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by pgoffner on October 29, 2020

Fixing the United States Postal Service: How Congress Must Act to Bring Financial Stability to the Agency and Comprehensive Mail Service to the American People

Congresswoman Alma S. Adams, Ph.D. and Gordon E. Holzberg

I. INTRODUCTION

The United States Postal Service (“USPS”) — first established as the United States Post Office with the Post Office Act of 1792 — has long served the American people. As of 2020, the Postal Service employs over 600,000 people,1See Fact #238, U.S. POSTAL SERV., https://facts.usps.com/size-and-scope/#fact238 [https://perma.cc/V2MA-RHME]. operates over 31,000 retail locations,2See Fact #226, U.S. POSTAL SERV., https://facts.usps.com/size-and-scope/#fact226 [https://perma.cc/6AW5-P9EC]. and handles 48% of the world’s daily mail flow.3See Fact #362, U.S. POSTAL SERV., https://facts.usps.com/size-and-scope/#fact226 [https://perma.cc/7XSC-398Y].

With the help of Congress, the Postal Service has evolved over the generations to adapt to the pressures at hand. In the late 1960s, those pressures—which included declining revenue, increasing operating expenses, and employee dissatisfaction4See OFFICES OF THE HISTORIAN AND GOV’T RELATIONS AND PUB. POLICY, U.S. POSTAL SERV., 100 THE UNITED STATES POSTAL SERVICE: AN AMERICAN HISTORY 60 (2020), https://about.usps.com/publications/pub100.pdf [https://perma.cc/SW9B-KXTW] [hereinafter USPS HISTORY]. —facilitated the evolution of the U.S. Post Office Department into the U.S. Postal Service, the agency that currently provides mail service in the United States.5See Postal Reorganization Act of 1970, Pub. L. No. 91-375, 84 Stat. 719 In the early 2000s, the pressures centered on declining mail volume.6See CONG. RESEARCH SERV., R40983, THE POSTAL ACCOUNTABILITY AND ENHANCEMENT ACT: OVERVIEW AND ISSUES FOR CONGRESS (2009), https://fas.org/sgp/crs/misc/R40983.pdf [https://perma.cc/9B6G-X4JP]. Now, USPS faces yet another crisis, in addition to the declining volume of letters and flat mail7Hearings on The Financial Condition of the Postal Service Before the H. Comm. on Oversight and Reform, 116th Cong. 3 (2019) (statement of Megan J. Brennan, Postmaster General and Chief Executive Officer, U.S. Postal Service), https://about.usps.com/news/testimony/2019/pr19_pmg0430.pdf [https://perma.cc/SH3F-DJGR].: the massive sums owed by the Postal Service to its retirees.8Id. at 12–13. Fortunately, however, Congress has both the power and the prerogative to identify and enact solutions to these problems.

The first section of this essay will explore the reformation of the Post Office into the Postal Service. The next will examine legislation passed in 2006 that impacted the Postal Service’s current dismal financial status. The final section will lay out a comprehensive vision of the postal reforms needed to ensure the long-term health of this vital institution.

II. THE POSTAL REORGANIZATION ACT OF 1970

The reorganization of the Post Office into the Postal Service has its genesis in the post-World War II economic boom.9Ryan Ellis, The Birth of the USPS and Politics of Postal Reform, MIT PRESS READER (Aug. 17, 2020), https://thereader.mitpress.mit.edu/birth-of-usps-politics-of-postal-reform/ [https://perma.cc/X3EK-3482]. Mail volume more than doubled from 27.7 billion pieces per year in 1940 to 84.8 billion pieces by 1970.10See First-Class Mail Volume Since 1926, U.S. POSTAL SERV., https://about.usps.com/who-we-are/postal-history/first-class-mail-since-1926.htm [https://perma.cc/Z5UE-KFYG]. Though revenue rose as a result of the growing mail volume, it did not rise fast enough to meet growing outlays.11Ellis, supra note 9. At that time, Congress directly oversaw the Post Office Department through the Post Office and Civil Service Committees of the House and Senate; they repeatedly refused to raise postage rates to generate needed revenue.12See USPS HISTORY, supra note 4, at 60–62. As a result of Congress’s failure to pursue unpopular but necessary rate increases, beginning in 1946 until its reorganization in 1970, the Post Office reported an annual deficit that exceeded $1 billion in total.13See Ellis, supra note 11.

