Preemption and choice-of-law coordination.

Author:O'Connor, Erin O'Hara
Position:III. A Choice-of-Law Coordination Approach to Preemption D. Implementing the Approach through Conclusion, with footnotes, p.683-713
  1. Implementing the Approach

    This Section discusses how courts might implement our approach. In general, we aim to enlist courts in preemption cases as active participants in facilitating a federal system that takes account of the benefits both of diverse state laws and of coordinating state law to accommodate markets that cross state borders. Where the terms of a federal statute and other evidence of congressional intent fail to provide guidance about whether state law is preempted, the court should take account of the extent to which the states have voluntarily allocated their sovereign authorities. Where states have effectively coordinated sovereign authority through choice-of-law rules or uniform lawmaking, the court should uphold the state law unless another policy cuts in the opposite direction. (172) This approach preserves state sovereignty when federalization of the law is unnecessary to facilitate clarity or otherwise to promote a national market. On the other hand, when the states have not horizontally coordinated and the federal statute applies to the given situation, our approach supports giving the statute preemptive effect. (173)

    Our approach would require courts to develop standards of coordination. This raises a host of questions. Just how many states need to agree to a single choice-of-law approach? What if states agree on a general approach but not on the circumstances where exceptions apply? What if some but not all states permit parties to choose their governing law in a particular context? If states agree on a formal choice-of-law approach, at what point is a national scheme's interference with the allocation of state authority sufficient to trigger a presumption in favor of preempting state law?

    We do not purport to resolve those issues here. However, in answering these questions, it is important to keep in mind a few general considerations. First, complete coordination is likely an unreasonable standard. Even the relatively rigid corporate internal affairs doctrine is deviated from in some states under some circumstances. (174) Presumably it is sufficient if states have adopted (or have shown promise in adopting) choice-of-law rules that tend to guard against regulatory spillovers by enabling the parties to choose or know the law at the time of the relevant conduct. Second, timing of coordination is also relevant to this determination because the states need time to work toward horizontal coordination. Thus, courts should not require full coordination at the time of their decision unless it is reasonable to expect the states to have already achieved such coordination. Third, the necessary degree and timing of effective coordination might turn on the context in which the laws operate. Because a healthy federalism balances the benefits of state experimentation and diversity against the benefits of creating a national market, the necessary degree of horizontal coordination likely will turn on the relative perceived benefits of state and federal law. More benefits from diversity suggest a greater tolerance for imperfect but promising coordination and vice versa.

    Although these judgments entail some uncertainty in decisionmaking, such standards can be worked out over time. (175) Working through these uncertainties is justified by the coherent guidance that our approach can give to courts and administrative agencies and our approach's firm grounding in principles of federalism. A clearer approach, such as across-the-board presumptions in favor of or against preemption, (176) could reduce decisionmaking costs but poses the risk of upsetting the important balance between federal and state power. Moreover, our approach has the added benefit of encouraging states to coordinate

    through choice-of-law rules, which would create further potential benefits to decentralized lawmaking.


    We have so far shown how a horizontal coordination approach to preemption can enable courts to fill gaps in congressional intent based on structural constitutional values intended to promote a healthy federalism. This Part uses several Supreme Court cases to further illustrate how our approach can inform preemption jurisprudence. (177) These cases involve subjects that illustrate one of five recurring situations relevant to our analysis: (1) states have coordinated their choice-of-law rules so as to have achieved effective formal horizontal coordination; (2) states have clearly failed to achieve such coordination; (3) states have formally coordinated choice-of-law rules but functionally the substantive laws of one or more states end up thwarting the practical effect of the substantive rules in other states; (4) the preemption analysis is better delegated to an administrative agency rather than a court because of factually unclear or temporally shifting horizontal coordination; and (5) horizontal coordination should not control the analysis because other policy considerations dominate.

  2. Formal Coordination

    In the cases discussed in this Section, states have achieved horizontal coordination. Under our analysis, when congressional intent is unclear, courts should refuse to preempt in the absence of an overriding policy concern.

    1. Corporate and Securities Law

      As discussed above, states have achieved a high level of choice-of-law coordination regarding corporate and other business association governance by adopting the internal affairs doctrine. Under that choice-of-law rule, the law of the firm's state of organization (i.e., "place of incorporation") applies to the firm's governance and its members' liability for the firm's debts. This rule fosters experimentation in state law with relatively little spillover cost. It follows under our analysis that courts should decline to preempt where congressional intent is unclear on the scope of preemption.

      Our analysis supports the result in CTS Corp. v. Dynamics Corp. of America, (178) where the Supreme Court upheld an Indiana law regulating tender offers for control of an Indiana corporation. The Court reasoned that the Williams Act, a federal law that mandates disclosure in connection with tender offers, did not preempt the Indiana law. Despite possible delays that could have resulted from applying the Indiana law, the Court reasoned that nothing in its earlier cases "suggested that any delay imposed by state regulation, however short, would create a conflict with the Williams Act." (179) Rather, after reviewing the many state law provisions that would have similar effects, the Court reasoned that states' traditional regulation of corporate governance supported a presumption against preemption. (180) However, under current preemption presumptions, the Court alternatively might have reasoned either that Congress had occupied the field by adopting the Williams Act or that the state law interfered with the objectives or purposes of the federal law, and that therefore federal law preempted state law. Our regulatory coordination approach provides a way to avoid conflicting and overbroad presumptions. Our analysis suggests that the Court instead should have rejected preemption because the states have achieved horizontal coordination around the internal affairs choice-of-law rule.

      The Court did in fact employ a regulatory coordination analysis in CTS, but it did so when analyzing whether to invalidate the Indiana statute under the Dormant Commerce Clause. The Court distinguished cases "invalidat[ing] statutes that may adversely affect interstate commerce by subjecting activities to inconsistent regulations": (181)

      The Indiana Act poses no such problem. So long as each State regulates voting rights only in the corporations it has created, each corporation will be subject to the law of only one State. No principle of corporation law and practice is more firmly established than a State's authority to regulate domestic corporations, including the authority to define the voting rights of shareholders. Accordingly, we conclude that the Indiana Act does not create an impermissible risk of inconsistent regulation by different States. (182) As we argued earlier, regulatory coordination is relevant to both constitutional doctrines, but the necessary degree of horizontal coordination may differ. For example, given that preemption analysis only occurs when Congress has passed a statute that provides clear evidence of a federal policy, more horizontal coordination may be necessary to insulate state law under preemption than under Dormant Commerce Clause analysis. But the potentially differing standards for horizontal coordination further justify consideration of coordination in both contexts.

      CTS also rejected the argument that the Indiana law should be invalidated based on the need to protect the national market for interstate tender offers. Instead, the Court focused on the state "interest in promoting stable relationships among parties involved in the corporations it charters, as well as in ensuring that investors in such corporations have an effective voice in corporate affairs." (183) The Court also responded to economic arguments citing the value of the market for corporate control by observing that "[t]he Constitution does not require the States to subscribe to any particular economic theory." (184) In sum, CTS stands for the basic principle underlying our approach: diversity trumps uniformity in the presence of horizontal coordination and the absence of an overriding substantive federal law policy. Although a determination of what counts as an overriding substantive federal law policy is a normative one left to the courts, the horizontal coordination principle remains a relatively objective determination that can be used to effectively guide the analysis.

      The coordination principle's role in resolving preemption issues in corporate law cases is also relevant in the more complex context of state securities regulation. Consider Merrill Lynch, Pierce...

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