Executive Branch Review Week will feature eleven webinar panels over four days of programming discussing the theme "The Next Four Years".
All panels will be live-streamed and available to watch online, as well as recorded for later viewing on our YouTube channel.
Continuing Legal Education (CLE) credits will be available for the four webinars on Wednesday, May 19.
No cost to attend.
CLE is offered only for the webinars on Wednesday, May 19.
CLE registration: $50 for members, $100 for non-members
Up to 6 credits available, depending on state approval.
This event will be hosted on Airmeet, a virtual event platform that combines the benefits of a webinar with virtual networking, so plan to visit the networking lounge before, between, and after panel discussions/sessions. Airmeet works best on a laptop or desktop computer. Functionality is limited on phones. Chrome is the preferred browser for Airmeet. Please click the "Webinar Register" button above and proceed through the registration process on Airmeet. After you register, you will receive a confirmation email from Airmeet. On the day of the event, return to Airmeet and sign in with the email address you used to register. If you have any difficulties, check out our Airmeet Registrant Instructions visual guide or feel free to contact email@example.com.
Monday, May 17
- Non-Delegation? Or No Divesting? Art. I, Sec. 1 at the Founding and Today
- Trade and Its Cross-Cutting Equities: New Horizons, New Challenges
Tuesday, May 18
- Civil Rights in the New Administration
- Reputational Risk in Banking: Is Operation Chokepoint the Answer?
Wednesday, May 19
- Regulating Social Media in the New Administration
- Settlement Payments to Non-Governmental Third Parties
- Religious Liberty in Transition?
- State Sovereignty or Fair-Weather Federalism?
Thursday, May 20
- Climate Change, Environmental Justice, and the Environmental Agenda
- Is Faithful Execution being Devoured By Factional Execution?
- Judicial Nominations and Confirmations
Airmeet, our new online platform for the Executive Branch Review Conference, offers us the exciting opportunity to network with one another, and with speakers, moderators, and FedSoc staff. Before, between and after panel discussions, feel free to click the Lounge button at the top of your screen and join a table of fellow conference attendees. As sessions conclude, we'll also send a "Lounge Alert" with a link you can click to make it easy to join the Lounge. We'll also send alerts to the Lounge before panel discussions begin, so there is no need to worry about missing any of the panels.Please plan to join us in the "Lounge" for a unique networking opportunity. It's a great way to stay in touch with everyone until we can convene in person once again. We look forward to seeing you there!
Confirmed participants to date:
- Hon. Alice M. Batchelder, U.S. Court of Appeals, Sixth Circuit
- Mr. Greg Baer, President and Chief Executive Officer, Bank Policy Institute
- Prof. Nicholas Bagley, Professor of Law, University of Michigan Law School
- Hon. Elizabeth L. Branch, U.S. Court of Appeals, Eleventh Circuit
- Hon. Brian P. Brooks, Former Acting Comptroller of the Currency, Office of the Comptroller of the Currency
- Ms. Nadira Clarke, Partner and Section Chair for Environmental Safety & Incident Response, Baker Botts LLP
- Mr. Art Coleman, Managing Partner and Co-Founder, EducationCounsel
- Mr. Eric Dreiband, Partner, Jones Day
- Hon. W. Neil Eggleston, Partner, Kirkland & Ellis; Former White House Counsel
- Mr. Tony Francois, Senior Attorney, Pacific Legal Foundation
- Prof. Thomas D. Grant, Faculty of Law, University of Cambridge
- Hon. C. Boyden Gray, Founding Partner, Boyden Gray & Associates
- Prof. Philip Hamburger, Maurice & Hilda Friedman Professor of Law, Columbia Law School
- Hon. Gail L. Heriot, Professor of Law, University of San Diego School of Law
- Mrs. Allyson N. Ho, Partner, Gibson Dunn
- Hon. Sandra Ikuta, United States Court of Appeals, Ninth Circuit
- Hon. Edith H. Jones, U.S. Court of Appeals, Fifth Circuit
- Prof. F. Scott Kieff, Fred C. Stevenson Research Professor, George Washington University Law School
- Hon. Joan Larsen, U.S. Court of Appeals, Sixth Circuit
- Mr. Matt Leopold, Partner, Hunton Andrews Kurth
- Mr. Gregory M. Lipper, Partner, Clinton & Peed
- Prof. Daniel Mach, Director, ACLU Program on Freedom of Religion and Belief; George Washington University Law School
- Hon. Kenneth L. Marcus, Founder and Chairman, Louis D. Brandeis Center for Human Rights Under Law
- Ms. Joan Marsh, Executive Vice President of Federal Regulatory Relations, AT&T
- Prof. Jennifer Mascott, Assistant Professor of Law, Antonin Scalia Law School
- Dr. Joshua Meltzer, Senior Fellow, The Brookings Institution
- Hon. Steven Menashi, United States Court of Appeals, Second Circuit
- Mr. Hashim M. Mooppan, Former Deputy Assistant Attorney General, Civil Division, U.S. Department of Justice
- Hon. John B. Nalbandian, United States Court of Appeals, Sixth Circuit
- Hon. Andrew S. Oldham, U.S. Court of Appeals, Fifth Circuit
- Mr. Jesse Panuccio, Partner, Boies Schiller Flexner LLP
- Prof. Christina Parajon Skinner, Assistant Professor of Legal Studies & Business Ethics, The Wharton School, University of Pennsylvania
- Prof. Nicholas Parrillo, William K. Townsend Professor of Law, Yale Law School
- Prof. Eloise Pasachoff, Professor of Law; Anne Fleming Research Professor; Associate Dean for Careers, Georgetown Law
- Prof. Chris Peterson, John J. Flynn Endowed Professor of Law, University of Utah, S.J. Quinney College of Law
- Hon. Noah Phillips, Commissioner, Federal Trade Commission
- Hon. Neomi Rao, United States Court of Appeals, D.C. Circuit
- Prof. Ed Rubin, University Professor of Law and Political Science, Vanderbilt Law School
- Mr. Justin A. Savage, Partner, Sidley Austin LLP
- Hon. Virginia Seitz, Partner, Sidley, Former Assistant Attorney General, Office of Legal Counsel, U.S. Department of Justice
- Ms. Carrie Severino, Chief Counsel and Policy Director, Judicial Crisis Network
- Hon. Roger Severino, Senior Fellow, Ethics & Public Policy Center
- Prof. Carolyn Shapiro, Professor of Law, Chicago-Kent College of Law; former Solicitor General, Illinois
- Prof. Theodore M. Shaw, Julius L. Chambers Distinguished Professor of Law and Director of the Center for Civil Rights, University of North Carolina School of Law
- Hon. Nathan Simington, Commissioner, Federal Communications Commission
- Mr. K. Dane Snowden, President & CEO, Internet Association
- Prof. Ilya Somin, Professor of Law, Antonin Scalia Law School
- Mr. Judd Stone, Solicitor General, Texas
- Ms. Anna St. John, President, Hamilton Lincoln Law Institute
- Mr. Steven Tepp, President & CEO, Sentinel Worldwide
- Ms. Farnaz F. Thompson, Partner, McGuireWoods LLP, Former Deputy General Counsel for Postsecondary Education, U.S. Department of Education
- Ms. Hana Veselka Vizcarra, Staff Attorney, Environmental & Energy Law Program, Harvard Law School
No cost to attend.
CLE is offered only for the webinars on Wednesday, May 19.
CLE registration: $50 for members, $100 for non-members
Up to 6 credits available, depending on state approval.
This event will be hosted on Airmeet, a virtual event platform that combines the benefits of a webinar with virtual networking, so plan to visit the networking lounge before, between, and after panel discussions/sessions. Airmeet works best on a laptop or desktop computer. Functionality is limited on phones. Chrome is the preferred browser for Airmeet. Please click the "Webinar Register" button above and proceed through the registration process on Airmeet. After you register, you will receive a confirmation email from Airmeet. On the day of the event, return to Airmeet and sign in with the email address you used to register. If you have any difficulties, check out our Airmeet Registrant Instructions visual guide or feel free to contact firstname.lastname@example.org.
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Airmeet, our new online platform for the Executive Branch Review Conference, offers us the exciting opportunity to network with one another, and with speakers, moderators, and FedSoc staff. Before, between and after panel discussions, feel free to click the Lounge button at the top of your screen and join a table of fellow conference attendees. As sessions conclude, we'll also send a "Lounge Alert" with a link you can click to make it easy to join the Lounge. We'll also send alerts to the Lounge before panel discussions begin, so there is no need to worry about missing any of the panels.
Please plan to join us in the "Lounge" for a unique networking opportunity. It's a great way to stay in touch with everyone until we can convene in person once again. We look forward to seeing you there!
Administrative Law & Regulation and Federalism & Separation of Powers Practice Groups
|Topics:||Administrative Law & Regulation • Separation of Powers • Federalism & Separation of Powers • Constitution • Founding Era & History|
Whether as the result of hyper-partisanship or as a residue of the constitutional design for lawmaking, government by executive “diktat” is lately increasing. Many of these executive actions appear to have dubious—if any—statutory authority, but the courts have been reticent to validate objections along these lines. The U.S. Supreme Court has indicated a willingness to revisit and possibly to reinvigorate the non-delegation doctrine (with 5 Justices adhering to that view publicly), or at least to put some teeth into its supposedly constraining intelligibility principle. To do so, the Court first will have to grapple with whether Article I, Section 1 of the Constitution contains a non-delegation principle at all?
- Prof. Nicholas Bagley, Professor of Law, University of Michigan Law School
- Prof. Philip Hamburger, Maurice & Hilda Friedman Professor of Law, Columbia Law School
- Prof. Jennifer Mascott, Assistant Professor of Law, Antonin Scalia Law School
- Prof. Nicholas Parrillo, William K. Townsend Professor of Law, Yale Law School
- Moderator: Hon. Neomi Rao, United States Court of Appeals, D.C. Circuit
Dean Reuter: Welcome to the ninth annual Executive Branch Review Conference hosted by The Federalist Society's practice groups. I'm Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. Thank you so much for being with us, today.
EBR9, as we call, it, will focus on the administrative state and the next four years — what to hope for and what to expect in the next four years. EBR9, as we call it, is live on The Federalist Society's website but also live streaming on YouTube, Facebook, Twitter, LinkedIn, and other outlets, and open to the public. So feel free to spread the word even at this late hour. We're also, for the first time ever, on the Airmeet platform, which will allow us to visit with you and you to visit with one another, friends, and colleagues, all in the Airmeet lounge before, after, and between sessions. It's not too late to register on Airmeet through our website to enjoy the networking opportunities in the lounge, and I hope to see you there.
To get us started, today, we'll begin our first panel on congressional delegation or divestment of congressional power moderated by D.C. Circuit Court of Appeals Judge Neomi Rao. To save time and because all speaker panels are on our website and in the conference app, I've asked our moderators to be brief in their introductions of speakers, so I'll try to set a good example introducing Judge Rao, only that she holds degrees from Yale and University of Chicago Law School, and she's had clerkships with Judge J. Harvie Wilkinson and Justice Clarence Thomas. She also founded the Center for the Study of Administrative Law at the Scalia Law School, and she's headed OIRA, making her a true ad-law expert or, perhaps, a true ad-law nerd.
With that, Judge Rao, the floor is yours.
Hon. Neomi Rao: Thank you, Dean. It's a pleasure to be on the kickoff panel for this annual Executive Branch Review Conference. And today, indeed, the first panel has a number of all-stars to discuss the non-delegation principle and the extent to which it is rooted in the text, structure, and original meaning of the Constitution.
Article I, Section 1, vests the Constitution's limited legislative powers in Congress, and our speakers will consider what this means through delegating rulemaking power to Executive Branch agencies. Against the backdrop of an ever-expanding administrative state, the questions about delegation go to the heart of what it means to live in a constitutional republic. Our panel today will address questions such as to what extent is a principle of non-delegation or no divesting consistent with the original meaning of the Constitution? What evidence should we look to when considering questions regarding the existence and scope of a non-delegation principle? What did the text and structure of the Constitution reveal about whether delegation is permissible, and what are the consequences of originalist debates for the modern administrative state which is built on longstanding and expansive delegations of authority to administrative agencies? And, finally, whether and how should courts enforce a principle of non-delegation? Can courts effectively enforce a non-delegation principle, or is it one that depends on the political branches?
Each of our scholars on our panel have written extensively about these subjects, and their full information can be found on the website. We're going to proceed in the following order: We start with Professor Nick Bagley and Professor Nick Parrillo, who will provide the case against an originalist non-delegation principle. Then we will hear from Professor Mascott and Professor Hamburger, who will discuss the historical, textual, and structural reasons for supporting a non-delegation or no-divesting principle.
After the introductory remarks, we will open it up to questions from the audience. There are two ways to ask a question: You can submit a written question through the Q&A tab in the upper, right-hand corner of your screen. You can also ask questions live by pressing the Raise Hand button.
And so, with that, I'm going to turn it over to Professor Bagley to kick things off.
Prof. Nicholas Bagley: Thank you so much, Judge Rao. I am beyond honored to be here, and I am excited to have this conversation about the non-delegation doctrine.
So, as you all know, there are now five justices on the Supreme Court that have signaled their receptiveness to reviving the non-delegation doctrine, and the question is what's the justification, the primary justification on offer for reviving a doctrine that, for most of American history, has been largely defunct? And, for Justice Gorsuch, who's leading the charge to revive the doctrine, the answer comes down to originalism — that the founders believed it would violate the Constitution for Congress to delegate too much power with too little guidance. As my co-author Julian Mortenson and I explain in a recent paper, though, that historical claim is mistaken. In our judgment, there was no such thing as a non-delegation doctrine at the Founding. That sounds like an arresting claim, but bear with me for a moment as I walk you through the basics of the argument and the evidence.
So I want to start with just the very simple point that originalists aim to discern the original public meaning of the Constitution at the moment of ratification. That means it can't be a secret or a hidden meaning. It must have been the meaning that the public would have assigned to its rather spare text. And, right out of the gate, it's pretty noteworthy that the text says nothing about delegating power.
Now, its advocates brushed past that, arguing that the founders would have understood the assignment of all legislative powers to Congress to preclude certain types of broad delegations. But what I want to just push at the beginning is that that's an implication from the text, and it's not a necessary one. Delegating authority is, at least arguably, a way to exercise legislative powers; it doesn't mark an alienation or an abdication of those powers. And that's why originalists have traditionally leaned so hard on history, here. To really carry the argument, they've got to show that the founders would collectively have read that implication into Article I. And not only that, they've also got to demonstrate that the founders agreed, at least in principle, on the line that divided permissible from impermissible delegations, even in the absence of textual guidance as to where to draw that line from Article I. Absent that showing, this non-delegation principle would be entirely vacuous.
So, if the founders did hold such views about the propriety of delegation, it really shouldn't be that hard to show. On the originalist's telling, the non-delegation doctrine was understood at the Founding to be a critically important — indeed an indispensable feature of the separation of powers. And the Founding era is especially rich in primary sources. You've got political tracts, polemical pamphlets, newspaper battles, records of state ratifying conventions, and extensive reports of congressional debates. Those sources collectively contain thousands of pages of sophisticated and extensive constitutional debate on issues ranging from implied powers to presidential removal to the scope of the commerce power. So, if the non-delegation doctrine existed, the historical records should be littered with evidence of a shared commitment — a shared understanding — of something so foundational to the new republic.
But, if you look at the sources, they tell a very different story. Prior to ratification, sweeping delegations of legislative power were a ubiquitous feature of Anglo-American law. Parliament delegated legislative power to ministers, colonies, corporations, to the king; colonial legislatures delegated legislative powers to governors and to other state officials; the states delegated legislative power to the Continental Congress; the Continental Congress delegated legislative power to territorial administrators. This practice of freely delegating legislative power flowed naturally from contemporary political theory which held that all government power had been originally delegated from the people and saw nothing intrinsically objectionable about further delegations of that same authority.
Now, some originalists say the Constitution marked a clean break with all of this practice. But, if that were so, it's pretty telling they didn't lock that view into the text of the Constitution itself. Nowhere have originalists assembled historical evidence that the founders, as a group, read the vesting clause to mark such an abrupt departure from what came before. And that evidentiary gap can't be overcome by invoking the founders' oft-repeated concerns about the consolidation of governmental power in a single branch, right? It does not follow from that impulse that they collectively believed that a particular legal doctrine was a necessary implication of the constitutional design.
In any event, early practice under the U.S. Constitution certainly suggests no shared commitment to anything like the non-delegation principle. The First Congress passed dozens of laws delegating wide discretion to the president, to cabinet secretaries, to federal judges, to territorial governors, to tax officials. Many of these laws offered little or no guidance, including laws about issuing, as may be necessary and best suited to the circumstances of the district, any and all civil and criminal laws for the Northwest Territory; the first patent law that gave to cabinet secretaries the ability to deem the invention of new inventions sufficiently useful important; and Congress also forbade trade with Indian tribes without a license, and it required all licensees to be governed by such rules and regulations as the president shall prescribe. So non-delegation doctrines are raised to none of these laws — not once — nor to any of the others during the First Congress delegating wide authority to the president or his subordinates.
Now, our critics dismiss these laws for various reasons. This law was about foreign affairs of the territories; that law wasn't quite important enough; this other law didn't involve private rights. But here's the key thing to notice about all of those objections: Not one of those reasons draws on an explanation that anyone actually offered up at the time as for the constitutionality of the delegation in question — none. These are post-hoc rationalizations offered to fit the evidence to the theory; they're not historically grounded distinctions.
Now, over the course of the 1790s, a few Republicans, including James Madison and Albert Gallatin, did occasionally voice something sounding like the non-delegation doctrine, in particular in the 1792 debate over the post roads and the 1798 debate over the authority to raise a provisional army. But their arguments were derided by their peers — with good reason — as having been manufactured to serve a political agenda. And, in every case, Congress rejected their objections supposedly in a reflection that any views about the non-delegation doctrine were certainly not widely shared.
And so close attention to early practice betrays no commitment to the principle that some category of laws were beyond the constitutional pale. And, even if it did, it would suggest that laws citing post roads and laws about raising armies would run afoul of the non-delegation principle. But delegations like those would not run afoul of any of the versions of the non-delegation doctrine that are being pushed today. And this is the originalists' best evidence from the Founding era. For those suspicious of centralized agency authority and strong federal government, it is comforting to believe that the founders believed in the non-delegation doctrine. But it is just not what the historical record shows.
Thank you so much.
Hon. Neomi Rao: Next, we'll hear from Professor Parrillo.
Prof. Nicholas Parrillo: Thank you very much, Judge. And thank you to The Federalist Society for the opportunity to be here.
So the debate on delegation and original meaning may seem like a binary one between those who deny any original limit on delegation and those who say there was a limit. But, actually, it's possible for people who think there was originally a limit to come to vastly different views about what the limit was, and I'll talk about some of those different views and give some responses to each of them.
Some believers in an original limit think the limit was categorical. According to Justice Thomas's separate opinion in the Amtrak case in 2015, delegations of rulemaking power to administrators were categorically unconstitutional if they coercively governed the conduct of private persons. On this view, such binding rules were only constitutional if they turned simply on fact findings or rested on the president's Article II powers, such as over foreign and military affairs. So we might call this the categorical critique of today's loose non-delegation doctrine.
But other critics of delegation don't think originalist sources support a categorical limit. They think the sources indicated a more amorphous kind of limit. In this view, it isn't that Congress could never empower administrators to make rules; rather, it's that, whenever Congress authorized rulemaking or any other agency action, it was not to give administrators too much discretion. As John Marshall wrote in Wayman v. Southard in 1825, Congress could not let administrators decide important subjects, but it could let administrators fill out the details.
But, if you start from that premise, where does it lead you? You could argue it's the basis for critiquing today's loose doctrine, albeit on a non-categorical basis. That is, Congress has delegated a lot of things that seem important, so the judiciary should strike down those delegations. But one might object that this non-categorical critique generally encourages courts to strike down statutes without giving them any really predictable method as to which statutes to strike down. "Important" is just too vague. Given this objection, it might be better for courts to be reticent in striking down delegations except, perhaps, in the most outrageous instances once or twice a century, which is pretty much how the non-delegation doctrine has operated up till now. From this perspective, the non-delegation doctrine today, officially established but hardly ever enforced, is a reasonable judicial reaction to an underspecified original meaning. This is consistent with the view of Justice Scalia, who justified the non-delegation doctrine's looseness by saying that the limit, being a matter of degree and not of principle, was not readily enforceable by the courts.
Now, in my own research, I have not focused on whether there was a limit; I assume there was. But, instead, I focus on what practical content the original limit had if any can be identified. I've examined several types of originalist sources, and I'll say a word particularly about early congressional statutes.
As Nick and Julian have emphasized, these acts contain many delegations of rulemaking powers to administrators. The non-categorical critics have responded to these statutes by saying that the things specified in the statutes were important, while the things delegated in the statutes were details. The analysis is inevitably post-hoc. And, while the critics have posited some mid-level factors to make the analysis more determinate — for example, that decisions regarding agency jurisdiction are more likely to be important — I'm concerned that the overall categories of "important" and "detail" remain so elastic that the theory risks being non-falsifiable. Meanwhile, the categorical critics have responded to these statutes by saying that the statutes fall into areas that are exceptions to the limit on delegations, such as government benefits or foreign and military affairs.
Now, I should first note that these ostensible exceptions actually cover the vast majority of early federal statutes. Only a small minority of early federal statutes were binding and domestic. But, while those statutes were few, they did contain at least one broad delegation of rulemaking authority, and that delegation was part of the direct tax of 1798, on which I've done a recent study. Congress apportioned this tax among the states with a set dollar quota for each state. The quota was filled within the state primarily by the state's landowners who each had to pay tax according to what their land was, quote, "worth in money." The legislation gave no further definition of value nor any method for deciding value. Because federal assessors in one region of a state might do valuation differently than their counterparts elsewhere in the state, Congress established for each state a federal board of tax commissioners. Each federal board had the power to divide its state into districts however it chose and to uniformly revise the taxable values of all land in any district up or down by any percentage, quote, "as shall appear to be just and equitable," unquote, with no further definition or methods or criteria in the statute. And the federal boards exercised this power aggressively. For example, the federal board covering Maryland raised the value of all houses in Baltimore upward by a hundred percent.
These mass revisions were rulemakings under the Supreme Court's case law. Indeed, they exactly matched the fact pattern of one leading case defining rulemaking. The revisions were not subject to any judicial review, and they were not the subject of any clear constitutional objections in the extensively recorded discourse about the tax. The categorical critics might argue that each board, in deciding what was just and equitable, was making the kind of factual determination that is allowable under the categorical theory as distinct from a determination of policy. But, if these critics claim that just and equitable mass revisions were matters of fact devoid of policy, that renders their exception for facts very broad, effectively blessing many — perhaps all — modern rulemakings.
Contemporaries in the 1790s recognized that land valuation was highly uncertain and contested. There was no consensus about methods, data were thin, and so forth. If you look at the states' real estate taxes at this time, the relative taxable value of land across different regions of a state was always decided through the political process by the state legislature itself and was notoriously politicized. That said, blessing mass-distributive decisions like these as factual determinations would actually fit with a line of Supreme Court cases going back to before the intelligible principle test in which the Court upheld rulemakings as turning on questions of fact even when they were obviously subjective questions of policy. So, if that's the case, then perhaps the categorical critique is not as categorical as it might first seem.
Hon. Neomi Rao: Next, we'll hear from Professor Mascott.
Prof. Jennifer Mascott: Good morning. Thanks to The Federalist Society for hosting this important panel discussion.
Stepping back a bit for the larger picture, not necessarily based just on the work of the scholars here, I have to say I found it perplexing, over the past several years, that individuals and scholars who have at times claimed various concerns about the way in which executive power is exercised could at the same time support the claim that the Constitution lacks any meaningful delegation constraint and sometimes be passionate about that view. Broad delegations, or at least the interpretation that statutes grant broad, almost-unchecked delegations, have led to the exercise of vast power in a presidency across multiple administrations to support rapidly, wildly changing policies: power on the one hand, for example, to defer the removal of broad classes of individuals under immigration laws; power on the other to build a border wall and declare broad emergencies.
Of course, all agree the president and, under his leadership, administrative agencies need to be able to exercise authority to keep the country safe and to vigorously carry out policies put in place by elected representatives. But the reality is that, if indeed there really is no meaningful delegation constraint in the Constitution, that view combined with incredibly broad modern views of preemption and an historic broad view of executive power and national security in foreign affairs, really indeed would just about add up to the view that a president's powers are total, at least even in the domestic context.
But what is one to do? If the Constitution really does lack a delegation constraint, interpreters cannot just read one into the Constitution. And perhaps folks who contend there's no delegation constraint are actually comfortable with broad delegations because, in the modern age, the delegations are in the end more diffuse, giving power across administrative agencies who often now operate independently from the president rather than giving broad power to the president who sits at the top of the Executive Branch. But then the problem there is that individuals exercising broad policymaking power are not accountable to the electorate.
It is true that proponents of the view that the Constitution lacks delegation constraints don't necessarily think that Congress should — or has — uniformly delegated broad power to the executive. Nick Bagley just wrote a Washington Post column contending that the public health and quarantine laws have a narrower meaning than the way in which the Executive Branch has interpreted them. And Congress, of course, could always choose to delegate less power to the executive. But I have my doubts that congressional choice alone is the answer to delegation concerns and the constant drift of more and more power away from elected representatives to non-elected agency leaders.
Just one small but currently poignant example: Before I left recent service in the Executive Branch, I was asked to interpret a statute addressing newly enacted home confinement authority for federal prisoners during the pandemic to stop the spread of COVID in federal jails. And, unfortunately or not, depending on one's policy perspective, that CARES Act emergency pandemic authority is limited just to the duration of the pandemic, meaning that, at the end of the pandemic, those prisoners who have been sent home, some of them would have to return to jail.
Understandably, there are a number of members of Congress and interest groups who have concerns about that policy outcome. This is a case where Congress could fairly easily, with a one-sentence technical correction, fix the perceived problem and make sure that folks once at home can stay at home. But, instead, members of Congress have chosen to lobby executive officials and ask that bureau of prison officials instead have the discretion to reinterpret the statute and expand home confinement authority.
This seems like a fairly simple, straightforward issue for Congress to address by policy. But, instead, these days, all eyes are on the executive. The question for us today on the panel is: Is this set of affairs okay? Does the Constitution really permit policymaking of any breadth on the private stage to be handed over to the executive or to agency officials?
Nick and Nick have provided great contributions to the literature in their work looking at the early congressional statutes. Their work is well written and very insightful, and I encourage everybody to read it. But in the end, the pro-delegation literature just does not support the conclusion that the Constitution clearly lacked meaningful delegation constraints. Many of the early delegations were much narrower or more nuanced than has been indicated in some of the work.
Professor Bagley's article suggests there's a very high burden to establish a delegation constraint in the Constitution — that, surely, if the Constitution contained a non-delegation principle, discussion of it would have been more ubiquitous. Is this correct? If a constraint is understood at the time or inherent in the structure of a document, would there necessarily have been broad discussion of it? Bagley and his coauthor Mortenson contend there were thousands of pages of constitutionally oriented debate around the time of the First Congress. But, really, at least once the Constitution was ratified, that debate in the First Congress was about how to raise revenue and pay off debts and get the government up and running. Much of the debate was not about grand constitutional issues, and the clearest or most uncontested principles, of course, would not have been discussed much at all.
Also, which way does the burden cut when interpreting the Constitution, which created a new system of separated powers and created a new federal government that lacked any power without an affirmative grant of authority in the Constitution? If the Constitution authorized all grants of delegation from Congress to the executive, then perhaps it would have said so. Bagley and Mortenson cite in their article many discussions in other contexts of the permissibility of delegated power. But there is no such general discussion of Congress having authority to delegate policymaking power to the executive however it sees fit. Instead, Article I, Section 7, imposes very fine-tuned procedural bicameral and presentment requirements, restrictions on the form of action that just are not present in Article II for the executive. Those restrictions mean something, and it's up to us to figure out what it is.
Professor Ilan Wurman has written a wonderful piece, just published in the Yale Law Journal, showing also that there was in fact a fair amount of deliberation over delegation constraints. James Madison at one point proposed a constitutional amendment specifying branches cannot delegate away their power, and the response was that such an amendment was unnecessary because the principle was inherent in the Constitution. And, as Professor Bagley noted, there was some discussion of delegation in the post roads debate, and there was a small amount of discretion given in the end. But the original proposal, one of them to give the president the power to establish roads as he saw fit, was indeed taken off the table, and there was discussion from many folks at the time that at least there should be some consideration of whether there was a constraint on the breadth of power that could be delegated.
More strikingly, the delegation scholarship just is not correct in the conclusions that are drawn from customs laws at the time and laws involving debt repayment. Last year, I published a piece on early customs laws in the George Washington Law Review. Those laws were enacted with significant deliberation, detail, and care — in some cases even before Congress bothered to create any executive department at all. It was critical to the members to ensure that various regional interests were accommodated and balanced in customs duties because of the impact those duties would have on the local economies throughout the new nation. And this ability to represent varied regional and state interests could not have been accommodated if one entity in the executive had been singlehandedly determining customs rates.
Even Alexander Hamilton, once he became treasury secretary — not one known to shy away from power — repeatedly sought congressional guidance from carrying out the customs laws, asking Congress for their interpretation of the relevant laws and requesting permission even for relatively small decisions such as a change in the location of a port for the unloading of goods during a weather emergency.
Finally, pro-delegation scholarship suggests that somehow the non-delegation position might be illegitimate if there are too many exceptions where the executive can indeed exercise discretion. But this is counterintuitive. The non-delegation position tries to be careful and modest and can either be articulate, as has been mentioned, by saying that Congress must decide important subjects or that Congress must make the decisions itself to impose binding obligations of private actors. The argument on the other side that we must claim more and try to suggest there can be no executive discretion at any time in any context or the delegation position is invalid is, of course, incorrect.
And, in a number of instances early on where discretion was given, it was in the exercise of clearly executive activity like decisions about how to administer debt repayment or enforce clearly detailed revenue laws. Even in more purely legislative cases like Nick Parrillo's discussion of the 1798 real estate tax that he beautifully unfolds in his article, congressional determinations, in the end, were detailed picking the overall amount of tax to be paid, making it a temporary tax, and specifying details about how it was to be calculated.
Thank you very much for your time, and I look forward to further discussion in Q&A.
Hon. Neomi Rao: Thank you, Jen. We'll next hear from Professor Hamburger.
Prof. Philip Hamburger: I'm going to begin not by commenting on delegation, but by removing my tie, as I'm in a rather hot office. Now that I can relax, I'm free to talk. So thanks to the two Nicks for their remarks. And I must say I especially appreciate Jennifer's thoughts, which I think are absolutely on point.
I want to begin by discussing some of the underlying scholarship. I know that's difficult to do in a talk because scholarship necessarily is very detailed and involves footnotes. But I think it's necessary to do that. And then we'll try to get some more general comments at this time.
So let's begin with the Mortenson-Bagley vision of uninhibited delegation. Forgive me; it sounds like delegation gone wild. I think the problems are historical and conceptual. Now, for the history, if you want the details, I invite you to look at my essay, "Delegating or Divesting?" in the Northwestern Law Review, and you can judge for yourself.
I'd like to just talk about the Article's historical method because I think it's very relevant here. The historical method may seem tedious, but it actually matters. Mortenson-Bagley selectively quote passages from John Locke and Thomas Rutherforth, leaving out other passages that make clear these theorists actually objected to delegation generally. And I've asked, "Why would they do that?"
They assert that executive power is merely a law-executing power even though some of the very quotes they rely on take a much broader view of executive power. Why then would they say that? Although Parliament had absolute power, they use quotations about parliamentary power to make claims about delegation by Congress. Why would one do that? Although Congress, under the Articles of Confederation generally had no legislative power, they used quotations about that Congress to argue for delegation by the Constitution's Congress. How does that make sense?
They claim that separation of powers did not bar delegation as if the Constitution's allocation of powers were the initial distribution of cards in a card game, leaving the players free to redistribute them. How could one say that? They claim that unlimited delegation has precedence in early federal examples of delegated lawmaking but offer no example — not a single one — of delegated national domestic rulemaking that was binding on the public. Not one example. Why would one omit this unless it didn't exist? And they say there was no non-delegation doctrine at the Founding, but don't even mention Madison's proposal at the Constitutional Convention that the executive shall have authority, and I quote, "to execute powers not legislative nor judiciary in their nature." They were delegated by the national legislature. A proposal rejected only because its objectives had already been accomplished. The Constitution delegated or vested power, so it's not necessary for the legislature to do so. Why would one omit this?
Now, I do not know what to say about historical scholarship that omits so much that counts against its theory, but I think you can judge for yourself. And I'm sorry to have to say that, but I just find it puzzling.
Now, second, let's look at a conceptual difficulty, and I think this is even more important. Their article attacks the non-delegation doctrine, but the very notion of a non-delegation doctrine, I think, is a distraction. Eighteenth-century political theorists generally talk about delegation; politicians talk about it; even the Tenth Amendment talks about powers not delegated. But the Constitution distributes its powers more specifically in terms of vesting — a particular type of delegation.
The Constitution's vesting power goes further than the political theory in barring transfers of power. Congress cannot divest itself of powers that are vested in it by the Constitution, and Congress cannot vest its powers where the Constitution did not vest them. So the Constitution's vesting language sharpens the delegation question. The attack on the non-delegation doctrine, therefore, seems strangely misdirected. Rather than confront the Constitution's vesting of powers, it takes aim at the 1935 judicial doctrine of non-delegation. The Constitution departed from what was then conventional language about delegation and thereby invites us to speak not merely in generic terms about delegation but specifically about vesting and divesting. That's the Constitution's language; that's my view, for whatever that's worth; that was the position of the New Civil Liberties Alliance in Gundy; and Justice Gorsuch also hinted at this.
So I think the debate is no longer the same as in the 1930s. The attack on the non-delegation doctrine made sense 85 years ago, but, for purposes of the current debate, it actually looks rather dated. It looks like an assault on the dead. So I would encourage the authors to engage for the living. We have an evolving — dare I say a living — constitutional debate, and the authors should consider participating in that debate rather than taking potshots at a phantasm from the 1930s.
Now I'd like to say also a few words, if I may, about the Parrillo thesis. Nick Parrillo has written a very serious and careful historical article on the 1798 tax statute, and he alluded to that in discussing delegation as a possible example of the sort of delegation that might justify current delegation. And I just want to note that there are some problems with this — not historically but perhaps constitutionally.
For one thing, the First Congress and the Fifth Congress took very different approaches. It's nice to learn so much about the Fifth Congress, but the First Congress took the opposite approach to taxation. As explained long ago by Leonard White, the First Congress carefully set up a revenue system, and I quote, "which, for some years, avoided the necessity for discretionary valuation of property." In other words, how can we rely on the Fifth Congress to show the Constitution's meaning when the First Congress took a different approach? I don't know. The Article says that the Constitution's earliest lawmakers relied on administrative rulemaking. Well, not quite. The fifth-earliest lawmakers did that. So, use that as you will. It doesn't seem to me quite the determinative evidence one would seek.
Second, and even more importantly, the rulemaking that Nick Parrillo alludes to was made by commissioners who essentially took appeals from valuations and made rules for valuations by assessors. But their rules are only binding on themselves and their assessors — that is, only on federal officials. They reveal nothing about rules that bind the public. I don't want to belabor this point, but it seems to me that it fits in the general observation that both Jennifer and I have made, and I think others, too, that proponents of delegation gone wild have yet to give an early federal example of delegation that's national and domestic and binding.
Now, if I have a minute left, I just want to say one other thing of a more general, less-focused sort. Why vesting? Why worry about non-delegation? Well, it's a crucial expression of consensual government. It preserves the people's constitutional choices; it preserves their power to elect their lawmakers; it preserves the value of voting rights. If you care about retail deprivation's voting rights, how can you not care about the wholesale removal of legislative power out of the hands of elected lawmakers? And, of course, the whole point of this, as Woodrow Wilson explained in the early administrative state, was to take lawmaking out of the hands of the unwashed masses. In contrast, divesting or delegation defeats these basic needs. It defeats the people's constitutional choices. It defeats their elective choices. It makes a mockery of voting rights.
I'll just conclude by saying I think the divesting position is absurd. After carefully specifying the election of lawmakers, are we to believe the Constitution lets the lawmaking power go to anyone? The president? My Great-Aunt Gertrude — charming, but still not really competent for these purposes? The King of England? Perhaps George III? Perhaps Prince Charles, when he becomes king? Lord North? Perhaps Lady Gaga? You want some originalism? I think this is highly original.
Hon. Neomi Rao: Great. Thank you so much to our panelists. I'll just note that you're welcome to submit written questions through the Q&A function or to raise your hand through the Raise-Hand function.
But, I think, given Professor Hamburger's comments, I should give Professor Parrillo and Professor Bagley an opportunity to respond to some of those comments.
Prof. Nicholas Bagley: Let me start and clarify something about the position that Julian and I take in our paper. One of the criticisms that we hear is that we've taken the non-delegation-gone-wild idea that, you know, every single founder at the moment of ratification were all firmly convinced that all legislative powers could freely be delegated.
In fact, our position is the founders are unlikely as a group to have had well-developed views on the matter one way or the other. Early on, at least, the founders still believed they could rise above the spirit of faction, and they had no reason to assume that Congress would be unwilling or unable to protect its prerogatives. They were really worried about legislative views, not legislative abdication. So our claim in the paper is really a negative one that, in 1789, the founders did not share a collective belief in a principle that would prohibit Congress from passing an identifiable category of laws delegating discretionary authority. So could you conjure a delegation that might have caused them to stand up as a group and say that goes too far? It's possible, right? Sufficiently strong policy objections to a sufficiently awful proposal can sometimes find a legal vessel through which to express themselves, but an inchoate impulse is not, without more, a doctrine.
The other point that I just want to, I think flag, both in response to Professor Mascott's comments and in response to Professor Hamburger's comments is this notion that everyone, at the time, must have taken it for granted. And I want to push back on that by pointing out just how much they would have had to take for granted. Professor Hamburger says that there were no examples of national domestic binding laws passed in the early republic. I think that's wrong as a matter of fact. But even if it were true, is the claim that everyone took it for granted that this highly detailed category of prohibitions was just accepted by anyone and everyone even though it was never actually spoken?
That's really the key point, here. The key historiographic move that we see in the literature from originalists is to try to say, well, there are a bunch of laws we don't see on the books; can we discern the shape of the non-delegation doctrine from the laws we don't see? It's like Plato's prisoners in a cave, kind of staring at the cave and hoping to discern through a negative picture what's there. And the answer is you don't need to strain like that in order to try to understand what was going on at the time. These questions were live; they were debated; there was no shared understanding as to the principle, much less as to the contours of that principle.
Prof. Nicholas Parrillo: Thank you for the opportunity to respond. I did want to respond to a couple of Philip Hamburger's points regarding my study of the 1798 direct tax.
