REDISTRIBUTIVE LITIGATION-JUDICIAL INNOVATION, PRIVATE...

REDISTRIBUTIVE LITIGATION-JUDICIALINNOVATION, PRIVATE EXPECTATIONS, AND THESHADOW OF INTERNATIONAL LAW

Paul B. Stephan*

I. REDISTRIBUTIVE LITIGATION: A DEFENSE OF THE CONCEPT .. 796A. Not All Litigation Is Redistributive ......................................... 796B. Some Litigation Is Redistributive ............................................ 797C. Not All Innovation Is Redistributive ....................................... 802D. Categories of Redistributive Litigation ................................... 802

1. Suits by the State ................................................................... 8032. Suits Against the State ........................................................... 8073. Creation of a Commons ....................................................... 8094. Suits to Privatize ................................................................... 8105. Naked Wealth Transfers ....................................................... 8116. Sum m ary ................................................................................ 813

III. THE LAW OF PROPERTY SAFEGUARDS-TAKINGS DOCTRINE,OUTSIDER PROTECTION, AND EXPROPRIATION LAW ................ 814A. Takings Doctrine and Its Neighbors ....................................... 814

1. Redistribution and Vested Rights ........................................ 8162. Outsiders and Predatory Localism ..................................... 8203. The Emergence of Modern Takings Doctrine ................... 823

B. Expropriation Law ................................................................... 830C. A Synthesis ................................................................................. 839

IV. EXPROPRIATION AS A COLLECTIVE ACTION PROBLEM-THEROLE OF LOCALISM ....................................................................... 841

V. AN INSTRUMENTAL ANALYSIS OF REDISTRIBUTIVELITIGATION ..................................................................................... 852A. Redistributive Legislation and Litigation-A Dynamic

A nalysis ...................................................................................... 852

* Percy Brown, Jr. Professor and E. James Kelly, Jr.-Class of 1965 ResearchProfessor, University of Virginia School of Law. Thanks to Pamela Clark, BarryCushman, John Harrison, John Jeffries, Kevin Kordana, Saul Levmore, Paul Rubin,Robert E. Scott, and Anne Woolhandler, and to participants in the Virginia LawSchool faculty retreat, the 2001 Annual Conference of the International EconomicLaw Interest Group of the American Society for International Law, and theUniversity of Texas Law School faculty colloquium, for comments and criticism.Blunders remain my sole responsibility.

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1. Rent-Seekers and Their Incentives ...................................... 8532. Legislatures and Rent-Seeking ............................................ 8563. The Agency Theory of the Judiciary ................................... 8574. Litigation and Agency Costs-The Incentives of Judges,

Litigants, and Juries .............................................................. 858a. Judicial Selection .............................................................. 859b. Structural Biases in Litigation ......................................... 861c. Jury B iases .................. : ...................................................... 863d. Sum m ary ........................................................................... 865

B. Legislative Responses to Redistributive Litigation ................ 866C. The Shape of External Constraints .......................................... 869

1. Revisiting Takings and Expropriation Law ....................... 8702. Federal Court Removal Jurisdiction as a Procedural

A lternative ............................................................................ 872CONCLUSION ....................................................................................... 876

W HAT constrains judicial innovation? The late controversyover the 2000 election surfaced this question. In Bush v.

Gore ("Bush II"),' three members of the United States SupremeCourt believed that the Florida Supreme Court had invented a newrule to decide the case before it, and that federal law barred suchcreativity The four dissenters found it amazing that the Courtwould regard a state court's interpretation of state law as willfullawmaking forbidden under federal law. Justice Stevens put it suc-cinctly: "[The Florida Supreme Court] did what courts do... ."' Inthese different perceptions of the lower court's behavior and a

1531 U.S. 98 (2000).2 Id. at 111-15 (Rehnquist, CJ., concurring). This proposition also seems to have

provided the foundation for the per curiam opinion in Bush v. Palm Beach CountyCanvassing Board ("Bush 1"), 531 U.S. 70 (2000). Richard Posner argues persuasivelythat the "new law" issue, and not equal protection doctrine, best explains the Bush IIdecision. Richard A. Posner, Florida 2000: A Legal and Statistical Analysis of theElection Deadlock and the Ensuing Litigation, 2000 Sup. Ct. Rev. 1, 48-53. Forfurther discussion of this issue in the context of Bush II, see Michael Abramowicz &Maxwell L. Steams, Beyond Counting Votes: The Political Economy of Bush v. Gore,54 Vand. L. Rev. 1849 (2001) (treating as a puzzle the majority's rejection of theposition articulated in the concurring opinion); Harold J. Krent, Judging Judging: TheProblem of Secondguessing State Judges' Interpretation of State Law in Bush v.Gore, 29 Fla. St. U. L. Rev. 493 (2001).

3 Bush II, 531 U.S. at 128 (Stevens, J., dissenting).

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higher court's duty to respond, we find framed a persistent issue ofincreasing significance. To what extent do courts compete withother lawmakers in the creation of legal rules? Where a court actsas an independent lawmaker, do external limits apply, and if so,what kind?

At the dawn of the twenty-first century, we have long since shedthe belief that courts "find" rather than "make" law. Once wecrossed this line, we had to struggle with contradictory commit-ments. We embrace the ideals of liberal democracy, which includethe notion of holding lawmakers accountable for their actionsthrough democratic processes. We believe in judicial independence,which means insulating courts from direct political intervention. Butwe cannot accept judicial lawmaking and still give full rein to bothof these aspirations.

Our responses to the dilemma fragment. Some find it sufficientto expose the naked preferences that underlie judicial lawmaking.4

Others seek to develop a system of internal constraints that judgescan adopt to master themselves.' Another possibility entails thefashioning of external mechanisms that would limit what judgescan do, either by imposing a self-enforcing doctrinal check, enlarg-ing the areas in which the political branches may override judicialconclusions, or bolstering supervision of subordinate courts bythose higher in the hierarchy. The Bush II concurrence representsa variation of the last approach: Chief Justice Rehnquist and hiscolleagues used a perceived federal interest to justify their rejec-tion of what they saw as a state court's invention of state law.6

International institutions increasingly provide another instance ofthe same strategy, as tribunals created by international agreementshold nations accountable for the actions of their courts.

41 take this to be the principal accomplishment of the critical legal studiesmovement, as well as of the earlier legal realists.

s One thinks of the work of Ronald Dworkin and Cass Sunstein, among others. In asense, this approach might function as a kind of external constraint, inasmuch asacademic critics will hold judges accountable for a failure to honor whatever internalconstraints the critics may believe to apply. Academic critics have little power to alterthe result of judicial lawmaking, but they may have some ability to determine judicialreputations, which in turn may affect judicial behavior. For more on factors affectingjudicial behavior, see the authorities cited infra note 142.6 Bush 1, 531 U.S. at 111-15 (Rehnquist, C.J., concurring).

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Embedded in the strategy of external constraint, as Bush II illus-trates, is a paradox. For a superior court to seize on the excessivecreativity of an otherwise competent lower court as a ground forreversal, the supervising court itself must invent a new rule, or atleast significantly extend preexisting doctrine. From the perspec-tive of the lower court, what distinguishes creativity from defianceis the absence of a clear edict from higher authority foreclosing thepath taken. We normally regard federal courts as powerless to re-vise state court determinations of state law, just as internationaltribunals ordinarily have no right to correct findings of nationallaw. But if federal courts or international lawmakers are to get intothe business of overseeing judicial innovation, they necessarilymust decide what outcomes would not be surprising. They thusmust indicate something about the permissible limits of innovation,even though promulgating and determining state or national lawfalls outside their capacity. The antidote to surprising and destabi-lizing judicial activity thus becomes more ingenious, and perhapsstill surprising and unstable, law arising at a higher level in the ju-dicial hierarchy.7

Yet in spite of these disturbing implications, the idea that a courtmay commit reversible error simply by straying too far from thepredictable path of its past declarations of the law is as old as theRepublic. It most certainly did not first appear full blown in theBush II concurrence. Occasionally, if rarely, federal courts have as-sumed the power to reject state court interpretations of state lawthat seemed fanciful and suggested hostility to federal interests. Inthese cases, courts have invoked due process and related constitu-tional doctrines to nullify judicial actions that seemed toosurprising and too unbounded to fit within the framework of con-ventional judicial lawmaking8

7 See Barton H. Thompson, Jr., Judicial Takings, 76 Va. L. Rev. 1449, 1468 & n.83(1990).

8 See, e.g., Presnell v. Georgia, 439 U.S. 14 (1978) (affirming a criminal convictionon a different ground from the trial court decision violates due process); Henry v.Mississippi, 379 U.S. 443 (1965) (disregarding a state court ruling on proceduraldefault); Bouie v. City of Columbia, 378 U.S. 347 (1964) (finding that a change incourt interpretation of state criminal law cannot justify criminal punishment);NAACP v. Alabama ex rel. Patterson, 357 U.S. 449 (1958) (disregarding a state courtruling on procedural default because it was contrived); Cole v. Arkansas, 333 U.S. 196(1948) (resting affirmance of state criminal conviction on a different statute from that

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To be sure, the Supreme Court cases do not deal with surprise assuch, but rather apparent antipathy to a significant federal interest.Yet some courts have hinted, and a few commentators have ar-gued, that settled expectations vel non create a protected federalinterest. In property law, the argument that creative judicial deci-sions altering the rights of property owners implicate the TakingsClause enjoys some currency.9 In international law, some have seendiscriminatory or uncompensated expropriations carried out by thejudiciary as every bit as objectionable as those imposed by otherbranches of government." In other words, the modest external lim-its on the power of governments to redistribute wealth retain somevitality when the judiciary, rather than the legislature or the execu-tive, undertakes to alter settled material interests.

I wish to ground this struggle to limit litigation's redistributivepossibilities in a familiar project of both constitutional and interna-tional law. One of the great ambitions of the Constitution-somewould say its central purpose-was the creation of a nationalcommon market free of the risk of predatory localism. The foun-ders believed that absent legal and institutional restraints, localauthorities would seek short-term advantages resulting from ex-ploitation of strangers and outsiders at the cost of a flourishing

relied upon at trial violates due process); Brinkerhoff-Faris Trust & Savings Co. v.Hill, 281 U.S. 673 (1930) (finding that states have a duty under the due process clausenot to use surprising interpretations of state procedural lav to destroy the right tochallenge an administrative action in court); Missouri ex rel. Mo. Ins. Co. v. Gehner,281 U.S. 313 (1930) (finding a federal claim not forfeited through procedural defaultwhen surprising application of state law created the federal claim); Saunders v. Shaw,244 U.S. 317 (1917) (basing a state appellate court decision on a fact finding that thelower court held to be irrelevant violates due process); Fairfax's Devisee v. Hunter'sLessee, 11 U.S. (7 Cranch) 603 (1813) (finding that a state supreme court misconstruedits forfeiture laws in confiscating land of British subject). For a review of cases fromthe pre-Erie era when federal courts invoked principles of general constitutional lawto disregard state court decisions, see Michael G. Collins, Before Lochner-DiversityJurisdiction and the Development of General Constitutional Law, 74 Tul. L. Rev.1263 (2000). See also Krent, supra note 2, at 493.

9 The cases are collected in Thompson, supra note 7, at 1468-72. See also BMW ofN. Am. v. Gore, 517 U.S. 559 (1996) (awarding extraordinary punitive damagesviolates due process); Stevens v. City of Cannon Beach, 510 U.S. 1207, 1207-08 (1994)(Scalia, J., dissenting from the denial of certiorari) (arguing that a judicial doctrinethat denied property owners a right to exclude was a Fifth Amendment taking);David J. Bederman, The Curious Resurrection of Custom: Beach Access and JudicialTakings, 96 Colum. L. Rev. 1375 (1996) (exploring beach cases as judicial takings).

10 See infra text accompanying note 106.

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national commerce. Consistently throughout the nineteenth cen-tury, and intermittently throughout the twentieth, the SupremeCourt honored this commitment by rejecting state court interpreta-tions of local law that smacked of localist exploitation. Similarly,over the last two centuries, international law has devoted much ofits resources to promoting the "national principle," under whichoutsiders enjoy some of the privileges and rights of locals. Theprinciple does not rest on abstract humanitarian values, but on aconviction that protecting outsiders can bring tangible benefits.Both of these legal traditions, I argue, should shape our efforts tocontain expropriatory judicial actions.

I begin by defining and exploring the concept of redistributivelitigation. I concede the slipperiness of the subject, as all judicialactivity contains the incubus of instability. I argue, however, thatone sensibly can distinguish between more and less predictableoutcomes, and that some departures from prior authority havesuch a significant effect on distributions of rights, duties, powers,and immunities that the concept of redistribution seems appropri-ate.

I reinforce these conceptual arguments by demonstrating how, attimes, the law deals with the general problem of government redis-tribution and the extent to which it has applied its tools to judicialbehavior. I provide a brief history of "takings" jurisprudence andthe international law governing expropriation to illustrate howcourts and their international counterparts have used these doc-trines to constrain governmental (including judicial) action. Whatwe find is not a set of hard rules that reliably deters judicial innova-tion, but rather the outline of a strategy that federal courts andinternational tribunals have invoked in the face of unwanted judi-cial creativity.

Next I describe theoretical arguments for constraining redistri-bution. I narrow the field of inquiry by putting aside competingmoral claims about the sanctity of property and the need to rectifymorally arbitrary distributions of rights. I instead focus on those in-stances of redistribution that seem most likely to harm generalwelfare. I employ the conventional Prisoner's Dilemma analysis toidentify the instances that present a collective action problem andthus seem most likely to be harmful. The argument suggests thatwelfare-reducing redistributions pose special problems when the

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decisionmakers choosing redistribution do not have to bear a pro-portionate share of the costs of redistribution. Cost externalizationthus becomes the tell-tale sign of redistributions that we shouldwish to constrain. This argument points directly to predatory local-ism as the central problem for which external constraints onjudicial creativity have their greatest justification.

I then extend this analysis by exploring how a redistributive ju-diciary might function. I examine structural attributes that maylead the judiciary to embrace redistributive projects without legis-lative authorization. Identifying the conditions under which ajudiciary may stray from legislative preferences suggests an argu-ment for limiting external review of judicial redistribution. In mostinstances, legislatures can rein in overly creative courts without anyneed for other checks. But this constraint may not suffice for thoseredistributions that present significant problems of cost externali-zation. The problem of predatory localism resurfaces, because wemight anticipate that legislators will fail to rein in free-lancingjudges exactly in these instances where we might question the effi-cacy of judicial outcomes. Where a redistribution achieved throughlitigation systematically disfavors outsider groups (the prototypicalcase involves nonresidents) and the judicial process producing theredistribution seems vulnerable to bias against such outsiders (forexample, popularly elected judges, flexible venue rules, and the useof local jurors), external constraints might have greater benefitsthan costs. Hence the conventional, if not fully developed, law gov-erning expropriation of foreign investors might help to anchor anotherwise difficult problem under the Takings Clause.

Besides exploring the possible evolution of takings doctrine, Ialso suggest a fairly straightforward legislative step that might dis-pel many of the problems associated with redistributive litigation.During the nineteenth century, the Supreme Court employed crea-tive interpretations of diversity jurisdiction and removal statutes toexpand the opportunities for outsiders to avoid litigation in localistcourts. Congress similarly might address the contemporary varia-tion of this problem by broadening the diversity and removaljurisdiction of the federal courts. I explore the constitutional issuesthat such an expansion might present and explain why, on balance,they are chimerical.

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I. REDISTRIBUTIVE LITIGATION: A DEFENSE OF THE CONCEPT

A proponent of the "redistributive litigation" concept mustgrapple with two problems. First, in one sense, all litigation smacksof redistribution. One side defends the status quo, the other sideattacks it, and at a certain level of abstraction a court's only choiceis between keeping things as they are and effecting change. Second,in another sense, no litigation is redistributive. Legal principles inmost cases are sufficiently abstract and indeterminate to justify, orat least to lend a patina of legitimacy to, almost any outcome. Eachof these points threatens to rob the concept of any meaning thatcan give it purchase.

I respond to each argument by demonstrating its incompleteness.I then clarify the distinction between redistribution and innovation.While redistribution involves the unsettling of expectations, and inthat sense presupposes innovation, an innovative legal rule doesnot necessarily lead to wealth redistribution, as distinguished fromwealth creation. Finally, I illustrate the concept of redistributivelitigation with examples.

A. Not All Litigation Is Redistributive

I first take up the problem of over-inclusiveness. Only from anex post perspective can one say that all litigation involves redistri-bution. Every case entails a struggle over particular assets, whethertangible or abstract, but it also presents an opportunity to confirmor announce a legal norm. A case involves both an ex post resolu-tion of a fully formed dispute and an ex ante indication of a standardor rule that will govern future conduct. On the one hand, the trans-fer of even a large body of assets as a result of the application of awell-established rule reflects not redistribution, but rather confir-mation of the principle that law, not power, determines the abilityto enjoy particular rights and privileges. The announcement of anew and surprising application of a rule, on the other hand, can beconsidered redistributive to the extent it achieves a significant al-teration in the legal interests held by people subject to the rule.Note that a case decision can be redistributive even if the assets atstake in the litigation are insignificant or do not change hands.Rather, the redistributive nature of litigation comes from thepower of courts to reach a legal outcome that unsettles reasonably

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fixed expectations, whether those of the parties to the case or ofothers.

Courts have two different ways of unsettling expectations exante. First, they can demonstrate that they will disregard well-established norms without indicating convincingly how they willbehave in the future. They can become, in essence, unpredictable.Perhaps the most common criticism of Bush II, for example, is thatthe Court failed to articulate a principle that plausibly would gov-ern its future decisionmaking. Courts at any level of the judicialsystem can carry out this kind of unsettling. A surprising trial out-come that goes uncorrected, perhaps because the parties settle,also degrades the predictability of law, even though such eventsnecessarily do not substitute a new legal norm in place of the newlyunreliable one.

Second, courts can use their powers of stare decisis to declarenew rules for the future. This power varies with the level of thecourt. The Supreme Court's declarations leave the widest wake, atrial court's the narrowest. A subsidiary issue is the credibility ofthe courts' pronouncements. A court with a history of disregardingprecedent has less of a capacity to shape future behavior, whetherits own, that of subordinate courts, or that of persons reacting tolegal rules. A convincing announcement of a new legal rule by acourt at the top of the hierarchy has the greatest redistributive ef-fect, but other judicial actions also can contribute to redistribution.

Even this generous understanding of redistribution does not en-compass all litigation. Some legal outcomes are uncertain, if only inthe sense that reasonable people would invest money in the lawsuitto find out the outcome. But not all outcomes are surprising, in thesense that a reasonable person would have heavily discounted thelikelihood of it occurring. My focus is on the class of remarkablyunexpected outcomes of litigated cases.

B. Some Litigation Is Redistributive

The problem of under-inclusiveness-the claim that no litigationproduces a completely surprising outcome--can rest on either old-fashioned conceptions of law as something found rather thanmade, or on post-modern depictions of judicial lawmaking as con-tingent, incoherent, and fundamentally an exercise of power.Consider the law-is-eternal argument first. All legal claims use a

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vocabulary that implies ancient usage, no matter how innovativethe underlying effort. The most surprising decision comes equippedwith hoary arguments: It is the application, and not the supportingauthority, that catches people off guard.

McBryde Sugar Co. v. Robinson" illustrates the law-is-eternalstrategy. Forty years earlier, the territorial Hawaiian courts, in acase to which McBryde was not a party, had ruled that Robinsonowned an unqualified right to all the surplus water from a particu-lar river.'" Other precedent, however, had indicated that surpluswater interests were subject to a right of reasonable use in favor ofdownstream riparian owners. 3 More generally, the territorialcourts seemed to treat Hawaiian land grants as sui generis and ab-solute, but early colonial legislation also suggested that somethinglike the common law concept of riparian rights existed.

McBryde represented the first opportunity for the Hawaii Su-preme Court, a body produced by statehood, to look at theseissues. It ruled that the earlier decision in favor of Robinson had nores judicata effect on persons who had not joined in the earlier liti-gation, and further determined that the concept of "normal dailysurplus water" constituted a null set because of riparian rights ofdownstream owners. Finally, the court rejected the argument thatthe state had not retained certain rights to the water flow. 4

Unlike the territorial court decisions, the Hawaii Supreme Courtrelied heavily on Anglo-American common law concepts of "fairuse" of water to guide its decisions.15 The United States Court ofAppeals for the Ninth Circuit later characterized the Hawaii Su-preme Court as throwing out an indigenous system of real propertylaw and supplanting it with the common law of riparian rights. 16

But the territorial law of Hawaii was at least pregnant with the

11504 P.2d 1330 (Haw. 1973), cert. denied, 417 U.S. 962 (1974).12 Territory v. Gay, 31 Haw. 376 (1930).13 McBryde, 504 P.2d at 1336-38.14 Id. at 1344-45.15 Id. at 1336-38.16 Robinson v. Ariyoshi, 753 F.2d 1468, 1470 (9th Cir. 1985) ("The Supreme Court

of Hawaii in 1973 sua sponte overruled all territorial cases to the contrary andadopted the English common law doctrine of riparian rights."), vacated by 477 U.S.902 (1986) (requiring reconsideration in light of Williamson Co. Regional PlanningCommission v. Hamilton Bank, 473 U.S. 172 (1985)), dismissed as premature, 887F.2d 215 (9th Cir. 1989) (applying Williamson Co.).

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possibility that riparian rights existed, and all the cases on whichRobinson and the other private landowners relied were distin-guishable. The law announced by the Hawaii Supreme Court mighthave surprised the parties, but nonetheless it was "out there" in thesense that prior authority did not specifically dictate a contrary re-sult and did hint at the conceptual architecture for the resultreached.

A more sophisticated alternative to this essentially pre-modernargument would contend that anyone surprised by any judicial out-come must suffer from unforgivable naivet6. We must see alljudicial decisions, before their announcement, as smears of prob-ability, clusters of possible results across an indefinite range ofpotential choices. Privileging any subset of these possible rules as"normal," and stigmatizing the remainder as "surprising," deniesthe fundamental arbitrariness of any choice among the range ofpossibilities. We know that courts do bizarre and incoherentthings-one need look no further than the per curiam opinion inBush II-and the recognition of this indisputable fact unsettles anyclaim that people have a reliance interest worth protecting in anyparticular cluster of expectations about legal entitlements.

Either variation of the under-inclusiveness assertion poses aformidable, but not insurmountable, objection to the concept ofredistributive litigation. Yes, legal authority and legal reasoningare plastic, and determined courts may find little in the way if theywish to take the law in a new direction. But the path of the law isnot completely random. Students of law can recognize a distinctionbetween impossible outcomes and unlikely ones: The former maynot exist, but the latter certainly do.

To begin with, what about law's own claim about the reliabilityof particular legal interests? Both takings and expropriation law,which I discuss below, presume that people can count on the ex-pectations that the legal system generates. Each of these bodies oflaw recognizes, at least theoretically, a class of actions that gov-ernment may not undertake because of the absence of anydiscernible public purpose, and a much wider class of actions thatgovernment may undertake but for which it must pay compensa-tion. The distinction between compensable infringement andunfettered power to intrude on private interests presupposes a le-gally defined territory of private domain. But why respect this

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boundary if it rests on endlessly shifting rules, norms, and princi-ples?

