections in Mtn. Oil & Gas Ass’n v. Watt. It recently reaffirmed that holding in a case similar to TU’s facts here. In 1997, an exploratory well struck natural gas on the Otero Mesa. O&G companies responded by nominating over 250,000 acres in the area for federal leases, and BLM determined the increased development interest required a new resource management plan. BLM conducted a large-scale land management planning process for O&G development in Sierra and Otero Counties, where the Mesa is located. The plan-level EIS recommended opening the majority of the Mesa to development, subject to a stipulation that only 5% of the surface of the Mesa could be in use at any one time.

The EIS analyzed five possible alternative management schemes for development in the area, three of which were fully analyzed. The other two were eliminated without further analysis.

Both eliminated alternatives would have increased the level of environmental protection for the entire plan area beyond any of the fully analyzed alternatives. One would have imposed a blanket ban on minerals development leasing; the other, through a “no surface occupancy” (“NSO”) stipulation allowing minerals development only by slant drilling from non-BLM lands. These alternatives were “considered initially but eliminated prior to further analysis” based on BLM’s conclusion that adopting a plan which so limited development would be arbitrary and capricious under FLPMA’s multiple-use mandate. BLM also discounted one of the three alternatives analyzed in the Draft EIS, the “No-Action Alternative,” as inconsistent with its own policies.

Thus, BLM was left with two possible management schemes, “Alternative A” and “Alternative B.” Of the two, Alternative A placed fewer restrictions on development, and BLM selected it as the preferred alternative. Alternative A opened 96.9% of the plan area but placed limitations on possible development, subjecting 58.9% of the area to a combination of NSO stipulations, controlled surface use stipulations, and timing stipulations. More importantly, Alternative A subjected 116,206 acres of the Otera Mesa to an NSO provision limiting disturbances to any 5% of the surface area of a leased parcel at a given time, regardless of location. BLM crafted this NSO restriction “[t]o protect portions of the remaining desert grassland community by minimizing habitat fragmentation.”

BLM refused to consider closing the entire Otero Mesa to O&G development, because it believed that a complete restriction on drilling violated the concept of managing for multiple use.

The Tenth Circuit rejected that argument, and decided that an alternative of closing the entire Mesa fell within BLM’s statutory mandate. The FLPMA requires BLM to manage public lands under the principle of multiple use. “Multiple use” means


a combination of balanced and diverse resource uses that takes into account the long-term needs of future generations for renewable and nonrenewable resources, including, but not limited to, recreation, range, timber, minerals, watershed, wildlife and fish, and natural scenic, scientific and historical values.


The court emphasized that multiple use does not direct BLM to prioritize development over other uses. And it does not require that every use be accommodated on every piece of land. If all the competing demands reflected in FLPMA were focused on one particular piece of public land, in many instances only one set of demands could be satisfied. For example, “a parcel of land cannot both be preserved in its natural character and mined.” Accordingly, BLM’s multiple use duty did not mean that drilling must be allowed on the Mesa. Development is a possible use, which BLM must weigh against other possible uses – including conservation to protect environmental values, which are best assessed through the NEPA process. Because BLM had not assessed an alternative of closing the Mesa to drilling activities, it had failed to analyze an adequate range of alternatives.

In short, this case decided that an alternative of closing an entire area to lease development is consistent with BLM’s statutory purpose, and that the multiple use duty is not a sufficient reason to exclude more protective alternatives from consideration. Accordingly, Otero Mesa squares on all fours with the facts presented by TU in this memo, and can be cited as supporting authority.


B. Anglers of the Au Sable (D. Mich. 2008) – alternative to protect trout

The court in Anglers of the Au Sable considered BLM’s and the Forest Service’s obligations under NEPA where a company was seeking to drill exploratory wells. . The court found that the agencies failed to “objectively evaluate all reasonable alternatives” by not considering greater protections for trout habitat. The range of alternatives considered in the EIS was deficient for two reasons. First, the no action alternative was improperly rejected because the Forest Service felt it was obligated to approve drilling. The court held, however, that none of the Service’s authorities require approval of a leaseholder’s proposed mineral extraction, foreclose a decision of No Action, or place the Service’s objectives at odds with environmental preservation. Additionally, the court noted that the plain language of 43 C.F.R. § 3161.2, which directs BLM to require that operations protect environmental quality, “makes it clear that approval is not appropriate in all cases, particularly cases where the project poses a threat to environmental quality.”

Second, the agencies impermissibly limited the range of alternatives to only those that would meet [the O&G company’s] project objectives, rather than alternatives that might better serve the agencies’ [environmental] goals.” In short, Au Sable confirmed that the rights of a mineral leaseholder are subject to BLM’s environmental obligations. When operations are proposed on a lease, BLM must interpret and perform its obligations in light of the policies established by NEPA.


C. Oregon Natural Desert – resource management alternatives

BLM’s impact statement for its Southeast Oregon Resource Management Plan violated NEPA by failing to consider alternatives that would have closed more acreage to off-road vehicles.

The EIS analyzed seven alternatives. With regard to ORV use, the alternatives varied almost entirely by the amount of land allocated between open and limited-use categories. Importantly, BLM never considered closing a significant amount of land to ORVs, nor did it consider an option geared toward protecting wilderness values from ORV use. The most protective limited-use category restricted ORVs to existing routes in wilderness areas and imposed seasonal closures to protect wildlife. But every alternative exposed more land to some type of ORV use than was previously permitted. For example, BLM’s recommended alternative opened approximately 20,000 acres of previously closed land to some ORV use. With regard to grazing, BLM considered only one alternative with substantial restrictions, and did not consider limiting grazing in areas with wilderness characteristics outside of designated wilderness.


D. Northern Alaska – adequate range of alternatives

Environmental plaintiffs challenged the adequacy of the EIS prepared by the BLM for its plan to offer long term oil and gas leases in the NWPA of Alaska. The leases would enable the oil companies to undertake exploration to determine what sites could be developed for productive drilling. The Ninth Circuit determined that BLM had adequately examined a range of viable alternatives.

The plaintiffs argued that BLM violated NEPA by failing to consider an alternative proposed by the Audubon Society in developing its recommended course of action in the EIS. The Audubon alternative recommended that BLM add four new special areas and, therefore, make 35 percent of the high oil potential area unavailable for leasing. Although BLM chose not to consider the Audubon alternative itself, the preferred alternative it did adopt included some similar protections. The court decided that BLM’s explanation that the Audubon alternative as a whole was inconsistent with the NWPA project and statutory mandates, coupled with BLM’s willingness to incorporate several recommendations into the preferred alternative, was a sufficient explanation for its refusal to consider entire Audubon proposal. Since BLM adopted components of the Audubon alternative, the BLM adequately examined a range of viable alternatives in preparing the FEIS.