So Philip suggests that the rules that were promulgated by the federal boards of tax commissioners were in the nature of binding federal officials rather than directly binding private persons. And this resonates with a lot of arguments in Philip's book in which he argues that several of the documents that have been invoked as early kinds of administrative rules are actually more in the nature of what administrative lawyers today would call guidance documents. In other words, they are documents that are handed down by the head of a department that direct lower-level officials as to what to do. The lower-level officials and their individual adjudications may affect private rights, but there's a kind of break in the circuit, as it were.
This is an important and interesting point. However, I do not think that what I found in my study regarding the powers of the federal boards of tax commissioners is vulnerable to that critique. It is true that the federal boards of tax commissioners could give instructions — and actually sometimes they were called regulations — to lower-level officials as to how they were to do a valuation in the first place — for example, how they were to handle abnormalities in the money supply. And I would agree that those fit into Philip's category of documents that are more like guidance than what we today would call binding rules.
However — and I go through this in the study — the federal boards of tax commissioners also had the power, after the lower-level officials had done their valuations, to raise or lower, en masse, the tax valuations themselves in any district, uniformly, up or down, by any percentage that was just and equitable. And the result of that increase or decrease by the board in all the valuations in any district that the board drew within the state was absolutely determinative of the tax liability of private individuals. It occurred after the internal administrative appeals by the taxpayers had been done. You know, all of the post-administrative-appeal valuations went to the commissioners, and then they said, okay, all houses in Baltimore, we increase the tax values by a hundred percent. And then, of course, that has an enormous effect on the actual tax liability, and there's no further administrative review; there's no judicial review. So I think that actually is an example that stands outside of the line of reasoning regarding guidance-like rules that Philip propounds in his book as to other administrative activity at the time.
And then also Philip asks a very important question about what is the constitutional import of the work of the Fifth Congress as opposed to the First Congress? And I think it is true, as a matter of constitutional interpretation, that the farther in time you get from 1788 or 1789, the weaker the evidence becomes as probative of original meaning. However, there could be a liquidation theory along the lines of what Will Baude has recently written about. But then, furthermore, I would emphasize that the political circumstances of 1798 were the first time that there had been enough of a fiscal crisis that it was a perceived necessity for Congress to tax real estate as opposed to just taxing imports which are politically much easier to tax and which Congress had been happy to rely upon almost a hundred percent through most of the 1790s.
So it's not as if there was taxation of real estate in 1789 and it was done in a less-administratively delegatory fashion. It was simply the first time they ever had occasion to do this kind of thing that they believed was something that was best done through very broad delegations even affecting private rights. And so, I think, to say, well the Fifth Congress is irrelevant here — the Fifth Congress is not relevant here because it's so late, that's kind of like asking whether somebody has an umbrella and saying they don't have one Monday to Thursday when it's sunny, and then say, okay, they must not have an umbrella. Then it rains on Friday, they pull out an umbrella. You've got to wait till it rains before you make that kind of determination about what a legal actor's capacities are.
Hon. Neomi Rao: Okay. Jen, Philip, would you like to respond to some of that? And then we'll turn to some questions.
Prof. Jennifer Mascott: Yeah, since we're going generally in speaker order, I'll step in.
So, starting with Nick Bagley, I mean, I'm not sure that quite precisely what we're saying is just everything was taken for granted or that's the sum total of what we're saying. I think what, at least, my view and understanding is that there didn't necessarily need to be broad debate or discussion over a principle that would be inherent in the structure of the Constitution itself and then talk about some evidence from Ilan Wurman and then some evidence from my piece on the customs laws that actually show that there was sort of discussion or awareness at least to a greater degree than one might get a sense of in just reading the recent Mortenson-Bagley article.
And I guess the other point is a lot of the evidence in the Article is coming from the Continental Congress and other systems of government, obviously, that didn't have the same separation of powers in place as we have under the Constitution. So, if we look at what's happening, which I think makes sense to weigh early practice, the customs laws, which again I don't think any of the pieces — the Ilan Wurman piece, the Mortenson-Bagley piece — any of them actually do contend with some of the points made in the GW article on the customs laws. In fact, the Mortenson-Bagley piece just simply says, well, there was broad discretion because you could go on -- you could send people on ships and figure out if goods had been fraudulently valued or were improperly there.
Without looking first at the great amount of detail that went into just the hugely detailed imposition of customs duties and actually debate in the documentary history of the first federal Congress that talked about, indeed, how the members really actually were quite desperate to raise revenue at the time because they had so much debt to pay off, and there were actually quite challenging political determinations to be made because different parts of the country would have been impacted vastly differently based on which goods were taxed which ways because of the different economies in the different parts of the country. Some folks were experts in shipbuilding; some folks were agrarian; and so there were lots of challenging decisions to be made, and they certainly did not want to hand all of those over to the executive. And again, indeed, if one is to also look at the American State Papers and some of the records about what actually happened in the interaction between Secretary Hamilton and Congress, one would see a lot of great concern that members from all over the country be together formulating the policy.
About Nick Parrillo's piece, I certainly agree that I think the 1798 example is evidence of regulation. I mean, the Fifth Congress is a little bit away, obviously, from the First Congress. Nick raises the point they didn't need direct revenue. I mean, they did need a lot of revenue in the customs laws; there were the tax on whisky distilleries. So I'm not sure that was a totally new problem, but it was addressed in a new way.
For me, one of the things that I found to be constraining, though, in that example — which I agree, Nick has a very careful piece; it's very in-depth, and a lot is made of some stray phrases. I think it's used once or twice in a statute that extends over 20 pages of reference to "just and equitable valuations." But I think the point is to understand that that's within the context of Congress deciding the overall tax is going to be $2 million. The tax is going to disappear once that's raised. The tax has to be proportionate based on population among the states. And then there were a lot of instructions given, like a precise amount that the tax is going to be based on the number of slaves that you have; the different percentage that's going to be imposed based on the value of your house; there has to be a list of windows and other features of the house. And then the just and equitable term is used in relation to the idea that everybody understood the just and equitable concept was going to be keyed to valuation.
So I actually -- I completely agree that I do think that seems to be a clear example of some kind of early regulation. I think the question is just how broad was it? What exactly was being decided? Is it true to suggest that it was actually an instance where Congress was handing over the policymaking decisions about how to bind people? And I don't the answer is "yes" if the overall burden of $2 million was determined by Congress. Certainly, I think some regulation, some executive discretion must be okay. And, if anything, I think folks who were on the side with the concern about a non-delegation principle should take comfort that, if you look at the true current divesting or delegation position, that does not indeed stand for the proposition that there's nothing the executive can do. There is quite a bit in administering the law and carrying out policy decisions made by Congress. But I just -- I think the concern is that that doesn't necessarily add up to all of the modern 20th-century delegations that have been occurring in recent years.
Hon. Neomi Rao: Professor, would you like to jump in?
Prof. Philip Hamburger: Yes. Thank you so much. So I guess we do have to dig back into the history, though I was hoping to talk about vesting and divesting for just the Constitution's language.
First, I really appreciate Nick Bagley's response in clarifying the degree to which he relies on essentially a consensus view. The article says that the standard for originalists is that there has to be a consensus. And that's rather a high standard. I don't think there's ever a consensus in any society, even in one person's mind. We all have multiple thoughts. How could there be a consensus? And, here, he adds that early Americans did not share a collective belief — these are all quotations — you can't say everyone took it for granted; you can't say the idea was accepted by everybody and that there was no shared understanding by everybody. That's an unrealistic standard, and that's actually what not originalism is about. I might add that my arguments on this have not been particularly originalist. That's okay; we can talk about that later. But it seems to me, if we're going to focus on originalism, what you really have to look at is the legal meaning or intent of an enactment. And that's very different from finding some sort of bizarrely high standard of consensus.
Now, I also appreciate Nick's comments. I do think, however, that the argument about his Fifth Congress is not that it was late, so much after the Constitution; rather, the point is that the First Congress quite deliberately tried to avoid these sort of issues. And that's not my opinion alone; that's Leonard White writing some 80 years ago.
But even more fundamentally, is what Nick found in the tax laws actually an example of national domestic regulation, delegated lawmaking? And, here, I'll disagree, for once, with Jennifer. Normally, I would agree with everything she says in her wisdom, but here I'll have a minor disagreement. I do not think this is really an example of early regulation. Nick Parrillo just conceded that the rules were not binding on the public, and that's right. I'll get to the statute and read it to you if you want, and we'll agree on that. What he says instead then, the fallback position, is well, actually, the commissioners sitting as a board can, en masse, alter assessments, and that's right. And that's crucial because their decisions were factual determinations which have long — for two centuries — been understood as judicial in nature.
These are early examples of what you might call administrative adjudication by force of circumstances by the Fifth Congress rather than the First. But they're not examples of delegated lawmaking, and this was widely understood at the time. I'm not going to cite you verse and chapter from early English or later American precedence on this, but this, as well as the just and equitable principle, all related to a judicial style of fact determinations, and so this has nothing to do with lawmaking of a delegated sort.
Hon. Neomi Rao: Okay. I'm going to turn now to some -- Nick, do you want to say -- just briefly, do you want to respond?
Prof. Nicholas Parrillo: Just a very brief response. I guess I don't share Philip's view that the mass revisions of tax valuations were judicial in nature, and I think the strongest evidence I have for that is that if you look at how state property taxes were structured up to 1798, it was universally the case that the state legislatures, within the state tax statutes, did exactly the equivalent of what the federal boards were called upon to do. That is, they determined the mandatory average tax value of land in each county or town of the state or equivalently the total tax liability of each county or town in the state. And I think there's a tension between saying that something was fundamentally judicial in nature and the historical fact that it had, in fact, always been done by the legislature and not by an administrative adjudicator or a court in every state that had property taxes by value up to 1798.
Prof. Philip Hamburger: Can I just point out that the New England legislatures that are good examples of this also served as the highest judicial courts, usually, that the federal government did not adopt the New England model and gave this to commissioners. And the just and equitable language comes out of a long line of decisions that recognize the judicial nature of factual determinations as sort of an exception from the courts. So I can go to this scholarship later, but I appreciate the back and forth, and I love this sort of historical inquiry. So thank you.
Hon. Neomi Rao: Okay. I'm going to turn to a few audience questions, now. Under the Raise Hands, I want to recognize Chad Squirtieri. If you have a question, please go ahead.
Chad Squirtieri: Great. So great panel, by the way, and fantastic scholarship, absolutely.
My question for any of our speakers is both regarding the current non-delegation doctrine and your view of it, how much work is the term "legislative" and "legislative power" doing? For example, in Article I, Section 8, a lot of power, or some of the power, is vested in Congress— and McConnell's latest book on this is helpful—are not very legislative, for example, declaring war. And yet, a lot of the non-delegation doctrine seems to be trying to distinguish between legislative and executive power. So I would just be interested and want to know what your view is on whether that is perhaps a mistake of the doctrine. And, just using Professor Hamburger's theory, for example, if Congress is vested with a power, does it really matter what, you know -- if a political scientist might think of as a legislative or executive or judicial power or not? If they're vested with it, does it change?
Hon. Neomi Rao: Thank you.
Prof. Philip Hamburger: All right. Well, let's just start with the Federalist Papers where Hamilton distinguishes between legislative will, the judgment of the judiciary, the force of the executive. And this has long -- these ideas reach back to the Middle Ages — not that most of these folks have read the medieval sources — but these are longstanding distinctions amongst these different types of power. So maybe it does matter.
Now, the Constitution actually is very careful in the separation of powers. It does not declare a general separation of powers; that didn't work in state constitutions. So, already, some of the early state constitutions, such as New Hampshire -- the committees forming the constitutions say we're not going to declare these principles of separation of powers as we believe in it, but our separation of powers are going to be a little different. We're going to tinker at the edges. So we're actually going to carry out the separation of powers that seem to be vesting, say, in legislative power, mostly in the legislature but then tinkering a bit at the edges. So it's sort of a default rule separation of powers whereby — and they've discussed this at great length in different states — whereby legislative power is mostly, by default, in legislature, but you can trim little bits out and save judicial power, you know, for impeachments and so forth. So there's a lot of tinkering at the edges, but the concepts remain pretty constant.
Hon. Neomi Rao: Does anyone else want to respond?
Prof. Nicholas Bagley: I'll jump in, briefly.
So I think our paper grows out of scholarship that my coauthor has really done about the meaning of executive power in the Constitution. And what Julian's research shows is that the term "executive power" was really an empty vessel for Congress to fill, that executive power had a very thin meaning. Of course, it referred to the force of the executive to carry out legislative instructions, but really it's the legislature that carries out the will of Congress. There's nothing sort of inherent in that bucket of executive power.
Once you see that, you start thinking that these categories of legislative power and executive power may not have had the sharp determinate meaning that current originalists would like to assign to them, that, really, the legislative power meant, in addition to the discrete items that are listed in the Constitution, the ability to chart the will of the state, and the executive was the entity charged with carrying out that will, following it through and forward.
With that vision in mind, I think it becomes a little bit easier to understand how a command from Congress -- or a delegation from Congress of authority to the executive wouldn't be taken to count as some kind of violation of the separation of powers but would simply be an exercise of the legislature's decision about how to sort of produce the will of the state. In this particular instance, we'd like the will of the state to be that the executive carries forward our instructions. And these instructions in this instance are going to be broad, and in other instances, our instructions are going to be quite detailed. Jen Mascott's work shows exactly how the customs statutes are so detailed and refined. But that only shows that Congress really cared about specifying when it came to taxing and spending — which it still does today, not because it's afraid of any non-delegation doctrine but because it's politically important for members of Congress to be keyed into questions of taxing and spending.
Hon. Neomi Rao: Thank you. Okay. I'm going to read out a question. And I'll just remind the audience: Feel free to raise your hand to ask a question in person or to write up a question in the Q&A.
So Conner Herbert, who is a student at the University of Cincinnati, asks "Why choose evidence outside of the intense debate that took place from 1790 to 1840 over the proposal of the Hamiltonian national bank? Personally, I'm a bit confused about the evidentiary choices, here."
Any thoughts about that?
Prof. Nicholas Bagley: So the delegation to the bank is obviously broad in many respects, but it doesn't appear — at least to my eyes — to run afoul of many of the versions of the non-delegation doctrine that are on offer today in the sense that it is authorizing Congress to -- I mean -- sorry -- executive branch officials to make decisions about the money supply enough to regulate private individuals directly. I don't think the founders carved the world that way. I think the fact that we've got such a broad delegation on the books and, again, no hint that there was any concern about that kind of delegation is telling. Nonetheless, it was not something we emphasized in part because we didn't think it was as responsive to the concerns of those who are pleading for the revival of the non-delegation doctrine.
Prof. Jennifer Mascott: Yeah, and I think the choice of folks to look at early practice again is because, you know, as the Bagley-Mortenson article looks at, their discussion -- they actually look at a lot of discussion from the Continental Congress. And, of course, if the discussion is just about the proper balance of power, of who is doing what, that would not have been as informative, nor would British practice, necessarily, on this particular question because the Constitution here was doing something different.
I think Philip Hamburger's work goes further back and looks more generally at the meaning of legislative. And, I think, if one were to look at sources on the meaning of legislative or executive power, those could be more helpful. So folks, I think, are looking at sources leading up to the ratification, but the early practice I think just can be confirming or questioning evidence to sort of show how people understood the power that they were exercising — certainly not definitive.
And I do think, because the constraint that we're talking about today is structural in nature, it requires a little bit more than just looking for one example here or there or a specific statement one way or the other about precisely what the principle would have been, but just understanding more broadly what the nature of legislative power was — executive power. And I do think that there was evidence that executive power had certain meaning because some of the national security and foreign affairs powers were not necessarily specified in Article II. And, indeed, the first version of the Constitution that was proposed during the drafting debates actually didn't really specify executive duties much at all but relied on the concept of an executive power inherent in the Articles of Confederation. So it definitely had some content.
It's possible, in the way Nick Bagley is describing, the legislature was about the will of the state. That, in and of itself, actually, I think, has a fair amount of information. And so one would question if there's no delegation constraint at all, does that simply mean that the Mortenson-Bagley view is that Congress could say, okay, we're going to actually, then, even leave the determination of the will of the states in total to the executive? And I think if the answer there is "no," then there's got to be some inherent principle, and I think we've all noted that there's not necessarily one precise statement at one point in time at the Founding as to what exactly that delegation constraint is. But I think Philip's and my work shows and suggests that the understanding at the time put us at a vastly different place than where we might be in the modern 21st century.
Hon. Neomi Rao: Jen, if I could just follow up. It may be a question for you, Jen, and also for Philip. I mean, it may be possible that the executive power is less determinate or less specified as a matter of its use in the Constitution, but the legislative power actually had a more specific or concrete meaning. I'm not sure if you agree with that.
Prof. Jennifer Mascott: Well, I mean, certainly, what was more specific in the Constitution is that there were limits. I mean, "the legislative power herein granted." So there were enumerated powers which I think, again, was the reflection that legislative power itself was quite vast and probably much more vast, certainly more vast than the executive power. And so it wasn't just going to be given wholesale over to one branch to be exercised in a particular way. It was only going to be given for certain functions and the rest left up to the states.
I don't know if Philip has more to add on that.
Prof. Philip Hamburger: Thank you. First, as to executive power, I think there was some disagreement. Some people sometimes said it was what's left over after the more well-defined legislative and judicial power, as Neomi suggests. But there's a long tradition — which many bought into, such as Hamilton — that executive power was this action, strength, or force of the nation. Domestically, that was law enforcement and foreign affairs; externally, it was something else. For details of that, I invite you to look at my Northwestern piece.
Can I just throw in something else, here, though? We've been -- I want to have a conversation around it a little bit. The whole point of my vesting argument for the Constitution is to get us away out of delegation and into a vesting conversation because that's what the Constitution talks about. But, in the same spirit, why are we just talking about originalism? For the non-originalists, here, I can't imagine that originalism really makes much difference except to poke a stick at those of us who have some faint attachment to that.
Let's talk about the living Constitution. I'd like to hear why it is that we should interpret the Constitution, when nothing in the foundational documents suggest we should do this, to deny the people their constitutional choices, to deny them the power to elect our lawmakers, and to undermine voting rights so that most legislative power is taken out of the hands of elected lawmakers. Why is that such a good idea?
And why is it that we should embrace a delegation doctrine that allows Congress simply to throw legislative power, again, to Lady Gaga or to anyone else as they see fit? I can't imagine you have such a high view of legislative judgment as to think that that's a good idea. So let's take a holistic view of this, not just an originalist view. There is originalism, I think, a strong argument and the text if you prefer that. But there's a lot more to it, and let's talk about that.
Prof. Nicholas Bagley: Yeah, I can start by responding to that. I'd be curious what the others had to think. Look, our paper took on the --
Hon. Neomi Rao: You have to pick either Aunt Gertrude or Lady Gaga, Nick.
Prof. Nicholas Bagley: You know, I actually also have a Great Aunt Gertrude, and I love her dearly. But I don't think she should wield the full run of the legislative power of the United States, either.
But I think it's important to notice the way that all of the objections that Professor Hamburger had to a broad non-delegation doctrine — that it subverts the will of the people by vesting in executive branch officials the authority to wield the power of the state — well, that can be just turned around very easily to say that, if you believe in the non-delegation doctrine, the courts are disrespecting the choices of our elected officials to allocate decision-making authority to cope with significant problems in the manner that they see fit, right?
Here, what we're talking about is a doctrine -- that is a doctrine that is counter-majoritarian, not majoritarian. It enlists the courts to strike down or narrow acts of Congress in service of what is a controversial political agenda. Now, do I think that it's possible that there are good ‑‑ do I think that there are good reasons for a non-delegation doctrine? Sure. I think both Professor Mascott and Professor Hamburger advanced some very good reasons. They don't move me, but they may move you; and that's fine. But I think it's important, when somebody says the reason we're doing this is because the founders all believed something, that we can evaluate that claim and decide whether or not it is, in fact, accurate. I don't view it as accurate, but if you want to adopt a non-delegation doctrine as a matter of the living Constitution or a principle that we need to read into the Constitution in order to save some vision of democratic accountability, sure. But defend it in those terms.
Hon. Neomi Rao: Can I just ask you one quick follow-up question to that, which is what is your -- I mean, is your view, then, that the text and structure of the Constitution is either indeterminate about the delegation or divesting principle?
Prof. Nicholas Bagley: Yeah, and I want to be clear about that. Our argument speaks to -- look, there's been endless ink spilled over whether or not the vesting of legislative power in Article I actually stripped Congress of the authority to delegate broad discretion to the executive branch. Some people say it's a divestiture; some people say it's a delegation; some people say simply the exercise of legislative power. I'm inclined to that view. But I don't think the Constitution itself definitively resolves that question.
What I know it doesn't say is you can't, you know -- that a law passed by both houses of Congress and signed by Congress is unconstitutional if it delegates too much authority or authority of the wrong kind. And so if you believe that it is a necessary structural feature of the Constitution as written — and Gary Lawson has something like this view — our article is not for you. But I don't think that originalists have rested their case on that because I think it's a very fragile case, and I think the history is what clinches it. And without that historical underpinning, I think the case collapses as an originalist matter.
But Nick Parrillo wants to say something. He's been flagging us down.
Prof. Nicholas Parrillo: Sorry. Thank you.
I also wanted to speak to Philip's question about potential living arguments for the non-delegation doctrine. And I think that actually brings us back to a point with which Jen Mascott opened her initial presentation, which was to say there is a lot of anxiety about and skepticism of presidential power among liberals and progressives. For example, the travel ban, the border wall, and these kinds of issues. And, I mean, Jen posited the question of why isn't there a broader political coalition for a robust non-delegation doctrine? And I think this is actually central to the question of what would be the living arguments or the living attractions of a non-delegation doctrine in today's political environment?
But I think this also points us to some pretty concrete aspects of the doctrine in an originalist debate because, of course, different versions of the non-delegation doctrine, many of them inflected by originalist analysis that are on order, would have very different payoffs, to use a crass word, for different possible members of a political coalition. So, for example, there's one version of the non-delegation doctrine that would apply weakly or not at all to the national security state, weakly or not at all to the federal reserve, but apply very robustly to domestic regulation of private rights, presumably including business regulation and taxation. That is a doctrine with a very different set of political attractions than one that would apply uniformly to those things and also to the national security state and that kind of thing.
And this, I think, goes to how important it is that there are these different formulations of the non-delegation doctrine that would or wouldn't cover national security, that would or wouldn't cover immigration, for that matter, if you consider immigration to be an aspect of external relations as that is formulated in the separate opinions recently of Justice Thomas and Justice Gorsuch. So, on this question -- I mean, to invoke Keith Whittington of Princeton and the idea that judicial power and judicial legitimacy ultimately rest on some kind of underlying political coalition, I think any set of questions about what the living arguments or the living attractions of a non-delegation doctrine are has to consider what the scope of that doctrine is and whether it encompasses delegations that are concerning both to political conservatives and to progressives.
Hon. Neomi Rao: Philip, did you want to --
Prof. Philip Hamburger: Yes, I just want to agree with Nick Parrillo on this, that it's not a matter of whether one likes it or not, as Nick Bagley was putting it, but as to the structural considerations. And the reality is unrepresentative legislative power that runs against the words of the Constitution and vesting runs against early precedent which is no example of early national domestic binding delegated legislative power. When you run against all of that to create unrepresentative legislative power, it leads to political instability, it leads deep alienation from our political institutions, and it leads to all the anxieties that we've seen in the past few administrations. Now we can get those anxieties in other ways, but this is a guarantee of it, and I think it's exceedingly dangerous. So I think we should all just pause and ask what we really wish for.
Hon. Neomi Rao: Okay. I'm going to go to another question from our audience.
This is from A.J. Jeffries who is a law clerk on the Sixth Circuit. So this person asks: "Advocates of the non-delegation doctrine focus on the vesting thesis, and Professor Mascott's customs article notes that it could be inherent in the constitutional structure. Has anyone argued that it is a requirement of due process of law? I'm thinking of Professors McConnell and Chapman's point that due process requires each branch of government to operate in a respective manner before depriving someone of life, liberty, or property."
An interesting question.
Prof. Jennifer Mascott: Well, I mean, sure. I think it could be conceived, in due process terms, if one takes the McConnell or the Lawson view that -- or maybe the historic view that due process is really about making sure that laws are crafted in accordance with constitutional process. But that does, in the end -- so it gives us another reason, I think, adding on to what Philip's already saying and what Nick Parrillo was hinting at about what the stakes are in figuring out who properly makes policy decisions of what breadth. But it does, I think, in the end also just get us back to the initial question of what is the legislative power that's vested exclusively in Congress at the beginning of the Article? And how much of that has to be exclusively exercised by Congress in what level of depth, rather than sort of giving us an extra tool to know how to answer that question of the division of labor.
But it is an -- it's another important reason, I think, again, to understand the stakes and how important the question is. Because, as folks are saying, right, the issue of delegation and who is exercising what power can lead to folks being upset about the breadth of executive power in different areas based on which administration's in charge. And it's not just, I think, people opposing or having concerns based on which executive is in charge, but it also leads to instability in the sense that the more power can sort of willy-nilly or rapidly be exercised or changed by administrative officials or by one person or a small group of people in the Executive Branch, the faster and more wildly the policies change from term to term. And, when Congress acts legislatively, it does tend to promote more stability and more awareness and more understanding. And, also — and this is why folks resist it — it's tougher, it's more challenging, and it's harder to evoke change, which I think is why, in the other example that I talked about at the beginning, Congress is trying to lobby the executive to get bureau of prison officials to execute the policy preference that Congress itself has rather than enacting a one-sentence statutory change on an important issue.
Prof. Philip Hamburger: I think it's a nice idea that was suggested about due process; it's an interesting argument. I think, with Jennifer, it all comes back to the Constitution. And, here, I would simply invite all of us, just a little more commonly, to use the Constitution's language. Why are we talking about non-delegation? Just because of some case in 1935? If we're serious about that, and especially if you want to dispute originalism, let's use the Constitution's language. Let's talk about vesting and divesting. And I think the conversation changes, then.
And just one other thought, if I may, as to Jennifer's thought; I want to echo her thought on this. And, to put it into perhaps controversial terms, think about election fraud. When so much power is in the executive, the motivations for election fraud and anxieties — sometimes false anxieties — about it are very, very high. When there isn't so much power in the executive, election fraud and anxieties about it tend to be localized, right? And if you didn't think this was important before January 6th, maybe you'll think it's important now. We have to tamp down some of the breadth of power if only to spare ourselves a lot of the commotion that comes with that.
Prof. Nicholas Bagley: If I can just pipe in.
So, two thoughts. I'm not as sanguine as Professor Hamburger about the non-delegation doctrine's quiescence being the root of our concerns around January 6th, nor do I think its revival would do much to actually mitigate the concerns. To the extent we've seen the non-delegation doctrine wielded in lower courts so far, it's been wielded in highly politicized cases with split courts, including here, in my home state of Michigan, striking down the governor's emergency authorities on a four-to-three partisan vote. I think it's more likely to inflame partisan tensions than to reverse them. But, be that as it may, we're speculating at this point.
I do want to address this because Professor Hamburger has begged us to — and I'm happy to address his desire to reframe the debate in vesting terms — I just fear he's trying to squeeze more meaning from that word than the text will allow. So, when Congress passes a law delegating authority to the president, it is by no means obvious that it is divesting its legislative power. And to the contrary, Congress, with its vested powers fully intact, remains on the scene to modify or to end the delegation. And Professor Hamburger says in his Northwestern Law Review paper that, look, that's not really true because Congress can't reliably recall a delegation because of the presidential veto, and, therefore, it's not really a delegated power, it's a full divestiture. I just want to note that these are Professor Hamburger's suppositions and definitions of vesting and delegation; they're not the founders'. He doesn't make an effort to link his claim with an historical record. And, in the 1790s, members of Congress referred to delegations of authority as "delegations." And, to the extent that those delegations are fine but vesting is not, maybe the originalist concerns dissipate.
The key point here, though, is that the existence of the presidential veto does not preclude Congress from resuming its authority. Congress can always do so. It can either elicit the president's signature, or it can get two-thirds of the vote by two-thirds majority. And maybe it's too hard because of the presidential veto for Congress to withdraw delegations. And, if so, I think that's a good — not one that convinces me — but a good policy argument for amending the Constitution, for adopting sunsets in laws that delegate power, or for embracing the organic development of something like the non-delegation doctrine over time. I just want to say it's not an originalist argument.
Prof. Philip Hamburger: I don't want to take up too much time, here, but I didn't talk about full divestiture versus partial divestiture. And the Constitution, having vested powers in Congress, doesn't place them elsewhere. And, Congress, when it places them elsewhere, is placing them where the Constitution does not. So there's both a divestiture problem and a vesting in places where the Constitution doesn't place them. It may be that you're right; I'll take this as an open supposition because the debate is still to unfold. But it makes no difference to talk about vesting. Let's just take you at your word for that. Well, good. Then, let's switch to the vesting language and see where it takes us. I think it actually sharpens the question, which is why I think it's in the Constitution. The Constitution uses different language than was common at the time. People continued to talk about delegation. The Tenth Amendment uses that language. That's not incorrect, it's just more generic -- a little bit more open. When you get to difficult questions, I think it helps to actually focus on the language of the Constitution, that's all.
Hon. Neomi Rao: I'm wondering if any of you, in your research on the original meaning, had a sense of whether, at the time of the Founding, people used the word "delegation" to also include sub-delegations of authority because oftentimes sub-delegations are sort of assumed. And I'm wondering if that also speaks to the difference between using the term "delegation" or "vesting and divesting."
Prof. Philip Hamburger: I'll throw in my two cents here, which is that people used language variously, then and now. Sometimes they specified sub-delegations; sometimes they talked about delegation. It's very hard to talk about sub-vesting, and I think that's exactly on point, here. That's perhaps why the Constitution so carefully uses the word "vesting." And I'll just throw in, along the same lines, if we're going to talk about this as to the legislative group, we also have to talk about it as to the judiciary and the executive. I don't think Neomi can delegate or divest her court of its power. Clerks can assist, but judgment has to be exercised by Neomi, herself.
Hon. Neomi Rao: Okay. We'll go to -- we're getting to the end of our session, so I'll go to another question from the audience.
Daniel Ortner, attorney at Pacific Legal Foundation, asks: "States have often applied a more robust non-delegation doctrine than the federal government. How does the history of non-delegation in the states impact our understanding of the historical meaning of the non-delegation doctrine?"
Prof. Nicholas Bagley: I'll just say that the state non-delegation doctrine appears later in the historical record, in the 19th century, not around the time of the Founding. So, to the extent that it sheds light on the question, I think it sheds light -- I think it suggests that, over time, a principle that maybe there was something constitutionally dubious about broad delegations started to crop up and become more mainstream. They were still pretty rare; state legislatures did not routinely strike down statutes. And remember here, too, that the U.S. Supreme Court didn't strike any through the 19th century, at all. So does it shed light on the original meaning? I think it sheds maybe a little bit of light in the sense that we didn't see this as a practice at the time of ratification, but not a whole lot.
Prof. Philip Hamburger: May I throw in just -- sorry.
Prof. Jennifer Mascott: Oh. No, you go.
Prof. Philip Hamburger: No. Go ahead.
Prof. Jennifer Mascott: Well, I was just going to say, I mean, that trajectory, though, of it being more robust in the states and earlier than the federal government would match and map onto the fact that the states were exercising regular police power. And so I think one thing we haven't talked about today but is more of a threshold question — and one that is dear to the heart of my former boss, Justice Thomas — what are the limits within the Commerce Clause? And there was a more restrained view with domestic policy and what Congress was going to be doing early on.
And so -- and I found this actually striking when I read the Mortenson-Bagley article because sometimes there's comments about how, well, the debate is centered on whether this power is proper or this more threshold question, and they're not debating delegation. And I think it's because, if the examination is whether this is something the federal government can do in the first place or there's more of a restrained view, of course, you then don't get to the second question about how broad the domestic constraint can be or broadly the executive [inaudible 01:30:51] thing and fill in the details of the constraint because the power is just moving a lot less rapidly and efficiently to begin with.
And so, of course, it would be more frequent in the states. And the fact that it existed there and that the states themselves had at least a sophisticated enough understanding of there being some limits on legislation for there to be judicial victories on that front does seem, to me, telling that the doctrine existed at least a little bit more than some would give credit to it.
Prof. Philip Hamburger: Can I just come in on just a little point that inadvertently arose when Nick Bagley referred to holding statutes unconstitutional? And it's also in the Whittington article, one sees an assumption that that's the measure, that that's the way this is litigated. So I just wanted to throw out an interesting litigation point here that we're very aware of at the NCLA. It's probably a mistake to think of this as a question of statutory unconstitutionality because that requires a court to reach a big decision all at once. It's much better to litigate against the actions taken under such statutes. So, if an agency exercises delegated, divested power, one can litigate against the constitutionality of that, and it's a much more modest question.
So thanks for reminding me of that.
Hon. Neomi Rao: Nick Parrillo?
Prof. Nicholas Parrillo: I wanted to ask a follow-up on what Philip just said -- really for anyone on the panel -- which is -- I don't think I've seen anyone address this, but does the enactment of the Administrative Procedures Act in 1946 and the imposition of the arbitrary or capricious standard on agency action generally mitigate non-delegation concerns for scholars and jurists who are worried about the weakness of a limitation on delegation or on divesting? I mean, if all agency action under that provision of the APA -- if all agency action is now required to be reasoned in a way that wasn't necessarily required before, does that provide a kind of general constraint on agency action that could mitigate some of these problems, whether they be originalist -- whether they be defined in an original sense or more of a living sense.
Prof. Jennifer Mascott: Well, I think I can see why, in a certain sense, it would, but I don't think precisely necessarily with the actors in place that the Constitution intended. For one, because it seems to me clear that, under that scenario, when you talking about the judicial review provision and arbitrary and capricious, it certainly moves power more toward the courts if one has a broad, robust view of what arbitrary and capricious means and thinks that review standard has a lot of teeth, which is the point that Nick Bagley was making earlier. Also, Gary Lawson's research suggests, actually, that the arbitrary and capricious standard was not necessarily supposed to be nearly as robust or strong as it is today, and I tend to agree with that view that, once actually Congress does constitutionally and successfully and actually delegate power to the executive within a constitutional area of discretion, that the executive should be able to exercise it without sort of the unelected judiciary coming in and kind of arbitrarily making that tougher and tougher and thinking of creative reasons about why it wasn't reasoned.
And so I think the pressure does go back to, initially, did Congress delegate or put in place enough of a meaningful policy standard or decision that the statute was constitutional or was properly framed in the first place? And, if there is some measure of examination from a departmentalist view, it's not just the -- the delegation doctrine or the divesting doctrine or limited divesting doctrine doesn't necessarily have to be enforced by the courts; it can be something that Congress or the executive are mindful of when legislating or when interpreting the laws and being willing to bind one's own power in having a modest or accurate interpretation of the law. And, if it's done properly and that division is proper, then the arbitrary and capricious standard, I think, could again properly -- rightly be done in a more narrow constrained way giving the executive the ability to really govern and administer laws the way that it's always been supposed to be able to do.
Hon. Neomi Rao: Okay. We are now at the end of our time, so I'd like to thank our panelists for all their really interesting remarks. We'll give them a virtual clap.
And the next event for the conference will be a panel on Trade and its Crosscutting Equities: New Horizons, New Challenges, and that panel will begin at one o'clock this afternoon.
So thanks, again, to our panelists and to The Federalist Society, and we'll see you in the lounge. Thanks.
Intellectual Property and International & National Security Law Practice Groups
|Topics:||Foreign Policy • Intellectual Property • International Law & Trade • International & National Security Law|
The Trump Administration re-focused U.S. trade policy on the interests of several sectors of the U.S. market, including traditional manufacturing. How the Biden Administration directs U.S. trade policy remains to be seen.
Rising to the challenge of IP theft—both by commercial firms and strategic actors—the previous Administration took a hard look at trade with China and other competitors. Keeping pace with emerging technologies, it re-aligned U.S. policies on export control and investment review. Meanwhile, the U.S.-Mexico-Canada Agreement (USMCA) re-configured the United States’ two most important trade relationships. Being a treaty in force, USMCA is likely to stay the touchstone for those relationships. Other areas of trade policy, however, the President may more readily shift in new directions. A range of national security-related policies in particular fall within Executive Branch discretion, and because of the granularity of so many critical trade-related rules, the interplay of White House preferences and Interagency equities inevitably will influence policy outcomes as well.
The ideal for any market is the frictionless flow of goods, services, capital, and ideas. Seldom, if ever, however, does any given market live up to the ideal. Trade, because it takes place across different national markets and regulatory régimes, entails distinctive challenges. This Conference Panel, Trade and Its Cross-Cutting Equities: new horizons, new challenges, will explore several key challenges that lie ahead as the Executive Branch seeks to steer its trade-related departments and agencies to make best use of its particular tools of the trade.
- Prof. Thomas D. Grant, Faculty of Law, University of Cambridge
- Hon. F. Scott Kieff, Fred C. Stevenson Research Professor, George Washington University Law School
- Dr. Joshua Meltzer, Senior Fellow, The Brookings Institution
- Moderator: Mr. Steven Tepp, President & CEO, Sentinel Worldwide
Steven Tepp: Hello and welcome to the second panel of The Federalist Society’s Ninth Annual Executive Branch Review Conference. My name is Steven Tepp, and I will be moderating this panel on the subject of “Trade and Its Cross-Cutting Equities: New Horizons, New Challenges.”
Before we begin, a few housekeeping items. The audience may type questions at any time in the Q&A tab in the upper right corner of your screen. There’s also a chat tab for attendees to chat with each other, but please do not use the chat to ask questions. We’ll also be allowing attendees to ask questions live later in the program by pressing the “raise hand” button. Of course, you’ll need a working microphone and the technical ability to unmute yourself to use this option. As I open the panel, let me note that my comments here today do not necessarily reflect the views of any client or employer.
Trade was a primary foreign policy tool of the Trump administration, with Ambassador Lighthizer winning bipartisan praise despite his aggressive actions, perhaps most notably the imposition of tariffs against an array of products from China. In contrast, President Biden reportedly views trade through the lens of foreign policy. He halted trade agreement talks and staffed most of the top ranks of the U.S. Trade Representative’s office with long-time congressional staffers, including the ambassador herself. However well regarded they may be, it raises questions about their leadership experience and clout within the administration.
But if anyone thought this administration was going to be sleepy on the trade front, that impression was shattered earlier this month when Ambassador Tai announced the U.S. was prepared to accept some form of a waiver of intellectual property obligations under the TRIPS agreement of the WTO, the World Trade Organization. For those not familiar with the issue, this proposal is from India and South Africa not merely to take advantage of existing flexibilities in WTO rules but rather to suspend whole categories of IP obligations entirely, a property rights kill switch if you will for patents, copyrights, and other IP at least as originally proposed.