A critic of the concept of redistributive litigation might rejointhat takings and expropriation law confirm, rather than contradict,the fundamental unreliability of the legal system. Although bothbodies of law invoke the rhetoric of legitimate law-based expecta-tions, each has proved elusive and malleable in its content. Thedisorder in the Court's contemporary takings jurisprudence is welldocumented.' As for expropriation law, we need only recall JusticeHarlan's observation that "[t]here are few if any issues in interna-tional law today on which opinion seems to be so divided as thelimitations on a state's power to expropriate the property ofaliens."'" We cannot have it both ways: The recent trend towardsgreater assertion of judicial power to protect law-based expecta-tions contains the seeds of its own subversion, exactly because it isa recent trend away from the legal status quo.

Yet these objections seem clever rather than profound. The per-ception of law-or more precisely, of some areas of the law-asreliable, in the sense that they provide a basis for organizing expec-tations about the future, does not appear to rest entirely onmystification and magical thinking. Beyond the internal logic of thelegal system, we find a social reality that manifests great faith(whether reasonable or not) in the idea that law can be settled.Those of us who work closely inside the system, and thus have ac-cess to all the sources of its instability and indeterminacy, tend tooverlook the resilience of the public's conviction that one cancount on law.

A simple way of demonstrating social confidence in law's reli-ability-or at least of the extent of the social delusion, if that iswhat it is-is the billions of dollars and millions of person-hoursdevoted ,to non-litigation legal services. Across a wide range ofhuman activities, whether organizing a business, a vacation, a fain-

'7 Cf. Abraham Bell & Gideon Parchomovsky, Takings Reassessed, 87 Va. L. Rev.277,287 (2001) (describing a "confounding welter of cases"); Thomas W. Merrill, TheLandscape of Constitutional Property, 86 Va. L. Rev. 885, 889-90 (2000) (noting thatthe most recent pronouncements of the Court on the constitutional law of propertyare "to put it mildly, likely to produce bewilderment among lower courts andpracticing lawyers").

Is Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398,428 (1964).


ily, or an estate, people act as though informed predictions aboutlegal outcomes have value. This behavior may not provide logicalproof that legal outcomes rest on legitimate expectations, but itdoes indicate that people consider some guesses about them asmore reliable than others.

It is not necessary to go down the path of determining how andwhy an objective basis exists for popular reliance on some portionsof the law. It suffices to suggest that the persistence of the beliefthat some law can be counted on may have something to do withthe success of this belief as a guide for action. It seems as if peoplewho act as if law were reliable by and large learn nothing too dis-couraging from their experience. To use the rhetoric ofevolutionary science, investments in the prediction of legal out-comes seem to constitute a successful adaptation to the socialenvironment in which we live.

This evidence that reliance on law is rational, in the sense thatindividuals more often than not do not come to regard their beliefin law's predictability as a source of disappointment, does notprove that this reliance is reasonable, in the sense that the benefitsto society resulting from reliable law outweigh the costs. The for-mer is simply a positive claim, that people by and large do notregret their reliance on law. The latter implies a normative judg-ment, namely that it is good that people so rely. People may expectto find law reliable, but there may exist good normative argumentsas to why they ought not.

Acknowledging the existence of those arguments, however, doesnot negate the existence of powerful counterarguments. The desir-ability of honoring widely held expectations is one of the mostcommonly offered normative justifications for the existence ofboth property and contract law. The intuition that prevents this jus-tification from becoming circular is the belief that life would beincoherent and morally arbitrary, and thus human flourishingwould be impossible, unless some command over the future werepossible. Law can aid in developing some sense, however limited,of the future's possibilities by rendering them predictable. 9

19 Other counterarguments exist, in particular the claim that predictability in legalrelations enhances welfare by facilitating cooperation and exchange. See, e.g., CharlesJ. Goetz & Robert E. Scott, Enforcing Promises: An Examination of the Basis ofContract, 89 Yale L.J. 1261, 1274-88 (1980).

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C. Not All Innovation Is Redistributive

Not all surprising judicial outcomes result in redistribution. Acourt might answer a question no one had thought to ask before.Alternatively, a court may come up with a creative solution that,while changing the status quo, makes everyone better off. In eithercase, some people end up better off and no one ends up worse off.By definition, no redistribution has occurred-only wealth crea-tion. 0 Alternately, the new legal rule may harm someone, but thebeneficiaries compensate the losers out of their winnings.2' The ad-versarial structure of litigation makes it more difficult tocompensate losers, relative to the legislative process. Many innova-tive legal outcomes, however, respond to gaps in the legal system,rather than replacing settled and reliable rules. Those of us whoteach private law, for example, tend to think that many court deci-sions fall into this category. Such cases typically generate nowelfare losses to anyone (ignoring the sunk costs of the litigants).

It is important to distinguish innovative cases where no redistri-bution occurs from those instances where society benefits fromredistribution. In the latter case, the gains from the new rule ex-ceed the costs, but, absent compensation, some persons suffer a netdetriment.' We might regard this kind of judicial innovation as de-sirable, at least if we value societal gains more than we care aboutthe harms that the losers suffer, but these innovations nonethelessinvolve a wealth transfer.

D. Categories of Redistributive Litigation

Our subject, then, is litigation that produces surprising outcomesand, viewed from an ex ante perspective, imposes substantial netcosts on a distinct class of persons (including, of course, a class ofone). Consider now the categories of cases that might achieve thisoutcome. First, the government might assert on its own behalf a

20 For reasons discussed in the preceding section, I am ignoring the direct effectsfrom the litigation on the losing party. The issue is whether the outcome, once itoccurs, imposes costs.

21 See generally Louis Kaplow, An Economic Analysis of Legal Transitions, 99Harv. L. Rev. 509 (1986) (exploring techniques for implementing legal innovations).

22This is, of course, the distinction between Pareto-optimality and Kaldor-Hicksoptimality.

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right to obtain material benefits from private persons, relying on anunexpected application of a particular legal rule to certain facts.Second, private persons might claim against the government a rightto obtajn an entitlement previously unknown to the law. Third,private persons might seek to strip away property status from someright or power, thereby converting an interest previously protectederga omnes into one unprotected against invasions. Fourth, privatepersons might try to have a private property right declared in whatpreviously was a public commons. Fifth, private persons might as-sert claims against others that previously had gone unrecognized.Illustrations come from contemporary headlines.

1. Suits by the State

As for state claims against private persons, consider either thelawsuits brought against the major tobacco companies by state at-torneys general, or the more recent spate of claims made againstU.S. gun manufacturers on behalf of various city governments. 3

Whether one considers these suits redistributive depends on thelevel of generality with which one views the claims. None of thesecases involves a startling new legal theory. Each sounds in somemixture of tort and product liability, bodies of law that have beenwith us for some time. Yet something seems decidedly odd about agovernment body suing on its own behalf claiming compensable in-jury due to its own failure to regulate dangerous activity. Thisreverse paternalism, which depicts government as victim based ontheories about improper private interference with the exercise ofregulatory power, represents a remarkable extension of old liabilityprinciples into uncharted terrain. It also inverts a political order

23 For recent scholarly analysis of these suits, see Hanoch Dagan & James J. White,Governments, Citizens, and Injurious Industries, 75 N.Y.U. L. Rev. 354 (2000);Deborah R. Hensler, Revisiting the Monster: New Myths and Realities of ClassAction and Other Large Scale Litigation, 11 Duke J. Comp. & Int'l L. 179 (2001);Developments in the Law-The Paths of Civil Litigation: H. The Use of the PublicNuisance Tort Against the Handgun Industry, 113 Harv. L. Rev. 1759 (2000); CharlesJoseph Harris, Note, State Tobacco Settlement: A Windfall of Problems, 17 J.L. &Pol. 167 (2001); Bryce A. Jensen, Note, From Tobacco to Health Care and Beyond-A Critique of Lawsuits Targeting Unpopular Industries, 86 Cornell L. Rev. 1334(2001); Philip C. Patterson & Jennifer M. Philpott, Note, In Search of a Smoking Gun:A Comparison of Public Entity Tobacco and Gun Litigation, 66 Brook. L. Rev. 549(2000).

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that presumes government potency and private person vulnerabil-ity. Victory for the government plaintiffs certainly would not beinconceivable, but would be startling nonetheless.

Note that the characterization of these lawsuits as unsettling,and therefore redistributive, does not turn on the desirability of theunderlying claim for compensation. It may well be true, as Dean-Saul Levmore has suggested, that the failure of a government toregulate risky behavior may have less salience than one first mightthink. The industry producing the risky products might withholdinformation to which it has particular access and thus induce thegovernment to make suboptimal regulatory choices. Under thesecircumstances, a rule requiring retroactive compensation dissipatesthe incentive to withhold harmful information.24 But Levmore doesnot offer this explanation to capture the common sense of a widelyaccepted practice, but rather to cushion the shock of recent legaloutcomes that many find surprising.

The point is important, because it allows us to take an initial steptoward disaggregating the concept of redistribution from generalnormative judgments, as well as distinguishing the case for redistri-bution from the case for redistributive litigation. Levmore makes aconvincing argument for certain kinds of redistributions, namelythose that will induce appropriate behavior on the part of personswith private knowledge about their own risky behavior. His argu-ment, however, is not that such results are not redistributive, butrather that the redistribution produces net benefits for society as awhole.'

The structure of Levmore's argument also is significant. Itspremise is not the moral need to address an unacceptable statusquo, about which only endless argument can ensue, but rather thatcertain kinds of redistribution will change behavioral incentives ina way that will enhance overall welfare. Premises of this sort arecontestable, but also subject to some empirical verification. (Howdo people react to legal incentives? How do people anticipatechanges in the law? How much private information about risky ac-

24 See Saul Levmore, Changes, Anticipations, and Reparations, 99 Colum. L. Rev.1657 (1999).

25 Id. at 1669-73.

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tivity is hoarded?) I argue below that we should use this frameworkin assessing legal rules about redistribution.

The more general point is that-using assumptions that may at-tract broad support and in any event can be disputed withoutlapsing into a priori reasoning-some redistributions may be desir-able. It follows that a blanket rule that deters all forms ofredistribution would be costly. Not surprisingly, we cannot findsuch a rule anywhere in our law. No critique of redistributive litiga-tion, then, can rest solely on opposition to redistribution.

A second, perhaps more subtle point, is that redistribution ob-tained through litigation may be problematic in ways that otherforms of redistribution may not be. The role of specialized legalknowledge, the absence of unlimited participation rights, and thepossibility of structural biases on the part of judicial decisionmak-ers (including civil juries) may produce outcomes that do notenhance welfare and would not have passed legislative muster. Thetobacco litigation is arguably a case in point. The major producersused the settlement with the States both to advance cartelization oftheir industry (by sacrificing volume for higher prices) and to givethe States, who took a long-term stake in the industry's futurerevenues, an incentive to ward off lawsuits by third parties. The ef-fect, according to some studies, has been a net wealth transfer fromcigarette customers, who disproportionately occupy lower socio-economic strata, to general State revenues and attorneys, with lit-tle, if any, losses to the producers.26 It seems implausible that alegislative bargain would have imposed as great a cost on smokersor transferred as much wealth to the States or to lawyers.

Another instance of redistributive litigation exposes other diffi-culties. In many developing countries, the government seems tornbetween a desire to attract foreign investment and an inclination topick off attractive business opportunities from those who devel-oped them. One possible strategy for larcenous governmentsinvolves using the courts as a means of ousting the initial owners,on the theory that outcomes produced through litigation will notseem as naked an exercise of state power as would an executive

26 See Jeremy Bulow & Paul Klemperer, The Tobacco Deal, in Brookings Papers onEconomic Activity: Microeconomics 323 (Martin Neil Bailey et al. eds., 1998); IanAyres, Using Tort Settlements to Cartelize, 34 Val. U. L. Rev. 595 (2000).

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order of expropriation. Illustrative is a current dispute over theownership of the foreign copyrights of cartoons produced by a So-viet film studio between 1936 and 1989.27 Films By Jove, Inc.("FBJ"), a U.S. company, believed that a 1992 license agreement itentered into with Soyuzmultfilm Studio ("SS"), a private Russianfirm, gave it an exclusive right to show and market this body ofwork outside of Russia. FBJ then invested considerable sums in thepackaging of these cartoons for Western markets and developed asuccessful business.

A dispute over ownership of these rights arose in 1998, whenFBJ brought an infringement action against Berov, a U.S. citizenselling videotapes of the cartoons without its permission. Berov de-fended by claiming, inter alia, rights under a license granted by FederalState Unitarian Enterprise Soyuzmultfilm Studio ("FSUESMS"), afirm wholly owned by the Russian government. At about this time,a bill introduced in the Russian parliament sought to nationalizethe foreign rights to all films produced during the Soviet era; theRussian administration resisted the legislation on the grounds thatsuch a law would amount to an expropriation of private rights forwhich the government would be liable for damages? Following theadministration's lead, the legislature took no action, but the ad-ministration then initiated litigation in the Russian courts toestablish the legal status of SS and FSUESMS. SS maintained thatit was the legal successor of the state-owned film studio that hadproduced the cartoons and thus owned the films' copyrights, whileFSUESMS contended that the Soviet state had retained theserights, which then had passed to the Russian Federation and ulti-

z7Films By Jove v. Berov, 154 F. Supp. 2d 432 (E.D.N.Y. 2001), contains anextensive discussion of the Russian litigation. A reader of this opinion will learn thatFilms By Jove retained me as an expert on Russian law, and that the characterizationof the Russian litigation I offer in this Article corresponds to that I provided on behalfof my client. The U.S. trial judge appeared to accept my characterization, but infairness I should note that the expert employed by an opposing party in the case, adistinguished U.S. law school professor, offered a significantly different account of thenature and purposes of the Russian litigation.

2In addition to its constitutional obligation to compensate for expropriations,Russia has entered into several international agreements that provide forinternational arbitration in the events of disputes over seizure of a foreign investor'sproperty. E.g., Treaty Concerning the Encouragement and Reciprocal Protection ofInvestment, Jun. 17, 1992, U.S.-Russ., S. Treaty Doc. No. 102-33 (1992); Agreementon Investment Incentives, Jun. 17, 1992, U.S.-Russ., T.I.A.S. 11471.

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mately to it. The decisions of the Russian courts defy compact de-scription, but it appears that they uphold some of FSUESMS'sclaims but do not resolve the issue of who owned the copyrights in1992. It would seem that the object, although not the result, of theRussian litigation was to procure judicial decisions that would dowhat the proposed legislation would have accomplished, namelyremove the legal basis for FBJ's successful business and expropri-ate for the benefit of the Russian state a valuable, if intangible,asset.2 9

To summarize, actions by the state to redistribute private wealthmay either advance or harm general welfare. The determinants ofthe value of particular redistributions involve too many factors topermit blanket and aggressive legal rules barring redistribution,and we do not find such rules in our, or in any other country's, le-gal system. Judicial redistribution may present additional problemsthat might require particular solutions. But we also should not ex-pect to find comprehensive strategies to deter judicial innovation.

2. Suits Against the State

To illustrate the category of private suits against government,consider a lawsuit now under discussion, but not yet filed. Severalprominent academics and trial lawyers suggest they may bring aclaim for reparations on behalf of descendants of slaves." At thisstage one can only speculate about legal theories and potential de-fendants, but consider one possible path of this litigation. If anyoneowes a debt for this terrible historic injustice, it would be the sov-ereigns that maintained the institution of slavery through both lawand violence. The Constitution itself enshrined slavery, both bypromising not to ban the slave trade for twenty years after thefoundation, and by specifying the weight of slaves in the census as

29 The precise holding of the Russian court decisions was that SS had ceased to existin 1999, and that FSUESMS was a valid legal entity although not the legal successorof the former Soviet film studio that had produced the cartoons. The consequences ofthese decisions under Russian law remain uncertain, and the courts' decrees have notyet been implemented. In the U.S. litigation, the trial court determined that theRussian decisions had no bearing on the question of who had owned the copyrights in1992 and determined that FBJ had obtained a valid exclusive license. Films By Jove,Inc., 154 F. Supp. 2d at 461-76.

30 For discussion of this prospect, see Kevin Hopkins, Forgive U.S. Our Debts?Righting the Wrongs of Slavery, 89 Geo. L.J. 2531 (2001).

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equal to three-fifths of a free person.3 Given this strong authorityin favor of pre-Thirteenth Amendment slaveholding, one mightthink that all slaveholders would have a valid defense (in addition,of course, to the statute of limitations) against civil actions, leavingonly the federal and state governments as potential defendants.'

Yet however justified may be compensation paid by these gov-ernments, any recovery through litigation would requireconsiderable judicial innovation. More than a 130 years havepassed since slavery (at least in its explicit legal form) ended in theUnited States. The national government and the states had an op-portunity to make reparations at the time of abolition and yetchose not to do so. In the modestly analogous case of the Japanese-Americans who suffered imprisonment during World War II solelybecause of their race, the decision to pay compensation came fromthe political branches, not the courts. In addition, the institution ofstatutes of limitation, and the concept of finality it expresses, per-vade the legal system, yet would have to be circumvented for theslavery reparations litigation to succeed. For all these reasons, anyreparations payments resulting from a lawsuit against the federalor state governments would constitute a surprising transfer of re-sources from the general interest to private hands.

Note again that the claim about innovation is independent ofany argument about the desirability of restitution to descendants ofslaves. The issue of whether desirable redistribution should pro-ceed through legislation or litigation also does not depend on thecharacterization of this claim as surprising, except to the extent oneobjects generally to judicial innovation.3 In the case of lawsuitsthat threaten to cost the government, in contrast to cases in thefirst category, we might worry less about the lack of transparency

31 U.S. Const., art. I, § 9, cl. 1 (forbidding federal legislation on slave trade until1808); U.S. Const. art. I, § 2, cl. 3 (weighing "other Persons").

32 Levmore's argument in favor of anticipating legal change might apply here, notbecause of private information but because the most affected class of persons (theslaves) had no role in choosing the legal rule. See Levmore, supra note 24. Thisargument, however, suggests only the desirability of a rule inducing such anticipation,not its predictability.

33 See Thomas W. Merrill & Henry E. Smith, Optimal Standardization in the Law ofProperty: The Numerus Clausus Principle, 110 Yale L.J. 1, 58-68 (2000) (arguing infavor of legislative over judicial creation of new property rights).


in the litigation process and count on the government to guardadequately against outcomes that reduce total welfare.

3. Creation of a Commons

Cases like McBryde, 4 as well as the various beach access ease-ment suits that have cropped up on the two coasts, illustrate thethird category of redistributive litigation. Mathews v. Bay HeadImprovement Ass'n, a principal case in a popular property case-book, exemplifies the beach easement litigation. Inhabitants of onecommunity sued owners of beachfront property in a neighboringtown to obtain a right to cross the privately held beaches. Per-suaded by academic commentary rather than establishedprecedent, the New Jersey Supreme Court earlier had determinedthat the tidal portion of beaches not only belonged to the state, butthat the state's ownership rights required unrestricted public accessto the state's property. 6 Mathews took the logical next step,namely an implication of an access right over adjoining non-tidalbeach property in favor of the general public. As a result of thisholding, the apparent power of owners of beachfront property toexclude outsiders from crossing over their land disappeared.

Characterization of these cases as redistributive depends cru-cially on whether one considers the judicial delineation of propertyrights as sufficiently reliable to create justifiable expectations. InNew Jersey, no earlier case had announced specifically that, withrespect to beachfront property, th6 owner had the power to ex-clude the public. Rather, this power rested on strong inferencesdrawn from the general structure of common law property rights.Until the academy invoked the public trust doctrine as a means ofconverting recreational land into a commons, owners had no rea-son to believe that the state lacked the power to keep the generalpublic off of tidal beaches. Once the New Jersey courts embracedthe public trust doctrine, the implication of an access easementover adjoining land was not a completely implausible development.

34504 P.2d 1330 (Haw. 1973). See supra notes 11-16 and accompanying text.35 471 A.2d 355 (N.J. 1984), excerpted in Jesse Dukeminier & James E. Krier,

Property 816-23 (5th ed. 2002).36 The article usually given credit for starting this trend is Joseph L. Sax, The Public

Trust Doctrine in Natural Resource Law: Effective Judicial Intervention, 68 Mich. L.Rev. 471 (1970).

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But, viewed from the time before the academy had spoken, the ex-tinction of the private owner's power to exclude interloperscrossing the beach would have seemed unexpected, if not incon-ceivable.37

4. Suits to Privatize

As a matter of historical development, the law has seen many in-stances where commonly owned interests evolved into privateproperty." Such developments count as redistribution, for the samereasons that transferring assets from the public fisc to privatehands qualifies. Interests once open to enjoyment by anyone be-come closed to all but their designated owners; the shift enriches afew at the expense of the many, absent secondary welfare effectscaused by altered behavioral incentives.

Remarkably, courts rarely have instigated such transformation.As a historical matter, custom or legislation has pushed the lawaway from commons, with judges then confirming the new settle-ments. The relatively recent trend toward privatization, more oftenseen outside the United States but present within our borders, al-most always involves a legislative or administrative decision ratherthan a judicial mandate.39

At least within the common law tradition, the few instances ofjudicially imposed privatization of which I am aware involve in-formation, a commodity that by its nature requires artificialboundaries to sustain its exclugivity. Even here the cases tend to bein spurts rather than representative of broad trends. Perhaps thebest example is International News Service v. Associated Press,4"

37 Or at least several Justices have so argued. See Stevens v. City of Cannon Beach,510 U.S. 1207 (1994) (Scalia, J., dissenting from denial of certiorari); Hughes v.Washington, 389 U.S. 290,296 (1967) (Stewart, J., concurring).

38 For a seminal account, see Harold Demsetz, Toward a Theory of Property Rights,57 Am. Econ. Rev. (Papers & Proc.) 347 (1967).

39 See generally Ronald A. Cass, Privatization: Politics, Law and Theory, 71 Marq.L. Rev. 449 (1988) (analyzing status of state provision of public goods); John D.Donahue, The Privatization Decision: Public Ends, Private Means (1989) (surveyingprivatization in the United States). For discussion of judicially-imposed constraints onprivatization under U.S. law, see Clayton P. Gillette & Paul B. Stephan, Richardson v.McKnight and the Scope of Immunity after Privatization, 8 Sup. Ct. Econ. Rev. 103(2000).

40 248 U.S. 215 (1918).