Under the strain of flagging revenue, burgeoning mail volume, and aging infrastructure,14See USPS HISTORY, supra note 4, at 60. the national mail system began to exhibit signs of stress. Following a “political catastrophe” at the 1966 Chicago Post Office, which experienced a backlog of 10 million pieces of mail,15STAFF OF H. COMM. ON POST OFFICE AND CIVIL SERV., 94TH CONG., TOWARD POSTAL EXCELLENCE: THE REPORT OF THE PRESIDENT’S COMMISSION ON POSTAL ORGANIZATIONS (1968), https://ufdc.ufl.edu/AA00024775/00001/19x [https://perma.cc/9H8L-Q6ZW]. and subsequent hearings by the powerful House Appropriations Committee, President Lyndon B. Johnson created the President’s Commission on Postal Organization to investigate and make recommendations concerning the future of the Post Office.16See USPS HISTORY, supra note 4, at 61–62. The Commission would take its name after its chair—Frederick Kappel, the chairman of AT&T.17USPS HISTORY, supra note 4, at 61.

The Commission’s report, entitled “Towards Postal Excellence: The Report of the President’s Commission on Postal Organization,” was released in June 1968 and made five major recommendations to Congress.18See REPORT OF PRESIDENT’S COMMISSION ON POSTAL ORGANIZATIONS, supra note 15, at 55–63. Chiefly, the Commission recommended that “a Postal Corporation owned entirely by the Federal Government be chartered by Congress to operate the postal service of the United States on a self-supporting basis.”19REPORT OF PRESIDENT’S COMMISSION ON POSTAL ORGANIZATIONS, supra note 15, at 2. The seeds of the Postal Service had been planted.

Simultaneously, another crisis reached its boiling point. To properly manage the growing mail volume, the Post Office hired more workers: the number of Post Office employees grew from 408,987 in 1960 to 548,572 in 1970.20See Number of Postal Employees Since 1926, U.S. POSTAL SERV., https://about.usps.com/who-we-are/postal-history/employees-since-1926.pdf [https://perma.cc/Y6PE-PB69] (last updated Feb. 2020). Inflation also rose year-over-year during the 1960s, approaching five percent annually by 1970.21Athanasios Orphanides & John C. Williams, Monetary Policy Mistakes and the Evolution of Inflation Expectations 12 (Fed. Res. Bank of S.F., Working Paper No. 2010-12, 2011), https://www.frbsf.org/economic-research/files/wp10-12bk.pdf [https://perma.cc/DZ2V-Y8DH]. Moreover, although President John F. Kennedy’s Executive Order 10988 had given federal employees the right to collectively bargain,22Exec. Order. No. 10988, 3 C.F.R. § 1959-63 Comp., p. 521, reprinted in 5 U.S.C. 631 (Jan. 17, 1962). the wages of postal workers could only be raised by Congress, and were stagnant as a result.23See USPS HISTORY, supra note 4, at 60. Wages for postal workers were so low, it was not unheard of for postal workers to be eligible for food stamps.24See APWU History: Early Days of Postal Unions, AM. POSTAL WORKERS UNION, https://apwu.org/apwu-history [https://perma.cc/BFW9-SURA].

Spurned by Congress and the Nixon Administration and crushed by inflation, postal workers took action. Without the approval of national union leaders, local union chapters in New York City voted to strike on March 18, 1970.25See The Postal Work-Stoppage, March 17-26, 1970, DEPT. OF THE U.S. ARMY (2009), https://www.nalc.org/news/the-postal-record/2010/may-2010/document/PostalWorkStoppage_GraphicHand_1970.pdf [https://perma.cc/79JH-784E] (The vote tally finished at 10:30pm on March 17, 1970, but the strike could not begin until work started the next day.). The wildcat Postal Strike of 1970—one of the largest strikes in American History—brought New York City to its knees; in an era before the internet or digital communication, almost all business was handled by mail, and major banking and financial institutions ground to a halt.

The crisis, though not entirely of Congress’s making, demanded a legislative solution that had been long delayed. By August 1970, the Senate passed the final version of H.R. 17070, the Postal Reorganization Act.26See Postal Reorganization Act of 1970, Pub. L. No. 91-375, 84 Stat. 719. The legislation was signed by President Nixon on August 12 of that year, and the U.S. Post Office Department was officially reorganized into the U.S. Postal Service.27See USPS HISTORY, supra note 4, at 64. From then on, the Postal Service would fund itself primarily through postage and services rendered.28USPS HISTORY, supra note 4, at 65.

Additionally, the postal workers so long overlooked by Congress and Democratic and Republican presidents had proven their point: essential workers deserved competitive pay. Ultimately, the workers secured a six percent raise, with an additional eight percent to come following the reorganization of the Post Office Department.29USPS HISTORY, supra note 4, at 64. They also earned, crucially, the right to collectively bargain for their wages.30USPS HISTORY, supra note 4, at 65.

