Tomorrow, January 30, at the Reagan Library, I will be speaking at the Federalist Society's Fourth Annual Western Conference, which this year is devoted to the topic State Judiciaries and the Popular Will: What Deference Do Judges Owe to the People?
I'm on the first panel (10:15 am - noon), which is devoted to Should Judges Consider the Economic Climate in Deciding Business Cases?
The text of my remarks follows:
It’s not clear to me how that question differs from the broader question of whether judges should consider public policy—economic or otherwise—in making decisions.
If I’m right that our topic is really a subset of that broader question, I start from the premise that the type of case matters. Are we talking about a common law adjudication or statutory interpretation?
As to common law cases, because no two cases are identical, public policy necessarily lurks in the background of every case. The court must always decide which precedent governs the case at bar. The court must then decide whether to apply, modify, distinguish, or overrule the precedent. Both decisions necessarily implicate the question of whether the apparently applicable rule as applied to the case at bar is consistent with the relevant public policies underlying the area of law.
To be sure, a judge deciding common law cases is constrained in choosing the relevant economic policies. The judge cannot simply advance his own personal values and policy preferences.
There are at least three reasons this is so: First, any complex society needs an institution before which claims based on existing societal standards can be heard. In our society, that institution is the courts. “If the courts resolved disputes by reasoning from those moral norms and policies they think best, there would be no institution to which a member of the society could go to vindicate a claim of right based on existing standards.” Second, since the judicial system is a peculiarly undemocratic institution, the legitimacy of the adjudicative process requires courts to look to “existing legal and social standards rather than those standards the court thinks best.” Finally, prohibiting the courts from employing their personal standards makes legal reasoning fairer and more easily replicable by the profession.
Let us turn then to the question of statutory interpretation. The US Supreme Court’s 2008 decision in Stoneridge vs. Scientific-Atlanta provides an excellent example of courts relying on economic policy concerns—indeed, on the economic climate as it then was. In deciding to limit the scope of secondary liability under Rule 10b-5, the majority opined that holding for plaintiffs would harm American competitiveness.
[E]xtensive discovery and the potential for uncertainty and disruption in a lawsuit allow plaintiffs with weak claims to extort settlements from innocent companies. Adoption of petitioner’s approach would expose a new class of defendants to these risks. [C]ontracting parties might find it necessary to protect against these threats, raising the costs of doing business. Overseas firms with no other exposure to our securities laws could be deterred from doing business here. This, in turn, may raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic capital markets.
This passage elicited harsh criticism from some prominent commentators. It also seems to be inconsistent with the Court’s prior decision in the Central Bank case—which was written by the very same Justice Kennedy who penned Stoneridge—in which the Court held that:
Policy considerations cannot override our interpretation of the text and structure of the Act, except to the extent that they may help to show that adherence to the text and structure would lead to a result so bizarre that Congress could not have intended it.
So what are we to make of all this?
In the first place, I would draw a distinction between cases like Stoneridge and another Kennedy opinion; namely, Gustafson v. Alloyd Co. You'll recall that in that case, which I have elsewhere called "the most poorly-reasoned, blatantly results-driven securities opinion in recent memory," Justice Kennedy drastically limited the scope of liability under Securities Act Section 12(a)(2).
I've argued that Gustafson demonstrated that, despite Central Bank, the Supreme Court still relied on policy considerations in deciding securities cases.
What does appear to have changed are the policy preferences of the Court's members. The consensus goal once was investor protection through expansive interpretations of the liability provisions.
[In contrast, stated] most crudely, the policy preference that seems to run through [Gustafson] is the desire to have fewer securities lawsuits.
Note that the same concern motivated Kennedy's Stoneridge opinion.
Kennedy erred in Gustafson not because policy concerns are always irrelevant, but because Kennedy was dealing with an express statutory cause of action. Kennedy invoked policy concerns in Gustafson to justify a result that was clearly contrary to the statutory language, the legislative history, and years of prior precedents. If there is anything left of neutral principles, one ought to object to decisions, such as Gustafson, which narrow the scope of an express cause of action in ways that are counter to congressional intent. As both dissents argued, that seems to me to be a task more appropriately left to Congress.
In Stoneridge, however, we are dealing with an implied private right of action. We’re dealing with a creature of the judiciary, but of statute.
Public policy considerations weighed heavily in the creation of the implied private rights of action. In J. I. Case v. Borak, for example, in which the Supreme Court created the analogous implied private right of action under Section 14(a)'s proxy rules, the Court expressly relied on the need for private attorneys general, opining that "Private enforcement of the proxy rules provides a necessary supplement to Commission action."
Similar public policy concerns were repeatedly invoked as the Rule 10b-5 cause of action evolved. This should not be surprising.
As Justice Rehnquist famously quipped, Rule 10b-5 is "a judicial oak which has grown from little more than a legislative acorn." We are dealing here with interstitial lawmaking in which the courts are using common-law adjudicatory methods to flesh out the bare statutory bones.
The analytical methodologies applied by the Supreme Court to federal common-law issues thus provide an appropriate mechanism for giving content to Rule 10b-5. As Judge Winter explained in Chestman, the text of Section 10(b) can be seen as "a general authorization to the SEC and to the courts to fashion rules founded largely on those tribunals' judgments as to why insider trading is or is not fraudulent, deceptive, or manipulative." The same holds true for the rest of Rule 10b-5 jurisprudence, in my opinion.
More important folk than I have been of the same opinion. As Adam Pritchard has demonstrated, Justice Lewis Powell thought policy considerations "particularly relevant in 'a private cause of action . . . wholly of judicial creation.'"
Powell "considered the judge-made remedy under Rule 10b-5 to be a species of federal common law, and thus appropriate for judges to consider policy in defining its limits. Second, Powell understood, based on experience counseling corporate clients, the consequences that the phenomenon of class action lawsuits had for corporations and their officers and directors. Finally, Powell was profoundly suspicious of judicially created private causes of action not specifically authorized by Congress. From Powell's perspective, the expansion of securities fraud lawsuits based on implied rights of action was creating a litigation crisis. That perception of crisis would influence the outcome in a number of cases that came to the Supreme Court."
And I believe, legitimately so.
Thank you.