Significantly, the court also concluded that BLM can condition permits for drilling on implementation of environmentally protective measures, and it can reject a proposal altogether if a particularly sensitive area is sought to be developed and mitigation measures are not available.


V. Conclusion


In short, BLM is required to “take environmental values into account” in carrying out its regulatory functions for oil and gas development. It also has a substantive duty “minimize damage to . . . fish and wildlife habitat and otherwise protect the environment.” And given that the rights granted in an oil or gas lease are explicitly “subject to” BLM’s right to condition development for its environmental purposes, measures to protect watersheds and fish are consistent with the purpose and scope of any proposal to drill on a lease. Therefore, to the extent that these measures are feasible and effective, they are reasonable alternatives and should be fully analyzed in the EIS.


Posted: September 18th, 2011
Categories: Energy
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Crime of Mistaken Speech


Elizabeth O’Nan lives alone on an 80 acre “island” of land she owns in the middle the Pisgah National Forest in northwestern North Carolina. O’Nan is 86 years old. Her property is accessible only by a small forest service road, over which she holds an easement. In December of 2010, the Forest Service charged O’Nan with blocking that forest road, in violation of 36 C.F.R. § 261.12(d), because she told a hunter that she owned the road and he had no right to use it.

O’Nan proceeded prose before a federal magistrate judge and was convicted. On appeal to the district court, O’Nan raised a first amendment defense to the charge. She argued, in essence, that the rule is constitutionally infirm because it permits punishment of protected speech based on viewpoint — that is, speech excluding hunters from the road. The district court reviewed for plain error and affirmed. The case is now before the Forth Circuit.

O’Nan’s position goes something like this. When she told the hunter he had no right to use the road, she engaged in constitutionally-protected speech. If so, the district court mischaracterized her speech as criminal interference with the use of a road. In holding that O’Nan could be sanctioned for what she said to the hunter, the court conflated protected speech and criminal conduct. On this theory, the two are distinctly different: while an agency may criminalize physically blocking a service road, it may not criminalize speech, even when the purpose of the speech is to stop people from using the service road.

To prevail on this argument, O’Nan would have to distinguish her case from the line of cases in which the Supreme Court has permitted the punishment of speech as an “illegal course of conduct.”


II. Discussion: Speech as an Illegal Course of Conduct

A. 36 CFR s. 261.12(d)

The road-blocking rule is a generally applicable law that is being applied to speech, but that on its face doesn’t mention speech. It was triggered against O’Nan by what she communicated. So we might call the rule content- based as applied, because the content of her speech triggered its application. This mechanism does not just restrict some speech more than other speech–most content-neutral laws do that. Rather, the rule applies to speech precisely because of the harms that supposedly flow from the content of the speech: threatening to have the hunter arrested for trespassing violated the road-blocking rule because it interfered with his use of the road.

In 1998, an Idaho district court upheld this regulation against a First Amendment challenge. The Ninth Circuit affirmed without comment. That case involved an environmental protestor who physically blocked traffic on a logging road. The protestor, Scranton, was found perched on top of a tripod structure in the center of the Forest Service road. The tripod stood thirty feet tall; near the top of the tripod a plywood platform supported Scranton. Forest Service officers used a “cherry picker” to elevate themselves to the platform level. As they did so, Scranton placed her arms inside a welded, L-shaped metal pipe attached to a tripod leg. She told the officers that she would not quit the tripod “until the logging stopped.” Forest Service officers attempted to remove Scranton’s arms from the pipe. When their efforts proved unsuccessful, they cut the strap securing the pipe to the tripod leg. After approximately twenty minutes, Scranton announced that her arms were going numb and that she was willing to leave the tripod platform. She was then removed and arrested.

Scranton argued that the language of the rule was unconstitutionally vague, and that a facial challenge was warranted because the rule implicated constitutionally protected conduct. The district court disagreed. First, it determined that the rule’s prohibition of “blocking, restricting or otherwise interfering” with the use of a Forest Service road did not reach a substantial amount of constitutionally protected conduct. Second, the court found that the regulation did not prevent the expression of First Amendment conduct in a multitude of other, lawful ways. Therefore, Scranton’s vagueness challenge had to be “examined in the light of the facts at hand.” Scranton’s conduct clearly fell within the scope of the regulation – she blocked the Forest Service Road by maintaining a giant tripod in the roadway.

By contrast, O’Nan’s conduct involved only speech. This difference, however, may not be enough to distinguish her case from the Supreme Court’s “speech as an illegal course of conduct” jurisprudence.


B. Giboney

“It has never been deemed an abridgement of freedom of speech,” Justice Black wrote for the Court in Giboney v. Empire Storage & Ice Co., “to make a course of conduct illegal merely because the conduct was in part carried out by means of language.” In subsequent opinions, the Court has characterized Giboney as stating that speech may be punished when it’s “brigaded with illegal action.” The Fourth Circuit described the Giboney principle as authorizing speech restrictions when the speech is tantamount to a “speech act.”

Giboney upheld an injunction against peaceful picketers who were trying to pressure a business “to agree to stop selling ice to nonunion peddlers.” Such an agreement, the Court said, would have violated antitrust law; therefore, enjoining such picketing did not violate the First Amendment. But the Giboney argument has also been used to justify a wide variety of speech restrictions:


(a) The DOJ and a court of appeals have recently reasoned that Giboney lets the government restrict books that may inform people how to violate the law, at least when the publisher intends that those books help people commit crimes. This “speech act” rationale goes something like this. If the speech in question is an integral part of conduct that the government otherwise is empowered to prohibit, it typically may be proscribed, since it is merely incidental that such “conduct” takes the form of speech.

(b) The Supreme Court described Giboney as supporting the proposition that “[a] man may be punished for encouraging the commission of a crime.” The Court cited as an example a 1915 case that upheld the punishment of a newspaper editor who endorsed nudism.

(c) Some courts have recently used Giboney to defend restrictions on doctors’ recommending medicinal marijuana to their patients.

(d) Courts have similarly used the “conduct not speech” argument to justify restricting speech that creates an offensive work environment.

(e) Judges have relied on Giboney to support restrictions on speech that urges political boycotts aimed at pressuring governments to change their policies.

(f) The dissent in Cohen v. California cited Giboney to argue that wearing a jacket containing the phrase “Fuck the Draft” should be constitutionally unprotected: “Cohen’s absurd and immature antic . . . was mainly conduct and little speech.”


These applications of Giboney seem confusing. This might be because the logic of Giboney itself is pretty confusing, and inconsistent with the logic of the more recent Supreme Court cases like Cohen, Brandenburg , and Claiborne Hardware. In particular, there are at least three different interpretations of Giboney’s ambiguous language that might bear on O’Nan’s first amendment claim, but none of them makes much sense.


