Permanent Mission of India to the U.N. v. City of New York: The State as Private Actor in a World of Private Actors

In a little noticed case decided June 14, 2007, the American Supreme Court held that the U.S. Foreign Sovereign Immunities Act of 1976, 28 U.S.C. Section 1604 et seq. ("FSIA"), does not immunize a foreign government from a lawsuit to declare the validity of tax liens on property held by the sovereign for purposes of housing employees. Permanent Mission of India to the United Nations v. City of New York, No. 06-134 (argued April 24, 2007, decided June 14, 2007). A majority of the American Supreme Court used the occasion for an interpretation of a rather technical part of the FSIA to give notice of a broader and perhaps surprising approach to a (merely) statutorily derived sovereign immunity of foreign states--one which runs counter to the increasingly broad construction of a constitutionally derived sovereign immunity of states within the federal system. The case appears to deepen a jurisprudence that increasingly treats state actors like other juridical persons (corporations, and other associations) in their relationships within the territory of other sovereigns. This leveling of states, not just amongst themselves, but between states, as such, and other entities (and individuals) suggests a wider ambit for the application of an increasingly global (and transnational ) jurisprudence in which states are becoming just another actor, like individuals and entities that more or less freely move among political communities.

The dispute giving rise to the case centered on the tax status of a portion of buildings, one of which was owned by the government of India and the other by the government of the Republic of Mongolia, both of which were used, in part, to house some of its "lower level" diplomatic staff. Id., slip op. at 1-2. New York exempts from taxation property owned by a foreign government "if it is “used exclusively” for diplomatic offices or for the quarters of a diplomat “with the rank of ambassador or minister plenipotentiary” to the United Nations. N. Y. Real Prop. Tax Law Ann. §418 (West 2000)." Id., slip op. at 2. On the basis of this provision, the City of New York levied property tax on a portion of the buildings used to house lower level Indian and Mongolian diplomatic staff. By 2003, the City of New York claimed that India owed "about $16.4 million in unpaid property taxes and interest, and the Mongolian Ministry owed about $2.1 million." Id., slip op. at 2. Both governments refused to pay on the grounds that their property interests were immune from assessment. In 2003 the City of New York filed suit in federal court seeking declaratory judgments to establish the validity of the liens. The suits could accomplish little more than this because the FSIA does not permit actions to enforce foreclosure proceedings against states. See Id., slip op. at 2 and note 1. The City noted that an inability to foreclose on the lien did not reduce the necessity of the action for three reasons: (1) sometimes governments paid upon the granting of declaratory relief, (2) sometimes federal law permitted collateral action to be taken against a foreign government that refused to pay (the majority opinion noted that under the Foreign Operations, Export Financing, and Related Programs Appropriations Act, 2006, §543(a), 119 Stat. 2214 the federal government could reduce a country's foreign aid by 110% of a valid court judgment, and (3) the liens could be enforced against subsequent purchasers (and thus effectively would have to be paid as part of any transaction in the property). See Id., slip op. at 2 and note 1. The governments of India and Mongolia argued that the FSIA immunized them from suit in federal court (28 U.S.C. Section 1604). The City of New York argued that the federal courts had jurisdiction under an exception to the general immunity presumption under section 1605(a)(4) (where “rights in immovable property situated in the United States are in issue”") ( Id., slip op. at 3).

On one level, the case presented a fairly straightforward issue of statutory interpretation. Justice Thomas, writing an opinion joined by the Chief Justice and Justices Scalia, Kennedy, Souter, Ginsburg and Alito, applied a fairly straightforward, if narrow, textualist analysis of the provision to determine the extent of its coverage. Id., slip op. at 4-5. Thomas looked first to the text of the exception. He chose to presume a broad interpretation of the provision--

Contrary to petitioners’ position, §1605(a)(4) does not expressly limit itself to cases in which the specific right at issue is title, ownership, or possession. Neither does it specifically exclude cases in which the validity of a lien is at issue. Rather, the exception focuses more broadly on “rights in” property. Id., slip op. at 4.

He could have adopted a more conservative approach to the exception from immunity: reading the overarching grant of immunity from suit broadly and the exceptions, including that in Section 1604(a)(4) narrowly as a derogation from the general rule. In that case, of course, the question would be whether the text of the statutory exception specifically provided for suits seeking to test the validity of tax liens, a specific exception nowhere found in the statute.

Ironically, this was the position of Justice Stevens in dissent.

"None of those exceptions pertains, or indeed makes any reference, to actions brought to establish a foreign sovereign’s tax liabilities. Because this is such an action, I think it is barred by the general rule codified in the FSIA. . . . Given the breadth and vintage of the background general rule, however, it seems to me highly unlikely that the drafters of the FSIA intended to abrogate sovereign immunity in suits over property interests whose primary function is to provide a remedy against delinquent taxpayers." Id., Stevens, J., dissenting, slip op. at 1-2.

But this more conservative approach would have run counter to the broader jurisprudential objective of this opinion--the treatment of foreign states like any other non-state actor, and the reduction of state sovereignty in effect while appearing to preserve its form.

Having determined that the provision did not expressly exclude tax lien actions, Justice Thomas then looked to the original understanding of the terms used in the exception at the time of its enactment. Having consulted the 4th edition (1951) and 8th edition (2004) of Black’s Law Dictionary for the meaning of the terms "lien" and the earlier edition for the meaning of the term "incumbrance", along with the statutory definition of "1072 (4th ed. 1951) (lien), the definition of "tax lien" under New York State law, and discussion of the interests of a lien holder in property (citing United States v. Security Industrial Bank, 459 U. S. 70, 76 (1982), a case interpreting the federal Bankruptcy Code), Justice Thomas concluded that the "practical effects" of these definitions bear out that a "tax lien thus inhibits one of the quintessential rights of property ownership—the right to convey. It is therefore plain that a suit to establish the validity of a lien implicates “rights in immovable property.”" Id., slip op. at 4-5.

Justice Thomas could have ended there. But he didn't. And what he wrote next provides the most interesting, and perhaps the most important, part of the opinion. Justice Thomas sought to support his interpretation of the exception to foreign sovereign immunity by reference to "two well-recognized and related purposes of the FSIA: adoption of the restrictive view of sovereign immunity and codification of international law at the time of the FSIA’s enactment." Id., slip op. at 5. For the majority, the foundation of the restrictive theory of sovereign immunity is essentially simple, and derives from a communication from the executive branch now over half a century old: "the immunity of the sovereign is recognized with regard to sovereign or public acts (jure imperii) of a state, but not with respect to private acts (jure gestionis)." Id., at 711." Id., slip op. at 5-6, quoting in part Letter from Jack B. Tate, ActingLegal Adviser, U. S. Dept. of State, to Acting U. S. Attorney General Phillip B. Perlman (May 19, 1952) (Tate Letter), reprinted in 26 Dept. of State Bull. 984 (1952), and in Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U. S. 682, 711, 712 (1976) (App. 2 to opinion of the Court). This public/private divide forms the cornerstone of, and thus the boundary around, the special status of a state as a sui generis form of artificial personality.

In systems in which the family of states collectively define the outer boundaries of power, such a restriction should be fairly narrowly read. If one starts with the presumption that states are not essentially corporations with special rights (sometimes), then the restrictive theory of sovereign immunity ought not restrict overmuch. Too great a restriction would have the effect of reducing the sovereign to corporation, and thus subject to power either by other corporations (in horizontal relationships governed by the law of contract) or by other special entities when they act within the now narrow band of sovereign (special) authority governed by international law. The result is perverse, in a way--while adhering to the formal distinctions between state and non-state actor, thew effect substantially guts the differences between states, as a class of legal actor, and other juridical persons (or even individuals). In this realm of substantive horizontal legal equivalence, power passes form states to transnational systems.

This was the point raised by Justice Stevens in dissent. "Diplomatic channels provide the normal method of resolving disputes between local governmental entities and foreign sovereigns. . . . The fact that the immunity is the product of comity concerns rather than a want of juridical power. . . does not detract from the important role that it performs in ordering our affairs." Id., Stevens, J., dissenting, slip op. at 1 (citing, in part, Verlinden B. V. v. Central Bank of Nigeria, 461 U. S. 480, 486 (1983). But now, sovereigns are reduced from special actors within a community of equals above non-state actors, to just another special form of juridical personality (one with certain privileges) within the territory of others. Disputes between sovereigns are no longer the subject of horizontal relations among them, but of the same sort of administrative treatment any state reserves for its own subjects before its courts. And it is that reduction--rather than the specifics of the immunity at issue--that is most troublesome for Justice Stevens.

