Vienna Woods Law & Economics

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Kelo v. City of New London after Ten Years — Book Review by Joel C. Mandelman — November 6, 2015

Kelo v. City of New London after Ten Years — Book Review by Joel C. Mandelman

The Grasping Hand: Kelo v. City of New London & the Limits of Eminent Domain by Ilya Somin, University of Chicago Press – 2015

In his book, The Grasping Hand: New London and the Limits of Eminent Domain, Ilya Somin, a law professor at George Mason University Law School, traces the history of eminent domain and 5th Amendment takings from colonial times to the 2005 Supreme Court decision in Kelo v City of New London.  This is not a minor intellectual topic. The protection of the rights of private property owners is a cornerstone of any free country and of any free market economy.  In the United States, the 5th Amendment to the Constitution provides that, “private property shall [not] be taken for public use without payment of just compensation” (emphasis added.)  Notwithstanding these limiting words, the U.S. Supreme Court has sanctioned the government (primarily local and state governments) taking of private property and its transfer to other private parties whose use of it may be of little benefit to the general public.

The most recent example of this disfigurement of the Constitution was found in New London, Connecticut where, in 2005, the Court sanctioned the seizure of several private homes so that New London could transfer the property to the Pfizer pharmaceutical corporation in order to build a new corporate headquarters, a luxury hotel, and a corporate conference center.  The principal authority for this seizure was a 1954 Supreme Court ruling in Berman v Parker in which the Court held that a seizure need not be for a traditional public purpose, i.e. a school, a hospital, or a highway, but that the seizure merely have a “public purpose” such as producing greater tax revenues by ending “urban blight”.  (Whether the seized property was, in fact, blighted is left to the judicially unreviewed discretion of the government agency seizing the property.)  The saddest irony of the Kelo case was that, after all of the litigation, and the loss of scores of homes, Pfizer changed its mind and never built the planned corporate park and hotel.

The vast majority of seizures — since the Berman decision more than 80 percent of all private property condemnations — have been for such non-public uses such as building sports arenas, corporate office space, and general urban renewal and not for traditional public uses such as building schools or highways.  The Supreme Court’s rationalization has always been that since “everyone benefits” from a neighborhood being generally improved, there is an inherent “public purpose” to the seizure. Thus, even if the seizure was not for a traditional public use, it is sanctioned by the 5th Amendment.  That this is not what the plain language of the 5th Amendment states seems to have escaped the Court’s notice.

As Somin discusses, courts have been reluctant to second guess what a state legislature or a city council thinks is “blight” requiring government action to eliminate it.  This judicial reluctance is a moral and constitutional cop-out. There has been no reluctance on the part of federal or state judges to second guess the legitimacy of search warrants, confessions, the providing of a fair trial (i.e. due process of law), the scope of government limitations on freedom of speech or the press, the scope of the right to bear arms or the meaning of the 14th Amendment’s equal protection and due process clauses; so why the reluctance to judge the validity of takings under the 5th Amendment? No explanation is offered, nor have judges ever tried to explain their sudden judicial restraint in this particular area of constitutional law.

Somin traces the history of 5th Amendment takings dating back to post-colonial times when many takings were made for the purpose of building privately owned dams that had a generalized public benefit by creating water power or the construction of privately owned turnpikes.  Many of the more controversial public benefit takings did not start until the New Deal, or thereafter, when urban renewal became all the rage. The trend became the seizure of private property – which typically had housing already on it – in order to use it for the building of massive public housing projects. That many of those public housing projects later became worse slums than the smaller, privately owned “slums” that they “renewed” is discussed at some length in the book. Sadly, no government official, or agency, has ever been held accountable for these widespread, often well publicized, failures. As Somin discusses, much of the impetus for these renewal projects came not from elected legislators or elected executive branch officials but rather from real estate and construction industry developers who were also major sources of campaign funds.