1. “Course of Conduct” Referring to the Noncommunicative Harms of Speech


Modern Supreme Court case law has recognized a sort of conduct/speech distinction. Speech may be restricted because of harms flowing from its noncommunicative component (noise, obstruction of traffic, etc.)–which we might think of as a “conduct” element–but not because of harms flowing from its communicative component, the “speech” element. But this can’t be the distinction Giboney or the above cases that cite Giboney are using, or that could justify O’Nan’s conviction, since those cases all involve speech that’s restricted because of harms that flow from its content.


2. Illegal Course of Conduct Meaning Speech that Itself Violates a Law


Maybe we could explain the opinions that rely on Giboney by reasoning that the speech itself–picketing to achieve a certain result, publishing a book describing how to commit a crime, threatening hunters to stop them from using the forest road–violates a law, and in that sense becomes an illegal “course of conduct.” On this theory, speech that amounts to the commission of an independently illegal act, such as bribery, perjury, and some threats, is constitutionally unprotected because it “is properly treated as action, even if it consists solely of words.”

But the point of modern First Amendment law is that speech is often protected even though it violates a law restricting it. Public profanity (as in Cohen ), speech that violated a Sedition Act , and speech “encouraging the commission of a crime” (as in Cox ) would indeed be illegal courses of conduct under laws that prohibit such speech. Such laws, though, are obvious speech restrictions, and courts rightly evaluate them–and often strike them down–under the First Amendment.

A threat is no less speech, and no more action, than was speech that violated the Sedition Act. A threat is speech in a particular context, such as the beliefs O’Nan had about her property rights, but it is still communication that is punished because of what it communicates. Certain kinds of threats are clearly punishable, but only because they fall within an exception to free speech protection and not because they are somehow not speech.


3. Illegal Course of Conduct Meaning Speech That Violates a Generally Applicable Law


O’Nan’s conviction, like many cases the Giboney line, might best be explained on the grounds that the speech violates a generally applicable law that bans a wide range of conduct.183 On this interpretation, speech should be treated as conduct when it has the same harmful effects and it is covered by a generally applicable law that restricts all conduct that has those effects. This sort of argument, though it would support the application of the road-blocking rule against O’Nan, would reduce the Giboney principle to an approval of speech restrictions that are content-based as applied.

This point is not a trivial one. Such an interpretation of Giboney cuts against the very purpose of the content based / content neutral distinction: allowing content-based restrictions (whether facially content-based or content-based as applied) is likely to burden speech more than allowing content-neutral restrictions. Because a content-neutral law – for instance, a leafleting ban — can potentially apply to a wide range of speakers, it can’t even come close to driving certain views entirely from public debate.

On the other hand, a content-based restriction, whether facially content-based or content-based as applied, can outlaw most expression of certain facts or opinions. If a law, such as the laws in Schenck v. United States or NAACP v. Claiborne Hardware Co. , bans any conduct that may cause a certain harm, and persuading people to act in certain ways can cause that harm, then any viewpoints that have the potential for such persuasion–the draft is evil, blacks should boycott white-owned businesses– would largely be prohibited. Because the law focuses either on the content of the speech or on the harm that the speech causes, it can block the speech in all media. O’Nan could not persuade hunters not to use the road in any way – she could not send this message with pamphlets, or on the radio. She could not write it on a billboard or post it on a blog. Her message would always be illegal, because it could have the effect of discouraging the use of the road.

The Court has confronted cases where a law was content-based as applied. In these cases, either the Court held that the speech was constitutionally protected, or–if it held otherwise–the decision is now viewed as obsolete.

The Court’s the World War I-era cases Debs, Frohwerk, and Schenck, upheld the criminal punishment of antiwar speech. In those cases, the defendants’ statements had violated a generally applicable provision of the Espionage Act, which barred all conduct–speech or not–that “willfully obstructed the recruiting or enlistment service of the United States.” These cases are now generally seen as wrongly decided. Under modern First Amendment law, courts would overturn convictions for antiwar leafleting or speeches, and would treat the law as content-based, because it is the content of such antiwar speech that causes the interference with the draft.

More broadly, if generally applicable laws were immune from First Amendment scrutiny, the government could suppress a great deal of speech that is currently constitutionally protected, including advocacy of illegal conduct, praise of illegal conduct, and even advocacy of legal conduct. For example, a general ban on “assisting, directly or indirectly, conspiracies to overthrow the government” could prohibit advocacy of overthrow as well as physical conduct like making bombs: Advocacy could assist by persuading people to join the rebellion. A ban on “assisting interference with the provision of abortion services” could ban speech that praises or defends anti-abortion blockaders or vandals, and not just actual blockading or vandalism. A ban on “conduct that interferes with the enforcement of judicial decrees” may be applied to speech that criticizes judges or judicial actions, on the theory that such criticism may lead people to lose respect for courts and thus to disobey court orders.

The speech in these examples, like O’Nan’s speech, could bring about the harms that the generally applicable law is trying to prevent. O’Nan’s speech may interfere with the use of the road, an effect that is unquestionably punishable if it were brought about by a giant tripod structure rather than communication. But the idea behind the rejection of Schenck, and of the adoption of the Brandenburg v. Ohio rule , is that the government must generally tolerate speech even when its persuasiveness or the informational content could lead to eventual harm.

Similarly, in NAACP v. Claiborne Hardware Co. the Court held that speech constituting tortious interference with business relations may nonetheless be constitutionally protected. Tortious interference covers a variety of conduct, not just speech. But when the interference flows from the persuasive or informative effect of speech–for instance, when the speech in Claiborne Hardware persuaded people to boycott a business, publicized the names of people who weren’t complying with the boycott, or persuaded others to ostracize people who refused to join the boycott– courts treat the tort as a speech restriction.

In short, O’Nan faces an uphill battle. Her speech did not express a view on a topic of public debate. Rather, she made a purposeful threat that misrepresented the law and interfered with a public right. Because her threat was likely to have the same harmful effects as a physical impediment blocking the road, the court will probably classify her speech as an illegal course of conduct.

O’Nan’s best argument is that because the regulation is content-based as applied to her, it should be presumptively unconstitutional, just as facially content-based laws are presumptively unconstitutional. Her speech does not fall clearly into an exception to protection, so the presumption may only be rebutted if the restriction passes strict scrutiny. But generally speaking, when a law punishes speech because its content may cause harmful effects, that law should be treated as content-based.


Posted: September 18th, 2011
Categories: First Amendment, Forests, Property
Comments: No Comments.