A whole host of routine civil controversies, from sidewalk slip-and-falls to landlord-tenant disputes, could be converted into property liens under local law, and then used—as the tax lien was in this case—to pierce a foreign sovereign’s traditional and statutory immunity. In order to reclaim immunity,foreign governments might argue in those cases—just as the Governments of India and the People’s Republic of Mongolia tried to argue here—that slip-and-fall claims,even once they are transformed into property liens, do not implicate "rights in immovable property." But the burden of answering such complaints and making such arguments is itself an imposition that foreign sovereigns should not have to bear. Id., Stevens, J., dissenting, slip op. at 2-3.

Just like any other corporation engaged in private business activity. And that, precisely, is the majority's point--states can be no different than Coca-Cola or Pepsico. As Justice Thomas emphasizes, "property ownership is not an inherently sovereign function." Id., slip op. at 6 (citing, quite (over)broadly it seems, Schooner Exchange v. McFaddon, 7 Cranch 116, 145 (1812)). And the property exceptions to immunity in both the Restatement (Second) of Foreign Relaitons Law of the United States Section 68 (1965) at 205 and Art. 31(1) of the Vienna Convention on Diplomatic Relations, Apr. 18, 1961, [1972] 23 U. S. T. 3227, T. I. A. S. No. 7502 , were read as supporting that result.

The result is not in itself remarkable. As Justice Thomas himself was surprisingly willing to suggest, foreign tribunals have come to similar conclusions on the basis of the application of similar principles. Id., slip op. at 8 (citing 1957 Y. B. Int’l L. Comm’n 94–95 (402d Meeting, May 22, 1957), Deputy Registrar Case, 94 I. L. R. 308, 312-313 (D. Ct. The Hague 1980) and Intpro Properties (U. K.) Ltd. v. Sauvel, [1983] 1 Q. B. 1019, 1032–1033). The interesting point is the accumulating effect of this decision on the position of the state in a transnational context. The prince, as sovereign, has come a long way since the early 19th century. No longer is it the exceptional case where the prince "may be considered as so far laying down the prince, and assuming the character of a private individual," Schooner Exchange v. McFaddon, 7 Cranch 116, 145 (1812). In a world in which goods, services and people increasingly move freely across borders, where states and economic, social, cultural and religious entities originating therein, engage in business and corporations assume the role of sovereigns abroad, it seems that the prince is becoming far more the individual and far less the sovereign outside the borders of her own realms. In such an order of things, law, as the majority demonstrated, goes transnational.

A Step Forward for EU Treaty Constitutionalism

I recently suggested the difficulties and frustrations of EU constitutionalism, and its representation among European elites and its media. See Larry Catá Backer, Constitutional DoubleSpeak and the EU Constitution (June 15, 2007). I suggested that the German approach to EU constitutionalism--moderating the earlier German enthusiasm for the formal construction of a sort of sui generis constitutional state from out of the European Union--made lots of sense. Well, it seems the Germans have gone a long way to getting their way. The Western Press reported agreement among the 27 Member States of significant revisions to the EU Treaties in the form of amendments to the Treaties, rather than in the form of a new "constitutional treaty." Fatima Yilmaz, "EU Summit: Death of Constitution and Birth of “Reform Treaty” The Journal of Turkish Weekly Opinion (June 24, 2007). Prime Minister Jose Socrates of Portugal was quoted as suggesting that the inter-governmental conference "should start work on July 23 with the text approved at an October summit, he said. Socrates said two working groups of representatives of the 27 member states and the main EU bodies would be formed for the conference. The aim is to have the treaty ratified by all states ahead of the next European parliamentary elections in 2009." EU Summit Leaders Agree on Deal on New EU Treaty After Marathon Meeting, Forbes.com, June 23, 2007.

The process toward agreement included the usual drama--in this case the last minute Polish grab for greater representation at the EU level. Not that the Polish action had been unexpected--but the Polish Prime Minister chose a fairly eyebrow raising method of publicizing the issue--by suggesting that increased representation might be viewed as a form of reparations for all of the killing of its population during the Second World War. Not that the Poles had clean hands in the matter--Polish eagerness (opportunistic for none the less less real for the opportunity) to rid itself of its own Jewish population might have had to have been taken into account in "adding" the numbers. And, of course, Soviet complicity, should not be overlooked. But the tactlessness bore fruit in the form of a compromise brokered (against Germany) by the United Kingdom and and France (a combination that was itself interesting in a historical sense). EU Summit Leaders Agree on Deal on New EU Treaty After Marathon Meeting, Forbes.com, June 23, 2007.

The outlines of the treaty amendments generally follow the modifications that had been written into the proposed constitution but without many of the more controversial provisions and those articles deemed to bring about too close a union among the Member States.

It would allow more decisions to be taken by a majority, rather than unanimous, vote, removing the threat of national vetoes. The European Parliament and national assemblies would get more say over decision-making, strengthening the EU's democratic credentials. The EU's executive arm — the European Commission — would be trimmed from 27 to 17 seats. The post of EU president — with a maximum term of five years — will be created to replace the system of rotating national leaders into the job. And the role of EU foreign policy chief will be strengthened, to give Europe a bigger voice in the world.

Aoife White, EU Agrees on New Treaty, SFGate.com (Associated Press report), June 23, 2007. For a listing of the main points of agreement, see, "At a Glance: E.U. Treaty Proposal," BBC News, June 23, 2007. But the framework within which these changes will be made is now substantially different; most of the symbolism of constitution making has been either eliminated or downplayed, and reform vamped down to fit within the traditional framework of EU governance, rather than to serve as a self consciously transitory stage to the erection of a state apparatus in the traditional sense. For those who had counted on the passage of the constitutional treaty, this is a less than sugary pill: ""The constitutional treaty was an easily understandable treaty," Luxembourg's Prime Minister, Jean-Claude Juncker, said about the discarded charter. "This is a simplified treaty which is very complicated."" Molly Moore, EU's Future Sealed With Treaty, Claims Leaders, Brisbane Times, June 25, 2007

But there is still a sense, that comes through in some reports in the media and from media insiders (inside and outside of the EU) that appeared to emphasize the idea of the return to inter-governmentalism as a sort of defeat, as a second best option. Thus, for example, Ms. Yilmaz characterized the agreement as a failure of constitutional reform--as if constitutionalism was either inevitable or the only appropriate form of "progress" in the development of the EU and its institutions. "The failed European Constitution, as expected, became the main agenda topic of the EU Summit. Following the two-day discussions, the EU leaders announced the death of the planned single text called “Constitution” and their agreement on a new Treaty amending the existing treaties, called the “Reform Treaty”." Fatima Yilmaz, "EU Summit: Death of Constitution and Birth of “Reform Treaty” The Journal of Turkish Weekly Opinion (June 24, 2007). The U.K. papers tended toward hostility. Those leery of actions that would tend to further concentrate power in Brussels dismissed the change in approach as cosmetic, the changes as real, and perhaps dangerous for U.K. independence of action, and looked for ways in which popular opinion could be felt. See "Press Views: The New EU Treaty," BBC News, June 24, 2007.

Molly Moore, who writes on EU issues for the Washington Post Foreign Service, provided a good example of a typical analytical stance among: She echoed the sense of EU insiders that the defeat of the proposed EU constitution appeared to paralyze the European elites. The appearance of doing something--a mental state common to the European elite that had marked the rush to the draft constitution in 2004, appeared to mark the move to inter-governmentalism in 2007. See Larry Catá Backer, "On the First Anniversary fo the French Rejection of the European Constitution: Why the Proposed Constitution for the E.U. May be Better Left Dead, Law at the End of the Day, (April 4, 2006). The continued strongly felt need for the appearance of institutional movement was nicely captured by s. Moore, who quoted European Commission President, Jose Manuel Barroso's comment to "the German newspaper Bild am Sonntag. 'Uncertainty about our future treaty has cast a shadow of doubt over our ability to act. Now those doubts have been removed.'" Molly Moore, EU's Future Sealed With Treaty, Claims Leaders, Brisbane Times, June 25, 2007 (note the skepticism in the title of the story itself--though the same story, appearing on June 24, 2007 in the New York Times, was given the more neutral headline: "EU Agrees on New Treaty to Replace Constitution" (at A-16)). Ms. Moore emphasized that "[t]he failure of the countries to agree on a unifying structure underscored public perception of the body as an unwieldy, bureaucratic entity run by leaders far removed from the European people." Indeed, it was that sense of movement as a necessary component of E.U progress that seemed to dominate the public statements of the leaders. For example, Ms. Moore quotes the U.K. Prime Minister, Tony Blair, saying "after a deal was announced at 4.30am on Saturday [that] "The most important thing here is that the constitutional treaty was put to one side. This deal gives us a chance to move on." Molly Moore, EU's Future Sealed With Treaty, Claims Leaders, Brisbane Times, June 25, 2007.