With its newfound independence, the Postal Service had greater flexibility than ever before to control its fate. A new Postal Rate Commission was established to set service rates; unions could collectively bargain on wages for their members; and the pay of USPS employees became competitive.31USPS HISTORY, supra note 4, at 65. Independence, though, came with a price, and it would not be long before an evolving economy would require Congress to revisit the federal government’s relationship with the Postal Service.

III. POSTAL ACCOUNTABILITY AND ENHANCEMENT ACT OF 2006

Though USPS had managed itself successfully since its reorganization in 1970, by the early 2000s the subject of postal reform had once again returned to the halls of Congress. First, first-class mail—the mainstay of the Postal Service’s revenue—had peaked in 2001 at 103.3 billion pieces and slowly declined thereafter until the Great Recession facilitated a further precipitous drop.32See First-Class Mail Volume Since 1926, U.S. POSTAL SERV., https://about.usps.com/who-we-are/postal-history/first-class-mail-since-1926.htm [https://perma.cc/Z5UE-KFYG]. Second, the Postal Service had reached its largest-ever size in terms of mail processing facilities, locations, and employees by the turn of the century.33See Number of Postal Employees Since 1926, supra note 20. The size of the Postal Service was not and is not a bad thing; in fact, it meant more good, stable jobs for Americans in all corners of the country.34Jeff Brady, Black Americans Worry Postal Changes Could Disrupt History of Secure Jobs, NPR (Aug. 31, 2020), https://www.npr.org/2020/08/31/907062526/black-americans-worry-postal-changes-could-disrupt-history-of-secure-jobs [https://perma.cc/3X2N-GVMP]. But it also meant that it had a large number of employees to provide for. Third, the Postal Rate Commission, the regulatory body established by the Postal Reorganization Act of 1970, needed significant reform.35See CONG. RESEARCH SERV., R40983, supra note 6, at 1. Raising rates on USPS services and goods was a long, time-consuming process that prevented the Postal Service from quickly responding to the changing business environment in which it found itself.36CONG. RESEARCH SERV., R40983, supra note 6, at 1.

Congress first tackled these issues by passing the Postal Civil Service Retirement System (“CSRS”) Funding Reform Act of 2003 (“PCSRSFRA”).37See Postal Civil Service Retirement System Funding Reform Act of 2003, Pub. L. No. 108-18, 117 Stat. 624 (codified as amended in scattered sections of 5 and 39 U.S.C.). While a complete review of PCSRSFRA is beyond the scope of this piece, it is important to know that the Postal Service had been overpaying its requirements to the CSRS and recouped billions when the legislation required that the federal government transfer those funds back to the Postal Service.38U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-04-238, POSTAL PENSION FUNDING REFORM: ISSUES RELATED TO THE POSTAL SERVICES PROPOSED USE OF PENSION SAVINGS (2003), https://www.gao.gov/assets/250/240766.pdf [https://perma.cc/FUB2-KZGY]. Additionally, the enactment of the PCSRSFRA reduced the Postal Service’s outlays by $2.5 billion annually by transferring pension liability for Postal Service employees who were veterans to the Department of the Treasury.39Id. at 2. Congress required that those savings be used to pay down debt that USPS had accrued,40S. Rep. No. 108-35, at 2 (2003). but the stage was set: many lawmakers saw a Postal Service suddenly flush with cash and high revenue from record first-class mail volume that was slowing, but thought to likely hold steady.

The culmination of the second major push for reform was H.R. 6407, the Postal Accountability and Enhancement Act (“PAEA”) of 2006, whose sponsors included House Oversight Committee Chairman Rep. Tom Davis (R-Va.) and Ranking Member Rep. Henry Waxman (D-Cal.), passed by both chambers of Congress without opposition, and swiftly signed into law by President George Bush in the lame-duck session of the 109th Congress.41See Postal Accountability and Enhancement Act, Pub. L. No. 109-435, 120 Stat. 3198 (codified as amended in scattered sections of 5, 15, 18, 29, 39, 42, 44 U.S.C.). ‘Reform,’ in this instance, may be too loose a term: according to the Congressional Research Service, the PAEA made more than 150 alterations to federal law.42See CONG. RESEARCH SERV., R40983, supra note 6, at 8. Because the PAEA so broadly impacted the Postal Service, this section will focus on the longest-lasting and most significant changes brought about by the PAEA, namely the prefunding mandate and the section 302 network rationalization requirements. While many of the reforms implemented by the PAEA were both positive and needed, it is impossible to separate the useful changes from the draconian requirements of the prefunding mandate. One bad apple spoils the barrel; so must we consider the prefunding mandate when discussing the PAEA.