Perhaps the most outrageous example of crony-capitalism seizures of private property was the infamous Poletown case, in which the City of Detroit seized thousands of private homes so that General Motors could build an automobile factory.  The Michigan Supreme Court sanctioned this theft on the grounds that the promised creation of 5,000 new jobs was a public use justifying the seizure of thousands of private homes and businesses. The cruelest irony was that fewer than half of the promised jobs were ever created and, several years later, a newly constituted Michigan Supreme Court partially reversed its Poletown decision in County of Wayne v. Hathcock, allowing takings in “blighted” areas but prohibiting takings for economic development.

The public reaction to the U.S. Supreme Court’s 2005 Kelo decision was swift and harsh. It was widely denounced as a threat to all private property rights. After all, if Kelo were followed to its logical conclusion, there would be nothing to stop the government from seizing 100 private homes so that a private developer could construct a high rise apartment that would pay more in local property taxes.

The problem is that many of the legislative attempts to prevent another Kelo-like case from ever happening again were half-hearted and possibly made in bad faith.  Although state laws were changed to bar 5th Amendment takings for economic development, a gaping – and likely intentional – loophole was left in those statues. There was no prohibition of takings to end undefined, judicially unreviewable, allegations of economic or social “blight.”  Almost any taking barred on economic development grounds could still be “justified” on the grounds that the affected property was “blighted.”

Somin carefully traces and analyzes both the history of the takings clause and the development of the “public purpose versus public use” expansion of its scope to the point where no private property is truly safe from any government bureaucrat or private developer with enough political clout to get its way.  Many of the state laws passed in response to the Kelo decision need to be substantially strengthened and federal law needs to be rewritten to bar illegitimate seizures of private property for other private, or quasi-private uses that primarily benefit the political party controlling the local government and its crony-capitalist allies.

This is an important book that, because of its arcane Constitutional premise, has not received the widespread publicity that it deserves. The Kelo decision and the weak responses to it by many state legislatures have left many citizens with a false sense of security.  Eternal vigilance truly is the price of liberty and greater vigilance, and efforts, are required to prevent Kelo from rearing its ugly, if somewhat shrunken, head again.

Joel C. Mandelman is an attorney practicing in Arlington, Virginia.  He has filed amicus briefs with the U.S. Supreme Court on behalf of Abigail Fisher in her challenge to the University of Texas’ racially preferential admissions policies and on behalf of the State of Michigan in defense of its state constitutional amendment barring all racial preferences in college admissions, government hiring and government contracting.  See the Contributors page for more about Mr. Mandelman.  Email him at joelcm1947@gmail.com.

(Correction, Nov. 8:  An earlier version of this post misstated the holding in Hathcock as fully reversing the Poletown case. Ed.)

(Correction, Nov. 20:  In an email to this site’s administrator, Professor Somin points out that “Pfizer was not going to be the new owner or developer of the condemned property.  As explained in the book, they lobbied for the project and hoped to benefit from it, but were not going to own or develop the land themselves.” Ed.)

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“What Does King v. Burwell Have to Do with the Antitrust Rule of Reason? A Lot” by Theodore A. Gebhard — July 15, 2015

“What Does King v. Burwell Have to Do with the Antitrust Rule of Reason? A Lot” by Theodore A. Gebhard

The first Justice John Marshall Harlan is probably best remembered for being the sole dissenter in Plessy v. Ferguson, the notorious 1896 Supreme Court decision that found Louisiana’s policy of “separate but equal” accommodations for blacks and whites to satisfy the equal protection requirements of the 14th Amendment.  Harlan, a strict textualist, saw no color distinctions in the plain language of the 14th Amendment or anywhere else in what he described as a color-blind Constitution.  Harlan’s textualism did not end there, however.  It was also evident fifteen years later in one of the most famous and impactful antitrust cases in Supreme Court history, Standard Oil Co. of New Jersey v. U.S. The majority opinion in that case, in important respects, mirrored Chief Justice John Roberts’ reasoning in King v. Burwell.  Like King, the majority opinion in Standard Oil was written by the Chief Justice, Edward White in this instance, and in both cases, the majority reasoned that Congress did not actually mean what the clear and plain words of the statute at issue said.  Although concurring in the narrow holding of liability, Justice Harlan in Standard Oil, as Justice Antonin Scalia in his dissent in King, criticized forcefully what he believed to be the majority’s rank display of judicial legislation and usurpation of Congress’s function to fix statutes that may otherwise have harsh policy consequences.  Indeed, Standard Oil demonstrates that both Chief Justice Roberts and Justice Scalia had ample precedent in Supreme Court history.