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where the Supreme Court gave a news agency the right to preventits competitors from reproducing the news it had gathered. The de-cision had enormous implications for those who invest in acquiringinformation, but the courts generally have refused to fulfill them.The more typical outcome, it appears, is for the courts to await leg-islative signals before carving out exclusive rights in information.4'

5. Naked Wealth Transfers

The fifth category, like the third and fourth, involves litigationamong private parties, but these cases transfer rights from onegroup of persons to another, rather than eliminating private inter-ests in favor of the general public or creating private rights inpublic commons. The Loewen dispute is both typical of the cate-gory of naked wealth transfers and significant in its own right.42

Loewen Group Inc., a Canadian funeral services conglomerate, ne-gotiated to buy a Mississippi funeral home and then walked awayfrom the deal. The funeral home sued Loewen for breach of con-tract and fraud. A jury returned a verdict of half a billion dollars,mostly for punitive damages. Because Mississippi law conditionedthe right to appeal this verdict on the posting of a bond well in ex-

41 See, e.g., NBA v. Motorola, Inc., 105 F.3d 841 (2d Cir. 1997); United States GolfAss'n v. St. Andrews Sys., Data-Max, 749 F.2d 1028 (3d Cir. 1984); CBS v. DeCosta,377 F.2d 315 (1st Cir. 1967); Cable Vision v. KUTV, 335 F.2d 348 (9th Cir. 1964);Cheney Bros. v. Doris Silk Corp., 35 F.2d 279 (2d Cir. 1929). For a rare instance of aconstitutional attack on a congressional transfer of information rights from the publicdomain into private hands, see Eldred v. Reno, 239 F.3d 372 (D.C. Cir. 2001)(upholding the Copyright Term Extension Act of 1998), cert granted sub nom. Eldredv. Ashcroft, 122 S.Ct. 1062 (2002).

42 For a rather clichdd and, for me, implausible account of the Mississippi litigation,representing the plaintiff's attorney as a modern folk hero and the Loewen firm as agreedy and ruthless corporation determined to exploit vulnerable consumers, seeJonathan Harr, The Burial, The New Yorker, Nov. 1, 1999, at 70. For a discussion ofthe litigation in scholarly journals, see Michael I. Krauss, NAFTA Meets theAmerican Torts Process: O'Keefe v. Loewen, 9 Geo. Mason L. Rev. 69 (2000); ReneLettow Lerner, International Pressure to Harmonize: The U.S. Civil Justice System inan Era of Global Trade, 2001 BYU L. Rev. 229; Robert K. Paterson, A NewPandora's Box? Private Remedies for Foreign Investors under the North AmericanFree Trade Agreement, 8 Willamette J. Int'l L. & Disp. Resol. 77 (2000); DonWallace, Jr., State Responsibility for Denial of Substantive and Procedural Justiceunder NAFTA Chapter Eleven, 23 Hastings Int'l & Comp. L. Rev. 393 (2000).

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cess of the judgment, Loewen settled for roughly a third of the juryaward.43

Under Mississippi law at the time Loewen entered into contractnegotiations with the eventual plaintiff, there existed both a riskthat a jury might regard Loewen's negotiating behavior as indica-tive of bad faith and that an outraged jury might award punitivedamages for what it regarded as egregious misconduct. But thepossibility that a dispute over the purchase of a ten million dollarbusiness might lead to a half-billion dollar judgment did not seemplausible until it happened. This instance of litigation as ambush,with a conventional business disagreement leading to a massivemoney judgment, was extraordinary, even if not impossible toimagine.

The Loewen episode represents a type of redistribution that oc-curs because of increased unpredictability, rather than thesubstitution of an unexpected rule for a settled one. Because thecase never got beyond the trial level, it did not announce a newrule. Rather, its occurrence introduced a strong element of instabil-ity to commercial relations. It signals that firms undertakingtransactions in Mississippi, or at least firms subject to the jurisdic-tion of the court that tried the case, bear a significant legal risk.

A different category of naked wealth transfers involves instanceswhere a higher court repudiates a rule on which people had reliedand substitutes a new rule that shifts rights to different persons.The various landlord-tenant cases generated by the poverty lawmovement of the 1960s and 1970s, which endowed tenants as aclass with claims against landlords that previously had not existed,offer an example.' These cases did not simply propagate legal in-

43Notice of Claim, The Loewen Group v. United States (ICSID Case No.ARB(AF)/98/3), at http://wwww.naftaclaims.com (visited March 31, 2002). Afterdeclaring bankruptcy, Loewen then contended that the Mississippi litigationamounted to an expropriation of its property in violation of the North American FreeTrade Agreement. Under that pact, the United States must submit all expropriationclaims to mandatory arbitration before an international tribunal. An arbitration bodyestablished by the International Center for the Settlement of Investment Disputes hasruled that it has jurisdiction to consider this claim. The Loewen Group v. UnitedStates (ICSID Case No. ARB(AF)/98/3) at http://wwww.naftaclaims.com (Jan. 5,2001) [hereinafter The Loewen Group].

44 E.g., Javins v. First Nat'l Realty Corp., 428 F.2d 1071 (D.C. Cir. 1970) (imposingimplied warranty of habitability and discarding common law duty of tenant to repair);

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stability, but, to the extent the pronouncements had credibility, re-sulted in a wealth transfer from landlords to tenants (againignoring secondary effects due to incentives).

The landlord-tenant cases also remind us that even naked wealthtransfers do not necessarily constitute unwanted outcomes. I willnot reprise the extensive literature on that development, but oneshould recall that the claim that these decisions increased overallwelfare, and thus did not rest only on dignitarian arguments, hasdistinguished adherents.45 The similarity of the litigation to a oncepopular form of legislatively mandated wealth transfer from land-lords to tenants, namely rent control, also suggests itself. The point,again, is that such litigation is redistributive, whether desirable ornot.

6. Summary

These five types of redistributive litigation differ both in termsof the stakeholder and the ultimate beneficiary, but commonthemes emerge. The examples involve shifts between the govern-ment and private persons, between private and commonownership, and between private owners. But both public andcommon ownership can mask private interests; if discrete groupswould or do derive disproportionate benefits from public or com-mon ownership. The "general public" that obtained accesseasements over private beaches in the Matthews litigation consti-tuted a broad class only in the formal sense; in reality only peoplewho lived nearby but did not own beachfront property derivedsubstantial value from the outcome of the case.

Two symmetric points follow from this observation. First, all re-distributive litigation has the potential to blur into the last categoryof naked transfers, where rights pass from one discrete class of per-sons to another. Nominal ownership may obscure real interests.Second, the distinction among nominal interests-public, com-mons, or private-still has salience. Those who control either

Brown v. Southall Realty Co., 237 A.2d 834 (D.C. Cir. 1968) (finding a lease to beunenforceable when property was in violation of housing regulations).

45 Bruce Ackerman, Regulating Slum Housing Markets On Behalf of the Poor: OfHousing Codes, Housing Subsidies and Income Redistribution Policy, 80 Yale L.J.1093 (1971); Duncan Kennedy, The Effect of the Warranty of Habitability on LowIncome Housing: "Milking" and Class Violence, 15 Fla. St. U. L. Rev. 485 (1987).

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government decisions concerning litigation or who litigate on be-half of everybody (that is, in opposition to private ownership) mayhave an agenda apart from that of those who would gain materiallyfrom the rule they seek (for example, fund raising, career ad-vancement, ideological argumentation, accumulation of power, andinfluence). Each of these points has a bearing on how the legal sys-tem might respond to redistributive litigation.

III. THE LAW OF PROPERTY SAFEGUARDS-TAKINGS DOCTRINE,OUTSIDER PROTECTION, AND EXPROPRIATION LAW

If the judicial system holds out to litigants the possibility of re-distribution, whether in ways that benefit society or that harm it,what doctrines check and contain this potential? There is, to besure, much in the structure of the common law that limits judicialinnovation-the rhetoric of stare decisis, a concern about honoringlegitimate expectations, the sense of legislative prerogatives. Thesenorms not only limit what trial courts may do, but provide generalauthority for appellate courts to rein in their subordinates. On oc-casion, however, these norms do not suffice to deter courts fromsupporting significant redistributive projects. What happens then?

I consider two contemporary bodies of law-takings doctrineand international norms regarding expropriation-that address theproblem of redistribution. I first explore their general boundaries,and then consider their applicability to the judiciary. Each is suffi-ciently unsettled to admit both aggressive policing of redistributivelitigation and benign neglect. I note in particular how U.S. law hasbolstered substantive rules limiting judicial creativity with forum-shifting procedures, particularly the removal jurisdiction of thefederal courts, as a means of constraining inappropriate judicialbehavior. International arbitration presents a parallel strategy.

A. Takings Doctrine and Its Neighbors

Establishing a link between takings doctrine as we find it and theproblem of redistributive litigation requires some unpacking. Theauthors of the Constitution unquestionably sought to design a na-tional state that would provide a secure foundation for privatecommercial activity. In particular, the Constitution addressed theconcern that government would act as the agent of groups seeking


to dispossess others. The limitations on federal and state powerboth overlapped and differed. Article I, Section 10 restricts thepower of states to interfere with protected legal interests by pro-hibiting ex post facto laws and laws "impairing the Obligation ofContracts." As for the federal government, Article I, Section 9prohibits federal ex post facto laws, and the Fifth Amendment barsfederal deprivations of property without due process of law andtakings of private property "for public use, without just compensa-tion."' But after some early uncertainty, the Supreme Courtrejected interpretations of both the Ex Post Facto Clauses and theImpairment Clause that would have made them sweeping bulwarksagainst all redistributive governmental action. At the same time,the Court showed itself ready to oppose certain kinds of expropria-tion, namely those targeted at outside investors. By the end of thenineteenth century, the Court had channeled its opposition to re-distribution into two doctrinal categories: substantive due processand the Takings Clause (applicable to the states through the al-chemy of due process). With the ebbing of substantive due process,the takings doctrine became the principal constitutional impedi-ment to redistribution.47

This, at least, is the story that gives our current constitutionalmoment an aura of inevitability. A closer look at the history ofconstitutional protection against redistribution suggests a some-

46 Article I § 9 also constrains federal power to tax by requiring that all directtaxation take the form of a capitation tax. While this limitation is of a piece with abroader story about the federal Constitution as a compact protecting property, itsmeaning and history go well beyond the scope of our inquiry here.

47 In theory, takings doctrine applies equally to federal and state governmentalaction. In practice, however, the cases suggest greater scrutiny of state and localdecisions. Of the twelve takings claims upheld by the Supreme Court over the last twodecades, eight involved state or local, rather than federal action (although noneinvolved judicial takings). See Palazzolo v. Rhode Island, 533 U.S. 606 (2001); City ofMonterey v. Del Monte Dunes, 526 U.S. 687 (1999); E. Enters. v. Apfel, 524 U.S. 498(1998) (federal taking); Phillips v. Wash. Legal Found., 524 U.S. 156 (1998); Babbitt v.Youpee, 519 U.S. 234 (1997) (federal taking); Dolan v. City of Tigard, 512 U.S. 374(1994); Lucas v. S.C. Coastal Council, 505 U.S. 1003 (1992); Nollan v. Cal. CoastalComm'n, 483 U.S. 825 (1987); First English Evangelical Lutheran Church v. Countyof L.A., 482 U.S. 304 (1987); Hodel v. Irving, 481 U.S. 704 (1987) (federal taking);Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984) (federal taking); Loretto v.Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982). Babbitt and Hodel areessentially the same case, with the later decision rejecting as inadequate the responseof Congress to the earlier one.

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what more complex series of developments. The nineteenth-century cases reveal a tension between two conceptions of propertyrights protection, both directed more against the states than againstthe federal government. On the one hand, the Supreme Court be-lieved in the existence of vested rights and invoked both generalnotions of legality and the Impairment of Contracts Clause to re-verse state encroachments on these interests. On the other hand,the Court envisioned the Constitution as creating a common na-tional market in the face of states that might prefer to extract localbenefits to the cost of the national system by exploiting outsiderinvestors. It responded to the threats of predatory localism with amixture of substantive rules and procedural moves. Separatingthese two strands allows us to appreciate a variety of strategiesavailable to the courts to deter certain kinds of redistribution, in-cluding that manifested in litigation.

1. Redistribution and Vested Rights

The early jurisprudence of the Supreme Court regarded certainlegal interests as foundational, in the sense that the expectationsprivate persons had in the continued existence of these intereststranscended any legislative prerogative. The leading case isFletcher v. Peck,48 where the Court invalidated an act of the Geor-gia legislature that had retracted land transfers procured from anearlier state legislature through bribery. Writing for the Court,Chief Justice Marshall did not doubt the strength of the state's in-terest in rectifying a fraud, but argued that innocent purchasers forvalue stood on a different footing from those who participated inthe outrage. Innocent purchasers could invoke the principle, de-rived from the common law and conceptions of natural justice, thatlegislatures cannot negate vested land titles without compensa-tion.49 Marshall declared that such "general principles which arecommon to our free institutions" empowered the Court to inter-vene against the state.0

48 10 U.S. (6 Cranch) 87 (1810).49 Id. at 135.50 Id. at 139. The alternative holding of the Court, that the Impairment of Contracts

Clause invalidated Georgia's attempt to reclaim fraudulently conveyed land, hascome down to us as the principal teaching of the case. Mark Graber hasdemonstrated, however, that in the nineteenth century, the "general principles"

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In justifying this outcome, Marshall hinted at a theory of consti-tutional authority that responds to the vices of unrestrained localpower:

Whatever respect might have been felt for the state sovereign-ties, it is not to be disguised that the framers of the constitutionviewed, with some apprehension, the violent acts which mightgrow out of the feelings of the moment; and that the people ofthe United States, in adopting that instrument, have manifesteda determination to shield themselves and their property fromthe effects of those sudden and strong passions to which menare exposed. The restrictions on the legislative power of thestates are obviously founded in this sentiment; and the constitu-tion of the United States contains what may be deemed a bill ofrights for the people of each state.5

That which in Marshall's conception "may be deemed a bill ofrights" ran not against the federal government, as did the first tenconstitutional amendments, but against the states. And the sourceof these restrictions was not only the text of the Constitution, butalso prior principles of which the common law of property and con-tract served as an expression.

This strand of constitutional jurisprudence, however, did not de-velop into a full-blown commitment to constitutional preservationof the common law. Other cases of the Marshall Court focused onthe express language of the Constitution, in particular the wordsfound in Article I, Section 10.52 References to general principles ornatural law became less frequent, as the Marshall and, later, TaneyCourts concentrated on the Impairment of Contracts Clause.53

asserted by Chief Justice Marshall's opinion mattered more. Mark A. Graber, NakedLand Transfers and American Constitutional Development, 53 Vand. L. Rev. 73,78-85(2000). See Green v. Biddle, 21 U.S. (8 Wheat.) 1, 89 (1823) (citing "universal law ofall free governments"); Terrett v. Taylor, 13 U.S. (9 Cranch) 42, 51 (1815) (noting"the fundamental laws of every free government"). But see 3 & 4 G. Edward White,The History of the Supreme Court of the United States: The Marshall Court andCultural Change, 1815-35, at 659 (1988) (arguing that the Marshall Court invokedthese general principles only in cases coming from the lower federal courts, and notwhen reviewing state court decisions).

51 Fletcher, 10 U.S. (6 Cranch) at 137-38.52 See Tr. of Dartmouth Coil. v. Woodward, 17 U.S. (4 Wheat.) 518 (1819); Sturges

v. Crowninshield, 17 U.S. (4 Wheat.) 122 (1819); New Jersey v. Wilson, 11 U.S. (7Cranch) 164 (1812).

53 The most significant, as well as the most disastrous, case of the Taney Court, DredScott v. Sandford, 60 U.S. (19 How.) 393 (1857), appears to rest on the proposition

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In retrospect, the "general principles" strategy embodied inFletcher presented two problems, one functional and one doctrinal,that explain the transition to the Impairment of Contracts Clause.As the modem era emerged, the Court confronted the increasinglyobvious attractions of legal dynamism. With the territory andpopulation of the country growing and radically new technologiesappearing, the legal system needed to do more than exercise a vigi-lant guard over the status quo. 4 This functional need encountereda doctrinal difficulty. The "general principles" argument was toocapacious to provide much useful guidance to an institution inter-ested in threading its way between the need to protect stability andthe demands of a rapidly changing social and economic environ-ment. The specific language of the Constitution provided greaterclarity, but at the cost of diminishing the role for judicial oversightof private law.

As the later history of the Supreme Court's use of the Impair-ment of Contracts Clause illustrates, a shift in focus from propertyto contract allows governments (including the judiciary) to maketwo moves that have the net effect of diminishing the stability ofprivate legal interests. First, government can enact new rules pro-spectively, thereby restructuring the outcome of future contracts.'5Second, courts can invoke interpretive rules to diminish the scopeof pre-existing contracts and, therefore, the extent of their constitu-tional protection. 6 By the end of Marshall's tenure, both of these

that there exist certain property rights with which it is beyond the power ofgovernment to interfere. But the governmental interference there involved federallegislation, not state law.

54 See 3 & 4 White, supra note 50, at 668-73.55 E.g., Ogden v. Saunders, 25 U.S. (12 Wheat.) 213 (1827) (applying debtor relief

rules prospectively does not impair contracts).56 E.g., Charles River Bridge v. Warren Bridge, 36 U.S. (11 Pet.) 420 (1837) (finding

no implied reservation of monopoly right in bridge charter); Providence Bank v.Billings, 29 U.S. (4 Pet.) 514 (1830) (finding no implied reservation of permanent taxexemption in bank charter). The Court also found it possible to distinguishcontractual rights from contractual remedies so as to allow governments greaterleeway over the latter. This move diminished the protection accorded contractualinterests, but not in a way that would be any different if applied to property. SeeBronson v. Kinzie, 42 U.S. (1 How.) 311, 315-16 (1843) (stating that States couldchange contractual remedies but not contractual obligations); Watson v. Mercer, 33U.S. (8 Pet.) 88 (1834) (holding that a change in requirements for recordation ofproperty interests did not alter underlying property right and facilitated protection ofcontractual expectations).


strategies had become acceptable, allowing a growing body of statelegislation to survive Impairment of Contracts review.

Perhaps just as important is the dog that did not bark. The logicand rhetoric of Fletcher, by referring to a bill of rights protectingprivate persons from the states, raised the possibility of some con-gruence between those protections explicitly guaranteed againstthe federal government and those implied against the states. But inBarron v. Baltimore, 7 the Court emphatically renounced the appli-cation of the Takings Clause of the Fifth Amendment to anygovernment besides the federal. The facts of the case may hint atwhy the Court did not feel compelled to make this move. Theowner of the largest and most profitable wharf in an economicallyimportant harbor sued the city for losses caused by silting. The citydid not deliberately seek to injure the wharf; rather, the gradualexpansion of the city and the building of its streets produced therunoff. Nothing in the case suggests that Barron was anything otherthan a prosperous and locally influential burgher. Moreover, thesilting damaged all owners of harbor property, although Barronmay have suffered the most. The Court saw no need to intervene incircumstances where the injured party seemed capable of lookingafter his own interests. Whatever Fletcher's "general principleswhich are common to our free institutions" may have meant toMarshall, they did not justify any judicial intervention on Barron'sbehalf."

It took the adoption of the Fourteenth Amendment, signifyingthe revolution in federal-state relations that the Civil War effected,followed by the passing of another generation for the Court toagain take up the cause of broad opposition to redistribution, thistime under the flag of substantive due process.59 But in the interim,another tendency emerged. Even as its interest in protecting vestedrights vel non receded, the Court showed heightened interest inguarding against a different threat to property, namely predatorylocalism.

57 32 U.S. (7 Pet.) 243 (1833).5s Moreover, Barron came from a state court, and Chief Justice Marshall did not

invoke these principles in such cases. See 3 & 4 White, supra note 50, at 659.59 For a valuable recent reappraisal of this period in our constitutional history, see

John Harrison, Substantive Due Process and the Constitutional Text, 83 Va. L. Rev.493 (1997).

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2. Outsiders and Predatory Localism

As part of its broad (if self-designated) role in policing theboundaries of the national common market, the Supreme Court in-creasingly confronted instances where state and local governments,including the judiciary, engaged in a kind of bait-and-switch tactic.Outsiders would invest resources and capital, only to discover thatthe rules had changed and that locals now owned everything. Thiskind of predatory localism often, although not inevitably, involvedstate courts as the main source of the switched law. The Court re-sponded with a variety of strategies, which only at the end of thenineteenth century became anchored in the Takings Clause.

The early perception by the federal judiciary of its obligation toaddress localist transgressions of conventional property rights inpart reflected the forces that brought about the Constitution, espe-cially the felt need to protect rights derived during Britishgovernance against state impairments. One of the Court's earliestcases illustrates the connection. In Ware v. Hylton," the Courtruled that the 1783 Treaty of Paris, which established the terms ofpeace between Great Britain and the former colonies, revived thelegal enforceability of a bond given to a British subject before theRevolution. After the outbreak of hostilities, a Virginia statute hadsequestered the bond, in effect allowing the local debtor to dis-charge his obligation to the English creditor at a deep discount.The Court understood that the Constitution owed its existence inpart to the inability of the old Confederation to hold individualstates to the obligations of that Treaty, a failing that discouragedforeign investment and contributed to economic distress. This un-derstanding led the Court to draw two important, but notinevitable implications: Virginia's ratification of the Treaty workedan implied repeal of inconsistent legislation; and the courts of theUnited States, a sovereignty that did not exist at the time of theTreaty, had the authority to invoke the Treaty to prevent enforce-ment of such legislation.6'

60 3 U.S. (3 Dall.) 199 (1796).61 The latter conclusion seems to have rested on an easy, but not foreordained,

reading of Article VI, Clause 1, which states that "Engagements entered into, beforethe Adoption of this Constitution, shall be as valid against the United States underthis Constitution, as under the Confederation." Under the Confederation, however,there existed no Supreme Court that could intervene to invalidate state legislation in

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Inchoate in the decision, although not stated in the opinion it-self, is an intuition about the collective action problem that existswhenever a confederation seeks to make an international commit-ment. Any state that refused to comply with the Paris Treaty mightgarner local benefits by protecting persons who profited from theearlier seizure of British property. The costs of such opportunismwould fall on the several states, all of which would suffer from thedegradation of the Treaty commitment. Every state would facethese skewed incentives and thus tend to dishonor the obligation torespect the property rights of Loyalists, even though collectivelythe states might do better by enhancing the value of their commit-ments. By asserting the power to negate state law that transgressedthe Treaty, the Court proposed itself as the nexus of the collectiveaction problem's solution.'

After Marshall left the scene, the Court developed yet anotherbasis for intervening to protect outsiders from local attacks on theirproperty. Under the regime of Swift v. Tyson,63 the Court deemedit proper for federal courts to invoke general constitutional law toreverse state court decisions hostile to the property rights of out-siders. Representative is Pumpelly v. Green Bay Co.,' a claim forcompensation for flooding caused by the construction of a statedam. In similar circumstances, the Wisconsin Supreme Court haddenied relief where a property owner suffered consequential inju-ries as a result of public improvements.65 Disregarding this

conflict with the Confederation's international engagements. Antifederalists (not agroup for which the Court of the day had much sympathy) might have argued thatSupreme Court enforcement made the Confederation's former engagements more,rather than equally, valid.

62A parallel development during the nineteenth century was the growth of thefederal courts' activity as protectors against discriminatory legislation and regulation,typically under the aegis of what we now call the dormant Commerce Clause. See,e.g., Minnesota v. Barber, 136 U.S. 313 (1890); Welton v. Missouri, 91 U.S. 275 (1876);The Passenger Cases, 48 U.S. (7 How.) 283 (1849); Gibbons v. Ogden, 22 U.S. (9Wheat.) 1 (1824). These cases reflect some of the same concerns as those dealing withpredatory localism, but differ in two significant respects. First, the kinds ofdiscrimination they confronted tended not to be predatory, in the sense that priorinvestment by outsiders was not the main target. Rather, their goal was to keepoutsiders out. Second, the courts in these cases policed legislative and administrativeoutcomes, rather than judicial lawmaking.