While the stated motivation is to hasten production of a COVID vaccine, there is agreement across the spectrum that voluntary licenses have already been in place and that IP rights are simply not an obstacle to vaccine production, which makes the move look more political than substantive. Further, this unprecedented move contradicts U.S. policy dating back to at least the Reagan administration that promoting the protection of American intellectual property abroad is in our national interest. On top of that, the administration faces questions on digital era issues, such as a variety of criticisms of the major internet platforms, including the immunities of Section 230 of the Communications Decency Act and Section 512 of the Digital Millennium Copyright Act, DMCA -- as well as challenges on cybersecurity as everyone who’s car is running low on gas can tell you and, oh, yeah, China. Lots for our panel to talk about.
So let me begin with the introductions. The Honorable F. Scott Kieff is a former commissioner of the U.S. International Trade Commission and advisor to the Bush, Obama, and Trump administrations on national security and economics. He’s the Stevenson Research Professor at George Washington Law School and a member of the European Academy of Sciences and Arts.
Dr. Thomas Grant is a fellow of the Lauterpacht Center for International Law at the University of Cambridge and is a practicing lawyer focused on international trade, investment, and national security. He served from 2019 to 2021 as Senior Advisor for Strategic Planning in the State Department’s Bureau of International Security and Nonproliferation. He’s a former U.S. designee to the permanent court of arbitration.
Unfortunately, our third panelist had a last minute personal matter arise that prevents his participation, but we will carry on. And I will do my best to play devil’s advocate and make sure that we have a variety of perspectives discussed in the course of the panel. And, of course, our accomplished panelists’ full bios are available online. So with that, let me turn to our first presentation from Scott Kieff. Scott?
Hon. F. Scott Kieff: Thank you very much, Steve. What a pleasure to join you in this discussion, and I will also try to emphasize multiple perspectives, recognizing that we’re down one panelists, so that we get a range of views included. As we think about the set of topics— intellectual property, national security, trade, antitrust, or competition—boy, these topics are interacting so much these days. And they were years ago and administrations ago, but it seems as though the curve is ever upwards on the degree and that nature of the interactions.
So you flagged the IP waiver relating to COVID vaccines. It’s an interesting topic. It’s an area where some people worry, gosh, is this a very anti-IP move. Certainly, today’s Wall Street Journal suggests that there are those in the Senate who think that these IP rules never should have existed in the first place.
I think one wonders, though, rather the right way to think about what’s happening right now is to envision it as an overture towards some true or correct destination instead of an overture towards, as you put it, politics and political economy. So let me be explicit about the metaphor or the idea to have in mind.
If you are running a business like Sotheby’s or Christie’s—an auction house—the last thing you want is one bidder coming to your auctions, and the last thing you want to run out of is stuff to put up for auction. In the language of Washington, inside the beltway speak, there’s a dichotomy people often flag between having an issue and solving an issue.
The concept of driving to a correct answer presumes that there’s an issue needing a solution. The concept of having an auction is, I think, quite cozy with -- compatible with the concept of having an issue, calling issues into question. And I think what we see right now across the Executive Branch is a desire to call big questions into issue and, even within the White House itself, an enhanced desire to call big questions into issue. And it doesn’t seem to be limited to just the Executive Branch and maybe even just the one political party in the Executive Branch.
So we might see a time when every auction house is open for every auction, and that’s a time when you can expect a lot of money to pour down K Street. And of course people who need to raise money for campaigns like that, and all political actors need that like we need oxygen. They need it badly. And it’s interesting because this dynamic is happening now at a pace and in a depth and breadth that suggests that topics that we normally thought of as not really seriously open for conversation may now in fact be entirely open for conversation. They might settle out in a whole range of places.
So in our discussion today, we can start to go through a couple of examples, whether it’s China or the EU, whether it’s intellectual property or national security or even the specifics of so-called trade remedies or dispute resolution. We can plug each of these examples into what I hope is a single theme, that everything’s open -- everything’s open for change. So why don’t I pause there, and I believe Tom Grant is next up at bat to give a brief introduction.
Prof. Thomas D. Grant: Hey. Thank you, Scott, and thank you, Steven. And apologies for the still photo. A little bit of a teasing problem on the video aspect of the link, but I hope the audio is clear enough at least technological, even if intellectual maybe it won’t be that clear. But I’ll do my best to try to say something to bring some of these themes together.
We’re talking about trade, cross-cutting equities, and the Executive Branch and national security. So those are a number of different themes, and they intersect in different ways. I thought we’d talk a little bit about that and taking some of the lead from Steven and from Scott. We think about technology as a historic driver for economic development and also a very important element in trade issues. And technology is one of those things -- it’s sort of like motherhood, apple pie, and baseball. Everybody’s in favor of technology.
So today, we see the news that the Senate is debating $110 billion appropriation for developing technology -- encouraging technology development over the last several years, spanning both administrations. We see talk about issues of technology and the supply chain and ways to secure the supply chain. We see initiatives that pop up in practically every branch from government on artificial intelligence and machine learning. Who wants to lead the agency that has no AI strategy? Nobody raises his hand.
The vaccine patent issue and TRIPS WTO issues are also an industry you can see through the lens of technology. After all, we’re talking about the development of (inaudible 14:47) life sciences equity that would historically -- you know, you’d think of it as a patentable equity. If you look at the renegotiation of NAFTA and the emergence of the USMCA, a very important, maybe sufficiently appreciated dimension of that trade initiative is that automotive manufacturing is a much more high-tech endeavor than it was 30 or 40 years ago. The components if you’re doing content requirements and if you’re looking at content requirements in the automotive industry, it’s not just about putting aluminum and steel on a scale and weighing it. It’s also about placing a valuation on a much large high-tech input in the supply chain for that industry. So on and on it goes. Tech drives so many different equities in trade.
One of the things you notice in law practice is that there’s an increasing cross-cutting aspect where these issues intersect in ways that, again, even a short time ago -- a generation, 20, 30 years ago you would have been able to separate, segregate, treat these things as mutably separable. But now, it’s harder to take those equities apart because the currents are now so intermixed. Looking, for example, at some recent major tech players who have been in litigation on patent issues, but then lo and behold, they have trade related international contests that work their way into what it -- again, 30 years ago it would have just been a patent dispute, for example, between Ericsson and Samsung. But then they got into a fascinating skirmish over removing the proceedings to Shanghai.
Steven Tepp: Just to interrupt you for one moment. I wanted to alert you that your audio is fading out, every once in a while, just a little bit for a moment or two. I don’t know if you’re moving around, but just to make you aware of that. Thank you.
Prof. Thomas D. Grant: Steven, I’m sorry about that. I’ll do my best. Yeah. I don’t -- if there’s a fix, I will do it. My apologies.
So I wanted to just open with that sort of -- it’s almost a mélange of different cross-cutting issues, but then I wanted to zero in on something at more of a granular level from my own experience in the administration at the Department of State. For several years, we had an ongoing discussion about how to deal with critical and emerging technologies, and indeed just at the level of nomenclature and at the level of definition, there was a great deal of interagency dialogue— and there still is—over how you define an emerging technology. And then answer that you give to that seemingly very basic threshold question of definition is going to relate in some part to the purpose for which you intend to use the definition. In other words, if you’re looking at it from the standpoint, let’s say, of supply chain security, that’s going to be a different lens through which to look at the definition than if you’re looking at it through traditional trade related equities.
So at the Department of State there was an effort to put forward something that would constitute a new bureau for cybersecurity and emerging technology. And as Scott was saying, in Washington when opportunity come to negotiate or to bargain or have an auction, if you will, over an issue, that attracts a lot of interest. And there was a great deal of bargaining over how to structure a new functionality to deal with emerging tech.
Now, at some level it’s rather boring to be talking about organization charts. How do you rework the organization chart in a U.S. Executive Branch agency? If you want a new tech function, where does it belong? But actually underlying that sort of seemingly inside baseball debate about where to lodge a new function in an existing bureau, there’s a pretty interesting long-term problems of executive organization.
If you place a new functionality -- let’s focus on cybersecurity and emerging tech -- if you place it, for example, under the Undersecretary of State who handles international security, that will imply and even require certain types of inputs, certain types of visibility. But if instead you put it under the undersecretary who handles economic development, then that’s going to bring the issue into the bailiwick of a very different set of civil servants and political appointees. There’s a risk, in other words, of siloing -- the silo risk which people talk about so much when thinking about Executive Branch organization.
How do you solve the problem of the silo risk -- siloing, placing things in isolated silos? Well, then, the answer some people suggest: we need to have a direct report to the principle. Let the Secretary be the direct report for a new technology bureau. The problem there is simple work overload. A single office or single officer can only do so much at one time.
So you’re pressing up against two constraints. The one constraint is if you place things in overly narrow categories, the thing doesn’t get enough information to do its job. On the other hand, in the interest of getting a sort of panopticon view of the issue you make everything under the sun a direct report to the principle. The principle becomes paralyzed. The principle cannot function that way.
That seems to me that’s almost a permanent problem of the Executive apparatus. Just at what level do you place lines of responsibility, lines of direct report, and how do you strike the balance between the need for (inaudible 21:21) -- or also actually having an efficient bureaucracy that functions?
I don’t think there are easy answers, and I think some of the trade related issues we’re wrestling with now demonstrate why these administrative problems, which are longstanding problems, take on particular salience. Anyway, I’ll leave it at that. I think we’ve got -- it will be nice to kind of launch into conversation kind of using that to maybe instigate remarks. And I’ll hand it back to you, Steven.
Steven Tepp: Great. Thanks very much, Tom. Thanks, Scott. Let me note for everyone’s benefit that Q&A is now officially open. We’ll be taking questions only through this platform, Airmeet. Please use the “raise hand” button located in the bottom middle of your screen if you want to ask your question live. Also, as I mentioned earlier, you can type questions into the Q&A tab in the upper right of the screen, and you can do that at any time.
So I’m going to take moderator’s privilege and go ahead and fire a few questions at you based on what I just heard. And I’ll start with Tom. Tom, you were just talking about how to structure different offices and where to place them and what it says about the priority and what it means if they’re under one roof or another, figuratively speaking -- or perhaps literally. But let me ask it this way. For all the moving of chairs that happens in any administration, not just different people in the chairs but some restructuring, how much does it really matter in the sense that what any administration will prioritize will necessarily have the ear of the higher ups who have the political clout to make the final calls on the tough issues?
Prof. Thomas D. Grant: That’s a really good question, Steven. Resources are a constant area of contestation in the Executive Branch and across government. Who gets how much in terms of personnel, which means budgets? That’s one way, perhaps, to trace -- that’s one way to measure the degree of importance that the chief executive places on any given issues. Just how much does the administration budget for it? To what extent is the administration ready -- in this sort of auction house that Scott referred to, to what extent is the administration ready to use political capital in an auction when you need to have legislative action?
One thing about org charts in the Executive Branch is that at a low enough level you can change the org chart through the fiat of the agency head or maybe with the President’s help. But then above a certain level of the org chart, you need to go back to Congress to have the statutory architecture itself changed to meet the requirements that you perceive.
So that’s a question as well. If the administration only cares enough to reorganize the furniture on the ground floor -- at the lowest levels of the apparatus and not really willing do shuttle diplomacy down Pennsylvania Avenue to talk about statutory refashioning, then maybe they don’t care quite so much. Or maybe they care a lot, but they just don’t see that the time has come to make the case yet to their interlocutors in Congress. So that’s a huge -- it’s something you can look -- I think you can look at different pieces of evidence for signs of greater or lesser concern and dedication to particular issues.
Hon. F. Scott Kieff: May I join a bit of that? I wonder also as we think about this auction house model whether multiple -- you know, it’s very easy to think of multiples as in competition with each other. But there’s an old joke that a one lawyer town is really bad for business for the lawyer, but a two lawyer town, oh, that’s great for business for the lawyers. You know, an Executive Branch with one CFIUS panel calling the question for the interface among IP trade security, tech, and so forth, well, that’s neat. We’ve tried it. We amended it recently with a beefed up version through the FIRMA statute.
What if we have several of those? What if there’s USTR? What if there’s state? What if Commerce has its own? What if, what if?
Well, that’s a lot of auctions, and that creates a lot of -- if your theory here is you’re trying to get to optimum operation, maybe that’s an interesting debate about how one manages complicated structures. But if your theory is there’s not enough money pouring down K Street right now and it’d be great to make rain, then suddenly the behavior is matching the hypothesis. The behavior is lots of focal points for calling of questions, and the hypothesis is that one wants to call lots of questions because that induces lots of input from those who pour money down K Street. So you might be seeing a lot of this.
So let me give a concrete example. I think in the recent case at the International Trade Commission involving two basically Korean battery companies that were fighting over trade secrets relating to batteries for electric vehicles -- and this was a case located in the 337 docket at the ITC, a docket that’s pretty familiar to people who think about commercial litigation. It resembles commercial litigation much more than it resembles regulation or administration.
That docket -- that case in that docket made its way as it is permitted to in the statute -- it made its way to the USTR’s office where the President has delegated authority for the possibility of injecting policy preference into that adjudication. 337, the statute itself, says that the Executive Branch is allowed to set aside one of these adjudications. It’s not appellate review. It’s not a disagreement on the facts or on the law. It’s policy review -- a disagreement on policy.
This kind of action from the Executive Branch has generally in the past been very rare. It was done once during the Reagan administration and once during the Obama administration and not in any significant way otherwise. But it showed up as a possibility in this recent spring of this year battery case involving these two Korean companies.
I think the trade bar watched the case. I think the trade bar breathed a bit of a sigh of relief when the White House ultimately did not intervene to set aside the ITC adjudication. But I think that sigh of relief maybe was not fully informed because what ended up happening in that case was a settlement but a settlement where the Executive Branch of the United States was publicly speaking about the settlement in a way that’s very familiar to those who watch kind of professional clearinghouses of mediation in effect as a very active party mediator, rather than a “behind the scenes” role.
Put differently, this looked like the Executive Branch was highly involved in structuring the settlement and not only the Executive Branch of the United States but also of Korea. And these were two very, very large Korean companies interacting with a number of American counterparts, so this is a kind of state industrial interaction that was pretty significant and is much more consistent with a Sotheby’s/Christie’s auction house open for business hypothesis than with the kind of primary guesses about “Are you pro or anti-trade or pro- or anti-domestic industry or pro- or anti-intellectual property?” It’s much more about being pro active engagement as a focal point for gathering large industrial players to come lobby.
Steven Tepp: All right. Thank you. Interesting. So I’m going to ask one more question on the subject of personnel and structure, and then I’d like to after that turn to some of the specific substantive issues that are out there. There’s an old saying that personnel is policy, so what do the Biden administrations moves thus far on personnel as well as restructuring—for example, considering the Office of Science and Technology Policy is a cabinet level office—tell us about what the Biden administration has in store?
Hon. F. Scott Kieff: You’re seeing a lot of talented people inside. Their talents are often in areas that are not -- they’re not primarily about coordination. So the question then becomes how are these -- how are professionals who are professionals at trade law or science research or so forth -- how are they going to master the interagency? And I think that’s a complicated question. The good news is they’re all smart, good people. The question becomes why are they there? Are they there to represent an audience? Are they there to communicate with an audience? Are they there to be a bridge, or are they there to coordinate with each other? Those are very different roles.
Prof. Thomas D. Grant: Yeah. It’s really pretty obvious. If you’re going to have a modern administrative state to the scale and scope that we’ve developed ours to be—our Executive Branch has equities in practically every walk of life, every dimension of the economy—you expect that it be largely a highly technocratic organization. That was sort of the promise of the New Deal in 1933 onward. Lots of smart people from outside the government came into the government. And heretofore, there had really been much of a government. Then, with the New Deal agencies and various sort of fresh understandings of the Commerce Clause and the growth of administrative apparatus, you had to bring in a lot of technicians to operate the thing that was built.
Now, we certainly expect scientific rigor and technological fluency, but it’s also kind of a mismatch in my mind. This might be a rather idiosyncratic view but forgive me for that. But science is a process of making falsifiable statements, and then the scientific community tests them. And some of these falsifiable statements have been so resilient that we accept them almost as laws. If I drop a ball, it’s going to go down because of something called gravity that attracts the Earth and the ball to one another.
So we don’t really consider that something that needs too much testing. But beyond that sort of rare example of a so-called rule of science or scientific truth, it’s not really a discipline that deals in truths, varieties, or sort of commands. Science is not designed to command us to do things. It’s designed instead to test falsifiable statements.
Now, government by contrast, administrative apparatus, starting with the military, which is sort of the original kind of governmental entity going back before you had technocratic trade related and technology related agencies -- it’s a command and control structure. It’s about investing authority in certain individuals, and then other individuals do what those authorities say. And that’s all well and good. You need that. Otherwise, you don’t have an army. You don’t have an administrative apparatus of any kind.
But there’s a bit of a mismatch between science as an actual discipline the way it really functions and the command and control apparatus. It’s the antithesis of command and control. What do you do? You cannot not have a scientific function in the modern administrative state. You need scientists. It’s one of the characteristics of international security and nonproliferation, which is a piece of the State Department which I’m familiar form recent exposure. Filled with very talented engineers and scientists with PhDs in all sorts of utterly fascinating topics, many of whom had devoted their careers to branches of their specialties where there probably is no really direct commercial private sector application.
Trying to stop bad people from getting really dangerous things is sort of a governmental function. It’s a defense and security function. And that’s not only necessary, but it’s a good thing that we have people willing to devote their careers as scientists and engineers to that sort of pursuit. But I’ve always thought there’s a certain uncomfortable, not totally smooth and copacetic fit between any science and technology function and the command and control aspects of a bureaucracy.
I asked about the current administration. I think it’s a case of having to watch this space on some of these emerging functionalities. It’s congenial to every administration to be seen to be doing something on science and technology, but then it goes back to our discussion a few minutes ago. What do you look for as evidence that the administration -- any administration is actually serious? And how serious are they about a given initiative? What type of resources? What type of -- who are the choosing to fill the seats?
And then after the ribbon cutting ceremony so to speak when it’s all very exciting, fresh, and new, after that going down weeks, months, and years away, how much political capital are they willing to invest to keep the thing going? Sorry, that’s a little bit of a longwinded kind of philosophical take on it, but it seems this combination of having a clear view of what science can do and can’t do and then trying to marry that up with an understanding of how the Executive apparatus actually functions -- that’s a tricky task. But I think that is the task that you have to perform if you’re to make sense of this.
Steven Tepp: Well, and of course the Office of Science and Technology Policy has the word “policy” in its name, and it’s located in the Executive Office of the President. And so anything that’s policy and in an inherently political environment has a multitude of factors that will be weighed.
Let me take both your comments just now and use that as a segue to talk about in some more detail this issue of the waiver of intellectual property -- or the proposed waiver of some level of intellectual property ostensibly to promote the production of more COVID vaccine faster. And I’ll segue to it on an administrative front first since that’s what we were just talking about.
By all accounts, the interagency process was at best suboptimal. The issue arose prior to Ambassador Tai’s confirmation, and so there were elements within the administration that sought to stake out a position and leadership on internal consideration of the issue. When Ambassador Tai was confirmed and took office, she made efforts to impose a more rigorous bureaucratic structure to it in the context of the usual consideration of a trade issue within the Offices of the USTR structure. But in the end, it appears that a political decision was made by the Chief Executive and his appointee for the trade office was required to carry that out.
The degree to which she in her own heart agrees with that or not, we’ll likely never know. But nonetheless, as an appointee of the President, one does what one is told, or one leaves office. So let me ask each of you to jump in on this, both in terms of the process and if you want to start to lead into the next phase of the question which is, Tom, you talked a lot about science -- is there actually reason to think that suspending patents would have any affect whatsoever on the production of vaccines at this time?
Hon. F. Scott Kieff: Yeah. I love talking about innovation and healthcare. And I am very aware that my own contribution to healthcare from an innovation perspective may be merely that I believe I have figured out how to cure just about any case of insomnia by writing lots of books and articles on patent law. And certainly if any of the viewers out there are having trouble going to sleep, I’ve got a solution for you. Just come read the books.
But I think on the question of is this stuff about patents, no. I think it’s pretty clear that these vaccines were not significantly induced by anything resembling patents. There was a call to meet with executives in nations’ capitols around the world, and business executives met with national executives. And deals got struck for vaccines to get produced and rolled out. And if there was any doubt lingering that nonetheless patents were somehow hindering development, the business executives have largely devoted -- tied their hands to the mast and said they’re not going to be enforcing patents to stop anybody from producing a vaccine.
So on neither side of the coin, the so-called pro or so-called anti side was this particular moment in time related to patents. So you’re right. One question that people then ask is so then why talk about patents, or why talk about IP?
And I think that gets back to the auction house model because, boy, can you increase the number of people bidding for political attention if you call that question. Again, Tom talked about science, and every high school physics student remembers well that if you forget to draw in the force of gravity on your force diagram, not only will your physics professor dock you a few points on your lab notebook but that brick that’s going to slide off your desk is still going to fall on your toe and hurt. So you’ve got to remember that force of gravity. It gets you a couple of extra points on the exam, and it saves your toe.
There are some other forces like gravity that while open to investigation are pretty well-established as a matter of science. Again, established as a matter of science means they’re still testable. But it does mean we’ve got a lot of data. And there’s some interesting fields of science out there that we sometimes forget about.
One of them is political science. Another one is economic science. And of course they intersect with political economics. And boy, it’s hard to think of a business that doesn’t try to maximize profits. It’s also hard to think of politically responsive actors who don’t try to maximize political power or at least political input, sometimes the combination. And sometimes they feed off each other.
So opening up the auction house by reminding the world that large industrial players around the world ought to come to Washington to talk about industrial policy is a great way to get more money pouring into K Street. And it’s a great way to get more money pouring into as many different parts of the discussions as possible. On the one hand, people might cry in their soup about that.
On the other hand, look, good government should listen to good ideas. And people who used to be world-class scientists and are now government administrators or used to be world-class staffers on Capitol Hill and now are administrators, they now in their expertise as administrators no longer presumably have current expertise in these other activities. So it makes sense for them to want to get input. And of course, we have the First Amendment. People in our society have a First Amendment interest in speaking to their government. So I’m not suggesting that government shouldn’t be open for input, but what I am wondering is the incentives inside the org chart matter.
So let me just be specific. It is worth noticing that in a bipartisan way both the Carter administration and the Reagan administration —two presidents from two different political traditions—both of their administrations focused in on a set of ideas about how innovation gets done that focused primarily not merely on the question of creating ideas of inventing ideas, so-called basic science, but instead focused on the downstream stuff, commercializing technology to bring it to market. And both of those presidential administrations from two very different ends of the political spectrum came to the same outcome, which was to think about the idea as a consensus idea of, let’s call it, strong intellectual property rights. And both of those presidential administrations deliberately socialized within their executive branches those idea in order to coordinate out from the government coordinating devices -- a strong IP system, not as tools to reward magical people for doing magical things, but as beacons around which a bunch of different unknown and unnamed people and actors could coordinate with each other.
That beacon strong IP approach is one that jurists across the political spectrum have embraced. Judges -- famous judges like Learned Hand, a centrist Democrat; Jerome Frank, a progressive Democrat; Giles Rich, a centrist Republican -- a relatively diverse group of jurists, a relatively diverse group of political actors directly, explicitly coordinating with each other about a more hands-off approach for facilitating commercialization outside of government with a strong IP system.
That seems to be the opposite of the approach that is associated with the current set of activities. And then the question becomes are the current activities opposite of that approach because they want to reach the opposite outcome or because they want to put all of this in question -- they want to put it all up for auction? The bad news is you can lose an auction. The good news is you can win an auction.
So I would say for those who are interested in those kinds of ideas now may be a good time across the political aisle to coordinate around a perspective and approach a set of ideas that we’ve seen before with both Democrats and Republicans. But it is different than the approach we’re at least being called to consider by the actions you were just highlighting.
Prof. Thomas D. Grant: Might I add a word, Steven?
Steven Tepp: Please, please.
Prof. Thomas D. Grant: I defer to you. As master of ceremonies, you should cut me off if I take it too far down a path that we might just leave aside.
Looking at the patent issue, you see there’s a general problem of administrative power in a system that there are administrative tools that are extremely attractive when there is something like a public consensus about the existence of a particular problem. There are types of problems that people find very difficult to coordinate solutions around on their own, but if you’ve got central authority—and we all broadly agree X, Y or Z constitutes a problem—central government apparatus is just extremely good at directing resources in a sometimes pretty blunt way but a very targeted way at the same time. You can sort of bring the sledgehammer down onto a problem if we all agree the thing is a problem.
Now, I’m not really qualified to judge myself whether patents is the choke point on vaccine production and distribution. It occurs to me and I guess it occurs to the current federal government of Germany that maybe patent rights are not the choke point, and maybe the choke point is production. Maybe the choke point is logistics and distribution. Put putting that aside -- and let us just for purposes of argument only -- let us say the choke point really is patent rights, and that’s what’s slowing it down. I’m skeptical, but let’s just for purposes of argument say the patent’s the problem. Okay.
So you bring a targeted public solution using all the weight of government, bringing it down onto the patent issue. You solve the issue by waiving patent rights. That becomes a little bit habit forming, I think. And I’m just going on the basis of a little bit of administrative law history and the little bit of armchair psychology. But when you do something and it rewards you in some way, you tend to keep doing that thing all else being equal. Max Weber taught us that bureaucracies are all about growing bureaucracies. Once you create one it grows on its own.
That ought to be in our set of considerations whenever we deploy an executive apparatus solution because not that the solution might fail today on this issue—though it might—but because even if it works -- maybe especially if it works, it becomes habit forming. And you start doing the same thing to situations where we really do not have such consensus that a solution is needed. And you start to apply the solution to situations where really it would have been better to allow different elements of society to coordinate on their own without the command and control structure telling them what to do.
So that’s -- I guess in a nutshell my concerns are, first, the premise might not be right. Maybe we really don’t need to waive patents to get the vaccines out faster. The second point is what happens to the rest of the patent architecture if you take a wrecking ball theoretically in a selective way to one piece but then you see, oh, that’s kind of fun. Let’s keep doing that -- there’s danger there.
Hon. F. Scott Kieff: And related to the science question the old saying, at least I thought, was inextricably linked with this notion of scientific hypothesis is the idea that there is a set of facts that if true would cause us to discard the hypothesis. So if the hypothesis is this intervention is needed, what set of facts, if true, would cause us to conclude this intervention is maybe, dare I say, not needed?
And if the answer to that discussion is, “Pshaw, please, you’re really getting in the way of important things by making us build a record to answer that question in writing,” then that sure seems a lot different than the stuff we generally think of as the rule of law and good administration of government. We generally think of rule of law and good administration of government as a system where people say openly to themselves and each other why they’re doing things and why they’re going to not do them and why those things are important in some way other than the identity of the person doing it. Because if person one gets to do it, why doesn’t person two of opposite political valence get to do it, too? And if one is generally interested in thinking about the “it” as a bad, then maybe we don’t want either one doing it.
Maybe another way to think about this is in lawyer speak patent law is part of the United States Code. The United States Code has been codified. Over the last hundred years we went through a significant amount of effort in Washington to codify our Code, to organize federal law into topics. Patent law is Title 35. We’ve got 34 up before and a whole bunch after.
And if what you really think you ought to do is delete Title 35, that’s easy to do. It can be done. It would be a lot easier for industry to organize itself if it knew yay or nay Title 35 had been deleted. It will be a lot more anxiety provoking but a lot better for the auction houses to keep calling the question whether in effect Title 35 is getting deleted.
Steven Tepp: So let me challenge some of your comments just there a little bit as I promised, playing devil’s advocate. So oftentimes an administration does not get to choose the issue of the day. The issue of the day is thrust upon them. And the coronavirus is of course a perfect, yet terrible example of that.
So first the Trump administration and now the Biden administration is dealing with this once in a century global pandemic. India and South Africa forced this issue presumably out of perception of self-interest. The Biden administration is forced to address it. They could have left it hanging in a way that might arguably have kept the -- to use Scott’s analogy, kept the auction opened longer. So that’s one question.
Here’s another aspect to it. Because when we’re dealing with international trade which is by definition a subset of international affairs and foreign affairs, one has to consider the ramifications beyond domestic stakeholders and domestic interests. And I note that one of the common critiques from the left of the Trump administration’s trade policy was that it was insufficiently multi-party -- that it was a go it alone approach. We didn’t particularly care about our European allies, and that harmed us. In fact, in some cases we took action that aggravated our European allies.
And yet, this administration has just made this announcement about the proposed waiver with no notice by most reports -- by all reports I’ve seen -- no notice to the European allies who were standing shoulder to shoulder with the United States in opposition to this waiver. And now where some predicted that the EU countries would drop their objections the moment the United States did, on the contrary. France, Germany have been quite vocal in continuing to object and now criticizing the United States for what appears to be a non-substantive political approach. What do you say about that?
Hon. F. Scott Kieff: Well, I think those are all interesting points. And one response is to just say the Trump approach seemed to be, let’s call it, more bilateral rather than multilateral. I don’t know whether we’re going to see that the Biden approach is more multi or all multi. I think if you -- I just don’t know. I don’t get the sense that the Biden administration’s approach is to cut off the rest of the world. I think it’s to reframe conversations and remind everyone that everything’s up for discussion or auction -- or discussion or auction or both or just come talk to us.
So I think it is an effective short term political strategy for gathering all the iron filings on the proverbial desk of the world to line up with Washington, at least the ones that want to -- the ones that have their own self-interest to. It’ll be interesting to see where things settle out on that from. But I think getting back to the first part of what you were talking about, I do want to be really clear.
Wherever one comes down on the debate about whether one ought to have patents or whether one ought to enforce patents in certain ways, there has long been even among the very pro-patent oriented crowd an explicit recognition that in the language of the U.S. system for example the Fifth Amendment of the Constitution does not seem to prevent the government from taking stuff. It seems to require the government to provide just compensation when it takes stuff.
And so the notions of sovereign immunity that are extremely old and go far before the United States and beyond the United States, those notions can co-exist with intellectual property regimes and allow for lots of pressure release valve, lots of escape clause, lots of room to maneuver to cope with emergencies that just require a little bit more government forbearance. That government forbearance either can come in the type of decision making where the government says, “Well, if we have to pay for it, maybe we shouldn’t do it,” or the kind of government forbearance that comes in the form of the government making itself amenable to suit. The United States government has graciously made itself amenable to suit in a lot of settings.
And going back to the Civil War, one of the traditions that Lincoln very proudly promulgated was an explicitly court designed to in the federal system locate adjudication against the government so that the public could fully and fairly bring actions against the government that would get the kind of compensation that the Fifth Amendment would suggest as appropriate. So that kind of concept of forbearance and collaboration with the citizenry is a different kind of dynamic interaction then come to K Street and pour your money to the auction.
Prof. Thomas D. Grant: That observation by Scott really spurs my historical -- it spurs me to put my historian’s cap back on, especially when you think of Lincoln’s initiatives in the Civil War. But this is Federalist Society Executive Branch week. If you’re thinking about the very origins of the American administrative state, they are trade based very heavily, not exclusively, but very heavily.
If you asked where is the federal apparatus circa the year 1850, the customhouse -- customhouse in New York, apart from a couple of other customhouses that was pretty much almost the full ball of wax when it came to executive apparatus. It’s not coincidental that trade is such a central consideration 200 years later -- 180 years later when we’re thinking about Executive Branch action.
One of the major differences, no great surprise to say things have changed in the last 180 years of course, but trade in its classic format a century ago was tariffs. Trade was an issue of tariff control. The emergence of several of the major European federal states, especially Germany and Italy, were driving by tariff barrier removal. But it was basically about putting end posts and duties on physical artifacts moving across borders. But today, the degree of economic integration is that much greater, and the technology (inaudible 01:05:22) 120, 130 years ago. So the non-tariff barriers to trade become a vastly more significant part of the picture. So if you’re thinking about action to change patent law one way or the other—strengthening, weakening, going sideways—you’re going to have trade impacts that go well beyond traditional concerns over end posts and duties on physical artifacts.
And that goes to not just the patent debate, but if you start looking at things like the Senate discussion today about $110 billion appropriate for a technology driving program, that’s maybe large enough. I’m not a macroeconomist, but it may be large enough in certain targeted sectors to have trade related impacts if you start having something on that scale influencing who wins, who loses, who gets the attention. That’ll just be subject matter for one trade jurisdiction. It may affect other jurisdictions.
And the same goes for monetary policy where you’ve got really large increases in liquidity. You lose track of how many trillions, but it’s trillions. And that is not just a monetary issue. That has trade aspects.
And Steven, if I could without taking up too much -- the time on one question, but it’s such a fascinating question. You asked, Steven, what about allies, and what about the approach of the current administration and the Trump administration to allies in trade? I think there might be some interesting lessons to be drawn from history there as well. If you look back at the early stages of the second World War, which I think we would agree marked the eve of a time of emergency. Governments don’t choose the issues that they deal with. Sometimes as you said, Steven, the issues are sort of landed on them.
And certainly the outbreak of World War II is something none of the democratic countries chose or desired, but they had to deal with it. (Inaudible 01:07:40). He was adamantly opposed to the proposition that was put forward quit seriously by quite a few people of a trade union between Canada and (inaudible 01:08:01). The idea was there’d be the beginnings of a British Empire single trade zone, which actually did not exist. These were separate -- Canada, Australia, New Zealand, the United Kingdom whilst part of the British Empire notionally had their own trade policies. But the thought was, hey, this is highly time given common cause that we all must (inaudible 01:08:22).
Steven Tepp: Tom, your audio’s slipping back out from time to time again.
Prof. Thomas D. Grant: Is that better like that? I’m sorry.
Steven Tepp: This is much better, yes. Thank you.
Prof. Thomas D. Grant: So you think of that period of time as one where it would have been high time for allies to act like allies. Shoulder to shoulder, let’s agree on everything. And there was serious momentum in Parliament in Ottawa and Parliament in Westminster to have a trade union -- a transatlantic British-Canadian trade union. But it did not happen. Beaverbrook himself said, “No. We’re not going to do that. The interests are too divergent. Not going to happen.”
Now, in the current parlance -- in the current narrative, one would then exclaim, “But allies don’t do that.” Well, I’m sorry. As a matter of fact, allies do in fact protect their trade equities. It’s not necessarily the case that political and military exigency led to everybody being on the exact same page when it comes to trade, tariffs, non-tariff barriers, and so forth. Those can be on very separate tracks, even under the seemingly overwhelming pressure of a crisis such as 1940-41. So just trying to put a little bit of perspective on that and maybe it’s not so surprising when allies do go their separate ways on trade related matters. But I just wanted to put that out of sort of food for thought.
Hon. F. Scott Kieff: May I briefly just follow up and just mention it also is interesting to note that around the time of the Civil War the politics of trade were so heated that they were a significant contributor to the entire notion of the choice to go to war with ourselves -- the politics of tariffs between the North and the South. On the one hand, gosh, what a horrendous price to pay. We fought with ourselves. On the other hand, remember part of the reason for the intensity was that we were financing the entire operation of the federal government on tariffs. This is before an income tax.
And now, of course, trade is significantly delinked from the day to day fiscal operation of most governments that we’re talking about here because most governments finance their operations with totally different forms of taxes. In Europe, they have the VAT, essentially a consumption tax. And in the United States, we have what is basically an income tax, although it’s kind of a wealth tax and some other things, too.
But the point is what it’s not is primarily a tariff. Yes, we have tariffs, and yes, they have tariffs in Asia and in Europe. But we and they finance the operations of the national government with something other than the tariff. So what that allows the central government in each of these locations to do is to play much more the role of auctioneer with their own and foreign industrial interests because they’re not choking off their government’s own ability to pay for day to day operations. And that’s part of what makes the auction house model so attractive these days is you don’t have to worry about civil war so much.
Steven Tepp: So let me pause for one moment to remind everyone in the audience that we are open for questions. You can type your questions in the Q&A, or you can raise your hand if you’d like to ask your question live. I’ve got to say I’ve never been involved in a trade discussion that didn’t have audience questions, but until the audience gets going, I’m perfectly happy to continue making waves.
So with that in mind, I’ll go slightly beyond the moderator’s usual role and reflect back on my days when I was in government at the U.S. Copyright Office. A substantial part of that time was spent negotiating free trade agreements on behalf of the United States and in cooperation with U.S. Trade Representative’s office and other Executive Branch agencies. And tying this back to particularly what Tom was talking about but also echoed by Scott -- how a century and a half ago the tariff was the primary tool of income for the government. It was the primary tool of trade for the government.
In the context of our modern free trade agreements, we have been quite willing to give away -- I should say reduce tariffs in exchange for compliance with non-tariff trade barriers, including perhaps most prominently intellectual property. And I find that an interesting observation in the context of the TRIPS waiver because having negotiated hard to get what we got in TRIPS itself in then further in a number of bilateral and regional trade agreements, we’re now giving that away, too, at least in this one context.
Hon. F. Scott Kieff: Yes, you’re absolutely right, Steve. You’re right that we have socialized a vocabulary and a style that was very focused on the importance of intellectual property to everyone in the developed world, as well as suggesting that in fact it would be also helpful in the developing world. And now, the narrative -- now, the script has flipped -- that calling this question makes it -- it’s very easy to click along to a smooth jazz rhythm, but screech like nails on a chalkboard when you go immediately to heavy metal or rock and roll or you pick the other form of music.
Here in the trade discussions, we, the United States, were generally speaking together with allies who, for nonmilitary reasons at least nominally, were all also singing off the same page of the songbook that IP was generally helpful to everyone. And now, we are singing off of a very different songbook or at least calling the question, is there a songbook about IP and, if so, opening ourselves up to the question of, what page do we want to be on? I don’t know how much conflict that will create.
But you are right. It certainly creates some dissonance. There are some other conflicts, though, that are starting to emerge that are pretty high visibility.
So one of them is how you even do adjudication. And this started to percolate up in a particular patent case involving two non-U.S. entities, a European entity and a Korean entity—Ericsson and Samsung— the in the context of a patent dispute pending in China and in the United States. But the conflict ended up becoming can courts in country A enjoin parties appearing before courts in countries B, C, D, maybe all the way up through Z? And that conflict where one country tries to shut down another country’s access to courts is starting to heat up quite a bit.
That particular case settled as between those two particular commercial parties in a worldwide settlement involving their own business interests. But that left very open the question of how to handle these antisuit injunctions. And similarly, you have just seen last week in the court of justice for the European Union a case pending in which the question is being asked -- how should a sovereign system -- the EU is essentially a collection of sovereigns, but in some respects, it acts like a sovereign. To what extent can it and should it block U.S. security sanctions against countries like Iran from having a commercial impact inside the EU? And so I think you’re going to see these antisuit injunctions and blocking statutes. You’re going to see all of those conflicts. That’s going to heat up very quickly.
Prof. Thomas D. Grant: Yeah. If I could jump in, Steven, on Scott’s observations. I’ll just add to that, or I’ll sort of diverge just a little bit. But there’s sort of an assumption in free trade models that firm to firm competition is extremely good for the market for innovation, for economic growth. And personally I subscribe to that. Competition leads to societal benefit.
But in a trade context where the sovereigns are involved -- where it’s an inter-sovereign agreement under treaty—so it actually is international law coming into the picture—it’s not just firm to firm competition, even when you’re dealing with allies with relatively similar operating systems, rule of law, good commercial code, good commercial judges, statutory enactments that are conducive to market competition. Even there, the sovereigns are also coming into play so that what might theoretically be a level playing field for firm-to-firm competition also has these other players involved. Maybe they’re just referees.