Gibson Sings Supply Chain Blues, Again

Gibson Guitar Corp., one of the most widely known makers of guitars in the world, was recently raided by the U.S. Fish and Wildlife Service for a failure in the compliance arena. It was not for a violation of the Foreign Corrupt Practices Act, U.K. Bribery Act, OFAC or other more widely recognized anti-corruption statutes.  Gibson was raided through an investigation regarding alleged violations of the Lacey Act of 1900.

The Lacey Act

Originally passed to protect wildlife, the Lacy Act was expanded in 2008 to cover wood products. It now requires companies to make detailed disclosures about wood imports and bars the purchase of goods exported in violation of a foreign country’s laws.  Congress passed the amendment to curb the market for illegally harvested wood and to document the foreign sources of wood products to help with compliance and conservation activities abroad. It is also intended to level the playing field for U.S. producers so they aren’t undersold by suppliers of illegal wood.  Under the Act, importers are prohibited from buying or selling of wood in violation of national forestry laws anywhere in the world, and must electronically submit an import declaration listing the scientific name of the wood, quantity, value and country of origin.

The Gibson raid offers a lesson: companies should be diligent about ensuring their entire supply chain is sourcing wood legally.  Guitar makers would be wise to retain local counsel in the countries where they purchase tonewoods to make sure that the wood is not exported in violation of local law.

The Allegations

On Aug. 24, agents from the FWS and Department of Homeland Security raided Gibson’s executive headquarters, as well as two factories in Nashville and Memphis, Tenn., where they confiscated several pallets of wood, guitars and electronic files, according to the company and news reports. The investigation centers on Gibson’s acquisition of two fingerboard woods, partially finished ebony and Madagascar rosewood, from an Indian supplier. Ebony and rosewood are endangered trees.
It took almost a week for Gibson to get back to full operations. The one-day shutdown and the materials taken cost more than $1 million, according to Henry Juszkiewicz, Gibson’s chairman and chief executive officer.  FWS made two allegationin its affidavit to obtain a search warrant for the raids. The first was that the woods in question were “exported from India by Atheena Exports under an incorrect tariff code (HS 9209), allegedly to avoid the Indian government’s prohibition on export of sawn wood products (HS 4407), and was declared upon import as finished veneer (HS 4408).”  The second was that Gibson Guitar was not identified as the end user. The importer of record, Luthier Mercantile International, listed itself as the end user. The Lacey Act imposes strict liability on a company for those in its supply chain.

An affidavit filed by the Fish and Wildlife Service to obtain the search warrant alleges Gibson falsely labeled the wood import to make it sound legal and omitted the company’s name as the recipient. The sawn wood in question was exported from India by Atheena Exports under an incorrect tariff code (HS 9209), allegedly to avoid the Indian government’s prohibition on export of sawn wood products (HS 4407), and was declared upon import as finished veneer (HS 4408). According to the affidavit, discrepancies among the paperwork accompanying 11 shipments over two years suggest the recipients knew they were purchasing sawn wood.

The most recent shipment, with 1,250 pieces of ebony, arrived in Dallas June 27 from Germany on American Airlines. The shipment was detained by Customs officers for suspected violations of the Lacey Act and referred to Fish and Wildlife, according to the affidavit. The importer was Luthier Mercantile International, a Windsor, Calif.-based wood supplier, which told investigators the ultimate consignee was Gibson. The customs entry listed Luthier as the end user.

Gibson responded unsurprisingly in a statement on its web site: “Gibson has complied with foreign laws and believes it is innocent of any wrongdoing. We will fight aggressively to prove our innocence.”  The statement further contends the Justice Department misinterpreted Indian law, that Indian officials did not consent to the enforcement action, and that if wood from the same tree was finished by Indian workers the material would be legal under the Lacey Act.  Indian law requires that all finishing work on ebony and rosewood be done in India before they are exported, an attempt to add value to diminishing natural resources.
Juszkiewicz has mounted an aggressive media campaign to discredit the government’s position.  He says that Gibson has been sourcing fingerboard wood for 17 years and that it is being bullied by the Justice Department. To wit, at a press conference outside Gibson’s Nashville factory on Aug. 25:

The issue here is not about whether this wood is legally logged. This is not about conservation. This is not           about the environment. This is specifically about a law in India that requires domestic labor content that we       (the United States) are enforcing.

The executive disputed the government’s interpretation of the Indian law in a radio interview, saying he has affidavits from government officials that it is legal to export fingerboard blanks.  He told the Wall Street Journal that a customs broker probably made a mistake in labeling the goods. His affidavit identifies the broker as a Memphis company called V Alexander & Co. Inc. Gibson has been warned that any guitar with infringing materials that it sells and transports will be considered a separate violation of the Lacey Act.  “I’ve instructed our staff to continue building the product and I’m taking personal responsibility for that action,” Juszkiewicz said.

This is not the first time that the FWS has targeted Gibson. In November 2009, more than a dozen agents raided the Nashville factory in search of illegally harvested ebony and rosewood from Madagascar, marking the first major enforcement action of the 2008 Lacey Act.  Gibson claims that most of the wood it procures is certified by the Forest Stewardship Council, an international organization of timber users, traders and environmental groups that sets standards for forest management. It offers voluntary certification, through accredited third parties, that wood products are made from responsibly harvested and verified sources.

The wood confiscated from Gibson is actually not FSC certified.  It is what the FSC considers “controlled wood.”  Controlled wood is wood from small areas which fail the requirements for certification, but which are exempted by the FSC so that the entire forest area can be certified.  “Gibson has a long history of supporting sustainable and responsible sources of wood and has worked diligently with entities such as the Rainforest Alliance and Greenpeace to secure FSC-certified supplies,” the company said in the statement.

After the 2009 raids Gibson said it takes the subject of responsible wood sourcing “very seriously” and that it was working to increase the amount of wood purchased from certified sources. The guitar maker has tried to make sure, to the extent possible, that it is dealing with reputable suppliers, Juszkiewicz said.  A statement to The Tennessean newspaper from the Rainforest Alliance said Gibson has made a good effort to locate and import legal woods since the earlier raid, but added the effort “also must be accompanied by a clear commitment to eliminating any volume, no matter how small, of illegal wood that may contaminate its supply chain.”
No charges have been filed so far in either case, although internal e-mails and other information released in court documents related to the first case indicate that Gibson decided to buy illegal wood knowing the risks involved. Federal prosecutors have filed motions stating that Gibson was not allowed to obtain the wood from Madagascar because it was unfinished wood and the in-country supplier was not authorized to sell it.
Gibson sourced the ebony in the form of blank strips from a German company, which obtained it from a supplier in Madagascar. The country prohibits the harvest of ebony wood as well as the exportation of unfinished ebony, according to the current civil case in the District Court of Tennessee, where Gibson has sued for return of its confiscated materials.
Gibson maintains the wood seized in 2009 was legally exported and that it violated no law in Madagascar.

