Monday, January 22, 2007

Wal-Mart and Economic Due Process

In the great ideological campaigns over the extent and appropriateness of governmental intervention in the economic relationships of its citizens, all combatants seek something from the state. So-called liberals, of course, seek to regulate economic entities for the purpose of redistributing income, or limiting power.1 So-called conservatives come in a variety of flavors. Some would reduce government to a boundary keeper.2 Some would use the government more affirmatively, to protect the power of economic entities to exploit capital and restrain other factors of production, notably labor, customers and lenders, in their role in the affairs of such entities. This short essay considers this latter position in the context of recent efforts by the State of Maryland to essentially regulate one enterprise—Wal-Mart—for the benefit of its competitors and other stakeholders. The use of state power for private advantage, amply demonstrated by this affair, ought to serve as a caution against any rush to embrace an ideology open to the idea of the state as a necessary active regulator of economic activity. The essay was first presented as my contribution to “A Debate on Wal-Mart and Economic Due Process,” held as part of the Ninth Annual Federalist Society Faculty Division Conference, Washington, D.C., January 5, 2007.

I start with a few basic premises. First, I am less respectful that is customary among my legal academic peers of the state and its purported monopoly of regulatory power, especially with respect to economic matters.3 Second, with the advent of globalization, states have become more participants and stakeholders in economic activity than neutral regulators above the affairs of its citizens and other entities. The insights of the dormant commerce clause in this respect have to be taken as a generalizable proposition. 4 Third, I challenge the idea of the character of regulation as purely instrumental—a tool of power.5 Regulation, like any other item, can acquire the character of an object of commerce, especially when states become stakeholders. As a consequence, utilizing jurisprudence to intervene as a participant in the economic relations of members of the political community, of engaging in legislation other than as an autonomous actor in such activities, will result in the production of ultimately economic inefficient efforts. The deployment of antique concepts, like economic due process, in the circumstances of situations like the failed attempt to deploy the state as an actor in the economic relations among Wal-Mart, its competitors, its stakeholders, suppliers and customers, illustrates the difficulties of treating the state as both actor in and governor of, the economic relations of the inhabitants of its territories.

Not that Wal-Mart, in this case, is incapable of taking care of itself. In some ways, Wal-Mart represents economic, social and political power far in excess of any that might be mustered by its antagonist, the State of Maryland. Wal-Mart, Inc. is a Delaware corporation with its headquarters in Bentonville, Arkansas. Its common stock is publicly traded on the New York and Pacific Stock Exchanges (Sym: WMT).6 As of March 20, 2006 there were 312,663 record holders of Wal-Mart stock.7 Wal-Mart posts information for the investor community on its web sites.8 According to that site, “As of November 30, 2006, the Company had 1,092 Wal-Mart discount stores, 2,195 Supercenters, 576 Sam’s Clubs and 110 Neighborhood Markets in the United States. Internationally, the Company operated units in Argentina (13), Brazil (301), Canada (282), China (68), Costa Rica (136), Guatemala (127), Honduras (39), Japan (391), Mexico (874), Nicaragua (38), Puerto Rico (54), El Salvador (60) and the United Kingdom (335).” Wal-Mart reported a net income of $11, 231, 000,000 on net sales of $312, 427,000,000.9 It is managed by a fourteen person board of directors,10 a majority of whom are independent.

Wal Mart runs a huge international distribution network to supply its retail operations with goods on an efficient basis. In the United States, this critical distribution network relies on the placement of large distribution centers, warehouses, in key locations. Wal-Mart competes with a number of national and international food and product retailers in the United States and abroad. As a consequence of such competition against ALDI and others in Germany, Wal-Mart chose to sell its German operations near the close of 2006.11 Wal-Mart also manages a network of almost 7,000 supplier factories that feed the enormous distribution network in the United States.

