Volume 116, Issue 1, Summer 2011 Penn State Law Review Online Companion Penn State Law Review

Volume 116, Issue 1, Summer 2011

Volume 116, Issue 1


Don’t Panic! Defending Cowardly Interventions During and After a Financial Crisis

By Brett McDonnell. 115 Penn St. L. Rev. 1.

How should we regulate the U.S. financial system after the financial crisis when we face the task with a radically inadequate understanding of what went wrong and what effect proposed regulations will likely have? This paper explores three quite different approaches to regulating in the face of severe uncertainty: the libertarianism of Friedrich Hayek, the conservatism of Michael Oakeshott, and the liberalism of John Maynard Keynes. Each man thought deeply about the problem of how uncertainty affects human affairs, but each came to different conclusions about how to address such uncertainty. The paper outlines the core, immensely useful insights of each theorist. The paper then outlines the even more useful and persuasive critiques that each launches at the other two. From this collision of viewpoints, the paper outlines a hybrid general approach to regulating the financial system which it (rather tongue-in-cheek) labels “cowardly interventions.” This approach accepts the basic insight of Keynes that unregulated financial markets will be deeply unstable, causing periodic destructive depressions. Thus, fairly strong regulation of finance is needed. But following the insights of Hayek and Oakeshott, I argue that new regulations should be cowardly. We should as much as possible heed the wisdom embedded in markets and existing institutions. We should identify as best we can the biggest problems that current markets pose, and address those problems with new rules that are measured, limited, market-friendly, and subject to evaluation and pruning.

This framework supports a three-part response to the crisis. First, the New Deal structure for regulating banks should be extended to the shadow banking system which was at the heart of the crisis. (What is “shadow banking”? Read the paper.) In that structure, the government acts as a lender of last resort to forestall panics while using resolution authority and prudential regulation to replicate much of the discipline of an unregulated market. Second, more specific limited rules should address glaring problems in the mortgage securitization chain. Third, regulatory agencies should be prodded to constantly re-evaluate existing regulation in light of new circumstances. Using this framework, this paper gives a guarded defense of the Dodd-Frank Act. All three elements of a proper response are there in the Act. There are major concerns, however. Most importantly, the Dodd-Frank Act does not do enough to address the largely unregulated shadow banking system. The Act should also have begun the process of eliminating Fannie Mae and Freddie Mac. Even legislation without these weaknesses would not end financial crises forever. However, if the many regulations implementing the Dodd-Frank Act are largely done well, they may postpone the next big crisis for a decade or two, as well as make the next crisis shorter and less severe when it does occur. The Dodd-Frank Act is imperfect even by the standards of a philosophy which emphasizes inevitable imperfection, but on balance it does pretty well under the circumstances.

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KABOOM! The Explosion of Qui Tam False Claims Under the Health Reform Law

By Beverly Cohen. 116 Penn St. L. Rev. 77

Since its inception in 1863, the federal False Claims Act (the “Act”) has included provisions whereby citizens can assist in the detection and enforcement of frauds against the government. To increase fraud recoveries, the Act authorizes private citizens (“relators”) to sue on behalf of the government (“qui tam” lawsuits) when they detect a fraud that is not already the subject of a federal enforcement action.

Periodically, Congress has adjusted the Act’s qui tam provisions in order to balance its dual goals of creating, on the one hand, sufficient incentives for private parties to detect and pursue frauds, but to discourage, on the other hand, qui tam actions where the federal government already has the ability to discover and prosecute the fraud on its own. Over the years, Congress aimed to attain the “golden mean”—an equitable balance between encouraging private fraud detection that increases federal fraud recoveries but discouraging “parasitic” qui tam actions where the relator merely asserts fraud claims that have already been made public.

The most recent adjustments to the qui tam provisions of the Act occurred with the enactment of health reform, the Patient Protection and Affordable Care Act. Amidst a national recession that ballooned the ranks of the uninsured and reports of rampant health care frauds that were robbing millions of dollars from federal health care programs, Congress sought to expand incentives for private citizens to detect and report health care frauds.