63 41 U.S. (16 Pet.) 1 (1842).64 80 U.S. (13 Wall.) 166 (1871).65 Alexander v. Milwaukee, 16 Wis. 247 (1862).

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precedent, the Supreme Court imputed to Wisconsin an intentionto honor what the Court saw as a universal principle-governmentobligation to provide just compensation for appropriated prop-erty.

66

For our purposes, what is interesting about this line of cases isthat it targeted predatory judicial activity as much as that of statelegislatures and administrative agencies. The Court did not directlyreview state decisions that deviated from general constitutionallaw. Rather, it allowed persons already in federal courts-which,given the jurisdiction at that time, meant diversity cases-to find away around redistributive state precedent.

This reliance on "general" constitutional law as a check onpredatory local works made sense only if potential victims of redis-tributive litigation had ready access to the federal courts. Swift v.Tyson, one should recall, did not require state courts to follow fed-eral interpretation of the general law, and thus provided nocomfort to those who could not escape the jurisdiction of the localcourts. As Professors Ann Woolhandler and Michael Collins havedocumented, the nineteenth-century Supreme Court saw to it thatout-of-state investors would have easy access to federal jurisdic-tion. Its strategies included expanded interpretation of federalcourt diversity and removal jurisdiction (all to the benefit of out-sider investors) and greater control over the federal civil jury.67

This combination of substantive doctrine and jurisdictional fine-tuning positioned the federal courts as a bulwark against redis-tributive litigation targeted at outsiders.

The point is important, because the pattern reappears when weturn to international law's protection of foreign investors. Investorprotection can come not only from substantive rules, but from achoice of venue.68 To understand how the Supreme Court has

66 Pumpelly, 80 U.S. (13 Wall.) at 182. See, e.g., Louisiana v. Pilsbury, 105 U.S. 278

(1881); Butz v. City of Muscatine, 75 U.S. (8 Wall.) 575 (1869); Rogers v. City ofBurlington, 70 U.S. (3 Wall.) 654 (1865); Havemeyer v. Iowa County, 70 U.S. (3Wall.) 294 (1865); Gelpcke v. City of Dubuque, 68 U.S. (1 Wall.) 175 (1863); Collins,supra note 8, at 1289-91.

67 For a full account of these developments, see Ann Woolhandler & Michael G.

Collins, The Article III Jury, 87 Va. L. Rev. 587 (2001).68 Hence modem investor protection treaties not only provide for substantive rules

governing state expropriation, but typically authorize binding arbitration of disputes


grappled with the problems of redistributive litigation, we must fo-cus simultaneously on takings law and neighboring doctrines offederal jurisdiction.

3. The Emergence of Modern Takings Doctrine

The final step in assembling our present jurisprudence involvedelevating "general" constitutional law into "federal" constitutionalinterpretation. At the end of the nineteenth century, the Courtfound in the Due Process Clause a means for making this move. InChicago, Burlington & Quincy Railroad Co. v. Chicago,69 the Courtdeclared that any legal process through which a state or local gov-ernment acquired property must contain a method for awardingjust compensation. Moreover, it was not enough for state law topromise compensation: The Supreme Court had the authority toreview the condemnation proceeding to determine whether it com-plied with the federal standard.

With Chicago, Burlington, the Court completed the assembly ofthe doctrinal elements of modem takings law. The Due ProcessClause now looked to the same jurisprudence as did the TakingsClause of the Fifth Amendment: A view of the legal landscape thatsaw the common law of property as foreground and governmentalpower to rearrange property rights as limited by a compensationobligation. But the Court's opinion also implied a limitation on thedoctrine that the earlier "general principles" cases had suggested.The ability of the property owner to participate in the political de-cisionmaking leading up to the taking would influence both thedetermination as to whether a compensable taking had occurredand what constituted just compensation.

Chicago, Burlington embodies both of these points. Illinois hadlaws on the books that required just compensation for governmenttakings. The railroad claimed that it had suffered from the city'scondemnation of its right-of-way as part of a street-widening pro-ject. The crux of the case was the Illinois court's determination thatone dollar would fully compensate the railroad for any injury suf-fered. If any violation of the Takings Clause occurred, it was due tojudicial action, not legislative or executive. Accordingly, the Su-

by international organs. One example of this strategy is NAFTA Chapter 11, which Idiscuss infra notes 102-108 and accompanying text.

69166 U.S. 226 (1897).

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preme Court justified its jurisdiction by asserting that the TakingsClause governed judicial conduct, not just the actions of the politi-cal branches. This doctrinal stretch strengthens the functional tiesbetween Chicago, Burlington and the Pumpelly line of cases, wherethe Court saw a particular role for the federal judiciary in policingstate court decisions that smacked of outsider predation.

In one sense, however, this link is formal and somewhat incom-plete. Chicago, Burlington did not involve a taking effectedthrough a surprising shift in judicial interpretation, and without thecity's decision to widen its streets (an executive rather than judicialaction) the question of a taking could not have arisen. It fell tolater cases to determine whether the newly restructured TakingsClause, available now as a tool for federal court supervision ofstate governments, would provide a general basis for federal con-trol over excessively innovative judicial activity. These cases, however,provide something less than a clear response to this question.

In Muhiker v. New York & Harlem Railroad Co.,7° the Courtcame as close to holding that the Takings Clause provides a meansof supervising judicial innovation as it ever has. An Act of the NewYork legislature had required the building of an elevated railroadin place of a surface car. Owners of adjoining property sued thestate for violations of their easements of sunlight and air. EarlyNew York precedent had recognized these easements, but inMuhlker, the state's highest court had interpreted the statute call-ing for the building of the railroad as a repudiation of the existenceof such rights. The Supreme Court reversed, holding that NewYork had an obligation to compensation the owners of the ease-ments. The majority explained:

We are not called upon to discuss the power or the limitationsupon the power, of the courts of New York to declare rules ofproperty or change or modify their decisions, but only to decidethat such power cannot be exercised to take away rights whichhave been acquired by contract and have come under the pro-tection of the Constitution of the United States.71

7o 197 U.S. 544 (1905).71 Id. at 570. Justice Holmes, writing in dissent, protested that it "certainly never has

been supposed to mean that all property owners in a State have a vested right that nogeneral proposition of law shall be reversed, changed or modified by the courts if the

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New York could let its common law develop as it pleased, butwhen those developments led to the destruction of previously rec-ognized property interests, the Takings Clause required thepayment of compensation.

Later cases backed away from the rhetoric of Muhiker, althoughnot necessarily its function. Typical is Brinkerhoff-Faris Trust &Savings Co. v. Hill.72 The Supreme Court of Missouri had sought todefeat a lawsuit attacking discriminatory taxation of a corporationby asserting that the plaintiff had failed to seek pre-assessmentadministrative relief, thereby precluding judicial review of itsclaim. Earlier precedent of that court had seemed to make clearthat no pre-assessment procedure existed. The Supreme Court ofthe United States declared that the Missouri court had failed to af-ford the plaintiff due process of law by penalizing it for failing toanticipate a reversal of well-established procedural rules. In de-fending this holding, Justice Brandeis used language that anticipatedhis Erie opinion, then eight years in the future:

It is true that the courts of a State have the supreme power tointerpret and declare the written and unwritten laws of theState; that this Court's power to review decisions of state courtsis limited to their decisions on federal questions; and that themere fact that a state court has rendered an erroneous decisionon a question of state law, or has overruled principles or doc-trines established by previous decisions on which a party relied,does not give rise to a claim under the Fourteenth Amendmentor otherwise confer appellate jurisdiction on this Court.73

Because the Court held that what Missouri had done had deniedthe bank access to any judicial process in violation of the federalConstitution, Brandeis' observation, although fascinating, had nobearing on the outcome of the case.

consequence to them will be more or less pecuniary loss." Id. at 574 (Holmes, J.,dissenting). His rejoinder strengthens the argument that, in spite of the majority'sconfusing formulation of its holding, the decision rested on takings doctrine ratherthan the Impairment of Contracts Clause.

72 281 U.S. 673 (1930). See Thompson, supra note 7, at 1463-67.73Brinkerhoff-Faris, 281 U.S. at 680 (citations omitted). Cf. Erie R.R. Co. v.

Tompkins, 304 U.S. 64 (1938) (clarifying limits on power of federal courts to interpretstate laws).

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Two years later, Justice Cardozo's opinion in Great NorthernRailway v. Sunburst Oil & Refining Co.74 also seemed to suggestthat federal courts had no authority to review state court interpre-tations of state law, although again the suggestion was superfluousto the decision. Montana's Supreme Court had interpreted thestate's railroad tariff statute as allowing retroactive attacks on filedrates, if a court found the filed rate unreasonable. In a later case,that court ruled that it had misinterpreted the statute, and that, inthe future, relief for unreasonable but filed tariffs could be pro-spective only. But because the parties had contracted under theearlier interpretation of the statute, the shipper had a right to seekrestitution for overcharges. Cardozo argued that the state court hasacted just like a legislature by making its changes in the law pro-spective, and that such behavior violated no interest protected bythe Constitution.

Both Brinkerhoff-Faris and Great Northern Railway anticipatedtwo key aspects of Erie. First, the Court conceived of judicial law-making as resting ultimately on jurisdictional competence: Thepower to announce rules of decision could not exceed the power togovern. Implicit in both opinions is the core idea that federal courtslacked the capacity to develop and impose rules in areas wherefederal lawmaking power, as opposed to federal court jurisdiction,did not go. Second, judicial and legislative lawmaking were, from aconstitutional perspective, equivalent: State courts could adoptrules that were within the capacity of the state legislatures to enact,and would receive the same kind of federal constitutional analysisas did legislative enactments. In the context of Great NorthernRailway, this posture suggested greater freedom of action for statecourts. But the structure of the argument also contained a negativepregnant: State courts could not go where state legislatures couldnot. This last point became critical thirty years later, when interestin constructing a doctrine of judicial takings revived.

In the immediate aftermath of Erie, during the emergence of theNew Deal Court, the suggestion that federal courts could guardagainst excess state court creativity would have cut against thegrain. That period generally was one where the Court felt no needto defend the interests of capital against localist encroachments.

74 287 U.S. 358 (1932).

[Vol. 88:789826


Congress, a national body, had become the champion of economicregulation. If the Court needed to police, or at least disregard, statecourts, it could avail itself of its power to interpret federal statutes.The great nationalizing force of the Second World War also mayhave dissipated the concern that predatory localism still mattered.As a more homogenous national culture appeared to emerge out ofthe cataclysm, members of the Court may have come to believethat its vigilance against crude efforts to expropriate outsiders nolonger was necessary.

By the 1960s, however, the criminal procedure and civil rightsrevolutions had given the Court new reason to distrust the states,including the state judiciary. The more familiar of its responses wassubstantive, principally by federalizing much of the law of policeinvestigation through the process of constitutional interpretation.75

Perhaps less well remembered is the Court's alternative strategyfor displacing distrusted state court determinations. Through a re-markably creative revision of habeas corpus jurisdiction, the Courtexpanded federal court review of state criminal proceedings.76 Thismove in some respects paralleled the nineteenth century's ex-panded federal court review of investor exploitation cases, not bydisplacing state courts so much as by removing any sense of finalityfrom their decisions."

What underlay these developments was a concern about a dif-ferent kind of predatory localism. The outsiders who inspired theCourt's sympathy no longer were strangers to the community, butrather longstanding members who by dint of race and poverty borespecial burdens and stigma. The general structure of the response,however, was the same-new substantive doctrines and expanded

75 See William J. Stuntz, The Substantive Origins of Criminal Procedure, 105 YaleL.J. 393 (1995) (explaining the function of constitutional criminal procedure).

76 Fay v. Noia, 372 U.S. 391 (1963); Brown v. Allen, 344 U.S. 443 (1953); Paul M.Bator, Finality in Criminal Law and Federal Habeas Corpus for State Prisoners, 76Harv. L. Rev. 441 (1963); Barry Friedman, A Tale of Two Habeas, 73 Minn. L. Rev.247 (1988).

77 The adequate-and-independent-state-ground cases of that period also reflected awillingness to disregard state judicial decisions, even on matters of adjectival lawnominally left to their competence. E.g., Henry v. Mississippi, 379 U.S. 443 (1965);Bouie v. City of Columbia, 378 U.S. 347 (1964); NAACP v. Alabama ex rel. Patterson,357 U.S. 449 (1958).

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federal court jurisdiction, working in tandem to displace feckless, ifnot arbitrary and discriminatory, state courts.

For the most part, this newfound suspicion of the states and statejudiciaries did not find its way into doctrines protecting propertyrather than liberty. Takings law generally languished during thisperiod, including consideration of the concept of judicial takings.In 1967, however, Justice Stewart argued for a connection betweenthe takings law and the Court's heightened skepticism toward statejudges. Using an argument that had its intellectual antecedents inGreat Northern Railway, he argued that sudden and unexpectedchanges in state law precedent could constitute a taking of prop-erty: "For a State cannot be permitted to defeat the constitutionalprohibition against taking property without due process of law bythe simple device of asserting retroactively that the property it hastaken never existed at all.""8 If state courts shaped the substantivelaw as much as state legislators, then they should face the sameconstraints on their lawmaking powers as legislators. Stewart couldadvance this proposition without specifying the particular contentof takings doctrine.

Stewart's argument, for all its apparent coherence, did seem outof place in a period when courts generally invited critical reexami-nation of settled property doctrine. During the late 1960s, both theunfolding poverty law movement, strong in some state courts andtriumphant in the academy, and the emergence of a nascent envi-ronmental movement prompted some judges to recognize newproperty norms and to reject conventional assumptions about thepriority of private control as the essence of property. Whether byrecognizing the right of guest workers to meet with activists overthe landowner's objections,79 imposing a warranty of habitabilityon landlords and tenants,8" or discovering a right of public access toprivately owned beaches,81 these courts broadened the sphere ofpublic authority and access at the expense of private ordering.Stewart's claim threw down a gauntlet. If his position were to be

78 Hughes v. Washington, 389 U.S. 290,296-97 (1967) (Stewart, J., concurring).79 State v. Shack, 277 A.2d 369 (N.J. 1971).1 Javins v. First Nat'l Realty Corp., 428 F.2d 1071 (D.C. Cir. 1970), cert. denied, 400

U.S. 925 (1970).1 Matthews v. Bay Head Improvement Ass'n, 471 A.2d 355 (N.J. 1984), cert.

denied, 469 U.S. 821 (1984).


taken seriously, none of these moves could proceed without someform of compensation to the property owner.

Despite its respectable antecedents and attractive implications,Stewart's suggestion remains only that. In the past decade, severalJustices, writing in dissent or from a denial of certiorari, embracedStewart's assertion that takings doctrine applied fully to judiciallawmaking. 2 Otherwise, the Court has said nothing. Some scholarssupport at least parts of his argument, and a few lower court deci-sions have climbed onto the bandwagonY In the last fifteen years,takings doctrine has acquired a new bite, as the Court once againhas taken seriously the need to constrain local regulators.8'Whether this new vigilance will extend to judicial regulation re-mains undetermined. Stewart's equation of judicial with othergovernmental takings continues out there, not quite accepted doc-trine but never directly repudiated by the Court. It describes apossibility, a space for argument.

In Part IV, I return to the issue of whether Stewart's position de-serves serious consideration, and what the concept of judicialtakings might suggest about takings doctrine generally. But beforeexploring those questions, we must review that body of law withwhich takings doctrine resonates both historically and conceptu-ally, namely the protection of foreign investors from expropriationunder international law. Here, unlike takings law, tribunals have

82 Stevens v. City of Cannon Beach, 510 U.S. 1207 (1994) (O'Connor and Scalia, JJ.,dissenting from the denial of certiorari); First English Evangelical Luterhan Church v.County of Los Angeles, 482 U.S. 304,334 n.11 (1987) (Stevens, J., dissenting).

83 See Robinson v. Ariyoshi, 753 F.2d 1468 (9th Cir. 1985); Sotomura v. County ofHawaii, 460 F. Supp. 473 (D. Haw. 1978); cf. Bonelli Cattle Co. v. Arizona, 414 U.S.313 (1973) (applying federal law to right in land formerly covered by navigable waterto avoid determination of whether state court determination created a compensabletaking); Corp. of Presiding Bishop of Church of Latter-Day Saints v. Hodel, 830 F.2d374 (D.C. Cir. 1987) (assuming that gross error or arbitrary action by state courtregarding claim to land would constitute constitutional violation but upholding actionof Samoan courts); Cherry v. Steiner, 716 F.2d 687 (9th Cir. 1983) (embracing Stewartposition but upholding action of Arizona courts); Reynolds v. Georgia, 640 F.2d 702(5th Cir. 1981) (accepting Stewart's position but dismissing claim on jurisdictionalgrounds); Williams v. Adkinson, 792 F. Supp. 755 (M.D. Ala. 1992) (same), aff'dwithout opinion, 987 F.2d 774 (11th Cir. 1993); Hay v. Bruno, 344 F. Supp. 286 (D.Ore. 1972) (embracing Stewart's position but upholding action of Oregon courts);Thompson, supra note 7, at 1468-72. See also Bederman, supra note 9 (discussingcases).

4 See cases cited supra note 44.

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confronted the question of whether limits apply to judicial lawmak-ing, and answered strongly in the affirmative.

B. Expropriation Law

There exist two obvious objections to the use of takings law as abulwark against predatory localism. First, the language of theclause, as well as much of the last century's application and inter-pretation of it, does not suggest a distinction among classes ofpersons more or less vulnerable to economically harmful govern-mental actions. It addresses property, not owners, and it remains astretch to suggest that the level of protection might turn on whothe owner is." Second, in spite of the history sketched above, itseems rather odd to find, in a provision designed to limit federalpower, a license for federal courts to intervene against overly en-thusiastic local governments.

One might avoid these objections, if not surmount them entirely,by demonstrating that takings doctrine has both a historic andfunctional connection to a body of law that unambiguously is aboutprotecting specific classes of owners from predatory localism. Thesource of this connection is the international law regarding dutiesowed to foreign investors. The framers of the Constitution took uptheir task in part as a response to the inability of the Confederationto goad the several states into providing minimum standards of se-curity to foreign, largely British, commercial interests. A doctrineof foreign investor protection already existed in international lawand informed the framers both thematically and directly.

In the previous Section, I noted that American takings law be-gan with a classic international law problem, namely the dutiesowed by a host state to a foreign investor. Ware v. Hylton,"6 theearliest Supreme Court case that struck down a local law in favorof property rights, relied on an international treaty to supplant astate statute and to protect a foreigner's property. England, thehome of capital exporters, needed some assurance that the newly

85 A stretch, however, is not the same as an insurmountable obstacle. One mightlook by analogy to equal protection doctrine. The language of the Equal ProtectionClause does not by its terms distinguish among classes of beneficiaries, but it hasbecome a commonplace that the level of judicial scrutiny depends entirely on thestatus of the victims of differential treatment.

s6 3 U.S. (3 Dall.) 199 (1796).

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revolutionary state would not use the rupture in sovereignty-thetransfer in authority from King George to the colonialists-as anoccasion for rearranging property rights to the disadvantage of hersubjects.

During the early days of the Republic, the United States enteredinto similar commitments. Thus, the 1819 U.S.-Spanish Treaty ofAmity, Settlement and Limits committed the United States tohonor the grants made by the Spanish Crown with respect to theland it acquired under that compact.' As with the 1783 ParisTreaty, the United States conceded that its sovereignty came bun-dled with an obligation to respect property rights established underprior regimes.

This kind of arrangement-an express treaty between nations,enforceable by local courts, containing a commitment to protectthe property of each other's subjects-is fundamental, but not theonly way in which expropriation law has manifested itself. As itsrole changed from host of foreign investment (second only to Ar-gentina as a destination for British capital during the nineteenthcentury) to a capital exporter, the United States began to see theappeal of the traditional British argument that the obligation of asovereign to respect a foreigner's property rested on norms of in-ternational law that are fundamental and prior to treatycommitments. In a series of negotiations and arbitrations duringthe first decades of the twentieth century, the United Statespressed the claim that a nation could seize from a foreign investorproperty found on its territory only if the expropriation had a pub-lic purpose, was not carried out in an arbitrary or discriminatoryfashion, and was accompanied by prompt, adequate, and effectivecompensation.'m As that century unfolded, this formulation becamea mantra of U.S. policy. In international arbitrations and otherfora, U.S. policymakers and academics pressed it upon a some-times unwilling world. Paralleling these developments, a body ofcase law developed in the lower courts asserting that, at least with

87 For litigation over the enforceability of this commitment in U.S. courts, seeUnited States v. Percheman, 32 U.S. (7 Pet.) 51 (1833); United States v. de la MazaArredondo, 31 U.S. (6 Pet.) 691 (1832); Foster v. Neilson, 27 U.S. (2 Pet.) 253 (1829).

3Note from U.S. Secretary of State Cordell Hull to Mexican Ambassador (July 21,1938), in 5 United States Department of State, Foreign Relations of the UnitedStates: Diplomatic Papers 1938, at 674 (1956).

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respect to property located within the confines of the UnitedStates, efforts by the owner's sovereign to engage in discriminatoryor uncompensated expropriations would have no legal effect.8 9

During the Cold War, the U.S. drive to promote its formulastalled. The campaign's nadir came in 1964, when the UnitedStates' own Supreme Court refused to join. Confronted with aclaim that Cuba's seizure of a ship's cargo in Havana harbor vio-lated international law, the Court in Banco Nacional de Cuba v.Sabbatino9 ruled that "the Judicial Branch will not examine the va-lidity of a taking of property within its own territory by a foreignsovereign government, extant and recognized by this country at thetime of suit, in the absence of a treaty or other unambiguousagreement regarding controlling legal principles ."' As a result, theCourt obligated the state courts to recognize, with respect to assetsthat had come into the United States, property rights derived froman uncompensated and discriminatory expropriation.'