The Standard Oil case was about whether John D. Rockefeller’s corporate empire violated the Sherman Antitrust Act, enacted 21 years earlier in 1890 and which prohibited monopolization, attempted monopolization, and “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce .”  Harlan believed that under the facts of the case, liability could be found within the plain language of the statute.  The majority likewise found that Standard Oil violated the Act, but did so by dint of construing the Act in a way that the Court had previously rejected on several occasions.  Specifically, Chief Justice White used the opportunity to read into the Sherman Act the common law principle of “reasonableness” such that only “unreasonable” restraints of trade would be illegal.  That is, the Court rewrote the statute to say in effect, “every unreasonable contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade” is prohibited. In so doing, the Court, by judicial fiat, discarded the plain language of the statute and injected the so-called “rule of reason” into antitrust doctrine.

Notwithstanding that the Court had previously found otherwise, Chief Justice White found that the 51rst Congress must have had in mind the common law focus on unreasonable restraints in trade when it drafted the Sherman Act.  Otherwise, he believed, the operation of the statute could give discordant results.  The fact that the Congress did not make this qualification explicit was of no matter; White’s clairvoyance was sufficient to discern and correct the textual oversight and Congress’s true intent.  Harlan, however, saw this as unwarranted judicial activism and harmful appropriation of the “constitutional functions of the legislative branches of government.”  Echoing today’s concerns about judicial overreach, Harlan worried that this constitutionally unauthorized usurpation of legislative power “may well cause some alarm for the integrity of our institutions.”

Moreover, in his long and detailed concurrence, Harlan forcefully argued that it is not the Court’s function to change the plain meaning of statutes, whether or not that meaning reflects actual legislative intent.  That is, a judge’s role is to look only at the four corners of a statute, and no more.  It is up to the legislature to fix a statute, if necessary, not the judge.  This principle was even more applicable in the case at hand.  Here, Harlan believed, the plain language of the Act did in fact reflect the actual legislative intent.  Thus, the majority’s contrary position was even more egregious.  That is, the majority simply substituted its preferred reading of the statute 21 years after the fact, notwithstanding contrary contemporaneous evidence.

In this regard, Harlan pointed out that in 1890 the Congress was especially alarmed about growing concentrations of wealth, aggregation of capital among a few individuals, and economic power, all arising from the rapid industrialization that the United States had been experiencing over the previous decades.  Congress, in keeping with the spirit of the age, saw this changing economic climate as requiring bold new law focused on checking the power of trusts.  Specifically, the new climate “must be met firmly and by such statutory regulations as would adequately protect the people against oppression and wrong.”  For this reason, the 1890 Congress, in drafting the Sherman Act, intentionally abandoned common law principles as being too weak to deal with the economic circumstances of the day.  In addition, the Congress wrote criminal sanctions and third-party rights of action into the Act, none of which were a part of the common law.

Finally, Harlan pointedly explained that the Court had itself previously found in a well-known 1896 decision, U.S. v. Trans-Missouri Freight Assn., and reaffirmed in several later decisions that the Act’s prohibitions were not limited only to unreasonable restraints of trade, as that term is understood in the common law.  The first of these decisions, moreover, was based on far greater proximity to the time of the Act than the current case, and if the Congress thought the Court to be wrong, it had at least 15 years to correct the Court on this issue, but failed to do so, indicating that it approved of the Court’s construction.  Harlan thus saw White’s reversal of these holdings as no more than “an invasion by the judiciary of the constitutional domain of Congress — an attempt by interpretation to soften or modify what some regard as a harsh public policy.”