One of the most interesting consequences from this turn to inter-governmentalism and incrementalism, is a new caution about popular democracy. The one thing that European elites appeared to have learned from the rejection of the proposed EU Constitution is that "the people" can't be trusted to do as they are told. So, in the name of greater democratic inclusion, etc., the leaders of the EU are urging caution about the use of popular referendum to approve this round of proposed treaty revision. "EU Boss Argues Against Referendum," BBC News, June 21, 2007. Apparently, within a certain strain of European thinking, the best kind of democratic mechanism, the highest form of democratic sovereignty, is parliamentary sovereignty. Thus, EC Commission President Jose Manuel Barroso urged the U.K. to avoid a popular referendum to approve contemplated treaty amendment. "He said it was up to the British people but he could not see why the country which exported democracy to the world would not respect its own Parliament. And he urged all EU leaders to resist "ugly nationalism" in talks later." "EU Boss Argues Against Referendum," BBC News, June 21, 2007. Thus, conflated are notions of fear of demagoguery, mistrust of expressions of popular will (except in national elections), and of a managerial approach to democratic governance that have been the hallmark of EU political thinking for a generation. Not that there is anything wrong with this. It is just a bit suspicious when the appeal to controlled or managerial democracy is made when the mechanics of direct democracy failed to deliver.

But I think Chancellor Merkel's public statements have the right of it, though a rightness that will be marginalized by an elite that is unhappy with the (re)turn from a state creating sort of constitutionalism to te more traditional inter-governmentalism of shared governance at the Member State leve (at least for fundamental issues): "She said she was happy leaders were able to keep key parts of the previous charter alive, despite the often deep and acrimonious divisions that tested the bloc's unity. "What this means for us is that we are moving out of stoppage," she said. "We managed to get all 27 states on board in the end." Aoife White, EU Agrees on New Treaty, SFGate.com (Associated Press report), June 23, 2007.

Rule of Law as Form or Substance: Pakistan and its Prostitutes

The global media recently ran a story about a raid, by Islamists Raid Pakistani Brothel, Press Association, June 23, 2007, against a brothel in Islamabad. According to the story, Abdul Rashid Ghazi and his brother, who run a local mosque in Islamabad, along with "[d]ozens of Islamic students seized . . . nine people from a massage parlour in an upmarket neighbourhood of Islamabad." Id. The leaders of the mosque, along with their students, were upset that, in their view, the owners, operators and employees of the massage parlour "were 'spreading obscenity" and "running a brothel in the cover of a massage parlour'." Islamists Raid Pakistani Brothel, Press Association, June 23, 2007. There was only one thing to do when faced with this sort of activity--close the business down by staging a raid on the premises and abducting the employees--especially the women providing the services complained of.

The raid by elements of the religious community of Pakistan was met with appropriate official response by the representatives of the Pakistani political community--"Interior Ministry said the abductions were a "shocking and unlawful act." Islamists Raid Pakistani Brothel, Press Association, June 23, 2007. Pakistani officials then immediately negotiated the release of the people kidnapped. All were released within fourteen hours of their kidnapping. Islamists Raid Pakistani Brothel, Press Association, June 23, 2007. Upon the release of the people abducted, "Mohammed Ali, the deputy chief of Islamabad's administration, said authorities would take "appropriate action" against those responsible." Islamists Raid Pakistani Brothel, Press Association, June 23, 2007. But that action may not include anything officially directed against the Ghazi brothers, their mosque, or their students and other participants in this act of religious justice. Indeed, Pakistani political officials were quoted as stating that "cracking down on the mosque could provoke a bloodbath - the mosque's prayer leader has warned of suicide attacks."

And the Ghazi brothers are not individual or aberrational actors. The story's authors suggested that " The abductions were the latest act in a freelance anti-vice campaign by seminary students and teachers that has embarrassed the government of President General Pervez Musharraf and raised concerns about rising extremism in Pakistan." Islamists Raid Pakistani Brothel, Press Association, June 23, 2007. And the story also had a local context--the authors suggested that attention to the Ghazi brothers' action was meant as a ploy--"Critics accuse intelligence agencies of manipulating the events to divert attention from a crisis triggered by Musharraf's controversial suspension of the country's top judge." Islamists Raid Pakistani Brothel, Press Association, June 23, 2007

At one level, the facts of this story is not unique to Pakistan, or the dar al-Islam, or even the developing world. The media is full of the occasional story of the "local folks" chasing vice out of town. And indeed, when it happens in the poorer sections of large American cities, the result (fewer sex industry workers in the neighborhood) is lauded.

But on another level, the story takes on a much more interesting character. The nature of the action taken--kidnapping--is extreme. The usual course of action for "concerned citizens" in many states is for the local citizens to band together to provide a foundation for effective action by the instrumentalities of the state--usually the local police and prosecutors. Yet in this case the law played a marginal part. Law, and its rule system was most effective in supplying sound bites to the western press by political officials who had no intention of applying its sanctions--because political officials couldn't or wouldn't apply them. And it is those deviating elements that make the story of the Ghazi brothers much more interesting from the perspective of globalization and the understanding of "rule of law" as a lived concept.

In particular, two elements of the story that makes it much more interesting to students of rule of law and of globalization. First, globalization is having a strong impact on local law. Second, that impact is evidenced by the rise of contradictions within law and rule of law. Second, law, and especially the rule of law, has the potential for strong contradiction within global networks of markets operating in territorially limited political states. That contradiction is illustrated in this case by the differences between substance and formalism in the application of law in Pakistan.

The story reminds us that commodities and services now exist within strong global networks that operate on their own terms. It is increasingly difficult to consider markets in goods or services as localized. In particular in this case, markets for physical contact, like markets for other commodities and services, has gone global. Worse, in the case of sex workers, global demand (even in places like Pakistan) and territorially limited legal regimes, has created a substantial amount of exploitation--mostly of the sex workers (usually women or the young--that raises serious human rights issues. The demographics in this episode is hardly unusual. In this case, "[s]ix foreign women were taken, including three Chinese. One Chinese man and two Pakistani men were also among those kidnapped. Ghazi didn't disclose the nationalities of the three other women." Islamists Raid Pakistani Brothel, Press Association, June 23, 2007.

Free movement of this type has some strong consequences for law. The story nicely illustrates a conundrum of law systems in a global context. The story illustrates the difficulties of applying a state centered and politically based rule of law concept consistently in a global order made up of overlapping communities with different normative systems of behavior. As a formal matter, the usual rule of law landscape appears to be operating in Pakistan. The state, through its apparatus, as representative of the people, have enacted law. In this case, that law prohibits prostitution, as well as kidnapping, interference with business, and the destruction of property. Obedience to law is an obligation of the individual; enforcement is the paramount duty of the state apparatus. Yet, as a substantive matter, formal law does not exist. A segment of the Pakistani religious community, adhering to the strictures of a legal system whose sources are not found within the political constitution of the Pakistani state, enforced those rules in a manner consistent with its own rules of process and justice. Though both stricture and enforcement methods were incompatible with the formal law structures of the Pakistani state. Yet the Pakistani state is essentially powerless to prevent the exercise of effective law power by the Ghazi brothers and their students. Any move against the Ghazis would test the loyalty of the Pakistani nation to the state apparatus. And the Ghazi brothers can project power in substantial enough ways--suicide bombing and other actions against the state apparatus itself. As a result, the substantive law of Pakistan is the law of the Ghazi brothers, mediated, to the extent that it can be, by the state apparatus seeking to persuade (and not coerce) adherence to the formal rule of law system.

The actions of the Ghazi brothers in Islamabad, like those of their counterparts in the Gaza Strip and in other places suggest the more complicated nature of rule of law as practiced "on the ground." Rather than the lovely construct of Western academics, rule of law in a world of fractured law making (and enforcing) power appears to be contingent and fractured. And it is not necessarily tied to the apparatus of the state. Thus, what for Western officials is "a major problem in terms of the breakdown of law and order" (Arrests Follow Gaza School Attack, BBC News, June 7, 2007 (quoting John Ging, described as "the top UN official in Gaza" Id.)) may be more indicative of a shifting of law making power within a territory in ways that threaten the monopoly power of the state apparatus over law and its rule.