In retrospect, Sabbatino seems an enigmatic case of uncertaindoctrinal significance. One might dismiss it as an artifact of a par-ticular time. Writing less than two years after the Cuban missilecrisis, the Court seemed reluctant to take sides in the ideological

89 E.g., Petrogradsky Mejdunarodny Kommerchesky Bank v. Nat'l City Bank of N.Y., 170 N.E. 479 (N.Y. 1930); Sokoloff v. The Nat'l City Bank of N.Y., 145 N.E. 917,919-20 (N.Y. 1924); George Nebolsine, The Recovery of the Foreign Assets ofNationalized Russian Corporations, 39 Yale L.J. 1130 (1930). But see United States v.Pink, 315 U.S. 203 (1942) (holding that a U.S.-Soviet executive agreement supersedescommon law and requires state recognition of Soviet expropriations). For the fullbackground to this litigation, see G. Edward White, The Transformation of theConstitutional Regime of Foreign Relations, 85 Va. L. Rev. 1, 77-134 (1999).9o 376 U.S. 398 (1964).91 Id. at 428.92 Congress immediately reversed this holding through its enactment of what is

commonly known as the Second Hickenlooper Amendment. Foreign Assistance Actof 1964, Pub. L. No. 88-633, § 301(2), 78 Stat. 1009, 1013 (1965) (codified as amendedat 22 U.S.C. § 2370(e)(2) (1994)). Moreover, Sabbatino did not cut off the commonlaw doctrine, embraced at least by the New York courts, that expropriations ofproperty located outside the territory of the expropriating states had no effect absenta federal law ratifying the expropriation. See Republic of Iraq v. First Nat'l CityBank, 353 F.2d 47 (2d Cir. 1965); supra note 89 and accompanying text. The broaderaspect of the case-its determination that at least some doctrines affecting foreignrelations present federal questions and thus are binding on the states-has had alonger life, although not one free from controversy. See Curtis A. Bradley & Jack L.Goldsmith, Customary International Law as Federal Common Law: A Critique of theModem Position, 110 Harv. L. Rev. 815, 828-31, 860-70 (1997).


jousting that underlay the investor's argument. But Sabbatino'simpact on the movement to recognize a universal norm of investorprotection remained significant. Both scholars and government of-ficials interpreted the Court's caution as indicating a lack ofcommitment to the principle. During the following decade a num-ber of developing countries joined forces with the socialist states(the Soviet Union, China, and their respective myrmidons) in argu-ing for an opposing norm of permanent national sovereignty overproperty located in a state's territory.93

Frustrated in its efforts to establish a universal norm, the UnitedStates and its allies pushed the investor-protection position througha series of bilateral treaties.94 These instruments invariably wouldcontain the U.S. formulation of the legal standard owed to inves-tors, and typically would provide for some form of third-partyenforcement. Sometimes the investment protection treaties gavethe International Court of Justice jurisdiction to hear claims ofunlawful expropriation.' Alternatively, some treaties, as well asvarious contracts between host governments and foreign investors,provided for international arbitration, either through the WorldBank's International Center for the Settlement of Investment Dis-putes ("ICSID") or a similar facility.96 The distinction mattered,because only governments may bring a matter to the International

93 See Charter of Economic Rights and Duties of States, G.A. Res. 3281, U.N.GAOR, 29th Sess., Supp. No. 31, at 50, U.N. Doc. A19631 (1975); Declaration on theEstablishment of a New International Economic Order, G.A. Res. 3201, U.N.GAOR, 6th Special Sess., Supp. No. 1, at 3, U.N. Doc. A/9559 (1974); PermanentSovereignty over Natural Resources, G.A. Res. 3171, U.N. GAOR, 28th Sess., Supp.No. 30A, at 422, U.N. Doc. A/9030/Add.1 (1973); Seymour J. Rubin, Economic andSocial Human Rights and the New International Economic Order, 1 Am. U. J. Int'l L.& Pol'y 67 (1986); Bums H. Weston, The Charter of Economic Rights and Duties ofStates and the Deprivation of Foreign-Owned Wealth, 75 Am. J. Int'l L. 437 (1981).

94 See generally Andrew T. Guzman, Why LDCs Sign Treaties That Hurt Them:Explaining the Popularity of Bilateral Investment Treaties, 38 Va. J. Int'l L. 639(1998) (tracing the history of the U.S. approach).

95 See, e.g., Treaty of Friendship, Commerce and Navigation, Feb. 2, 1948, U.S.-Italy, art. XXVI, 63 Stat. 2255,2294.

96 See, e.g., Treaty Concerning the Encouragement and Reciprocal Protection ofInvestment, June 17, 1992, U.S.-Russ., art. VII, para. 3, S. Treaty Doc. No. 102-33(1992). For a general discussion of how investor protection treaties authorize bindingarbitration of disputes by international organs, see Charles N. Brower & Lee A.Stevens, Who Then Should Judge? Developing the International Rule of Law UnderNAFTA Chapter 11, 2 Chi. J. Int'l L. 193 (2001).

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Court of Justice, while a private investor can invoke arbitrationagreements whether its home country government approves or not.

As disputes based on these instruments have arisen and reachedresolution, a kind of expropriation law has emerged. This body ofrules and standards rests not on general principles of natural lawand international practice, as did the domestic U.S. investor-protection law of the nineteenth century, but on specific commit-ments entered into by sovereign states as interpreted by particulartribunals. It necessarily has an ad hoc and diffuse character, giventhe absence of any central body authorized to impose consistent in-terpretations. Yet enough coherence exists to sustain a narrativeabout its features, ambitions, and limitations.'

For our purposes, what is intriguing about this expropriation lawis its tendency to treat judicial decisions as extensions of govern-mental actions, and thus bound by the treaty to the same extent asare the other branches of government. For example, the mostprominent attempt to get the International Court of Justice to ar-ticulate norms governing the seizure of the property of foreignersinvolved litigation. Barcelona Traction, Light & Power Company,Limited98 resulted from a Spanish bankruptcy proceeding that en-abled bondholders to gain control of a Canadian company worthmany times the value of the defaulted bonds. The Spanish courtserved as an instrument to transfer millions of dollars in wealthfrom one set of private hands (the investors in the firm's equity) toanother (the bondholders, who enjoyed good relations with theFranco regime). The case was decided on procedural grounds: Bel-gium, the domicile of most of the company's investors, had a treatywith Spain providing for resolution of such disputes by the Interna-tional Court of Justice, but Canada, the place of incorporation ofthe company seized through the Spanish bankruptcy proceeding,did not. Nowhere in the vast literature that travels in BarcelonaTraction's wake can one find sustained arguments to the effect thatan otherwise unambiguous expropriation of foreign-owned prop-

97 For a review of these commitments, see Thomas Waelde & Abba Kolo,Environmental Regulation, Investment Protection and "Regulatory Taking" inInternational Law, 50 Int'l & Comp. L.Q. 811 (2001). For a critique of these trends,see M. Somarajah, The Settlement of Foreign Investment Disputes (2000).

98 Barcelona Traction, Light & Power Company, Limited (Belg. v. Spain), 1970I.CJ. 3 (Feb. 5).


erty ceases to be objectionable if a judicial body acts as the agencyof expropriation.99

Other international bodies have directly endorsed the proposi-tion that judicial acts may constitute expropriation within themeaning of the relevant treaties. In 1986, for example, the U.S.-Iran Claims Tribunal declared: "It is well established in interna-tional law that the decision of a court in fact depriving an owner ofthe use and benefit of his property may amount to an expropriationof such property that is attributable to the state of that court."'1

Accordingly, the tribunal ordered Iran to compensate the ownerfor machinery retained in Iran pursuant to a court order.10 1

By far the most ambitious expropriation-law attack on judicialactivity yet seen involves that of the bankrupt Canadian firmLoewen Group, described in Part I' The case is replete with iro-nies, not the least being that the United States, the author of thelegal standard governing treatment of foreign investors, finds itselfcalled to account for tolerating local autonomy in the judicial proc-ess. Loewen suffered a $ 500,000,000 verdict following a state courtjury trial of a common law claim of fraud. Part of the plaintiff's ar-gument to the jury focused on Loewen's status as a foreigncorporation.0 3 Loewen maintains that the litigation amounted to aviolation of North American Free Trade Agreement (NAFTA)Article 1110(1), which provides:

No Party may directly or indirectly nationalize or expropriatean investment of an investor of another Party in its territory ortake a measure tantamount to nationalization or expropriationof such an investment ("expropriation"), except: (a) for a publicpurpose; (b) on a nondiscriminatory basis; (c) in accordance

99 For a dispute where the U.S. government attacked an Italian bankruptcy proceedingas infringing on an investor's rights, see Elettronica Sicula S.p.A. (ELSI) (U.S. v.Italy), 1989 I.C.J. 15 (July 20); Sean D. Murphy, The ELSI Case: An InvestmentDispute at the International Court of Justice, 16 Yale J. Int'l L. 391 (1991). Althoughthe International Court of Justice rejected the U.S. claim, it did not suggest thatjudicial actions enjoyed any immunity from expropriation law.

100 Oil Field of Tex. v. Iran, 12 U.S.-Iran Cl. Trib. Rep. 308, 318 (1986).101 Id. at 319.102 See supra text accompanying note 43.103 See authorities cited in supra note 42.

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with due process of law.., and (d) on payment of compensa-tion ....

The arbitration tribunal considering this case has not yet ad-dressed the merits, but it has resolved the question of itsjurisdiction. It ruled that the Mississippi litigation, if carried out inthe manner described in Loewen's petition, could constitute a"measure tantamount to expropriation" and thus may render theUnited States liable in damages for Loewen's injury. In reachingthis result, it argued that expropriation law generally, and Article1110 of NAFTA in particular, recognized no distinction betweenjudicial and other governmental action."5

At one level, the refusal of expropriation jurisprudence to dis-tinguish between the judiciary and other branches of governmentmay reflect the formal premises of international law. Old-school in-ternational law, which upholds the principle of sovereign equality,professes indifference as to how a state organizes its internal af-fairs. As the International Law Commission, a UN agency, puts it:

The conduct of an organ of the State shall be considered as anact of that State under international law, whether that organ be-longs to the constituent, legislative, executive, judicial or otherpower, whether its functions are of an international or an inter-nal character, and whether it holds a superior or a subordinateposition in the organization of the State."

From this perspective, international law does not decompose thestate into its elements. Indeed it could not without assigning differ-ent rights and obligations to different kinds of states, a move thatwould transgress the equality norm that pervades international law.The only question is whether a state acts in a way that infringes

104 North American Free Trade Agreement, Dec. 17, 1992, art. 1110(1), 32 I.L.M.605, 641. For further discussion of this provision, see Frederick M. Abbott, ThePolitical Economy of NAFTA Chapter Eleven: Equality Before the Law and theBoundaries of North American Intergration, 23 Hastings Int'l & Comp. L. Rev. 303(2000); Charles H. Brower I, Investor-State Disputes under NAFTA: The EmpireStrikes Back, 40 Colum. J. Trasnat'l L. 43 (2001); Investor-State Disputes underNAFTA: A Tale of Fear and Equilibrium, 28 Pepp. L. Rev. (forthcoming 2002);Daniel M. Price, Chapter 11-Private Property v. Governments, Investor-StateDispute Settlement: Frankenstein or Safety Valve?, 26 Can.-U.S. L. 107 (2000).

105 The Loewen Group, supra note 43, at 39-60.106 Draft Articles on States Responsibility, art. 6, [1980] 2 Y.B. Int'l L. Comm'n 31,

U.N. Doc. AICN.4/SER.A1980/Add.1 (Part 2).


upon an interest protected under international law. The definitionof infringement does not turn on the mechanism that producesharm. The argument parallels that of Justice Stewart on judicialtakings.

Yet old-school international law is not the only game in town.Over the last couple of decades, and especially since the end of theCold War, a different kind of international law has emerged. WhatI elsewhere have called the new international law depends muchless on ministerial and scholarly declarations of general principles,as exemplified by the work of the International Law Commission,and more on the specific acts and justifications of well-developedinstitutions with clearly defined responsibilities and explicit law-making authority. 7 Because these institutions have the characterof clubs that create particular rights and duties for their members,rather than promoting universal benefits in the nature of publicgoods, the principle of sovereign equality seems less robust andpervasive. Duties owed by particular states to some, but not all, na-tions now dominate the terrain, with general obligations owed byall to all receding into the background.

In this shifting environment, it may become possible to speak ofinternational law obligations that turn on which branch of domesticgovernment has acted. At a doctrinal level, one needs to argue onlythat the anti-expropriation obligations of a particular internationalagreement, such as NAFTA's Chapter 11, need not express, or beinterpreted in light of, general principles of international law, butinstead might reflect the particular context of the agreement andthe specific understandings of the parties. At a functional level, onemight assert that particularized obligations among nations shouldreflect the institutional structure of each nation, if only to ensurethe development of a rich legal environment tailored to the needsof those that operate in it. Those countries that have establishedindependent judiciaries might well maintain that international lawshould take account of this characteristic.

These arguments remain suggestions, not widely held convic-tions or solid doctrine. Much controversy surrounds efforts to pin

107 See Paul B. Stephan, International Governance and American Democracy, 1Chi. J. Int'l L. 237, 237-39 (2000); Paul B. Stephan, The New International Law-Legitimacy, Accountability, Authority, and Freedom in the New Global Order, 70 U.Colo. L. Rev. 1555, 1556-57 (1999).

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down the differences in tone and character that have emerged ininternational law during the last decade or so. Controversy, how-ever, is not the same as chaos. One suggestion that the academiccommunity has received well involves the assertion that Kantiannotions of "perpetual peace" infuse the modern world of interna-tional law. Central to Kant's argument was an empirical claim:Liberal states, defined as those whose rulers face some kind of de-mocratic political accountability and in turn strive to respect therule of law, enjoy more cordial as well as thicker relations witheach other. Professor Anne-Marie Slaughter, the most prominentproponent of this approach, has argued that these domestic institu-tional characteristics have an effect not only on internationalrelations, but on the content of international law as well."38

In keeping with Slaughter's argument, one might maintain thatinternational law does and should treat states with independent ju-diciaries differently, and generally should put the actions of well-ordered courts beyond the reach of constraints that otherwise ap-ply to boisterous states. We might, in other words, apply differentstandards to the manifestations of judicial authority in revolution-ary Iran and to the unpredictable actions of Mississippi trial courts.The former represent formal extensions of unchecked state power;the latter reveal an inevitable aspect of jury freedom and judicialautonomy, institutions that on the whole contribute to a flourishingliberal society.

Still, the old-school approach may have some life in it yet. Onemight concede the differences between Iranian and U.S. courts andstill assert that the latter are not simply suffused with liberal virtue.Independence from political pressure does not automatically trans-

108 See Anne-Marie Burley [now Slaughter], Law Among Liberal States: LiberalInternationalism and the Act of State Doctrine, 92 Colum. L. Rev. 1907, 1909-14(1992); see also Andrew Moravcsik, Taking Preferences Seriously: A Liberal Theoryof International Politics, 51 Int'l Org. 513, 513-16 (1997); Anne-Marie SlaughterBurley, International Law and International Relations Theory: A Dual Agenda, 87Am. J. Int'l L. 205, 226-38 (1993). Liberal internationalism as Slaughter and othershave conceived it does not lack for critics, especially from the left. See, e.g., ChristianReus-Smit, The Strange Death of Liberal International Theory, 12 Eur. J. Int'l L. 573(2001). But these critics presumably would be unhappy with any theory thatprivileged property rights as an extension of the status quo. To that extent, theyshould not object to using Slaughter's arguments to take courts outside expropriationlaw.


late into freedom from animus towards outsiders, as the history Itraced in the prior section illustrates. A judiciary free from exces-sive governmental influence still might discriminate againststrangers; indeed, as I will argue below, it might throw up greater,or at least different, hurdles to foreigners than do politically-accountable governments. And if discrimination against outsidersunderlies expropriation law-a claim I have documented in thissection-then a principled reason exists to include the judiciarywithin the strictures of the evolving jurisprudence of investor pro-tection.

C. A Synthesis

Superficially, takings doctrine and expropriation law seem unre-lated except to the extent that both deal with governmentencroachments on property rights. Takings doctrine rests on theU.S. Constitution, both expressly through the Fifth Amendmentand implicitly through incorporation into the Fourteenth. Expro-priation law today rests on a variety of international instruments,although at one time several nations tried to position it as a foun-dational principle of international law. U.S. courts apply takingslaw on behalf of all property. Designated international tribunals,whether permanent bodies such as the International Court of Jus-tice or ad hoc arbitration tribunals such as those constituted byICSID, enforce expropriation law on behalf of the beneficiariesspecified in the instruments. The Loewen dispute, for example,could not have arisen if the putative victim were a British, ratherthan a Canadian, firm.

Yet the two doctrines share more than a focus on property andan intertwined genealogy. Structurally, each involves a superim-posed norm. Federal courts enforce takings doctrine against stateand local organs (as well as, of course, against federal organs).International bodies enforce expropriation law against all organs ofa state subject to an investor-protection obligation, whether na-tional or subnational. Subordinated bodies, including courts, mayinternalize the norm, but it is the lurking power of the superiortribunal that provides the motivation for internalization.1" In other

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that provides the motivation for internalization."° In other words,both are externally enforced commitments.

Moreover, each responds to the same kind of problem, even ifeach does other things as well. Expropriation law explicitly, andtakings doctrine in its prehistory if not through present practice,regard the significant tension as not between property owners andnon-owners as such, but rather between outside owners of propertyand the local demos. This focus may rest on an intuition that locals,owners and non-owners alike, have some ability to influence theprocesses that govern government actions regarding property, andthus require less support through an external norm.

Finally, both doctrines have the capacity to discipline courts aswell as other organs. In the case of expropriation law, the premisesof international law itself push the doctrine towards this result.With respect to takings law, the conclusion that judicial decision-making might trigger an obligation to provide just compensation istentative at best. But the example of expropriation law suggestsreasons why takings law might move in this direction. If the specialrisks borne by those who cannot influence local decisionmakingjustify external protection, then one must ask whether those risksextend to the judicial process. An affirmative answer, the plausibil-ity of which I argue in the next part, suggests that takings law has ajob to do here."'

109 1 do not mean to suggest that both norms work directly to constrain subordinatedcourts. All U.S. courts have a duty to enforce all constitutional norms, including theTakings Clause. But in many cases, the international law obligation to respect aforeigner's property does not operate directly through local law. In the case ofNAFIA, for example, Congress expressly provided for no private enforcement of theAgreement's various provisions, including Chapter l1's investment protection rules.Only the U.S. government has the authority to petition a court to bring a state or localorgan into compliance with NAFrA. North American Free Trade ImplementationAct § 102(c), 19 U.S.C. § 3312(c) (2000). This does not mean, however, thatinstrumentalities of state authority should be or are unmindful of NAFTA'srequirements.

110 This argument also suggests why not all aspects of expropriation law translateback into takings jurisprudence. An expropriation case by definition involvesoutsiders as victims, while the Takings Clause implicates distributional choices madewithin a community. One might anticipate more rigorous and prophylactic rulesgoverning expropriations, even if protection of outsiders underlies both bodies of law.Cf. Jon A. Stanley, Keeping Big Brother Out of Our Backyard: Regulatory Takings asDefined in International Law and Compared to American Fifth Amendment

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If both of these doctrines devote special attention to the prob-lem of the outsider, including the outsider drawn into litigation,what does this tell us about redistributive litigation generally? Isthe problem one of the security of ownership qua ownership, orshould the law hone in on the vulnerabilities of some investors atthe expense of others? Should courts take up this challenge, orleave it to other decisionmakers? The answers to these questionsmay be latent in existing doctrine, but plenty of room remains forserious consideration of their implications. I now turn to this task.

IV. EXPROPRIATION AS A COLLECTIVE ACTION PROBLEM-THEROLE OF LOCALISM

Having defined the concept and reviewed the extant authoritiesthat may apply to redistributive litigation, we now must return tothe central question. Exactly what, if anything, is problematicabout redistributive litigation? In particular, is it possible to de-velop a critique of redistributive litigation that is independent ofgeneral opposition to government-mandated redistribution?

Judicial unsettling of reasonable expectations may amount tonothing more than the cost of living in a dynamic society whose in-stitutions respond to changing needs. In rejoinder, one might assertthe primacy of property and contract as a means of organizing civilsociety and personal lives against the state's encroachments. A re-spectable scholarly literature, highlighted by the work of ProfessorsRobert Nozick and Richard Epstein, takes this position."' It wouldreject all redistribution, even when such action achieves an overallenhancement of utilitarian welfare, because it violates core moralprinciples. Anyone convinced by these arguments would have an apriori basis for rejecting redistributive litigation. The violence thatredistribution does to the moral basis of property is not amelio-rated by the use of judges as the state's agents.

For my purposes, the Nozick-Epstein attack on redistribution isuninteresting, because it ignores what may be distinctive about thelitigation process. Rather than close down the discussion with ageneral attack on redistribution, I want to explore the special prob-

Jurisprudence, 15 Emory Int'l L. Rev. 349, 385-89 (2001) (arguing for merging thecontent of the two doctrines).

]"E.g., Robert Nozick, Anarchy, State and Utopia (1974); Richard A. Epstein,Takings: Private Property and the Power of Eminent Domain (1985).

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lems and opportunities that innovative litigation may present. I ar-gue that the international-law strategy, with its core concern aboutpredatory localism, has more to teach us about the cases and curesof redistributive litigation, whatever position one takes on redistri-bution generally.

Consider first a possible case for redistribution, whether throughlitigation or by other means. Unless one has made the kinds ofcommitments that Nozick and Epstein advocate, at least some ar-guments for redistribution seem appealing. Once one concedes themoral arbitrariness of the existing set of outcomes, an effort to dobetter-to align access to resources with qualities we would regardas sympathetic-seems appealing. Yet the case for any particularredistribution remains problematic, at least in moral terms. We as asociety have achieved nothing like a consensus about even trans-parent issues such as the optimal degree of progressivity in our taxsystem. We may enjoy a general commitment to ameliorating themost extremes instances of deprivation, but I cannot detect a paral-lel consensus to eradicate the greatest concentrations of wealth.

My preferred response to this difficulty is to ask a different ques-tion. Rather than arguing from moral insights, I would rely on theconventional artillery of utilitarianism. On the one hand, a redistri-bution that contributes to overall wealth (in technical terms,Kaldor-Hicks optimality) is at least plausibly desirable, pendingconsideration of the claims of the losers and the availability ofcompensatory strategies. On the other hand, a redistribution thatdiminishes welfare by foreclosing enriching opportunities, as wellas destroying existing wealth, seems presumptively dubious. Itwould take a very strong justice argument to maintain that satisfac-tion of particular moral imperatives requires diminishing oursociety as a whole.

I am aware of problems implicated by a focus on social welfare.The risk of circularity is great, given the dependence of what wevalue on what social choices we make. The illusions of quantifica-tion and specious scientific authority also exist. But welfareanalysis helps us answer some questions, these questions can be in-teresting, and there is no imperative to try to answer everyquestion.

In considering the welfare effects of redistributive litigation, Iwill isolate a subset of all possible interests that this activity might

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disturb. Many instances of redistribution seem inherently ambigu-ous, where rearrangement of property rights might producebenefits that offset the reliability losses that the rearrangementnecessarily incurs. As a positive matter, U.S. society, as well asthose of most other prosperous countries, tolerates a wide range ofregulatory, tax, and other government interventions that have re-distribution as their justification. In general, we leave it to thepolitical process to sort these matters out. Our commitments toconstitutional checks on such redistribution have waxed andwaned, but even in the heyday of the Court's free-market sympa-thies, a considerable amount of economic legislation intended toalter the status quo passed muster."2 We generally seem confidentthat the risk of successful rent-seeking coalitions generating wel-fare losses diminishes when seen with a sufficiently long-termperspective, and we fear that external, judicially enforced checkson redistribution may become sticky and counterproductive in theface of changed circumstances."'