That would be perhaps the better outcome, but often they’re not just referees. They’re players. And you’ve got relatively mercantilist philosophies in some countries, industrial policy, or whatever title you want to give it. And when developing trade policy -- and Steven, you probably saw this in your Patent Office working with USDR and other Executive agencies. You have to ask yourself what else will the government interlocutor be trying to do in order to influence the playing fields. Are we really dealing with a free market of firm-to-firm competition, for example, between American and—not to pick on any one country—but Chinese firms? Sometimes yes, it is genuine market competition, but sometimes it’s not.
And I think in some of these, for example, the Ericsson/Samsung matter that Scott mentioned where ostensibly it’s a pair of dueling suit and antisuit injunction and then, believe it or not, an anti-antisuit injunction. Are the parties and the courts really the only thing involved, or are there, perhaps, executive equities on one side or the other than also influence the playing field? It seems that that well could be a -- and also that EU matter. I mean, it’s an EU kind of sovereign concern over extraterritorial effects of U.S. law. That’s not just a market issue.
Steven Tepp: So we have a question from the audience from Dr. Roger Cline, which fits perfectly into the theme of intellectual property trade and the Executive Branch review week here at The Federalist Society. Given that Congress in the context of the Uruguay Round agreement effectively created property interest and the adherence to minimum standards of IP protection, is it within the President’s power to abrogate these statutorily created property rights without Congress? And Scott, this probably alludes back to your reference to the Fifth Amendment’s Takings Clause as well.
Hon. F. Scott Kieff: Yeah. It’s a wonderful question, and it’s very close to a question I would give or dare I say have given on a final exam in even just a first year property course. Assuming the students have no knowledge of the specifics, can they spot the general questions? And it seems to me the general questions start to include the following.
First of all, what is your approach to a takings analysis? Do you think the public use question is a serious pause point or advocacy point along the road to doing a takings analysis? Some would say it is; some would say it isn’t. Some would say it must be. Some would say it must not be.
But that wouldn’t end the discussion. The next conversation -- the next stopping off point would be in this language of issue spotting would be fine, what Takings analysis do you even want to go through? Do you want to go through something resembling Penn Central/Penn Coal? Do you want to think about this as total economic wipeout? Do you want to think about this as something analogous to permanent/physical? Or do you really want to pivot and not think about this as a takings problem but something much more analogous to the switch that can happen inside a highly active regulatory or administrative branch?
Sometimes the administrative or regulatory system pivots, and sometimes that pivot can create what much more resembles a breach of contract cause of action than a property takings cause of action. So in the parlance of those who are very familiar with U.S. litigation, this would be something like the Winstar cases brought after the savings and loan debacle and the capitalization requirements that allowed banks to -- savings and loans to basically merge. And then a shift in those capitalization requirements, which then triggered a lawsuit, the kind of most famous of which was named after a bank called Winstar.
But that one sounded much less like a takings case and much more like a breach of contract case. So yes, there are a lot of arguments here. The problem is how do you, if you’re running an industry inside or outside of the United States or you’re running the general counsel operation either inside a law firm or inside a GC’s office -- how do you think about these things? And I think what at least I’m seeing is these days a lot of businesses and a lot of lawyers are finding that they need strategies that are highly informed by these diverse siloed areas of law and siloed areas of jurisdiction.
So you need more that U.S. law. You need more than patent law. You need more than takings law. You need a bundle. You need a bundle of approaches where you can think about particular venues, particular doctrines, and particular national legal and international legal systems before you can, as a business, mount an effective strategy.
I think the good news is these strategies can be built and run. I think right now the dominant strategy that I think too many businesses are still focused on is whatever it is, I’m just going to pour more money down K Street. And I think that strategy plays in very well to the auction house strategy. Every auction house will welcome you. Every casino loves a big whale, but I don’t know that competing to be the biggest whale is the right strategy when you’re in that environment. I think the right strategy in that environment is a more technical strategy, one that is informed by these different areas.
Steven Tepp: Tom, do you want to make a quick comment if I can ask? And I want to respond to this briefly as well, and then I had one more question in the five or so minutes that we have left on the panel.
Prof. Thomas D. Grant: Thank you, Steven. Really quick, just thinking about the Uruguay Round, but there’s also the whole universe of investment treaties, bilateral as well as the USMCA which do contain their minimum standard rules and industrial protection rules. And it might just be some interest into looking into the impact on some of those obligations if you’re talking about major changes to patent rights through executive action. I’ll just leave it at that.
Steven Tepp: That’s a really interesting point, Tom. So what I wanted to say on this very briefly is when we -- if the TRIPS council agrees to waive some portion of the TRIPS agreement, that will suspend the obligations of every WTO member to comply with whatever is, quote/unquote, waived. Does that mean that the United States Congress will -- or that the United States Patent Act at that moment is suspended? No.
I agree with the pretext of the question that for the U.S. Copyright Act or the U.S. Patent Act to be suspended in some way would absolutely require congressional action, and that would trigger domestically the sort of analysis Scott just discussed in depth. Of course, Tom alludes to the fact that this could also happen around the world. Every member of the WTO would be free under such an agreement to suspend existing rights.
The Fifth Amendment does not apply outside the United States, of course. And since it is the Executive Branch that decides whether or not to initiate any sort of dispute process under the auspices of the WTO, one would imagine that agreeing to the waiver would be tantamount to agreeing not to initiate such a dispute. However, as Tom points out, there are other instruments that allow investor state dispute settlement processes where the dispute is brought by the private entity, not the government, and where those exist under perhaps other instruments that require some of the protections that the waiver would proport to abrogate within the TRIPS agreement could provide a basis for litigation.
We’ve got just over two minutes left, which is hardly adequate to address the topic I’m going to raise. But you’ve both now alluded to issues of tariffs, non-tariff barriers, intellectual property, currency manipulation. And all of that points us to China. So I’ll invite you to give about one minute each in terms of what should the Biden administration be looking to do on China and any quick closing remarks you have before we end the panel.
Hon. F. Scott Kieff: I’ll just briefly point out that while Chinese courts and agencies are truly first in class in reaching decisions that are founded well in a record using the best lawyer and economic and technical skills and also generally fair as between party A and party B, it is vital for those outside of China to remember that those courts and agencies inside of China are also operating inside a very powerful central government with a very strong military civil fusion that would demand -- in fact require and coerce full compliance with the obligation to draw all information brought into those adjudications into the security state and back out through the belt and road initiatives, through the hands of favored state actors inside China.
So put differently, while a lot of people celebrate the incredible professionalism of Chinese courts and agencies right now, I think right now is exactly the wrong time to choose to go litigate there if what you want to do is avoid any of those things that I just mentioned.
Prof. Thomas D. Grant: I think it goes back to that issue that we were talking about whether you’re really looking at a firm-to-firm competition on a level playing field. Is the government a referee, or is the government also a player? And I think what Scott was getting at is, yeah, government in some countries can be a player as well.
The thing I would add about China specifically, Steven, in response to your invitation, is that historically looking back the last 40, 50, 60 years -- the beginning of the Cold War through to the present and the new challenges of Iran’s nuclearization, North Korea’s nuclearization, the export of terrorism by certain countries, sanctions have been largely a United States instrument, sometimes joined by allies in Europe, Japan, Australia, and so forth. And sanctions have had largely similar geopolitical targets. Let’s stop terrorism. Let’s stop the proliferation of weapons of mass destruction. Let’s defend democracy, human rights. But sanctions have been, again, largely aimed at similar targets.
We now see, though, that China is starting to think about sanctions as a tool in China’s toolkit. Sanctions have an interplay with trade. One of the fraught issues of WTO law is the legality of certain types of economic sanctions. That’s been bandied about by academics but also governments.
But that’s been against a backdrop of essentially likeminded countries adopting essentially, broadly aligned sanctions -- devil’s in the details, but at least UK, U.S., EU have some sort of shared philosophical groundwork. But now we do see that one of the world’s biggest financial, economic, commercial trade countries, China, is starting to learn about using sanctions. That seems to me to be an area that could raise quite a few challenges for trade as well as security and geopolitics.
Steven Tepp: Thanks, Tom. I agree that sanctions represent an interesting subset of many of these issues, and you’re certainly reference to Iranian supported terrorism is particularly timely.
Thank you to both Scott and Tom, as well as to all of you in the audience and to The Federalist Society for this very interesting panel. I hope you all enjoyed it as much as I did. A reminder that the next conference event will be tomorrow morning at 11:00 a.m. Eastern, “Civil Rights in the New Administration.” So standby now for the alert directing you to the lounge and watch out for Colonel Mustard. I hear he may be wielding a knife. Thank you again.
Airmeet, our new online platform for the Executive Branch Review Conference, offers us the exciting opportunity to network with one another, and with speakers, moderators, and FedSoc staff. Before, between and after panel discussions, feel free to click the Lounge button at the top of your screen and join a table of fellow conference attendees. As sessions conclude, we'll also send a "Lounge Alert" with a link you can click to make it easy to join the Lounge. We'll also send alerts to the Lounge before panel discussions begin, so there is no need to worry about missing any of the panels.
Please plan to join us in the "Lounge" for a unique networking opportunity. It's a great way to stay in touch with everyone until we can convene in person once again. We look forward to seeing you there!
Airmeet, our new online platform for the Executive Branch Review Conference, offers us the exciting opportunity to network with one another, and with speakers, moderators, and FedSoc staff. Before, between and after panel discussions, feel free to click the Lounge button at the top of your screen and join a table of fellow conference attendees. As sessions conclude, we'll also send a "Lounge Alert" with a link you can click to make it easy to join the Lounge. We'll also send alerts to the Lounge before panel discussions begin, so there is no need to worry about missing any of the panels.
Please plan to join us in the "Lounge" for a unique networking opportunity. It's a great way to stay in touch with everyone until we can convene in person once again. We look forward to seeing you there!
Civil Rights Practice Group
The Biden Administration has signaled, in various respects, that it would take a new course on civil rights. For example, in January, President Biden issued four executive orders regarding executive orders regarding what the new administration describes as systemic racism. In addition, President Biden issued early executive orders regarding sex-based discrimination, gender identity, and gender orientation. Incoming executive officials have begun taking actions based on these orders. For example, the Education Department has announced a comprehensive review of its Title IX regulations. Similarly, HUD officials have signaled plans to revisit approaches to disparate action that had been abandoned during the prior administration. The new administration’s emphasis on equity also reaches other agencies that have not historically been associated with the issue. The Centers for Disease Control and Prevention, for instance, have launched an initiative to address how “social determinants of health” (education, neighborhood, wealth) impact people of color. In light of such developments, the civil rights panel will review new actions and policies undertaken or announced by federal executive departments. They will examine such questions as the nature, extent, and desirability vel non of these approaches, as well as the underlying legal authority to act.
- Mr. Art Coleman, Managing Partner and Co-Founder, EducationCounsel
- Mr. Eric Dreiband, Partner, Jones Day
- Hon. Gail L. Heriot, Professor of Law, University of San Diego School of Law
- Prof. Theodore M. Shaw, Julius L. Chambers Distinguished Professor of Law and Director of the Center for Civil Rights, University of North Carolina School of Law
- Moderator: Hon. Kenneth L. Marcus, Founder and Chairman, Louis D. Brandeis Center for Human Rights Under Law
Dean Reuter: Welcome in to the second day of the Ninth Annual Executive Branch Review Conference, hosted by The Federalist Society’s Practice Groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. Thank you all so much for being with us today.
EBR9, as we call it, is live on The Federalist Society’s website, YouTube, Facebook, Twitter, LinkedIn, and other outlets, free and open to anyone, so do help us by spreading the word. We’re also hosting, for the first time ever, on the Airmeet platform, which will allow you to visit with friends and colleagues in the Airmeet lounge before, between, and after panel discussions.
I didn’t see as many of you in the lounge yesterday as I’d hoped, so I hope you’ll drop in today. To do go to the lounge, you will need to register on Airmeet, which you can do in a few simple steps through The Federalist Society’s website. In other Federalist Society news, look for a series of weekly Teleforum calls beginning June 11 to help launch our Freedom of Thought Project. Check the website for details.
Turning now to the substance of this week, our first panel today will examine civil rights in the new administration and will be moderated by Ken Marcus. Kenneth L. Marcus is the founder and chairman of the Louis D. Brandeis Center for Human Rights Under Law, established in 2011 to combat the resurgence of anti-Semitism in higher education. Most recently, he served as Assistant U.S. Secretary of Education for Civil Rights. Perhaps most importantly, he’s now the Chairman of the Executive Committee of The Federalist Society’s Civil Rights Practice Group. Ken Marcus.
Hon. Kenneth L. Marcus: Thank you, Dean. Hi, everybody. So we’ve been looking forward to this for a while, and I think that this panel, Civil Rights in the Biden administration, is going to be one of the most interesting ways of looking at this issue that we have seen. As Dean mentioned, we have both the panel discussion now, and then, afterwards, a lounge opportunity.
Dean mentioned that there weren’t as many people as we’d anticipated yesterday, but let me tell you, for those of you who have previously attended Federalist Society conferences and enjoyed the networking that takes place in the lobby and in the tables, the Airmeet technology has provided really an extraordinary opportunity for people to connect. So I’m going to encourage that at the end as well.
But for now, we have, I think, a very timely and early intervention and an opportunity to consider what is happening with the new administration on civil rights with various appointments that have been made or announced, and initial moves, including executive orders. The initial outlines are coming into sight, and it is now possible, I think, to make the first informed, intelligent assessments of what the Biden administration’s program and policy on civil rights is going to look at. And I think that the four people that we’ve assembled for this panel are really the perfect group to discuss this.
You have, as part of the online conference materials, the official biographies of our speakers, so I’m going to give you the unofficial now and give you my thoughts because these are four people whom I have always considered, for many years, to be some of the most insightful people on civil rights and really the best for this particular moment.
Ted Shaw, you’ll recall from prior Federalist Society events, if you’ve been around for a while. Ted Shaw is not only a distinguished professor of law at the University of North Carolina, he was for many years an advocate with the NAACP Legal Defense Fund. So he is one of the most experienced and forceful civil rights advocates out there, and we’ll be pleased to hear from him first.
Second will be Eric Dreiband. Eric Dreiband, another very experienced civil rights practitioner. Nobody knows more than he does about the workings of the civil rights bureaucracy. He had been general counsel of the EEOC during the George W. Bush administration, but most recently, he was the head of the Civil Rights Division at the Department of Justice during the Trump administration.
So he’s really perfectly positioned to understand what is happening now with the Biden Justice Department and civil rights, particularly as it applies to the question of what changes are happening or are going to happen with this administration as compared to the last. Since leaving the Trump administration, he’s returned to his partnership at Jones Day with approximately 85 percent of the Trump administration lawyers. Eighty-five or eighty-seven percent, Eric? Somewhere in that ballpark.
Eric Dreiband: Exactly. Yeah. It might be a little lower, Ken, but go ahead.
Hon. Kenneth L. Marcus: Okay. Very good. Very good. Art Coleman, in my opinion is -- I think he might’ve been arguably the leading civil rights policy intellectual of the Clinton administration, I would say. From his perch at the Office for Civil Rights at the Department of Education, he was involved in many of the most important civil rights policy changes of that period. He’s very much stayed in the game of civil rights, especially in the area of higher education, where he has developed a reputation as one of the most astute legal analysts of higher education legal issues, especially as the apply to civil rights.
Gail Hariot is a member of the U.S. Commission on Civil Rights and in that respect has been doing oversight of civil rights in the federal government over the various administrations. She’s also a law professor at San Diego and is well known to Federalist Society conference goers. As Dean Reuter indicated, she also headed this practice group during what I think you might call the Golden Age of The Federalist Society Civil Rights Practice Group, which ended only last year when I took over in her place.
Hon. Gail L. Heriot: And I’m so glad that you have, Ken.
Hon. Kenneth L. Marcus: The end of the Golden Age, but the beginning of a new era. So now we have as the first conference since I’ve taken over for Gail, and we have, as I’ve discussed, four great speakers, and I hope some great questions from you. If you, members of the audience, have questions, you will have the opportunity to write them in the Q&A section, or at the end of the presentations, you can raise your hand, as it were, using the function on the right hand of your screen. Raise your hand and we may be able to call on you.
There’s also a chat function. That’s not so much questions for the speakers, but that’s a function in case you want to chat with other members of the audience during this talk. So there you have it. An excellent panel about to start, followed by the lounge period. We will start with Professor Ted Shaw.
Prof. Theodore M. Shaw: Well, good morning and thank you, Ken. I’ve been with The Federalist Society on many occasions, and I welcome this occasion to engage in dialogue. Sometimes, we mix it up, and sometimes, it’s a pretty steady conversation, but either way, I welcome the opportunity to be with you all again. I think I have five to eight minutes, and so I’ll try to stick with that. My dear friend and colleague, Art Coleman, will be surprised if I do that, but I’ll do the best that I can.
Obviously, with the initiation of the Biden administration, things at Justice have changed and will continue to change, and I want to just talk a little bit about that and talk about not only some of the personnel changes but also some of the substantive issues and what we’re likely to see coming down the pike.
So in the first instance, obviously, with a new Attorney General, and, of course, he’s well known to all of us given his history, the Oklahoma City bombing prosecution. But just as importantly, he was a nominee to the United States Supreme Court. Of course, Merrick Garland, no stranger, and under his leadership, the Justice Department has announced a couple of priorities, and they include domestic terrorism. They include the challenges with respect to white supremacists, violence, which included the January 6 insurrection, and that has led to 2,000 charges against individuals who were involved in that incident, as well as 411 defendants.
Now, that’s not the job of the Civil Rights Division, but the question of white supremacists, that is an issue that falls within the four corners of the work of the Civil Rights Division. And so that’s a priority that the Attorney General has announced, as well as hate crimes more generally. And we’ve seen a huge increase in hate crimes across the United States, most recently in a very disturbing manner, the only manner that it could be, of course. We’ve seen a focus of hate crimes against Asian Americans, and that as well as white supremacist hate crimes, that appears to be a focal point of the Civil Rights Division of the Justice Department and the Justice Department more generally.
We also have seen a focus and will continue to see a focus on police departments. We all know that in recent times, we’ve seen a terrible uptick in deaths of unarmed African Americans—but not exclusively African Americans, primarily African Americans—at the hands of law enforcement. And so the issue now, or the issues, go to policing. That’s not new under this administration. Under more recent administrations, we’ve seen these issues. Ferguson is one of the places where we saw that violence, but also in Minneapolis, and in Louisville, Kentucky, and many other places where police departments have been involved in shootings and the deaths of unarmed African American men and women. So that’s a priority of this administration and more specifically, police department reform.
There’s a lot of conversation now about what to do about police departments, and I should’ve started off by saying, of course, that right now there’s not a confirmed assistant attorney general for civil rights. Kristen Clarke, who is a former NAACP Legal Defense Fund Lawyer as well as a former head of the New York State Attorney General’s Civil Rights unit and has been most recently at -- and is at the lawyer’s committee, is a nominee of the department.
She, like Vanita Gupta, who now has been confirmed to the Justice Department, she is receiving a lot of opposition. Part of her opposition is right-wing conservatives claiming that she wants to defund the police. She says that’s not what she said and certainly not what she meant, but the nomination has been held up, up until now. My hope is that Kristen Clarke, who is an excellent public servant, will be confirmed soon.
Voter suppression issues, they’ve been percolating for quite some time, and in the aftermath, again, of the insurrection, we’re seeing a great deal of action at the state level with respect to proposed legislation that will make it more difficult for individuals to vote, and we could say a whole lot more on that. I think that’s going to be a priority. I know it’s going to be a priority within the Justice Department under the Biden administration.
And we’re likely to see a lot more litigation to protect the right to vote, although, given the decision in Shelby County v. Holder in 2013, some of the protections that existed before have been stripped away, so it’s more difficult to protect individuals from being discriminated against in the exercise of their right to vote.
And I want to perhaps -- there’s a lot more I could say, but I want to mention that the Justice Department has gotten involved in protecting LGBTQ individuals, in particular, a case in which a trans woman was repeatedly raped in a Georgia men’s prison. I except we’re going to see more of those types of issues percolating up through the Justice Department.
And finally, I think many of us have our eyes on the Harvard and the UNC admissions cases and other challenges to admissions, diversity efforts, etc., in which the Justice Department Civil Rights Division will take a different position than the department and the administration under the administration of President Trump.
So I’ll stop there. I could say a whole lot more about that, but I want to stay somewhere close to what I promised.
Hon. Kenneth L. Marcus: Eric Dreiband.
Eric Dreiband: Well, thank you, Ken, and --
Prof. Theodore M. Shaw: -- I’m sorry, Eric. I was supposed to do that. Eric Dreiband.
Eric Dreiband: That’s all right. That’s okay. Let me start, first of all, by thanking Ken, and The Federalist Society, and Dean Reuter for inviting me to join this distinguished panel. It’s, for me, a real honor to participate with Professor Shaw, and Professor Heriot, and with Art Coleman, and with Ken, who I’ve known for a long time.
I’m going to talk very briefly, basically, three different topics to try to frame our discussion. First, to follow up on Professor Shaw’s remarks about what happened in the Civil Rights Division during my tenure there, secondly, changes by the new administration, and then very briefly, I’ll talk about another civil rights enforcement agency, the Equal Employment Opportunity Commission where, as Ken mentioned, I’d once served as their general counsel. And I want to do that to frame the discussion because I think a lot of what the Civil Rights Division, in particular, is doing will be a continuation of what happened when I served there, and it may surprise some people.
So with respect to criminal cases in the Civil Rights Division, we made the prosecution of hate crimes, in particular, and police crimes a priority of the Civil Rights Division, and in fact, set enforcement records in both areas. So with respect to hate crimes, during my tenure at the Civil Rights Division, prosecuted more hate crimes than it’s done in over two decades, just this past year in 2020, despite the fact that we had difficulties with grand juries in the midst of a pandemic.
And those cases include several race-motivated cases, including the Tree of Life Synagogue case in Pittsburgh, Pennsylvania, where the defendant is alleged to have killed 11 people and nearly killed 7 others. A national-origin and race-motivated case out of El Paso, Texas, where at a Walmart, where the defendant allegedly murdered 23 innocent people and several dozen others were injured. And, of course, in Charlottesville, Virginia, we successfully prosecuted and convicted a white supremacist there who killed one individual and [injured] several dozen others after the Unite the Right rally occurred in 2017.
We also prosecuted—and this may surprise some people—more color of law crimes than ever in the history of the Civil Rights Division during my tenure. These are cases that typically involve law enforcement who engage in excessive use of force, often resulting in death or serious bodily injury to victims of these kinds of crimes.
In other areas, sexual harassment, we set records with respect to the Fair Housing Act, sexual harassment in housing. We also prosecuted sexual harassment civil cases involving Title VII of the Civil Rights Act and Title IX of the education amendments involving public schools.
And then with respect to racial justice, this was something that I stressed as a priority during my tenure. We prosecuted all kinds of cases under the Fair Housing Act with respect to housing, racial steering, lending under the Fair Housing Act and Equal Credit Opportunity Act, race discrimination voting under the Voting Rights Act under Title VI of the Civil Rights Act, race discrimination in college admissions, among others.
With respect to religious liberty, we had something called the Place to Worship Initiative, where we significantly increased the number of investigations and lawsuits brought on behalf of victims of religious discrimination. Our cases involved Buddhists, Christians, Hindus, Jewish people, Muslims, Native Americans, and many others. And, of course, prosecuting anti-Semitic and other kind of religiously motivated hate crimes was a priority of the department and of the Civil Rights Division.
Prison reform is something that we did all around the country, including filing suit against the cases pending now against the state of Alabama for guard-on-prisoner and prisoner-on-prisoner excessive force. We prosecuted civilly state prisons for sexual abuse of female prisoners and juvenile justice systems to keep youth safe.
We also prosecuted civilly cases that involved immigration discrimination, including our Protecting U.S. Workers initiative. Now, this was something involving employers that abused temporary foreign visa programs by discriminating against U.S. workers.
We increased significantly our human trafficking prosecution unit by a fairly substantial number, and that was a three-year plan that remains in place to increase every year the number of prosecutors dedicated to prosecuting sex and labor trafficking cases. And we brought 100s of those cases during my tenure at the division.
On disability rights, we successfully settled cases involving the State of West Virginia involving children throughout the state, Amtrak involving accessibility of their train stations throughout the country, the State of North Dakota involving individuals with disabilities. And in Voting Rights Act, our cases included a huge case against Harris County, Texas.
We also successfully defended in court protections against coercive abortions for women and their unborn children who are diagnosed with Down syndrome. And we spent much of last year prosecuting cases civilly involving COVID-19 restrictions that infringed upon civil liberties around the country, including First Amendment rights to free speech and the free exercise of religion.
With respect to changes that have already occurred, I think a couple of things I want to mention, six of them, real quickly. One, the department rescinded a memo issued by Attorney General Sessions involving long-term consent decrees in state and local government institutions, so the internal approval process at Justice will be different than it was during the previous administration.
The administration rescinded a memo that my immediate successor signed late in January that dealt with the extension of Title VII sexual orientation and transgender protections to other statutes. So it’s unclear what the department will do with that, but there was a memo issued after I left the department extending the reasoning of the Supreme Court in the Bostock case, under Title VII, to other statutes, like the Fair Housing Act.
Transgender athletes—I think Art may talk about this later, maybe Gail will—the department has changed positions. The department filed a brief in a pending Ninth Circuit case involving whether or not a state law can mandate athletic participation for people of their biological gender, and the department withdrew that brief.
In voting, there’s a case pending at the Supreme Court of the United States called Brnovich v. Democratic National Committee. That case involved out-of-precinct voting and ballot harvesting limits by Arizona State law and whether or not those restrictions violate the Voting Rights Act. And just to be clear, that case is pending. I was fully recused from that case when I was at the Department of Justice. I did not participate in it because my current firm represented one of the parties. In any case, the department indicated in its withdrawal of the brief that it disagrees with the framework of the brief but not the conclusion of the brief.
The department, during my tenure, filed a lawsuit against Yale University for its college admissions, alleging that its admissions violated Title VI in the Civil Rights Act with respect to race and national origin discrimination. The department dismissed that case, and then finally, the final change involved the filings about the pandemic-related restrictions. So far, we’ve not seen any, that I’m aware of, anyway, similar types of challenges since the new administration took into effect. There will be other changes, and Professor Shaw, I’m sure, will talk about them as well.
At the EEOC, one thing I should mention briefly, is there was actually, during the 2017 to 2021 period, a fairly significant increase in both the number of lawsuits filed and recovery. So the number of lawsuits went up in that four-year period by 27 percent, and recovery increased by 34 percent over the prior four-year term. With respect to policy at that agency, I think it remains to be seen, primarily because of the five commissioners. It is a bipartisan commission. Three of those five commissioners are Republicans, and the earliest that the commission will change will be in July of 2022, when current Commissioner Janet Dhillon’s tenure expires, unless President Biden removes her earlier than that or she resigns.
We did have an unusual event happen at the EEOC as well, when the general counsel left the agency after President Biden fired her. There had been some other internal operating procedural changes at the EEOC. I think the most important for anyone who has a case pending there is that the litigation approval now rests entirely with the commissioners. That is a sea change from the last 25 years or so, so that anybody that has a pending lawsuit at the EEOC can go directly to commissioners now as opposed to the authority that the general counsel had.
So I’ll leave it there for now, and look forward to a spirited discussion. So from me, I think, Art, I’ll turn it over to you.
Art Coleman: Thanks, Eric, I appreciate it. And thanks, Ken, for your kind introduction, and to The Federalist Society for inviting me today. It’s a privilege to be here with this panel.
I’m going to pivot pretty quickly to Department of Education issues and, in particular, focus on Title IX which prohibits the discrimination based on sex within any institution that’s a recipient of federal funds. For starters, I think it’s very clear -- and by the way, Ken, good timing because there’s been a lot of news about the Office for Civil Rights and the Department of Education in the last week on this front, in particular. What’s very clear is issues of sexual harassment, sexual violence are going to be central and a priority to this administration, as they were, in fact, in the last administration, but with some consequential pivots to come.
We saw an executive order by the president in early March telegraphing this intent around emphasis. And just yesterday, as part of the implementation of that executive order, the Department of Education announced it’s going to hold virtual public hearings on issues of policy and enforcement of sexual harassment under Title IX in early June.
I want to talk about the two points of focus that it telegraphed in that context. One, looking at the 2020 amendments to the regulations promulgated by the Trump administration and issues of sexual orientation and gender identity under Title IX.
Before I go a little deep on substance on each of those, I want to make just two big picture points, one kind of a soapbox for me. I hope on this set of issues -- and as Ken kindly noted at the outset, but he said it better than he might have, I’m old. I’ve been around for a while, both within and then watching and being part of conversations on issues of policy on this front. And I hope, to the extent that it’s feasible, we can park politics at the door and focus on real students, and real harms, and real evidence about the consequences of policy shifts in multiple directions so that we actually understand the issues, the harms, and the science, by the way, that undergirds what I think are really important judgements.
The second big picture point I want to make before I dive in a little bit into substance is that last week, the Biden administration announced that Catherine Lhamon would be its nominee for Assistant Secretary for Civil Rights, and that’s a notable action because she was also the Assistant Secretary for Civil Rights in the latter stages of the Obama administration. So one might presume that this is going to be Groundhog Day all over again, and my guess is that Ken can probably respond to that better than I can because he had two separate stints in that position over his tenure.
But the point I want to make is that 2021 is not 2012 for a couple of important reasons. Number one, we are dealing with a very different legal landscape with very consequentially different precedents in the federal courts, that I’ll address a little bit, that I think sets a very different foundation for decision-making.
Two, as I’ve alluded, the Trump administration promulgated for the first time in the history of the department Title IX regs that reached the question of sexual harassment and violence, and that’s a positive, in my view. It gives it more power in that zone, but it also is a very different context than the context in which Assistant Secretary Lhamon previously—and assuming she’s confirmed—would again be operating in a context that the foundation for Title IX sexual harassment guidance was actually guidance we promulgated when I was in the department in the mid to late ’90s and into 2001.
And the third point I want to make is -- and this is often, I think, missed in the context of these issues that really do address harms to students, physical harms, psychological harms, educational harms. Scientifically, we know more. There is just a bit bigger body of evidence, and I would simply call out if you have not looked at the National Academy of Science’s 2018 report on Sexual Harassment of Women: Climate, Culture, and Consequences. It is a tome of very rich information, principally focused in the post-secondary context. But it’s a very rich foundation to think about these issues, so I’d offer that, for what it’s worth.
And so with that background, let me offer two points, one addressing the question of sexual harassment in general, and then one turning to issues of transgender and lesbian and gay students. So we’re dealing now with the context where the Trump administration proposed these regulations. And as I said, I think elevating the issue to the question of regulatory status, was it positive? And as was, at least, conceptually, its focus on issues of due process for the accused, which I think had been both underattended and insufficiently attended in prior administrations. And I think conceptually, at least, that’s good.
But in the wake of those regulations, a number of issues have surfaced, and time won’t let me tick through all of them. But I would anticipate, as part of this public comment period and whatever other activity the Biden administration may take on the issue of sexual harassment, we will see attention focused on, one—and I’m just going to lift up three here—the scope of the definition of sexual harassment.
The Trump administration narrowed the scope of that definition to conform more in line with Supreme Court precedent and the historical enforcement standard that the department had adopted back in the mid ’90s that then tracked a legal standard that was in place. And I think there’s some interesting questions about how different the two standards really are, in effect, and so that should be a question that everyone is watching.
Second, the 2020 regulations shifted materially the required notice sufficient to trigger an obligation by an institution or a school to respond to an incident of sexual harassment in very simplistic terms. The standard is now actual knowledge by a Title IX coordinator or an official with a specific authority, when before it was whether a responsible employee, whether they were in an official position or not—they could’ve been a professor or a teacher—knew or should have known about that harassment. So there’s a big gap there in that, and I would expect that to be an issue.
And then third, the issue that I raised that I think is both consequential and complex, and I often find that the headlines on the right and left of this issue at the extremes tend to get it wrong because there’s a lot of nuance, and there’s a lot of context here. But getting to the question of due process for the accused in assuring that there are appropriate protections while ensuring full enforcement of Title IX to protect those who have been victims or alleged victims of harm.
And I would just say there, there’s a real question in my mind about the way the regulations may have removed important discretion for institutions and schools to address some of these issues, particularly at the post-secondary level where institutions attempting to do the right thing might want to really invest in community building and restorative practices. And some of the requirements that are mechanical or more detailed and put it more in a very legalistic frame may undercut that effort, and so I think that’s going to be a challenge.
To shift quickly to the issue of LGBTQ+ rights, building on my theme about Groundhog Day all over again and this not being that because of context, what’s very different in 2021 than in 2008 or 2012 is that we now have five or six, by my last count, federal circuit court decisions in what is an unbroken string of cases since, I think, around 2015 or 2016 that have ruled in favor of inclusive prop policies for transgender students, sometimes in support of district policies challenged by opponents, and sometimes against the districts that had restrictive policies deemed discriminatory.
And that’s a very different landscape than the Obama administration faced when it first issued Dear Colleague letters, where it was really the front end of the ski, if you will, on that front. That collection of cases is further bolstered by the decision in—Eric mentioned earlier—the Bostock v. Clayton County decision of last term that recognized that discrimination, quote, unquote, “because of sex” under Title VII included protections for LGBTQ individual employees. And the question is now, what’s the implication there for Title IX?
I would simply call out, for decades, the courts have considered the “because of sex” standard under Title VII to be the functional equivalent of the “on the basis of sex” standard for Title IX. Some of the later cases on this front, post-Bostock, have actually recognized that point. But you can see a trajectory there, even though the Court was very careful to say, “We’re not reaching those other questions today on a number of fronts,” including some that would implicate fact questions that they could not reach.
I will note in the regulatory context, as robust as the Title IX regulations were in the Trump administration, they punted on the question of defining “sex” in the “on the basis of sex” context, did not recognize or incorporate any of those cases that were being decided along the way. So there is a major gap in that regulatory frame, and I would certainly expect the department to address that as it moves forward.
So let me stop there and pass the baton to Gail. Hi, Gail.
Hon. Gail L. Heriot: Hi. Thank you so much. I know that many people, including some conservatives, voted for Joe Biden because they judged him to be middle-of-the-road, at least from his campaign rhetoric, and many of our viewers may be among those. But I think it’s important to recognize that middle-of-the-road is not what we have been getting so far, at least on the issues that I’m most familiar with.
On those issues of race, sex, and ethnicity, I think the Biden administration is leaning heavily to the left. Biden’s appointments to major civil rights positions make that clear. But it’s the policies, not the personalities that we’re talking about right now. Alas, I only have eight minutes here, so I won’t be able to get to everything, but I hope to be able to point out a few of these.
First, on the issue of race preferential university admissions, Biden’s Department of Justice withdrew the Trump administration’s support for Students for Fair Admissions. That’s the group that is suing Harvard for discrimination against Asian Americans. Students for Fair Admissions has a cert petition currently pending in that case against Harvard.
I don’t think I know for sure, anyway, whether the Biden administration will affirmatively weigh in on Harvard’s side in that case since those briefs are not yet due. But what we do know for sure is that it has withdrawn support for the Asian American group. Meanwhile, the Biden administration has abandoned a similar lawsuit that had been filed by the Department of Justice during the Trump years alleging discrimination against Asian Americans by Yale University.
Now, the abandonment of Asian Americans at Harvard and Yale doesn’t really surprise me. Democratic administrations have long supported race preferences in university admissions, and that pretty much guarantees discrimination against Asian Americans. On the other hand, the Department of Education’s proposal to give funding priority to schools that adopt critical race theory curriculum in history and social science, that did surprise me. That’s a real lurch to the left, and so I suppose that’s my second example.
The Biden administration’s proposal explicitly mentions the 1619 Project, and it’s the curriculum that has been developed surrounding it as the kind of curriculum that they would like to give funding priority to. It’s seeking comment on that proposal now, and I hope a lot of people do file comments. I think they might be due tomorrow.
What exactly is the 1619 Project curriculum? It is the curriculum that was developed to promote the New York Times 1619 Project. So if you read the New York Times, you know a lot about that. That project purports to date our nation’s founding not from the American Revolution, Declaration of Independence, or the ratifications of Constitution, or the Mayflower Compact, for that matter, but rather from the first year that African slaves were brought to America.
The 1619 Project argues that all American institutions are fundamentally infected with slavery and that the American Revolution was fought to prevent the British from abolishing slavery. Hence, everything the country purports to stand for really is just a cover for slavery and for racism. Some of our country’s most distinguished historians -- and I’m not just talking about conservatives here. Sean Wilentz, Gordon Wood, James McPherson, they have condemned the 1619 Project as inaccurate historically and overly focused on race and slavery.
Frankly, it’s a bit shocking to me that any administration would threaten to make that kind of curriculum preferred for young minds. If the rumors are true on all of this, the Democratic Party political strategists are already starting to warn office holders that storm clouds are on the horizon. Voters are not nearly as enamored of wokeness as some have thought.
A grassroots movement has sprung up nearly overnight to oppose the 1619 Project curriculum and similar critical race theory training in general, not just at the federal level but also at the state and perhaps more importantly at local levels. It has already started affecting school board elections. It already has been persuading state legislatures to take some action, some of which is better thought out than others.
The other political storm cloud on the horizon is connected with the overwhelming defeat of California’s Proposition 16. That measure would have repealed the provision of the California Constitution that prohibited, among other things, race-based preferences in state university admissions put there in 1996 by a state popular initiative. And that repeal effort was generously funded by some of America’s largest and wokest corporations, and yet, it went down in multi-million-dollar flames.
I co-chaired both the original voter initiative back in 1996 and the “No on 16” campaign this past year, so I suppose that you could say that I have a personal incentive to tell you that Prop. 16 was defeated because my colleagues and I are just political geniuses that knew exactly what to say to persuade California voters about an initiative they might not otherwise have taken much account for. But let me tell you something. We are not political geniuses, and what’s more, we were outspent by about 16 to 1.
The one and only reason that we won that initiative was that most Californians, even in deep blue California I’m talking about, agreed with us and always have on that issue. Race preferential admissions are very unpopular in polls, especially if the issue is explained so the people know exactly what you’re talking about rather than using euphemisms.
So that’s not new, but what is new is how Asian American voters are utterly energized on this issue, and not just in California now. And they are very much aware of the Biden administration’s abandonment in the Harvard and Yale cases. So those are two issues where the Biden administration is very much to the left, not just of voters in general, but of energized voters.
Of course, there’s a lot more that’s coming up on the Biden administration’s agenda on the issue that’s been getting a lot of attention, and I think deservedly so, that is the fate of the Trump administration’s efforts mainly to give due process rights to students accused of Title IX sexual assault. And as many of you know, there was a series of guidances, beginning with the Clinton administration, that essentially required colleges and universities to follow certain procedures. One was to employ proponents of the evidence standard rather than a clear and convincing evidence standard in determining whether or not a student has committed a sexual assault.