But in a larger sense, the drama of the Ghazi brothers mosque in Islamabad, the Chinese service workers kidnapped, the shadow governance in Gaza and its systematic attacks on Christians and what it considers "immoral" and therefor unlawful, works on a larger template as well. Globalization, in effect, has made virtually all of its actors--multinational corporations, religious groups, elements of civil society, diaspora organizations, and the like--like the Ghazi brothers and their followers. Each is, to some extent, empowered through the law or norm system through which they operate to act on those norms. Each has sufficient power, to the extent of that power, to challenge the hegemony of the traditional monopoly power wielder within a physical territory--the state apparatus--even within its territory. And with respect to each, the state is increasingly reduced to negotiating some sort of arrangement that represents a compromise between its norm system (and the processes of its enforcement) and those of other global actors. Not that the state is happy to do this, but like the case in Pakistan, while formal power systems continue to be centered on the state, the substance of law has to some extent shifted.

Credit Suisse Securities (USA) LLC v. Billings: Protecting the Regulatory Authority of the State Against Private Vindication of Rights

In Credit Suisse Securities (USA) LLC v. Billings, No. 05–1157. Argued March 27, 2007—Decided June 18, 2007, six justices of the American Supreme Court, speaking through Justice Breyer, held that the federal securities laws preclude application of the American Antitrust laws to actions otherwise within the regulatory ambit of the federal governmental bureaucracy charged with the administration of securities and markets in the United States (the Securities and Exchange Commission) and that such regulatory power further precluded the authority of private individuals to maintain actions under the antitrust laws to vindicate rights created thereby. The case had its origins in a private action filed by a group of sixty investors (Credit Suisse, supra, slip op. at 3) that alleged that the defendant banks (described my Justice Breyer as "10 leading investment banks", Credit Suisse, supra, slip op. at 3) violated American antitrust law by forming syndicates to bring initial public offerings (IPOs) to market for a large number of technology-related companies. The anti-competitive elements of these syndicates were alleged to be grounded in the agreement among the syndicate participants to refrain from selling newly issued securities to a buyer unless the buyer committed a number of conditions. The most troublesome of these conditions (for the plaintiffs, at least) were the laddering provision (a promise to buy additional shares of that security later at escalating prices), a tying provision (a promise to purchase other (usually less desirable) securities from the underwriter, and a promise to pay what were described as uncommonly high commission. Credit Suisse, supra, slip op. at 2-3. On the underwriters motion to dismiss "on the ground that federal securities law impliedly precludes application of antitrust laws to the conduct in question. (The antitrust laws at issue include the commercial bribery provisions of the Robinson-Patman Act.)" (Credit Suisse, supra, slip op. at 4), the District Court dismissed the complaints. Id. (See In re Initial Public Offering Antitrust Litigation, 287 F. Supp. 2d 497, 524–525 (SDNY 2003) (IPO Antitrust).). The Second Circuit reversed (426 F. 3d 130, 170, 172 (2005)), and was in turn reversed by the Supreme Court.

Justice Stevens concurred in the judgment. He suggested that there was no conflict between the securities and antitrust regimes in the case.

In my view, agreements among underwriters on how best to market IPOs, including agreements on price and other terms of sale to initial investors, should be treated as procompetitive joint ventures for purposes of antitrust analysis. In all but the rarest of cases, they cannot be conspiracies in restraint of trade within the meaning of §1 of the Sherman Act, 15 U. S. C. §1.

Credit Suisse, supra, slip op. (Stevens, J., concurring in the judgment) at 1. He strongly objected to the presumption against private actions (under the antitrust laws in this case) in the face of the regulatory power of the state. For Stevens there could be no suggestion, "as the Court did in Twombly, and as it does again today, that either the burdens of antitrust litigation or the risk “that antitrust courts are likely to make unusually serious mistakes,” ante, at 16, should play any role in the analysis of the question of law presented in a case such as this. " Credit Suisse, supra, slip op. (Stevens, J., concurring in the judgment) at 3.

Justice Thomas dissented, principally on the grounds that the federal securities statutes themselves compelled application of the antitrust laws to actions otherwise regulated under the federal securities laws which might give rise to actions under the antitrust laws ("The securities statutes are not silent. Both the Securities Act and the Securities Exchange Act contain broad saving clauses that preserve rights and remedies existing outside of the securities laws." Credit Suisse, supra, slip op. (Thomas, J., dissenting) at 1). Justice Tomas suggested that "Given Congress’ demonstrated ability to limit provisions of the securities laws to States and the lack of any such limitation here, the saving clauses cannot be understood as limited only to state-law rights and remedies. Credit Suisse, supra, slip op. (Thomas, J., dissenting) at 3-4. Justice Kennedy did not participate in the decision.

Justice Breyer, for the majority, used the opportunity to affirm and extend a line of prior cases focusing on the relationship between the federal securities and antitrust regimes. But he did much more--he appears to confirm a tendency within American government to institutionalize a hierarchy of governance in which private action is discounted and judicial oversight is deemed prone to error, in favor of administrative regulation and enforcement, which is increasingly privileged as the principal means by which the instrumentalities of the state may be used to regulate private activity in vindication of private rights directly affected by the action of individuals or entities subject to regulation. This is a proclivity that was adopted by the legislature and written into the Sarbanes Oxley Act. See Backer, Larry Catá, "The Duty to Monitor: Emerging Obligations of Outside Lawyers and Auditors to Detect and Report Corporate Wrongdoing Beyond the Securities Laws." St. John's Law Review, Vol. 77, No. 4, p. 919, 2003; Backer, Larry Catá, "Surveillance and Control: Privatizing and Nationalizing Corporate Monitoring After Sarbanes-Oxley" . Michigan State University Law Review 2004:327. Under this regime, the state, and its interests come first, and individuals may maintain actions to vindicate their own (personal and inferior) rights only to the extent that they may be permitted this, and that it does not otherwise affect regulatory policy. It now appears to have been embraced by the judiciary as well. Though, as is usual in these matters, the judiciary reserved to itself the power to determine the circumstances under which such deference to the regulatory state would be manifested:

Where regulatory statutes are silent in respect to antitrust, however, courts must determine whether, and in what respects, they implicitly preclude application of the antitrust laws. Those determinations may vary from statute to statute, depending upon the relation between the anti-trust laws and the regulatory program set forth in the particular statute, and the relation of the specific conduct at issue to both sets of laws.

Credit Suisse, supra, slip op. at 5.

Justice Breyer read several prior cases involving the compatibility of the federal securities and antitrust laws (Credit Suisse, supra, slip op. at 5-10) to fashion a standard applicable in these cases:

in finding sufficient incompatibility to warrant an implication of preclusion, have treated the following factors as critical: (1) the existence of regulatory authority under the securities law to supervise the activities in question; (2) evidence that the responsible regulatory entities exercise that authority; and (3) a resulting risk that the securities and antitrust laws, if both applicable, would produce conflicting guidance, requirements, duties, privileges, or standards of conduct. We also note (4) that in Gordon and NASD the possible conflict affected practices that lie squarely within an area of financial market activity that the securities law seeks to regulate.

Credit Suisse, supra, slip op. at 10. Justice Breyer then applied to standard thus formulated to maintain that the "the underwriters’ efforts jointly to promote and to sell newly issued securities—is central to the proper functioning of well-regulated capital markets." Credit Suisse, supra, slip op. at 10. He then read the SEC's regulatory power broadly (Credit Suisse, supra, slip op. at 11 ("Indeed, the SEC possesses considerable power to forbid, permit, encourage, discourage, tolerate, limit, and otherwise regulate virtually every aspect of the practices in which underwriters engage.")). He noted, in that regard, that the securities acts also provide a basis for private action against underwriters as well. Having determined that the conduct can be characterized as a subject of the regulation of securities, and that conduct of this character falls squarely within the jurisdiction of a federal regulatory agency (by operation of federal statute), he posited that the SEC had been quite energetic in the use of this regulatory power. Credit Suisse, supra, slip op. at 11. He noted that the SEC "has defined in detail, for example, what underwriters may and may not do and say during their road shows. . . . It has brought actions against underwriters who have violated these SEC regulations. . . . And private litigants, too, have brought securities actions complaining of conduct virtually identical to the conduct at issue here; and they have obtained damages. " Credit Suisse, supra, slip op. at 11. The references to the availability of private action in the opinion, is particularly pointed, given the ultimate object of the opinion.