However, by eliminating the two predominant statutory limitations to qui tam jurisdiction, the PPACA has enormously broadened the ability of relators to commence qui tam lawsuits under the Act. First, the PPACA revised the Act’s “public disclosure” provisions to dramatically increase the sources of public information that relators may utilize as bases for their qui tam actions. And second, the PPACA revised the Act’s “original source” rule to eliminate the “direct knowledge” requirement, formerly the most stringent requirement that relators needed to satisfy to maintain their suits. Thus, the PPACA’s reforms signal a new age of extremely broad qui tam authority.

This Article will examine these recent amendments to the qui tam provisions of the False Claims Act, focusing on the enormous expansion of relators’ ability to commence qui tam actions, and changes to the qui tam bar that are likely to result.

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The Great Spill in the Gulf . . . and a Sea of Pure Economic Loss: Reflections on the Boundaries of Civil Liability

By Vernon Valentine Palmer. 116 Penn St. L. Rev. 105

What has been called the greatest oil spill in history, and certainly the largest in United States history, began with an explosion on April 20, 2010, some 41 miles off the Louisiana coast. The accident occurred during the drilling of an exploratory well by the Deepwater Horizon, a mobile offshore drilling unit (MODU) under lease to BP (formerly British Petroleum) and owned by Transocean. The well-head blowout resulted in 11 dead, 17 injured, and oil spewing from the seabed 5,000 ft. below at an estimated rate of 25,000-30,000 barrels per day.

The Deepwater Horizon is technically described as “a massive floating, dynamically positioned drilling rig” capable of operating in waters 8,000 ft. deep. In maritime law, such a rig qualifies as a vessel; yet, as a MODU, the rig also qualifies as an offshore facility that may attract higher liability limits under the Oil Pollution Act of 1990 (OPA). Under these provisions the double designation as vessel and/or MODU potentially raises the liability limits to as much as $75 million. The operator and principal developer of this well is BP, which owns a 65% interest. Various attempts at stemming the initial flow of oil failed. The oil spread on the surface and in the depths over a very wide area, killing marine life and water birds, entering estuaries, and polluting shores. The National Oceanic and Atmospheric Administration closed commercial and recreational fishing in a very wide area of the Gulf, and the federal government declared a moratorium on exploratory drilling for six months, thus idling about 33 drilling operations in progress. Meantime, BP, after meeting with President Obama, agreed to establish a $20 billion compensation fund, which would be independently administered by a nongovernmental agency led by Kenneth Feinberg. BP carried very little or no third party liability insurance and reportedly operated on a self-insured basis. Given the minimal insurance, questions arise as to whether BP’s pockets are deep enough to meet its overall liabilities which, in addition to the compensation fund already discussed, may include $21 billion further in civil fines under the Clean Water Act (CWA). The compensation fund, after an initial $5 billion deposit in 2010, would receive quarterly installments of $1.25 billion until the full amount is reached in mid-2013. The fund would pay for damage to natural resources, state and local response costs, and individual economic losses (whether in the form of civil judgments or settlements with the fund), but it will not be used to cover any fines and penalties incurred by BP. The right of individuals to seek compensation through the courts instead of the Fund remains open.

The flow of oil was finally arrested on July 15, 2010, 87 days after the blowout. By then more than 200 million gallons of oil had poured into the Gulf, which was nearly 20 times more than the Exxon Valdez emptied into Prince William Sound (11 million gallons) and 60 million gallons more than the Ixtoc I disaster in the Bay of Campeche (140 million gallons). The environmental, economic, and social impacts of the spill are staggering, and long-term effects will be unknown for much time to come.

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State Damage Caps and Separation of Powers

By Jeffrey A. Parness. 116 Penn St. L. Rev. 145

In 2010, the Illinois Supreme Court invalidated certain statutory caps on noneconomic damages in medical cases because they “unduly” infringed “upon the inherent power of the judiciary” theretofore recognized (albeit in judicial dictum). Such judicial authority originated within the separation of powers clause of the Illinois Constitution. The caps were deemed to “encroach” on the judiciary’s “sphere of authority” because they impeded “the courts in the performance of their function.”

Elsewhere, American state statutory damage caps have also been challenged on state constitutional separation of powers grounds. These challenges included setting where the caps operate for nonmedical cases and where the limits extend beyond noneconomic damages.

