The Sovereign in Commerce.

AuthorElengold, Kate Sablosky

Table of Contents Introduction I. Exploitation of the Sovereign Shield II. The Challenge of Tactics That Fall Through the Cracks A. Federalism: The Feds (and Contractors) Versus the States B. Separation of Powers: The Executive Versus the Legislature and Agencies Versus Oversight C. Democracy: Business Versus Accountability D. Winners and Losers: Cascading Effects of the Expanded Sovereign Shield III. Brightening the Lines: Classifying Commercial Conduct A. Defining "Commercial" 1. Sue-and-be-sued clauses 2. The Foreign Sovereign Immunities Act 3. The market-participant exception to the Dormant Commerce Clause. B. A New Protocol 1. Did Congress unambiguously preempt state law or provide immunity for the challenged conduct? 2. Is the challenged conduct commercial? 3. Who engaged in the challenged conduct? 4. If the actor is not the government, who is liable under traditional agency law principles? C. Returning to First Principles D. Applying the Protocol: Bright Lines and Grey Areas 1. Student Loan Servicing Alliance v. District of Columbia 2. Scott v. J.P. Morgan Chase & Co. 3. Lamb v. Martin Marietta Energy Systems, Inc Conclusion Introduction

The federal government is a unique actor in the national economy. It performs an astonishingly diverse array of activities, (1) and at the same time it is protected from liability and oversight by potent legal doctrines. (2) This sovereign shield--comprising the doctrines of federal preemption, sovereign immunity, and intergovernmental immunity (3)--protects federal actors from civil liability for a range of harms they may have caused. (4)

The protection afforded by the sovereign shield extends beyond the federal government. As we have warned in our prior work, courts have extended sovereign-shield protections to a wide array of private actors under contract with the federal government. The result is that private actors receive protection from both potential liability and mechanisms of legislative oversight. (5)

Contractors have sought sovereign-shield protections in a wide array of cases. For example, student-loan servicers under contract with the Department of Education asserted preemption and intergovernmental-immunity defenses to avoid liability and regulation under a local law designed to protect borrowers from bad servicer behavior. (6) A bank under contract with the Department of the Treasury to issue cash cards to District of Columbia jurors relied on sovereign-shield defenses to avoid liability when it allegedly charged the jurors outrageous fees and failed to provide them full compensation. (7) And Department of Energy contractors asserted all three sovereign-shield theories to defend themselves against allegations including willful, wanton, and grossly negligent conduct in their management of enriched uranium. (8) In each of these cases, the court determined that, under certain factual conditions, the contractor could be protected from liability by the sovereign shield. (9)

Businesses performing the same activities on their own would enjoy no such privileged status. Further, as the federal government has increasingly hired private businesses to fulfill its functions, (10) the executive branch of the federal government has developed closer relationships with those businesses. This "alliance of Goliaths" confers benefits on both sides. (11) Businesses get paid, and they get to leverage their association with the executive branch in legal conflicts with the legislative branch and state governments. Privatization and outsourcing also benefit the executive branch by permitting it to advance ideological aims (12) and evade certain forms of oversight. (13) In effect, private businesses, in collaboration with the federal executive, increase their ability to protect themselves from consumers both directly (by undermining civil liability) and indirectly (by disempowering elected representatives in the legislature). (14) The result is the encroachment of self-interested private business on our democracy and the expansion of federal executive authority at the expense of Congress and the states.

This is the diagnosis of the problem, which we extensively examined in a previous article published in these pages. (15) But what is the solution? In some instances, it makes sense to offer legal protection to government actors and their private contractors because the federal government is acting in a uniquely public fashion, providing a clear public good. In other cases, the government--directly or through private contractors--provides a commercial good or service. In these cases, it is less clear as a normative matter whether or to what extent the sovereign shield should protect the government contractor (or the government) from liability and oversight. This Article discusses both where and how those lines should be drawn.

Although constitutional, administrative, and consumer law scholars have all brought their expertise to bear on issues raised by privatization and outsourcing, this Article explains why the phenomenon we identify has fallen through the cracks in these bodies of scholarship. Scholars writing about federalism have increasingly recognized the possibility for cooperation and competition between states and the federal government, but they have not delved deeply into the role that private businesses can have on the balance of power between state and federal actors. (16) Scholars analyzing relationships between federal agencies and the private sector have identified myriad ways that businesses and other federal agencies can affect federal regulatory policy, but they have largely ignored the role that the states play as regulators and policy drivers. (17) And consumer law scholars have recognized the harmful effects of businesses' attempts to foreclose remedies for victims of corporate wrongdoing, but they have not focused on this phenomenon's implications for federalism principles or democratic well-being. (18)

There is another problem. In determining whether to apply sovereign-shield doctrines, courts have generally focused on the actor rather than on the action taken. (19) Scholars have criticized courts' conventional focus on the nature of the actor, (20) writing that this approach is misguided because of the considerable degree of intermingling and the blurring of lines between government and business. (21) In developing a doctrinal response to the sovereign-shield problem, we draw on these scholars' work and take up their invitation to think in concrete terms about drawing a line between those activities that should result in liability and those that may be conducted with effective impunity. Like these scholars, we fear that the consequences of permitting existing doctrinal confusion to persist are profound. Our fear is especially pronounced given the staggering number and variety of services that the federal government provides to the people of the United States, both directly and through hired contractors. (22)

We suggest, then, that a shift in thinking is necessary to move toward a resolution of the sovereign-shield problem. We argue that the problem does not arise because the federal government relies increasingly on contractors that assume a dual private-public character. Rather, we argue that the problem arises because the federal government itself has assumed a dual character: It is both a sovereign and a business. Put slightly differently, it is not about who is doing the government's work, but about what sort of work the government is doing. Directly and indirectly the federal government is in the retail business. Many of its services, like running recruiting campaigns, (23) issuing loans, (24) and operating health care plans, (25) are commercial in nature--meaning that entities other than the federal government provide identical or very similar services directly to consumers.

Thus, this Article proposes that the focus of judicial analysis of the sovereign shield should shift from the relationship between the sovereign and its contractor to the nature of the challenged action: If the action can be classified as commercial, then the provider should not be treated as a federal entity for liability purposes. While Congress could take up this shift through statutory changes, doing so is not necessary. As we set out below, there is an existing jurisprudential foundation that allows courts to make this doctrinal shift without congressional attention or significant intervention from the Supreme Court.

To be sure, changing the question does affect the answer. Accordingly, this Article argues that even if a federal entity itself performs a commercial activity, that entity should not benefit from anything less than express federal legislative preemption, a finding of federal field preemption, (26) or an explicit congressional grant of immunity. At first glance, this may appear to be a radical change from the current jurisprudence. Early Supreme Court cases from the 1800s, however, recognize that a sovereign entity or instrumentality can face different consequences when engaged in commercial activities. (27) In fact, in a string of cases, the Court recognized that a government entity could not claim the special protections of the sovereign when it was engaged in commercial actions. (28) This thread has carried through various doctrinal contexts. (29) And it remains good law: In 2019, the Supreme Court recognized the difference between commercial and noncommercial activity in construing sovereign immunity's extension to a federal instrumentality. (30) Following our proposal, courts could shrink the reach and power of the sovereign shield. This would both preserve long-standing distributions of power and enable consumers to obtain remedies for harms caused by the performance of a commercial activity, whether the actor is the sovereign or its agent.

And this is a commonsense solution. (31) When the government undertakes noncommercial activity...

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