Bargaining in the shadow of democracy.

AuthorDana, David

INTRODUCTION

The government needs money, for example, to save the Social Security system, improve our schools, and provide health care to those too poor to afford it. The problem is that Americans are unwilling to pay for the government they want We hate taxes, always have, always will.

So, how might we fund the government without raising taxes? Debt has been the traditional answer. After years of federal budget deficits and an ever-escalating federal debt burden, however, Americans have become, at least for the moment, almost as attached to the idea of a balanced budget as they are to tax cuts. The question now becomes more difficult: how do we fund expensive but cherished old government programs and, if possible, some modest but not cost-free new programs while lowering taxes (or at least not raising them) and keeping the budget balanced? One answer: the government could find something valuable to sell.

The government has many assets: land, monuments, collectibles (original documents, such as the Declaration of Independence, the Constitution, and a wide range of one-of-a-kind objects from Archie Bunker's armchair to the Enola Gay), and other more esoteric forms of property, like the broadcast waves. The asset with the greatest value to the greatest number of potential buyers, however, is not among those listed. That asset is the power to make laws. Generally speaking, our law prohibits government agents from selling for personal gain that part of the government's law-making power that they control,(1) but our question here is different. Does and should our law allow the government to raise revenue to swell the public coffers by promising to pass and keep in place certain laws? To make this question more concrete, we ask you to consider the following example.

An industry, say the tobacco industry, wants a certain law passed. It details the legal protection for which it is willing to pay. For example, it drafts a law that includes some form of tort immunity for damages caused by its products and some restrictions on the FDA's ability to regulate nicotine. Its offer is this: if Congress enacts the law and promises to keep it in place for twenty-five years, the industry will pay into the national treasury some amount of money, say $368 billion, $68 billion due upon enactment and the rest due in annual installments to be paid over the next twenty-five years.(2)

Should Congress or any other legislature in this country make such a deal? If a legislature does, should a court enforce that deal? What about holding an auction to fund a tax cut? Entities and individuals could submit bids--bills they would like passed and the amount of money they are willing to pay to keep those laws in place for the next twenty-five years. While many legal academics have addressed topics that bear on these matters, we have been unable to locate any discussion in the literature of entities or individuals buying laws from the government.(3) Perhaps this is because there has been no reason to take the issue seriously in the past. The 1997 offer by the tobacco industry changed that, and a consideration of the legitimacy of such deals is a matter that now seems long overdue.

Tobacco aside, there is another reason to take up these questions now: the rise of contracts that trade performance for favorable regulatory treatment or regulatory stability. Raising money is not the only concern of government--protecting the general welfare of the people and the nation is another. What about selling the power to make or change a law (or regulation) in exchange for a promise by private parties to do something in the public interest? Indeed, the proposed tobacco deals also included this kind of regulation-for-performance exchange: the tobacco companies would agree to certain restrictions on their claimed First Amendment right to advertise (and would pay money) in exchange for the legal protections they wanted written into law and maintained for twenty-five years.

In the paradigmatic regulation-for-performance contract, the regulated entity contractually promises the government that the entity will provide or do something that is not otherwise clearly required by extant law. In return, the government contractually promises the regulated entity to maintain the regulatory regime set out in the contract. If the government breaches its promise of regulatory stability, it must pay contract damages. Consider, for example, the Department of Interior's ("DOI") heavy reliance on habitat conservation agreements as a means of implementing the Endangered Species Act.(4) Under the DOI's program, private landowners and regulators agree to a plan for conservation and habitat protection of threatened or endangered species on private land.(5) In return for their willingness to undertake contractual commitments to fulfill specified habitat conservation measures, private landowners receive a contractual promise from the DOI to either forego imposing additional conservation requirements in the future or to pay compensatory damages should the DOI or another branch of government do so. Should agencies make such deals? If Congress decides to impose additional conservation requirements, should courts order the government to pay damages to all parties with a DOI contract?

Regulatory contracts, especially the regulation-for-performance variety, are suddenly in vogue. The Supreme Court recently placed its imprimatur of approval on such contracts in United States v. Winstar Corp.(6) Winstar involved a deal between federal bank regulators and certain solvent banks wherein the regulators allegedly promised to maintain certain regulatory standards governing the calculation of required capital reserves. In return, the solvent banks agreed to merge with insolvent banks that otherwise would have immediately fallen into federal receivership.(7) Subsequently, Congress responded to the crisis in the savings and loan industry by passing the Financial Institution Reform, Recovery, and Enforcement Act ("FIRREA"), which included provisions on calculating required capital reserves that would have disallowed some of the accounting methods allegedly guaranteed by the regulatory contracts.(8)

In Winstar, the Supreme Court held that the more stringent capital reserve requirements included in FIRREA breached the regulatory contract and that the government was therefore liable for damages.(9) In so holding, the majority indicated that courts should interpret and enforce almost all regulatory contracts under standard contract law rules.(10) As a general matter, regulatory contracts enjoy the same legal status as ordinary, nonregulatory contracts employed to constrain uncertainty in the private marketplace. The implicit premise of the Winstar plurality and concurring opinions is that regulatory contracts are no more normatively problematic--indeed, are as presumptively socially beneficial--as the ordinary, nonregulatory contracts that are the subject of standard contract law.

For its part, the Clinton Administration has been strongly attracted to regulatory contracts as a means of addressing contentious regulatory issues. While the President expressed some concerns about the details of the June 20 tobacco deal, his federal budget plan anticipated huge tobacco company payments but included no proposed tobacco tax from which such payments might come.(11) It is reasonable to conclude that he was receptive, if not committed, to a deal that would call for the industry to make voluntary, i.e., contractual, payments in exchange for a law providing regulatory relief.(12) As for trading the power to regulate for concessions above those required by law (in stead of for money), the DOI contracts discussed above are a centerpiece of the Clinton Administration's "reinvention" of environmental regulation.(13)

Congress also seems open to the idea of raising money through selling law-making authority and has been generally supportive of regulatory contracts. The Senate responded to the tobacco industry's June 20 offer to pay $368 billion over twenty-five years in exchange for Congress's promise to limit the industry's exposure to the legal process and adopt various procedural obstacles to the regulation of nicotine with a counter-offer, the McCain bill.(14) Under the McCain bill, "participating" tobacco companies would promise to pay $514 billion to the federal and state governments and to refrain from certain forms of advertising in exchange for the government's passage and maintenance of a law providing those companies and their agents some protection from lawsuits and from FDA regulation, albeit much less than the industry's offer had contemplated.(15) More money for less law was an offer the industry could and did refuse.

The tobacco industry's gambit did not fail because Congress refused to trade its law-making authority for money. Rather, it failed, at least for the time being,(16) because the parties could not agree on terms. Perhaps another industry (with a better public image than tobacco) will have better luck.(17) Congress may have proved itself a difficult bargaining partner, but it has also demonstrated its willingness to negotiate. Before Congress goes any further down this path or other government entities decide they can bargain their law-making authority for money or other goods, we, as a nation, should consider the wisdom of such horse-trading. The tobacco deals spawned a lively national debate about public health, the dangers of nicotine, the FDA's power to regulate, the industry's right to advertise, the size of attorneys' fees, and the regressive nature of a tobacco consumption tax.(18) That debate did not include, however, a discussion of whether the government should trade its law-making authority for money. It is now time for that discussion to begin. To all those inclined to minimize this problem by pointing out that as a practical matter lawmaking is always a market commodity...

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