What is the prefunding mandate? Simply put, it involves stashing currently-available money away to pay for estimated future costs. In this case, Congress mandated that the Postal Service create a pot of money—the Postal Service Retiree Health Benefit Fund (“RHBF”)—by making 10 annual mandatory payments of approximately $5.5 billion into the fund from 2006 to 2016.43CONG. RESEARCH SERV., R40983, supra note 6, at 2–3. Bolstered by a $20 billion transfer from the surplus in the CSRS fund mentioned above, the approximately $55 billion input by USPS was intended to provide a ‘nest egg’ that, as it accrued interest, would be able to cover the retirement health needs of the Postal Service’s employee pool.44U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-13-112, U.S. POSTAL SERVICE: STATUS, FINANCIAL OUTLOOK AND ALTERNATIVE APPROACHES TO FUND RETIREE HEALTH BENEFITS (2012), https://www.gao.gov/assets/660/650511.pdf [https://perma.cc/PN6V-HTJR].

This mandate, however, was an extreme departure from the norm. For years, the Postal Service (and the federal government more broadly) utilized a pay-as-you-go model to fund retirement benefits for employees.45Id. at 5. Statutorily mandating those payments stripped the Postal Service of the flexibility that all other private mail businesses had. The deleterious effects of the prefunding mandate were felt immediately. USPS net profits totaled $900 million in 2006 when the PAEA was enacted; losses immediately spiked to $5.1 billion in 2007 and were almost entirely attributable to PAEA prefunding requirements.46Id. at 9. For more perspective: USPS revenue in fiscal years 2005, 2006, and 2007 were $69.9 billion, $72.8 billion, and $74.9 billion, respectively.47U.S. POSTAL SERV., 2007 AUDITED FINANCIAL STATEMENT (2007), https://about.usps.com/what/financials/10k-reports/fy2007.pdf [https://perma.cc/UR85-P3C2]. Operating expenses for those years were $68.2 billion, $71.7 billion, and $80.1 billion, respectively.48Id.

The Great Recession struck at the worst possible moment for the Postal Service. As the economy contracted, mail volume plummeted, and USPS revenues followed.49OFFICE OF THE INSPECTOR GEN., U.S. POSTAL SERV., RARC-WP-12-010, STATE OF THE MAIL (2012), https://www.uspsoig.gov/sites/default/files/document-library-files/2015/rarc-wp-12-010_0.pdf [https://perma.cc/E8B2-CW4C]. Simultaneously, the statutory requirements of PAEA forced the Postal Service to continue squirreling away billions of dollars.50See CONG. RESEARCH SERV., R40983, supra note 42, at 2–3. By 2012, the Postal Service had reached a breaking point: it defaulted on its obligations to prefund the RHBF and other retirement funds.51See Press Release, U.S. Postal Serv., Postal Service Statement on Retiree Health Benefits Payment (July 30, 2012), https://about.usps.com/news/national-releases/2012/pr12_0730rhbpayment.htm [https://perma.cc/V2J7-B9Z9]. To date, USPS has defaulted on $33.9 billion in required payments to the RHBF and unfunded liabilities for retiree health benefits total $69 billion, according to the Government Accountability Office.52U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-20-385, U.S. POSTAL SERVICE: CONGRESSIONAL ACTION IS ESSENTIAL TO ENABLE A SUSTAINABLE BUSINESS MODEL 14 (2020), https://www.gao.gov/assets/710/706729.pdf [https://perma.cc/UCK5-NJFL]. How has the Postal Service been able to accrue such debt without collapsing? The answer is complicated but lies in the 2011 opinion of the Department of Justice’s Office of Legal Counsel, which advised that as long as the Postal Service eventually pays the Office of Personnel Management back for those costs, its retirees can continue to receive their benefits.53OFFICE OF LEGAL COUNSEL, U.S. DEP’T OF JUSTICE, WHETHER POSTAL EMPLOYEES ARE ENTITLED TO RECEIVE SERVICE CREDIT, FOR PURPOSES OF THEIR RETIREMENT ANNUITY UNDER THE FEDERAL EMPLOYEES’ RETIREMENT SYSTEM, FOR PERIODS OF EMPLOYMENT DURING WHICH THE UNITED STATES POSTAL SERVICE HAS NOT MADE ITS REQUIRED EMPLOYER CONTRIBUTIONS NO. 36 (2011), https://www.justice.gov/file/18331/download [https://perma.cc/4AZ7-5AZN]. So, while the Postal Service continued to accrue debt on paper, it managed to keep the lights on and the mail flowing.

