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

Regulatory State
Brandon Hofmeister
Spring 2012
01           Introduction
·     Two primary sources in class
o   Statutes
o  Agencies
§ Make rules that function like statutes and have the power to enforce them
o  Why not have one agency that handles everything
§ Specialized expertise
§ Organic agencies created by statutes
ú Often they overlap because they are created at different times
·     What does the Constitution say about agencies?
o  Not much
§ Does this mean they are unconstitutional?  No.
§ Language suggests the authors thought agencies might exist
ú But no enumeration of them and their functions
·    Michigan state constitution limits primary agencies to 20
·    Inference that authors wanted flexibility with creation and structuring of agencies
o  To do otherwise would restrict future generations and administrations
o  Administrative agencies are the primary source of federal law
§ Adopt more binding rules than Congress
§ Adjudicate more disputes than all of the courts combined
§ Compliance with the regulations created compose of a huge amount of economy
·     American society doesn’t want to eradicate all risks
o  Otherwise cars, guns, cigarettes would be banned
o  Regulatory state manages and intervenes in these risks people face in their ordinary lives
§ Regulates auto safety
§ Seat belts – criminal law
ú Cars with anti-lock brakes and airbags
ú Traffic and drunk driving laws
ú Kid safety seats
ú Spread the cost around
·    No fault insurance gets rid of high litigation tort law
o  Everyone shares in the cost equally
ú Repairing roads, etc.
·     How do we decide if system is effective?  What principles do we use?
o  Cost/benefit analysis
o  Statistics of their effect, scientific information
o  Concerns about individual liberties
§ Controversy about seat belts laws
o  Public opinion
§ But might backfire because general public doesn’t have expertise and if often unwilling to change
o  Politics – political/ideological overlay to many agencies and regulations
02           The Possibilities and Limits of Contract
·     Reading
o  Lochner v. State of New York
o  Henningson v. Bloomfield Motors
o  RS 75-77
·     Class
o  Theoretical justifications for regulations
§ Lochner v. New York, US, 1905
ú Regulatory issue:  statute limited the work hours available to working in bakeries
ú No more than 60 hours per week
ú No more than 10 hours a day unless it makes another work day shorter
ú “no worker shall be required or permitted”
·    Can’t work more regardless as to if he wants to
§ Lochner was bakery owner whose workers worked more than 60 hours
ú Criminal enforcement of this law
§ Constitutional issue:
ú Freedom of contracts issue
ú 14th Amendment issue — Due Process Clause
·    People cannot be deprived of life, liberty, or property without due process of the law
o  Older theory on constitutional law that has now been overturned
§ Purpose/policy of these bakery laws
ú Safeguard the health of the public and the workers
·    Public:
o  Healthier workers would lead to a healthier product
o  State argues that the state takes interest in a strong, robust, not burned out workforce
·    Bakers:
o  Constantly exposed to high temps, lots of attendant health problems, overworked
§ Majority: declared it unconstitutional and thought it wasn’t a good law
ú Line drawing at 10 hours arbitrary and unsupported by convincing rationale
ú Interfered with an individual’s right to contract on a basis that was unreasonable
·    Decision based in notion of liberty
o  “don’t tread on me” kind of decision
o  People can make up their own minds about how many hours they want to work
ú Rejects public safety argument
·    Doesn’t deal with sanitation laws, only maximum hours law
o  Said sanitation laws are valid
o  If those regulations were challenged, court would view them differently
§ Holmes dissent: 
ú Says majority’s opinion is driven by economic considerations
·    Laissez-faire:  the economy should be left to itself
o  Strives to maximize the “utility” of the economy: total overall happiness of society
·    How does freedom of contract maximum utility?
o  Who is better able to decide the best use of my time?  Me or the government regulation?
§ This theory says the individual, and the way to maximum everyone’s utility is to let everyone do what they way
·    Criticism of this theory and maximum utility?
o  Assumptions in theory for maximizing utility
§ Theory doesn’t take into account specialized workers that might not find work in a different field
ú  Barriers to entry, transaction costs are often ignored in this theory
§ Assumption of perfect information
§ Collective action problem:  any single one person could ruin the efforts of a collective group to better their bargaining position
ú  Theoretically possible through unions
o  Price of an item or the price of the salary covers the potential costs
§ Opportunity costs
§ Risks of disease
§ Transaction costs
ú  Costs of suing to enforce rights, as in though laid out in K
ú  “administrative costs”
o  Overcoming these assumptions
§ Level the playing field through regulations
o  Externalities
§ Costs to other people are not considered when entering into an agreement or making a decision
o  Henningsen v. Bloomfield Motors, Inc., N.J., 1960
§ Warranties: a number of states by statute passed implied warranties
ú Even if the K doesn’t expressly provide a warranty, one will be implied in every sale to protect consumers from products in which they don’t have the expertise to inspect themselves
ú Express warranty was included in K
·    After 90 days or 4,000 would have to bring car back to factory and then they will provide new part
·    Form also waived any implied warranties
§ After accident, ∏ did not comply with express warranty
ú Instead argued shouldn’t waive implied warranty of merchantability and he should be able to recover because they sold him a crap car
ú ∆ argued there was no warranty because
·    Standardized form was used
·    Warranty was only extended to the dealer
o  Because that was the sale they made, dealer was responsible for the sale to ∏
§ “privity of K” can only sue on the K if you are party to it
§ Court distinguished between “buyer” and “consumer”
ú  This theory doesn’t work in realm of mass produced products
ú  Implied warrant of merchantability extends all the way to the consumer
§ But ∏ signed away implied warranty, why shouldn’t that close the case?
