May 22, 2012

Corporations Are People, Too

Jeffrey Toobin plays fast and loose in his assault on Citizens United.

Jeffrey Toobin’s recent exposé in the New Yorker takes aim at the Roberts Supreme Court for its controversial decision in Citizens United v. Federal Election Commission, which struck down the key provisions of the McCain-Feingold Act prohibiting “corporations from running television commercials for or against Presidential candidates for thirty days before primaries.” To Toobin, Citizens United was the Supreme Court’s illicit gift to corporations; it recalls the worst excesses of the “Gilded Age,” a time when, Toobin claims (falsely), the Supreme Court “barred most attempts by the government to ameliorate the harsh effects of market forces.”

To Toobin, one unfortunate byproduct of the nineteenth-century Court’s worldview was its 1886 decision in Santa Clara County v. Southern Pacific Railroad, which held that corporations—railroads, no less—were “persons.” They are thus entitled to the protections of the Due Process and Equal Protection clauses of the Fourteenth Amendment. A second low point of that Gilded Age, Toobin insists, was the Supreme Court’s 1905 decision in Lochner v. New York, which, by his account, held “that most attempts to regulate the private marketplace, or to protect workers, were unconstitutional.”

 Epstein  
 Illustration by Barbara Kelley

It is necessary to expose his multiple errors of constitutional history and interpretation if only to explain why Citizen’s United did not turn back the clock on sensible regulations in a mindless return to some inglorious era. First, what possible reason is there to deny that corporations are persons protected by the Due Process and Equal Protection clauses of the Constitution? Suppose a state decided to seize corporate land for use as a public facility. Why not make it pay for the land that it takes? If individual shareholders held title to that land in their own names, full compensation would be required to effectuate the government taking, if only to make sure that the burdens of running public facilities were put squarely on the public that benefits from their operation.

Ordering state compensation is the most effective means for assuring that the land has greater value in public hands than in private ones. That great purpose remains even when its individual coowners put the land into a corporation to reduce the transaction costs incurred for its effective deployment. Nor does confiscation become more attractive solely because the law protects the corporation’s shareholders by limited liability—which allows the corporation to raise more funds to answer for any wrongs that it might commit, without putting individual investors at the risk of losing their entire personal fortunes.

To be sure, corporations do pose serious legal difficulties given the scale of their operations. In particular, special attention has to be paid to public utilities that operate local monopolies in such key industries as electricity, power, transportation, and communications. But that point was well understood by the Justices in the Gilded Age, who never once questioned, in principle, the rate regulation of these natural monopolies. At the same time, they recognized, as Toobin does not, that public utilities will not be able to attract private investment if state public utility commissions were allowed to constitutionally set rates so low as to deny investors returns sufficient to attract and retain capital. Rate regulation is no easy business, but it was a problem to which the earlier Court brought an immense degree of intellectual sophistication.

Toobin also misfires on the more contentious issue of labor regulation. Quite simply, the Supreme Court of the Gilded Age upheld far more types of regulation than it struck down. Fundamentally, it thought that the freedom of contract was an important element of ordinary liberty. Do we really think that the state can just prohibit all individuals (or corporations) from entering into any contracts whatsoever? The only question worth asking is: What justifications can the state put forward for the regulations that it wants to impose? During the Gilded Age, the basic standard was that the regulation met the requirements of the police power, i.e. was directed to protecting the “safety, health, general welfare, and morals” of the public at large.

Corporations, like persons, are protected by the Fourteenth Amendment.

Under this test, the Supreme Court upheld, for example, the constitutionality of the workers compensation laws, food inspection laws, zoning laws, height restrictions, and much more. In many cases, the Court went too far. But in Lochner v. New York, the Court’s majority well understood that a ten-hour restriction on the length of the work day was designed not as a device to protect workers against exploitation, but, as David Bernstein has compellingly shown, to protect unionized firms against the competition of nonunionized rivals. Toobin seems utterly oblivious that most of the distinctive achievements of the Progressive Era consciously perpetuated cartels and other restrictive practices, most particularly in labor and agricultural markets.

His cartoonish understanding of Supreme Court history dooms him to a systematic misunderstanding of Citizens United’s critique of McCain-Feingold. The narrow issue in Citizens United was whether Hillary: The Movie, a 90-minute attack documentary, counted as “electioneering communication” that could be banned from running within 30 days of the election. The larger constitutional issues would not disappear if Citizens United only handed down a narrow decision that the McCain-Feingold Act did not apply to that movie. The next case down the road would be sure to raise the same overarching issues. It is therefore incumbent on Toobin to explain why the general guarantee that Congress shall “make no law abridging the freedom of speech” does not apply to political speech in the run up to a national election.