Having thus determined that three of the four conditions for implied preclusion existed, the question for the majority reduced itself to a simple one: is there a conflict between federal securities and antitrust regulatory regimes. Credit Suisse, supra, slip op. at 12. Rejecting a characterization of the complaint as one seeking to undo the current system of securities underwriting, the issue for the majority reduced itself further to an even simpler issue: "the manner in which the underwriters jointly seek to collect “excessive” commissions." Credit Suisse, supra, slip op. at 13. Even assuming that there would be similar results applying the securities and antitrust laws to this narrow issue, the majority rejected the notion that it followed that there was no conflict (even in this case) between the two regulatory regimes. "Rather, several considerations taken together lead us to find that, even on these prorespondent assumptions, securities law and antitrust law are clearly incompatible." Credit Suisse, supra, slip op. at 13. It is in the majority's discussion of this point that it draws some conclusions, and exposes some presumptions, that may have have more far reaching application to constitutional jurisprudence in the United States and in the constitution of democratic governance in general.

Justice Breyer gives several reasons for holding that the two regulatory regimes conflicted here, even though application of either in this case would produce the same result. First, he argued regulatory harm ("to permit antitrust actions such as the present one still threatens serious securities-related harm." Suisse, supra, slip op. at 13. This securities related harm takes a decidedly institutional character. It is institutional in the sense of a focus on the integrity of the regulatory jurisdiction of the SEC. That regulatory authority, in turn, is to be understood here as a monopoly governmental regulatory power, the monopoly power of which it was incumbent on the courts to protect. For Justice Breyer regulatory harm takes several forms. First--the issue of line drawing: "For one thing, an unusually serious legal line-drawing problem remains unabated. " Suisse, supra, slip op. at 13. Only a thin line, Justice Breyer tells us, separates that complex of regulated activity that is lawful from that to be deemed unlawful. Id. Both laddering and tying, the majority reminds us, can be lawful or unlawful, depending on the form it takes. Suisse, supra, slip op. at 14-15. Thus, for example, with respect to "laddering,"

It will often be difficult for someone who is not familiar with accepted syndicate practices to determine with confidence whether an underwriter has insisted that an investor buy more shares in the immediate aftermarket (forbidden), or has simply allocated more shares to an investor willing to purchase additional shares of that issue in the long run (permitted). And who but a securities expert could say whether the present SEC rules set forth a virtually permanent line, unlikely to change in ways that would permit the sorts of “laddering-like” conduct that it now seems to forbid?

Suisse, supra, slip op. at 14. The parsing of these complexities is beyond the talents of anyone but a securities expert. It certainly is too much for a court, and would pose great difficulties if courts (enforcing the antitrust acts) were to engage in such parsing at the same time that the SEC (enforcing the securities laws) did the same.

Two issues are implicated--the importance of uniform interpretation and that of efficiency (expertise). But they are oddly applied. The majority imposes a uniformity principle by reference to the consequences of regulation (the IPO conditions). It ignores uniformity focused on the source of regulation (the statutes) on the results. It suggests that uniformity requires privileging rules derived from regulatory systems (the regulation of markets) rather than from statutes prohibiting certain discrete forms of conduct (anti-competitive behavior) and that bureaucracies empowered to construct and enforce regulatory systems are to be privileged over general purpose courts with no statutorily mandated expertise.

But there is more to the regulatory harm issue: "For another thing, evidence tending to show unlawful antitrust activity and evidence tending to show lawful securities marketing activity may overlap, or prove identical." Suisse, supra, slip op. at 15. Again, the uniformity principle (applied against the consequences of securities regulation (by implication privileged in the majority's discussion) suggests that this inconsistency leads not to a bad, but rather to an unacceptable result. The majority suggests that Congress could not have meant to make a particular set of behaviors unlawful under the anti-trust laws at the same time that it vest a regulatory agency with the power to issue regulations that suggest that the same conduct would not violate the securities laws if undertaken by an underwriter. But of course they can--and this court has been eager, at times, to hold Congress to its multi-statute inconsistencies, when it has suited the Court.

Justice Breyer then turns, more specifically, to arguments from efficiency, arguments that also touch on competence. Antitrust plaintiffs, we are told, "antitrust plaintiffs may bring lawsuits throughout the Nation in dozens of different courts with different non-expert judges and different non-expert juries. In light of the nuanced nature of the evidentiary evaluations necessary to separate the permissible from the impermissible, it will prove difficult for courts to reach consistent results." Suisse, supra, slip op. at 16. This leads to a bad result: "The result is an unusually high risk that different courts will evaluate similar factual circumstances differently." Suisse, supra, slip op. at 16. But it is not clear why this is a bad result if (1) Congress permits this result by its legislative enactments and (2) the "inconsistent" results are a consequence of consistent application of two distinct statutes. There is nothing in the Constitution that suggests that Congress cannot prohibit something by statute that it might have otherwise permitted an administrative agency (by delegation) to permit pursuant to a distinct statutory scheme. But this should be a political rather than a judicial question, the majority engages in a bit of separation of powers aggression in the guise of statutory interpretation. See Backer, Larry Catá, "Using Law Against Itself: Bush v. Gore Applied in the Courts". Rutgers Law Review, Vol. 55, No. 4 (2003); Backer, Larry Catá, "Race, “The Race,” and the Republic: Reconceiving Judicial Authority After Bush v. Gore," 51 Catholic University Law Review 1057 (2002).

Thus the great problem of regulation, and regulatory authority for the majority, a problem that must produce a hierarchy of power in which the state--through it subsidiary regulatory organs--must prevail over anything else, including the power of Congress to legislate against its own regulatory creation:

Together these factors mean there is no practical way to confine antitrust suits so that they challenge only activity of the kind the investors seek to target, activity that is presently unlawful and will likely remain unlawful under the securities law. Rather, these factors suggest that antitrust courts are likely to make unusually serious mistakes in this respect. And the threat of antitrust mistakes, i.e., results that stray outside the narrow bounds that plaintiffs seek to set, means that underwriters must act in ways that will avoid not simply conduct that the securities law forbids (and will likely continue to forbid), but also a wide range of joint conduct that the securities law permits or encourages (but which they fear could lead to an antitrust lawsuit and the risk of treble damages). And therein lies the problem.

Suisse, supra, slip op. at 16-17. And the solution: avoid any action, or the assertion of any non-regulatory (privately asserted) power that might "threaten serious harm to the efficient functioning of the securities markets." Suisse, supra, slip op. at 17.

Not only is the regulatory element privileged, but the value of the private action in antitrust is minimized. So, Justice Breyer tells us that "any enforcement-related need for an antitrust lawsuit is unusually small." Suisse, supra, slip op. at 17. The importance of private enforcement under the antitrust laws is further minimized because the regulatory scheme under the securities laws themselves provide for a private right of action under circumstances that further the aims of the regulatory scheme (rather than work against it under the antitrust laws). Again there is a privileging of the state's interest through a regulatory system overseen by an agency than by individual suit to protect private interests with a a double focus. First, the availability of private rights of action under the securities laws "makes it somewhat less necessary to rely upon antitrust actions to address anti-competitive behavior". Suisse, supra, slip op. at 18. Second, private rights of actio0n under the securities laws are more severely regulated than under the antitrust laws and thus better suited to the regulatroy scheme administered by the SEC. "We also note that Congress, in an effort to weed out unmeritorious securities lawsuits, has recently tightened the procedural requirements that plaintiffs must satisfy when they file those suits. To permit an antitrust lawsuit risks circumventing these requirements by permitting plaintiffs to dress what is essentially a securities complaint in antitrust clothing." Suisse, supra, slip op. at 18.

In sum, the majority determined, that the protection of the securities markets, and the regulatory scheme devised for that purpose, administered through the SEC, must outweigh the rights, even statutorily conferred rights, of individuals under other federal statutory schemes. The regulatory state triumphs over the individual. Individuals must defer to th state for the vindication of private rights--now collectivized. While the Soviets collectivized agriculture in the 1920s, Americans are now collectivizing private rights through great administrative structures increasingly given regulatory power to oversee large sectors of American life. These administrative structures are increasingly vested with the "public interest" and with the power to act collectively on behalf of individuals wronged by others. The "Fair Funds" model of government substituting itself for individual claimants in the securities acts in growing in its appeal. Backer, Larry Catá, "Surveillance and Control: Privatizing and Nationalizing Corporate Monitoring After Sarbanes-Oxley" . Michigan State University Law Review 2004:327.