Over a decade of losses took its toll on the Postal Service, which was forced to respond drastically. In her April 2019 testimony to Congress, then-Postmaster General Megan Brennan summarized the sweeping measures that USPS had been forced to implement as a result of its severe decline in operating funds.54Hearings on The Financial Condition of the Postal Service Before the H. Comm.. on Oversight and Reform, 116th Cong. 4 (2019) (statement of Megan J. Brennan, Postmaster General and Chief Executive Officer, U.S. Postal Service), https://about.usps.com/news/testimony/2019/pr19_pmg0430.pdf [https://perma.cc/SH3F-DJGR]. The Postal Service consolidated over half of its mail processing facilities, reduced its workforce by almost 200,000 employees, and reduced capital expenditures by over 44 percent.55Id. (See Fig. 1 below.)

Fig. 1. Cost control measures implemented by USPS since the enactment of the PAEA.
Source: PMG Brennan’s testimony before the House Committee on Oversight and Reform United States House of Representatives56Id.

It is evident that the catastrophic impacts of the Great Recession and the prefunding mandate forced a severe downsizing of the Postal Service’s footprint.57Id. However, a partial “right-sizing” was actually required by section 302 of the PAEA.58See Postal Accountability and Enhancement Act, Pub. L. No. 109-435, 120 Stat. 3198 (codified as amended in scattered sections of 5, 15, 18, 29, 39, 42, 44 U.S.C The Postal Service was to examine its excess facilities, unprofitable locations, and certain ‘redundant’ employees and begin consolidation in an effort to reduce costs.59Id. The Postal Service estimated that this downsizing via the Network Rationalization Initiative (“NRI”) would save $805 million annually.60OFFICE OF THE INSPECTOR GEN., U.S. POSTAL SERV., NO-AR-16-009, MAIL PROCESSING AND TRANSPORTATION OPERATIONAL CHANGES 1 (Sep. 2, 2016), https://www.uspsoig.gov/sites/default/files/document-library-files/2016/NO-AR-16-009.pdf [https://perma.cc/GU8N-KQGK].

For obvious reasons, the NRI proved extremely unpopular.61See Jerry Davich, Gary Postal Center Gets One-year Reprieve for Final Closure, CHI. TRIB. (June 5, 2015, 9:12 AM), https://www.chicagotribune.com/suburbs/post-tribune/opinion/ct-ptb-davich-gary-post-office-st-0608-20150604-story.html [https://perma.cc/Y5TB-TLNK]. Despite efforts to communicate the imminent changes, the general public was caught unaware and frustrated by the closures of facilities and subsequent mail delays.62Id. Postal workers and communities were upset that their local post offices were slated for closure in the wave of consolidation and cost-cutting.63Tracey Leong, Local U.S. Postal Service Workers Protest Cost-cutting Changes, CBS BALT. (Nov. 14, 2014, 6:45 PM), https://baltimore.cbslocal.com/2014/11/14/local-u-s-postal-service-workers-protest-cost-cutting-changes/ [https://perma.cc/M3SS-TTR8]. Congress acted swiftly, scrutinizing the NRI and eventually forcing USPS to abandon Phase II, and the savings from the initiative ultimately proved minimal.64See OFFICE OF THE INSPECTOR GEN., U.S. POSTAL SERV., NO-AR-16-009, MAIL PROCESSING AND TRANSPORTATION OPERATIONAL CHANGES, supra note 60, at 17. In retrospect, declining revenue necessarily meant that the Postal Service had to reduce its footprint.65See Hearings on the Financial Condition of the Postal Service Before the H. Comm. on Oversight and Reform, supra note 55, at 3. However, the Postal Service’s failure to communicate to the general public and Congressional leadership the dire straits in which it found itself complicated its downsizing mission and led to Congressional reactions that tied the Postal Service’s hands further, including mandated six-day delivery and the preservation of other service standard safeguards.66Ron Nixon, Post Office Rebuffed Again on 5-Day Service, N.Y. TIMES (Mar. 21, 2013), https://www.nytimes.com/2013/03/22/us/politics/gao-rejects-post-offices-5-day-delivery-service.html [https://perma.cc/MXC3-GUTQ]. More generally, these constraints are present in the report accompanying every annual government funding bill. See e.g., Consolidated Appropriations Act, 2012, Pub.L. 112-74, 125 Stat. 786 (noting “6-day delivery shall continue at not less than the 1983 level”).