Sometime in 2005, it became clear that Wal-Mart was seeking to increase its distribution capacity in the mid-Atlantic region of the United States and that it intended to build a distribution center in Maryland.12 On January 12, 2006, a divided Maryland General Assembly enacted over the veto of Maryland’s governor, the Fair Share Health Care Fund Act, which was scheduled to become effective January 1, 2007.13

The Act applies only to non-governmental employers of 10,000 or more people in the State.14 It requires that a for-profit employer that "does not spend up to 8% of the total wages paid to employees in the State on health insurance costs shall pay to the Secretary an amount equal to the difference between what the employer spends for health insurance costs and an amount equal to 8% of the total wages paid to employees in the State."15 For non-profit employers, the benchmark is 6%.16 The Act also requires an employer to report annually its total number of employees in the state, the amount spent by the employer on health insurance costs, and the percentage of payroll spent by the employer on health insurance costs.17

The political alignments that made passage of the Act possible were curious. The Act was extremely popular among the Maryland electorate. “A Washington Post poll conducted last month found that 77 percent of registered voters supported it.”18 And while it is easy enough to sneer at the manipulability of the electorate, it must be remembered at all of the actors in this legislative drama had a fair access to the levers of political persuasion and public opinion. The problem wasn’t access so much as division of opinion among the principal actors with a stake in the legislation. Thus, three of the four entities that might have been subject to the provision—Johns Hopkins University ("Johns Hopkins"), Northrop Gruman Corporation ("Northrop Gruman"), Giant Food Incorporated ("Giant Food")—were either supportive or neutral. Johns Hopkins was able to meet the reduced special standard after for non profits. Northrup Gruman “successfully lobbied for an exception in the Act that permits employers to exclude, for purposes of calculating the percentage of payroll spent on healthcare, compensation paid to its employees above the median household income in Maryland. This exclusion permits Northrup Gruman to meet the requirement.”19 The Giant, a competitor of Wal-Mart in the grocery business “actively lobbied for enactment of the legislation, and spends substantially more than eight (8) percent on health insurance than the total wages it pays to employees working in Maryland.”20 The Giant, it should be noted is part of the U.S. flagship operations of Royal Ahold, a multinational food conglomerate based in the Netherlands, which has been having a biot of financial and regulatory problems of late and was eager to use whatever levers might be available to maintain its competitive advantage in the markets it was seeking to retain. Labor unions, notoriously unable to effectively unionize Wal-Mart, of course, were quite supportive.21 And the intelligentsia was divided along the usual lines.

It is easy to dismiss the Maryland provision as mere “special legislation” of the type that might, at worst, suggest a sort of systemic corruption against which all citizens of this Republic ought to be on guard against. But the legislation reveals more than the common proclivity of lower level legislators to serve a mass of “special interests.” First, it suggests that the division among those who seek legislative favors are more complicated an a simple economic or class analysis might reveal. This legislation, for example, was not the product of populist demagoguery alone. It was also the product of calculations by Wal-Mart’s competitors to seek competitive advantage through the deployment of state power. It reveals that that state might be hijacked (an extreme term I grant in these circumstances) not only by those who would regulate economic entities as a class, but by elements of that class of economic entities themselves. Second, it suggests that legislation has specific economic value. In this case, it had value to Giant, in particular (and labor in general), as a means of reducing their costs to compete against Wal-Mart. As something of value, legislation acquires the character of object or commodity. But this is a special type of commodity, one produced by a political community through its representative apparatus. To the extent the state produces this good, in the market place of behavioral norms, it ought to maximize the wealth of its stakeholders. But it may achieve that end in a variety of ways, and long and short terms strategies for value maximization may point in different directions. States may thus sell regulation (to the extent it does not otherwise compromise basic limitations on governance) tot he same extent it otherwise commodities any economic right through licensing, examination and special grants.

Thus understood, the Maryland legislation acquires a different character altogether. Only Wal-Mart was affected adversely by the legislation. And only Wal-Mart sought to oppose it. Wal-Mart-s response was indirect and legal, rather than economic or political. Working through the Retail Industry Leaders Association ("RILA"), a trade association of which Wal-Mart Stores, Inc. is a member, the RILA filed a lawsuit for declaratory and injunctive relief against the Maryland Secretary of Labor seeking to a declaration that the Fair Share Health Care Fund Act was preempted by federal law (ERISA). The federal district judge hearing the case, Judge Motz, agreed and issued an opinion published as Retail Industry Leaders Ass'n v. Fielder, 435 F.Supp.2d 481 (D.Md.,2006),22 an opinion recently affirmed by the 4th Circuit Court of Appeals.