To me, at every turn, the old guidances were imposing procedures that made it difficult for a young man—and it usually would be men—to defend themselves when accused of sexual assault. Even Justice Ginsburg said that she thought that there were some problems. I, myself, have spoken to several young men who, in my opinion, have been wrongly accused, but who were nevertheless punished for a sexual assault that I do not believe they committed.
The Trump administration tried very hard, I think, to do the right thing. Unlike previous administrations, it employed the full notice and comment procedures as required by the Administrative Procedure Act to promulgate actual regulations, laying out, in this case, minimum due process rules for those who are accused. Title IX activists have been calling for the repeal of those regulations ever since.
And now the Biden administration has set in motion procedures that could lead to exactly that. We don’t know for sure. Hearings are going to be followed presumably by preliminary proposals. It may take a long time. These procedures do tend to take a long time, but, given that the Trump administration did promulgate these as regulations, the Biden administration has to go through the same procedures now if it wants to repeal or modify them. I’m not optimistic about how that will turn it out, but we’ll see.
On school discipline, the Biden administration has now sponsored a web event that points very strongly towards the likelihood that they will at least re-institute the Obama-era policy and quite possibly extend it, I believe, by emphasizing disability, that is disparate impact in disability, rather than emphasizing just race. I consider this to be hugely important, the school discipline issue, in general, and the use of disparate impact, in particular.
Students don’t learn in chaotic environments, and efforts to exert federal control over school discipline during the Obama administration, I think, led to exactly that in many parts of the country. I will be glad to elaborate further in the question and answer period on why I think that is contrary to the law under Title VI if anybody wants to ask me about that.
On transgender issues, President Biden signed an executive order—I believe it was actually signed exactly on inauguration day, so this was a high priority—directing his administration to look very closely at transgender issues. So far, it has backed away from the Trump administration’s position that Title IX actually forbids assigning anatomical males to girls’ and women’s sports teams. I am told that there is plenty more to come on the transgender issue.
Interestingly, my read of Bostock and that opinion is that it actually makes it harder, not easier, for the Biden administration to go back to the Obama administration’s insistence that transgender individuals be treated according to their gender rather than their anatomical sex for the purposes of bathroom, locker room, and shower assignment. I don’t have enough time in my little eight minutes to explain that, but I’d be glad to talk about it in the question and answer period. So ask me that if you want to.
And judging from Ken’s look on his face, I’ve probably used up my eight minutes, so I’m going to now turn it back over to Ken.
Hon. Kenneth L. Marcus: Thank you, Gail, although that was a look of gratitude for the excellent presentation that you’ve just given and that the other three have given as well. For members of the audience, you’ll notice that in the upper right hand corner of the screen, you’ll have an opportunity to raise your hand, as it were, in which case we will be able to call on you to provide a question directly. Alternatively, of course, you could continue to use the Q&A box to provide questions.
I’m going to start though, while we’re waiting to see if others raise their hand, by inviting, I would say, in the first instance, either Ted Shaw or Eric Dreiband to address a big picture issue that in different ways, I think, both Art Coleman and Gail Heriot raised, which is, in a big sense, what can we expect from the Biden administration on civil rights?
Everyone has given a large number of areas in which we can expect changes, but overall, overall, is this going to be an extension of the Obama administration? After all, as Art pointed out, OCR, the Office of Civil Rights at the Department of Education, will likely be headed by the very same person who headed it during the tail end of the Obama administration.
And by the way, at the Civil Rights Division, the person who headed that division towards the end of the Obama administration is now overseeing civil rights as the Associate Attorney General. So should we expect essentially more of the same, or alternatively, should we expect something different perhaps because, as Art pointed out, the context has changed? There have been legal cases, for instance, that in some ways provide more running room, and in other ways might provide more constraints, or alternatively, because as Gail pointed out, there might be political issues.
On the one hand, there’s some language from President Biden suggesting perhaps a more unifying or moderate approach. On the other hand, some tea leaves perhaps suggesting a more radical approach. So what should we -- and I know that at least one participant just lost a connection. What should we expect? Is this Obama three, or is it something else? Eric, can I turn to you since I don’t think that you addressed it, and since I don’t think you’ve lost network connection?
Eric Dreiband: Yeah. I have lost it a few times, so I’ll start while we’re waiting for Professor Shaw to rejoin. I think a couple things. One, certainly there have been and will continue to be policy changes that will mirror what we saw in some ways during the Obama years, the sort that Art and Gail described, and that Professor Shaw described, and that I described. There will be changes. Elections have consequences, and there are changes. The landscape is different today, and I think the biggest change that has occurred is in the LGBT area with the Bostock decision by the Supreme Court of the United States last year under Title VII.
That decision issued in June of 2020. When it issued, I instructed the Civil Rights Division team to enforce the law consistent with the Bostock case. And that was happening when I left in January, but I think it does raise questions about the extension of that Supreme Court case to other statutes like Title IX, and the Fair Housing Act, and others. And I expect that the current team will take an aggressive approach on those issues.
I think likewise on things like Professor Heriot said, with respect to racial preferences, there is a clear difference between what we saw when I was at the Civil Rights Division and what has happened since. And the best example is the one that I mentioned, the Yale case. On the other hand, I think a lot of the work of the Justice Department and of the EEOC will continue apace. Hate crimes prosecutions increased significantly during my tenure, for example. I expect that will continue.
Likewise, with human trafficking, sex and labor trafficking, in particular. Those prosecutions will continue. And I think, of course, on issues about police misconduct cases, I think we will see a continuation of what we saw when I was at the department on the criminal side where we, as I mentioned, did set a record on the criminal side.
I think on the civil side, what Professor Shaw, I think, was referring to, I think we will see more pattern or practice investigations of police and other law enforcement agencies than we saw during, for example, my tenure. We did have those cases in various places around the country when I was there. We also took a slightly different approach.
For example, Minneapolis, I think, is a good example. When I was at the department, we worked with the Mayor of Minneapolis and the Chief of Police of Minneapolis to try to propose collaborative work between the Justice Department and the Minneapolis Police Department. The city council, however, despite the support of both the mayor and the chief of police, rejected our offers. And then we saw more recently Attorney General Garland announce the opening of a civil pattern or practice investigation in Minneapolis. I think on those things, we will see changes.
But the bulk of the work, Title VII work, Fair Housing Act work, voting work, hate crime, human labor and sex trafficking, and color of law prosecutions, among others, I think will continue. Same thing with the educational cases involving sexual and racial harassment and things of that nature that we prosecuted during my tenure. And I think those will continue apace, but there will be changes of the sort that Professor Shaw, and others, Art and Gail, mentioned as well.
Hon. Kenneth L. Marcus: So Professor Shaw, I’m not sure exactly when you lost the network connection. My question is, to what extent do you think that this administration would essentially be a continuation of what we saw under the Obama administration in civil rights, or to what extent would it be different either because of different legal context or different political context?
Prof. Theodore M. Shaw: Well, let me first say that I don’t think the -- with all due respect, I don’t think the question is whether it’s going to be resumption of the Obama administration. I’m not sure that that’s -- I don’t think it’s the right frame. There’s been, for decades now, back and forth between various administrations on civil rights policy, sometimes more extreme swings and sometimes less so. But I think the question is going to be where this administration fits with respect to civil rights enforcement that has been underway since the late 1960s.
Yes, this administration is going to be more similar to the Obama administration, and for that matter, to the Clinton administration, and more similar to other administrations where the Democrats have held the White House than the policies and practices under Republican administrations. I’m not going to attempt to go jot by jot with respect to the wreckage that, with all due respect, Eric Dreiband claims have been said.
I will refer you to the Leadership Conference for Civil and Human Rights and suggest that there’s a year-by-year accounting of civil rights policies and practices during the Trump administration. And this is going to be a very different administration with respect to those issues.
For me, one of the big issues, you can talk about the Yale case and the Harvard case and refer to them as cases involving issues of preferences and abandonment of Asian American students. That’s a much more complex position. Not all Asian American students, even at Harvard, support the lawsuit brought by the challenges to Harvard’s diversity programs.
And I think we’re going to continue to see big differences with respect to this administration and supporting programs and efforts that open up opportunities for African Americans and other people of color. That’s what’s being abandoned, or was abandoned, by the Trump administration. And I know, Gail, with all due respect, we continue to have and will continue to have big differences about those issues. So look at the leadership conference record.
I also want to point out with respect to voting rights, there was a Texas case in which the issue of whether changes in political processes should be precleared, and the Trump Justice Department said that they didn’t have to be precleared. And career lawyers at the Justice Department refused to sign on to that brief. And so I’m raising that to say there are real differences. It’s not enough to say that the Trump administration enforced the Voting Rights Act. There are real differences between that administration and the administrations under Obama and would’ve been in previous years, including some of the Republican administrations with respect to the Voting Rights Act.
I, Gail, would love to engage with you some time about the 1619 Project, although I don’t think that’s the stuff of the Justice Department, which is where I focus. I will simply say that Americans, from the time I was a child and way before that, were taught about American history going back to Plymouth Rock, and they weren’t taught about black folks, and Jamestown, and 1619.
It’s quite interesting, and that’s the kindest I can put it, to see the kinds of opposition to teaching that full history and suggesting that we shouldn't keep doing when we taught about American history going back to Plymouth Rock. But that’s another conversation that I would love to have with you at some other time.
So I’ll just mention very quickly, HUD, under the Trump administration, gutted the affirmatively furthering fair housing standards. There were attempts to gut disparate impact regs. That I expect to change under this administration and return to what I would consider to be the longstanding purposes of the Fair Housing Act and its regulations.
I’ll stop there quite arbitrarily. I could say a whole lot more.
Hon. Kenneth L. Marcus: Very good. Eric, did you want to reply to the portion that referred to the work of the Civil Rights Division during your tenure?
Eric Dreiband: Yeah. So, yes, I do. Professor Shaw, who I should add, I’ve admired for many, many years, even though I don’t think we’ve actually met until recently. I want to talk about the issue about whether or not we abandoned race discrimination. And I can only speak to my tenure at the Justice Department, which was from 2018 to 2021. And I want to give you a few examples.
So when I arrived at the department, I stressed to every section of the Civil Rights Division the importance of prosecuting civilly and criminally race discrimination cases. And I just want to give a few examples of cases we brought under my tenure.
For example, in California, we sued local government agencies for trying to drive out African American and Latino renters from the town. In Georgia, we sued an Atlanta-based management company for illegally steering African American housing applicants to racially segregated housing. In Indiana, which is my home state, we prosecuted a man for allegedly threatening an African American neighbor by burning a cross, displaying a swastika, and racial slur.
We brought many, many other cases. In Maine, we convicted two men who committed a series of racially motivated attacks against African American men. In Maryland, we successfully sued a car dealer that discriminated against African Americans by offering different terms of credit than offered to white borrowers, and we sued a police department under disparate impact theory for race discrimination in employment against African American victims of race discrimination.
And we brought many cases in North Carolina of hate crime prosecution where the defendant—and we convicted a guy—but a defendant who threatened to shoot an African American family because of the family members’ race. In Ohio, we successfully settled allegations by African American students of race discrimination by a school district.
In South Dakota, we successfully sued state and local agencies that discriminated against Native American job applicants and deprived Native American voters voting rights protections. In Virginia, as I mentioned earlier, we convicted a white supremacist who killed an individual and injured several others. And so these are just a few of the cases that we brought.
And so while I do agree that the current administration, on some issues, will take a different approach than we took when I was at the Justice Department, I do not agree, respectfully, that we abandoned race discrimination prosecutions, either civilly or criminally. We brought many, many of those cases, including, as I said, against law enforcement officers both in prisons and jails, and police officers that patrol the streets. We brought many, many of those criminal prosecutions successfully and, in fact, set a record there.
So I’ll leave it at that, but I did want to respond just to that one. But I do agree with Professor Shaw, there are differences, obviously, that the new administration is taking and will continue to take.
Prof. Theodore M. Shaw: Ken, if I can just say, first, let me thank you for your kind words, Eric. When I talked about and I used the term abandoning the effort to fight discrimination against African Americans, I think I said it, and I intended to say it, particularly in the context of the higher education cases opening up opportunities to black and brown students in higher education. That’s what I think is an abandonment of opening opportunities for black and brown folk in the name of so-called reverse discrimination.
And with respect to suits that under your administration or the Trump administration that brought racial discrimination against African Americans and anyone else to the extent that those suits were filed and pursued, then I would commend that. But I’m still compelled to point out the irony, and I’m not saying, Eric, this was you, but the head of the Trump administration, President Trump himself, the irony of his role in the Charlottesville violence.
And so, yes, you can talk about what the Justice Department may have done in the aftermath of that. But in the first instance, the president, the head of that administration, was on the wrong side of that issue when he talked about good people on both sides, etc. And in my view, he promulgated a great deal of racism right on up through the election and the January 6 insurrection. I’m not asking you to respond to all that because I’m not really attacking you for that. But I’m saying that the head of that administration, President Trump himself, does bear responsibility for that.
Hon. Kenneth L. Marcus: So I’m sure we could --
Eric Dreiband: -- Well, Professor Shaw, I can only speak to what I did, so…
Prof. Theodore M. Shaw: I get that. I understand that.
Eric Dreiband: Yeah. No, I understand. Let me just say, my nomination was pending when Charlottesville happened in 2017. I pledged, after Charlottesville, while my nomination was pending, that if confirmed, I would do everything I could to bring white supremacists to justice, including in Charlottesville.
Having said that, I also said I have not prejudged that case or any other case. We did, as I say, convict the individual who killed an individual and injured dozens of others during the Unite the Right rally. And working with the FBI and the U.S. Attorney’s Office in Charlottesville, we prosecuted many other people for criminal misconduct related to that as well, successfully.
So I’m not going to get into anything about President Trump. I’m just going to talk about what I did and worked both with the FBI and the career professionals in the Civil Rights Division to bring white supremacist violence to justice, those who committed such violence to justice. And we did that, in my view, successfully. And the Civil Rights Division, and the U.S. Attorney Office, and FBI, I’m confident are continuing that work even currently and will continue that into the Biden administration.
Hon. Kenneth L. Marcus: And returning to the Biden administration, one of our audience members invites further discussion of Kristen Clarke, the attorney who has been nominated to head the Civil Rights Division at the Justice Department, the position that Eric Dreiband previously held. Professor Shaw had made some remarks favorable towards Kristen Clarke. The questioner invites any other comments that people have on this pending nominee.
Hon. Gail L. Heriot: Nobody wants to comment on personalities, I think, including me.
Hon. Kenneth L. Marcus: Okay. Fair enough. Again, for members of the audience who choose to raise their hands, you’ll have the opportunity to ask questions directly.
The 1619 Project, Professor Shaw mentioned that it’s not related to the Justice Department, but as Gail Heriot mentioned, there is a request for comments that is open. It’s from the Department of Education, and it refers to procedures involving grants that are outstanding. Given that this is a very timely—two of our speakers have addressed the 1619 Project—I’ll invite if there’s any other further discussion about the approach of this administration towards the 1619 Project in general, or in particular with respect to this grant program for which there is an open request for comments due. I think it may be tomorrow.
Hon. Gail L. Heriot: Yeah, I think it is tomorrow. I want to say that I don’t think that Ted and I are quite joining here in the sense that he’s saying quite correctly that the history of African Americans, the history of slavery, is important to American history and needs to be taught, but that’s not what the 1619 Project curriculum is all about. It’s all about, instead, conceptualizing all of American history in terms of slavery and relating every aspect of history is simply somehow connected to keeping slavery going.
The argument that the American Revolution was inspired not by a love of freedom, not by a belief that taxation without representation is wrong, but rather as an effort to bolster slavery, a fear that the British government would have abolished slavery. And again, some of the most distinguished historians in the country -- and again, they’re not conservatives. Nobody would say that Sean Wilentz is a conservative. He’s the guy that posed the question, “Is George W. Bush the worst president in history?” And he seemed to think there was a case for that.
James McPherson has been very much upfront on the notion of not honoring confederate memorials. I don’t believe he sees himself as right of center. And they have agreed that this is simply bad history. This was not the case. This is not an appropriate way because it’s not a truthful way to look at a much more complicated world. You can’t really boil everything down to support for slavery.
That is not the only thing that ever happened in American history, and yet, that’s what the 1619 Project says. It’s saying that American history really begins at that moment that slaves are first introduced into the colonies. And Ted, I don’t know whether they taught about that in your school, but in elementary school, they did indeed teach me that 1619 was the date that the first slaves arrived in Virginia, and it’s not a happy moment in history. It needs to be taught, but it’s not the center of all American history. And for the Biden administration to be considering prioritizing that kind of curriculum for students, I think that speaks of a very strong lurch to the left.
I don’t believe that we’re talking about a continuation of the Obama administration. It is a different world now. And that different world includes a lot of elites quite wedded to the notion of wokeness. I don’t think the average American is wedded to that notion, and I don’t think it’s a good direction to go into, but it does seem to be what the Department of Education has in mind, at least with that particular program. And so I think it’s extremely telling.
I hope that many people comment on this, and I hope that the Biden administration is persuaded not to go in that direction. But I don’t want to suggest that’s the only area in which the Biden administration has gone further to the left, I think, than the Obama administration. For one thing, I think, on the school discipline issue, there’s a lot of interest in the notion of disparate impact based on disability status. The point is being made by advocates, left of center advocates, that disabled students are disciplined in school more often than non-disabled students.
And I think the average American hears that, and they think, “What? They’re suspending children in wheelchairs?” But no, that’s not what it’s about. What it’s about is the fact that some disabilities are diagnosed on the basis of misbehavior. And so when we say that disabled students are disproportionately being disciplined, what we’re saying is that for that kind of disabled student, those whose disability is essentially, yes, they misbehave more often than the average student, of course, the numbers are going to be higher. And they’re doesn’t seem to be an understanding of that in some of the people that have been discussing this issue, quite shockingly, I think. And that again, I think, is a rather strong lurch to the left.
Then you get programs like the Small Business Administration is right now administering a program that I think is called something like the Restaurant Relief Fund, and they have explicitly given priority to restaurant owners who are female or who are members of racial minorities. If one can classify oneself as socially disadvantaged, one also can get priority, but socially disadvantaged is defined in terms of race, ethnicity, or culture, and hence, we’re back to the white male who owns a restaurant has to get at the back of the line. And the law is now riddled with this sort of thing, particularly COVID relief, and I think it’s a serious problem.
Prof. Theodore M. Shaw: So Gail, very quickly, I don’t think Nikole Hannah-Jones said -- although, I think she probably may have tweaked some of the things that she said. But I don’t think she claimed that all of American history is only about slavery and that legacy and history.
Hon. Gail L. Heriot: You might want to look at her original version of this. It was very, very strong in that direction. It takes a lot to get these historians to say, “Look, this is just wrong,” but they were able to do it with this.
Prof. Theodore M. Shaw: Yeah. Well, that doesn’t necessarily mean that the historians -- and I’ve read McPherson, and I admire his work. I like his work. But I also believe that slavery has been central to the American story, and if you don’t agree with that, we can have that conversation.
Look, I love this country, but I love it critically. I’ve said this many times. I love it more often, sometimes, in spite of what it has been, not always because of what it has been. But the story that has been told or aided in the 1619 Project is an important and central story to America. And it’s very interesting to see the kinds of reactions that people have, how virulent the reaction has been to that telling and that story.
So as I said, I’d be happy to take you on on this some more. I don’t think that slavery has been the entire American story, but for goodness sake, it was the issue over which our country was almost stillborn with respect to the Constitutional Convention. It is the issue over which we fought a civil war, and it’s the issue over which we continue to struggle with respect to its legacy even today. And if people don’t think that and believe it, that’s their right. I disagree.
Hon. Gail L. Heriot: Yeah. But the thing is I think that we may actually agree a lot more than you realize. It depends on what you mean by central. If by central you mean it’s the only thing, then, no, I disagree with you. If you mean it’s an important thing, then, of course, I agree with you.
But what I’m saying is you’d be surprised. If you look at that 1619 curriculum, it’s not a question of this is an important thing in our history. I think everybody agrees on that. I think everybody wants to know the history of slavery to be taught. They want to talk about these things, not just in history class but in civics class. It’s important.
But there are limits, and the 1619 Project has gone past those limits. And I think that’s why you get the most important historians in the country saying, “This is simply inaccurate history to teach the American Revolution as being primarily a question of trying to defend slavery against the belief that the British might terminate that slavery.” That’s just not accurate history, but that doesn’t mean that we don’t agree on the importance of slavery.
And, I think, I suspect we actually do because I think, weirdly enough, you and I agree on a lot of things. That’s why I want to get you out to the University of San Diego for a summer so that we can spend more time talking about these things. I brought you up to our associate team recently, and she was kind of excited about it. So we don’t have any money right now, and that’s why you haven’t already been invited.
Prof. Theodore M. Shaw: Well, Gail, that’s all right. I’m not traveling yet anyway.
Hon. Gail L. Heriot: Soon. Soon.
Prof. Theodore M. Shaw: But I’ll see you there some time. And as I said, we can take this on some more.
Hon. Gail L. Heriot: You bet.
Hon. Kenneth L. Marcus: Another audience member invited further discussion of hate crimes prosecution. The question was aimed at Eric Dreiband in the first instance, and specifically, the question was why was he spending so much focus fighting hate crimes during the Trump administration when those crimes are already illegal under state law? So an invitation to discuss the importance of prosecuting hate crimes.
Eric Dreiband: Okay. So both Attorney General Sessions and Attorney General Barr made prosecution of hate crimes a priority. There are multiple federal hate crime laws, and there is a federal interest in prosecuting hate crimes and the work those laws reflect. There is also a policy at the Justice Department known as the Petite Policy that involves various evaluations when there are also state law charges to be brought, and we often did, and the Justice Department continues to this day, to defer to state criminal prosecutions of particular hate crimes.
So there is a judgement call when that happens that the department has engaged in for many years prior to my arrival, when I was at the department, and that continues, where there are times when the department will stand down and defer to state criminal prosecutions of hate crimes, and that’s true of other crimes too. It’s true of color of law crimes as well, involving police officers and so forth.
What we saw, though, was that there were cases, many cases during my tenure at the department, where in consultation with Attorney General Barr and others, as well as the career prosecutors in U.S. Attorney Offices and at the Civil Rights Division, where we concluded for various reasons unique to each particular case that there was a federal interest involved in prosecuting a particular crime.
So, for example, when an individual drove 10 hours down to El Paso, Texas, to murder dozens of people and, in fact, killed 23 people and nearly killed several dozen others at a Walmart because that defendant, as alleged by the government, was upset about people crossing the border from Mexico into Texas, we felt that in addition to state law charges that federal law charges where appropriate under the department’s Petite Policy. We evaluated each case on its own merit based on the standards that govern each case.
Hon. Kenneth L. Marcus: Thank you. We have just a few minutes left and no hands up. Do any panelists have any further remarks they would like to make?
Eric Dreiband: Ken, let me, if I could, respond to one point that I don’t think I’ve directly addressed to Professor Shaw about the alleged abandonment of opportunities for students in higher education. So first of all, we did bring Title IV, desegregation, race discrimination cases all across the country involving race where the victims were African American students, number one.
Number two, I think with respect to, I think, as Professor Shaw cited, the Harvard case where we were amicus in support of the plaintiffs, I think it’s important to understand that any use of race under currently existing law must be narrowly tailored. And what we found in the Harvard case was that the class of plaintiffs, Asian Americans, were experiencing race and national origin discriminations. This was not an attack against African American students or anything of that nature in that case. It was rather, based on the evidence we had in front of us, concluded that Asian Americans were being victimized in their case.
Prof. Theodore M. Shaw: Well, Eric, again, the Justice Department under the Trump administration supported the plaintiffs who brought the suit against Harvard. Harvard, as you know, was held up in the Bakke case in 1978 as an example of diversity pursued in a way that was not only defensible but that was constitutional. And then, of course, in 2003, in the Grutter case, once again the Supreme Court referred back to Bakke, and mentioned the Harvard diversity plan, and took no issue with it.
Look, Ed Blum, who, as you know, is responsible for bringing the Harvard case, the case against the University of Texas, and, for that matter, who was responsible for bringing the suit that invalidated the operating mechanism for the Voting Rights Act Section IV, and therefore undercut Section V review, and we can see what that’s led to now. Ed Blum is opposed to any conscious efforts which end up opening opportunities or supporting opportunities for African Americans [inaudible 01:31:07].
So when the Trump administration came down on that side, in my view, it’s coming down on the side of those who are trying to close the doors of opportunity to conscious efforts to admit and enroll African American, and Latino, and other students of color. I get it. You disagree, but that’s my view, and we disagree about that. Ed Blum is no friend of opportunity for black folks.
Hon. Gail L. Heriot: Can I add something here, as long as we’re talking about the Bakke case and how Justice Powell’s opinion endorsed the Harvard method of admissions. That’s because you didn’t know the history of it. The Harvard admissions policy grew out of their efforts to exclude Jewish students in the 1920s by saying that we want geographical diversity. What they wanted was not so many students from New York because too many of them were Jewish. That’s clearly from the record.
Prof. Theodore M. Shaw: Gail, with all due respect, that history was there. You’re right that that history existed, and there’s been, even at the time of the Bakke case, some of the Jewish groups and organizations came down against Harvard’s diversity efforts. That’s no secret. Now, not all of the Jewish groups and organizations came down opposed to efforts to open opportunities for black and brown students.
But my point is that you’re right; Harvard discriminated against Jewish students at one time. That does not mean that efforts to open up opportunities for black and brown students who historically have been excluded from Harvard and many other institutions is in any way discriminatory and intended to be discriminatory against white students. For goodness sake, we’re talking about low single-digit percent of black students at Harvard and all of these other institutions. Given our history in this country, we can’t stand that. That’s discrimination against white folks?
Hon. Kenneth L. Marcus: That will be the last word as we are now out of time. In a better world, Edward Blum would have an opportunity to respond. He’s not with us today, but I do appreciate the panelists who have joined us.
In a moment, there will be an opportunity to join the lounge where we have virtual tables. I’m pleased to say that all of the speakers will be joining the lounge for at least a period of time following this event.
I’ve also been asked to mention that the next conference event, after the lounge, will be a discussion of “Reputational Risk in Banking: Is Operation Chokepoint the Answer?” That program will begin at 1:00 p.m. Eastern Time, but standby now for the alert directing you to the lounge. Thank you, all.
Financial Services & E-Commerce and Corporations, Securities & Antitrust Practice Groups
|Topics:||Corporations, Securities & Antitrust • Financial Services • Financial Services & E-Commerce|
Beginning with Operation Chokepoint, financial regulators, often boosted by community activists, have introduced social issues into regulation, sometimes under the label “reputational risk,” to discourage banks from serving legal businesses. Emboldened by successes in denying service to industries they disfavor, such as payday lenders, gun shops, and oil companies, groups now pressure banks to deny service to individuals. This panel will discuss the impact of these efforts on public access to financial services, and whether additional market participants, new technologies such as cryptocurrency, or policy measures similar to the OCC’s fair access rule, are called for.
- Mr. Greg Baer, President and Chief Executive Officer, Bank Policy Institute
- Hon. Brian P. Brooks, Former Acting Comptroller of the Currency, Office of the Comptroller of the Currency
- Prof. Christina Parajon Skinner, Assistant Professor of Legal Studies & Business Ethics, The Wharton School, University of Pennsylvania
- Prof. Chris Peterson, John J. Flynn Endowed Professor of Law, University of Utah, S.J. Quinney College of Law
- Moderator: Hon. Sandra Ikuta, United States Court of Appeals, Ninth Circuit
Hon. Sandra Ikuta: Good Morning, everyone. And welcome to our panel Reputational Risk in Banking: Is Operation Chokepoint the Answer? I'm Sandra Ikuta, a judge on the Ninth Circuit Court of Appeals.
Before I introduce the panel, I'd like to begin with some housekeeping items. If you're in the audience you may send text-based questions through the Q&A tab in the upper right corner of your screen. There's also a chat tab for attendees to chat with each other. Don't use chat to ask questions, however. We'll also be allowing attendees to ask live questions later in the program by pressing the raise hand button. You'll need a working microphone to use this option.
Okay, now, to our panelists. I'd like to start just by saying I read the district court's decision in a case challenging Operation Chokepoint with great interest. The district court held that it was plausible, though just barely, that the FDIC had deprived the payday lenders of liberty interest. I think it was this decision that led the government to settle the case and promise that regulatory threats, undue pressure, coercion, and intimidation have no place in the FDIC. So I'm very interested in hearing the behind-the-scenes version of this story with our panelists.
Since you have the panelist's bios in your material, I'll be very brief. Greg Baer is the President and Chief Executive Officer at the Bank Policy Institute. Previously, he served as Executive Vice President and General Counsel of the Clearing House Payments Company, which is the largest private-sector payments operator in the United States.
Next is Chris Peterson. He's a Professor of Law at University of Utah, S.J. Quinney College of Law. From 2012 to 2016, he served as a special advisor at the United States Consumer Financial Production Bureau during the Obama Administration.
Next, we have Christina Skinner. She's Associate Professor of Legal Studies and Business Ethics at the University of Pennsylvania's Wharton School. She was previously legal counsel for the Bank of England.
And finally, we have Brian Brooks, the CEO of Binance United States. He was previously the acting Comptroller of the Currency during the Trump Administration. We'll start with opening remarks from each of the panelists and then give each panelist a chance to respond to the other panelist's remarks. So let's start with Mr. Baer.
Greg Baer: Thanks very much. Very good to be here with you. I should emphasize I'm currently on vacation. I say that only because I want to make clear that the deplorable piece of artwork over my right shoulder is not one I have purchased or leased [Laughter].
With that important caveat, I was going to start off just with a little bit of history on reputational risk. It's sort of a little definitional work. And then maybe lay the groundwork for some of the other panelists. What's really interesting to me — and I've been following this for some time — is that reputational risk really didn't play a role in examination until the 1990s.
I would very much commend to use some work in a recent law review article by Professor Julie Andersen Hill at the University of Alabama, who actually did extraordinary research on this. So I'll quote from her, which I thought was interesting. She said, "In 1996, the OCC rewrote portions of its examination manuals covering credit card lending, mortgage banking, and allowance for loan and loss reserves to include detailed discussions of reputational risk. The other federal regulators also began integrating it into their frameworks. Today, the Federal Reserve's bank examination manual uses reputation or reputational 190 times. The FDIC's manual uses it 50 times. The OCC's large bank examination manual uses reputation 45 times. Even specialized examination manuals, like those for IT and any money laundering, are replete with references to reputation. Impressive, considering that reputation risk was hardly mentioned 25 years ago."
Now, coming forward from the 1990s, over the past 10 years really, the biggest change has been how the agencies enforce their views of reputational risk. Interestingly — again, a credit to Professor Hill — when they first adopted the risk-based assessments, they assured banks that no major changes would be required. Indeed, the OCC even clarified that its examiners would only monitor, not "actively supervise" reputational risk. Clearly, that has changed. You sometimes see enforcement orders that reference reputational risk, but much more importantly is that through the secret examination process, where everything is considered confidential supervisory information, examiners routinely will cite reputational risk as a reason for an MRA or matter requiring attention.
Don't want to get too into the weeds there, but basically, an MRA is a mandate issued through the examination process of something the bank has to fix. It's done outside the public view, and it's really a quasi-enforcement action because a failure to remediate it can affect the bank's ability to grow, its management rating, and can also — speaking from personal experience, although not my personal experience — get the person who's responsible for it fired at the bank. So now, clearly, it is no longer a monitor. This has been, at least since 2010, an active part of supervision.
So an interesting question, why the change in the 1990s and 2010? Here I don't have Professor Hill's rigor, but I do have some theories. First, in the '90s, capital regulation became much more quantifiable and objective -- so less, I think, of an examiner focus. In 2010, consumer examination, interpretive, and enforcement authority was transferred from the banking agencies to the CFPB. So that was no longer, at least by law, part of their mandate. Also importantly, post-2010, in the wake of the financial crisis, banks really lost the power and will to push back too much on examiner mandates. And so really, reputational risk was a way, I think, for the examination teams to remain relevant, to retain authority over consumer, and also to not have to worry about it being reviewed. Again, because this is all going on behind the scenes where we can't see it.
So if to paraphrase love means never having to say you're sorry, reputational risk means never having to explain your rationale. So what exactly is reputational risk? Regulators define it quite broadly, including remarkably listing themselves among the stakeholders whose view of your reputation is relevant. So it's sort of a bootstrapping l'état, c'est moi kind of view of reputational risk. But really it is an exception to the general rule that the focus of examination regulations should be on violations of law or on unsafe or unsound practices that pose a material financial risk, also known as safety and soundness.
And I think as you'll be hearing more from the other panelists, once you remove those two guard rails of legality and materiality, there really isn't a lot to constrain the use of reputational risk as a mandate. And, of course, again, others will cover this more than I -- it's fairly easy for a view of reputational risk to become a rather politicized view, which is one reason I've actually been so critical of it because ultimately there isn't a lot of difference between saying this activity may be legal and it's not causing a material financial risk but it causes a reputational risk in saying I just don't like this. So I think that's been the core concern.
As an aside I'd note — and here I actually did some research — one of the foundational views of this is well, it may not be a present material financial risk or violation of law but still is somehow a safety and soundness problem. There I thought it was kind of interesting to look at the Wells Fargo example, as I think it's clear that Wells Fargo, starting in September 2016 and for the next couple of years, suffered a fairly major reputational damage as a result of some conduct -- won't get into the conduct. But if ever there was a reputational risk event, clearly that was it.
So we went and looked at Wells Fargo's credit default spreads, which is sort of the best market view of its chance of insolvency and failure. And it turns out that during that entire period there was no material impact on it whatsoever. In fact, throughout that entire period, they were trading at near historical lows. So even what I think anyone would acknowledge as perhaps the worst reputational risk event in modern history — in banking, at least — had no safety and soundness impact. So I think that really is a challenge to the notion.
But let's assume counterfactually that this is relevant. The next question is, can bank examiners manage it for banks? Again, I think that's a very difficult position to maintain. I think oil and gas -- again, which will come up -- I think is a great example. Are you in the present political climate of great conflict? Are you at greater risk for banking oil and gas companies, or not banking oil and gas companies, if all you're worrying about is your reputation? In fact, does that depend on the outcome of the midterm elections and the 2024 presidential? And should the banking agencies be hiring political consultants to determine that and make their assessments based on that? I kind of doubt that.
Don't want to be too long. So recent developments -- I think there's some good news, bad news -- this topic actually came up without a lot of notice in the context of a recent agency rule making about what should constitute a material MRA or matter requiring attention. So the main focus was whether guidance — a violation of guidance alone — should be the basis for an MRA, and they said it should not, commendably. But in response to our comment, actually, saying, well, it also should not be based on reputational risk alone when there's no violation of law and no safety and soundness issue. It turns out, actually, the FDIC came out and said yes, that is correct. We will no longer base MRAs -- we will no longer issue an MRA on reputational risk when there's no violation of law or unsafe or unsound practice. The Fed has yet to finalize its rule and is pondering that.
Interestingly, OCC came out on the other side and refused to say that, which I think is a little incongruous with its Fair Access proposal, which, of course, is about — and Brian can explain it better — it's about the notion that banks shouldn't really be allowed to consider reputational risk in deciding whom they bank. So now it appears that, at least for the time being, that there is some risk that banks will be told, or at least national banks be told, well, no, there are reputational risks to banking oil and gas or other types of companies and that edict will come not from the bank or its investors or its shareholders or Congress or others, but rather from its regulatory agency. So with that, I've probably overstayed my welcome. I look forward to the chat afterward. But now, let me turn it over to Chris Peterson.
Prof. Chris Peterson: Well, thank you, Greg. I appreciate it. And thanks to all the staff at The Federalist Society for setting up this online conference. It's nice to get together and visit with folks. And, frankly, I'll also say that it's an honor to be invited. This is the first -- I think this is the first panel I've done for a Federalist Society event, and it's also the first time I've been on a panel that's been moderated by a sitting United States Court of Appeals judge. So I'd like to thank Her Honor for joining us today too.
Well, I'll try to give a little bit of context. First, maybe four points. One, I did work at the Obama Administration. The heading of our panel today is Operation Chokepoint, and I suppose it's fair to say that I was in some of the meetings -- the interagency meetings that talked about the formation of this so-called operation. I worked at the Consumer Financial Protection Bureau. Operation Chokepoint was really a Department of Justice Consumer Protection branch show. There was also some related stuff that was going on at the Comptroller of the Currency and the FDIC.
But essentially, my understanding of what that was was really not about favoritism of one particular agency — or one particular industry I should say — or another. It was really about trying to ensure that banks weren't facilitating violating state laws, and in particular, doing so in ways that were fraudulent. The original subpoenas for Operation Chokepoint were issued under FIRREA, the bank fraud statute that facilitates prosecution -- civil cases against companies or individuals that commit bank fraud. And in particular, prominent in that was what was going on in the online high-cost lending industry at the time -- sometimes called pay day loans, but also installment loans or open-end lines of credit that have typical average interest rates in that marketplace of over 600 percent APR, and are often marketed to very low-income consumers. These loans are very dangerous loans.
Now, I know that there is disagreement out there in the academic circles and amongst economists, and I suspect amongst very Federalist Society members, about whether or not usury laws are a good idea. But there is a super-majority support for usury laws amongst both Republicans and Democrats all across the country. And in many states across the country, online payday loans at the time were 100 percent illegal. They were being -- they were circumventing state usury laws by partnering with Indian tribes that had sovereign immunity and could not be brought to court by State Attorney's General or by individual private plaintiffs, and that was further buttressed by arbitration clauses that were preventing class-action lawyers, or even individuals, from getting a day in court.
And many of the arbitration forums were really illusory. They were so-called tribal councils that did not actually engage in any -- there was really no arbitral forum. It was a way to deflect attention and litigation over illegal practices. But these were big businesses that were doing billions of dollars of illegal transactions and the money was flowing through major banks. So the premise of it was to try to attack some of these illegal online practices that were creating real harm for consumers across the country violating state laws, and also violating federal law because the federal racketeering statute makes collecting an unlawful debt, which is defined as two-times -- in an unenforceable debt that's two-times a federal or state usury limit -- the interest rate.
So these were illegal loans. It wasn't about favoritism. And, of course, several of the leading CEOs in this business were eventually prosecuted by the Justice Department and are currently in prison. And it's also fair to say that the largest bank that was processing payments for the largest company ended up paying -- which was U.S. Bank -- don't mean to call them out by name, but that's just it's the historical fact. They paid a $613 million fine for money laundering for these illegal online loans.
Now, of course, that being said, it's not -- I agree that it's not okay to try to use reputational risk or favoritism for one industry over the other but often times there are underlying disputes in our society about what is legal and what's not legal. And because of the lack of clarity and the difficulty of getting legislation through Congress in a timely matter, it's the simple reality of the banking business right now — and the payments business — is that those online -- those payment systems become proxy battles for deciding what's legal and what's not legal. And it's particularly likely to happen where there are marketplaces — industries — that are unpopular or where there are lots of state and local laws being passed all across the country that could affect whether or not transactions in that industry are legal. And what that, in turn, does is increase the monitoring costs that banks face when they're deciding to make -- to process ACH payments or credit card payments or debit card payments.