In 2020, it is not hard to see how the tumult that has ensued as a result of new Postmaster General Louis DeJoy’s operational changes at the Postal Service has its roots in the enormity of the PAEA’s failure. There would be no need to forbid overtime or implement other operational changes that reduce outlays if the Postal Service’s finances had not been impacted by the PAEA.67Jacob Bogage, ‘Everyone’s clueless’: Cost-cutting uncertainty mires Postal Service in more delays, WASH. POST (Aug. 29, 2020), https://www.washingtonpost.com/business/2020/08/29/postal-service-dejoy-delays/, [https://perma.cc/VL46-PJKZ]. I must acknowledge that, as Postmaster General, Mr. DeJoy inherited an unfavorable situation. However, I remain concerned that he has failed spectacularly at managing USPS, an agency providing a key public service, with the necessary openness and transparency. I will refrain from further discussion regarding the operational changes at the Postal Service out of respect for the ongoing investigation by the House Committee on Oversight and Reform into those changes.

IV. RECOMMENDATIONS FOR CONGRESSIONAL AND LEGISLATIVE ACTION

The state of the U.S. Postal Service is dire, but it doesn’t have to be. Congress must commit to enacting substantive postal reform in the 117th Congress. I propose a legislative package composed of five central points that would significantly ameliorate the short- and long-term difficulties facing the Postal Service and ensure its long-term health.

First, Congress must immediately pass emergency appropriations totaling $25 billion for the U.S. Postal Service for revenue forgone as a result of the COVID-19 pandemic. On April 9, 2020, then-Postmaster General Megan Brennan addressed the House Committee on Oversight and Reform regarding the impact of the COVID-19 pandemic on the Postal Service and conveyed the urgent need for $25 billion in emergency appropriations to offset coronavirus-related losses, a $25 billion grant to fund “shovel-ready” projects to modernize the Postal Service, and access to $25 billion in unrestricted borrowing authority from Treasury.68See Press Release, House Committee on Oversight and Reform, Postmaster General Warns Committee of Dire Consequences Without Congressional Action (Apr. 9, 2020), https://oversight.house.gov/news/press-releases/postmaster-general-warns-committee-of-dire-consequences-without-congressional [https://perma.cc/4PFL-VPXQ].

In May 2020, Rep. Peter DeFazio (D-Ore.) and I led eighty one of our colleagues in requesting $75 billion in aid for USPS be included in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.69See Letter from Alma S. Adams et al., Members of Congress, to Nancy Pelosi, Speaker of the House, and Kevin McCarthy, Minority Leader (May 6, 2020) https://adams.house.gov/sites/adams.house.gov/files/Rep.%20Adams%20-%20Support%20the%20Strongest%20Possible%20Relief%20of%20USPS.pdf [https://perma.cc/3UAG-5K7E]. Though the CARES Act provided $10 billion in additional borrowing authority for the Postal Service,70Coronavirus Aid, Relief, and Economic Security (CARES) Act, Pub. L. 116-136. 134 Stat. 286 (codified as 15 U.S.C. 116). it was unable to access those funds until late July–in part because its borrowing authority with the Federal Financing Bank (“FFB”) had lapsed and the Treasury Department failed to assist in those negotiations.71See Press Release, U.S. Department of the Treasury, Treasury and United States Postal Service Reach Agreement on Terms of CARES Act Loan (July 29, 2020), https://home.treasury.gov/news/press-releases/sm1071 [https://perma.cc/7DHC-MJHY]; U.S. POSTAL REG. COMM’N., FORM 8-K, CURRENT REPORT PURSUANT TO 39 U.S.C. 3654 AND SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (2019), https://about.usps.com/what/financials/periodic-reports-8k/09-06-2019.pdf, [HTTPS://PERMA.CC/AP6W-866L].

Rep. DeFazio and I remained extremely concerned about the state of the Postal Service’s finances because of those complications. Additionally, in July, we received word from alarmed USPS employees that Postmaster General DeJoy was making substantial changes to the Postal Service’s operations that were creating widespread mail delays. In response to those actions, we led a letter with Rep. Carolyn Maloney (D-N.Y.), Chairwoman of the Committee on Oversight and Reform, Rep. Gerald Connolly (D-Va.), Chairman of the Subcommittee on Government Operations, and 127 of our colleagues in encouraging House Speaker Nancy Pelosi (D-Cal.) to provide $25 billion in emergency appropriations to the Postal Service and undo Postmaster General DeJoy’s operational changes.72See Letter from Representative Alma S. Adams, et al., to Representative Nancy Pelosi, Speaker of the House, Senator Mitch McConnell, Senate Majority Leader, Representative Kevin McCarthy, House Minority Leader, and Senator Charles Schumer, Senate Minority Leader (July 31, 2020), https://adams.house.gov/sites/adams.house.gov/files/Phase%204%20USPS%20Relief%20Operations-%20Final%20Signed.pdf [https://perma.cc/84LC-UDBD].