And in this case, the Solicitor General's fears were exquisitely realized: "The Solicitor General fears that otherwise, we might read the law as totally precluding application of the antitrust law to underwriting syndicate behavior, even were underwriters, say, overtly to divide markets." Suisse, supra, slip op. at 19. There is a lesson here not just for students of securities and antitrust law in the United States. The majority's decision evidences the absorption of a number of important presumptions and principles of modern economic globalization: the presumption of the importance of the protection of markets, the principle that governments functions at their best when they privilege regulatory systems designed to protect markets, that the principle of regulatory efficiency ought to trump virtually all other principles of governance (including fear of tyranny or concentration of power), the privileging of collective expressions of individuals rights through the state or some other entity (privatizing collectivization), and the presumption that general purpose courts ought to give way to specialty tribunals with respect to disputes touching on the objects of regulatory systems.

Expect to see more decisions like this one in the context of the regulation of the political economy of the United States in the coming years. Indeed, in a global context, the Credit Suisse majority is in tune with developments in other parts of the world--developments that have been characterized in some places as a return to the ideals of authoritarian capitalism. Those ideals posit the supremacy of the individual and individual action--but only within the rules (natural, objective, supreme, etc.) that optimize activity for both individual and community. Those rules, and the integrity of the systems optimizing individual action, must be protected by the state--the political community. Individual policing is incidental to the primary function of the state as the preserver of the systems within which optimizing individual action is possible. Under such a set of presumptions, it is possible to support the primacy of individual action in markets and the primacy of state control (or regulation, preservati0on, protection) of those markets. Where the object of optimization is individual welfare, it is possible to construct complex layered systems of regulatory systems; where the object is the maximization of the welfare of a political state, the relationship of these notions to early 20th century fascist, Stalinist or nationalist socialist economic theory is clear.

Credit Suisse reminds us of the sometimes short distances between market oriented democratic globalizing economic-political theory (and the systems built thereon), and the rising authoritarian capitalist system of modern China and (increasingly of Russia), or traditional fascist or Marxist Leninist systems of political economy.

Constitutional DoubleSpeak and the EU Constitution

About the only constant aspect of the machinations that have characterized the long struggle for a "constitutional treaty" for the European Union, has been its ambiguities. The long march to the draft of the EU Treaty in 2005 represented an extraordinary act of hubris by the elite political classes of Europe. Its quick collapse on the negative vote of French and Dutch voters in 2005 demonstrated both the fragility of the coalition that had cobbled together the "constitutional treaty" and the lack of enthusiasm for "progress" in the transformation of the political institutions of Europe among the masses (or at least the masses that bothered or threatened to vote). And, of course, the usual form of democratic authoritarianism that has characterized the entire constitutionalization process (as well as the intergovernmental treaty amendment processes from the 1980s (that is, from the Maastricht to the Nice Treaties) played no small part on the disillusionment that has marked treaty transmogrification since the Treaty of Amsterdam.

It should come as no surprise, then, that at the end of the German Presidency of the E.U., Angela Merkel was sounding a bit pessimistic about the future of the process toward constitutionalization. What is odd, however, is the way that pessimism was reported in two very different places--Britain and Spain. In Britain, the BBC posted a fairly sunny report on the state of the forced march toward constitutionalization. Merkel Warns EU Over Constitution, BBC News, June 14, 2007. Although an agreement on a constitutional treaty was not in sight, Ms. Merkel was reported as suggesting, "Mrs Merkel told parliament in Berlin she hoped the summit would take a clear step forward and produce a "roadmap" to a new treaty by 2009." Id. The BBC News story also suggested that "The plan would lead to a new EU constitutional treaty by 2009." The story quoting Ms. Merkel a caution from Ms. Merkel: "This is not just up to us, but we will do our part. If this doesn't succeed, it will not yet be the downfall of Europe, but it will have... extremely serious consequences." The German chancellor added that a solution was essential to enable the enlarged EU bloc to "function properly"." Id. As one might expect from a news organization that prides itself on both its status as a member of the global media elite and as a "good" European citizen, the story highlighted the (perhaps inevitable) progress towards constitution: "Mrs Merkel has made the constitution a priority during Germany's presidency of the EU - which comes to an end at the end of June - and her reputation hinges on securing a deal, our correspondent says." Id.

The story from Spain was both much more curt and much less positive.

La presidencia alemana de la UE propuso ayer formalmente abandonar el proceso constitucional y volver al método clásico de reforma de los tratados como solución al “estancamiento” e “incertidumbre” que vive la UE desde el rechazo francés y holandés a la Constitución en 2005. [The German Presidency of the EU yesterday formally proposed abandonment of the constitutional process and a return to the classic method of treaty reform as a solution to the stagnation and uncertainty that has gripped the EU since the French and Dutch rejection of the constitution in 2005]

Merkel propone desechar la constitución, Què Barcelona, June 15, 2007 at 13. This presents to its readers a much less positive picture of EU constitutionalism than the BBC version. Ironically, of course, the actual substantive results might well be the same. After all, many of the European elite had spoken in favor of the constitutional treaty on the grounds of its similarity to the current treaty structure, including Tony Blair. And so, quite perversely it seems. once again, Europe (through its media) is speaking through more than one side of its mouth. In this they serve as amplification of the divisions within Europe as to the form and content of the EU. The multiple levels of perversity, of indicating one thing in order to obtain something quite distinct, is amply described in (of all places) the Guardian's version of events:

Tony Blair [the U.K,'s lame duck Prime Minister and EU job seeker] is poised to forge a united front with Nicolas Sarkozy [France's new leader] at next week's European summit in Brussels, raising hopes that Europe's 27 leaders will finally reach a deal on replacing the EU constitution. . . . The EU is divided into two broad camps. On one side stand the 'maximalists', the 18 countries, led by Germany, that have ratified the measure and who believe it should be salvaged. They are faced by the 'minimalists', led by France, the Netherlands and Britain, who want to introduce a more modest measure to avoid having to hold referendums. Merkel [Germany's leader] has moved in the direction of the 'minimalists' by dropping the word 'constitution' and describing the new measure as an 'amending treaty'. But she is keen to maintain key proposals in the constitution that are unacceptable to Britain. Nicholas Watt, Anglo-French Cordiale Sets the Scene for EU Deal, The Guardian (the Observer: Politics) (UK), June 17, 2007.

None of this can auger well for any progress on a constitution (much less on any intergovernmental progress toward treaty revision). Perhaps 2009 is wishful thinking.

My sense is that the Spanish version of the news makes better sense, both as a matter of the long term integrity of EU lawmaking and as a matter of European politics. The intergovernmental system of periodic treaty revision had the benefit of compelling a European wide conversation about the shape of the EU among all of its members. It permitted a greater degree of participation within a system that is more functionally protean--precisely because the founding documents are still denominated "treaties" even though they might (at least in the eyes of the European Court of Justice) be treaties with constitutional effect. It is to some extent comforting, within democratic systems, to force political decisions from representative institutions of government, than to foist the job onto the courts. Not that the European Court of Justice has done a bad job--indeed, to some great extent, it has been the most successful instrument in the "dirty work" of crafting a European "constitution" on the ground. But courts better serve to articulate, preserve and enforce fundamental rights, than to constitute a state. See Larry Catá Backer, Reifying Law: “Let Them Be Lions,” in LAW AT THE END OF THE DAY.

Constitutions tend to be change inhibiting documents. And they tend to shift power to change constitutional foundations from the political (intergovernmental process and treaty revision) to the judicial (treaty interpretations and applications). It is not clear to me that power at the European level ought to shift that far toward the judicial and away from the political branches. See Backer, Larry Cata, "Restraining Power from Below: The European's Constitution Text and the Effectiveness of Protection of Member State Power within the EU Framework" (July 2004). Federal Trust Constitutional Online Paper No. 14/04. While such a shift might bring a greater degree of stability (to the extent the political institutions are willing to follow through on judicial determinations), it will threaten the sort of slow moving comitology that has served the EU well enough this past half century. Efficiency in foundational norm making, in this case, may not be worth the price of powewr shifting at the Community level.

On State Action and Sovereign Immunity

The courts of the United States, like those of other Western states, have been busy fashioning what appear to be two distinct areas of jurisprudence--state action and sovereign immunity.