The activism of Chief Justice White in Standard Oil and nearly all of Justice Harlan’s concerns re-emerge in King v. Burwell.  In King, the principal issue was whether, under the Affordable Care and Patient Protection Act, an “Exchange” (an insurance marketplace) established by the federal government through the Secretary of Health and Human Services should be treated as an “Exchange” established by a state.  The question is important because under the ACAPA, an insurance exchange must be established in each state.  The statute provides, however, that if a state fails to establish such an exchange, the Secretary of H.H.S. will step in and establish a federally run exchange in that state.  The statute further provides that premium assistance will be available to lower income individuals to subsidize their purchase of health insurance when such insurance is purchased through an “Exchange established by the State.”  The Act defines “State” to mean each of the 50 United States plus the District of Columbia.  The plain language of the statute therefore precludes premium assistance to individuals purchasing health insurance on a federally run exchange.

Notwithstanding the plain language of the Act, however, Chief Justice Roberts, writing for the majority, held that premium assistance is available irrespective of whether the relevant exchange was established by a state or the Secretary.  In effect, the Chief Justice rewrote the pertinent clause, “Exchange established by the State,” to read instead “Exchange established by the State or the Federal Government.”

Much like Chief Justice White more than a century earlier, Chief Justice Roberts reasoned that the Congress could not have actually meant what the plain text of the Act said and that if this drafting oversight were not corrected by the Court, serious discordant consequences would result.  Also, like his predecessor, Chief Justice Roberts came to this conclusion despite evidence suggesting that the plain language is exactly what Congress intended.  According to the now public remarks of Jonathan Gruber, a chief architect of the Act, by limiting premium assistance only to purchases made on state-established exchanges, the Congress intended to create an incentive for each state to establish an exchange.  Even so, the Chief Justice discerned otherwise (perhaps because in hindsight the incentive did not work and, as a result, the consequences to the operation of the Act will be severe) and held that Congress must have intended “Exchange” for purposes of premium assistance to encompass both state and federal-established exchanges.  That is, just as Chief Justice White found, 21 years after its passage, that the plain text of the Sherman Act did not contain the full intended meaning of the words in the Act, Chief Justice Roberts similarly found the plain text of the ACAPA to fall short of its true meaning, notwithstanding that Congress did nothing to change the text since its 2010 enactment.

The parallel between the two cases does not stop with the majority opinions.  In King, Justice Scalia, a textualist like Justice Harlan, echoed the same concerns that Harlan had in Standard Oil. In his dissent, Scalia states, for example, that [t]he Court’s decision reflects the philosophy that judges should endure whatever interpretive distortions it takes in order to correct a supposed flaw in the statutory machin­ery.  That philosophy ignores the American people’s deci­sion to give Congress all legislative Powers enumerated in the Constitution. … We lack the prerogative to repair laws that do not work out in practice. … ‘If Congress enacted into law something different from what it intended, then it should amend the statute to conform to its intent.’”  That is, it is not up to the Court to usurp the legislative functions of Congress in order to fix the unintended consequences of a statute. Scalia goes on, “‘this Court has no roving license to disregard clear language simply on the view that Congress must have intended something broader.’”  Scalia concludes by suggesting that, to the detriment of “honest jurisprudence,” the majority “is prepared to do whatever it takes to uphold and assist [the laws it favors].”