Those efforts culminated in the August 22, 2020 passage of H.R. 8015, the Delivering for America Act.73See Delivering for America Act, H.R. 8015, 116th Cong. (2020) (as reported by H. Comm. Oversight and Reform, August 11, 2020). Though our legislation is currently sitting on Senate Majority Leader Mitch McConnell’s desk, its enactment is imperative. With $25 billion, the Postal Service could modernize its aging delivery vehicle fleet, perform much-needed maintenance on its facilities, and pay off debt owed to the FFB to stabilize its financial footing.

Second, Congress must enact H.R. 2382, Rep. DeFazio’s USPS Fairness Act.74See USPS Fairness Act, H.R. 2382, 116th Cong. (2019) (as passed by House, Feb. 5, 2020). H.R. 2382 is one of the rare bills that combines efficacy with brevity: in two sentences, it repeals the PAEA’s prefunding mandate in its entirety. This substantive legislation passed the House of Representatives on February 5, 2020 under suspension of the rules, a technique regularly employed by the House to quickly pass bipartisan, common-sense legislation using a two-thirds affirmative vote. H.R. 2382 cleared that high hurdle by a vote of 309-106.75Roll Call 37, OFFICE OF THE CLERK, U.S. HOUSE OF REPRESENTATIVES (Feb. 5, 2020), https://clerk.house.gov/Votes/202037 [https://perma.cc/76RS-AEZK].

Why, though, should Congress pass legislation that has little meaningful impact on the day-to-day operations of the Postal Service? As discussed in the previous section, the prefunding mandate only required that USPS fund the RHBF until 2017. Repealing the prefunding mandate wipes $33.9 billion in RHBF payments off of the Postal Service’s books while simultaneously reducing annual amortization outlays for the RHBF fund by $1 billion.76See Press Release, United States Postal Service, U.S. Postal Service Reports First Quarter Fiscal 2020 Results (Feb, 6, 2020), https://about.usps.com/newsroom/national-releases/2020/0206-usps-reports-first-quarter-fiscal-2020-results.pdf [https://perma.cc/N7EN-WG2R]; U.S. POSTAL REG. COMM’N, FORM 10-Q, QUARTERLY REPORT PURSUANT TO 39 U.S.C. § 3654 AND SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (2020), https://about.usps.com/what/financials/financial-conditions-results-reports/fy2020-q3.pdf [https://perma.cc/8HM2-EZNU]. Ultimately, these changes help move USPS towards long-term fiscal solvency.

Third, Congress should enact legislation that would require most current and future Postal Service retirees to participate in Medicare Part B. In 2017, then-Chair of the Oversight and Government Reform Committee Jason Chaffetz (R-Utah) and then-Ranking Member, the late Elijah Cummings (D-Md.), included this proposal in their Postal Reform Act, H.R. 756. The nonpartisan Congressional Budget Office estimated that this proposal would reduce USPS direct spending by $470 million annually.77CONG. BUDGET OFFICE, COST ESTIMATE, H.R. 756 POSTAL SERVICE REFORM ACT OF 2017 (June 1, 2017), https://www.cbo.gov/system/files/115th-congress-2017-2018/costestimate/hr756.pdf [https://perma.cc/2NUK-R5F6].

Although this proposal drew some opposition from retired federal employees because of the increased cost to Medicare,78See NARFE Warns of Perils to Mandatory Medicare Measures as Part of Postal Reform, NAT’L ACTIVE AND RETIRED FED. EMPS. ASS’N. (May 6, 2020), https://www.narfe.org/communications/?fa=viewArticle&ID=4553, [https://perma.cc/7KQT-R578]; Letter from Ken Thomas, Nat’l President, Nat’l Active and Retired Fed. Emps. Ass’n., to Rep. Elijah Cummings et al., Chairman, H.R. Comm. on Oversight and Reform (Apr. 26, 2019), https://www.narfe.org/pdf/NARFE%20Letter%20to%20COR%20for%20Postal%20Hearing.pdf, [https://perma.cc/TQ3N-35V4]. it was supported by both National Association of Letter Carriers and the American Postal Workers Union, two of the largest unions for postal workers.79See Postal reform update: A changed political landscape requires a new strategy, POSTAL REC. (Feb. 11, 2017), https://www.nalc.org/news/nalc-updates/postal-reform-update-a-changed-political-landscape-requires-a-new-strategy [https://perma.cc/5ZAS-6QKA]; Postal Reform Questions & Answers, THE AMERICAN POSTAL WORKERS UNION (Apr. 10, 2017), https://apwu.org/news/postal-reform-questions-answers [https://perma.cc/RBD9-BFC4]. See Postal Service Financial Improvement Act of 2019, H.R. 2553, 116th Cong. (2019) (as reported by H. Comm. Oversight and Reform, May 7, 2020). Enacting this proposal would not only ensure that postal employees maintain their high-quality healthcare, but also serves as a necessary acknowledgment that the federal government cannot completely separate itself from the fate of Postal Service employees.