But where interests and expectations result from mobility-where an investor comes from outside the local community and, asan outsider, presumptively lacks an effective way of influencing thecommunity's deliberations-redistribution, including that achievedthrough litigation, may present particular problems that demand aspecific response. Where decisionmakers have the ability to exter-nalize the costs of redistribution, because those who will bear thoseburdens have limited capacity to retaliate or otherwise to sharetheir losses with those who will benefit from the redistribution, ra-tional decisionmakers will redistribute even if the overall impact onwelfare is negative. In other words, situations that present substan-tial risks of cost externalization present the greatest likelihood of

112 See generally Barry Cushman, Rethinking the New Deal Court: The Structure ofa Constitutional Revolution (1998) (documenting the propensity of the pre-New DealCourt to uphold regulation of business); G. Edward White, The Constitution and theNew Deal (2000) (analyzing origins of characterization of pre-New Deal Court asantiregulation).

113 See generally Saul Levmore, Just Compensation and Just Politics, 22 Conn. L.Rev. 285 (1990) (analyzing institutional basis of rent-seeking); Saul Levmore, TheCase for Retroactive Taxation, 22 J. Legal Stud. 265 (1993) (exploring the case forredistributive legal rules).

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overall welfare losses. Here, unlike instances of redistribution, apresumption in favor of some kind of constraint seems desirable. 4

The argument for protecting outside investors can be illustratedby modeling a dynamic set of interactions between potential inves-tors and jurisdictions that would serve as hosts for that investment.Consider the incentives these parties face. In a world of mobileproperty rights and local political decisionmaking, sovereigns mayfind themselves in the position of hosting property owned by per-sons who have no direct right of participation in local politics. Inmany cases, those persons with participation rights ("voters") alsomight own property outside the locality. The voters might prefer aworld in which no locality can divest outsiders of their property,but absent some form of coordination, localities would have noway to bind themselves to this outcome. Without a binding com-mitment, each locality would have no reason not to divest outsidersfor the benefit of insiders.'1 5

A numerical example may help. Assume that Investor can builda factory at a cost of $10,000,000 that will be part of an enterprisehaving a going concern value of $19,000,000."6 The creation of thefactory requires that Host Jurisdiction extend benefits to Investor(debt guarantees, road improvements, trade secrets such as geo-logical data, monopoly rights, or comparable inducements) thatwill cost Host $6,000,000. Investor must sink $4,000,000 in the site,creating an asset worth $2,000,000, before Host Jurisdiction ex-tends any benefits. At that point, Host must extend the benefits.Assume these benefits are sufficiently fungible that Investor canderive $6,000,000 from them even if Investor makes no furtherprogress on the project. The value of these fungible benefits ex-

1147The symmetrical point is also true: Situations where the risk of benefitexternalization is high will result in insufficient changes to the status quo. The analysisin this Article of collective action problems applies to these circumstances as well.

11s This is only one possible variation in the array of incentives that investors andhosts might face. For a more elaborate analysis of the problem, see Guzman, supranote 94; David W. Leebron, A Game Theoretic Approach to the Regulation ofForeign Direct Investment and the Multinational Corporation, 60 U. Cin. L. Rev. 305(1991).

116The $19,000,000 figure represents the discounted present value of all futurereturns from the project, ignoring taxes or other regulatory interventions that mightreduce the project's value. As I discuss below, the host state might carve out its shareof these returns though direct ownership or indirect regulatory or fiscal intervention.


ceeds the cost to Investor of obtaining them by $2,000,000; Hosthas a net cost of $4,000,000, because it can seize the factory if In-vestor runs off with the fungible assets. Assume that if theenterprise is brought to fruition, Host's stake will be worth$7,500,000 (as a result of either equity ownership or anticipated taxrevenues). Investor's share thus will be worth $11,500,000 obtainedat a total of $10,000,000. Also assume that simply by entering intothe commitment to undertake the project, neither Investor andHost will incur any opportunity costs, i.e., either can back out at nocost.

Both Investor and Host will be better off seeing the projectthrough, as each will realize a profit of $1,500,000. At the sametime, each has an incentive to defect. If Host can induce Investor tomake an investment before releasing any of the benefits, Host willhave control over an asset (an unfinished factory, for example)worth $2,000,000 for which it paid nothing. If Investor acquires thebenefits extended by Host and does nothing further to develop theproject, it will have rights worth $6,000,000 for which it expendedonly $4,000,000. If neither does anything, neither loses anything(disregarding Investor's sunk costs). Table 1 illustrates the payoffmatrix for both, with the left integer indicating Investor's return,the right Host's.

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HostCooperate Defect

1.5,1.5 -4,20

U

0

TABLE 1

Astute readers will recognize this as the Prisoner's Dilemma, astaple heuristic of game theory, as well as of the various social sci-ences that exploit the theory."' It represents what generically iscalled a collective action problem. The players maximize combinedwealth by pursuing some collective goal through cooperation, buteach has an incentive to defect so as to frustrate the realization ofthat goal. Both parties, under conditions of ignorance about theother's strategy, do better by defecting than by cooperating. Both,anticipating that the other will choose a strategy based on igno-rance, will predict that the other will defect. Absent some means ofsignaling a commitment to cooperate, these parties will find them-selves backing out of all transactions that have comparableincentive structures. Without some way of coordinating their be-havior, each party's rational choice is to engage in opportunisticbehavior. This is a world where predatory localism and investor

17 On the uses of the Prisoner's Dilemma in international relations theory and itsapplications to international law, see John K. Setear, Responses to Breach of a Treatyand Rationalist International Relations Theory: The Rules of Release andRemediation in the Law of Treaties and the Law of State Responsibility, 83 Va. L.Rev. 1, 27-33 (1997). For important qualifications on these uses, see Paul G. Mahoney& Chris W. Sanchirico, Competing Norms and Social Evolution: Is the Fittest NormEfficient?, 149 U. Pa. L. Rev. 2027 (2001).

2,-4 0,0


fickleness exist side-by-side, each contributing to the impoverish-ment of society. '18

In the classic version of the Prisoner's Dilemma, the players en-gage in only one iteration of the game and have no means ofsignaling a precommitment to a particular strategy. Relaxing theseconditions leads to possible solutions of the collective action prob-lem. Sufficient iterations of the game provide both players with anopportunity to acquire a reputation that will induce reliance (or theopposite). Alternatively, players may make credible precommiments,such as by exposing themselves to independently administered penal-ties upon defection. Within the confines of the Prisoner's Dilemma,both strategies have evolutionary advantages. Each allows partiesto undertake more and greater beneficial projects than they couldotherwise.

Under what conditions can one reasonably expect host countriesand investors either to invest in reputation or to design institutionsthat enhance the credibility of their commitments so as to increaseinvestment? Under some scenarios, the expropriation problemmight solve itself. Outside investors, who presumably lack a politi-cal voice to dissuade local authorities from seizing their property,might forego investing in localities that acquire a reputation for in-hospitability. Faced with the resulting economic hardship, authori-ties may seek to make credible commitments to future investors.Alternatively, host states that have limited power to influence anoutside investor's behavior might refuse to do business with firmsthat have cut and run in the past. In Professor Albert 0. Hirsch-man's classic formulation, exit and voice may operate symmetricallyto discipline decisionmakers subject to either sanction.119

118 elide the question of whether commitments to cooperate, while adaptive in the

sense that they increase global welfare, may decrease the welfare of some class ofparties (for example the Third World) because they impede opportunities to extractrents through cartelization. For the suggestion that the distribution of benefits frominvestment might go disproportionately to First-World investors, see Guzman, supranote 94, at 671-74. For evidence that investment protection might redound to thebenefit of host Third World countries, see Paul G. Mahoney, The Common Law andEconomic Growth: Hayek Might be Right, 30 J. Legal Stud. 503, 514-23 (2001).

119 Albert 0. Hirschman, Exit, Voice, and Loyalty: Responses to Decline in Firms,Organizations, and States 3-5 (1970). Alternatively, we can describe such results asdemonstrating Tiebout outcomes. This theory posits that, in the absence of significantthird-party effects, consumers can affect the array of government-provided servicesthrough their ability to migrate. Charles M. Tiebout, A Pure Theory of Local

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With both businesses and states, however, neither the acquisi-tion of a reputation nor exposure to independently administeredpenalties is straightforward. Collective bodies necessarily face aturnover in their decisionmakers, whether through takeover, gen-erational change, coup d'6tat, or democratic choice. The knowledgethat decisionmakers will change encourages observers to discountthe value of information based on past conduct. Both businessesand states find it more difficult to acquire and to maintain a reputa-tion than do individuals.

As for precommitments, the problem lies in the ability of collec-tive bodies to become judgment-proof. Firms can do this bysiphoning assets out of the entity subject to prospective liability;states can simply invoke sovereign immunity. While sovereign im-munity may not shield offshore assets, it provides a justification fora state not to cooperate with respect to property on its own terri-tory.

But these problems are not insurmountable. First, a state canadopt and sustain institutions that make government expropriationmore difficult. In the United States, the pairing of takings jurispru-dence with an independent judiciary, bolstered by the availabilityof the federal courts for some classes of disputes, serves this func-tion. Second, both firms and states can structure their transactionsto make backing out more costly, thus providing credible reassur-ance that they will carry through with their commitments. As avariation on this strategy, they can link their promise to cooperateto some broader benefit that they would forfeit upon breach. Ex-amples of this last technique include the tying of the investorprotection provisions of the European Charter on Human Rightsto the economic liberalization promoted by the European Unionand the nesting of Chapter XI's investor protection rules in theNorth American Free Trade Agreement.1 20

Expenditures, 64 J. Pol. Econ. 416, 422-24 (1956); see also Donald H. Regan, TheSupreme Court and State Protectionism: Making Sense Out of the DormantCommerce Clause, 84 Mich. L. Rev. 1091, 1160-67 (1986) (forcing states to internalizethe interests of outsiders robs them of the power to engage in autonomousdecisionmaking on behalf of their constituents).

120 In Europe, the strongest protections against expropriation are not found in thetreaties that underlie the European Union (EU), but in the international law structurethat has as its foundation the European Charter on Human Rights. See Lithgow v.United Kingdom, App. No. 9006/80, 8 Eur. H.R. Rep. 329, 397 (1986). Europeancountries, however, attach great value to membership in the EU, and good standing in


Either strategy-developing internal institutions or making ex-ternally enforceable precommitments-has costs. Both internaland external enforcers can make mistakes or use their authority topursue self-aggrandizing objectives at the expense of their putativemission. In technical terms, no institution or mechanism devised toprotect outside investors can be free of agency costs.121 To justifythe use of investor-protective strategies, then, one must have aplausible explanation as to why the benefits they would produceshould exceed their costs.

In the case of domestic institutions, substantial evidence sup-ports the proposition that an independent judiciary inclined toprotect private interests against government encroachments resultsin an overall increase in material well being.' " Proof of the generalproposition that judicial protection of property rights makes soci-ety better off does not, of course, amount to proof that anyparticular instance of protection enhances welfare. But we at leasthave some reason to believe that independent courts, and the fed-eral courts in particular, have some ability to detect and resistespecially egregious instances of exploitative expropriation. It doesnot require too great a leap to suggest that the federal courts alsomay play a beneficial role in monitoring the use of the state judici-ary for similar ends.

As for externally enforceable commitments, much depends onthe design of the enforcement mechanism. Embedding the mecha-nism in a comprehensive and valuable set of agreements, such asNAFTA, strengthens the credibility of the investor-protectivecommitment but also makes it harder to withdraw in the event thatthe enforcer manifests higher-than-expected agency costs." Ground-ing the mechanism on express international commitments, ratherthan shadowy perceptions of custom, also makes it more likely

that club requires, as a matter of custom rather than legal obligation, adherence to theCharter.

121 See Michael C. Jensen & William H. Meckling, Theory of the Firm: ManagerialBehavior, Agency Costs and Ownership Structure, 3 J. Fin. Econ. 305, 312-30, 338(1976).

122See Mahoney, supra note 118 (providing evidence).123 On the incentives of arbitrators, see Eric A. Posner, Arbitration and the

Harmonization of International Commercial Law: A Defense of Mitsubishi, 39 Va. J.Int'l L. 647, 655-56, 663-64 (1999). See also Andrew T. Guzman, Arbitrator Liability:Reconciling Arbitration and Mandatory Rules, 49 Duke L.J. 1279 (2000) (proposingchange in incentives).

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that, at least ex ante, the governments concerned plausibly couldhave believed that the mechanism would produce benefits in excessof costs. Recent calls to renegotiate the investor-protection provi-sions of NAFTA indicate, however, that what governments claimto expect may not reflect what they believe they get.124 Perhaps themost one can say is that international regimes voluntarily enteredinto have a valid basis in theory, and may function beneficially inpractice.

To summarize, whenever a locality or a nation serves as a hostfor investments by outsiders, the possibility of a collective actionproblem exists. Both governments and investors face risks of op-portunism that might discourage them from entering into valuabletransactions. Reputation alone may not suffice to surmount thisdifficulty. Precommitments, as exemplified by the Takings Clausein the U.S. Constitution and the investment-protection obligationscontained in various international regimes, may provide a mecha-nism for increasing the likelihood that welfare-enhancing investmentswill take place. If these precommitments function as a successfuladaptation to an uncertain environment, we should expect them toincrease in scale and scope over time.

A cautionary note is in order. I have used the general structureof collective action problems to illustrate why particular commit-ments to respect property rights may advance welfar e . But, usingdifferent assumptions, one also can demonstrate why a commit-ment not to recognize property rights may serve as a welfare-enhancing solution to a collective action problem. Under certainconditions, a commons may prove to be an optimal property re-gime, but, absent a collective commitment to respect the commons,individuals might have an incentive to carve out private rights. Inother words, a commons may produce positive externalities, notnegative ones. Professor Ronald Gilson has made exactly this ar-gument in explaining why California's refusal to enforce covenantsnot to compete gives that state a superior capacity to foster innova-

124 In response to earlier arbitration decisions enforcing the investor protectionprovisions of NAFrA, the governments agreed to a "reinterpretation" of the scope ofChapter XI's protection. Free Trade Comm'n, U.S. Dep't of Commerce,Clarifications Related to NAIFTA Chapter 11, at http://www.mac.doc.gov/naftalar-july3l%232.htm (July 31, 2001). Implicit in this response was a critique of thosedecisions, which treat various regulatory rules as compensable expropriations.


tion through job mobility." The general point is that, dependingon considerations such as production functions, network effects,and background expectations, either respect for private propertyrights or the opposite might serve as the desired end-state that aPrisoner's Dilemma thwarts.

This qualification does not detract from the main point. There is,to be sure, something important, and perhaps even disturbing, inthe insight that a certain symmetry exists between predatory local-ism and excessive specification and enforcement of property rights.Yet this symmetry suggests only a meta-principle, that from a gen-eral welfare perspective society can have too much property. Thisdoes very little to help us understand what, on the margin, our ex-isting commitments might mean. In particular, we need both afuller theory of the differences, if any, between positive and nega-tive externalities and the likelihood of one or the other producinginformal adaptations, and empirical evidence to confirm such theo-ries. My intuition is that negative externalities resulting frominadequate property protection remain a more tractable problem.Institutional responses, such as judicial enforcement and third-party arbitration, are likely to produce more benefits then wouldinformal adaptations when addressing these issues, while over-specification of property rights leads more readily to informaladjustments. So understood, the collective action problem providesa useful analytical framework for considering the function andscope of both domestic and international investor protectionmechanisms. And by identifying the kinds of benefits the designersof these mechanisms seek, this analysis brings us closer to under-standing whether, and in what contexts, redistributive litigationpresents a problem.

125 Ronald J. Gilson, The Legal Infrastructure of High Technology IndustrialDistricts: Silicon Valley, Route 128, and Covenants Not To Compete, 74 N.Y.U. L.Rev. 575, 602-09 (1999). For further analysis of situations where alternatives toprivate property might prove optimal in a welfare sense, see Carol Rose, The Comedyof the Commons: Custom, Commerce, and Inherently Public Property, 53 U. Chi. L.Rev. 711 (1986); Henry E. Smith, Semicommon Property Rights and Scattering in theOpen Fields, 29 J. Legal Stud. 131 (2000).

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V. AN INSTRUMENTAL ANALYSIS OF REDISTRIBUTIVE LITIGATION

I have no intention of developing a general critique of judicialinnovation. The use of the courts to prod the legislature and thepublic toward a more noble and just society remains one of thegreat stories of contemporary U.S. legal culture. Accountsgrounded in civic republicanism, natural law, or a more focusedcelebration of the judiciary's peculiar high ground pervade the lit-erature. But as long as present accounts of redistributive litigationbeg important questions, yet another effort to explain the phe-nomenon remains worthwhile. I continue with an approach thatfocuses on social welfare, while conceding its shortcomings.

I first consider what factors may induce the judicial system, incomparison to state and local legislatures and administrative agen-cies, systematically to produce redistributive outcomes. Then,drawing on Part IV, I focus on characteristics that increase the riskthat litigation may lead to predatory localism. In each case, litiga-tion operates in a dynamic relationship with the legislature, whichmay have its own redistributive preferences.

A. Redistributive Legislation and Litigation-A Dynamic Analysis

There exists a literature analyzing choices made by rent-seekersbetween litigation and legislation, but to my knowledge, no one hasexplored the dynamic relationship between the judiciary and legis-lators in the face of rent-seeking. 6 To do this, one first mustexplore the incentives affecting the choices of rent-seekers, legisla-tors, and the judicial system. Then one must account for the waysin which these three groups interact in a dynamic process. The real-ity is dense and obscure: I offer a stylized account that draws onthe mainstream of the political economy literature.

126 See Charles J. Goetz & Gordon Brady, Environmental Policy Formation and theTax Treatment of Citizen Interest Groups, 39 Law & Contemp. Probs. 211, 225-29(1975); Paul H. Rubin, Common Law and Statute Law, 11 J. Legal Stud. 205, 212-14(1982); Paul H. Rubin & Martin J. Bailey, The Role of Lawyers in Changing the Law,23 J. Legal Stud. 807 (1994); Paul H. Rubin et al., Litigation versus legislation: Forumshopping by rent seekers, 107 Pub. Choice 295 (2001).

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1. Rent-Seekers and Their Incentives

If rent-seeking involves the pursuit of a benefit or the avoidanceof a cost that results from governmental action, then the class ofpotential rent-seekers is virtually limitless. In reality, however, onlysome members of the polity participate in rent-seeking coalitions.Participation in group action is costly. It takes time and money toidentify persons with a common interest, to organize them, and todevise a decisionmaking and monitoring structure so that agentscan act effectively on behalf of the group. The public choice litera-ture rests on two powerful insights about these costs. First, groupswill not engage in rent-seeking unless the benefits from collectiveaction exceed their costs. Second, even among those that wouldfind rent-seeking cost-effective, different groups have different coststructures, enabling some groups to act more effectively than oth-ers. A major task of the literature is to identify those groupcharacteristics-homogeneity, compactness, issue salience-thatreduce organizational costs and thereby increase the potency ofgroups in influencing governmental action.' 27

Most of the public choice literature looks at the impact of pri-vate groups on legislative decisionmaking. In a democracy, groupscan influence legislators in a variety of ways. They can contributefunds to legislators, provide them information about the potentialimpact of legislation, maintain a disciplined voting bloc, and influ-ence public discussion through some combination of informativepresentation and cultivation of the organs of mass media. In caseswhere legislation involves multiple steps-a good example is draft-ing by a standing private group, such as the American LawInstitute, followed by legislative adoption-private groups exert in-fluence through some combination of information provision andprofessional inducements (employment, commissions, and the

127 The classics are James M. Buchanan & Gordon Tullock, The Calculus ofConsent: Logical Foundations of Constitutional Democracy (1962); Dennis C.Mueller, Public Choice H (1989); Mancur Olson, The Logic of Collective Action:Public Goods and the Theory of Groups (1965); Gary S. Becker, A Theory ofCompetition Among Pressure Groups for Political Influence, 98 QJ. Econ. 371(1983); Richard A. Posner, Theories of economic regulation, 5 Bell J. Econ. & Mgmt.Sci. 335 (1974); George J. Stigler, The theory of economic regulation, 2 Bell J. Econ.& Mgmt. Sci. 3 (1971).

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like)."2 Holding all else constant, a better organized but numeri-cally smaller group can succeed at these activities to a greaterextent than numerically larger, but more difficult to organize,groups. The result, the public choice literature explains, is legisla-tion that benefits minorities, including a subset of enactments thatentail naked redistribution, that is, that enrich small groups to thecost of society as a whole. 29

Scholars have paid less attention to the influence of rent-seekinginterest groups on litigation.3 ' Yet in some instances litigation pre-sents rent-seeking groups with an alternative means to theirdesired end. Moreover, groups seeking litigated rents face differentorganizational problems than do those addressing legislatures.Campaign donations and disciplined voting become less of a factor,except in jurisdictions that hold contested elections for judges. Theability to influence public opinion also matters less, because judgesdo not have to face the voters as often as legislators. The ability togenerate and present information may matter more. And to agreater extent than legislation-directed groups, litigation-orientedgroups must deal with problems of agency costs, in particular exer-cising effective influence over their litigators' decisionmaking. Thislast problem is especially acute when litigation takes the form of aclass action, where the conventional ability of the client to exertcontrol through its ability to replace its lawyers no longer effec-tively exists.'

128See Alan Schwartz & Robert E. Scott, The Political Economy of Private

Legislatures, 143 U. Pa. L. Rev. 595, 610-37 (1995); Robert E. Scott, The Politics of

Article 9, 80 Va. L. Rev. 1783, 1803-22 (1994).129 See authorities cited supra note 127.130 But see Frank B. Cross, The Judiciary and Public Choice, 50 Hastings L.J. 355

(1999) (exploring role of interest groups in producing litigated outcomes). Otherscholars contend that judicial independence negates the influence of special interests

and thus see the judiciary as a counter to public choice processes. Richard A. Epstein,

The Independence of Judges: The Uses and Limitations of Public Choice Theory,

1990 BYU L. Rev. 827; William N. Eskridge, Jr., Politics Without Romance:Implications of Public Choice Theory for Statutory Interpretation, 74 Va. L. Rev. 275,

301-09 (1988); Jonathan R. Macey, Competing Economic Views of the Constitution,56 Geo. Wash. L. Rev. 50, 66-70 (1987); Thomas W. Merrill, Does Public Choice

Theory Justify Judicial Activism After All?, 21 Harv. J.L. & Pub. Pol'y 219 (1997).

For criticism of this contention, see Einer R. Elhauge, Does Interest Group Theory

Justify More Intrusive Judicial Review?, 101 Yale L.J. 31 (1991).131 Although focusing on ideological rather than material conflicts between lawyer

and client and not employing economic analysis, much less the stylized concept of

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To summarize, the public choice literature predicts that privategroups will pursue rent-seeking legislation where, relative to theiradversaries, they have relatively lower organizational costs. Thesame literature implies that groups with higher organizational costsbut lower agency costs respecting litigation or lower costs in influ-encing litigation decisionmakers (that is, judges and juries) willchoose to seek rents through litigation. The first part of these hy-potheses-those involving the legislative process-has receivedsignificant empirical confirmation.132 The second part-that involv-ing litigation--only recently has been tested, but the results wehave sustain the theory. Two studies, for example, have demon-strated that lawyers, a group with distinctly low agency costs withregard to litigation and distinctly low costs with regard to influenc-ing litigation decisionmakers, use litigation to enhance their ownwealth, probably to the detriment of society.133

There is, of course, much more to this story than these simplepoints. Any dynamic account of rent-seeking has to consider theextent to which competition among interest groups dissipates therents from government action, as well as the possibility that thethreat of competition may deter rent-seeking behavior." 4 Becauseof the adversarial structure of litigation, such competition mayhave an especially significant impact on this form of rent-seeking.Still, the basic propositions seem clear. Some, but not all, groupsengage in rent-seeking. Where they do, the choice between legisla-tion and litigation will turn on the characteristics of the group, inparticular its relative costs in influencing litigation decisionmakerscompared to legislators. Any rule designed to constrain redistribu-tive litigation must rest on some hypothesis about these characteristics.

agency costs, the leading account of attorney interests in the context of class actionlitigation remains Derrick A. Bell, Jr., Serving Two Masters: Integration Ideals andClient Interests in School Desegregation Litigation, 85 Yale LJ. 470 (1976).