Judge Motz found no standing issue preventing RILA from bringing the action. He somewhat reluctantly found that ERISA preempted the Maryland Act. In doing so he rejected the arguments that Maryland effectively enacted a payroll tax. He rejected an equal protection challenge on the current usual grounds: that in matters of “economic and social policy that does not create a suspect classification or infringe upon fundamental interests, it is presumed constitutional and "must be upheld against equal protection challenge if there is any reasonably conceivable state of facts that could provide a rational basis for the classification."23

This result is curious for a number of reasons. First, the result required a strategic use of federal authority that continues to deepen the national commitment to the erosion of federalism. Second, even Maryland’s argument in favor of its regulatory rights was derivative, based on a limited federal grant, the Tax Injunction Act.24 Third, Judge Motz appeared somewhat sympathetic to the equal protection argument, suggesting that additional data might have been useful in making the argument stronger for the purpose of constructing an ‘irrationality with teeth’ argument.25 This last point provides a bit of irony—it essentially applies the jurisprudence of individual rights, so opposed by those who would read the Constitution narrowly,26 in the service of economic rights jurisprudence, supported usually by the same group.

Some people may point to these antics to argue that this story makes a compelling case for the re-imposition of structural constitutional limitations on the power of government to interfere with the workings of markets in economic activity. I suggest here that the moral of this story may be far more complicated than that and simplistic solutions to complex issue—like economic substantive due process may be more rather than less market distorting. I suggest to you that the benefits and burdens of regulation can, like the price of capital and labor, and markets for components and finished products, reflect the wealth maximizing participation of a critical market participants. And that, like customers, suppliers, lenders, and shareholders, governments represent a complex form of stakeholder in economic activity, useful to other stakeholders (including enterprises) in significantly different way. Last, I suggest that, in the global free market context, economic substantive due process may be anti-competitive.

There has been a bit of nostalgia for the short lived judicial flirtation with economic due process, an early and influential form of substantive due process. Thus doctrine, always controversial, was espoused most vigorously, from the mid 1890s through the early 1930s. It suggested that the Due Process Clauses of the 5th and 14th Amendments either: (i) limited government from using regulations to interfere with individual rights to property or contract (in its substantive aspects, an interference so severe that no amount of process could save the statute), or (ii) permitted courts to strike down legislation impinging on private property interests and contractual relations.27

The aggregate of cases decided on the basis of this jurisprudence, usually referred to Lochner era cases,28 are considered, according to the orthodox vision taught to most law students, as an improper and mercifully short period of judicial activism. The irony of course, is the simultaneous ululations at the rise of cultural substantive due process from the 1960s from Griswold v. Connecticut on.29 But that is a story for another day.

Whatever its benefits or faults, the doctrine had the effect of limiting the use of the political process to affect economic relationships between labor and capital. Of course, even in its most pristine form, the limiting effects tended to privilege capital over labor.30 Thus, for example, the Supreme Court’s notorious application of the antitrust rules against aggregations of labor (unionization) while facilitating regulations protecting the free aggregation of capital within increasingly liberalized economic entities are well known.31 But perhaps the most beneficial effect of the economic due process doctrine was as a mechanism (however crude) to confirm the possibility of limiting government power, and to find within the back letter of the constitution, legitimacy and perhaps even a set of principles, for effecting these limitations. And to some extent it lives on in vestigial form in Takings (or Just Compensation) Clause jurisprudence (especially with respect to regulatory takings).32 The well recognized problem, of course, is that the takings Clause permits the government to interfere with property for an appropriate price, substantive due process does not view economic regulation in a transactional context. Though there is a delicious irony in the market elements inherent in modern Takings jurisprudence.33

The Takings Clause comments, though a bit cheeky, bring me to the central point illustrated by Maryland’s failed legislative efforts.

1. In a world in which transactions, and economic life generally, more or less freely leeks across borders, states have lost the monopoly power over regulation that they once had

2. On the other hand, residual public regulatory power remain a potent force, available to anyone with sufficient power to utilize the political process, including invocation of the political process. That was made as apparent under the Lochner doctrine of economic laissez faire and cultural control by the state, as under its successor doctrine of cultural laissesz faire and economic control by the state.