“We feel totally abused. We believe the arrogance of federal power is impacting me personally, our company and the employees here in Tennessee,” Juszkiewicz told reporters at the press briefing, a video of which is posted on the Gibson Web site. He said Gibson feels singled out because all guitar manufacturers use Indian ebony and rosewood for their products. The company also hasn’t been afforded due process as the government drags its feet trying to postpone the civil proceedings or filing any charges, he complained, adding that investigators won’t explain what Gibson allegedly did wrong.  “We’re guilty of something they can’t tell us what it is yet” so the company can’t defend its reputation, Juszkiewicz said.

A troubling aspect of the Lacey Act is that it imposes strict criminal liability on any non-compliant company, even a company that didn’t know it was doing anything wrong. There is no mens rea requirement.  Importers are expected to take all reasonable means to comply, but the law doesn’t define the steps a company should take to ensure it doesn’t obtain prohibited wood products.  For Gibson, understandably, this is exasperating.  As Juszkiewicz pointed out

If people wanted to stop us from doing something you would think they’d tell you in advance. ‘Hey, look guys we have a problem with this. You need to do something. Give us a plan. In two cases, we had a SWAT team treat us like drug guys. Come in and shut us down with no notice. That’s just wrong.

After the first raid the manufacturer no longer deals with Madagascar.  Juszkiewicz has conducted a series of interviews, mostly on talk radio shows, in an apparent effort to bring public pressure on the government to back off. In one radio interview he said the raid two weeks ago is an attempt “to intimidate us into copping a plea” in the first case as Gibson prepares to present evidence that it behaved properly.

The National Association of Music Manufacturers expressed “deep frustration” with the Lacey Act in a Sept. 1 letter to President Obama and members of Congress:

The wide range of interpretation possible in the law and lack of regulatory clarity has resulted in great difficulty in compliance. The confusion is due in large part to the law’s ambitious scope, including enforcement of the laws from all other countries that are the source of these natural materials. . .

The recent high profile raid of Gibson . . . compounded with the slow response on needed guidance for compliance that we have been seeking has created fear and uncertainty for all those involved in the manufacturing, distribution and retailing of instruments and increasingly, artists and owners of musical instruments. We cannot state strongly enough the impact that this confusion, uncertainty and threat of criminality are having on our industry even when intentions of due care and compliance are followed and documented. We have concrete ideas on how to improve the law and are ready to work with members of Congress and federal agencies to make positive changes that will fulfill the intended vision of the Lacey Act and preserve not only the world’s forests, but the vital work of U.S. manufacturing and commerce in the                  music products industry.

Gibson’s public campaign is generating support on the company’s Facebook page from people opposed to big government and outsourcing of U.S. jobs.  And in an interview on KMJ 105.9 in Fresno, Calif., Rep. Thaddeus McCotter, R-Mich., claiming to be a guitar player himself, said, “You‘re looking at American artisans having the federal government come in and tell them they’d be better off if they let people in Madagascar or elsewhere do the work is insane. That’s outsourcing by government fiat from an administration that claims to oppose it.”  What we’re looking at has absolutely nothing to do with outsourced labor.

Compliance Convergence

The Gibson case underscores the importance of having strong internal controls over compliance activities. So how does a company, or an entire industry subject to the Lacey Act, manage all of these risks? I suppose the first thought would be to only buy American, but that thought is probably as unrealistic as a U.S.-based energy company not doing business overseas because of the FCPA. The answer is that a company must first identify the risks it faces and then manage those risks. Here the primary risks would appear to be knowledge of local laws and liability for the acts of those in your supply chain. There are two keys to managing these risks. The first is process, process and process. The second is document, document and document.

Whatever business you are in, the requirement is for you to understand what laws are applicable to your business. If you have to hire local lawyers in the jurisdiction where you are doing business to ascertain if your exports violate local law, don’t whine about it–hire them. If your company has strict liability for those in your supply chain, engage in due diligence, train those vendors in the law and your requirements, and manage those relations going forward. All of the above should be documented so that your company can produce those records in short order if it is investigated . Whining about unfair 111 year-old laws will not get you much sympathy from the U.S. Department of Justice, the U.S. Fish and Wildlife Service or a federal judge.

Posted: September 16th, 2011
Categories: Blog, Forests, Luthiery, Small Business, Wood
Tags: , , , , ,
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Small Business, Creditors, and the Good New Corporate Opportunity Doctrine

The so-called corporate opportunity doctrine prohibits a corporate fiduciary from seizing for herself an opportunity in the corporation’s line of business, unless she first offers that opportunity to the corporation. There is no question whether the doctrine applies to small businesses. The more interesting question is how it applies, given the unique characteristics of many small businesses. For example, questions will arise as to whom, if anyone, a corporate opportunity must be disclosed; whether the holder of a distributional interest can challenge the business’ decision to turn down an opportunity; what happens when basic corporate formalities are not followed; and whether the persons taking the opportunity have violated any duty to the business’ creditors. You want to take care of these issues before they arise.  Check it out:

Rule of Disclosure

The officers, directors, and shareholders of a small business owe a fiduciary duty to their company.  This duty includes an obligation to refrain from exploiting so-called corporate opportunities that rightfully belong to the company. What’s a corporate opportunity?  Simple.  When a proposed activity is reasonably related to the company’s present or prospective business and is one in which the company has the capacity to engage, that’s a corporate opportunity.

The corporate opportunity doctrine is actually a rule of disclosure: When a company’s fiduciary wants to take advantage of an opportunity that is in the company’s line of business, “the fiduciary must first disclose and tender the opportunity” to the company. As the Supreme Court of Illinois once explained it, “[I]f the doctrine of business opportunity is to possess any vitality, the corporation or association must be given the opportunity to decide, upon full disclosure of the pertinent facts, whether it wishes to enter into a business that is reasonably incident to its present or prospective operations.” Kerrigan v. Unity Savings Association, 58 Ill. 2d 20 (1974).

Still, some states do not require the formal presentation of a potential opportunity the company has no interest in or cannot afford to pursue. In Broz v. Cellular Information Systems., Inc., 673 A.2d 148 (Del. 1996), for example, the Supreme Court of Delaware held that presentation is a form of safe harbor, “which removes the specter of a post hoc judicial determination that the director or officer has improperly usurped a corporate opportunity.”  Other states, including Georgia, Rhode Island, and Connecticut have adopted similar approaches.

