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Regulatory State
Wayne State University Law School
Hofmeister, Brandon J.

REGULATORY STATE – PROFESSOR HOFMEISTER – WINTER 2011
PART I.  WHEN GOVERNMENT REGULATION IS JUSTIFIED AND ACCEPTABLE INTERVENTIONS
WHAT IS AN AGENCY? UNIT OF GOVERNMENT CREATED BY STATUTE
The regulatory state is a collection of federal government institutions and laws that determine many aspects of social and economic policy.  Agencies are chief among them  Agencies have the ability to create regulations and enforce them.  Administrative agencies are the primary source of federal law in the US.
JUSTIFICATIONS FOR REGULATION
·         U.S. Constitution, Art II §2: Briefly discusses but doesn’t spell out powers of agencies.  It’s like the Framers of the Constitution did this in order to allow flexibility in the operation of the government and agencies.By and large, the entire subject of regulatory state will not come directly from U.S. Constitution.
·         Supreme Court held that Congress has authority to create agencies, subject to fairly minimal constraints. U.S. v. Rock Royal Co-op, Inc.
·         Expertise: Agencies are often seen as possessing institutional expertise for solving the complex problems that confront modern society because they have broad access to information, specialized knowledge, and trained staff.  They also have time to devote to a particular set of problems.
·         Fairness and Rationality: Agencies are subject to constraints imposed by the 1) Due Process clause, 2) procedural requirements imposed by statute (APA, 5 USC §551 et seq.).
·         Interest representations: When agencies act through processes that are open and accessible to a wide range of interests, they can provide a form of interest representation that might also enhance their legitimacy.
·         Political accountability: can be seen as accountable to the people indirectly through the President who is an elected official and can be held responsible for unpopular agency decisions.
·         Efficacy and Flexibility: Might be able to implement policies that are preferred or needed when Congress is gridlocked.
·         Coordination: cross agency coordination allows for uniform regulatory regimes and consistency.
·         Efficiency: Issue efficient regulations.
·         It’s a myth to say we want to ban all risks at all costs.  We do want to ban unreasonable risks.  Auto safety regulation is one such area in which it’s appropriate for the government to intervene.  Some examples of regulation of auto industry (seat belts through criminal law, cars with antilock brakes through agency regulation, speed limit through local or state enforcement of the laws, drivers license, crash tests, drunk driving, tort law, insurance, infrastructure)
THEORETICAL JUSTIFICATIONS FOR REGULATION
THE POSSIBILITY AND LIMITS OF CONTRACT METHODS TO ACHIEVE AUTO SAFETY
Lochner v. New York
(NY statute to regulate baking industry; Majority dec. based in allowing freedom of contract and liberty as opposed to regulating people’s working hours; Dissent argued that majority opinion was based in economic theory)
·         Point of this discussion is to understand how to make an economics argument and the reasons that go into it.
·         Regulatory issue was whether baker could work more than 10 hours per day.  The State’s statute used terms “required” or “permitted” to prevent bakers and employers from contracting into more than 10 hours a day.  The regulation also discussed bathrooms, washing hands, structure, and inspection requirements.  The bakery was found to have workers working more than 60 hours per week so he was fined for violation.
·         Constitutional Issue: Whether the State violated the Due Process Clause of the 14th Amendment by limiting working hours.  The question was whether this interfered with people’s right to contract for labor, which is a liberty protected by the 14th Amendment.
·         The purpose of the policy was to protect the safety and health of the public and the bakers.  It’s likely the rationale for this legislation was to alleviate health and safety risks for the bakers.
·         The Majority opinion felt the law was arbitrary and based its decision on the notion of liberty.  People should be able to decide for themselves how long they work.  Notion of efficiency or social welfare to maximize utility. Theory is that we can use freedom of contract because it promotes maximum social utility because individuals know better than the government what they value because we’ll all be looking out for for own self interest.
·         The Dissent says the majority’s opinion is more about a theory of economics.  Assumes all costs and benefits have been factored into the decisions people will make when they make decisions in contracting.  Advocates a laissez faire approach to allow people to freely contract.  For an economist, the goal is to maximize the utility or total overall happiness in society. 
·         Theory that free contract maximizes utility: Assumptions: parties rational in their own self interest, have all the same information about costs and benefits, relatively equal bargaining power, transaction costs (admin for enforcement), collective action problem means that you need everyone to agree to the same thing like forming a union, price assumes every person doing cost and benefits analysis (lost time (opportunity costs) + transaction costs (research, enforcement, admin costs) + risk of admin costs VS salary)
·         One of the reasons the other laws would be upheld is b/c they work more to protect the general public who have no information at all about the product they’re getting.
·         Another reason is the fact that the costs of allowing unhealthy practices in the workplace actually hurts society and not the workers or employers.  This is called an externality. This means all cost and benefits not shared by both parties. A cost being borne by somebody else that’s not being accounted for which could lead to an inefficient, less than optimal option for all in society. 
·         Collective actioning problem: A form of a transaction where you need a bunch of entities to be on the same page and has a lot of costs to it.
Henningson v. Bloomfield Motors
(Example of the limitations of freedom of contract theory and when they will be applied.  Here, there was a limitation placed on contracting away warranties i.e. liability for negligence.  Allowing this exculpatory clause impacted the entire public so the auto safety industry was transformed as a result of this decision.)
·         Man purchases car for his wife; she is injured
·         Traditional contract law embraced theory of caveat empor.  States imposed regulation regarding implied warranty in every sale.  There was an express warranty providing for recovery but the expense and effort was to the buyer.  The implied warranty was waived.
·         Mfgr claims no implied warranty (waived in purchase) + woman was third party and thus they had no liability to her.  Said implied warranty was between Chrysler and the dealer.  This was based on privity of contract.
·         Privity requirement relaxed if reasonable to assume that third parties will use or consume product
–         UCC 2-318 – Third Party Beneficiaries of Warranties Express or Implied
·         Court rejects attempted disclaimer of an implied warranty
–         UCC 2-314, Implied Warranty of Merchantability
–         UCC 2-316, Exclusion or Modification of Warranties (language must be conspicuous; must alert buyer; 6 pt font)
·         Justice required an intervention on the “freedom of K” – When appropriate?
–         Unequal bargaining power, inconspicuous provisions
–         Lack of education / unintelligible (legalese)
–         People not adept at assessing risks – not assumed rational actors
§  Essentially the court completely rewrote a contract by allowing for the warranty even though Henningson signed it away.
·         Concern about the externalities to public of not regulating in cases like this.  The reason you want regulation is because one individual’s actions impacts more than just him, it also impacts other people.
 