3. The resulting relationship between the state and private economic actors is complex. While it has a monopolistic and hierarchical aspect—the state sits atop the regulatory hierarchy—it also has a horizontal aspect, as another stakeholder in economic life.

4. Regulation, like workers’ hours, the cost of capital and the price of cloth for the production of umbrellas, at least within the realm of economic regulation, can take on the characteristics of a commodity, or better put, a factor of production. Like all commodities, or factors of production, markets for regulation can develop and take on characteristics of its own. Those characteristics may be dependent on the nature of the bargaining between groups of stakeholders.

On the one hand there is bargaining between non-governmental parties with respect to their contractual arrangements—enterprise versus labor; enterprise versus enterprise (supplier vs. retailer; competitor vs. competitor; production entity vs. financing entities). On the other hand there is bargaining between enterprises and the state itself. These can take a variety of forms as well—enterprise and tax abatements or zoning variances; eminent domain;34 though this later bargaining can also assume a hybrid character as the enterprise might be bargaining to use state power against private interests (precisely part of the issue with respect to the enactment of the Maryland legislation).

And in these relationships, government itself becomes a market participant both directly and indirectly. The involvement is direct when the government seeks to maximize its own advantage vis a vis other governments in the market for state power. The government is then acting as an autonomous personality, separate from the state from which it derives its powers. The involvement is indirect when it seeks to act to maximize the welfare of its aggregate stakeholders as they might discern that welfare. The difficulty here, of course, is that stakeholders in democratic societies tend to be broad, contradictory and unruly constituencies.

The larger moral I want to draw is this: Any jurisprudence that posits a role for the state as governor only is bound to fail because the state both governs and participates in the market.

The idea that governmental or public regulation always has a strong or significant substitution effect (and therefore a distorting and inefficiency producing effect) on private or market arrangements is far too simplistic. It mischaracterizes regulation as inevitably a subject rather than an object. It avoids confronting the issue of the utility of regulation as a means of ordering private arrangements among private actors all of whom are inextricably bound together and dependent on the actions of the others for the maximization of their own interests.

The idea that regulation has a specific vector, for example for promoting absolute private rights of contract or property, or for protecting labor, or for otherwise injecting itself into the economic life of the people within the territories it controls, is also an oversimplification, and may leave out an important player in economic markets as a participant—the state. Regulation is an important commodity, and a critical factor in the production and preservation of wealth. They may resemble capital and capital markets: (i) markets in regulation are difficult to capture or capture for long: (ii) alternative regulatory markets may exist—just across a border. Everyone participates in markets for regulation to press for advantage, Wal-Mart no less than unions, or environmental or so-called social justice groups. As such economic regulation that “protects” economic interests may be as inefficient as those designed to opposite effect.

1. See George Will, Barney Frank, Jan.22, 2007 at --.


3. See Larry Catá Backer, Economic Globalization and the Rise of Efficient Systems of Global Private Law Making: Wal-Mart as Global Legislator, 39(4) UNIVERSITY OF CONNECTICUT LAW REVIEW – (forthcoming 2007).

4. See Hughes v. Alexandria Scrap Corp., 426 u.S. 794 (1976); Reeves, Inc. v. Stake, 447 U.S. 429 (1980).

5. See Larry Catá Backer, Reifying Law: “Let Them Be Lions,” in LAW AT THE END OF THE DAY, available at

6. Wal-Mart 2006 Annual Report: Building Smiles, at 53, available at (last visited Dec. 16, 2006).

7. Id

8. See (last visited Dec. 17. 2006).

9.Wal-Mart 2006 Annual Report, supra., at 13.
the current members of which may be found at (last visited Dec. 13, 2006).

10. See Larry Catá Backer, Economic Globalization and the Rise of Efficient Systems of Global Private Law Making: Wal-Mart as Global Legislator, 39(4) UNIVERSITY OF CONNECTICUT LAW REVIEW – (forthcoming 2007).