But this “safe harbor” is not universal. Illinois courts, for instance, view the failure to disclose a corporate opportunity as undermining the “prophylactic purpose” of the rule. In such circumstances, the failure to disclose “forecloses” the interested fiduciary from exploiting the opportunity, even in cases where he or she reasonably believes the company is incapable of claiming the opportunity. Thus, in Kerrigan, the directors’ belief that their savings and loan association was precluded by law from capitalizing on an opportunity in the insurance business could not “operate as a substitute for [their] duty to present the question” to the corporation for independent evaluation.

Application to Small Businesses

In theory, disclosure is simple process: The interested fiduciary sadly tenders the opportunity to the company, fully discloses all pertinent information, and watches from the bleachers as disinterested fiduciaries then evaluate whether the company should engage in the opportunity. The problem, however, is that this process does not always neatly apply in the context of a small business, where (1) each fiduciary may want to pursue the opportunity for himself; (2) distributional interests may be held by someone other than an owner; (3) corporate formalities are not always observed; and (4) the company may be insolvent or nearly insolvent.

Absence of Disinterested Fiduciaries

Here’s an interesting practical question. The smaller the business, the more likely it is that every owner knows about or is personally interested in the corporate opportunity. What happens when there are no disinterested officers, directors, or owners to evaluate an opportunity on behalf of the business? Must the opportunity be served up to a disinterested third party for independent evaluation?

The classic In re Tufts Electronics, Inc., 746 F.2d 915 (1st Cir. 1984) (Mass. law), considered this issue in detail. There, the former president, director, and sole shareholder (Martin) of a bankrupt corporation challenged the imposition of a constructive trust on property he personally owned. Martin had acquired the property in part with corporate funds, and then leased the property back to his corporation. The bankruptcy and district courts, applying the corporate opportunity doctrine, decided that Martin had breached his duty to the corporation by using corporate funds to help purchase the property for himself rather than for the corporation. If that reasoning seems kind of stupid to you, given that the sole owner of the corporation was Martin, you’re right.  But formalism was cool back then.

The First Circuit reversed. Emphasizing that Martin was the sole shareholder, director, and president of the company, the court held that the corporate opportunity doctrine was inapplicable because Martin’s actions “necessarily involve[d] the knowledge and assent of the corporation.” The court further recognized that even though Martin and the corporation were separate persons, “absent some element of defrauding, Martin was not obliged, in every action he took, to prefer the corporation’s interests to his own. No one could operate a corporation solely on such a basis.”

Other jurisdictions have applied similar reasoning to reach the same conclusions. For example, in L.R. Schmaus Co. v. Commissioner of Internal Revenue, 406 F.2d 1044 (7th Cir. 1969) (Wisconsin law), the court found that “if an officer of the company owns all the stock, he may use the corporate assets as he sees fit and there can be no misappropriation of corporate assets by him.” Likewise, in Mediators, Inc. v. Manney, Adv. 93 Civ. 2304 (CSH), 1996 WL 297086, at *10 (S.D.N.Y. June 4, 1996) (New York law), the court dismissed a corporate opportunity claim because the corporation had “necessarily consented” to diversion of its assets through the acts of its sole owners and officers, who were accused of usurping opportunity. In In Committee of Unsecured Creditors of Specialty Plastic v. Doemling, 127 B.R. 945, 952 (Bankr. W.D. Pa. 1991), the court found the corporate opportunity doctrine was “difficult to apply” to a small business where “there were no other shareholders to whom [the sole fiduciary] owed a duty of disclosure and loyalty.” And in Pittman v. American Metal Forming Corp., 649 A.2d 356 (Md. 1994), the court held that the sole shareholder could not be liable for usurpation of a corporate opportunity in the absence of any harm to creditors.

The logic of these cases is compelling. After all, as the Seventh Circuit recognized in In re Doctors Hospital of Hyde Park, 474 F.3d 421 (7th Cir. 2007), a sole shareholder can “hardly . . . defraud himself or breach a fiduciary duty to himself.” Other courts have reached the same conclusion, as in In re Hearthside Baking Co., Inc., 402 B.R. 233 (Bankr. N.D. Ill. 2009) (a “sole shareholder does not owe a fiduciary duty against its own corporation and cannot breach a fiduciary duty to itself”); and In re Gordon Car & Truck Rental, Inc., 65 B.R. 371, 376 (Bankr. N.D.N.Y. 1986) (corporate opportunity doctrine inapplicable where sole stockholders and officers “cannot be accused of withholding information from themselves“).

A minority of courts have reached the same result through a different-but-related doctrine–ratification. For example, in In re Safety International, 775 F.2d 660 (5th Cir. 1984), the Fifth Circuit held that “even when [a] transaction is detrimental to the corporation, no cause of action will lie if all of the [interested] shareholders have ratified the transaction.” According to the court, “[e]ven if [the directors/shareholders] breached their duty to [the corporation] by taking the purchase option in their own names, no party to this action can complain of the breach. There are no non-consenting shareholders.”

In short, where the usurpation of a corporate opportunity from a small business necessarily involves the “knowledge and assent” of the corporation ( Tufts) or ratification by the shareholders (Safety International), there can be no claim under the corporate opportunity doctrine. With the exception of insolvency, explained below, this rule is true even where the consenting or ratifying fiduciaries are personally interested in the opportunity.

Transfer of Distributional Interests

Many small businesses are structured as limited liability companies. Because a distributional interest in an LLC ordinarily is a transferable asset, it is not uncommon for a member of an LLC to transfer her distributional interest to a person who has no ownership interest in the business, like a creditor. That raises the question of how, if at all, such a transfer affects a fiduciary’s disclosure obligations under the corporate opportunity doctrine.

The transfer of a distributional interest does not confer an ownership interest or a fiduciary relationship with the company’s other members. The consequences of this are twofold. First, the transferee of a distributional interest is not entitled to exercise the rights of a member, which include challenging–either directly on its own behalf or derivatively on behalf of the company–the supposed usurpation of a corporate opportunity. Second, as a corollary, corporate fiduciaries are not obligated to disclose the opportunity to some independent third party for evaluation merely because a non-owner holds a distributional interest in the company.

Consider a recent Virginia case.  The sole members of a limited liability company, a husband and wife, faced a claim that the husband had usurped an opportunity of the LLC in precisely this situation. The usurpation claim was brought by a judgment creditor of the wife who had used part of its judgment to acquire her distributional interest in the company. The creditor argued that the husband could not take a corporate opportunity without first formally tendering the opportunity to the company and having it evaluated by some independent person. According to the creditor, if the husband had not taken the corporate opportunity for himself, the company would have profited from the opportunity and would have had assets to distribute, which would have benefitted the creditor. The trial court rejected the creditor’s argument. It found that the husband had no fiduciary duty to a creditor holding his wife’s distributional interest in the LLC and, further, that the husband and wife, both of whom knew of the corporate opportunity, had no obligation to formally present the opportunity to the corporation or to submit it to an independent third party for evaluation. Accordingly, the court dismissed the claim.

