July 9, 2013

The Myth of a Pro-Business SCOTUS

Commentators inaccurately condemn the five conservative justices as corporate shills.

Across a wide range of business cases, the United States Supreme Court is defined by a five-to-four split that pits the conservative quintet of Chief Justice Roberts and Justices Scalia, Kennedy, Thomas, and Alito against the liberal quartet of Justices Ginsburg, Breyer, Sotomayor, and Kagan. That split makes it easy for indignant commentators to denounce the Court’s “pro-business” decisions.

Just that position was taken in a forceful New York Times op-ed by Dean and Professor Erwin Chemerinsky of the University of California, Irvine, entitled, with evident sarcasm, “Justice for Big Business.” Much the same theme was echoed by Adam Liptak in his review article in the Times, which announces that “Corporations Find a Friend in the Supreme Court.”

  epstein  
  Illustration by Barbara Kelley

This anti-business mentality is also seen among legal academics. In particular, Liptak cites my NYU colleague, Professor Arthur Miller, and his recent NYU Law Review article on the “deformation” of civil procedure. Miller argues that the procedural decisions of the Supreme Court on critical matters, such as pleading and class actions, have often taken a pro-defendant stance that could easily tilt the balance strongly in favor  of business interests. In their detailed empirical analysis of Supreme Court decisions, Professor Lee Epstein (no relation) of the University of Southern California, together with my University of Chicago colleagues Professor William Landes and Judge Richard Posner, also observe a pro-business slant on the Supreme Court in their recent article in the University of Minnesota Law Review. They conclude: “The Roberts Court is indeed highly pro-business—the conservatives extremely so and the liberals only moderately liberal.”

Neither Pro Nor Con

I do not want to be construed as an apologist for big business, but I do think that the current anti-business rhetoric seriously misstates the relevant issues. Commentators could just as easily denounce the four liberal justices as anti-business apologists for big government. But that transparent ploy suffers from the same three defects as the usual attacks on the Supreme Court: selection bias; misplaced significance; and failure to account for the importance of consistently taking the ex ante perspective.

Selection Bias

The simple fact that the Supreme Court comes out on one side or the other tells us little about whether it is pro- or anti-business. The Supreme Court does not randomly choose cases. Rather, it tends to pick those cases that represent the most important unsettled issues now before the Court. Currently, Congress has churned out many ambitious statutes, like Dodd-Frank and Obamacare, neither of which could ever be described as pro-business.

In this regard, I think that Judge Posner is wrong when he observes, as Liptak points out in his piece, that “American society as a whole is more pro-business than it was before Reagan.” More polarized seems like a much better descriptor of American society, especially in light of the direction of the Obama administration’s legislative agenda, which systematically calls for expanded government control over business activities.

One standard theory of judicial decision-making, which dates back to an important 1984 article in the Journal of Legal Studies by George Priest and Benjamin Klein, notes that the cases that are most likely to make it up the judicial hierarchy are those that have the greatest uncertainty in how they could be handed down. If the overall distribution of cases has moved either left or right, then the cases selected for review at the Supreme Court will track that movement.

For example, the trend in antitrust generally has turned away from regulation, and the new cases tend to drift off in this direction. The issues associated with such key areas as antidiscrimination law, civil procedure, and patent law have moved in the opposite direction. The so-called conservative justices therefore can be better seen as resisting further moves towards regulation. But that fact does not tell us how they compare to earlier justices who, although operating in a very different legal environment, might have decided these cases the same way. It could, in other words, be that the world has moved, not the justices.

Significance

All cases are not created equal. Just classifying and counting cases as either pro- or anti-business does not resolve two technical difficulties. First, it is difficult to code a case that comes down as pro-business on one issue and anti-business on another; such cases are clearly a bit of both. Second, the counting of cases, even if the outcome is clear, gives no information about the relative importance that the cases have over the long run. To determine that, it is necessary to know how often an issue will tilt the balance, and how large that tilt will be.

Some years ago, many academics, including Professor Miller, voiced a strong belief that the tightening of pleading rules in the twin cases of Bell Atlantic. Corp. v. Twombly (2007) and Ashcroft v. Iqbal (2009) closed the courthouse door to plaintiffs in favor of business interests. But a careful empirical study in 2012 by my Chicago colleague William Hubbard concluded that “Twombly caused no legal change, even after accounting for possible selection effects”—that is, those just mentioned above.

Ex ante versus ex post

Most important, it is always critical to distinguish between the ex ante and ex post effects of decisions. Under the ex post perspective, the question of who wins is asked after the dice have been rolled; here, commentators find it easy to classify outcomes as pro- or anti-business.

But that judgment is much more difficult to make when these cases are reexamined from the ex ante perspective, where the question is to figure out the overall social gains and losses that are likely to flow from the choice of any particular rule before any particular dispute arises. The stumbling block in the analysis is that any decision that benefits particular consumers, say, in the ex post state of the world, may well harm consumers as a broader class in the ex ante state of the world.

