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FILE PHOTO:    With the U.S. Supreme Court building in the background, Supreme Court nominee judge Brett Kavanaugh arrives prior to meeting with Senate Majority Leader Mitch McConnell on Capitol Hill in Washington, U.S., July 10, 2018. REUTERS/Joshua Roberts/File Photo - RC193B83C020
Up Front

Key SCOTUS question: Will Kavanaugh further deregulation using the First Amendment?

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As the Senate takes up Judge Brett Kavanaugh’s nomination to the Supreme Court, one issue that shouldn’t get lost in the debate is the extent to which his confirmation will accelerate the Court’s use of the First Amendment’s right to free speech to strike down various regulatory disclosure requirements.  From a regulatory policymaking perspective—this legal tactic is highly problematic, and it should give pause to those who think regulation should happen through the least costly means possible.

As noted in a recent Time article, the Court has overturned, in its last term (ending June 30) alone, four different laws or regulations on grounds that they compelled people or firms to “speak” in ways they did not agree with or interfered with free speech. Two of the decisions have received much publicity. In one, the Court struck down a California state law that would have required anti-abortion “crisis pregnancy centers” to report information about abortions. In the other, the Court overturned judicial precedent allowing public sector unions to require public sector employees to pay non-political dues (and thus not “free ride” on the efforts of unions to gain benefits for public sector workers).

In her dissent in the public employee case (Janus v. AFSCME), Justice Elana Kagan warned that the majority was “weaponizing the First Amendment,” and that if the trend continued, the Court could undo many more regulations.

Judge Kavanaugh’s own jurisprudence suggests that his place on the Court would advance this trend. Although he has rarely had the opportunity on the D.C. Circuit Court of Appeals to weigh in on the application of the First Amendment to regulatory issues, the Time article notes that he has invoked the concept in two opinions. If Kavanaugh supports the use of the First Amendment in this way, his elevation to the court could strengthen the numbers of Justices wanting to deregulate through the First Amendment. But that result would have unintended consequences that many supporters of this trend may not currently foresee.

Up to the Trump era, regulatory reformers have concentrated largely on trying to ensure that, to the extent permitted by the underlying statutes that authorize them, regulations should only be issued if their benefits exceed their costs.  The Trump administration has gone much further: requiring two regulations to be cut for every new one issued and adopting a “regulatory budget” for all regulations that focuses only on the costs of regulations and not the benefits.

One regulatory principle has remained or at least has not been repealed, however, which dates from the Reagan Administration executive order on regulation: that whatever regulation is chosen, it should be one that imposes the “least net cost to society,” or in the language of President Obama’s Executive Order, each agency should “tailor its regulations to impose the least burden on society, consistent with obtaining regulatory objectives.”

In practice, disclosure requirements have been chosen as the least net costly regulatory option. The Obama Order is quite explicit about this, requiring agencies to “identify and assess available alternatives to direct regulation, including providing economic incentives to encourage the desired behavior, such as user fees or marketable permits, or providing information upon which choices can be made by the public.” (emphasis added).

As the Senate takes up Judge Brett Kavanaugh’s nomination to the Supreme Court, one issue that shouldn’t get lost in the debate is the extent to which his confirmation will accelerate the Court’s use of the First Amendment’s right to free speech to strike down various regulatory disclosure requirements.

Mandated disclosures are typically the first regulatory remedy of choice because they empower consumers to know what they’re getting before they decide to buy, rather than have the government step in and tell them what they can or cannot purchase. There are countless examples of mandated disclosures – in the financial arena, for many products, especially for pharmaceuticals.

Why is there even a need for government mandated disclosure? Can’t we count on the market – specifically firms seeking an edge over others to inform customers of the best features and the risks of their products?

Yes, on the good features, but no on the risks, even though the failure to warn customers of potential dangers of a product or service can expose companies to lawsuits under common law tort or under specific statutes that allow for private rights of action.

Exposure to liability works imperfectly as a deterrent for at least reasons. One is that it can a long time for consumers to realize they have been harmed, and by then many of them may be dead or severely injured (example: tobacco litigation). Another reason is that lawsuits are costly and risky. For consumers to gain any relief, they often must have their attorneys file their suits as “class actions” which the Supreme Court over time have made more difficult to sustain.[1]

The failure to disclose risks also can drive good products out of the market or cause the sellers of such products to receive less than they should. Professor George Akerlof won a Nobel prize for illustrating this “lemon’s problem” by referring to the used car market, where buyers typically know a lot less than sellers about the quality of the cars being offered. Because of this “information asymmetry,” buyers worried about buying a “lemon” and unable to distinguish perfectly between it and a car in good condition, may not buy a used car at all, or those offering “good cars” may be discouraged from doing so or compelled to accept a lower price than what the car is worth. A warranty from the car seller, such as CarMax, or a certification of worthiness helps solve this “lemons” problem. But so can mandated disclosure of certain facts about the car, such as its mileage, with penalties for turning back the odometer.

More broadly, Akerlof and his Nobel-prize winning co-author Robert Shiller wrote an entire book, Phishing for Fools, about unscrupulous behavior by many types of sellers in different industries. Their book makes the case both for effective tort law and mandated disclosures.

If the Supreme Court continues to invoke the First Amendment to bar mandated disclosures, however, then that “least net costly” regulatory tool may become a relic. That outcome would leave more draconian regulatory prohibitions or taxes as the only ways of addressing the market failures that regulation is necessary for in the first place.

Someday Democrats will return to power. When they see a need for regulation, only these costlier regulatory tools will remain. Do those who favor using the First Amendment to bring down current disclosure rules want an even more intrusive regulatory regime to take their place?

The direction the Court is taking us with regulation—chipping away from moderate solutions and leaving only extreme ones behind—is analogous to the polarization happening in the electorate. Both parties are moving to the extreme ends, leaving a shrinking middle behind. Maybe such a prospect will give a future Justice Kavanaugh—and his potential future colleagues—a reason to hit the brakes on their use of First Amendment as a deregulatory tool.

 


[1] Readers should be aware that in my law practice, I mostly represent plaintiffs in class action lawsuits (primarily antitrust).

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