Are there core separation of powers principles guiding all American state statutory damage caps? If so, do they apply similarly to all types of cases and all forms of damage caps? With or without such core principles, are there other doctrines that better speak to damage caps when conflicts arise between the legislative and judicial branches?

This paper first explores the Illinois precedents on damage caps and separation of powers. It then explores other state precedents, finding they usually involve state constitutional allocations of procedural lawmaking powers. It also finds that caps on “statutory causes of action” or during “special proceedings” are often treated differently, as are caps on punitive damages. The paper then posits that separation of powers analyses should usually be replaced in damage cap cases with judicial rulemaking analyses. It finds no core principles involving separation of powers provisions that implicate damage caps. Interstate differences in constitutional allocations of procedural rulemaking authority (and, at times, justiciable matters) should be recognized more often in damage cap settings. These observations have implications beyond damage caps. Other civil litigation issues prompt tensions between the judicial and legislative branches, such as evidence privileges. Here, too, separation of powers analyses should generally not be employed, and often should be replaced by judicial rulemaking analyses.

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Hey! Universities! Leave Them Kids Alone!: Christian Legal Society v. Martinez and Conditioning Equal Access to a University’s Student-Organization Forum

By David Brown. 116 Penn St. L. Rev. 163

Imagine the following scenario: You are a student at the unimaginatively-named Public University. You and a handful of other students form a student organization on campus called “Students for World Peace” with the purpose of advocating world peace. Your organization applies for official recognition to take advantage of the benefits provided by the school’s registered student organization program: use of classrooms to hold meetings; access to the email system and bulletin boards; the ability to request modest funds; and the opportunity to dialog with other student groups. You willingly comply with the university’s regulations, including the university’s nondiscrimination policy. Citing its nondiscrimination policy, the university imposes an “accept-all-comers” policy, requiring student groups to accept any student for membership or leadership regardless of the student’s beliefs. Your organization is granted official recognition.

After a successful inaugural year, your organization holds elections for the following academic year. To your dismay, a large handful of students who oppose world peace have joined the group and are now running for office. Unfortunately, because the university’s accept-all-comers policy prohibits your group from adopting a selective membership policy, these peace-haters take over the organization. The newly elected board’s first order of business is to change the organization’s mission to impede world peace, believing that disharmony is good for society and that world peace is unattainable.

While some members of the United States Supreme Court think that such a “hostile takeover” of a student organization is unlikely, the Court recently held in Christian Legal Society v. Martinez (“CLS”) that a university may condition official recognition of a student organization on the requirement that the organization accept all students who wish to participate regardless of status or beliefs. As the scenario above suggests, however, if the group is not permitted to engage in selective membership, the Court’s holding may have a significant impact on the ability of a student group to communicate its mission and effectuate its goals. CLS is the latest Supreme Court case to consider university students’ First Amendment rights in connection with a public university’s ability to condition access to a student-group forum. Many universities create student-group forums to promote speech and debate on campus. Often, universities will impose restrictions on student groups who wish to participate in the forum.

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Standing Alone?: The Michigan Supreme Court, the Lansing Decision, and the Liberalization of the Standing Doctrine

By Kenneth Charette. 116 Penn St. L. Rev. 199

Standing refers to a litigant’s ability to bring a specific cause of action before a court. A litigant’s failure to demonstrate the necessary requirements of standing to sue will result in a dismissal of his or her claim. Standing is a judicially created doctrine designed to limit the jurisdictional reach of courts. The basic premise behind the standing doctrine is that courts should only have the power to adjudicate certain types of claims. Article III of the United States Constitution limits the power of Federal Courts to deciding only “case” or “controversy.” This doctrine generally is justified on the basis of maintaining the separation of powers between the various branches of government. While state governments are not necessarily bound by the requirements of Article III, all state courts have recognized the need for some form of a standing doctrine.