Clearly, it makes no sense to exclude corporations systematically from the First Amendment simply because corporations, whether or not they are persons, are not mentioned in the constitutional text. After all, the First Amendment doesn’t refer to citizens either. But the logic for bringing corporations under its protection parallels those used in connection with the Fourteenth Amendment. Does Toobin really think that the New Yorker, as part of the press, could be somehow prevented from publishing because it is a corporation bereft of any First Amendment protection? No: The magazine did not lose the protections of the First Amendment when its partners decide to incorporate it.

So why are progressives so uneasy about the case? It is not because the decision, on its face, favors one side in the political struggles over another. Nor does it attempt to censor some political viewpoints while allowing others to be advanced with impunity. Quite simply, a single theme lies behind the fierce denunciations of the decision: the corruption of the electoral process.

Without question, anticorruption legislation is a permissible exercise of the state’s police power. So the multibillion-dollar question in the run up to the 2012 presidential campaign is whether the manifold restrictions found in McCain-Feingold count as legitimate protection against any perversion of the political process. Toobin notes that restrictions on direct campaign contributions to candidates have long been upheld against the First Amendment, first under the 1907 Tillman Act, which prohibited federally-chartered corporations “from making money contributions in connection with political elections.” That effort was subsequently expanded under the 1947 Taft-Hartley Act that applied to both corporations and unions generally. Thereafter, in Buckley v. Valeo (1976), the Supreme Court sustained still greater restrictions on campaign contributions.

In a democracy, political majorities will vote benefits to themselves.

These present restrictions speak with two voices. They surely establish that some campaign financing limits could be justified in order to prevent direct contributions to a candidate who might exact a silent quid pro quo in exchange. Yet, paradoxically, once these restrictions are on the books, it becomes more difficult to justify the next round of Congressional regulation. Given the high level of scrutiny that any restriction on political speech undergoes, the right question is whether the incremental gains, if any, from successive legislation outweigh its heavy incremental burdens on political speech.

On this score, McCain-Feingold flunks for two reasons. First, a documentary attack does not pose the risk of political corruption, any more than an ill thought out article in the New Yorker does. Toobin also fights against modern technology when he seeks to draw a hard and fast line between “the pervasive influence of television advertising on electoral politics” and books that operate “in a completely different way,” given that individuals have to make an “affirmative choice to acquire and read a book.”

Oh? Thanks to the internet, books can be excerpted and transmitted in a thousand different ways online to consumers who need only a single click to ignore messages they don’t like. Given the vast reduction in cost in the production of information, it seems positively odd to ban, or even regulate, one form of dissemination while allowing other forms to survive unregulated. It is not that books deserve as little protection as Toobin would accord to the broadcast media. It is that the broadcast media deserves as much protection as books.

Toobin’s second argument is a full-throated populist attack on Citizens United: “The Roberts Court, it appears, will guarantee moneyed interests the freedom to raise and spend any amount, from any source, at any time, in order to win elections.”

There are no “moneyed interests” if that expression refers to corporations and their key personnel. Corporations are as fractured in their loyalties as every other group in society. The competition for financial support is fierce between Democrats and Republicans. Often, the battle for funds takes place through Super PACS, which gain their political influence precisely because they fall outside the campaign finance laws when they spend money without coordinating their activities with a political campaign. But at the same time, both parties have become extremely adept at raising small sums from large numbers of individual donors.

Against this difficult backdrop, one fact shines through. In the political battles in Washington, corporations and the wealthy have lost out big time in recent years. As Robert Samuelson has recently documented, the single most powerful Washington trend of the past five decades is higher taxes on the rich and greater transfer payments to everyone else. James Madison’s fear of popular democracy provides the simplest explanation. In any democracy, political majorities will vote benefits to themselves. In the United States, property rights are now quite weak, so it pays for political groups to seek major wealth transfers through the political system.

There are, of course, many reasons why it is hard for corporations to counter these trends by their own political activities, given their exposure to political retribution and consumer boycotts. So, increasingly, their key owners and executives turn to Super PACs to fight these dangerous long-term Washington trends. But these efforts, too, can easily backfire, as is evident from the wrath that deservedly fell on Joe Ricketts for his bumbling effort to ignite an anti-Obama campaign through his own Super PAC.

Nonetheless, these incidents should not divert us from the main event. The progressive attack on Citizens United must be seen for what it is: yet another effort to insulate Washington’s tax-and-transfer champions from political counterattack. Toobin’s unregulated speech against Citizen’s United is part of that grand plan.


Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).


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