Failure to Adhere to Corporate Formalities

The failure to adhere to basic corporate formalities, like documenting board meetings or recording shareholder votes, unfortunately is commonplace among many small businesses.  This oversight is often a product of the cost of compliance, the casual approach to operations taken by many small business owners, or simple ignorance of proper procedure. Whatever its cause, a lack of documentation can lead to significant problems where corporate opportunities are concerned.

Consider, for example, the following situation.  Every shareholder knows of a corporate opportunity, and agrees that the business should not pursue it. Some of the shareholders decide to take the opportunity for themselves, but they fail to document any sort of formal presentation of the opportunity to the business or official vote of the officers or directors. Sometime later, maybe because the business opportunity turns out to be better than expected or because the shareholders have a falling out, the shareholders who did not pursue the opportunity bring a lawsuit against those who did, claiming that the opportunity was not fully or properly disclosed to the corporation.

What might have been quickly resolved with proper documentation had corporate formalities been observed now presents a thorny factual issue. Was the opportunity actually tendered to the corporation? Were the material facts fully disclosed? Did the board or shareholders in fact agree that the business should not pursue it? The fact that the answers to these questions cannot be found in board minutes or shareholder ballots could mean the difference between a speedy resolution of the claims on a motion to dismiss and costly, time-consuming discovery. In short, the failure to adhere to corporate formalities that so often plagues small businesses can needlessly complicate  your life in the context of a usurpation claim.


An additional consideration is whether the small business was solvent at the time of the challenged transaction. This is important because, when a company is insolvent, the duties of its fiduciaries–including the duty to disclose corporate opportunities–extend to its creditors. As the Supreme Court of Delaware explained in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007):

It is well settled that directors owe fiduciary duties to the corporation. When a corporation issolvent, those duties may be enforced by its shareholders, who have standing to bring derivativeactions on behalf of the corporation because they are the ultimate beneficiaries of the corporation’s growth and increased value. When a corporation is insolvent, however, its creditors take the place of the shareholders as the residual beneficiaries of any increase in value.

And once an insolvent company files for bankruptcy, its creditors have standing to complain about the usurpation of corporate opportunities, and they often do. A small business is no different than any larger company in this respect.

In re McCook Metals, LLC , 319 B.R. 570 (Bankr. N.D. Ill. 2005), illustrates the point. There, the bankruptcy trustee of a closely-held aluminum processor (McCook) brought suit against McCook’s principal (Lynch) for, among other things, transferring an opportunity to acquire a smelter away from McCook. As part of his defense, Lynch argued that he had breached no duty to McCook because he had disclosed the opportunity to purchase the smelter to McCook’s other members, who agreed that a separate entity should make the acquisition. The bankruptcy court rejected this argument because the duty involved was to McCook’s creditors, not its other members. According to the court, “That the other member owners agreed to transfer the [smelter] opportunity away from McCook makes them jointly and severally liable, with Lynch, for a breach of duty to the creditors; it does not excuse Lynch.”

Similarly, in Brown v. Presbyterian Ministers Fund, 484 F.2d 998 (3d Cir. 1973), the president and majority shareholder (Hoffman) of a family-owned business arranged to personally buy a mortgage at a discount when the opportunity to do so rightfully belonged to his corporation. The corporation filed for bankruptcy hours after the purchase was complete. The district court found that Hoffman had not breached a duty because the acquisition was agreed to with the “knowledge and approval of all of [the corporation’s] officers, directors and shareholders,” i.e., Hoffman and his sons. The Third Circuit rejected this logic, finding that it could not “countenance such a narrow view of the scope of Hoffman’s fiduciary duty. As an officer, director and principal stockholder of an insolvent corporation . . . Hoffman was duty bound to act with absolute fidelity to both creditors and stockholders.” The court explained that because Hoffman had arranged the transaction with knowledge of his corporation’s insolvency, approval by the fiduciaries did not free him to appropriate corporate opportunities to the detriment of the corporation’s creditors. Corporate assent did not, therefore, relieve Hoffman of his fiduciary duties, and the “opportunity should have been disclosed to the receiver as representative of the creditors.”


The corporate opportunity doctrine can pose significant challenges to the owners of small businesses. These problems can be exacerbated by the failure to observe corporate formalities and, in particular, whenever the corporation is insolvent and the rights of creditors are at stake. Still, when insolvency is not an issue, the case law now suggests that small business owners have the right to treat their business as their own, including by taking corporate opportunities for themselves personally.


Posted: September 15th, 2011
Categories: Small Business
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Green Building is the Bomb Diggity

If you have not already felt the impact of emerging green laws and policies aimed at enhancing the energy efficiency of buildings, fear not: you soon will. As of January 2011, green laws, executive orders, ordinances, and incentives affecting buildings had been implemented in at least 45 states, 58 counties, 384 cities and towns, and dozens of federal agencies and education districts.

The increased emphasis on greening new and existing buildings is due to several interrelated factors, including high energy prices, increased focus on reducing dependence on fossil fuels, and the benefits of an environmentally friendly public profile.

If you own or lease real estate, or plan to construct new buildings or acquire or renovate existing buildings, green laws should be in the front of your mind. You’ll need to understand applicable developments to comply with new requirements and, if desired, take advantage of available incentives.

So.  This post discusses (1) how these laws and policies incentivize green practices in buildings; (2) the costs and benefits associated with green buildings; (3) why the next trend in green law will likely focus on energy audits and retrofitting for existing buildings; and (4) why you should not wait to consider greening your real estate.

Incorporating Green Practices

Initially, green laws, policies, and incentives applied only to new and significantly renovated government buildings. They later expanded to include new commercial buildings and major renovations of existing nongovernmental buildings. More recently, some jurisdictions have expanded mandates to require nongovernmental owners of existing buildings to evaluate and even retrofit their structures to improve energy efficiency.

Traditionally, governments used local building codes to control the construction and occupancy of buildings. These codes outline the minimum standards to ensure the protection of public health, safety, and welfare. Although the minimum standards increase over time, building codes do not mandate or encourage any standard above these minimums.

The green building movement aspired to improve these minimum standards by introducing more environmentally conscious design and construction elements. In the early 1990s, the movement achieved national momentum, primarily through the Energy Star and the Leadership in Energy and Environmental Design (LEED) programs.  Energy Star and LEED largely are compatible; the principal difference is that Energy Star focuses solely on energy efficiency, and LEED more broadly emphasizes building design and operation.