This Comment will address the ways in which a recent Michigan Supreme Court case dramatically altered the requirements for standing to sue in Michigan. The Michigan Supreme Court recently handed down its opinion in Lansing Schools Educational Association v. Lansing Board of Education. In Lansing, students allegedly assaulted four high school teachers. An applicable state statute required the expulsion of any student who assaults a teacher. However, the school board, in its discretion, chose only to suspend the students, as opposed to rigidly adhering to the statutory requirements. The teachers union, on behalf of the four teachers, filed suit seeking a writ of mandamus to compel the local school board to expel the students. The trial court and the appellate division dismissed the suit on the ground that the teacher union lacked standing to sue for the enforcement of the statute under the applicable test. The Michigan Supreme Court reversed and chose to abandon the federal test for standing on the grounds that it departed too dramatically from Michigan’s historical precedents and because the Michigan Constitution lacks an explicit “case” or “controversy” requirement. The court held that a plaintiff in Michigan now has standing to sue if either 1) he has a specific legal cause of action; or 2) a trial court, in its discretion, believes a litigant should have standing.

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Fruit of the Vine: Understanding the Need to Establish Wineries’ Rights Under the Right to Farm Law

By Katherine Pohl. 116 Penn St. L. Rev. 223

In the age of the Slow Food Movement, Americans are increasingly embracing a farm-to-table philosophy. People are generating an awareness of where their food comes from and are becoming active participants in the growing process. This philosophical shift opens the door to new opportunities. Particularly, it creates a new market for traditional farmers struggling to stay in business. As a result, more and more farmers are seeking creative ways to diversify their family farms and align their production to suit this new market, offering products that entice American families back to the family farm. For example, one Maryland cow farmer is considering opening a winery on his land to stabilize his annual revenue and bring people to his farm.

A winery is a perfect example of an agricultural operation that provides diversification and stability to farm incomes while bringing people to share in the bounty of the land. Because wineries create an idyllic expression of vitality and beauty, and often marry the pastoral, agrarian lifestyle with notes of luxury, they provide the perfect forum to view the full-circle process from vine-to-bottle, exposing generations far removed from the labors of the land to a newfound understanding of experiencing and tasting the notes of the soil and the expression of the sun.

Unfortunately, these innovative solutions, such as wineries, are often not met with open arms by surrounding communities or local municipalities and face severe legal impediments to their upstart and expansion. Because wineries and other new forms of agritourism do not fall within the traditional ambit of a “farm” or an “agricultural use,” legal questions arise as to whether these activities are “agricultural” and thereby protected from local regulations under the state’s Right to Farm law (RTF), or other agricultural legislation. In a recent case, Terry v. Sperry, the Ohio Court of Appeals addressed this very issue.

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A Second Sitting: Assessing the Constitutionality and Desirability of Allowing Retired Supreme Court Justices to Fill Recusal-Based Vacancies on the Bench

By Rebekah Saidman-Krauss. 116 Penn St. L. Rev. 253.

“Could we not have a provision in the law for some mechanism that retired Supreme Court [J]ustices could be asked to sit on the Court when there is a recusal,” wondered former Supreme Court Justice John Paul Stevens. This question spurred Vermont Senator Patrick Leahy to draft legislation that would create such a mechanism. If enacted, Leahy’s proposed legislation would enable the active Justices on the Court to select, by a majority vote, retired Justices to return to the Bench to fill recusal-based vacancies.

Judicial recusal describes a judge’s sua sponte withdrawal from a case, whereas disqualification refers to judicial removal that is required by statute or prompted by a party’s motion. These technical distinctions notwithstanding, recusal and disqualification are governed by the same federal standard and are often used interchangeably.

Historically, Supreme Court Justices have been disinclined to recuse themselves, even when a litigant has moved for a Justice’s disqualification. Common law doctrines such as the “duty to sit” and the “rule of necessity” effectively create recusal loopholes, allowing judges to refrain from recusal in situations that would otherwise warrant such action. Prior to 1974, Supreme Court Justices frequently invoked these common law doctrines in support of their refusal to recuse.

In 1974, Congress amended 28 U.S.C. § 455 to curb widespread judicial reliance on these common law doctrines. Despite Congress’s attempt to create a standard wherein judges would “err on the side of recusal,” certain Justices have failed to comply. The Supreme Court, in particular, has indicated that its “unique nature justifies a less demanding recusal standard” than that which governs all other federal judges.

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