So I guess my next point then is that I think that it is entirely appropriate for ACH originators, credit card -- receivable originators, debit card originators, to pay risk-adjusted prices to banks in difficult to monitor markets. So if your product or service is very similar to something that's illegal, and the underwriter that's deciding whether or not to process that payment for the bank can't tell whether or not your engaging in something that's illegal or not without really digging in and doing some legal research, it's appropriate for that bank to charge you a higher risk-adjusted premium. And that's just simple market economics that's functioning in the way that we should all anticipate it should.
And then I suppose last point then I'll stop -- I think that in -- ironically, banks are doing -- in doing that, banks are doing something very important about preserving the mixed federalist society that we have in our country where state governments and their elected representatives have the right and should be able to take a stand on commerce that they think is inappropriate and pass laws that regulate that commerce. And, in turn, by discriminating between which banks -- or sorry, which merchants are engaged in legal versus illegal activity and deciding whether or not to offer payment processing and other banking services to those merchants, banks are in fact reinforcing the rule of law and preserving our democratic institutions. So I think that with that there's a lot of positive things that are happening here.
But, of course, I certainly agree with Greg that it's not appropriate for any bank examiner to use their own personal opinions or preferences. It's about following the law and doing the work that is necessary to protect banks from the risk of having broken those laws and having to pay penalties or incurring liability on behalf of their shareholders. All right, well, I'm going to stop there. And I think next is Christina. Professor Skinner, passing it off to you.
Prof. Christina Parajon Skinner: All right. Well, thanks very much Chris for that handoff. And also my thanks to The Federalist Society for having me on this panel today. So I'm going to shift gears a little bit and talk about central banks, which is the area of my own academic research. And I want to suggest to you in doing so that there are few other legal hooks, if you will, aside from the traditional sort of reputational risk that we've been discussing so far that could be available to the Fed — the U.S. Central Bank — to deter banks from lending to certain disfavored industries.
Now, I want to be perfectly clear, I don't believe that that's where we are right now. With their balance sheets, you see that these banks are exposed somewhere in the range of 2% to 6% when you look at their wholesale loans focusing on things like automotive, oil and gas, and even adding in transportation -- broader categories. So the point is that even if all of these loans had to be written off the bank's balance sheet, the equity cushion of these institutions would cover those losses two, three times over. But, nevertheless, we still see this real desire for the Fed to make a connection between financial stability and climate change because doing so opens the door to a range of different policy interventions.
So a second example to flag for you is, again, going to the safety and soundness issue. The Fed's ability to make a safety and soundness determination in its supervisory capacity is another thing to consider. So there is this language in the Bank Holding Company Act that gives the Fed very broad authority to decide with a lot of latitude what presents that kind of safety and soundness issue for a bank. And so under that authority you -- like other regulators, the Fed can do things like examine banks underwriting practices and keep tabs on asset quality. It's known to be a flexible standard, as others have said, and the Fed has previously been criticized for being opaque in the way that it uses supervisory discretion to lean or to nudge on banks to do or not do certain things.
And this can raise concerns in the context of climate change with this sort of pressure -- this ability to exert pressure on banks to divest from certain lending activities. Now, I have faith that the Fed leadership right now will be, and will continue to be, judicious in the use of its supervisory power where climate is concerned. So the current Vice Chair for Supervision, Randy Quarles, he's been very vocal about pressing for greater transparency in supervision. Kevin Stiroh who, until recently, was heading supervision at the New York Fed and now he's leading a lot of the board's work on climate, is very much of the view that the Fed should remain faithful to statutory convention and constraints when it comes to climate supervision.
I think the real point here is that there's a lot of discretion that's hardwired into the statutory language. So what the Fed ultimately does down the road can vary with leadership changes. So, in other words, there is this opening to political pressure that can have some impact where supervision is concerned. And, of course, this isn't unique to climate, but like I said, it's very much a live issue right now.
We're here to review the Executive Branch, so I want to discuss how the current Administration's decision to put climate very high on the agenda fits into what the Fed is doing in this space. Nominally, and via some statutory bulwarks, the Fed is independent from the political branches and especially from the Executive Branch. So left to its own independent devices, I do think we see the Fed working very hard to be responsive on the one hand to increasing calls to consider how climate change can impact its various mandates while remaining apolitical and technocratic.
But I certainly see a beachhead for the Executive Branch to influence the Fed in this space, especially where these climate decisions are concerned via the Financial Stability Oversight Council, the FSOC. So the FSOC is this post-crisis counts innovation created by the Dodd-Frank Act. It's a council of regulators. It's not a regulator itself, but it has the power to designate non-bank financial institutions as systemically important, thereby porting them over into the Fed's jurisdiction. And it also has the power to make a non-binding recommendation to its member agencies.
So if you look at the first principle meeting that the FSOC had at the end of March, the entire focus was on climate. Secretary Yellen elicited, provided opportunity, for comment from the members on how their respected agencies were handling climate change. There was a special presentation allocated for the Fed. Now, to me, this is unmistakably soft pressure on the Fed to put its foot on the gas where climate change is concerned. So for those that favor a whole of government approach to tackling the climate, the Fed seems to be dragging its feet.
Now, objectively, I think, that the Fed is going slowly because, as I've just been discussing, it's not at all clear that it has the legal authority to do much more about climate change other than engage in research and supervise bank's balance sheet for known exposures to climate change -- so this microprudential space -- mortgages in flood-prone areas, loans to coal plants, other major fossil fuel producers. But to go even further, for the FSOC to issue a non-binding recommendation to the Fed to consider financial stability issues more, I think we should hope for the sake of the Fed's independence and preserving this line between monetary and fiscal that we don't get there.
So to wrap up, I want to give you the big picture, why do we care? Certainly, with Chokepoint and the OCCs Fair Access Rule, the emphasis was very much on fairness, clarity, due process. So I want to flag a few other rule of law concerns at stake if the Fed were to wade more deeply into these waters. First, there's an age-old slippery slope problem. Truly, once you put the Fed in the business of deterring banks from lending to this sector, or another that the Executive has determined to be against economic or national interests, what's next?
Second, there's a broader question of how large a role you want a central bank to play in society. There has to be some line drawn about what is a job for the Fed and what is not. There are a lot of significant economic issues that affect our society -- trade, immigration, tech disruption -- just to name a few. The question is, do we want this central bank leviathan?
And then finally, it's a bit anti-democratic to put the Fed in the business of making judgments about what's in or out of a green perimeter. And I doubt very much the Fed wants this job either. Fed leaders exercise unelected power, and we really should want the democratically responsive institutions out in front here making decisions about how to allocate credit in this very fine-grained kind of way. So the Fed is designed to remain sector-neutral, to remain faithful to these fundamental principles of republican — small R — kinds of government. And so I think it's important to preserve the Fed's ability to exercise that neutrality. So with that, I will conclude and hand it over to Brian Brooks.
Hon. Brian P. Brooks: Okay. Well, thank you very much, everybody. I really appreciate the chance to be here. I have to say this is the first Federalist Society panel I've ever been on where I'm going to be the most conservative voice, but I appreciate the opportunity to exercise that privilege [Laughter].
I want to sort of cover four -- or I'll cover the topic in four basic ways. First of all, I want to talk about several dimensions of reputational risk in terms of what I, as a former bank regulator, think it should mean and can plausibly mean versus what it's kind of morphed into meaning. So I'll talk about that. I want to talk about Chokepoint in particular because I think the specifics of both Operation Chokepoint, and then later the set of bank practices that led to the Fair Access Rule, need to be unpacked much, much more specifically in order for people on this webinar to really understand what's going on. Because if it were just about climate change, or even mostly about climate change, I think it would be a very different discussion. I then want to put all of this in the frame of who in a market democracy should be making cost-benefit decisions about things. I think for -- in a bunch of ways we moved in sort of a univariate direction, and I'm going to suggest that's not a sustainable approach to decision making. Then finally, I'll tell you a little bit about the story of fair access and what it was really supposed to be about, and how at the OCC we tried to balance considerations of privately-owned banking on the one hand with sort of anti-trust and market power considerations on the other, and try and point a way forward as to how we might actually have these discussions in a way that works for a pluralistic society, many of whom don't agree with each other.
Let me start, first of all, with the concept of reputation risk and run through a few features that I think should be discussed in some detail. The first issue is reputation risk can have both a subjective and an objective meaning. Objective is sort of easy to define, and a lot of banks will have risk measurements about when they've triggered a high severity reputational risk event. But there's a risk whenever you talk about reputational risk that you will morph into pure personal opinion about what's good for the world or what choices you might want to make. So examples of this would be it's obviously a reputational risk if, for example, you have a CEO who is using drugs, or who is having extramarital affairs, or who is speculating in the financial markets and occurring enormous losses and that's going to get written up in the newspaper and cause customers to flee or potentially raise questions actually about the stability of the institution.
You could quantify that, and many institutions do. They'll define very specifically what counts as a reputational risk, and then they will ask themselves is it a one-time story in a local newspaper or a sustained story in a series in the New York Times, and they'll have different severity levels on their internal severity scale for that, which marries up to a risk tolerance that one could measure, a board could govern, you could define versus saying well, a bank that banks fossil fuel companies is reputationally risky.
Well, that's in the eye of the beholder. Every single person on this webinar used fossil fuels today -- every single one of us. So is it reputationally risky or not? That's sort of a subjective and opinion question. And so in defining how an examiner and a regulator should look at this, one first has to make the decision of how much subjectivity and discretion are you willing to indulge. And as Greg said, that's one of the reasons when I was running the OCC that we put out a rule about guidance versus regulations, and we made very clear that the subjective opinions of individual examiners, let alone the non-APA approved guidance of an agency, won't be cause for sanctions or enforcement actions, at least on our watch.
So that was intended to address, in part, the subjective versus objective part. There is, then, the question of outcome determinativeness versus viewpoint-neutral approaches to reputational risks. Again, I'll take ESG, and specifically climate change concerns, as an example. I was often asked when I was the acting Controller to take action to look at what was referred to as transition risk. And I would say to the people who were calling me about this -- I would say, "What, exactly, is transition risk?" And they would say, "Well, it's the risk that banks will not adapt quickly enough, or that their customers won't adapt quickly enough, to the coming abolition of fossil fuels." To which I would say, "Well, what if there is no abolition?" I mean, you're presuming a political conclusion. You want there to be an abolition of fossil fuels, and you believe by forcing banks to acknowledge that as a risk, we will cut off funding, and then we'll have a transition, which is what creates the risk in the first place.
There is, of course, an alternative viewpoint, which was to let the price mechanism and markets decide what the appropriate mix of fossil fuels is, and that then sort of addresses the presumption, but not the fact, that there's a transition risk. So if your outcome that you've already predetermined is that we're going to abandon fossil fuels as part of our overall energy mix, that would dictate one approach to reputational risk. But if you didn't presuppose that, and if you assumed that we still lived in a market democracy and people, through their elected representatives and markets, would make that judgment. The risk calculus would be very different, but resolving, which it is, is an open question.
Then finally, I would say there is the question of minority rights in a constitutional democracy, which is to say what rights should people whose preferences are in the minority, but not the trivia minority, have to obtain goods and services that they want. So an example might be if you're from a small rural place like I am where hunting is a weekend pastime, your view about whether banks should process payments for shotguns and ammunition might be very different from if you live in Los Angeles or New York where culturally you're probably opposed to the idea of widespread firearm ownership. But in Pueblo, Colorado, every house has a gun, and people buy them with their credit cards every day. So there is the viewpoint that I think many of us who are on these kinds of panels sometimes miss, which is we import our cultural preferences because we live in certain bubbles, we interact in certain communities, but we live in a really big country where many, many people don't have the preferences that we have, and actually don't agree with some of our most foundational assumptions.
So the question is, what role does financial regulation play in shaping those assumptions versus enabling people to kind of do the things that they want -- which leads me to the second point I want to talk about, and that is, let's get much more specific about Chokepoint. So we've heard from previous dissents on this panel the concept that Chokepoint was really about sort of enforcing laws or giving voice to -- I think one of the comments was preserving our democratic institutions while reinforcing the rule of law.
So let me just walk through for you some of the things that were affirmatively listed by the FDIC during its formal Operation Chokepoint process. These were things that were designated as categories that were high risk, and thus, should be avoided by FDIC-insured institutions. And then we can unpack and see whether, in fact, these things are rule of law issues or not. So one category of business that the FDIC deemed high reputationally risky and unbankable was dating sites -- dating sites like Match.com and Bumble and Tinder. Now, last year 35 million Americans were on dating sites. The total market cap of dating sites in the United States was in excess of $60 billion, and they were not illegal in any state. And yet the FDIC said in 2014 that those sites were inherently risky as a category and were subject to, at a minimum, enhanced due diligence and very likely debanking under the thing that was called Operation Chokepoint.
A second category of companies that was deemed to be inherently risky was pawn shops. Pawn shops are licensed by the state governments of every state where they exist. They're licensed money transmitters with MTL licenses in almost every state. They're not only not illegal, they're licensed by state governments. And yet again, the FDIC listed them on the list of inherently risky businesses that shouldn't be subject to IDI banking along with such other reputationally risky businesses as fireworks dealers. Again, I could be from a different part of the country than some other people, but buying fireworks for the 4th of July was a very common practice in my neighborhood. Ammunition sales -- again, I mentioned the hunting culture that exists in much of the middle part of the country.
One of my favorites was the category of "racist materials." The FDIC website didn't describe exactly what that meant, but as I think we've seen in the last year or two, there's a wide variety of opinions of what constitutes racist materials with all of its First Amendment dimensions. Tobacco sales was deemed to be inherently reputationally risky, telemarketing, and a series of other things -- none of which is illegal under the laws of any state.
So that was Chokepoint 1.0. And the point here is to say that it was A, not focused on climate change, B, highly subjective, and I would argue politically elitist, to say that some of these things shouldn't be used. Many of us don't go to pawn shops, but millions of our countrymen do, and why it should be that we should make choices for that is at least something that our democratic institutions, as opposed to our administrative institutions, ought to be talking about in my judgment.
Which brings me to the third topic that I wanted to just put on the table, having to do with not only who makes these decisions in this country but how do we make the decisions. So the problem with having administrative agencies make decisions is every administrative agency in the United States — perhaps there's an exception I can't think of — but everyone I can think of is focused on a particular mission. So at the OCC, our mission was the safety and soundness of the banking system. And at the OCC, we didn't know a darn thing about health policy. We have absolutely zero expertise in environmental science or climate change. What we know a lot about is credit and bank operations. That's what we know about.
By contrast, we have the CDC, which knows a lot about public health, but absolutely nothing about financial services. So it's a weird world, for example, when you have the CDC prohibiting foreclosures. It would be as though you had the OCC prohibiting mask mandates or prohibiting social distancing. Neither agency knows a darn thing about the others and is not well situated to make cost-benefit analyses. What they're well situated to do is to explain the risks of a given policy within their vertical.
The entities in the United States, in my belief, that make cost-benefit analyses are really two. They are the elected branches of government where we elect leaders to say we will accept this much risk for that much benefit on the given thing. For example, we will raise the speed limit from 55 to 75 knowing that it will cost lives because the efficiency gains on net are better for society than the relatively marginal costs of life. But you could make a different decision, and NTSA probably would make a different decision, but our democratic institutions don't do that. You see it with COVID where we save a certain number of lives in certain categories at the expense of other things. If the democratic organs of government made that choice it might be different, and it's the same thing in the world of economic policy.
Who can say how much climate change is worth how much loss of quality of life in this generation? That's not a decision for the FDIC to make, I would argue. It's a decision for either the Congress to make because we elect them to make those balancing judgments or for markets to make through the price mechanism where people can decide what they really want. But I would argue that the bank regulators are ill-suited to do that kind of a thing.
Which then brings me to the last point, which is, what was the Fair Access Rule? How does it relate to reputational risk? And why did we do it in the first place? So the why is where I'll start just very, very quickly and here. I will tell you that while the things that we saw banks starting to debank were different from the things that we saw in Chokepoint in the earlier part of the decade, they were still widespread and mostly had nothing to do with climate change. Whereas, in original Chokepoint, we saw dating sites being boycotted, pawn shops, fireworks sales, and tobacco, among other things. In the second version, when I was running the OCC, we saw banks, including some of the biggest banks, essentially wholesale deplatforming all of the following kinds of companies. And when I say deplatforming I don't mean refusing to make loans to them because there was credit risk. I mean literally cancel the checking accounts and taking them out of the financial system.
So I'm talking about things -- and again, you may find these sketchy. I find these sketchy. Private prisons, which are companies engaged by almost a majority of U.S. states to provide correctional services as government contractors, wholesale debanked by several of the largest banks. Gun manufacturers, including for hunting rifles and things that are sort of excepted American past times -- again, wholesale debanked. Weirdly, on the other side of the political aisle, we saw a mass movement to try and get banks to debank family planning agencies like Planned Parenthood because, again, they were politically unpopular among a certain segment of the society. And then, yes, also including oil and gas companies for various reasons.
Now, to be super clear, I'm a lifelong member of the Sierra Club. I grew up in Colorado. I am an outdoors person. I actually have a significant degree of concern over climate change, but I have an even greater degree of concern over how we make these judgments as a society. Because what I do know is that there are not environmental scientists on staff, nor was anyone at the OCC or the Fed elected to make environmental judgments for the United States. We elect democratic representatives to make those kinds of judgments. And when the Congress decides not to enact gun control, or when it decides not to enact national CAFE standards of a certain kind, the idea that we need unelected regulators to "fill the void" ought to trouble us when the people we elected to make those decisions have decided that that's the wrong decision for us. That becomes, sort of, the government of the Solomon Guardians or the Platonic Guardians, rather than a government of the people or of free people acting through markets.
So the point of the Fair Access Rule was simply to say this, it was to say, "Listen, banks are privately owned and in the main, they can make decisions as they want to make them." But there are two legal constraints on those decision makings that do exist in statute. One of them is the existing anti-trust laws which apply to banks as much as they apply to any other commercial company. And so we framed the Fair Access Rule in terms of a constraint only on banks that can be demonstrated to have pricing power in a particular market segment. So generally speaking, banks can do whatever they want, but if you have actual pricing power in a segment and are refusing to bank a legal business, you have heightened risk obligations to demonstrate why in those circumstances. So it was a very limited rule based on that.
The second animated concept behind it was the fact that in Dodd-Frank, which has been discussed a lot on this call, there was a little known provision added to the OCC's organic statute, and that was that in addition to the OCC's historic mission of ensuring safety and soundness of financial services, it also created a new obligation on the OCC to ensure the "fair access" to financial services. And the question is what did that mean? Now, the term fair access does exist in various places in anti-trust law, but it also implies the notion that in the same way that you can't discriminate on account of race or other immutable characteristics, you shouldn't be able to discriminate because you, the bank CEO, just find a given segment icky or not consistent with your own personal political preferences. And so the fact that you don't like hunting rifles or that you don't want your daughter to have an abortion — if you're on the other side and you're boycotting Planned Parenthood — doesn't mean you can use your federal charter to try and choke off finance to something that the markets want and that our democratically elected representatives have chosen not to outlaw.
So that was the concept of Fair Access. I signed the final rule. At the very last minute it did not get published in the Federal Register, and so it never took effect. As a result of which 30-some senators have introduced legislation to enact it by statute, so we'll see where that debate goes. Look, I think the bottom line is this is all a question of who decides in a society and do they decide subjectively or objectively. I've now filibustered long enough, but having lived this I thought I would just provide some perspective from the guy who actually signed the rules. So I really welcome the conversation. I think it's a great topic and I hope that this is not the last time we talk about it.
Hon. Sandra Ikuta: All right. We've now heard one round from our panelists, and I feel enlightened or maybe alarmed [Laughter] to hear about the -- there's a political pressure on the banking industry. But I'd like to give our panelists a chance to respond to the points that were made and so I will do another round and ask Mr. Baer to start us off.
Greg Baer: Sure. Actually, I think I had four or five things. First, I'm really glad Professor Skinner raised climate, which wouldn't immediately jump to mind as a reputational risk. But there is a really interesting question about what is a financial stability risk. A questioner could view that as very broad. And to the extent that there is the existential climate change going on, that's a risk to everything so, of course, it's financial risk. But what I think you'll be watching — and what she eluded to — was actually more at this point in the UK and Europe. I think that she's correct in saying that the Fed, I think, is a little more cautious here, is the notion of a climate stress test on banks.
That's a very complicated subject. We've written a fair amount about it if you want to look. Follow us at bank policy. But a lot of it comes down to this question -- suppose you have a 90-day revolving loan to Exxon Mobile and the Bank of England, or someone, is going to conduct a 30-year stress test. Well, what do you assume about that loan? Now, I would tell you as a bank micro-prudential risk that there's no risk to that loan. Because if Exxon refuses to change its business model and climate goes as it's projected to and Exxon eventually is ruined, well, you'll just stop rolling that loan over at some point. The concern about the stress test is that they will actually assume, first, that Exxon never changes its business. Second, that that loan is rolled over every month for the next 30 years. And third, that you take no actions to hedge it. You could hedge it by buying CDS on Exxon or you could hedge it by actually lending to some green companies that will profit as Exxon fails.
So that's sort of a fundamentally intractable problem with climate stress testing. Fortunately, I think some regulators are beginning to realize that. Interestingly, the Banque de France just actually did a stress test, which I think everyone assumed would come up with a huge number -- perhaps for other reasons. But in fact, they found that bank losses would be quite moderate even under some rather draconian — even counterfactual — assumptions. But this is a roaring debate now. Again, separate from the notion of what should we be doing about climate change more generally. But really, is this really a bank safety and soundness risk?
A couple points on Brian. First, just on rep risk — and this is kind of an aside — and he's certainly not the transgressor here, but if you think about it, any company in America is kind of at risk if their CEO is dating his employees — or her, although it's usually his — or taking a lot of drugs. It's only in banking that you would need to come up with policies and procedures to quantify the risk of your CEO dating too many people or taking drugs. And that's sort of a lot of what the reputational risk exercise has become is a compliance policies and procedures matter. But that's not terribly important.
On Chokepoint, I think Brian gives great examples of activities that were choked but completely legal. But I think the broader question — and to some extent, this gets to Chris's remarks — is to the extent that you believe that a given industry is doing something illegal, should the first action be to investigate that industry and challenge the legality and indict the people who are doing the illegality? Or should it be to go to their bank and tell them to stop lending? Because ultimately — and I think this is what Brian's driving at — if it's illegal, well then prosecute people who are doing illegal things or prosecute the bank for aiding and abetting, but you wouldn't actually say as a sectoral matter all banks should stop lending to that company or that industry.
And then on Fair Access and just sort of a larger topic, I think Brian noted the first version of Choke which was pawn shops, dating sights, etc., and then the second, which was private prisons, gun manufacturers, etc. There's a crucial difference there. In the first Chokepoint, that was the government telling all banks don't do this. And so that's a systematic government-mandated denial of credit. You can debate how broad it was or where it was, but that's one thing. It's a very different thing, it seems to me, if an individual bank decides — because its shareholders want it to or because it believes it will help it more in the market — not to bank a given firm or given sector. First of all, I think that's a legitimate concern. But second of all, and perhaps more importantly, if one bank decides not to bank a given company or sector, there are thousands of other banks who might. It's only when that reputational mandate comes from the government that it is truly systematic and disabling.
On the Fair Access — Brian and I debate this all the time — but I would just note what I think is one problem with this notion, which is you can say we don't want the bank or the CEO -- I don't like this business. But if you think about how banks work in the United States, most banks don't bank most businesses. It actually requires a lot of special knowledge and investment in resources to do an aircraft leasing business or to bank dentists. There are actually banks that specialize in banking law firms. So there are lots of banks that say, "You know what? I don't want to bank aircraft leasing. I don't want to bank dentists. I don't want to bank lawyers. I don't want to do commercial lending in certain areas."
And, of course, they have to be able to say that. And I don't -- obviously, that's not what the OCC was driving at, but how do you say, okay, well, you are allowed to say for non-financial reasons you're not going to do a dental practice or an aircraft leasing practice, but you do have to do a gun manufacturing business. And, of course, the answer is well, no, we just pick gun manufacturers because that's politically charged but now -- I mean, at that point the game is over. Right? Because now it's the agency deciding what's a politically important business that needs that, and then that is not, sort of, a neutral application of banking. That's back to a Chokepoint-like thing where certain industries are picked for reputational protection. So I don't see any way out of that box canyon, which is why I was a little down on that proposal -- something Brian knows. But in any event, that's my five cents.
Hon. Sandra Ikuta: Let me turn to Professor Peterson.
Prof. Chris Peterson: Well, thank you, Judge. Great comments and fun to visit about and chat about all this stuff. First off, I think maybe I'll take my time to respond to Brian's -- begin by responding to Brian's list of the different types of businesses that had some sort of risks associated with them. First, -- and you left one off, it was the online payday lending industry, which was engaged in illegal loans -- the one that I focused on. But for each of these businesses that you list, they're legitimate businesses. And I'm not disagreeing about that, but for each of those businesses, I think that there was something that's not about our preferences, but there were complicated underlying legal issues that did not render the banks unbankable but meant that there probably needed to be a little more due diligence and investigation into whether or not some of the participants in that industry were engaging in some form of illegal activity.
So dating sites, completely legitimate -- an important part of our online commerce, but they also can facilitate romance scams, which the FTC has said has led to about a third of a billion dollars in terribly tragic losses for victims of online fraud. So at what point is a dating site facilitating online fraud and what steps do they need to take and does the bank need to take to ensure that they're not facilitating online scammers?
Pawn shops, of course, are a legitimate financial institution, and they're regulated by state governments. But they also have had a systemic problem for thousands of years for fencing stolen goods, and there are local rules that deal with that. Some pawn shops are compliant, and some are not, and providing banking services to pawn shops might require some additional due diligence and investigation. I don't think that anybody -- at least I'm not suggesting that pawn shops shouldn't have access to the banking service system.
For fireworks dealers, -- look, I like fireworks too, but fireworks -- and it's a complicated patchwork of state and local laws. Fireworks can also lead to wildfires and pollution. And the laws in Wyoming, Colorado, and my home state of Utah, are not all the same, and different cities are not all the same. And some fireworks businesses may be actively circumventing those state laws, and it may be the case that the bank needs to take more time to investigate whether or not some fireworks sales businesses are in compliance with state and local laws before they engage in banking services.
Then, ammunition sales -- of course, we all know that there's a huge controversy about firearms. There's also some constitutional protections, but those constitutional protections are unclear, and different states -- Colorado and -- where you live and your home state -- and of course Chicago have very different laws, and whether or not a merchant is compliant with those laws is a difficult question and may require some additional due diligence.
The racist stuff I don't know so much about what's going on with that. It's a tough issue. I'm not sure where we're at on that. On the tobacco sales, a lot of -- some tobacco merchants online are attempting to circumvent state and local sales taxes, which is not lawful. And then also, telemarketing -- of course we need telemarking. Nobody is suggesting they should be unbanked, but some telemarketing operations are at risk for being boiler rooms to pump up stock prices or engage in fraud and scams. So banks that provide payment services, banking services, checking account services to businesses that are -- where it's difficult to know whether or not they're legitimate, and whether or not they're licensed properly or not, may need a little bit more attention and due diligence.
Then, I guess, responding to Greg's excellent point that we should focus on prosecuting the individual as opposed to using banks as a bank shot to try to enforce the law. Look, I agree that that's the first choice. Yes, we should prosecute scammers that are engaging in romance scams or pawn shops that are deliberately engaging in fencing stolen goods. But the problem is that it's not that easy, is it? Tracking down the online scammer who's operating from Mumbai or Ukraine, or the boiler room that does a call center that starts up and immediately shuts down as soon as they get a certain amount of money that runs through it. It's not that easy. And it's especially not that easy when banks wink and nod and knowingly facilitate the large businesses that are very profitable that in turn create profits that are used to frustrate the law enforcement prosecutions of those same scammers that were breaking the law in the first instance. So I think that that's the first choice, but we also need our financial institutions to take responsibility for engaging in reasonable due diligence to screen out illegal activity from our online and digital market places.
Then, I guess, last point is that I think that to say that the position of anybody out there -- and look, there may be some people -- but I think we need to be very careful not to engage in a straw man fallacy here where we say that the position of these unelected government bureaucrats is to render some entire industries unbankable or that those practices shouldn't be used. Nobody that I'm aware of, in any conversation I've ever had in my entire 20 years, has ever said that we should not allow people to buy a shotgun. It's not my position. It's never been anybody's position.
Instead, what I think the position is much more nuanced is that we should expect our financial institutions who when extraordinary profits and have -- many of our money center banks have revenue that dwarfs the gross national product of many of the world's nation states that we should expect them to engage in some reasonable due diligence in screening to prevent illegal practices from creeping into the banking industry. And we should be careful to distinguish what things are illegal and what things are not illegal. On that point, I agree with everybody on the panel.
Hon. Sandra Ikuta: All right. Professor Skinner, do you have some comments?
Prof. Christina Parajon Skinner: I do -- I do. I have two main comments, I think. I'll be relatively brief. The first comment, I guess, is for you, Brian. I agree with everything you said in your excellent presentation and particularly the remarks that you made in regard to the democratically responsive institutions being out in front making these subjective value-laden decisions. When I make that point, often in my own research, I'm met sometimes with the skepticism that's a fairytale. We can't expect the Congress to make these decisions. We're in this period of gridlock and so, therefore, we need to lean on these agencies that have broadly worded mandates that they can press wider, we can give -- let them exercise their discretion, let them develop the expertise, bring on that climate scientist to the Fed or what have you.
I find this sort of ends justify the means difficult to respond to and wrestle with and I wonder — soliciting your advice, really — how you address those remarks other than saying we have a system in place that's designed to slow down when the nation is politically divided, and so it's not a democratically appropriate response to say well, let's short circuit that and use the agencies and use this sort of "technopopulism", which a colleague of mine has cleverly coined the term of. So that's one question for you, Brian.
And then I guess my second question, comment, remark is for Greg in response to some of the things that I've seen written by you in terms of operational risk, and how on the one hand operation risk is a growing and real threat, we're in a world of cyber risk now, on the other hand — I think as you've pointed out — it seems a slippery slope to allide operational risk with reputational risk, and how do we keep the lines relatively clear there? So I may be upsetting the course of things by putting questions back into the panel, so Judge I'll let you decide how you want to handle my provocative questions there.
Hon. Sandra Ikuta: Thank you. Well, we'll let Mr. Brooks respond to your question and make any remarks he liked, and then we'll turn it over to Mr. Baer to respond to your specific question.
Hon. Brian P. Brooks: Well, this is so great. I mean, boy, I wish we could have done this six months ago when some of these things were live. This would have been a great dialogue at the time. Let me start, if I can, Christina, by answering your question — because I think this is a super profound question — is, what do you do about the gridlock problem? I have spent a lot of the last five years in Silicon Valley where the line about anything that goes wrong in a product is it's a feature, not a bug. But I'm going to argue, actually, that sometimes gridlock is a feature and not a bug.
And what I mean by that is there are times when what the failure to regulate something means, whatever it is, is a decision that not regulating is better than regulating. And I think Americans often misunderstand that because we have a view nowadays that every single thing on planet Earth needs to be subject to some kind of a regulatory regime. This is why we have state licensing of florists and hairdressers and an increasing number of activities that we used to just do in a free country now can't be done without some sort of sanction of the state. Classic example in financial services was in the beginning of the Trump Administration — when the Administration decided to take a different perspective on consumer financial enforcement at the CFPB — is a number of states, starting with California, decided that — and this was the common phrase that was used — they decided to beef up their state regulatory agencies to "fill the void" left by the Trump Administration.
But of course, that wasn't a void at all. It was a conscious policy choice. The belief being that the cost of a relatively low level of kind of inherent fraud and loss in the financial markets was more than swamped by the reduction in economic activity and job creation created when banks, in particular, stayed way, way, way back from whatever the legal line of demarcation was. So not a void, but a conscious policy judgment. Very similar to tax policy where there are some states that have elected not to charge tax, and it's not because they forgot to, it's because they decided that it's a good thing to leave more zone for private economic activity.
And so in this world when we say gee, Congress can't be trusted to impose gun control so we need banks to impose gun control. Well, what if it was the decision of the people's democratically elected representatives not to control guns? Again, I'm not saying that's a good thing. Remember the old line about -- that Oliver Wendell Holmes said about democracy, which is, "If the American people want to go to hell in a handbasket, it's my job to help them get there." That was once the view of a democracy, but it seems like today there's a real skepticism where elites believe that they know the right answer and they're willing to let Congress have the first crack at it. But if the people's representatives don't agree with them, and thus, don't impose those restrictions -- well, we got to have the restrictions and we'll take anybody who wants to impose it even if that is banks versus somebody else. So again, I think the main point here is sometimes the decision not to do something is a decision. It's not a failure to make a decision. It is, in fact, the decision.
Let me turn for a second to something that Chris said about some of these categories I was talking about -- about dating sites, pawn shops, etc. And Chris, I think if I understood your comment it was look, no one is saying you can't bank those companies, it's just that they have higher risks, and thus, you have to make sure that you're managing those risks specifically. So I wish that were true. I think it would be a different conversation if it were true. But candidly, it really isn't, and I can give you two pieces of evidence for that. The first is that I actually ran one of the country's 50 largest banks during Operation Chokepoint. In that time, in 2012 and '13, we [inaudible 1:05:54] policies, which is sort of where all this sat, and we got an MRA from our examiner in charge because we didn't have a policy that blanketly refused to bank pawn shops among other kinds of companies that were on that list.
And we were only able to resolve the MRA by prohibiting all transactions with those kinds of companies. There was no discussion of a risk management framework. We had to prohibit them in order to resolve the MRAs, so I've actually sort of personally observed the way that Chokepoint was implemented inside of a large bank.
But the other evidence of it is — and you probably know this from your time during the Obama Administration — is in 2014 the OCC looked at two different categories of activity that were being entirely squelched by Chokepoint, and the most famous of these -- I mean there were two, really. There was money services businesses and then there was foreign correspondent banking, which had been identified as part of the effects that many of the most significant banks had adopted policies based on the FDIC guidance that simply said we don't bank those sectors. It's not that we'll engage in risk management and enhanced due diligence, we simply will not bank foreign correspondent banking activities or money services businesses.
And the OCC, in the mid-Obama Administration, came out with guidance that said you can't refuse to bank those as a category. So, Chris, they were saying what you're saying today, which is what you must do instead is determine which, among the companies in that sector, have effective risk management. And then you can bank those, while refusing on an individualized basis, to bank those that are not effectively managing those admittedly heightened risks. But that distinction is all the distinction in the world because the industries response to Chokepoint wasn't to make nuanced decisions, as you say, it was to boycott them entirely. And that's sort of what led to the OCCs regulatory response in 2014 -- [inaudible 01:07:41] 2014.
And, I guess, last thing I'll do is I'll address Greg's comment, which I think is a really good one, which I agree with. And that is it's a different thing entirely for the government to prohibit a bank from doing something than it is for privately owned banks to decide on their own that they don't want to be in a given line of business. And I think that's definitely true. What I think got badly misunderstood, because of just the political tone of the last 12 months, is that nothing about the OCCs Fair Access Rule challenges that assumption.
So we had two or three key points in Fair Access that were designed to kind of acknowledge Greg's point. The first is if, in fact, there are lots of other banks banking a given sector -- so if it's really true that your bank doesn't want to do factoring or whatever, but other banks are doing it, that's totally fine -- totally fine. That's why we built it around an anti-trust concept where the rule only imposed obligations on banks that had market power. Because the definition of market power is if you exit the market either the product will not be available or you were such a big part of the market the prices will rise. And we do that kind of anti-trust analysis in every other industry in America, so why wouldn't that apply in the banking business is the first point?
The second thing is we only imposed the requirement on banks of a certain size as a proxy for market power, so the rule only would have applied to $100 billion asset banks and above. And the last point was, to make very clear, that we're only talking about services that the bank offers. So if you're not in the secured lending business, or the asset based lending business, naturally you're not going to lend to an oil and gas company because you don't do that business. And if you don't do it for anybody, you certainly don't have to do it for them. But what we were trying to get at — and I think this is intuitive, but gosh, tell me if I'm wrong about this — if you offer business checking accounts, which many banks do, you can't offer a business checking account to a wind farm but deny the business checking account to the oil company. Neither of those presents credit risk or any other kind of financial risk to you. That's just a fee for service business. Why are you not granting the checking account to the oil company? That's a question no one ever really adequately answered.
Greg Baer: Okay. I'll go. I'll come back to some of that. But on op risk -- and thanks for the question. My colleagues would think you -- I might have planted that question because I was just doing an op risk grant yesterday. So for those who don't know, operational risk is sort of distinguishable from credit risk or market risk, and it's basically -- complicated, but basically, the risk that something's going to break. This has clearly -- over the last five years -- this sort of next great frontier for bank examination under the rubrics of vendor management, third party vendor management recently, fourth party vendor management, and basically, you have to make sure that everything's always going to work, and that means sort of indirectly supervising your cloud provider or your law firm cybersecurity, etc.
Of course, we got a good reality check in the pandemic, and it turns out that banks around the country were able to go completely off-premises through virtual work, really, without any operational problem at all. Which is astounding and would seem to argue that, in fact, they don't need a lot of regulation of their operational risk, but we have yet to see on that. Of course, what it's really now about in terms of operational risk is cyber risk. And there, I think, there's currently very good discussions about this and the question is if you're worried about bank cyber risk, is the answer to send in some examiners who did credit risk and AML last week, and now they're going to come in and check to make sure you have a lot of policies and procedures when, in fact, you already employ say five, ten thousand people doing nothing but cybersecurity who came all from the NSA or the Air Force or whatever? Or is the better way to reduce that operational risk to actually have information sharing between the intelligence community and banks, or at least systemically important banks?
I think there's actually a fairly good discussion going on on that, but there's certainly ways that could go awry. But, of course, then there's the separate conversation is about operational risk capital, which is, I think, a very difficult discussion to understand. Banks now are required under the advanced approaches — too complex — to hold vast amounts of operationalist capital under the Basel Accord -- that at least the largest banks will be required to hold vastly more operational risk capital. When in fact, when you look at it they really don't lose a lot of money on operational risk. I mean, even big cyber events, it's a -- even if it's a denial of service -- that's not a material financial loss in most cases.
And in fact, the way they calculate operational risk capital -- originally there was something called the AMA, or advanced management approach, which completely failed. Currently, the new approach at Basel, which presumably the U.S. would adopt in some form — although I would argue against it — is the SMA, which basically says your op risk is a function of your net income. So no relation to your operations, just if you make this much money then you have this much operational risk, which is sort of intellectually bankrupt. But what it's really always been more about previously was just your litigation losses. So your cyber risk is basically how much you paid in mortgage settlements as a result of the last financial crisis -- even if you got out a mortgage, by the way.