The state action doctrine is meant to shield private parties from liability for conduct obligations imposed only on states. In the United States, state action doctrine elaborates a series of limitations on the obligation of individuals and institutions to conform their conduct to certain constitutional norms. These norms are essentially derived from the 14th Amendment to the American Constitution (which directs that "No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws."). The doctrine is an elaboration of the holding and discussion in United States v. Stanley; United States v. Ryan; United States v. Nichols; United States v. Singleton; Robinson et ux. v. Memphis & Charleston R.R. Co., 109 U.S. 3; 3 S. Ct. 18; 27 L. Ed. 835 (1883) (the “Civil Rights Cases”) in which a majority of the American Supreme Court determined that the 14th Amendment prohibitions did not apply to purely private acts. Since that case was decided, the determination of what sort of conduct is "public" and therefore subject to the constitutional prohibitions, and what conduct s private and not subject to such regulation has been a tortured and constant exercise. Contrast Marsh v. Alabama, 326 U.S. 501 (1846) (running a company town is a public function) with Jackson v. Metropolitan Edison Co., 419, U.S. 345 (1974) (utility company with a service monopoly owes no 14th Amendment obligations to its customers) For a classic discussion and critique, see Charles L. Black, Jr., Forward: State Action, Equal Protection and California's Proposition 14, Harvard Law Review 81:69 (1967)

The doctrine of sovereign immunity (municipal and foreign), on the other hand, is meant to protect states from liability to individuals and others, for the losses or damage caused by their conduct. In the United States, sovereign immunity is best understood as three related concepts with different foundations and unequal borders. The sovereign immunity of the United States itself is based on the English notion of sovereign prerogative. To a large extent, federal sovereign immunity has been waived by actions of the legislature over the course of the last century. State sovereign immunity is a creature of both the 11th Amendment of the American Federal Constitution and. especially since the mid 1990s, a Supreme Court jurisprudence extracting a general principle of state sovereign immunity from out of the federal constitutional framework. See, e.g., Alden v. Maine, 527 U.S. 706 (1999). This form of sovereign immunity may be waived, is ineffective against some forms of federal legislation (especially those grounded in the post Civil War Amendments) and is no defense against actions demanding that state officials do their duty (by actions in equity). Lastly, the immunity of foreign sovereigns to suit (and liability) in the United States at one point protected all activities of the foreign sovereigns within the United States (and in its courts) but has, since the last half of the 20th century insulated the regulatory or "sovereign" activities of foreign states. commercial activities, actions by a state in the market, reduce a state to a position similar to other juridical entities--like corporations. These ideas have been reduced to statute in the United States--the federal Foreign Sovereign Immunities Act, 28 U.S.C. Sections 1602 et seq.

In a traditional social order, both doctrines serve their purposes. With respect to state action, it made a certain amount of sense that documents constituting government should be limited to the state. To the extent that individuals were the object of a constitution's concern, the object might most effectively have been to protect them against the actions of states. In traditional social orders, where governmental activity was limited and the boundaries relatively well defined, the object was to preserve as the state as an entity of a character different from that of individuals and other juridical persons. State action doctrine was part of a larger jurisprudence designed to preserve distinctions between the state (and its apparatus) and others. It was meant to deepen the notion that states were different, special and superior to other persons and entities.

Likewise, as the expression of the collective will, the state apparatus ought to stand in a special relationship to the law it creates as agent of the ultimate sovereigns. In that context, the state apparatus ought not to be responsible for and required to compensate against individual wrongs unless the people themselves permit it and direct the4 state to make appropriate amends as a matter of policy (or grace). That is not to say that the state apparatus ought not to be subject to a compulsion to do its duty; but rather that this apparatus ought not to incur liability for its wrongs in a manner that might suggest it is of a character substantially the same as an individual or other juridical personality. Again, sovereign immunity was designed to separate and distinguish the state as a body corporate distinct from and superior to other persons and entities.

But as easy as the doctrines might have been applied in a traditional social order, their justification, and the perversities attendant on their application, have become more problematic in this century. Globalization and privatization, especially, have called both doctrines into question. Donald L. Doernberg, Sovereign Immunity or the Rule of Law: The New Federalism's Choice (Carolina Academic Press 2005, 260 pp.) Doernberg suggests

Particularly in a society like that of the United States, where a formal constitution creates and defines the government, its powers and its limitations, the clash between sovereign immunity and the rule of law is unavoidable. The Constitution has no function other than to define, empower, and limit the government. When the courts invoke sovereign immunity to shield government or its agents from the consequences of violation of constitutional norms, the rule of law and the basic fabric of society suffer.

Donald L. Doernberg, supra (abstract). Others have criticized the doctrine on the grounds, essentially, that it distinguishes the state, as an entity, from other persons or entities, and thus, is inimical to the rule of law (accountability is the usual expression used). See Edwin Chemerinsky, Against Sovereign Immunity, Standford Law Review 53:1201 (2001). And state action has been criticized for failing to hold individuals to the same standards as the state, especially in the exercise of power (racial, religious, ethnic, gender) over others. See Gary Peller and Mark Tushnet, State Action and a New Birth of Freedom, Georgetown Law Journal (April 2004) (concurring with Charles L. Black, Jr's "call for the abolition of the state action doctrine in equal protection because its application immunized the exercise of racial power from constitutional review" id., at 25). State action is particularly perverse in the face of governmental delegation of its programs and functions to private entities, who in turn are deemed not bound by the rule of law limits otherwise imposed on the same actions if undertaken by the state. See Robert S. Gilmour , Laura S. Jensen, Reinventing government accountability: public functions, privatization, and the meaning of "state action", Public administration Law Review 58(3):247 (1998) ("When public functions are delegated to private actors and are allowed to be transformed into "private" actions, public accountability is inevitably lost. Indeed, delegations of this sort may even shield such private actors from the mechanisms of private accountability as well, since they may be able to assert governmental immunities as instrumentalities of the state.").

Thus, sovereign immunity is criticized because it preserves a space in law where the apparatus of state is not treated like other objects of law (the common citizen or legal subject), and state action is criticized for insulating individuals and other non-state entities from obligations otherwise imposed on the state. There is a strong principle of levelling, of horizontal equity, inherent in these criticisms. The criticisms also mark a strong mutation of rule of law notions to one that suggests a substantive governance component of equal treatment and equal obligation among public and private entities. Perhaps also, the criticisms suggest the ways in which the state has ceased to be "special" and different. This last point is especially powerful in the context of the recent push to privatize traditional governmental functions either by delegation (through contract) or by leaving areas of of behavior regulation to the "market."

And it is this emerging reality--of private entities performing governmental functions, of governments participating in the market, of corporate entities that act like states and states that act like corporations--that the current sets of doctrines evidence the great distance between evolving reality and the jurisprudential foundations of current American constitutional law.

On the one hand, the courts have continued to extend the protection of state sovereign immunity. On the other hand, the courts have carved out exceptions to the application of constitutionally derived obligations when states are said to act as common people--as market participants rather than as regulators. These are said to be constitutionally mandated results. Yet, legislative will is said to underlie the extension of doctrine that strips foreign states of their immunity in broader and broader contexts--from the offering of rewards for the capture of fugitive state officials (Montecinos of Peru), to the jailing of deposed leaders of states invaded by the United States (Noriega) , to the privatization of customs services (Honduras).