To see why this is possible, recall that much litigation benefits only a small fraction of consumers as a whole and that the costs of the decision must be absorbed into the overall costs for the firm to stay in business. In the ex ante state of the world, it is often difficult for business to know which consumers will be in a position to sue and which will not. Accordingly, the increase in costs will be passed back, at least in part, to consumers who do not benefit from the favorable outcome in a particular case. Why favor litigious consumers over others?

To the contrary, it is wise to remember that litigation always costs gobs of cash, which has to be paid by someone, for bad claims and good. The correct relationship between litigation and social welfare requires that the improvement in, say, accident prevention, must exceed, at a minimum, the administrative costs needed to secure that supposed gain. Often, however, litigation generates expensive errors that create perverse incentives. For example, in many product liability areas, excessive liability is often the norm. In those cases, where the consumer (or employee or tenant) is in a direct contractual relationship with some business firm, it is wrong to assume a priori that this burden is routinely met. Indeed, the presumption should always be in favor of upholding, not attacking, standard form contract terms.

Liptak makes just that point unintentionally when he notes that arbitration agreements “can offer benefits in speed and cost to both sides, though the car rental companies or cellphone stores that have customers sign nonnegotiable contracts presumably do not have their best interests at heart.” The first point about administrative savings is surely correct, but the follow-on denunciation about forcing consumers to sign non-negotiable contracts is wrong.

Any regulatory regime imposes the wrong take-it-or-leave-it deal on sellers. Yet there are enormous advantages from privately generated take-it-or-leave-it contracts insofar as they control transaction costs, ease and organize overall business operations, and prevent favoritism among consumers. The firm that only has its interests at heart will not attract repeat consumers if it is known that they charge more for a product than it is worth.

But these issues are passed by in silence. For example, at no point does Liptak (or for that matter Chemerinsky) mention how business brands and reputations powerfully constrain corporate action. Nor do they consider whether some direct form of regulation (itself often a subject of some abuse) might be superior to class actions when some legal sanction should be imposed. It is also worth noting that sharp limitations on litigation are routinely imposed in all sorts of business contexts, where traces of unequal bargaining power are not present—which should caution opposition to litigation only arising in consumer contexts.

A Fresh Look at Supreme Court Cases

This set of insights puts the Supreme Court’s business decisions in a fresh light. For example, Chemerinsky is critical of the Court in Vance v. Ball State, where it held that a lawsuit for sexual harassment by a low-level supervisor should make the employer strictly liable for that harm under the antidiscrimination laws. The entire system of employee relationships has multiple layers and it is far from obvious that an employer should be strictly liable for the harms that one low-level employee does to another.

Right now, firms know that they are in trouble under the antidiscrimination laws if they do not put in place a management program that guards against these abuses. I am very doubtful that from the ex ante perspective, expanding liability makes sense in an age when employers are all too reluctant to hire new workers. Nor does Chemerinsky make his case by noting that in the 2007 case of Ledbetter v. Goodyear Tire and Rubber, the Court refused to toll the statute of limitations to allow a female employee to complain of sex discrimination from years earlier only on her retirement. Even though that decision was overturned in 2009 by statute, it was in my view clearly correct in preventing opportunistic behavior by disgruntled employees.

Nor is it clear that Professor Miller is correct in his broad-scale attack on the Court. The class action suits for overcharges are nightmarish operations, generating massive litigation over difficult individual issues, even after the common class issues are resolved. If allowed on a wholesale basis, a defendant may face such enormous damages that it will capitulate to unjust claims. It may well be that the correct choice between class litigation and no litigation is preferable to class action warfare, especially if government action is targeted to the direct control of fraud on consumers.

It is thus perfectly sensible for the Supreme Court to uphold, as it did in AT&T Mobility LLC v. Concepcion, clauses that limit consumer class actions. Firms would gladly include these provisions if they generated a positive gain that they could share with their consumers. But the fierce resistance to them indicates that there is no set of prices that could be charged that is sufficient to cover their anticipated costs and leave some profit to share.

The same broad condemnation is appropriate for the huge class actions that plaintiffs bring under the employment discrimination law, including the ill-conceived class action in Wal-Mart v. Dukes (2011). There, a highly diverse class of 1.5 million female employees was unanimously, and I believe correctly, bounced from the Supreme Court. Indeed many of these employee class actions have the worst of both worlds, insofar as they invoke class actions to enforce the antidiscrimination laws, most of whose provisions are themselves competitive.

The key point to remember here is that no judge should think that either pro- or anti-business sentiments define the proper attitude toward Supreme Court adjudication. The question is which decision from the ex ante perspective advances overall social welfare—and by that standard the vocal critics of the current conservative majority come off second best.


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).


Letters to the editor may be sent to definingideas@stanford.edu. Editors reserve the right to reject or publish (and edit) letters.