So we can only conclude that the controversy surrounding Chief Justice Robert’s reasoning in King is anything but new.  Textualists have been sounding alarms about judicial overreach for decades.  Whether or not one believes that Chief Justice Roberts assumed a proper judicial role, it is undeniable that he had precedent for doing what he did.  Similarly, it is undeniable that Justice Scalia’s concerns are well grounded in Court history.  One other certainty is that just as the judicial creation of the “rule of reason” has had a significant impact on the administration of antitrust law in the last 100-plus years, Chief Justice Robert’s rewrite of the ACAPA will have a lasting impact, not only on the U.S. health insurance system, but in sustaining the self-authorized prerogatives of judges.

Theodore A. Gebhard is a law & economics consultant.  He advises attorneys on the effective use and rebuttal of economic and econometric evidence in advocacy proceedings.  He is a former Justice Department economist, Federal Trade Commission attorney, private practitioner, and economics professor.  He holds an economics Ph.D. as well as a J.D.  Nothing in this article is purported to be legal advice.  You can contact the author via email at theodore.gebhard@aol.com.

“The FTC’s Supreme Court Victory in N.C. Dental: A Rare Win for Both Libertarians and Regulators” by Theodore A. Gebhard — April 28, 2015

“The FTC’s Supreme Court Victory in N.C. Dental: A Rare Win for Both Libertarians and Regulators” by Theodore A. Gebhard

[Originally posted at Gayton Law Blog, April 1, 2015]

The Federal Trade Commission’s (FTC) recent Supreme Court victory in the North Carolina State Board of Dental Examiners (NCSB or Board) case brought together in common cause both economic libertarians and federal antitrust regulators — groups often at odds with each other respecting important philosophical and policy principles. The FTC’s win, however, gave both groups much reason to celebrate.

The question before the Court was whether unilateral anticompetitive actions of the NCSB, a state-created body, were immune from antitrust law under the “state action” doctrine. The state action doctrine arises from Parker v. Brown, a 1943 Supreme Court decision that sought to reconcile the Sherman Antitrust Act with the constitutional principle of federalism. Federalism is the idea that the U.S. Constitution recognizes both national and state government sovereignty by giving certain limited powers to the national government but reserving other powers to the individual states.

Because the Constitution is the highest law and therefore always trumps statutes, the Court carved out immunity from the Sherman Act for anticompetitive actions of states acting in their sovereign capacity, which includes regulating private actors in a way that restricts competition. In 1980 the Court extended this carve out to include the anticompetitive actions of non-sovereign bodies upon a showing that the actions were the result of clearly articulated state policy and were actively supervised by the state. (See, Cal. Liquor Dealers v. Midcal Aluminum, Inc.) The active supervision requirement ensures that the anticompetitive consequences are only those that the state has deliberately chosen to tolerate in exchange for other public policy goals.

The NCSB was established by the North Carolina Dental Act to be “the agency of the State for the regulation of the practice of dentistry.” In that capacity, the NCSB has authority to administer the licensing of dentists and to file suit to enjoin the unlawful practice of dentistry. Starting in 2006, the NCSB began to send strongly worded cease and desist letters to non-dentist providers of teeth whitening services. People in this occupation grew in numbers in North Carolina – as well as other states — as the popularity of these services increased over a period of years. Often the non-dentist providers are simply individual entrepreneurs operating out of kiosks in shopping malls and similar venues. Licensed dentists also provide teeth whitening services, but typically at substantially higher fees.

Significantly, the N.C. Dental Act is silent with respect to whether teeth whitening constitutes the practice of dentistry. Nonetheless, the NCSB determined that it was, though without hearing or comment and without any independent confirmation by any other state official. In so doing, the Board found that the non-dentists were unlawfully practicing dentistry. Instead of obtaining a judicial order to enjoin the non-dentists as prescribed by statute, however, the NCSB sent out cease and desist letters, which contained strong language including a warning that the non-dentist teeth whiteners were engaging in a criminal act. The letters effectively stopped the provision of teeth whitening services by non-dentists.