Energy Star Certification

The EPA and the Department of Energy (DOE) jointly administer Energy Star to promote energy efficiency and greenhouse gas reduction. Over the past two decades, the program has expanded to improving energy performance in almost every type of building.  In 1995, the program began to offer the Energy Star label to new homes that were generally twenty to thirty percent more efficient than the DOE’s national model energy code (now part of the International Energy Conservation Code). Currently more than one million new homes have been Energy Star qualified, together saving an estimated $270 million in utility bills annually.

LEED Certification

The nonprofit US Green Building Council (USGBC) developed LEED to promote sustainability. Introduced in the mid
1990s, LEED is now the most widely recognized program in the national and international green building community. Between 2008 and 2009, ten states enacted laws requiring that large new government buildings receive LEED or equivalent certification.

The certification programs provide building owners with a framework for implementing a wide variety of green building elements to enhance their structure’s design, construction, operations and maintenance. The LEED building elements are grouped into five main areas: sustainable site development; water savings; energy efficiency; materials selection; and indoor environmental quality. Each owner may choose its own unique blend of design elements to achieve LEED certification.

LEED certification is granted if the building achieves a certain number of points based on the number and degree of LEED elements incorporated into its design. The four levels of LEED certification are Certification (40–49 points), Silver (50–59 points), Gold (60–79 points), and Platinum (80–110 points).

Costs and Benefits of Green Buildings

The primary costs of green building occur upfront: the expenses of construction and certification. These costs are significantly outweighed by benefits of greening a building.


The costs of incorporating green building elements into a structure vary widely because of the broad range of possible design elements. Standard return on investment can be calculated for certain elements, like enhancements relating to water and energy efficiency. However, other elements are more difficult to evaluate, like adding bicycle racks or increasing daylight or views from interior building spaces.

The costs of obtaining certification under Energy Star or LEED typically falls under three categories: (1) application and registration fees; (2) consultants’ and architects’ additional fees to manage the process; and (3) extra design, research, commissioning, or energy modeling costs required for certification.


Companies can derive a number of other benefits from following the design elements of LEED or similar programs, even if certification is not sought or achieved. These benefits include financial incentives, increased asset valuation, and lower operating expenses, expedited construction procedures, and positive public perception.

Financial Incentives

Some jurisdictions provide financial incentives for attaining LEED or similar certification and, in some cases, even for incorporating green elements from those programs without achieving formal certification. Incentives may include rebated or reduced permit fees or application costs, reduced or waived taxes, or zoning allowances to permit larger buildings than otherwise allowed.

Increased Asset Valuation and Lower Operating Expenses

According to USGBC, an up-front investment in green building design yields life-cycle savings of ten times the initial investment amount, and typically affords improved air quality, more access to natural light, and other benefits over conventional buildings. When compared to conventional buildings in the same market, surveys cited by USGBC show that green buildings tend to have a higher valuation, leasing rates, and resale prices.

Valuation may be further impacted in the future as energy audit and efficiency information becomes increasingly public. As discussed below, jurisdictions are starting to require building owners to perform energy audits and make the results public. In response, ASTM International recently released ASTM E2797, a standard to provide a uniform means of collecting, compiling, analyzing, and reporting building energy performance data for lenders, buyers, and tenants.

Expedited Construction Procedures

Companies that achieve LEED or equivalent certification, particularly at the higher levels, can go through the various stages of the development process on an expedited basis. This can translate to reduced construction and carrying costs and to the faster receipt of income from the building’s sale or rental. For example, Los Angeles and San Francisco offer expedited plan review and permitting for projects seeking LEED certification.

Positive Public Perception

Designing and constructing a building with green principles provides an opportunity for public relations and advertising. Local media and governments, and green certification organizations like USGBC, frequently highlight these developments, including through awards or features on Web sites or in print.

Energy Audits and Retrofitting for Existing Buildings

The next wave of green laws and policies is expected to incentivize and even require that existing buildings be evaluated and retrofitted to improve energy efficiency. Some jurisdictions already require that energy audits be prepared for existing large buildings.

An energy audit surveys a building’s features and mechanical systems to assess overall energy usage and to identify and price out both inefficiencies and measures to improve them. Following the path of other green building requirements, the early mandates of retrofit initiatives applied to government buildings but they are beginning to be applied to commercial and other categories.

Local Government Initiatives

Only a few leading jurisdictions have mandated energy audit and retrofitting for private buildings, such as New York City (NYC) and San Francisco. However, these initiatives are expected to become more commonplace and increasingly mandatory in coming years.

In December 2009, NYC enacted the Greener, Greater Buildings Plan, which requires large private buildings and certain city buildings to track, assess, and publicly report their energy and water use. The audit report must identify the costs and savings associated with all reasonable efficiency and retrofit measures; although retrofits are not (yet) required, building owners must retro commission (or “tune-up”) existing systems to ensure efficiency. Buildings that are Energy Star or LEED certified are exempt from these requirements.

In December 2010, San Francisco adopted an ordinance requiring owners of non-residential buildings over 10,000 square feet to conduct an energy audit and submit a report every five years. That audit report must identify retrofitting or retro-commissioning alternatives that could pay for themselves in five years.

Why Companies Should Consider Greening Real Estate Now

The design, construction, and operation of buildings continue to green as a result of improved technology and industry practice, amended building codes, the influence of LEED and Energy Star and available benefits and incentives. Taken together, these factors continually set a higher “floor” for the performance of green buildings. At the same time, revised Energy Star and LEED standards continually raise the “ceiling” for sustainable green development by recognizing the most cutting-edge green elements. As this cycle continues, today’s cutting edge will become tomorrow’s standard practice.

When designing or renovating a building, you should consider the costs and benefits of green building elements and whether to seek Energy Star or LEED certification. Attaining such certification could exempt your company from, or at least delay its need to comply with, future energy audit or retrofit mandates.

By exploring these issues now, you may be able to take advantage of funding opportunities, tax credits, and other incentives to defray the costs associated with green building construction or retrofitting.

Posted: September 14th, 2011
Categories: Energy, Green Building
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Climategate goes to Richmond

Rector and Visitors of the University of Virginia v. Cuccinelli (Va. Mar. 11, 2011):

The Virginia Supreme Court agreed to consider the Virginia Attorney General’s request for documents concerning the so- called climategate controversy concerning grant applications of a former University of Virginia climate change scientist. In May 2010, the University filed a lawsuit objecting to a subpoena served by the Attorney General on the University concerning five grants received by a professor previously employed by the University who was involved in the so-called climategate controversy. In August 2010, the presiding judge held that four of the five grants were federal grants and thus the Attorney General could not question the professor about them. In addition, the court held that the document requests were not specific enough because they did not show sufficient reason to believe incriminating documents existed.

Posted: September 14th, 2011
Categories: Climate change, First Amendment
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