Yet, the courts have refused to extend the obligations of states to governments engaged in market activities. Thus the so called dormant commerce power does not reach the market activities of states, just as it does not reach those activities of economic actors. Hughes v. Alexandria Scrap Corp., 426 U.S. 794 (1976). The courts have also refused to extend the state action doctrine protections (and obligations) to those entities that now perform the privatized services within the United States, especially with respect to programs operated by private entities subject to extensive state regulation, for example the workers compensation system. See American Manufacturers Mutual Insurance Co v. Sullivan, 526 U.S. 40 (1999). In that case the Rehnquist Court found no state action under a law that permitted insurance companies to withhold payment for medical treatment pending utilization review. Yet most states have conceded the nature of the benefit as property. Rehnquist suggested that merely because the statute permits an action does not make the action mandatory and thus state directed for state action purposes. Thus "mere" state encouragement by enacting a law permitting such conduct is insufficient as a basis for state action. It will be necessary to find a way to distinguish that case." This reasoning reflects a line of cases in which the Court was willing to look precisely at the transaction giving rise to the cliam without considering the nature of that transaction in the context of the regulatory system in which it was made. See Moose Lodge No. 107 v. Irvis, 4067 U.S. 163 (1972) (liquor licensing system; distinguishable I think)) and CBS v. DNC, 412 U.S. 94 (1973) ((not majority position but dicta to effect that federal licensing of broadcast media not amount to state action) and Jackson v. Metropolitan Edison Co., 419 U.S. 345 (1974) (regulation of public utilty does not create state action where pre termination of service hearing sought, but compare Memphis Light, Gas & Water Div. v. Craft, 436 U.S. 1 (1978) (government owned utility required to provide pre termination hearing)). For this reason the usual the entwinement of the entity with the state system (see Brentwood Academy v. Tennessee Secondary School Athletic Assn, 531 U.S. 288 (2001) (court used "entwinement" rather than the usual "entanglement") and Lugar v. Edmunson Oil Co., 457 U.S. 922 (1982) (use of courts to issue and sheriff to enforce writ of prejudgment attachment sufficient for state action) does not appear to carry much weight when considering the relationship between private actors operating within a system of benefits tightly constrained by state regulation. Yet it also evidences the importance of the the manifestation of the state, through its agents, in these cases. Thus, even in workers compensation cases, it might be possible to argue that private actors owe state derived obligations to citizens when an instrumentality plays a role in the private action--through judicial or administrative action, for example. On this difference rests the likely distinction between traditional denial of state benefit cases (like Goldberg v. Kelly, 397 U.S. 254 (1970)) and Sullivan. It is clear that subsequent to the Sullivan decision, the courts have distinguished Sullivan on the basis that it dealt with "purely private conduct" Thus, in Tucker v. Darien Bd of Educ., 222 F. Supp. 2d 202 (DConn, 2002) the district court suggested:

"Plaintiff also points to the U.S. Supreme Court decision in American Manufacturers Mut. Ins. Co. v. Sullivan, 526 U.S. 40, 119 S.Ct. 977, 143 L.Ed.2d 130 (1999) where the Court recognized that medical benefits provided under state workers' compensation laws could be a recognized property interest under the Due Process Clause. Such workers' compensation benefits were viewed there by the Court to be similar to federal welfare assistance and Social Security disability benefits which meet the "extreme dependence" test set forth in its earlier decisions and followed by the Second Circuit in S & D Maintenance. 526 U.S. at 60, 119 S.Ct. 977 (citing Goldberg v. Kelly, 397 U.S. 254, 90 S.Ct. 1011, 25 L.Ed.2d 287 (1970) and Mathews v. Eldridge, 424 U.S. 319, 96 S.Ct. 893, 47 L.Ed.2d 18 (1976)). However, coverage of particular medical procedures and specific health benefits in private medical plans, even when those plans are incorporated into public collective bargaining agreements, do not rise to the level of "extreme dependence" so as to be subject to due process protection. See also Lujan v. G & G Fire Sprinklers, Inc., 532 U.S. 189, 196, 121 S.Ct. 1446, 149 L.Ed.2d 391 (2001)(state court breach of contract action adequately protects subcontractor's claim to payment on public projects). Thus, in order to prevail on a due process claim alleging a deprivation of a property right, the plaintiff must demonstrate something more than an ordinary contract right and a reliance thereon."

Id., at 206.

The object appears to be to preserve the exceptionalism of states, even as the activities of state and private actors conflate, merge and interact in ever more intimate ways. For this purpose, the court continues to try to build a jurisprudence of distinctions, based on the character of actions as private and market participatory, or public and regulatory. On such distinctions rest both positive governmental obligations (state action) and privileges (sovereign immunity) on the one hand, and private benefit (freedom from the burdens of fairness imposed on the state) and obligation (liability to compensate for torts and other damage).

China, the Olympic Games and Conformity to Evolving International Standards of Behavior

Just when the nation state reached the point where it had essentially acquired a monopoly of positive (and in some places customary) law, new systems of law have arisen to diminish the effect of this sort of control. Among the competing systems of rules that are rising to regulate global commercial activity are private law systems based on contract relations among the chain of suppliers of goods. In one form, rules are created by a corporation, sometimes with the help of elements of non-governmental organizations. These standards are imposed by contract within the supplier chain, conformity with the terms of which are monitored by other non-governmental organizations, authenticated through media exposure and targeted to customers and investors. Governments play an incidental rule, articulating clusters of standards from among which companies and non-governmental organizations. Though governments, corporations and non-governmental organizations all compete for control of norm standard setting through ideological campaigns directed to consumers and investors in developing states. See Backer, Larry Cata, "Economic Globalization and the Rise of Efficient Systems of Global Private Lawmaking: Wal-Mart as Global Legislator" . University of Connecticut Law Review, Vol. 39, No. 4, 2007.

In another form, rules are created by non-governmental organizations. Authoritative organizations can create certifications of compliance with certain standards of conduct--for example complying with certain standards of labor relations, or paying a fair price for raw materials and other goods, or "typically promulgate their own standards, which are often considerably stricter than state standards, and to implement them through distinctive inspection and monitoring institutions. Conventionally labeled as 'self-governance' because they are organized around global product chains, the programs also incorporate a growing variety of non-economic interests from around the world in policy making and implementation. " Meidinger, Errol E., "Multi-Interest Self-Governance through Global Product Certification Programs" (July 2006). Buffalo Legal Studies Research Paper No. 2006-016.

While the focus of these forms of private rule making have focused on corporations, consumers and investors in the West, the confluence of the upcoming Olympic Games to be held in Beijing, combined with China's increasingly powerful position as a developing state willing to project power, are combining to turn attention to China. A recent report suggests the context and form of what is likely to be a greater attention to the means by which China emerges as a developed and powerful state among the community of nations. It is unlikely that the Chinese State apparatus will be amused.

The BBC reported that an influential non-governmental organization (influential enough, that is, to be treated as an authoritative source and thereby legitimized as such by the apparatus of the BBC), "Playfair - an alliance of world trade unions - has condemned "severe workers' rights violations" in four Chinese factories ahead of the Beijing games. . . . The group said it found abuses at the factories - licensed to make official Olympic caps, bags and stationery." Olympic Firms Abusing Workers, BBC News, June 10, 2007. As a consequence, the International Olympic Committee has been forced to respond--carefully noting that it would not merchandise the Olympics using goods that were made by exploited workers. "The IOC said it did not have direct control over merchandise companies - but that host cities were expected to follow guidelines on fair labour standards. . . . An IOC statement said: "The IOC is committed to being a socially responsible leader of the Olympic Movement that takes care of the Olympic brand in the best way possible." Id. It also roused the BBC itself to send it own investigative reporters to the identified factories to find out for themselves. Id. And not just the BBC; the Associated Press also sent investigative reporters to determine whether there was a factual basis for the allegations. Id.

This has put the Chinese government on the defensive: "Sun Weide, a spokesman for the Beijing Olympic Games Organising Committee said he had not read the report, but added: "When we sign an agreement with a firm they have to make a commitment that they will completely honour China's Labour laws and regulations."" Id. But the government still does not understand the power of private norms--and its assertion through formal or informal certification. It will discover, I suspect, that foisting the non-compliance onto the private manufacturers will not save it, or its economic policy, from actions by consumers and investors abroad. And besides, such a policy of indifference goes against the grain of the Marxist-Leninist state ideology grounding China's development. Whether understood in western terms (certification) or Chinese terms ("development with Chinese (Marxist Leninist) characteristics"), the state apparatus will have to act. Either it must act to satisfy the demands of consumers and investors (the incentives under certification or private law making models), or it must act to comply with its mandatory duties as the guardians of the rights and welfare of the proletariat and the state (the incentives under Marxist-Leninist governance models).

And, there is an interesting side note to this power of certification programs to reach directly to China. The current flap over the production of Olympics related souvenirs has revealed again the increasingly strong ties between Taiwan and the People's Republic. One of the factories names in the reports was "Lekit Stationery, . . . a Taiwanese company which has been operating in the city of Dongguan, in Guangdong Province, for the last 20 years." Id.

China is beginning to reap the rewards of a long sought goal--a prominent place in the world. It will soon discover the burdens of that goal--interconnectedness brings with it an expectation of compliance with global rules, some of them formal and legal, many of them global and informal (but grounded in contract and expectation). As the Olympic Games get closer for Beijing, its state apparatus as well as its private ordering will be scrutinized in ways that resemble scrutiny of Western states. Whether the Chinese are prepared for interaction at this level remains to be seen.