So it is an area, I think, of very little intellectual rigor where the numbers are just kind of made up on the capital side. But I do think on the -- in the real world of what's your actual operational risk, banks have demonstrated extraordinary resilience, and I think also the government's actually doing a pretty good job of that.
Just two other quick notes on -- and perhaps to mediate between Chris and Brian, I would note there's a big difference between reputational risk management and AML KYC, which I spend a lot of time on. In fact, you could actually argue if you're forced to debank people you can't actually file suspicious activity reports. So there's no reason -- I would think if it's a legal business, the bank should be able to bank it. But then if there are all these bad things that Chris is talking about going on, well, the bank is under an obligation to note that and file suspicious activity report and identify for law enforcement that that is in fact occurring.
And if they fail to do that, as USB did -- I don't believe they were actually engaged in money laundering, and in fact, I think they were cited for failure to adopt a sufficiently rigorous program to notice that there was bad activity going on, which is the norm for these things. But again, if you can't bank them, well, then you can't really be spying on them for the government, which is cynically sort of what AML KYC is really about -- not that there's anything wrong with that. So perhaps that is a middle ground.
And then to Brian — I mean, again, we've done this before — but I think my quibble with Fair Access is that there was -- I mean, as you note it was about market power, but there was a presumption that every large bank had market power in all these markets, and I think a lot of these are very competitive markets. So I had a little quibble with that. So much for me.
Hon. Sandra Ikuta: All right. Well, I think we can turn now to questions and answers, and we will be taking questions only through Airmeet. There's no way to ask questions of the speakers on other platforms. Use the raise hand button located in the middle of your screen — bottom middle of your screen — if you want to ask a question live, or an Airmeet participant can enter text questions in the Q&A tab in the upper right-hand section of their screen.
We already have some questions, and this first question, I think, I'll start with Professor Skinner. It says, "Putting aside government intervention, how do we address the secondary problem of bank CEOs exercising their own political preferences in deciding which companies to bank? For example, City Bank and Bank of America regarding firearms manufacturers and retailers. This has become more of a societal problem as banking has become more concentrated with a handful of banks running syndicated lending." Can you start with that, Professor Skinner?
Prof. Christina Parajon Skinner: Yes, absolutely. So you put your finger on a really important issue and it's sort of the other side of the coin here. I'll start by saying I don't think I have the answer of how to address it, but I'll give some context and set up the question. Maybe some of the other panelists want to provide some suggestions. I think big picture we've been discussing all these various regulatory pressures that could be, or have been, leveled against banks, but it's certainly worth us considering also this endogenous pressure that's coming from within the banking sector itself. And I think what's interesting is that over the past couple of years you've really seen these academic debates spill over into the boardroom in terms of so-called corporate purpose.
I'll use the example of climate I guess because it's a big live issue right now, but it applies equally to other sectors that have or may become politically or popularly unpopular. There's a bandwagon effect. So all of the banks made these commitments to go to net zero as of April of this year, I think, and it seems like it was really kicked off by asset managers and then it made the rounds through banks. It seems like the banks really seem to think that this is something they need to do to compete or retain customers, and talent even, on this new sort of climate-focused dimension. I think one of the major reasons why customers and clients, and even the institutional shareholders, are pressing for these various commitments from the banks is because of this rhetoric around corporate purpose.
And this debate was really set up years ago to challenge the shareholder privacy model, this notion that was first sort of famously espoused by Milton Friedman, that companies should maximize profits for their shareholders and should use that as the principal rationale for just sort of guiding which projects to undertake. Now, Friedman is often misquoted, I think, as endorsing this idea that companies should do anything possible to pursue profit, but he never said that. He was always clear that companies needed to play within the letter of the law. But in its place, there was this growing push to supplant the shareholder privacy model with conversations about a stakeholder model. And in its strongest form that companies should pursue things other than profits, that they should pursue the interests of other stakeholders -- so their customers, their employees, the environment.
Or in a lighter version of it that companies should certainly consider the interests of stakeholders when they're deciding which projects to undertake. I always thought it was a bit of a false paradigm because, in my opinion, successful companies always take a long-term view and do necessarily take and view stakeholder interests when they're deciding how to pursue profit-maximizing activities. But, of course, one key stakeholder that has really emerged in all of this is the environment and the implications that has on bank's business models. So I think that's the broader debate, which is I think what is motivating a lot of corporate America, including the banks to voluntarily take on these initiatives without any additional pressure from the regulators. But I'm very interested to hear what the other panelists think about this.
Hon. Sandra Ikuta: Would anyone else like to jump in on this issue?
Greg Baer: I thought that was a terrific summary of where we are.
Hon. Sandra Ikuta: Well, let me -- speaking as a judge, I'm interested in the legal framework here. One of the things that I've heard is that the government here -- is that the government doesn't have legal authority to pressure private industry to further the government's policy goals -- or the legal authority, at least, is questionable. But then my question would be, does doing so violate any law? Is there a legal action that could succeed here? And maybe I'll aim my question at Mr. Baer since he was involved -- you were involved in a legal action against Operation Chokepoint.
Greg Baer: Well, it's funny -- a lot of things in banking these days -- I think banks have the legal ability to push back but not necessarily the will or practical ability. I mean, if you think about the authority that the regulatory agency has over a bank, there is the authority to enforce violations of law. And then the major statute is 12 U.S.C. § 1818, which forbids a bank from engaging in unsafe or unsound practices or being in an unsafe or unsound condition. There is actually a fair amount of jurisprudence. There's a slight Circuit split, but not huge Circuit split, in terms of what that means -- I think the D.C. Circuit rule being the most popular. And also since banks could always challenge in the D.C. Circuit, as you might know, probably the one that's most determinative.
And that really finds that in order for an agency to prohibit a practice under 1818, there has to be -- the words are a little unclear, but basically a risk of material financial loss to the institution. I would say a lot of the focus on activities through the exam process does not really meet that standard. Certainly, given some of the examples we've heard today, those would not in any way represent that kind of loss. So we could argue that a lot of the mandates are not qualifying, either under a classic violation of law or an unsafe or unsound practice.
And then the next question, which is really -- I mean, I think what occupies a lot of our thoughts in terms of how banking works, and what makes it so complicated, is well, that assumes that you're actually willing to contest an 1818 action, which means that the agency actually files a complaint against the bank and says you have violated 1818. That never happens. I mean, you can check your records. The list of contested bank examinations is basically zero for generations. And that's really because the -- and this gets back to why reputational risk is such a useful tool to examiners — and the agency more broadly — is that banks don't really have the ability to fight with the regulators in court because that's seen as a reputational risk. It's seen that you can't get along with your regulators. Your shareholders don't like it. Trust me, from personal experience, your board does not like it.
And so there is always -- and again, all of this is going on behind the scenes under the cloak of examination secrecy, so you are much better advised to do what you are told thereafter, after some haggling. So you never really get to litigate these issues in any meaningful way. There's an internal supervisory process where you can do examination appeals, but you're actually applying to the agency that gave you the examination rating. So, again, Professor Hill, who I really admire, did a whole analysis of bank examination appeals and shows that you always lose. So the courtrooms are empty when it comes to banks being able to challenge mandates like that.
So that's why you see things like this actually going on when you drill down, as I like to, and say what's really the legal authority for it. It becomes less and less relevant over time it appears. It's funny, I'm an adjunct at Georgetown Law School and I always feel kind of silly because I teach a chapter or a class on bank administrative procedures and you have to at the end just say everything I've just told you is irrelevant because you don't have contested actions, you don't really do this. And I think a whole other topic, potentially for The Federalist Society, over time you have — and this gets to what Brian and I think we're agreeing about — you've seen a drift away from doing notice-and-comment rulemaking to issuing guidance, which they -- or it pains to say is not binding like an informal rulemaking under the APA. But in practice, the examiners treat it as binding. And perhaps to their discredit, bank compliance departments certainly treat it as binding.
So you sort of have this vast library -- and I at one point, when I was at one bank, had to do a list of the -- I think it was several hundred rules that are things that our board had to be doing — or a committee of our board had to be doing — and that involved cataloging every piece of guidance, every issue. Now, of course, I could have told them this is not technically binding, but that was not an answer. It's guidance issued by an agency, so we have to certify to our board that they are doing this or we're in big trouble. I think it's very frustrating for rule of law folks, and perhaps actually for Circuit judges, that you don't see a lot of these cases because there's just no ability to get them into a court under your article of the Constitution.
Hon. Sandra Ikuta: Anyone have a comment on that? Does anyone think there is a possible legal action here? We know that the district court thought that there was at least a possible due process argument, and so I'm curious if anyone shares that view.
Prof. Chris Peterson: Well, I'll chime in, Judge. I guess the -- first off, I think that my comment has to be read in the context of lots of different overlapping agency jurisdictions and legal theories. Unlike Brian, who works at the Comptroller of the Currency, I worked at the CFPB. I'm a little more familiar with the unfair, deceptive, and abusive practices framework of the Dodd-Frank Act.
But just for a moment, imagine that you have a company that's making illegal loans under state law, and the state law renders those loans non-existent -- they're void. It's not lawful for that particular type of business to collect the loan. And now, further, let's assume that the bank has been processing payments, collecting those loans on behalf -- the payments from the borrowers. And if that happens on a one-off thing, well, the bank can't really be expected to know. But on the other hand, suppose that the bank is doing that to the tune of billions and billions of dollars, and they're widespread exposés and the bank acting as a service provider to that lender knows and is winking and making extraordinary profits facilitating an illegal online business. In my view, there is a strong argument that the bank is engaged in a deceptive, unfair, or abusive practice as a service provider for the original lender.
So I do -- and of course, that's not -- I'm not sure that was responsive to the safety and soundness reputational risk or if it's in a context of an examination, but these things can come up lots of different ways and I'd want to drill down to the particular transaction for each -- particulars for each transaction and which agency's bringing it, which -- whether or not it's a private citizen that's bringing it. But once a bank starts processing payments for loans that -- for any type of service that's illegal under some state or local law, there's a real chance that the bank is going to start to get closer and closer to potential liability in my view.
Hon. Sandra Ikuta: Any comments? Well, I have one final question for Professor Skinner. Putting this in a historical context, is it novel -- this approach that the Fed is taking pressuring industry behind the scenes, or is this something we've seen before?
Prof. Christina Parajon Skinner: Yeah, so this will bring me back into some totally different work that I'm doing. I want to be clear, I don't think that the Fed is pressuring banks at all right now. I think that there is a live conversation about whether that's a possible direction the Fed could go in that is starting to look like a bit of a parallel to the things that we were talking about in connection with some of the agencies, which is why I raised it. But yet at the same time, there are past periods in history where the Fed — and I would guess the other agencies too — have had to confront this question about whether they should use the policy tools at their disposal to try and either steer the economy in certain directions or certainly steer credit in certain directions.
And I think in response to your question about how to situate this in historical context, I think perhaps the most analogous period, at least for the Fed, would be in the 1920s, ironically, 100 years ago where there was increasing concern about the imminent stock market bubble. When you look at that history — which is fascinating by the way — you see that the Fed board -- of course, much -- nearly out of the gate at that point -- trying to engage in something called direct action where there was a little bit of an attempt to try and lean on the reserve banks to try and lean on banks to not lend for speculative purposes.
And it may not surprise you to learn that the policy was short-lived because it just generally made legislatures and people uncomfortable that this could be applied in a nondiscriminatory way. And I guess the upshot of that is old wine in new bottles. It's not a new problem, and it's good to continue the conversation because often I see when we look back at history these issues, as in all areas, do tend to repeat themselves, and I think they probably are here as well.
Hon. Sandra Ikuta: Well, thank you for that. That's a good note to end our panel.
I'd like to thank our panelists for a truly excellent and illuminating presentation. And I'd also like to thank the audience for your participation. A reminder that the next conference event is a discussion of regulating social media in the new administration, and that will begin at 11:00 a.m. Eastern Time tomorrow. But standby now for the alert directing you to the lounge.
Telecommunications & Electronic Media and Corporations, Securities & Antitrust Practice Groups
|Topics:||Corporations, Securities & Antitrust • Culture • First Amendment • Politics • Telecommunications & Electronic Media • Free Speech & Election Law|
Simmering controversies over the social media platforms we use every day have recently come to a boil, with certain platforms suspending or permanently disabling accounts, others directly or indirectly targeting disinformation, and others removing certain applications from their app stores. While many statutes, including the Communications Decency Act (and its Section 230), have played a role in the tremendous growth and innovation of modern technology and online platforms we use every day, we are now at a crossroads. The new Administration must confront important questions, such as the role federal law will play in protecting future innovation, growth, and competition in today’s fast-changing online era. Furthermore, the appetite to reform Section 230 is shared across the executive and legislative branches: the President, Department of Commerce, Congress, and the FCC have all criticized the existing statute. Ultimately whether reform happens as an executive branch exercise—or through a more traditional legislative process—is yet to be seen. This panel will address these issues and more.
- Ms. Joan Marsh, Executive Vice President and Chief Regulatory Officer, AT&T
- Hon. Noah Phillips, Commissioner, Federal Trade Commission
- Hon. Nathan Simington, Commissioner, Federal Communications Commission
- Mr. K. Dane Snowden, President & CEO, Internet Association
- Moderator: Hon. Elizabeth L. Branch, U.S. Court of Appeals, Eleventh Circuit
Litigation Practice Group
President Biden, on his first day in office, signed Executive Order 13990, which ordered all agency heads, not just those overseeing health or environmental issues, to “immediately review all existing regulations, orders, guidance documents, policies, and any other similar agency actions promulgated, issued, or adopted” during the entire Trump Administration, giving agency heads significant leeway to suspend, revise, or rescind a large swath of Trump-era administrative actions.
A related document issued the same day entitled “Fact Sheet: List of Agency Actions for Review; Actions Address the COVID-19 Pandemic, Provide Economic Relief, Tackle Climate Change, and Advance Racial Equity” includes the U.S. Department of Justice’s “Prohibition on Settlement Payments to Non-Governmental Third Parties,” 85 Fed. Reg. 81409 (Dec. 16, 2020), for review and suspension and/or rescission. The original regulation prohibits the government from including “provisions in settlement agreements directing or providing for a payment or loan to a non-governmental person or entity that is not a party to the dispute, except in defined circumstances.” Prior to this policy, DOJ sometimes gave significant discounts in monetary penalties to defendants who agreed in exchange to give money to third parties unrelated to the litigation.
Many interest groups and industry representatives welcomed the promised return of third-party payments on the grounds that they incentivize settlement and can be used to achieve desired policy outcomes. But the move also drew sharp criticism. As these critics have noted, third-party settlement payments (1) often use federal enforcement power to pressure defendants to give money to an administration’s political allies, (2) likely offend Congress’s power of the purse (as well as the Miscellaneous Receipts Act and the Anti-Deficiency Act) because they effectively divert penalty monies from the U.S. Treasury to projects and entities which Congress never selected, approved, or legislated, and (3) can be combined with the controversial practice of “sue and settle,” where the government declines to defend against a special-interest group’s lawsuit and settles on terms favorable to the plaintiffs, allowing interest groups to collect large amounts of attorneys fees and, in some cases, enabling "regulation by litigation" by using settlement terms to achieve policy goals without the transparency and accountability of rule-making under the Administrative Procedure Act.
- Ms. Anna St. John, President, Hamilton Lincoln Law Institute
- Mr. Jesse Panuccio, Partner, Boies Schiller Flexner LLP
- Mr. Justin A. Savage, Partner, Sidley Austin LLP
- Moderator: Hon. Alice M. Batchelder, U.S. Court of Appeals, Sixth Circuit
Hon. Alice M. Batchelder: Well, good afternoon everyone. It's a pleasure to be here, and I'm hopeful that we have a good audience out there. I would have to say that this is a lot more complicated than it used to be when you could just be in a room with a lot of people, and I’m new to this. I'm not exactly a Luddite, but I could be mistaken for one so hopefully I will be able to accomplish what I need to do electronically here.
We're supposed to begin this panel with some housekeeping items. I would admit that I went to law school in the vain hope that I wouldn't have to do housekeeping, so I'm just going to call these the preliminary things.
Turning now to some questioning, if you're in the audience, you can send text-based questions through the Q&A tab in the upper right corner of your screen. There's also a chat tab for attendees to chat with each other, but don't use chat, please, to be posing any questions. And there will be, later on, a live question period, and you can participate in that by pressing the "Raise Hand" button. You do, however, need a working microphone in order to use that option.
So with those preliminaries, we can get started. President Biden, on his first day in office signed Executive Order 13990 which ordered all agency heads, not just those overseeing health or environmental issues, to immediately review all existing regulations, orders, guidance documents, policies, and any other similar agency actions promulgated, issued, or adopted during the entire Trump administration, giving agency heads significant leeway to suspend, revise, or rescind a large swath of Trump-era administrative actions.
Included in those matters to be reviewed and potentially axed is the U.S. Department of Justice's Prohibition on Settlement Payments to Non-Governmental Third Parties. The original regulation prohibits the government from including provisions in settlement agreements directing or providing for a payment or a loan to a non-governmental person or entity that is not a party to the dispute except in defined circumstances.
Prior to the adoption of this policy, the DOJ sometimes gave significant discounts in monetary penalties to defendants who agreed in exchange for the penalty to give money to third parties unrelated to the litigation. So as you can imagine, many interest groups and industry representatives would very much welcome the return of third-party payments, claiming that they, among other things, that they incentivize settlements of enforcement actions and can be used to achieve desired policy outcomes.
Critics of these payments strongly disagree noting that these payments often use federal enforcement power to pressure defendants to give money to an administration's political allies, probably -- excuse me. The critics point out that these are payments are probably both constitutionally and statutorily wrong because they're contrary to Congress's power of the purse, not to mention the Miscellaneous Receipts Act and the Anti-Deficiency Act and can be combined with the controversial practice of sue and settle where the government declines to defend against a special interest group's lawsuit and settles on terms favorable to the plaintiffs, allowing interest groups to collect large amounts of attorney's fees and facilitating regulation by litigation by using settlement terms to achieve policy goals without the transparency and accountability or rulemaking under the Administrative Procedures Act.
So among things, which I expect our panelists today may address, will probably be what the point of penalties is, either criminal or civil, and how this point is furthered or not by payments in lieu of penalties, what is the authority for payments in lieu of penalties, and -- well, there certainly are both statutory and constitutional concerns with these payments in lieu of penalties, are there policy considerations?
So with that, I would like to introduce our very fine panel here. And let me point out that I'm going to do this in the order that I was given, just in case anybody wonders how I chose to go -- whom I chose to go first.
Our first panelist is Jesse Panuccio. He is with the firm of Boies Schiller and Flexner. He has offices both in Washington and Fort Lauderdale. He is the former third ranking official at the U.S. Department of Justice. By the way, I'm doing this in an abbreviated fashion because all of our panelists have bios that we could spend the entire time going through. Before joining the firm, Jesse was the acting associate attorney general at the United States Department of Justice. And in that role, he oversaw the civil and criminal work of the anti-trust civil rights, environment and natural resources and tax divisions.
And he also has served as chair of the DOJ's regulatory reform task force and vice chair of the DOJ's task force on market integrity and consumer fraud. He served for three years as the Secretary of Florida's Labor Economic Development and Land Use Agency, the Florida Department of Economic Opportunity. And before that, he served as Governor, now Senator, Rick Scott's General Counsel, and I understand that he has some very specific experience with these third-party payments in lieu of penalties.
Our second panelist is Justin Savage. You may be disappointed to learn that this is not the Justin Savage who is a gospel singer or the Justin Savage who is a wrestler. He is, instead, an attorney with Sidley Austin. I see that he's laughing about this. That's good. He's a global co-leader of the firm's environmental practice and serves on the firm-wide marketing and practice development committee. He also serves on the firm's COVID-19 task force. His focus is on high stakes environmental litigation and strategic counseling, including government enforcement actions, internal investigations, and rulemaking challenges.
He is recognized for his litigation and trial prowess in major environmental cases and his understanding of regulators' viewpoints. That's an understanding that some of us on the bench would probably enjoy getting more acquainted with. He won the law 360 MVP award in 2018 for several notable victories including using litigation to leverage a solution to a multi-billion-dollar regulatory problem for a heavily regulated industry. Like the other panelists, his accomplishments are really too many to detail, but he has extensive experience in various things having to do with the environment and internal investigations, audits, diligence reviews, and compliance engagements over a whole variety of types of things. And I'm not going to try to even go any farther with that, Justin, because it'll take us the rest of the day.
And our third panelist is Anna St. John who is an Attorney with the Hamilton Lincoln Law Institute. She began working with the Center for Class Action Fairness, which has since moved to—excuse me—the Hamilton Lincoln Law Institute. She has argued appeals before the Seventh and Ninth Circuits and has presented argument to nearly a dozen federal and state trial courts. Her work has led to the return of over $100 million in settlement funds to class members.
She also serves as a Deputy General Counsel for the Washington Ballet. And previously, she was an attorney with Covington and Burling and clerked for the Honorable Rhesa Barksdale on the Fifth Circuit Court of Appeals. She's a graduate of the Columbia Law School, where she was named a James Kent scholar. And she is a member of the state bars of New York, Louisiana, and the District of Columbia. And she resides in New Orleans where I bet it's even warmer and muggier than it is right now in D.C.
So having now introduced them, I will turn first to Mr. Panuccio for his presentation.
Mr. Jesse Panuccio: Well, thank you, Judge Batchelder, and thank you for the kind introduction. Thanks to my co-panelists and thanks to The Federalist Society for hosting, once again, this important conference examining the Executive Branch and reviewing its work.
As this is a Federalist Society panel, I think it's probably appropriate for me to begin with James Madison. I wore the tie. I've got the Madison head tie on. So let me start with that. Famously lamenting in Federalist 51 that men are not angels and thus need the government, Madison explained as follows. "In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself."
When I served, as you heard, at the Department of Justice from 2017 through 2019, we took seriously Madison's admonition. And many of the policies we put in place were geared toward obliging the government, and especially the DOJ, to control itself. Examples included the new policy on dismissing meritless False Claims Act cases, the prohibition on the use of sub-regulatory guidance documents, and the policy implementing requirements and procedural safeguards for consent decrees with state and local governments. And relevant to our discussion here today, we implemented a ban on including third party payments in DOJ settlements.
Now, to begin unpacking why we implemented that policy, let me start by reading a quote from a dissent by former D.C. Circuit Judge Janice Rogers Brown. "Perhaps one day, I will possess my colleague's schadenfreude toward the Executive Branch, raiding hundreds of millions of taxpayer dollars out of the Treasury, putting them into a slush fund disguised as a settlement, and then doling the money out to whatever the constituency the Executive wants bankrolled. But that day is not today."
Now, what had gotten Judge Brown so exercised? The dissent came in a long running saga of a case called Keepseagle, a lawsuit filed in 1999 by a class of Native American farmers who alleged that the Agriculture Department had discriminated against them under various government loan programs.
In 2010, DOJ agreed to settle the case for $680 million, providing for payments to each class member with precise amounts to be determined through a claims process. The money, of course, was to come from the Treasury through an appropriation known as the judgment fund. That's the fund that DOJ draws upon when it settles litigation.
Now, the parties predicted there would be at least 10,000 claims and agreed that any remaining funds would be paid to third-party organizations that served Native American farmers. Now, if you think about this, it sounds laudable and sensible, right? After all, who can object to funding non-profits that seek to serve the community? And given that the result of the claims process was a bit uncertain, who could object to this tidy way of cleaning up some loose ends?
Well, Congress could object, that's who. Article I Section 9 Clause 7 of the Constitution, known as the Appropriations Clause, states as follows. "No money -- no money shall be drawn from the Treasury but in consequence of appropriations made by law." Now, Congress has appropriated funds to settle cases. As mentioned, the judgement fund, 31USC1304, provides "that necessary amounts are appropriated to pay final judgments, awards, and compromise settlements."
But query whether Congress thought that by providing this general authority to provide settlements of claims against the United States for which sovereign immunity had been waived, it was authorizing the Executive Branch to negotiate settlements that also provide funding to organizations that have no valid claim against the United States. If so, what is the limiting principle? Vast sums can be allocated by the Executive Branch without any congressional consideration whatsoever.
And indeed, vast sums have been spent without any congressional consideration whatsoever. The Keepseagle case provides one stark example. Recall the parties had anticipated 10,000 claims. In the end, there were only about 5,200 claims filed, and only 3,600 were deemed valid and payable. Even after paying the lawyers $61 million, that left a lot of money on the table. Indeed, it left more money in the settlement fund than had been paid to the parties with actual claims.
The parties renegotiated and agreed that the remaining amount, a whopping $380 million, would still be paid through a so-called cy-pres distribution to third party organizations with no claim against the government. Judge Brown summed up the situation thusly. "The Executive Branch may wish to favor certain interests on the taxpayer's dime. If the government wishes to achieve certain purposes by expending taxpayer money to people with no monetary claims against the United States, a legislative appropriation is required. No such appropriation exists here because the money was appropriated to pay claims, and those claims have been compensated. The more than $380 million that remains here should be returned to the American people."
Now, Keepseagle was far from the only example of settlements being used to end run the appropriations process. That particular case involved DOJ taking money directly from the judgment fund and paying into parties that had no claims against the United States. But what happens when DOJ settles a case with a party that has violated the law, and thus owes the United States damages and penalties?
Well, according to something called the Miscellaneous Receipts Act, "An official or agent of the government receiving money for the government from any source shall deposit the money in the Treasury without deduction for any charge or claim." And according to another statute, the Anti-Deficiency Act, "An officer or employee of the United States government may not make or authorize an expenditure or obligation exceeding an amount available in an appropriation or involve the government in a contract or obligation for the payment of money before an appropriation is made."
In other words, when a liable party pays the United States, the money is to be deposited in the Treasury, and Congress, consistent with the appropriations clause, gets to decide how to expend those funds through the normal lawmaking process with its democratic accountability and procedural protections. Yet for years, DOJ included terms and settlements that require defendants to pay money to third parties who were not victims and who had no plausible claim for compensation from the defendants.
For example, in the settlements with big banks for their fraudulent conduct in securitizing and selling residential mortgage back securities prior to the 2008 financial crisis, DOJ included terms requiring the banks to pay third-party organizations. For example, in the $15.65 billion settlement with Bank of America entered into in 2012, DOJ required the bank to provide 7 billion, billion with a B, in consumer relief, "consumer relief."
But DOJ did not require all of that relief to be paid directly to victims of the bank's conduct. Instead, according to provisions buried in something called annex 2 menu items d through g of the settlement agreement, the bank could receive two dollars of credit for every one dollar it donated to non-profit organizations, community development and financial institutions, legal aid organizations run by statewide bar associations, and housing counseling agencies.
What was the result? Hundreds of organizations were funded, many of which are groups that have ideological missions or advanced policy positions on highly contentious issues. For example, a group called New Jersey Citizen Action received a healthy payment. It defines itself on its website as "a grassroots organization that fights for social, racial, and economic justice by taking positions on everything from healthcare to boating laws to climate and clean energy to banking and housing."
The National Council of La Raza received millions, a group that identifies itself on its website as advocating for policy positions on issues such as criminal justice, the economy, education, healthcare, immigration, and voting. In short, the Obama administration used third party payments to funnel billions of dollars to hundreds of organizations, all of which just happen to align perfectly with the administration's political views.
Now, lest you think I'm being one-sided, and though this abuse was most pronounced during the Obama administration, it was not limited to that administration. During the Bush administration, the then US Attorney for New Jersey signed a deferred prosecution agreement that required Bristol Meyers Squib to endow a professorship at the Seaton Hall School of Law, which just happened to be the then US Attorney's alma mater.
Now, perhaps all these are worthy causes and groups. Perhaps their policy positions are unassailable. Perhaps they make society better through their work. But ask yourself whether these sizable payments compelled by the threat government enforcement action are really consistent with the Appropriations Clause and our democratic system. And further, ask yourself whether the funneling of such monies is consistent with the plain text of the Miscellaneous Receipts Act and the Anti-Deficiency Act.
Well, the leadership that came into DOJ in 2017 thought not, and we took very seriously our responsibility to the public fisc and too, as Madison said, oblige the DOJ to control itself. To that end in June 2017, just a few months after he was confirmed, Attorney General Sessions prohibited payments to third party organizations that were not directly involved in the litigation or harmed by the defendant's conduct.
That policy was then memorialized in the justice manual and in additional policy memoranda such as those from the AAG from the environmental division who provided a lengthy analysis explaining why EPA's Supplemental Environmental Projects, or SEPs, almost certainly violated the law and had to cease.
As noted, such third-party payments raise serious legal, policy, and ethical concerns. If a payment is imposed as a penalty for misconduct, then it should be paid to the Treasury. Funds intended to make victims whole should be paid to the victims. And even if one assumes that third-party payments are lawful, quite an assumption, they create the appearance of political favoritism and cronyism, as the former New Jersey US attorney found out when he ran for president and this issue was brought up and as Congress found out when it investigated the banking settlements. Congress even uncovered an email stating that a funded organization said it was "willing to build a statue of the Associate Attorney General who was overseeing the settlement. And then we could bow down to this statute each day after we get our $200,000." This, my friends, is not what we want American citizens saying about our unelected, unaccountable prosecutors who wield tremendous, tremendous power.
Thus, we determined that the Department of Justice should not use its settlement authority to subsidize favorite causes or political allies. Under the Sessions memo, DOJ got out of that unseemly business. It was a significant blow in favor of, again, as Madison put it, obliging the Executive Branch to control itself. But alas, as you've heard from Judge Batchelder, the new administration has decided it would prefer to be an appropriator rather than have to deal with the American people's representatives in Congress. And so pursuant to an executive order from President Biden, it appears the slush funds are coming back. It will be important to monitor closely how DOJ uses these funds and to be vigilant in calling out political cronyism and illegality.
And now for a rebuttal, let me turn it over to Mr. Savage. Thank you.
Mr. Justin A. Savage: Thanks, Jesse. And thanks, Judge, for the kind introduction. And I do apologize that I am neither a gospel singer or a professional wrestler, although it would be pretty cool if I could be both. And let me just say that I, like Jesse, was at the Justice Department, perhaps a bit longer, about a decade, and in a career position where I had the honor to work for the environment division but also in some cross functional organizations like the National Advocacy Center down in South Carolina, which has delicious shrimp grits, although not as good as where Anna St. John's is.
So listening to Jesse's speech, I was both quite concerned and I thought my day job is not this interesting. I think both the legal reality and the on the ground facts are, for the most part, third-party settlements are appropriate and can work with the right oversight and safeguards. And I thought it was telling that he talked about judicial decisions which means there is a level of review by Article III judges, such as the one -- the distinguished one we have on this panel, and other folks. But I really do think that Jesse is someone who served across multiple administrations and actually worked on these settlements, including some ones that went through under the Sessions policy.
But this is really taking a meat ax to something that might need a scalpel. Or another way of looking at it is it's a solution in search of a problem based on some lofty principles. On Madison, that sounds great. I love Madison, but it really ignores a wealth of law out there and how this works in the real world outside of these political talking points.
So let's talk a little bit about the law. Jesse mentioned Article I of the Constitution, which vests Congress with appropriations authority. He mentioned the Miscellaneous Receipts Act, and he mentioned the Anti-Deficiency Act and a lone dissent. Let me tell you about some things that were left out and I think will inform the audience about the legality of this.
The Office of Legal Counsel looked at this in a softwood lumber settlement in 2006, and that's quite, as everyone knows, that's the government lawyer, the pretentious government lawyer. And they said that the issues identified, Article I, the Miscellaneous Receipts Act, and the Anti-Deficiency Act, are not implicated if there's a third-party settlement that one, is reached before there is an admission of liability or a judgment and two, the government doesn't control the disbursement of the funds.
That opinion is also consistent with GAO opinions that have been reached, and GAO is the Government Accounting Office. It's the police, so to speak, of Congress's fiscal authority, and it's concluded multiple times, looking at settlements with the FTC and other organizations, that as long as those two criteria are met, they're lawful.
So to me, as a practicing lawyer who does this day to day, that's informative that these organizations both within the Executive and the Congressional Branch have said okay, let's look at this, and this seems lawful provided there are these safeguards in check that I've mentioned.
Now, that's not a lot. There's not just one dissent out there by Judge Brown, who I think it's the Judge Brown who's retired, who's a distinguished jurist, rashly been, by my count, at least four cases that have looked at this. And I should say, my background is in the environmental context. I was a trial lawyer and then a senior counsel in my division. I think my experience is generally applicable to these other fields of law in terms of third-party payments. Both is this legal, and then are there appropriate safeguards that can be put in place, both within the Executive Branch and then ultimately the Judicial Branch and through public and congressional oversight? I think the answer is yes, there can be.
Let me just tell you a little bit about the cases. There's one published opinion in the Third Circuit. It's called Public Interest Group v. Powell Duffryn. There's another one in the Ninth Circuit called Sierra Club v. [Electronic] Controls Design. If you're interested and you're a law nerd like I used to be before I started practicing 25 years ago, happy to send you the sites. And in both those cases, what was interesting, there were so-called citizen suits under environmental laws. And that's when literally, citizen groups stand in the shoes of the Executive Branch to enforce. And in those cases, there were objections just like the ones Jesse mentioned in appropriations clause, the Miscellaneous Receipts Act, because those settlements in those cases required third party payments.
And in both of those decisions, unanimous decisions by six city and appellate court judges, they found that the payments were lawful because they were made before an admission of liability or a judgment and the government didn't control the payment structure once they went out. There's also two district court opinions on both coasts, one from the Western District of New York and one from the Western District of Washington. I won't bother you with the sites. If you'd like to see them, I'll certainly send them to you.
So to me, this is more of a policy issue and more of a political issue that there's this concern that everything's a slush fund. And I work on enforcement matters on a day-to-day basis. I've been on the other side at the Justice Department doing environmental enforcement for 10 years, so this is something that it's part of my day job and I wish it was that interesting that people were having these lofty policy debates to steer money this way or that or it was all that political. But the sad reality is it's not. There are both institutional controls inside the government, and then as Jesse's alluded to, you can review this in court.
So let me go through just a little bit of the judicial oversight because I think that's so vital, right? We have different branches of government. And then a judicial side, the third-party settlements typically arise in the context of a judicial consent decree, and there's a standard of review when an Article III judge reviews a consent decree. It has to be fair, reasonable, in the public interest, and further the objectives of statute.
And furthermore, they're often opportunities for the public to file comments on that. If someone feels very worked up, they can try to intervene and oppose a consent decree. And in that context, it provides some oversight if there is a third-party settlement. So I mentioned the four cases that are out there. That's where those decisions came from. It's a consent decree. And then also, I think the decision that Jesse mentioned, obviously Judge Brown felt strongly and had a dissent, which again indicates there is judicial review.
I think the other thing to keep in mind, at least in the environmental context at the environment division before the last administration, and there did continue to be some third-party payments under AG Sessions, but let me just give you some real practical examples quickly of some of the safeguards that at least the environment division follows that I think are generally applicable and could be something to be considered for other settlements.
First of all, the defendant who's settling, if they want to have a third-party payment, there has to be some work, some specified work tied to the payment. It's not just a payment for the good of the order to toastmasters international and do what you will. There has to be something. So in the environmental context can be removing led paint. I did one of those in a city in judges district where they cleaned up led paint. It could be putting in a park. It could be something that's -- work that's tied to the alleged violation.
There has to be accountability, meaning there's reporting. The defendant has to report to the government, and in some cases a judge, what's the work being done? How's the money being spent? And as part of that, there has to be "eligible costs," meaning you can't just buy somebody a pickup truck or a Cadillac who works at a public interest organization, receives a payment. There actually has to be some eligibility criteria for how the money is spent.
And I think the final safeguard that you have there, you know, Jesse mentioned the Slush Fund Act or the hearings in the Bank of America act, that was through congressional oversight. There was an act introduced in Congress in 2016 to ban third-party payments to stop slush fund act. It failed, but there's a lengthy report everyone should read. And that just emphasizes there's, again, some measure of accountability.
So my bottom line is, from a legal perspective, all three branches have weighed in and said listen, there's broad enforcement discretion in the Executive Branch to do this. There's some limitations on that, okay? And then to reach the practical perspective, some of the guidance I shared with you from the environment division I think really provides some good working guidelines for both judges and parties to consider. And look, there are benefits to doing these kinds of settlements. They directly benefit communities that maybe impacted by an alleged violation or other issues as opposed to an amorphous deposit into the Treasury.
So I understand that high-minded folks, you begin with Madison and then this parade of horribles. And I'll just say this has been reviewed several times by all three branches of government, and there are working guidelines that both internally, at least on the environmental side, it could be applied more generally, and in these judicial decisions provide a level of oversight where I think it's appropriate to have these third-party payments provided there's limits in oversight as I've just recommended.
So thank you, and I'm going to turn the microphone now over to Anna St. John. Anna?
Anna St. John: Thank you, Justin. And thank you to The Federalist Society for the opportunity to discuss a topic that's now more timely than ever. So I'd like to address some further problems with these settlements even with the safeguards that their supporters have suggested.
Now, no one is claiming that all or even most of DOJ's settlements had or will have these third-party settlement payments, but we know that a number of them did and we know that one of the Biden administration's very first actions was to issue an executive order directing DOJ to review the rule against third-party settlement payments. And that's a problem.
Some people have argued, as Justin did today, that these settlements are usually in the form of consent decrees. And those consent decrees require court approval, and therefore, they have a degree of oversight by another branch of government. That doesn't solve the problem. When these consent decrees are presented to the court for approval, there's rarely anyone on the other side arguing that the court should withhold approval.
Instead, you have the Department of Justice bringing its full authority to the table saying the settlement should be approved. And the defendant, too, is asking the court to approve the settlement. Well, courts are structured to decide issues in an adversarial context, where they're presented with the best arguments on either side of an issue. Judges also rely on precedent and because it's very rare for anyone to fight these things, there's no real precedent for them to look for when a settlement should be rejected.
Now, there was one case where Judge Rakoff of the Southern District of New York actually rejected a proposed consent decree between City Group and the SEC. He found that the proposed consent decree did not meet the necessary standard and did not provide the court with enough evidence to approve it. Well, as you can expect, both the SEC and City Group appealed. And in that ex parte posture, the Second Circuit vacated Judge Rakoff's judgment.
The Second Circuit ended up creating this watered down rule that district courts have to give significant deference to a government's proposed consent decree. A court essentially only has to review for procedural fairness and basic legality. So, really, as long as there isn't bribery in the settlement process or human trafficking required by the terms, this holding allows the government to get what it wants in a consent decree.
Now, this was an SEC settlement, but there's no reason to think the same standard doesn't apply to DOJ settlements. It also doesn't help the process that people can conceivably file notices with the court voicing objection to the consent decrees. So for example, when DOJ and Volkswagen entered into a consent decree following the clean diesel scandal several years ago, the settlement directed $2 billion to zero emissions vehicles charging stations infrastructure and promotion of zero emissions vehicles.
And this was a rare event because usually there's no notice or media coverage of the settlements, but DOJ received thousands of pages of objections and other comments which it shared with the district court. And we were among those who submitted comments, and we addressed the separation of powers issues among other legal problems.