132 See authorities cited supra note 127.133 Rubin & Bailey, supra note 126, at 827-28; Rubin et al., supra note 126, at 303-06.

These studies establish that lawyers successfully engage in redistribution on their ownbehalf through litigation, but do not address the question whether this redistributionis welfare-diminishing, as opposed to Kaldor-Hicks welfare-enhancing.

134 See generally Becker, supra note 127.

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2. Legislatures and Rent-Seeking

The core premise that the public choice literature makes aboutlegislators is, at its heart, Darwinian. Legislators care about gettingelected and reelected, and those who perform that task well crowdout those who do not. Legislators who care about other things,such as obtaining private benefits from their office (in its crudestform, extortion payments) or sponsoring legislation that conformsto the legislator's idiosyncratic sense of social good and justice, willfind themselves displaced over time by those who do not. All otherthings being equal, legislators have an incentive to respond togroups that can enhance their prospects of election. While enact-ment of laws that increase overall welfare may redound to thecredit of the legislators who sponsor such actions, this is not theonly means by which legislators can augment their electability. Inparticular, they will support redistributive legislation, even thatwhich reduces overall welfare, if the beneficiaries can enhancetheir electability more than the victims can detract from it. In thecase where the costs to the victims of organizing their oppositionexceed the costs they bear from the redistribution, legislators willface no penalty and some rewards for enacting such legislation.

To what extent does this account of legislative process corre-spond to reality? We know that sometimes legislatures solvecollective action problems, which increases overall welfare, andsometimes they exacerbate them by using their power to transferwealth from one group to another. Whether any particular legisla-tive act has aspects of welfare-enhancing solutions to collectiveaction problems, or to what extent it rewards favored groups at theexpense of the disfavored and overall welfare, almost always iscontroversial and problematic."' For my purposes, it suffices to as-sert that some legislative actions are both redistributive andwelfare-reducing. A substantial body of literature, generally char-acterized as public choice or political economy, documents thisassertion. While plenty of debate exists around the edges, it is toolate in the day to contest the core point that legislatures on occa-sion engage in wealth-reducing redistribution.

135 Indeed, the very determination implies some baseline as to what counts as a

welfare-enhancing solution, and the choice of any baseline requires normative

judgments about legislative outcomes generally. See Elhauge, supra note 130, at 48-66.


3. The Agency Theory of the Judiciary

Legislatures might redistribute wealth directly or through anagent. A familiar pattern involves a legislative decision to delegateto the judiciary the power to make law within rather capacious lim-its.'36 Much of federal antitrust, communications, and environmentallaw looks like this, with Congress directing rent-seekers to thecourts. 37 Conventional analysis suggests that legislatures will tendto make such delegations in cases where effective interest groupsoppose each other as to outcomes but prefer further competitionfor the agent's choices to the status quo.13 But while litigation un-der such statutory schemes might redistribute wealth, thelegislature sets the boundaries and suggests the broad direction inwhich transfers of wealth should run. The enactment of suchschemes often means that the legislature will keep its hand in, andwill respond to dissatisfaction with, the agent's choices more read-ily than it would in the face of a tabula rasa.

The agency relationship on which these statutory schemes relyresonates with the dominant conception of the judiciary in the law-and-economics literature. Scholars have portrayed judges as the in-strument through which legislators can ensure that deals struck atthe time of enactment will continue to have future effect.139 An in-dependent judiciary, according to this analysis, maximizes thevalue of legislative choices, and therefore the return to legislators.Implicit in this literature, but not fully explored, is the assumptionthat the legislature not only will prefer judges to act in this fashion,but will discipline the judiciary to ensure its loyalty to past legisla-tive commands. Judicial independence, in this perspective, meansnot unconstrained decisionmaking authority, but rather obedienceto authoritative legislative pronouncements in the face of pressures

136The alternative is to delegate to an administrative agency. While muchredistribution doubtlessly takes place behind the veil of agency decisionmaking, and aliterature exists regarding the incentives bureaucrats face to disregard theirobligations to the legislature, these issues are collateral to our inquiry.

137 See Goetz & Brady, supra note 126, at 226-29.'33 Cf. Peter H. Aranson et al., A Theory of Legislative Delegation, 68 Cornell L.

Rev. 1 (1982) (explaining the political economy of delegation).139 William M. Landes & Richard A. Posner, The Independent Judiciary in an

Interest-Group Perspective, 18 J.L. & Econ. 875 (1975); Francesco Parisi, Sources ofLaw and the Institutional Design of Lawmaking, J. Pub. Fin. & Pub. Choice(forthcoming 2001).

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from either interest groups or later legislators to unmake validlyenacted legislative choices.

If the judiciary always were to act as a faithful agent, it does notfollow that redistributive litigation disappears as a concern. Legis-latures might enter into commitments, whether constitutional orinternational, that they might come to regret. If the commitmentdid not symmetrically constrain the judiciary, courts might providean avenue for chiseling. Recall the Films By Jove dispute discussedin Part I, where the Russian state arguably tried to use the courtsto take back intangible property from a foreign investor after re-jecting a legislative expropriation."4 The Russian state plausiblymight have wished to engage in a bait-and-switch game, where itfirst induced foreign investment through a credible commitment toprotect investors and then, when the prospects for further gainsseemed limited, pursued opportunistic expropriations. A loyal ju-diciary would fulfill this wish.

The agency theory does not completely explain the problem. It4rgues that the legislature would want judges to act independentlyof interest groups and current political pressures to maximize thereturn to legislators from their actions. Yet it does not explain whyjudges would want to behave in this fashion, or whether legisla-tures have the capacity or desire to create a system of incentivesthat will maximize this sort of judicial independence.14' And thescope of the phenomenon of redistributive litigation suggests thatanother dimension of judicial activity exists.

4. Litigation and Agency Costs-The Incentives of Judges, Litigants,and Juries

What explains judicial decisions to promote redistribution in theface of legislative silence or even opposition? Why do judges free-lance when it comes to transferring assets in or out of the publicdomain and among private persons? That they sometimes doseems evident, if the examples given in Part I of this paper haveany force. What would lead judges to such indifference to their ob-ligations as agents of the legislature?

140 See supra text accompanying notes 27-29.141 See Gary M. Anderson et al., On the Incentives of Judges to Enforce Legislative

Wealth Transfers, 32 J.L. & Econ. 215 (1989).

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Two possible explanations suggest themselves. First, somethingin the judicial selection process may produce judges with tenden-cies or preferences that do not conform to those of the legislature.Especially where constitutions prescribe the process for selectingjudges, as is the case in most U.S. jurisdictions, legislatures mayfind themselves selecting less than faithful agents. Alternatively,aspects of the litigation process might generate decisions that devi-ate from legislative preferences. Case selection by litigants mightprovide one explanation. The civil jury, which again in most U.S.jurisdictions has a constitutional basis, is another likely source ofsuch departures. I consider each in turn.

a. Judicial Selection

In recent years, a literature on judicial incentives has appeared,but the topic remains underdeveloped. 42 Only recently have schol-ars begun to consider possible connections between judicialselection procedures and court decisionmaking. 4' Differences inthe constitutional structures of the federal government, the severalstates, and various countries preclude any powerful conclusions,but some observations are salient. For our purposes, the most in-teresting is a comparison of the size of trial judgments against out-of-state defendants in three categories of lawsuits: those beforejudges chosen through contested partisan elections; those beforejudges chosen through nonpartisan elections; and those beforejudges chosen in some other manner. The Tabarrok and Helland

142See, e.g., Ronald A. Cass, Judging: Norms and Incentives of RetrospectiveDecision-Making, 75 B.U. L. Rev. 941 (1995); Robert D. Cooter, The Objectives ofPrivate and Public Judges, 41 Pub. Choice 107 (1983); Epstein, supra note 130;Duncan Kennedy, Freedom and Constraint in Adjudication: A Critical Phenomenology,36 J. Legal Educ. 518 (1986); Richard A. Posner, What Do Judges and JusticesMaximize? (The Same Thing Everybody Else Does), 3 Sup. Ct. Econ. Rev. 1 (1993).

143 See, e.g., Mita Bhattacharya & Russell Smyth, The Determinants of JudicialPrestige and Influence: Some Empirical Evidence from the High Court of Australia,30 J. Legal Stud. 223 (2001); J. Mark Ramseyer, The Puzzling (In)Dependence ofCourts: A Comparative Approach, 23 J. Legal Stud. 721 (1994); J. Mark Ramseyer &Eric B. Rasmusen, Judicial Independence in a Civil Law Regime: The Evidence FromJapan, 13 J.L. Econ. & Org. 259 (1997); J. Mark Ramseyer & Eric B. Rasmusen, Whythe Japanese Taxpayer Always Loses, 72 S. Cal. L. Rev. 571 (1999); Eli Salzberger &Paul Fenn, Judicial Independence: Some Evidence from the English Court of Appeal,42 J.L. & Econ. 831 (1999); Alexander Tabarrok & Eric Helland, Court Politics: ThePolitical Economy of Tort Awards, 42 J.L. & Econ. 157 (1999).

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study indicates that judgments are significantly higher in the firstcategory (judges chosen through contested elections) than in theother two, and that no significant difference exists between 'thesecond and third categories.'"

What should we make of the enhanced home-court advantagethat exists where judicial selection involves partisan competitionamong candidates for popular votes? First, it seems unlikely thatsuch judges are more responsive to legislative preferences than areother judges. To be sure, partisan popular elections may subjectthese judges to exactly the same localist preferences that legislatorsface, while judges chosen in a less transparent fashion may enjoy adegree of independence that allows them to counter localist biasesexpressed through legislation. But why would judges selected bymeans other than contested elections systematically resist themandate of the legislature? It seems more plausible to supposethat, all other things being equal, independent judges produceabout the amount of localism that the legislature desires, given thetrade-off between enriching locals and discouraging outside in-vestment.' 45

An alternative hypothesis, consistent with casual empiricism ifnot systematic research, would assert that local lawyers have agreater impact on contested judicial elections than they do on thecontent of legislation, and that, on the whole, these lawyers prefermore predatory localist litigation than does the legislature. Thefirst part of the hypothesis--disproportionate lawyer influence-reflects the general observation that local lawyers traditionallyhave been the largest source of campaign funding in contested ju-dicial elections and that ratings by local bar associations have animpact on the outcome of these contests. The second part is morespeculative, but not outlandish. It rests on two hypotheses: thatlawyers' interests reflect both a desire to maximize the value oftheir services and to please their clients, and that local clients havea greater influence on most lawyers than do outsider clients. The

144 Tabarrok & Helland, supra note 143, at 168-69, 186-87.145 1 am using the term "independent judges" here only as a means of designating

judges not chosen through contested partisan elections. I do not mean to suggest thatthese judges might be indifferent to incentives such as local prestige or that theywould run trials free from the special-interest biases I discuss in the followingsections.

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first hypothesis assumes that the value of a lawyer's services de-pends on the amount of money at stake, so that raising the likelyvalue of claims benefits plaintiffs' and defendants' attorneys sym-metrically. The second assumes that local clients are more likely tochoose to sue locally, as well as to be sued locally, and thus aremore likely to employ local lawyers. If these guesses come close tocapturing the reality of lawyers' preferences, then they may explainwhy lawyers would prefer judges who increase the mean payofffrom litigation (something that enhances the value of legal ser-vices) in cases where outsiders must pay (a class of clients that willhave relatively less impact on lawyers' preferences). Whether thesesuppositions capture reality poses an empirical question, for whichmore data is needed.

In summary, judicial selection processes seem to have some ef-fect on the disposition of judges. Where judges face contestedpopular elections, as they do in roughly half the states, their deci-sions seem more prone to predatory localism than where theyarrive at the bench by other means. This tendency toward localismmay exceed what legislatures typically prefer but may match thepreference of local lawyers.

b. Structural Biases in Litigation

In adversarial proceedings, judges depend heavily on the inter-ests of the litigants to get at information about the dispute. Thisinformation includes not only retrospective accounts about whathappened, but also data and analysis about the likely ex ante con-sequences of the litigation's outcome. In shaping the law, judges toa large extent rely on the parties to inform them about what theirdecisions will accomplishY

The interests of the parties are not likely to coincide with eithergeneral welfare or the preferences of the legislature. In theory, theadversarial process addresses this problem by giving each side anincentive to correct the other's errors. We think of litigation asanalogous to a marketplace, where contesting interests function asinformation-forcing mechanisms. But the marketplace analogy

146 Experience and academic guidance also matter, but even there the parties have adisproportionate role in shaping the judge's perception about how experience andacademic reflection bear on the matter at hand.

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breaks down where structural impediments to market entry exist.In the case of litigation, we can detect at least two such barriers.

First, litigation as we understand it in the United States requiresan ex post dispute, even though the outcome may have ex anteconsequences. We allow precedents to emerge out of cases wherethe parties' interest in the existing dispute may differ significantlyfrom their interests in the precedential impact of the case. Standingdoctrine and its constitutional fellow traveler, the case-and-controversy requirement, keep persons who care about the prece-dent, but not about the disposition of the dispute, from participatingin the litigation.147 As a result, judges and juries systematically willlack significant information about the implications of their deci-sions. Contrast this approach to well-functioning markets, wherethe only barrier to entry is the capacity to bid or to ask.

Second, our reliance on private, as opposed to public, litigants inthe production of legal outcomes results in a skewing of precedentin favor of discrete interest groups. Private actors can control theaccess of courts to disputes through the parallel devices of suit-filing and settlement. A person who would run the risk of settingan unwanted precedent would pass up the opportunity to bring aclaim, even if the claim otherwise has positive value. Conversely,someone faced with a suit that would create a precedent againsttheir interests might choose to settle the suit for an amount in ex-cess of the discounted value of the plaintiff's interest. As long as agroup has the capacity to absorb the cost of obtaining favorableprecedents, and avoiding unfavorable ones, by buying out unwantedcases, it can constrain the choices faced by judicial decisionmakersto a range reflecting the group's interests. And well-organized ho-mogenous groups that can meet standing rules, all other thingsbeing equal, will have a superior ability to make such invest-ments.' 48

Just as it seems plausible to suspect that contested elections ofjudges might promote anti-outsider bias, the likelihood that prece-dent skewing due to structural aspects of private litigation may

147 Cf. Cross, supra note 130, at 363-66 (analyzing relationship between standing and

litigated outcomes); Maxwell L. Steams, Standing Back from the Forest: Justiciabilityand Social Choice, 83 Cal. L. Rev. 1309 (1995) (same).

148 Cf. Cross, supra note 130, at 366-68 (describing the mechanism of precedentselection by repeat players).

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produce anti-outsider outcomes seems substantial. Lawyers andlitigants seeking results that favor locals will confront opportunitiesto sue or to settle more frequently than will outsiders, and thusthey will have more opportunities to shape the array of choices that.judicial decisionmakers face. Lawyers contribute significantly todecisions whether to sue and whether to settle, and reasonably maybe expected to exercise their influence in ways that reflect thebroad interests of their clients (and themselves) collectively, ratherthan the narrow interest of the client at hand. Choosing when tolitigate in ways that maximize the value of local claims against out-siders seems a reasonable strategy for such lawyers to pursue, forthe reasons discussed in the previous Section.

c. Jury Biases

An enigmatic and poorly understood factor in judicial decision-making is the jury. Systematic assessment of the impact of jurybiases on civil litigation is difficult, if not impossible, because of se-lection problems. A direct comparison of jury and judge verdictsgives an incomplete picture, because it fails to consider filing andsettlement choices as well as separating plaintiff and defendantdemands for a jury trial. We thus cannot say with confidence whatthe pool of cases that result in jury verdicts represents. 49 The ab-sence of any significant discrepancy between jury and judge trialverdicts, for example, might mean only that lawyers for plaintiffsand defendants tend to have symmetrical risk assessments and riskpreferences, and chose to try, rather than settle, only cases that aregenuinely unpredictable along a fairly constricted range. Alterna-tively, defendants may be systematically more risk averse thanplaintiffs and thus more likely to settle riskier claims, and juryclaims might be systematically riskier than those tried to a judge.

149On selection effects and how they complicate assessment of judicialdecisionmaking generally, see, e.g., Kevin M. Clermont & Theodore Eisenberg, DoCase Outcomes Really Reveal Anything About the Legal System? Win Rates andRemoval Jurisdiction, 83 Cornell L. Rev. 581 (1998). On the relationship betweenselection effects and jury outcomes, see Kevin M. Clermont & Theodore Eisenberg,Trial by Jury or Judge: Transcending Empiricism, 77 Cornell L. Rev. 1124 (1992). Foran example of scholarship that disregards selection effects, see Valerie P. Hans, TheIllusions and Realities of Jurors' Treatment of Corporate Defendants, 48 DePaul L.Rev. 327,339-40 (1998).

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The basic point is that we lack good empirical evidence whether ju-ries discriminate against certain classes of litigants, and inparticular, whether juries disfavor outsiders in disputes with localparties.

In the absence of solid evidence, we must fall back on anecdotalobservations. It is commonplace among trial lawyers (not just thepopular press) that juries favor local parties against outsiders, es-pecially if the outsider is a profitable corporation. There are somereasons to believe this perception rests on a factual foundation.Limitations on the jury pool-local availability of the jurors-andthe power to exclude outliers through peremptory challenges maycreate an appreciable tendency to tolerate, if not actively pursue,redistribution against deep pocket outsiders. Insiders, by contrast,might possess attributes-community standing, job prospects-thatblunt this tendency.

One narrow but intensive study of litigation practices in Ala-bama bolsters this anecdotal supposition with suggestive, althoughnot conclusive, evidence. Professor George Priest looked at tortclaims filed in three rural, sparsely populated Alabama countiesthat lacked substantial industry.5 ' In these counties, virtually allsuch suits involve claims against outsiders, as there are no localpockets of wealth to be picked. Priest found that virtually all filedsuits included a punitive damages claim, even though by law suchrecoveries are meant to occur only under extraordinary circum-stances.'5' Priest lacked data on the settlement value of the claimsfiled, but did document remarkable jury verdicts.152

The Priest study points to a phenomenon that pervades the an-ecdotal assertions about extravagant jury awards in the UnitedStates: A disproportionate number of extraordinarily large judg-ments occur in a small number of poor rural counties located instates where the appellate courts take a passive role in supervisingthe size of awards. The Loewen litigation arose in exactly such acounty in Mississippi; Texas also produces oversized judgments in a

150 George L. Priest, Punitive Damages Reform: The Case of Alabama, 56 La. L.Rev. 825, 828 (1996).

151 Id. at 828-30.152 Id. at 834-37.


few counties with similar demographics. 53 It may be the case, inshort, that jury involvement in predatory localism is limited to afew jurisdictions, but that in those venues the problem is acute.

d. Summary

Judicial selection, the structure of litigation, and the compositionof juries all can make it likely that litigation will result in some out-comes that legislatures might not prefer. Whether these factorsproduce systematic, as opposed to random, departures from legis-lative preferences is more difficult to determine. Casual empiricismand some scholarly studies suggest that litigation manifests an ob-servable tendency to transfer resources to lawyers in ways that mayharm society as a whole. Less well documented, but plausible, is abias in favor of local interests. This may result in undercutting ofcommitments to protect outside investors.

One should note that the second potential bias-susceptibility topredatory localism due to structural biases-explains a phenome-non that the agency theory of the judiciary also predicts. Courtdecisions that expropriate from outsiders might occur either be-cause the legislature wishes to circumvent commitments .againstthis kind of predation, or because the litigation process tilts againstoutside investors to a greater extent than a legislature may wish.As an analytical matter, this confluence of stories may be trou-bling: We cannot look at instances of predatory litigation anddetermine whether the action reflects or transgresses legislativepreferences. More generally, we cannot look at litigation-based at-tacks on outsiders and generalize what this reveals about theincentives facing the judicial system.

At the same time, the confluence of the two theories points to-ward a common policy response. If a legislature can makecommitments to protect outsiders but has the freedom to chiselthese commitments, its ability to reach optimal solutions of collec-tive action problems is impaired. External constraints on redistributivelitigation then would function as a means of making such commit-

153 On Loewen, see Harr, supra note 42. For a discussion of strategic forum selectionin Texas, see Gregory B. Westfall, The Nature of This Debate: A Look at the TexasForeign Corporation Venue Rule and a Method for Analyzing the Premises andPromises of Tort Reform, 26 Tex. Tech L. Rev. 903 (1995).

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ments more credible, and thus more valuable. Conversely, if struc-tural aspects of the judicial system and litigation produce biasesagainst outsiders, external constraints may be the most effectivemeans of implementing a legislative desire to suppress predatorylocalism. Even though they rest on inconsistent premises, eithertheory provides a justification for using both constitutional and in-ternational law doctrines to constrain local courts in instanceswhere outsider interests seem at risk. Neither justifies using theseconstraints with respect to other instances of redistributive litiga-tion.

B. Legislative Responses to Redistributive Litigation

There is, then, plausibility, if not unassailable proof, in the asser-tion that the judicial process exhibits some biases that will attractrent-seekers not otherwise able to obtain comparable rewards fromother branches of government. But this alone is insufficient to jus-tify external restraints on litigation. Potential beneficiaries willinvest in redistributive litigation only if the payoffs justify the costsof litigating. Large one-time wealth transfers might suffice, but atleast some of the kinds of redistributive litigation discussed in PartI-for example, the displacement of a private property right with apublic access right-will justify the effort only if they prove endur-ing. And for a benefit to endure, it must not face a reasonableprospect of legislative reversal.

Consider the beach easement cases,'54 which have sought toforce owners of beachfront lots to open up their property to thegeneral public. If the wealth transfer that these cases pursue wereto have a significant effect on local property owners, would not oneexpect the owners to obtain redress from the legislature? What sys-tematic obstacles would bar a legislative response?

I do not mean to say that the prospect of legislative reversal al-ways serves as an adequate safeguard against redistributivelitigation. The status quo, including a status quo attained throughjudicial fiat, always enjoys the benefit of those institutional featuresthat deter legislative action. The legislative process entails costs;otherwise we would care only about the ex post effects of judicial

154 See supra text accompanying notes 35-37.

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lawmaking and never worry about bad precedents. Opponents ofcorrective legislation, having seized victory in the courts, may bot-tle up any bill that threatens their gains. And the threat ofexpropriative outcomes prevailing, notwithstanding the possibilityof legislative action, might diminish social welfare.