AIRBAGS 101 (Purpose of article was to educate people about airbags.  For this class, it was to provide an example of whther market based choice over regulation works.  Can individual consumers if they’re educated make the right choice?)
·         Don’t really know what kind you have or how it works unless you crash.  Driver and passenger airbag mandated but don’t deploy in side crash.  Goal is to reduce amount of injuries that earlier less sophisticated frontal airbags caused in smaller, adults and children.  More is better.  Side airbags not req’d by regulation.  Have to ask for them.
THE POSSIBILITIES AND LIMITATIONS OF TORT AND CRIMINAL LAW TO ACHIEVE AUTO SAFETY
How effective is tort as a regulatory system?  What are its limitations?
1.     Discretionary (not mandatory); each potential D can perform his own cost/benefit to determine his compliance.  Leaves the decision for safety up to the auto makers.  Nothing to force them to implement safety society wants.
2.     Reactive (not proactive).  Only comes into effect after injury, so P’s cannot always become “whole.”
–         D’s might have not know what they were doing was illegal
3.     Decentralized System (punitive damages could be replicated for same act/behavior by multiple juries); 50 dates, 50 different rules.  Juries impact outcomes too.
4.     Legal Uncertainty: not clear what rules are; differs by J; unclear whether you are breaking law / putting yourself at risk
5.     Doesn’t regulate risk – have to wait for actual damage/harm to trigger tort system; people can choose to engage in risky behavior (i.e. drunk driving) and not be punished for enhanced risk
6.     Under-Inclusive for small or non-traditional plaintiffs (not worth cost/stress/time of lawsuit) (e.g. injury c

impacts behavior
o    Downsides: seems like it should only be used for really heinous things; issues with whom to hold accountable b/c not always a clear bad actor with corporate behavior.
o    Some argue it has a moral weight.
o    When is it appropriate to make the act a criminal violation and when is it not?
 
GOVERNMENT INTERVENTIONS IN MARKETS: ARGUMENTS FROM UTILITY AND LIBERTY
For exam: We’ll get potential regulation and will need to make the different types of arguments.  Grading on ability to see these arguments, make counter-arguments. (i.e. policy args based on economics, liberty, freedom, equality, justice, etc.)
 
JUSTIFICATIONS FOR REGULATION: FREEDOM V. SOCIAL WELFARE
Analysis of Regulation Based on Liberty & Freedom of Contract
Excerpts from Milton Friedman, Capitalism and Freedom
·         Allowing people to make individual choices in marketplace will typically result in optimal social utility.
·         Markets attractive because they allow us to make free choices:  Maximize Liberty/Freedom to choose.
·         Free market is not a zero sum gain and it is possible that all parties can benefit.  Each of the parties involved in the transaction feels like he’s better off so you can maximize utility by allowing voluntary transactions to occur.
·         Government, with its concentration of power, is a threat to individual freedom; \ limit scope of government
·         Government exists only to the extent that it aids individuals to make independent actions – set ground rules for market to allow us to act to do what we want to do (rule-maker & “umpire”)
·         Thinking about freedom in a negative sense – freedom from people telling me what to do
·         Example where maximizing freedom doesn’t maximize utility? Assumptions that have to be made to assume that giving freedom to maximize utility results in the greatest happiness for the greatest number of people.
·         Example where maximizing liberty doesn’t maximize utility: monopolies could overcharge unless there’s a sub.
 
Theodore Roosevelt, New Nationalism
·         Government intervention required to establish equality of opportunity
·         Thinking about freedom in a positive sense – freedom to be able to take advantage of something
–         This can require someone else to be regulated, i.e. big business
–         Much more trusting of government; skeptical of big business & special interest groups
–         Centralization of government needed to stand up to big business
·         Freedom/Liberty can be used to argue for or against governmental action – flip either way to advocate
–         Freedom from something (Friedman) v. Freedom to do something (Roosevelt)
·         Differences and similarities b/n Friedman and Roosevelt
–         Notion of equality and distributed justice is about how the “pie” should be split up.
–         Both want to promote freedom but have very different concepts of what it means.
–         Both are afraid of where power should be concentrated in the government.
–         They are on opposite ends of spectrum regarding how much gov’t should be involved.
–         Distinction is how they feel about centralizing power as opposed to disbursing government. Fed v. local gov’t
·         Friedman (Hands-on-approach)
–         Worried about concentrated power in government. Negative liberty which means gov’t stay out b/c screws things up.
–         Not opposed to ALL forms of regulation.
§  Be umpire in contract law, property law
§  Public goods where ind do not own i.e. national defense (regulate and tax everyone to pay for it).
§  Environmental regulation due to externalities (pollution in streams).
·         Roosevelt (Direct Action and proper safeguards)
–         Worried about regulation power being in the public sector.
–         Positive liberty means in order to be free, might need the government to regulate larger institutions.