But unlike an agency under the Administrative Procedure Act, a court has no obligation to consider any comments at all. If anything, it's more likely to review DOJ's rationalization of the comments. And in fact, in that case, the district court barely covered the substantive objections raised in the consent decree in its opinion approving the settlement. It issued a short opinion. it wasn't even the length of DOJ's response to the comments, and it made no mention of the separation of powers issue.
And this was a really outrageous settlement. President Obama had asked Congress to fund a zero emissions vehicles program on more than one occasion, and Congress had repeatedly refused to do so. So here, you have money from the settlement with Volkswagen that could or should go to Treasury, and if it went there, it would never fund a zero emissions vehicle program because Congress wouldn't allow it. And yet, because of the settlement, DOJ is now making spending decisions on behalf of the government, completely bypassing Congress.
The Volkswagen settlement is not a lone example. Jesse mentioned the mortgage settlements. In 2014, DOJ entered into a settlement with Bank of America that raises similar constitutional and policy concerns. So under the deal there, if Bank of America funded a critical need family housing development, it got a credit of nearly four dollars for every dollar it lost on the resulting loans.
This program was completely unrelated to the theory of the suit which was that investors were defrauded by the way the bank was selling mortgage-backed securities. But that's not even the worst of it. HUD, a different part of the Obama administration, thought the program was a bad idea. HUD, which has the housing policy experts, thought that that sort of mortgage relief made things worse because a lot of people were in houses they couldn't afford. And this was a sort of government giveaway that prolonged the pain where the recipients of the program had a high probability of still defaulting on their loans later.
So it was a big waste of money, and it's not clear why DOJ imposed housing policy that a different part of the administration opposed. But the important point is that you had a DOJ attorney who is not an expert in housing policy undermining the housing policy of experts on the issue within the same administration. Well, the problem is no judge is going to look at that. It doesn’t have the information before it. It's all buried in the paperwork. Nobody's even told HUD about it, and nobody's telling the court about it.
So even if you think DOJ has the authority to enter into these settlements, its hard to imagine that anyone thinks it's a good idea to have DOJ making policy that contradicts what the policy experts in the same administration believe is the correct approach on the issue.
So I'll end with a point that not all is lost with respect to these settlements. It's my experience that when you have a party before the court with standing and that party challenges improper settlements, the courts will recognize the problem. Hamilton Lincoln Law Institute, my organization, challenged an FCC settlement on behalf of consumers harmed by unlawful merger conditions that the FCC imposed on Charter and Time Warner Cable in a settlement with respect to their merger.
The merger conditions there had nothing to do with the transaction and were outside the FCC's normal regulatory authority. And these conditions resulted in increased prices to subscribers and also reduced the quality of service they received. Well, when we challenged this, the D.C. Circuit found that the consumers did have third-party standing to challenge certain of these conditions and struck them down noting that they were troubling.
And the court pointed out that even FCC acknowledged that certain conditions were not a transaction specific benefit. They were just add-ons that the agency decided to impose. So we're 1-0 challenging improper administrative settlements when we have clients that have standing to do so. And while we'd like to see these abusive settlements disappear entirely, that seems unlikely, especially with the executive order that the Biden administration put out.
So we're looking to increase our win count to 2-0, 3-0, as high as we need to go because we're not afraid to take these on, and we're looking for the right opportunity to make that happen. So I'll stop there and turn it back to the panel. Thank you.
Hon. Alice M. Batchelder: Well, thank you all three of you for a very enlightening, I think, overview of either the process or the problem, whichever way you might want to be looking at it. And so before we turn to the audience Q&A, I thought maybe we might have a little bit of additional discussion here. And I mentioned in my opening that one of the things that might come up, but I don't think, at least explicitly, has come up, is a question that I have which is in either the civil or the criminal type of statutes that these enforcement actions are being brought under, what is the point of the penalties in those statutes, and how is the reason for or the point of those penalties being either furthered or not by these third-party payment settlements? And I would turn, I guess, first to you, Mr. Panuccio.
Mr. Jesse Panuccio: Well, thanks for that excellent question and to my fellow panelists, both, for enlightening commentary on this. My view is prosecutors wield incredible power in this country. Their job is to enforce the criminal law and the civil penalties. And the point of penalties in our criminal justice system and our civil justice system is punishment and restitution.
So if we're looking at restitution, the money needs to go to the parties deserving of restitution, victims. If we're looking at punishment, that means it's the sovereign, it's the state, wielding its coercive authority to collect money from otherwise free citizens and entities and take that money and do something with it. And the question is, I think the legal and policy question is, who decides? Who gets to decide what happens to that money? Same as when the government uses its coercive power to tax citizens. Who gets to decide what's done with those funds? And the answer is right there. It's in the plain text of the Constitution. Congress decides, and the reason Congress decides is Congress is the only representative of the people.
As well-meaning as they might be, and I've worked with many of them, I was one of them, Department of Justice officials aren’t elected by anybody and they're not accountable to anybody. And so if we want to further the purpose of punishment and then the United States getting that money, it should be appropriated by the one body that is elected to appropriate funds, and that’s Congress.
Hon. Alice M. Batchelder: Mr. Savage, following up with that, so if the point of the penalty is that the government is entitled to have either the money, the monetary penalty, as punishment or as restitution, why does it make sense to have the party being punished or against whom the restitution order is being levied, deciding where the money goes and how it's going to be spent? How is that punishment or restitution?
Justin A. Savage: That's a great question, Your Honor. And I appreciate --
Hon. Alice M. Batchelder: Oh, I hope you do think my questions are good.
Justin A. Savage: Oh, it's good. It's good. I like it. I like this. So here's what I'm -- here's my point of view, for what it's worth. From a punishment perspective, you could take the money, put it into projects. You could take the money, put it in the Treasury. You could take the money and put it in a garbage can and burn it. It's irrelevant from a changing behavior perspective, right? The point of a penalty or other fine is to promote general deterrence in the regulated community or business community or whatever your target community is. And then specific deterrence as to the particular company or individual, right? And so whether they make that payment to X or Y or Z, it's irrelevant. And I think there's a robust body of literature on that.
I think on the point of well, it should go to the victim and restitution, absolutely. But this is all at such a high, philosophical level, let's make it into ground truth. Let's talk about a particular case. If I've got a case where there's an allegation of led paint not being completely remediated appropriately and people are exposed to it or at risk, does it really make sense to that community to say you know what, ya'll been harmed, we're going to give you some money. Go out and fix the led paint in the homes. No, it doesn't. And that's why the environment division typically requires, and sometime agencies do too, say let's have a third-party payment so we can have an expert in there to remediate led paint in homes because this was an alleged led paint violation and so there's a nexus.
And so I think both from a deterrence perspective and a restitution perspective, this can make sense. I think what doesn't make sense is to say let's throw the baby out with the bath water. We don't think the oversight is enough, blah, blah, blah, and change what's been 40 or 50 years of practice, Your Honor.
Hon. Alice M. Batchelder: Ms. St. John, what do you think?
Anna St. John: Well, I think it's hard to argue that the funds from these settlements are not public funds that belong to the American people. These are claims brought on behalf of the American people. The settlement represents the value of those settled claims, and so they should be coming into the Treasury to the public purse, which Congress then has the appropriate power to distribute as it sees fit.
There's a real lack of oversight if it's prosecutors deciding where to send the money for these settlements. If you think DOJ has the authority to decide how it'll spend the money from a settlement, you get into real conflict of interest problems. You get lobbying from third parties, and I think there's a natural tendency, just as we see in class actions by class action attorneys, that where there are absent victims, there's no one really standing up to the principles to make sure that they are true fiduciary agents for the American people here to make sure that the funds are spent in their interest rather than in the interest of the attorneys who are getting to make these decisions.
The natural human inclination is to follow their self-interests and get the money to political allies as we've seen in some of the abusive settlements that we've talked about today.
Justin A. Savage: May I briefly respond?
Hon. Alice M. Batchelder: Sure, briefly.
Justin A. Savage: As someone who's a career prosecutor in the government, I just think that assumes that people are not acting in good faith and doing their jobs in the government. And then from a corporate perspective, Jesse and I represent companies. They're interested when they do a settlement, again, in good faith, in seeing the work performed by a third party. It's very much painted as you're in a dark room with a gun to your head and you better give to whomever political organization or bad things are going to happen, and I just don't think that scary picture is how it works in the real world with specific cases.
Jesse Panuccio: And, Your Honor, allow me to just add one thing to that because it is a point I -- if I may.
Hon. Alice M. Batchelder: Please.
Jesse Panuccio: Justin raises this point that look, in most cases, this is just well-meaning prosecutors doing their job, and there's really nothing to see here and just let it happen. Now, even if you accept that that is sometimes the case, it is also very often not the case, and Anna and I have both pointed out two tremendously important large-scale settlements that saw the transfer of billions of dollars of money from these parties that had broken the law to hundreds of private parties. And we, to this day -- and I know this because I was there and tried to figure it out.
To this day, we still don't know what happened to the billions of dollars in the banking settlements that went from the banks to these private organizations because there was no system setup for accountability. We don't know if that money was spent on improper political projects. There was nothing setup to say if you're getting this money, here's how you have to spend it, here's who you're reporting back to, and most importantly, here's how the public can trace every dollar that's spent. We don't even know who at DOJ made the decision about which groups would be included. Congress tried to investigate and was stonewalled. So that was a multi-billion-dollar third party settlement. Ten years later, we still don’t know what happened to it.
Hon. Alice M. Batchelder: Sort of casting aside any debate on the prevalence of good faith of the actors here, because I suspect there's room for disagreement, one of the things that I was kind of intrigued by was Mr. Savage's point, and I know it's been widely made, that as long as we haven't proceeded to judgment, sort of, the defendant hasn't admitted liability, you really can't call the money that would have been coming if we had proceeded to judgment, you really can't call that a penalty. So what's the problem here if everybody agrees on how the defendant ought to anti-up vast sums of money according to a consent decree?
And I guess one of the concerns I have about that, Mr. Savage, is it seems to me that maybe is an argument a little bit built upstairs over a vacant lot because certainly, the defendant wouldn't be spending those mega dollars doing whatever it is the consent decree makes it do, but for the enforcement action and the threat of the penalty. How do you answer that?
Justin A. Savage: That is the argument for the other side of these, and the way I would answer it is in litigation, no one knows. There's a risk to a defendant in a case that could cause them to say we think it makes sense to do a settlement and to consider doing a third-party settlement.
In the environmental context at least, and I think it has some policy lessons for exercising enforcement discretion, you can't be forced to do a third-party settlement. And I'll say there, further, Judge, this has been looked at, I think by OLC and others who are comfortable that in that context it is not actually -- there are not actually funds received by the Treasury that would cause the Article I, Miscellaneous Receipts Act, Anti-Deficiency Act concerns that you've raised.
Hon. Alice M. Batchelder: Because under those statutes, the government really hasn't ever had the money, so we don't need to worry about either of those statutes because we can avoid having it actually be government money by doing what has been described, I think, by Mr. Panuccio as an end run around the requirements. Am I interpreting you correctly?
Justin A. Savage: You're interpreting that -- I don’t agree it's an end run, but the OLC has ruled, and I think this is consistent with some case law there, that as long as there's not an admission of liability or judgment and as long as the government doesn’t control whom the money goes through, which I still think means they can ensure there's performance, then those concerns are not implicated. And it's a classic question of where do you draw the line? And we've seen this in other appropriations fights over things such as the wall in the last administration.
Hon. Alice M. Batchelder: One of the criticisms that I have seen and, honestly, this is not an area that I've had a lot of experience in, but one of the criticisms that I've seen is that these third-party payments tend to be very one-sided politically. And that is the criticism, that this has become a very, very political thing to do. And one of the people who was opposed to these, and I'm not sure whether it was Mr. Panuccio or Ms. St. John, treaded lightly on that subject. Does either of you want to go any further into detail?
Jesse Panuccio: I'm happy to or if Anna wants to take that, she can as well.
Anna St. John: Go ahead, and I'll follow up after you.
Jesse Panuccio: So I think if I understand that question, are these often politically one-sided? I think the bigger the case, the more political -- and more funds that are available, the more political it becomes. And that's just human nature. If you are a government regulator and you have a few billion dollars to give out, you're not going to give it out to things and causes and people you disagree with. You're naturally going to be inclined. And that's what Congress does too. The only difference is Congress is elected to do that. They have the democratic legitimacy to make those decisions on behalf of the people, and prosecutors don't.
And what prosecutors also have is this tremendous power behind them to say -- to come to this notion that companies -- defendants often want this. Defendants want to do anything to get out from under the tremendous power of DOJ, and so if a DOJ prosecutor comes along and says oh, hey, we'll lower your penalty two for one, as they did in the banking settlements, if you just fund this project over here.
Or let's take SEPs, an area that Mr. Savage has much more familiarity with. For years, the EPA said we will give you up to an 80 percent credit on your penalty with the United States if you do these SEPs projects. So the notion that oh, well, the money never touches the hands of a regulator so therefore, it's okay. I mean, it's completely fictional. It's only on paper. The DOJ and the EPA are trading penalty dollars for these projects that they favor, and those projects are projects that they favor.
Anna St. John: I'll add too --
Hon. Alice M. Batchelder: Ms. St. John?
Anna St. John: Yes. Thank you, Your Honor. I'll add too that investigating these settlements, it has come to light that the Department of Justice has directed the money to political allies. There were emails that are detailing The Federalist Society paper on this topic that during negotiations with a settlement with Citibank, there were DOJ lawyers saying like let's make sure this settlement includes language so that money doesn't go to conservative organizations like the Pacific Legal Foundation. And so we know that there is this kind of slush fund-y political thinking that does exist behind some of these more abusive settlements.
Justin A. Savage: May I briefly respond, Your Honor?
Hon. Alice M. Batchelder: You probably should have that opportunity.
Justin A. Savage: Thank you. This notion of widespread slush funds makes me feel like a Chicago politician in the 1970s. Unfortunately, my day job working on enforcement settlements, it's not like that. I mean, I'm hearing well, DOJ's not democratically elected, the President is. And there's a wide band of enforcement discretion and then this notion that well, there's more money so these bureaucrats, they're just going to go hog wild and their Biden supporters are going to give this money to this group or that group. I think most people want something good to happen from a settlement if there's a settlement, and they're going to direct in a way that makes sure something good happens whether it's building a park or led paint or whatever.
And so, yeah, I get it. I get why there's concerns because this is a very technical area that I work in every day and it sounds -- makes a good talking point. All these settlements that Jesse and Ms. St. John have mentioned, they're all out there because there's been some level of congressional or judicial review. And so I hear ya'll, but I just don't think that's the way it works in the real world.
Hon. Alice M. Batchelder: Well, that kind of brings up what I think is maybe my last question which is the extent to which the judicial review to which Mr. Savage refers is real. Now, he described that in his opening remarks, and he talked about if the people out there whose tax dollars are involved or who would be the taxpayers benefitting from the money coming into the treasury where if the penalty were enforced, the money would actually go, if you don't like these settlement agreements, you can -- and I think the words he used were you could attempt to intervene. That struck me as being probably pretty realistic in terms of the likelihood. So I'm just wondering whether any of the three of you have anything further you would want to say on the subject of the extent to which there really is judicial review of these settlements and what is the role that the court should be playing?
Anna St. John: I'll start, Your Honor. So I do agree that there is a path to intervene when a party is aware of these consent decrees and these settlements that when they are presented to the court, but a party has to have standing or have some injury to really be a participant in those court actions. And if they're not, I've seen in my experience that if you just submit a comment, the court kind of brushes it aside because it does have two parties in front of it, the defendants and the Department of Justice, pushing for approval of these settlements.
And so I think that one of the stronger ways to challenge abusive settlements with the third-party settlements is through intervention if you can find a party that has been harmed by the third-party settlements and can really make a strong showing in court as to why the settlement shouldn't be approved.
Jesse Panuccio: I'll just add to that, I mean, my view is as a matter of [inaudible 61:22] judicial oversight over these settlements? No. I think judges want to clear their dockets of big cases, and when you have a willing prosecutor and a willing defendant and they come in and say we've settled, your honor, independently, the court does not have much reason or inclination to review all of the terms closely and make sure that every single line complies with law. That's as a matter of incentive.
As a matter of reality, we know that's the case. These settlements, which sometimes include sweeping provisions -- and take consent decrees generally. Justin said these often come in the form of consent decrees, not always. But when they do, it's a topic for another day, but consent decrees include many times structural relief and dozens of provisions that have no basis in federal law and if actually analyzed, could never pass muster and never be announced through an actual final judgment that was litigated. And yet, judges sign off on them every day.
So the reality is we have a -- I mean, this is why I lump this in with things like sub-regulatory guidance. We have a whole system of lawmaking that's going on in this country, of appropriating that's going on, and it all happens below the level of any actual elected officials who are supposed to be doing that stuff. And courts sign off on it all the time every day.
Justin A. Savage: And if I may just briefly respond.
Hon. Alice M. Batchelder: Yes.
Justin A. Savage: Having doing this on a day-to-day basis, interacting with judges, I think they take seriously their oath to look and make sure a settlement is fair, reasonable, in the public interest. People are not just clearing their dockets. I've been involved in cases where people filed comments, both government and the defense side, where the judge raised questions and he had to go in and explain it. And I've been involved in at least one case where someone intervened where they had standing. And I don't know, call me old fashioned. I just have faith in the system, both from a judicial and from a litigant perspective, and I just think we're really searching because of fears for a solution when there's not a significant problem.
Hon. Alice M. Batchelder: So with that, before we turn to the audience to see if we have any questions, I guess I would like to ask each of the three of you if you have any general closing remark you'd like to be able to make. And we'll go in the order that we went before, so we'll start with you, Mr. Panuccio.
Jesse Panuccio: Okay. Well, thanks very much for that opportunity, and I'll just say a few things, probably in response to the discussion generally but a few points that Justin made.
One, in terms of OLC, I love the lawyers at OLC. Let's not forget what their job is. It's to make arguments in favor of Executive Branch action. They often overrule themselves from administration to administration. And, of course, if you go back and read the AAG ENRD memos from the Trump administration on this, there are OLC opinions from the early 1980s as well as comptroller of the currency opinions casting serious doubt on these kinds of settlements. And even putting that all aside, I love an OLC opinion, but I love more the plain text of the Constitution and statutes. And it is very hard to make a plain text argument that these are lawful.
And then again, I would just come back to Justin says oh, the system's working. it's fine. I have faith in the system. The question is what system? Established by whom? Under what laws? The system that I see that was established says no appropriation. No money can be spent absent an appropriation. That's the system. I have faith in that system because it respects my vote as a citizen and makes sure the people that I elect actually have the say rather than prosecutors. Thanks very much.
Hon. Alice M. Batchelder: Thank you. Mr. Savage?
Justin A. Savage: Thanks, Jesse. Thanks, Judge. Thanks, Anna. This has been a fun panel. And I'll just say that, again, I have faith in the system, and we've brought up some settlements. There's some law in there whether you consider the OLC law or not or some of the opinions, they are there. And I think they've consistently found that this practice is lawful.
And then the question is are there measures in place to make sure there's appropriate oversight? I think we can get there, and I appreciate everyone working together. I would just not cite this ENRD AAG memo just because that's also -- the author of that particular memo is also someone who wrote a memo or thought that would be a good idea to sue the State of Georgia, overturn the election. So not necessarily the best precedent there, but I appreciate the thought. Thanks, Jesse. On to you, Anna.
Anna St. John: Thanks. I really appreciate the opportunity to be here today. It's been a fun discussion. I want to close by saying again, this is not a problem with every DOJ settlement, but we know that there are billions of dollars in these settlement payments that have been slushing around and without any oversight by Congress. That money settled public claims. It belongs to the public, and it should be subject to the Appropriations Clause with congressional oversight and authority directing those funds. This is really a problem no matter where you sit on the ideological spectrum because just because it's one party doing it today, it could be the other party tomorrow. So with that, I turn it back over to the Judge.
Hon. Alice M. Batchelder: And with that, I hope I can figure out how we now are supposed to go to the audience to see if we actually have people who would like to be able to pose some questions to this panel. And I think I'm supposed to mention, as I think I already did, that you can do text-based questions through the Q&A tab on the upper right corner of your screen, and you also have the raise the hand button if you have questions that you want to be able to pose vocally. And I'm not seeing anything on my screen.
Jesse Panuccio: We do -- if you click on Q&A, Judge, I believe we do have a few questions there.
Hon. Alice M. Batchelder: Hang on. As I warned everybody, I am something of a Luddite here. Okay. So this is a text question that has come in. And the question is for Mr. Savage. Can't we distinguish between a circular remediation expressly authorized by Congress as a remedy and the sort of industrial policy in the VW settlement where the DOJ is overriding the judgment of Congress?
Justin A. Savage: That's a great question. Circular does have specific provisions for remediation. The judges have also found that they have broad equitable authority to mitigate the harm from an alleged violation. And I think in that particular instance in VW, there was an argument that in fact the funding of the ZEV infrastructure was mitigation.
And beyond that, there's the Executive's broad take power authority, which I'm sure Jesse advocated for when he was at the government. But I think it's a good question and one that's been wrestled with in the OLC opinion in the other cases that I mentioned, which I'd be happy to provide to the questioner. Thanks, Your Honor.
Hon. Alice M. Batchelder: And I think we have one raised hand, so I'll click on that. Oh, we have the raised hand of Dean Reuter.
Dean Reuter: Hi. Hi, Judge. While I'm here, I will ask a question, and it specifically goes to audit and oversight of the third-party settlement funds. I was in the inspector general community a couple of different times, and we took seriously the oversight of federal expenditure of funds. Federal funds come with all sorts of restrictions with regard to hiring, firing, environmental impact, everything you could name top to bottom.
Do these funds transfer to third parties with the same restrictions, with any restrictions? And are there provisions for independent audits of the funds at any point along the way? How do we know they're not using the funds for Christmas parties, for example?
Hon. Alice M. Batchelder: Which one of you wants to tackle that?
Justin A. Savage: I can just offer briefly my experience. In environmental settlements, typically with the environment division, there is reporting on spending on eligible costs, and there's a percentage that has to be met for eligible costs, somewhere between 90 to 95 percent so that some dude at amortization doesn’t spend it on a pickup truck.
And I've also, when I was there, participated in a GAO audit that was precipitated by Congressman John Dingell, not the current Congressman Dingell, of third-party disbursements. I don't know have happened since.
Dean Reuter: Well, then I'm curious, Justin Savage, what's the legal authority? Is that part of a settlement itself? What's the legal authority for the government to oversee funds that I suppose went in one instance from Citibank directly to a third-party or private party?
Justin A. Savage: Yeah. So I'm not commenting on the Citibank, somehow I wasn't involved in that. But from environmental settlements, they're generally is a term that says defendant, you can pick who will perform -- so the led paint example, go mediate led paint. But then there's a requirement that a percentage of the money spent by the organization, it's typically pretty high, 90-95 percent, actually go toward the remediation.
And those reports are sent into the government. I've seen situations where judges have wanted to have periodic briefings on settlements. So there are at least mechanisms in the environmental context, which I think more broadly makes sense as a policy matter just to make sure that money, as you know, when there's money, there can be a risk of fraud or abuse.
Jesse Panuccio: And let me -- I think this is helpful because it helps show the fiction that as long as the money doesn't touch government hands, it's okay from a Miscellaneous Receipts Act, Appropriations Clause, and Anti-Deficiency Act perspective. So what we have here is the government official, the regulator, says it's not us. It's not touching our hands because then I'd be in violation of the Anti-Deficiency Act which could be a real problem to me personally, so you do it over there.
But by the way, make sure you send in reports to me so that I spend my government paid for time monitoring what happens to that money and making sure that it's being used exactly as I want it to be used. I mean, it's sort of just shines a light on the fiction that the government regulator is not directing exactly where this money goes and touching that money in a very real way by spending its -- their own time and funded time on making sure that money goes exactly where they want it.
Hon. Alice M. Batchelder: If I could interject something here, which really does raise the question of what the policy considerations are with regard to either supporting or opposing these third-party payments because one way or another, this is money that initially would have been directed to the Treasury. One way or another it doesn't get to the treasury, but the government is still having something to do with some oversight. And if it isn't, then these consent decrees may very well, you could at least argue, not be in the interest of the public. So we've skirted this and sort of talked in general terms, but does anybody want to address very specifically some of the policy considerations here for either permitting or not permitting these types of payments? Don’t everybody talk at once.
Jesse Panuccio: I want to give Anna a chance to go first on one of these, so I was kind of waiting.
Anna St. John: Well, I think that's exactly right. There's either oversight because these are public funds or there can't be oversight because it's not government money. And so that really does put into sharp focus the policy problem. And I don't think anyone supports just sending off money to third parties with no oversight. Maybe they do spend it on a Christmas party, and we wouldn't know unless there's some kind of oversight. But, again, if it's not public funds, where does the authority for the oversight come from?
Justin A. Savage: Yeah. So let me briefly address that. I think we're conflating are these public funds with is there both judicial and executive branch oversight of performance of a consent decree? And so the way it works in the environmental world is yes, there can be third party payments, but the defendant can choose to do the work himself. If you make widgets, you're not going to choose to do led remediation, you're going to have a third party do it. If the third party does it, there needs to be reporting.
So I don't think just because there's oversight of performance of a consent decree that suddenly money spent to do that makes that the government money, just the same as it wouldn't be if the government said yeah, we want you directly, Widget Acme America, to clean up a sandlot of contamination. That doesn't' mean the money the company spent becomes public money. And, again, I think this is something that's been looked at by the courts repeatedly as I mentioned.
Jesse Panuccio: One thing I'll just note here is if you look at the memos that came out during the Sessions era, for example, whether it's on third party payments or the control of consent decrees with state and local governments, there were very detailed provisions and explanations about legality and sources of law. If you look at the practice of DOJ prior to those memos, there's virtually no explanations. There is nothing you can turn to. There is nothing that Mr. Savage can say oh, here's the DOJ policy on how they monitor and make public how these funds are used and whether they're used appropriately, and here's the report that comes out every year that's up on the website that says here are all the monies for third-party projects and how they have been spent.
It's an ad hoc process that's done project by project with no serious policy behind it and no routine policy, and nothing that anyone can grab ahold of and say oh, now I understand the full scope of what DOJ is doing with billions of dollars every year throughout all these cases. And by the way, it's not just environmental. It's civil rights, it's civil, it's the financial sector. And there is no uniform policy that governs any of that, none of it.
Justin A. Savage: And I do think that's a good point, actually, Jesse. I agree with you. I think there should be more transparency, more oversight. How is this working? But there's a difference between saying there should ought to be more oversight and saying let's just ban it together. A good example, there was a farmland project in New Orleans, where Anna is right now, with the City of New Orleans public water system where they actually cleaned up a beach, Lincoln Beach, so people could use it, etc. So to me, that's sort of throwing the baby out with the bath water to say yeah, the system's ad hoc. It's hard to follow. Yeah, true, and then saying okay, well, let's ban it.
Jesse Panuccio: Let me respond to that one point, should we ban it? And here's the reason why. We live in a society where there's more wants than there are funds to satisfy all those wants. And all of those wants and needs are often for the public good, and one of the hard decisions that representatives elected to Congress have to make every year is what's going to get funded, and what's not going to get funded? And what we've seen is Congress has actually made those decisions in Appropriations Act, stripped provisions out in a negotiation process, and then DOJ comes behind it and funds it anyway through a settlement. That's exactly what happened with the banking.
Or let's take the Volkswagen settlement, for example. There, DOJ started something, maybe we actually could call infrastructure, which is these charging stations throughout the country. The question is maybe the charging stations are great, but Congress has to fund a lot of stuff that's great. And in the years prior to that, they decided charging stations weren't going to make the cut. And then DOJ regulators came in and said eh, you know, we hear you, but we have better ideas. And so we're going do it and then there's no oversight over it.
Justin A. Savage: And I think, again, that's a principle too far. Congress has a lot of things, and just because they touch on a subject like should we fund a wall, certainly the last administration took a view of the Executive's authority that touched on that. So, again, I don't think just the principle that because Congress may have some appropriations on a particular subject, the government can't settle particular enforcement action as too far.
Hon. Alice M. Batchelder: Well, that leads directly to a question which has been posed from the audience which is is Mr. Savage's position that the Constitution, the Appropriations Clause, is not being violated or that it doesn't matter so long as the money is put to good use? Is separation of powers simply irrelevant?
Justin A. Savage: Great question, audience member. And let me say this at the outset. You're talking to a guy who went to McNeese State University in Lake Charles, Louisiana. So my super power is that I recognize my limitations. I am not as smart as the people in OLC and at DOJ, and I'm not as smart as the judges who have looked at this before. And all I'm saying is if there are these limits and conditions, if there's not a judgment of initial liability, the government doesn't direct who gets the money, then I think there is not a constitutional issue. I'm not out here saying yeah, as long as it's building a park or Lincoln Beach in New Orleans, spend what you want. I have a much more limited position based on the precedents that are out there.
Hon. Alice M. Batchelder: So I'm not seeing any additional questions coming from the audience. I guess maybe my final comment before I -- the next thing, I guess, is to put everybody into the lounge if they want to get there. But I guess part of my question would be following that last one, am I correct, Mr. Savage, that your point, your position is pretty directly founded on your belief that the money in these consent decrees, these consent settlements, these third-party payment things, that money just really isn't public money.
Justin A. Savage: Correct. And I'll give you an example. Judge Rebecca Beach Smith actually in Virginia Beach today, in the Eastern District of Virginia, had a case overseen against Smith Field Foods. The government had a judgment. She invited questions to the government that said can we disburse this to anyone else? And the government said no, there's a judgment. But short of that, if there's not an admission of liability or judgement and the government's not directing who the money goes for, then, yes, I think that's what the law is today as we know it, and we know the law sometimes can evolve, but that's my understanding.
Hon. Alice M. Batchelder: Okay. I was incorrect if I can bring up this question. I'm not having fun trying to pick up some of these questions. Okay, here's one. Justin, what is the source of legal authority for the restrictions, limits, oversight that you propose as making third party payments palatable? And if they're not legally required, then how can self-imposed restrictions make the practice lawful?
Justin A. Savage: I love this question because I asked the same thing when I started working for the government, and as a defense lawyer, I've looked at it before. It goes back in the midst of times to the 1970s. I guess, it's not too old. I was born in the 80s, where there were some GAO opinions and earlier OLC opinions saying there's some constitutional issues with just handing this stuff out willy nilly. So the government, both the Justice Department, EPA, CFTC, in light of those opinions, have imposed these limits. And as someone who's had to go to a senior political official, like Mr. Jesse, and say this makes sense to do this, people take that seriously. So that's really the authority. I'm happy to share the history. It's actually fascinating because it shows at least the system got a little out of control and people pushed back based on their understanding.
Hon. Alice M. Batchelder: And we have another one here. Following the lines of argument here, cannot one make an argument that non-compensatory damages, punitive, exemplary, etc., should all be put into the public fisc? Let me not turn to Mr. Savage on this one, let's turn to Ms. St. John.
Anna St. John: Well, I think that there is an argument for that, but there's also an argument for direct compensatory relief. And so if the relief is in fact going to victims whether it's equitable in nature or compensatory, that makes a lot more sense. The problem comes when the relief of any sort is going to those who are not actually harmed by the underlying conduct and those who are not by statute given any right to recovery from the underlying claims.
Hon. Alice M. Batchelder: And Mr. Panuccio, did you want to add anything there?
Jesse Panuccio: Well, I'll just add, it's a good question and I think I understand where it's headed. The issue, though, is if you look at the Anti-Deficiency Act, for example, it says you can't do something with this money if it's not -- there's not already an appropriation. A lot of these statutes have a prevision for restitution, that is actually something that the DOJ or the other enforcement agencies are authorized to go out and get which is victim restitution.
But if you don't have such a provision, then yeah, that's a serious issue to be wrestled with. If all the United States is authorized by Congress to do is seek retribution, seek penalty, then those monies, those penalties are public fisc monies and should go into the public fisc.
Hon. Alice M. Batchelder: So we have, I think this might be the last text question. I keep being told if I would just scroll up or down, I would find something different, but I think this is the last one. Would the panelists -- and I cringe a little bit in doing this, but I will. Would the panelists be interested in comparing and contrasting the legalities of these settlement payments with the funding arrangement used during the Iran-Contra affair in the late 1980s? The panelists aren't old enough to remember that affair, but I'll turn it over to them anyway.
Jesse Panuccio: Sounds like a question for Justin.
Hon. Alice M. Batchelder: Justin is being very quiet.
Justin A. Savage: I'm not sure I understand the question. It seems more like a statement buried in a question. And I guess in this question, who's Fawn Hall? Who's Oliver North? Listen, whoever asked that, reach out to me, we can talk. But no, it's not Iran-Contra. I was born in 1972, so I don't remember all that perfectly, but what I recall was there was some sale of weapons to Iran to fund the Contras in Nicaragua, and that's not what's going on. All of these cases that you've heard about from Anna and from Jesse and they don’t like them, they're in the light of day. We know about them, and judges ruled on them. But I do appreciate the historical reference. It brings back some memories from middle school.
Hon. Alice M. Batchelder: And actually, I think that you did address that question, which is all the questioner asked, would you be interested in doing that? And you did.
Jesse Panuccio: Judge, I'll clear one thing about that, but I think it goes back to something earlier. I think Justin and I and probably Anna have one point of agreement we've heard here today which is actually we don’t know what happens to all these funds. For maybe some of the run of the mill projects, the smaller SEPS that Justin is talking about, we do. But for the really big settlements, one of my points -- I mean, again, look at the banking settlements, the biggest of all time. We don’t know what happened to those monies. We don’t have sufficient oversight, and the public still doesn't truly know who made the decisions and how the monies were spent. That's just fact.
Hon. Alice M. Batchelder: I see that we have one more raised hand which appears to be Dean Reuter.
Dean Reuter: Yes, it's me again, Judge. I thought we might want to not end early, but I have two questions really. One, do we really know about the whole universe of these settlements? Are they all done through Department of Justice, or does SEC do some of these? And as a company, don’t companies painfully try to, always, at pain, try to avoid indictments. Could some of these be happening before indictment outside a court even? And that's my one question.
And my second question is we haven't talked too much about the two for one provision where company might be required to pay a billion dollars or 800 million dollars, 100 million of which goes to one of these groups, so they're out of pocket 900 million instead of a billion. That seems to me to be an interesting wrinkle that hasn't been discussed a lot. But there's something, I can't really put it into words, there's something particularly illicit about that, that the defendant gets off 100 million dollars cheaper, but I'd be happy for responses on either of those.
Hon. Alice M. Batchelder: Who would like to --
Jesse Panuccio: Well, I'll offer --
Hon. Alice M. Batchelder: Mr. Panuccio.
Jesse Panuccio: I'm sorry, Your Honor. Let me offer one opening thought on that which is yeah, the two for one provision in the banking settlements or more particularly the up to 80 percent trade off that was EPA policy for SEPs for supplemental -- I'm sorry. Justin, can you hear? Can you hear me, Judge?
Justin A. Savage: I can hear you, Jesse.
Jesse Panuccio: Okay. I just want to make sure. So we were just talking about the two for one policy and the 80 percent -- up to 80 percent trade off policy that EPA has for SEPs. I mean, the implication of that is the government is saying if you fund these projects so that the money never touches us, we will give you a direct reduction in the penalty that we would otherwise force you to pay and that would otherwise come into the Treasury.
It seems to me that that is absolutely an end around the appropriations process. It's actually giving value to the defendant and taking value away from the Treasury so that these defendants use this money in ways that these regulators want used outside of the appropriations process. I think it's a serious flaw in the argument that there's no problem because it's not touching the government's hands, the money.
Anna St. John: Right. And I'll say that I think that it really brings home how there's an argument that the defendants want to settle and they're only going to pay money to causes that they can support. But when you're being offered double credit to give money to particular organizations or causes, of course you're going to accept it because it's also a tax donation. And so you're really getting a reduced fine as a company, as a defendant, and getting rid of the liability of this lawsuit. And so it's hard not to see some kind of compulsory aspect to these elements when they do have these credits.
I also want to say that we know that there are abusive settlements outside the DOJ context. I mentioned an FCC settlement that we settled -- that we challenged successfully where the FCC imposed conditions that were outside of its authority. And so while it wasn't a direct monetary payment, it was an abuse where they were forcing parties subject to their authority to do things they didn't have regulatory authority to do. And so you see multiple types of abuses in settlements by administrative agencies that don't necessarily just involve direct transfer of monies.
Justin A. Savage: May I briefly respond or --
Hon. Alice M. Batchelder: Sure.
Justin A. Savage: Okay. I think if you read the report that The Federalist Society put together, I applaud it. It acknowledges that further research is needed to undercover the details of politically motivated third-party disbursements because it cites sources like The National Review Forbes, which I enjoy, but are not original source documents. And so I think this concern animating that it's illicit, it's done purely to create value for someone. So, I mean, Jesse, you're a defense lawyer. Of course, you're going to create value for your clients. The point is why do clients like them? Why does the business community like them?
I've got to say, this is a rare panel. I think the business community would have watched it and say why are they doing this? I think the business community likes this not just because there might be a credit but because it can actually benefit their community and that they don't like it because oh, their arms getting's twisted or they have a bat upside their head in a darkened room to give to [inaudible 91:16] or whoever. That's not how it works. They're doing it because they see some benefit, at least in an environmental context, some good work is done.
Hon. Alice M. Batchelder: So this is just a I'm curious because I don't know question to follow up the very last one that we've been discussing and because we've got, like, a minute and a half left. So one of the big criticisms of this whole thing is that the beneficiary of these third-party payment requirements has been pretty generally one side of the political spectrum rather than the other. So my question is who, of the three of you, can anybody give me some examples that would demonstrate that that's not correct?
Justin A. Savage: I'll give you some. So I've done settlements in Texas and Louisiana. I was raised in New Orleans and spend a lot of time in Texas. It's not a super blue area, right, but there have been settlements that benefitted communities in those states. And so, yeah, we mentioned a few organizations here or there, but I think for the most part -- and I applaud The Federalist Society for having this dialogue. If you were to dig in and do research, you'd see more of a range of communities and a range of organizations.
Hon. Alice M. Batchelder: In the remaining minute and a half, I think, no, less than that, few seconds, does anybody have anything further on that topic that you would like to contribute?
Jesse Panuccio: I'll just say thanks for a great panel and for really active and great moderating. And thanks to Anna and Justin for a good debate and Justin especially. You're a good sport. You got ganged up on two to one here and defended your position very well. So thanks to you both and thanks to you, Judge, and to The Federalist Society.
Hon. Alice M. Batchelder: Well, I want to thank everybody for this. And I want to thank you for making it easy for me. I've never done one of these electronically, and I cringed at the idea. But I have survived, so I thank you all. And now, I guess the next thing is for everybody if they want to go into the lounge, and I don't remember exactly how to do that, but I assume that all the rest of you do. And with that, I think we are bringing this to a close.
Religious Liberties Practice Group