In 2010 the FTC sued the Board on antitrust grounds. In response, the NCSB asserted that it was entitled to immunity under the state action doctrine. The FTC rejected that claim and in an administrative hearing ruled that the cease and desist letters constituted unlawful concerted action to exclude non-dentist teeth whiteners from the North Carolina market for such services. The FTC further found that that this exclusion resulted in actual anticompetitive effects in the form of less consumer choice and higher prices. The Commission then ordered the NCSB to stop issuing cease and desist letters to non-dentist providers of teeth whitening services without first obtaining a judicial order.

Key to the FTC’s antitrust finding was that, under the N.C. Dental Act, the majority of NCSB members must be practicing dentists elected to the Board by the community of N.C. licensed dentists. Moreover, throughout the relevant period, most, if not all, of the dentist members of the NCSB performed teeth whitening in their respective practices. In addition, the Board’s actions came after it received several complaints from licensed dentists about the competition from non-dentists teeth whiteners and the lower fees that these providers charged. Only a few dentists suggested that teeth whitening by non-dentists might be harmful to customers. The FTC found the validity of such public health claims tenuous.

The NCSB appealed the FTC’s rejection of its state action defense. The appeal reached the Supreme Court in 2014, and in an opinion handed down last February, the Court held that, under the record facts, the NCSB does not have antitrust immunity. In reaching this conclusion, the Court found that, although the NCSB is a creature of the state and could properly be labeled a state agency, it is nonetheless a non-sovereign body and thus subject to the active supervision requirement for antitrust immunity to obtain. This requirement was not satisfied. (Not at issue was whether the state had a clearly articulated policy to regulate the practice of dentistry. All parties stipulated to this factor.)

The Court’s finding that the NCSB is a non-sovereign body is the key to the decision, and rightly focuses on substance over form. In particular, the Court focused on the fact that the NCSB is majority-controlled by active market participants and that its decisions in this case were unsupervised by any state government officials. Given these circumstances, the Court found there to be a high risk that Board decisions were and are influenced by self-interest instead of public welfare. When this risk is present, it trumps any formal label given by a state to a regulatory body. The Court specifically held that a “state board on which a controlling number of decision makers are active market participants in the occupation the board regulates must satisfy [the] active supervision requirement in order to invoke state action antitrust immunity.”

The practical result of this holding is that the FTC’s finding of illegal anticompetitive conduct stands. This outcome will no doubt yield important benefits to North Carolina citizens. Teeth whitening entrepreneurs can seek to re-enter the market, and consumers of those services will enjoy lower fees resulting from the increased competition. These will be tangible, observable benefits.

Critically, however, the Court’s holding also has important legal and policy implications beyond North Carolina. States will have to re-evaluate their regulatory boards and account for the fact that giving unsupervised control over who is qualified to compete to boards comprised of members whose incomes depend on those decisions may not produce good outcomes. Going forward, states must give greater care not only to establishing such boards, but also to overseeing their decisions. Decisions made behind merely the facade of a state-created agency will be insufficient for a board to obtain state action immunity.

Additionally, the Court’s holding recognizes that license requirements that do not rest on firm evidence of a risk to public health absent licensure serve not only to protect incumbents from healthy competition, but unnecessarily infringe on basic economic liberty and the right to earn a living. As such, the holding implicitly elevates economic liberty to a position as prominent as the antitrust concern. In so doing, the holding is an important victory for economic libertarians, just as it is for antitrust enforcers. It is a rare example of an instance when groups with economic philosophies that often diverge can come together in common celebration. A great win for both.

Theodore A. Gebhard advises attorneys on the effective use and rebuttal of economic and econometric evidence in advocacy proceedings.  He is a former Justice Department antitrust economist, Federal Trade Commission attorney, private practitioner, and economics professor.  Mr. Gebhard holds an economics Ph.D. as well as a J.D.  Nothing in this article is purported to be legal advice.  Facts or circumstances described in the article may have changed by the time of posting. You can contact the author via email at theodore.gebhard@aol.com.