11. See Edward A. Zelinsky, Maryland’s “Wal-Mart Act:” Policy and Preemption, 28 CARDOZO LAW REV. 847 (2006).

12. Md. Code Ann. Lab. & Empl. § 8.5-103(a)(1).

13. Id. § 8.5-102.

14. Id. § 8.5-104(b).

15. Id. § 8.5-104(a).

16. Id., § 8.5-103. See also Retail Industry Leaders Ass'n v. Fielder, 435 F.Supp.2d 481, 484 (D.Md.,2006).

17. Matthew Mosk and Yian Q. Mui, ‘Wal Mart Law’ in Maryland Rejected by Court, THE WASHINGTON POST July 20, 2006 at A-06, available at 2006

18. Arthur D. Rutkowski JD [FNa1] and Barbara Lang Rutkowski Ed., Can Individual States Mandate A Multi-State Employer To Pay For Not Having Sufficient Group Healthcare Coverage? 20 EMPLOYMENT LAW UPDATE No. 8 (August 2006).

19. Id.

20. Mosk & Mui, supra, note 17.

21. For a report of the case, see, e.g., Matthew Mosk and Yian Q. Mui, ‘Wal Mart Law’ in Maryland Rejected by Court, THE WASHINGTON POST July 20, 2006 at A-06, available at 2006

22. Id., at 498 (citing FCC v. Beach Comm'ns, Inc., 508 U.S. 307, 313, 113 S.Ct. 2096, 124 L.Ed.2d 211 (1993)).

23. The Court noted that “The Secretary next argues that the Act imposes a "payroll tax" upon covered employers and that the Tax Injunction Act ("TIA") therefore strips this court of jurisdiction to hear the case. The TIA, in its entirety, provides: "The district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State." 28 U.S.C. § 1341.”

24. Id., at 498-500.

25. See, e.g., Lawrence v. Texas, 539 U.S. 558 (2003).

26. Commentators have noted the influence on the drafters of the 14th amendment of “William Blackstone and James Kent, whose commentaries on the protection of life, liberty, and property were quoted. Both of these commentators had declared that the three “absolute rights” of individuals were those of personal security, personal liberty, and personal property. For Blackstone, the right of property meant the “free use, enjoyment, and disposal [by the owner] of all his acquisitions, without any control or diminution, save only by the laws of the land.”17 Kent wrote that “the right to acquire and enjoy property [is] natural, inherent, and unalienable.” Bernard H. Siegan, Economic Liberties and the Constitution: Protection at the State Level 4 CATO JOURNAL 689, 694 (1985) (quoting William Blackstone, Commentaries on the Laws of England: A Facsimile f the First Edition of 1725—1 769, vol. 1 (Chicago: University of Chicago Press, 1979), pp. 134—35. ~ Kent, Commentaries on American Law, vol.2, reprint of the 1827 edition (New York: Pa Capo Press, 1971), p. 1.

27. Named for one of the most important cases of the series, Lochner v. New York, 198 U.S. 45 (1905), but in its heyday never consistently applied. See, e.g., Muller v, Oregon, 208 U.S. 412 (1908).

28. Griswold v. Connecticut, 381 U.S. 479 (1965). For the current expression of a version of this jurisprudence turned to individual rather than economic rights, see Lawrence v. Texas, 539 U.S. 558 (2003). Walter Dellinger nicely argues for a necessary connection between the protection of economic and individual rights in constitutional interpretation. See Walter Dellinger, The Indivisibility Between Economic Rights and Personal Liberty, Cato Institute, Supreme Court Review 9, 18-20 (2003).

29. See e.g., Coppage v. Kansas, 236 U.S. 1 (1915) (voiding state law limiting power of aggregations of capital to impose contractual limitations on individual laborers to aggregate on the grounds that it interfered with the contract rights of individual laborers)

30. See, e.g., Loewe v. Lawler, 208 U.S. 274 (1908); Coronado Coal Co. v. United Mine Workers, 268 U.S. 295 (1925).

31. And the form is vestigial. See, e.g., Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency, 535 U.S. 302 (2002).

32. See, e.g., Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992).

33. See Kelo v. City of New London, 125 S.Ct. 2655 (2005).

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