ú Lack of bargaining power
·    Couldn’t negotiate for a warranty, couldn’t collectively bargain for a warranty
ú ∏ probably didn’t understand the risks of signing that form
·    Probably understood the normal dangers of driving the car
§ Court totally rewrites an express contract
ú Seems to assume people have no power over auto safety
·    Maybe at this time it was right because all auto dealers used the same form to complete sale
§ Mass marketing and bargaining
ú Markets might not produce something that a person wants to bargain for
·    Won’t make a random car that one person wants to buy because it would cost too much to get it off the ground
03           The Possibilities and Limits of Tort and Criminal Law
·     Reading
o  The Common Law as a Regulatory Regime
§ In addition to government regulations, the law can respond in other ways to activities that generate risk, through contract and tort law
§ The common law is the particular set of legally binding rules that are made and implemented by judges in the course of resolving formal disputes between contesting parties
§ Contract law rests on the enforcement of actual or implied warranties
§ Tort law imposes obligations independently of whether the person on whom the obligation is being imposed made any sort of promise or warranty to the person bringing the suit
o  The Limitations of Tort Law
o  MacPherson v. Buick Motor Co.
o  Rotche v. Buick Motor Co.
o  TWEN –          Grimshaw v. Ford Motor Co.
o  Indictment of Ford Motor Company
·     Class
o  Considerations:
§ When is government intervention through regulation justified?
§ What regulations are the best?
§ What level of safety do we want in society and how do we get there?
o  We don’t want complete safety (like in banning cars to prevent deaths in crashes)
§ Freedom of contract
ú Good thing for individual liberty
ú Freely contracting leads to most welfare to overall society
·    Individuals know better than the government what makes them happy so they should be allowed to freely trade between themselves
ú Assumptions
·    That people are acting rationally for their own self-interest
·    Reasonably equal bargaining power
·    Perfect information about costs and benefits for any individual trade
o  At the very least, maybe good information will suffice
·    Every person doing a cost/benefit analysis every time

bout what level of safety is right?
§ Arguments for Ford and against tort system
ú Uncertainty and unpredictability in potential judgments
·    Can’t make cost/benefit analysis
·    Might make overall costs go up for them by compensating for risk of high punitive award
·    Retroactive nature of tort system
o  Don’t know what rules are until something happens and someone is hurt
§ Amorphous common law rules
ú  Higher transaction costs
ú Transaction costs
·    Cost to public in making the system work
·    Lawyers’ salaries are huge transaction cost in tort system
ú Decentralized system of rules for a company trying to make one car in 50 states
·    Really inefficient, high transaction costs
·    Might win in one state and lose in another on the exact same case
ú Any concerns about judge or jury making decisions about design alternatives?
·    They are not experts in the field
·    Courts not well designed to be making decisions about auto safety that are technically complex and difficult to understand
ú Whistleblower
·    Some guy came forward and gave the ∏’s attorney all the dirt on ∆
o  Not going to happen in every case
o  Courts can only act on information presented before it
§ Decide on issue the lawyers bring to them, don’t often have authority to ferret out information for itself
§ Other administrative bodies might have this ability and authority to do it better
ú Implementation and enforcement of tort law is more litigation
·    May want a system that has proactive enforcement tools that don’t require another injury to activate the system
o  Latent injuries — need actual injury to trigger tort law system
§ Some injuries take a long time to appear
ú Causation issues make it hard to use tort law to prevent things like cancer
o  Criminal law as regulatory element
§ Could Ford be liable for murder for its approval of the knowingly faulty design of the Pinto?
ú Could say that even a perfectly safe car would create murder liability because statistically speaking, someone will always die
ú If Ford is put on trial, who would be the ∆?
ú Criminal law might have higher transaction cost than tort
·    Higher burden of proof
§ Why do drunk drivers deserve jail when Ford executives don’t?
·     Review
o  Tort law as regulatory tool
§ How can tort law achieve the right level of regulation?
ú Making the entity most able to change safety at the least possible cost the liability of damages
·    Car makers change technical aspects of auto safety
·    Individual people are in charge of safety hazards from drinking and driving
§ Economics don’t always point to conservative view point
o  Problems with using tort law
§ Can be discretionary
ú Up to car makers to decide level of auto safety through cost/benefit analysis
§ Reactive:  system only triggers after an injury
ú Also, for ∆ don’t know what the rules are or how to make things better until after they are hit with massive tort judgment
§ Inconsistency because of 50 different states with 50 different sets of rules
§ Problems can come from nature of judicial system itself
ú Judges don’t have a lot of expertise in auto safety
ú Authority of court to implement rule might be hard
·    Don’t have authority to force Ford to change its behavior
ú Case-by-case analysis:  hard cases might make bad law
ú Pretty big transaction fees headed by lawyers’ fees
·    Under inclusive:  not everyone can bring a court case, especially with small injuries
ú Judges as institutions create concerns about democratic accountability because they are not elected