What Story got wrong - federalism, localist opportunism and international law.

• Author: Stephan, Paul B.
• Position: US Supreme Court Justice Joseph Story - Symposium

1. INTRODUCTION

   In Swift v. Tyson, Justice Story argued that the rules of commercial law were too important to be localized. (1) The case involved a negotiable instrument. This specialized contract depends on wide circulation and acceptance for its value. Uniform rules promote these qualities, and an international body of legal rules already existed for this instrument. (2) Story concluded that federal courts, in the exercise of their diversity jurisdiction, should construe their statutory authority so as to disregard local rules that might obstruct the construction of a national common market in harmony with the international financial community. (3) Accordingly, the Court ruled that the federal judiciary could ignore a rule developed by the courts of New York, even though New York law governed the negotiable instrument in question.

   Implicit in Story's argument is an assumption that state courts will embrace rules of law that harm general welfare. They might do so either because they are foolish or, more likely, because they seek local benefits at the expense of the national interest. At the time of the founding, the principal argument for creating the federal courts' diversity jurisdiction was a belief, based on considerable evidence, that state courts favored local parties to the detriment of the national interest. Story's interpretive strategy resonated with this constitutional determination: State judges are subject to local pressures inimical to interstate commerce and should be marginalized whenever possible.

   Story's insight that the actions of local judges reflect local pressures seems indisputable. What he got wrong, however, is the assumption that local actors inevitably have an incentive to act so as to disadvantage outsiders. To be sure, it is an easy mistake to make. In any representative polity, local officials must answer mostly to local interests, because outsiders lack the franchise. But this argument is too primitive. Other mechanisms beside direct political accountability can induce local actors to internalize the effects of their actions on outsiders. Local officials do not always need federal supervision to promote acts that redound to the nation's benefit.

   This point is fundamental to any inquiry into the role federalism plays in international law. If Story is wrong, then so are many others. In particular, Story's claim--that in law, localism is pervasive and inevitable, and thus requires federal supervision--underlies prominent arguments for the federalization of international rules within the domestic legal order. Harold Koh, for example, argues:

   One need not denigrate the ability or impartiality of state court judges to recognize that the federal judges have structural attributes that make them more appropriate adjudicators to rule on international matters that may embroil the nation in foreign policy disputes. Unlike state judges, who are effectively unaccountable to national institutions on matters of pure state law, federal judges are nominated by a national official (the President), are confirmed by a national body (the Senate), are granted salary independence and life tenure, and render federal common law rulings subject to review and revision by federal appellate courts, Congress, and the executive branch. (4) Others too have maintained that international law must be federal to avoid local actions that, as Koh put it, "may embroil the nation in foreign policy disputes." (5) These scholars walk with Story in seeing the risk of localism as a compelling argument for a nationalist approach to international law--that is, regarding all international law as federal in nature and presumptively enforceable by federal courts at the behest of interested parties. The core error in Story's argument is the assumption that the accountability of local actors necessarily depends on direct federal supervision. The nationalist argument is not only primitive, but inconsistent with the assumptions of other arguments that proponents of international law generally embrace. One anti-nationalist critique of customary (that is, non-treaty) international law is that individual nation-states are likely to defect from generally desirable norms due to local opportunism. (6) In response, international law proponents contend that the iterative nature of international interactions can, if certain conditions are satisfied, alter the incentive to defect from a generally desirable cooperative outcome. (7) But if customary international law can emerge among nation-states without the supervision of an international enforcer, why insist that the U.S. states always must submit to the nationalist discipline of the federal courts?

   I first explain the theoretical underpinning of the argument against the inevitability of localist opportunism. I then illustrate the general theory with three examples where the international obligations of the United States can be met without the strong federal supervision that Story deemed necessary and that latter-day nationalists embrace. I first discuss the body of law that was the subject of Swift v. Tyson, namely the rules governing negotiable instruments. Story thought that developing a federal common law was necessary to thwart idiosyncratic, and presumably opportunistic, state decisions. Yet both before and after the overthrow of Swift v. Tyson in 1938, the United States attained national uniformity in negotiable instrument law without resorting to national supervision. The next examples involve the Hague Child Support Convention and the UNCITRAL Electronic Commerce Convention, two private international law treaties which the United States might relegate to state enforcement. In the conclusion, I discuss the broader implications of these debates and relate them to ongoing controversies over the role of the judiciary in propounding public law and the significance of international law.

2. THE LIMITS OF THE ARGUMENT FROM LOCALIST OPPORTUNISM

   One of the main reasons the Founders replaced the Confederation was the unwillingness of the states to meet the commitments made through the 1783 Treaty of Paris. (8) The United States had promised to honor commercial obligations owed British subjects and to redress expropriations of their property, but state legislatures and courts refused to go along. (9) The naked interests at stake seem clear enough: Not just national honor, but renewed commerce depended on enforcing the treaty. Yet these benefits attached to the entire nation and, from a local perspective, were diffuse. The rewards from protecting local debtors (including the holders of wrongfully expropriated property) were direct and concentrated. It was another act in the tragedy of the commons, with self-interested and uncoordinated local actors plundering a common resource. For purposes of clarity, I will refer to such behavior as localist opportunism.

   There is nothing wrong with the starting point that local officials sometimes have an incentive to disregard a generally optimal legal strategy and instead may reward local actors. Much of international trade theory rests on this premise, as do bodies of law such as federal preemption doctrine. (10) Story's mistake was to assume that this problem was absolute and thus demanded a categorical solution. Local decisionmaking authority is a necessary, but not a sufficient, condition for localist opportunism. Even though outsiders lack direct political means of influencing local decisionmakers (indeed, that is the definition of an outsider), other means may exist to induce local decisionmakers to account for the effect of their actions on outsiders.

   A widely accepted model of the political and economic interests that lead to lawmaking supports the first step in this argument: Not all regulatory issues present a significant risk of localist opportunism. Game theory provides an analytic approach to the general problem of indirect coordination of behavior. Simplifying greatly, two general classes of problems present themselves. Instances where cooperation is desirable but individual actors have an incentive to defect from the cooperative outcome are called collective action problems. Instances where actors lack an incentive to defect and instead search for an outcome around which cooperation can coalesce are called coordination problems. A familiar example of the latter is the rule governing which side of the road to drive on: Once a solution becomes conventional, drivers face strong disincentives to defect even in the absence of state enforcement. (11)

   The solution to coordination problems involves a credible norm entrepreneur, someone who can stake out a position around which others coalesce. This entrepreneur need not be an official body, as long as its position has sufficient notoriety and credibility. Recognition of the norm itself alters the incentives parties face.

   In the case of collective action problems, altering the incentive to defect may entail further steps. For example, Congress occasionally will induce states to participate in a collective-action project (that is, a program that produces general benefits if all participants cooperate, but that unfolds in an environment where there exist local incentives to defect) by making funding conditional on cooperation. Consider the minimum drinking age in the United States. Not too long ago, states had unfettered discretion to set that age (a power arguably enshrined in the second section of the Eighteenth Amendment). Because of population mobility, however, a state that sets the age higher than its neighbors faces the risk of low-cost avoidance. Moreover, the larger the number of states that set a higher limit, the greater the incentive to holdouts to make the age low to attract revenues from outsiders. Congress responded not by enacting a national minimum drinking age (which might face constitutional objections), but by conditioning certain kinds of federal funding on...