This argument for erecting some general constraints on judicialredistribution is weaker than it might first appear. External con-straints also involve costs. The tribunals may make mistakes,overturning just and socially desirable rulings. The possibility of in-tervention by such bodies might deter courts from reachingwelfare-enhancing rulings or providing reasonable guidancethrough their opinions. People with valid legal claims might notpursue them because they expect an external constraint to kick in.More fundamentally, an external solution relieves local decision-makers of the responsibility for confronting and rectifying localproblems. Externally imposed constraints may not only demoralizelocal lawmakers, but they may also teach them to test the limits ofthose constraints and otherwise to take risks at the expense of thegeneral welfare.

These concerns do not suggest that external constraints shouldnever apply. Rather, they clarify the burden that a proponent ofsuch constraints should bear. Part of the case for allowing externalbodies to police local law, whether it be federal courts exercisingconstitutional review or international arbitrations bodies enforcingtreaties, must include an explanation why local legislatures cannotprovide sufficient supervision over their courts. Systematic, ratherthan anecdotal, explanations of legislative inadequacy are required.

In addressing these difficult questions, it may be helpful to re-turn to the categories of redistributive litigation developed in PartI, using predatory localism as a lens for understanding when a con-straint on litigation might produce benefits in excess of costs. Thekinds of lawsuits I consider involve litigation on behalf of the state,claims against the state, private suits to create a commons, privatesuits to carve property rights out of a commons, and suits to rear-range rights among private owners. None of these categoriescomprises exclusively predatory localism, but some present agreater likelihood of that dynamic than do others.

First, where the state is the claimant, as in the tobacco and gunsuits, the legislature normally can supervise the government agents

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asserting the claim as well as it can oversee the courts in which thecase is brought. Budget constraints set by the legislature normallywould limit rent-seeking outlays (ignoring special arrangements,such as when private attorneys take on the case under contingencyfee arrangements).'55 The only systematic deficiency in legislativesupervision may occur in situations that present significant exter-nalities, that is, where losses fall on outsiders. In all other instances,the risk of provoking the legislature probably is sufficient to deteroverreaching.

Second, where the State is the defendant, the legislature nor-mally is in a good position to supervise the case and, whereappropriate, to enact rules that forestall surprising applications ofpreexisting law. Moreover, this category presents the least risk ofexternalities. Any payout must come out of the locality's budget,and presumably all parties involved in the local government wouldhave an incentive to prevent that from happening. The marginalbenefits to be obtained by adding an alternative check on this cate-gory of redistributive litigation seem nonexistent.

Third, where the litigation has as its object the conversion of aprivate right into a public right, the incentives seem similar to thosein the first category (suits brought by government). If the litigationachieves its purpose, the benefits will accrue to the general public.The legislature normally should be in as good a position as any ex-ternal entity to determine whether the benefits of such transfersjustify the costs. The exception again is the case where the costs areexternalized to outsiders.

Fourth, where the litigation seeks to convert a public right into aprivate one, the analytics resemble those applicable to the secondcategory. In both instances, the question is whether the agent cho-sen to represent the interests of the general public will haveappropriate incentives for doing so. Where the State is sued di-rectly, one asks whether the legislature will ride herd on thegovernment lawyers handling the case. Where a private personseeks to wrest something away from the general public, the issuebecomes whether the person chosen to represent the public inter-

155 Such arrangements do exist. In one case with which I am familiar, the

government plaintiff transferred a percentage of its claim outright to the privateattorneys who represented the government in the litigation.


est (whether selected by the private litigant or by the court) willfunction as an adequate representative, as well as whether the leg-islature will act on behalf of the (perhaps dispersed) group ofpersons who derive real benefits from access to the challengedcommons. These may present hard cases, but the externality prob-lem should not be present. Accordingly, as with the secondcategory, there is no good argument for erecting a special, externalconstraint on this sort of lawsuit.

Fifth, where the litigation results in a direct transfer from oneprivate party to another, the risks of losses attributable to invest-ments in rent-seeking and undesirable transfers of rights are attheir peak. But even here, if the potential losers have equal accessto the legislature with the rent-seekers, there is no a priori reasonwhy an external check would do a better job of deterring undesir-able efforts than would the risk of legislative reversal. As incategories one and three, the exception involves outsiders.

In summary, once one concedes to legislatures a capacity to su-pervise the judiciary, the case for external constraints on suitsagainst the state and litigation that would convert rights held incommon into private interests cannot be made. In other cases, wekeep coming back to the problem of outsiders. I discussed abovetwo theories that provide a systematic accounting for legislativefailures to address redistributive judicial behavior that victimizesstrangers. Under the agency theory, legislatures might prefer to re-nege on commitments to resolve collective action problems if theycan do so without full accountability. Using the judiciary as ameans of chiseling satisfies this need. Alternatively, under an inter-est-group theory of litigation, legislatures may be unable, except atan unacceptable cost, to counteract the anti-outsider biases thatlitigation contains. Each theory points toward discrete steps tolimit redistributive litigation.

C. The Shape of External Constraints

External constraints on unwanted judicial outcomes can come intwo forms. An outside body can review the outcomes of litigation,as a federal court does when it intervenes in a state lawsuit and aninternational arbitration body does when it holds a government li-able in damages for the consequences of judicial action.Alternatively, the constraint can forestall unwanted outcomes by

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permitting the transfer of litigation to a more neutral forum. TheUnited States can pursue each of these strategies with only minoradjustments in its contemporary legal practice.

1. Revisiting Takings and Expropriation Law

Empowering an outside body to review local court decisions re-quires some kind of commitment, whether constitutional orstatutory. In the United States, one can locate the constitutionalantecedents for federal court review of redistributive state litiga-tion in the Takings Clause and a mixture of due process andconstitutional common-law cases going back to the nineteenth cen-tury. The statutory commitments involve treaties (approved by asupermajority of the Senate, rather than majorities of both Housesas with ordinary legislation) and enactments implementing interna-tional agreements.'56 I offer a brief account of how the presentcommitments, as currently interpreted, may extend to redistribu-tive litigation.

With respect to constitutional doctrine, Justice Stewart's sugges-tion about application of the Takings Clause to judicial outcomesprovides an entry to the problem, but not a solution.157 There are atleast two impediments to a straightforward translation of contem-porary takings doctrine to litigation. First, the core instability ofcurrent doctrine makes a wholesale extension to the judiciary unat-tractive.15 Until we have a better sense of what it is that constitutesa taking, we should refrain from a path that would rob a widerange of litigated outcomes of their finality. Second, throughout itshistory, takings doctrine has revealed a tension between a felt needto protect property qua property, as in the "vested rights" line of

156 I note, but have no intention of addressing here, the question whether the U.S.Constitution requires certain legal enactments to take the form of a treaty rather thana statute. See Made in the USA Found. v. United States, 242 F.3d 1300, 1311-14 (11thCir. 2001) (refusing to address issue on merits); Bruce Ackerman & David Golove, IsNAFTA Constitutional?, 108 Harv. L. Rev. 799 (1995); Joel R. Paul, The GeopoliticalConstitution: Executive Expediency and Executive Agreements, 86 Cal. L. Rev. 671(1998); Paul B. Stephan, Accountability and International Lawmaking: Rules, Rentsand Legitimacy, 17 Nw. J. Int'l L. & Bus. 681, 721-23 (1996-97); Laurence H. Tribe,Taking Text and Structure Seriously: Reflections on Free-Form Method inConstitutional Interpretation, 108 Harv. L. Rev. 1221 (1995).

See supra text accompanying notes 78-83.15 On the instability, see supra text accompanying note 17.

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cases, and an effort to limit federal intervention to instances wherelocal action threatened the national common market. It seemsunlikely that we can entirely strip contemporary doctrine of theprecedents that reflect the first impulse, but only the second re-sponds to the considerations that justify imposing externalconstraints on local litigation.

Still, Stewart's insight that courts should not get a pass whenthey act in ways that are unconstitutional for other state actors re-mains sound. If takings doctrine remains too problematic to applywholesale to the courts, it still can serve as a medium for bringingin other constitutional constraints. The most salient substantivecheck for present purposes is the enduring principle that the statesmay not act in ways that discriminate against interstate or foreigncommerce. Although adding flesh to this principle has proven chal-lenging-What counts as discrimination? What state purposesjustify otherwise discriminatory action?-there is an irreduciblecore that could apply to litigation as much as legislation or adminis-trative action. One can imagine the position of Justice Scalia-thatstate action violates the Constitution "if, and only if, it accords dis-criminatory treatment to interstate [or foreign] commerce in arespect not required to achieve a lawful state purpose"5 -- as in-forming federal supervision of state litigation undertaking throughthe Takings Clause. Such supervision would not require a radicaldisruption of the relations between federal and state courts, butrather rests on the well-established, if seldom applied, idea thatstate courts may not twist local law to defeat a federal interest."6

I do not mean to neglect the other problems that expanded con-stitutional supervision of state court judgments would entail. Themove presents technical as well as deep political problems. Butnone of the obstacles is insurmountable."

159 Bendix Autolite Corp. v. Midwesco Enters. 486 U.S. 888, 898 (1988) (Scalia, J.,concurring). Justice Scalia's stance is controversial, and has not enjoyed the supportof the full Court, but only because others regard it as underinclusive. As a minimalistposition, it seems the most likely to underlie an extension of the takings clause tostate court actions.

160 See authorities cited in supra note 8.161 The technical questions include determining when a takings question first arises

in a state suit that produces a surprising application of a legal rule, cf. Rooker v.Fidelity Trust Co., 261 U.S. 114 (1923); Reynolds v. Georgia, 640 F.2d 702 (5th Cir.1981); Williams v. Adkinson, 792 F. Supp. 755 (M.D. Ala. 1992), aff'd without

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As for international law, the issue is one of nonretrocession, notextension. The Loewen case embraces the principle that the stan-dard terms of protection against expropriation found ininternational agreements that the United States endorses apply tolitigation as much as to other governmental actions. To be sure, wedo not have much experience applying this principle to actualcases, and thus do not have any sense of what it means in practice.At a minimum, however, my arguments about the scope of collec-tive action problems, the purposes of investment protectiontreaties, and the incentives involved in litigation suggest that theLoewen principle is both defensible and desirable. By definition itapplies only to outsiders, because only foreign investors can claimthe benefit of international law's protection against expropria-tion.62

2. Federal Court Removal Jurisdiction as a Procedural Alternative

During both the nineteenth and twentieth century, the SupremeCourt not only engaged in substantive review of state court deci-sions that it regarded as hostile to federal interests, but tweakedthe rules governing federal court jurisdiction to make it easier forpersons likely to suffer at the hands of state judges to obtain a fed-eral hearing. When the Court believed that the state courts woulddiscriminate against out-of-state investors, it adopted interpreta-tions of diversity jurisdiction that made it easier for these investorsto assert their claims in federal court. 63 In the last century, con-vinced that state courts would not fully implement the revolutionin constitutional procedure it had mandated, the Court radically

opinion, 987 F.2d 774 (11th Cir. 1993); deciding when a state court determination hasbecome sufficiently final to constitute a taking, cf. Williamson County Reg'l PlanningComm'n v. Hamilton Bank of Johnson City, 473 U.S. 172 (1985); and contriving ajust-compensation remedy, given the lack of funds at the disposal of courts, seeThompson, supra note 7, at 1513-22.

162There may be conceptual arguments in favor of recognizing a broader norm

protecting citizens from their own governments with respect to investments. See PaulB. Stephan, Creative Destruction-Idiosyncratic Claims of International Law and theHelms-Burton Legislation, 27 Stetson L. Rev. 1341 (1998) (describing the argumentfor broadening protection). These arguments, however, turn on premises other thanthose raised by collective action problems, in particular, substantive claims abouthuman dignity, freedom, and flourishing. They thus have no bearing on the issuesraised by this Article.

163 See supra note 67 and accompanying text.

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broadened federal habeas jurisdiction to permit full relitigation ofa wide range of state criminal cases." In both instances, the Courtsaw state courts as the problem and federal court jurisdiction as thesolution.

A few relatively recent lower court opinions have employed acomparable strategy with respect to lawsuits brought against out-siders that involve international transactions. Typical is Sequihua v.Texaco, Inc.," a suit brought by Ecuadorians in a Texas state courtunder Texas law claiming that out-of-state U.S. corporations hadcaused significant environmental damage in Ecuador. Because theplaintiffs had joined at least one Texas defendant, the defendantscould remove the case to federal court only if they could character-ize the plaintiffs' claim as presenting a federal question.1" Thedistrict court ruled that the case implicated the federal commonlaw of federal relations, even though the plaintiffs asserted norights derived from federal law.167 Having upheld removal jurisdic-tion, the court proceeded to dismiss the case under the forum nonconveniens doctrine, something that a state court would not havedone."s One has difficulty suppressing the suspicion that the courtsaw its principal obligation as rescuing a large out-of-state corpora-tion from the depredations of the Texas state courts, even thoughthe plaintiffs (although not their attorneys) also were outsiders.

The difficulty that cases such as Sequihua present is the indeter-minancy of the standard used to federalize the question presented.As Professor Jack Goldsmith has argued persuasively, we nolonger live in a world where foreign relations provides a meaning-ful basis for sorting among cases. In a global economy, it is hard tofind a private dispute that does not implicate foreign relations in

164 See supra note 76 and accompanying text.165 847 F. Supp. 61 (S.D. Tex. 1994). After the Texas district court dismissed the

case, essentially the same claim was filed in federal court in New York. Jota v.Texaco, Inc., 157 F.3d 153 (2d Cir. 1998), dismissed on remand sub nom., Aguinda v.Texaco, Inc., 142 F. Supp. 2d 534 (S.D.N.Y. 2001). For description of these cases, seeJack L. Goldsmith, Federal Courts, Foreign Affairs, and Federalism, 83 Va. L. Rev.1617, 1634-36 (1997).

166The federal removal statute, 28 U.S.C. § 1441 (1994), permits defendants toremove a state case to federal court if either the claim presents a federal question or ifdiversity exists and no defendant is a citizen of the forum state. Id. § 1441(a)-(b).

167 Sequihua, 847 F. Supp. at 62-63.163 Id. at 63-65.

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some respect. 6 9 At its core, the invocation of foreign relations as ameans of federalizing a dispute is essentially lawless, and thereforeprofoundly unsatisfactory.

This critique does not mean that all instances of supplantingstate court jurisdiction necessarily are illegitimate. It maintainsonly that the language of the removal statute, which refers to a"civil action.., founded on a claim or right arising under the Con-stitution, treaties or laws of the United States, ' 170 cannotreasonably reach claims resting on state law that happen to haveimplications for the foreign relations of the United States. But,were Congress to enact specific legislation authorizing removal incertain cases, a different issue would arise.

Recall the prior discussion of the different theories explainingjudicial incentives and anti-outsider tendencies. If the agency the-ory provides a comprehensive account of how judges behave, thenwe should not expect Congress to enact a statute that reduces therisk that cases like Loewen will arise in the future. Under this the-ory, Congress wants the state courts to help our country chisel onthe commitments embodied in Chapter XI of NAFTA. If, on theother hand, Congress would prefer that state courts not engage inlitigation that threatens investors from Canada and Mexico, butfinds direct interference too costly, it might enact a specifically tai-lored removal statute as a form of prophylactic.

Imagine that Congress did enact a statute giving all personsclaiming Canadian or Mexican citizenship, or businesses owned orcontrolled by Canadian or Mexican persons, the right to removelitigation brought against them in a state court to the correspond-ing federal court and to choose to bring suits against U.S. personsin federal courts. The obvious analog is the Foreign Sovereign Im-munities Act, which entitles foreign sovereigns to have essentiallyall claims to which they are a party heard in federal court.171 Just as

169 Goldsmith, supra note 165, at 1712-13.170 28 U.S.C. § 1441.171 Under Title 28 § 1330 (2000) federal courts have jurisdiction over all civil actions

brought against a foreign sovereign. This provision does not bar a foreign sovereignfrom consenting to suit in state court. Under Title 28 § 1332(a)(4) (2000) a foreignsovereign has the right to bring a suit against U.S. citizens (but not against foreignpersons) in federal court. Again, the sovereign has the right to elect to sue instead in astate court, and, if the claim is not founded on or does not arise under federal law, the


the Foreign Sovereign Immunities Act safeguards against localhostility to foreign governments by affording them the federal ju-risdictional option, Congress might conclude that the commitmentsmade under NAFTA to Canadian and Mexican investors requiregiving them the power to transfer their lawsuits to federal courts.

As an initial matter, it seems reasonably clear that Congress hasthe constitutional authority to enact such a statute. The SupremeCourt in Verlinden B.V. v. Central Bank of Nigeria172 upheld theanalogous provisions of the Foreign Sovereign Immunity Actagainst a claim that federal diversity jurisdiction did not extend tosuits by an alien against another alien. The Court held that Con-gress could regard suits brought by and against foreign sovereignsas "arising under" federal law within the meaning of Article III ofthe Constitution, even if no claim in the litigation "arose" underfederal law."7

Verlinden has both technical and jurisprudential aspects that in-form discussion of my hypothetical NAFTA-jurisdiction statute.As a technical matter, the Court consistently and plausibly has dis-tinguished the question of what constitutes a federal questionunder Article III from the issue of what part of that jurisdiction theenacted statutes exercise, even though the constitutional and statu-tory language largely overlaps." The distinction rests on animportant insight about the respective decisionmaking capacity ofcourts and legislatures. Deliberate choices by Congress about thejurisdiction of federal courts typically do not present the prospectof open-ended discretion and merit respect absent a strong struc-tural reason to oppose them." Efforts by courts to capitalize onthe unbounded text of the jurisdictional statutes, by contrast,

defendants must abide by that choice, unless none of the defendants is a citizen of theforum state.

in 461 U.S. 480 (1983).173 Id. at 491-97.174 See, e.g., Louisville & Nashville R.R. Co. v. Mottley, 211 U.S. 149 (1908); Osborn

v. Bank of the United States, 22 U.S. (9 Wheat.) 738 (1824).175 The strongest objection to the extension of federal court jurisdiction under

discussion would rest on federalism grounds. My colleague, Professor Bradley, hasargued persuasively that the existence of an international agreement should notinsulate enactments from federalism constraints. Curtis A. Bradley, The Treaty Powerand American Federalism, 97 Mich. L. Rev. 390 (1998). Professor Tribe has argued,although to my mind not persuasively, that NAFTA encroaches excessively on areasof state prerogatives. Tribe, supra note 156, at 1249-78.

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smack of results-oriented adjudication that undermines confidencein the litigation process. The kind of discretion Congress exerciseswhen it frames a statute is ex ante, and Congress must live with theresults. The kind of discretion courts may exercise when they ag-gressively interpret a statute, by contrast, too often implicatesprejudgment of the case before the court.

To summarize, the external constraint to which the UnitedStates currently binds itself-Chapter XI of NAFTA, enforceablethrough binding arbitration-may prompt a form of internal con-straint, namely an extension of federal court jurisdiction overprivate lawsuits to which persons protected by NAFTA are parties.This extension would not eliminate the risk of Chapter XI liability,but would address an important source of the risk. Whether Con-gress takes this step might shed some light on the relative validityof the agency and interest-group theories of judicial behavior de-scribed in the prior Section of this Article.

CONCLUSION

If one is prepared to view the international law norm against un-compensated expropriation of foreigners as generally beneficial,then a lot follows. The extension of this norm to judicial activityseems logical, even if not ineluctable. The norm resonates with anintuition that the welfare argument for rules seems especiallystrong where rules solve collective action problems with relativelylow agency costs. The norm also identifies the cases where collec-tive action problems are likely to exist, namely where investors,however wealthy or sophisticated, remain vulnerable to local deci-sionmaking processes to which they have only incomplete access.And there are good reasons to believe that litigation can be such adecisionmaking process.

The negative pregnant of this intuition also is significant. It sug-gests that redistribution, including redistributive litigation, thatdoes not target outsiders presents a weak case for external inter-vention. Absent a strong moral commitment to protecting thoseinterests that property and contract rights embody, we can com-fortably leave these kinds of disruptions of settled expectations tothe realm of politics.

But embracing the international law norm requires countrieswith independent and activist judiciaries to reconsider what re-

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straints their judges should face. For the United States, this meansin particular contemplating the use of the Takings Clause as acheck on judicial behavior, and at the same time using expropria-tion law as a template for determining the content of thatconstitutional regime. Each of these tasks is challenging, but doesnot pose a sharp break with the status quo.

That takings doctrine might supplement international commit-ments against expropriation seems sensible, if not inevitable. Theargument for the extension rests on a core commitment of the U.S.constitutional system, namely the unification of the national mar-ket in the context of local decisionmaking. Once we recognize thatmany persons may be insiders as to the United States but outsidersof the communities in which they invest, the relevance of the inter-national law norm and the need to extend it to this class ofoutsiders seems obvious. But once one embraces a rule that pro-tects U.S. persons against U.S. localities, one has difficulty notextending the protection to foreigners. Regardless of whether the.U.S. Constitution requires that the property of foreigners receiveprotection comparable to that bestowed on U.S.-owned property,strong nondiscrimination norms of international law long advo-cated by the United States demand this result. The outcome is alegal regime that marries constitutional and international commit-ments, each setting boundaries on and informing the other.

The idea that takings doctrine might look to expropriation lawto clarify its content may strike some as bizarre. A century ago theSupreme Court may have borrowed norms from internationalpractice to inform its interpretation of the Constitution, but todaywe can dismiss that practice as the product of empty formalism andan outmoded understanding of judicial lawmaking. 176 Now that weunderstand international law as a body of rules and standardspremised on state practice and consent, we can assert its irrele-vance to a state system designed to promote ordered liberty andthe flourishing of the individual.

176 Perhaps the most prominent example where the Supreme Court transposed

patterns it perceived in international law onto the domestic Constitution is Pennoyer

v. Neff, 95 U.S. 714 (1877). For the argument that this kind of decisionmaking rested

on what we now see as outmoded conceptual architecture, see Lawrence Lessig,

Understanding Changed Readings: Fidelity and Theory, 47 Stan. L. Rev. 395 (1995).

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But this argument confuses lawmaking process with a law's func-tion. Granted, the means by which we fabricate international andconstitutional law are so different as to constitute separate uni-verses. They rest on completely different bases of authority andlegitimacy, and to the extent such considerations matter, we shouldnot confuse them. But function can overlap, and, I have arguedthroughout this Article, in the case of takings and expropriationlaw, they do. Both make sense, within the context of welfare norms,as a precommitment designed to overcome a collective actionproblem. Expropriation law does this obviously, while takings doc-trine seems more confused. If the present confusion in takings lawis undesirable-and I am not aware of anyone willing to defend thestatus quo-then we can do worse than look for clarity to a body oflaw that has a common history, addresses common problems, andhas adapted to comparable evolutionary pressures.

Any response to the problem of redistributive litigation, whetherdoctrinal or statutory, also suggests broader themes embedded injudicial lawmaking. It is appropriate, and even necessary, to con-sider judges as lawmakers, and this consideration must extend tothe forces and interests that influence what these lawmakers do.Such an inquiry may put popular perceptions of judicial legitimacyat risk, to the extent our collective faith in what judges do rests onmagical thinking rather than cold analysis. But it also can give us abetter sense of how judicial decisionmakers, operating under con-ditions of bounded rationality, can serve us even while theysometimes serve themselves.

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