Fourth, Congress should enact legislation, proposed by Rep. Stephen Lynch (D-Mass.), to reinvest the funds currently attributed to the Postal Service Retiree Health Benefits Fund.80See Postal Service Financial Improvement Act of 2019, H.R. 2553, 116th Cong. (2019) (as reported by H. Comm. Oversight and Reform, May 7, 2020). Presently, the funds deposited by the Postal Service into the RHBF are invested in low-interest Treasury bonds. H.R. 2553 would allow between 25 percent and 30 percent of the approximately $48 billion that is currently available through the RHBF to be invested in higher-yield index funds.81Id. While reinvesting those funds inherently presents greater risk, the likelihood of fully funding the RHBF increases significantly with the adoption of this method, according to the Postal Service’s Office of Inspector General.82OFFICE OF THE INSPECTOR GENERAL, U.S. POSTAL SERV., FT-WP-17-001, POSTAL SERVICE RETIREE FUNDS INVESTMENT STRATEGIES 1 (2017), https://www.uspsoig.gov/sites/default/files/document-library-files/2017/FT-WP-17-001.pdf [https://perma.cc/6NDC-PUJ6]. Consider that, by 2018, the Postal Service had earned $15.3 billion in interest from the funds invested in the RHBF.83U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-18-502, POSTAL RETIREE HEALTH BENEFITS: UNSUSTAINABLE FINANCES NEED TO BE ADDRESSED 27 (2018), https://www.gao.gov/assets/700/694188.pdf [https://perma.cc/DV9G-UTJ5]. A slightly more aggressive investment strategy would yield billions of dollars.

Fifth and finally, Congress must address the Postal Service’s repeated failures to effectively communicate with both the public and Congress itself. As discussed previously, one of the key failures of the NRI was the inability of the Postal Service to adequately convey the potential and realized disruptions in service to Americans and Congress prior to its implementation. In the same way, Postmaster General DeJoy completely failed to notify Congress, USPS leadership, the American people, or his own employees of the nature of his recent operational changes. By failing to convey that information to the public, Mr. DeJoy ensured that his efforts would ultimately do more harm than good to the Postal Service.

In order to more successfully implement operational reforms moving forward, Congress should require quarterly reports beyond standard financial disclosures from the Postal Service Board of Governors and Postmaster General regarding upcoming plans for operational and service changes. The Postmaster General should also be required to meet annually with both the House Oversight Committee and its Subcommittee on Government Operations. These reports and meetings would allow Congress to weigh in on any planned changes and keep constituents informed on the topic.

The proposals identified above are not all-encompassing; I do not pretend to have all of the answers. I have not touched upon proposals to institute exigent prices for the duration of the COVID-19 pandemic, untie price caps from their current CPI tether, or equip post offices with public high-speed Internet or electric vehicle charging stations. Rather, the value of the proposals above lies in their bipartisan support and their ability to provide both immediate and long-term relief to the Postal Service’s most pressing problems.

V. CONCLUSION

While I believe that the adoption of the five measures above would significantly benefit the U.S. Postal Service, the first two are clearly the most necessary. In order to survive the COVID-19 pandemic, Congress must provide $25 billion in emergency appropriations to the Postal Service to help it cope with lost revenue and make the much-needed infrastructure investments that they have had to ignore for too long. Moreover, eliminating the prefunding mandate will enable the Postal Service to move beyond the damaging effects of the past decade and into a more sustainable future.

The Postal Service remains what it has always been to our country: an essential provider of goods and services; a core component of our economy; a pathway for many good, stable jobs; and a point of pride for the American people. Looking towards the 117th Congress, it is essential that Congress urgently advance postal reform legislation. By adopting the provisions outlined above, Congress will deliver for the Postal Service and ensure that they, in turn, can deliver for the American people for generations to come.

Filed Under: JOL Online, JOL Online Article, JOL Online Notes, Uncategorized

by pgoffner on June 28, 2020

A Chapter 11 Makeover: Timely Revisions to the Bankruptcy Code to Assist Small Businesses Through Crises

A Chapter 11 Makeover: Timely Revisions to the Bankruptcy Code to Assist Small Businesses Through Crises

Matthew J. Razzano*

I. Introduction

Rarely does Congress act proactively. But with the passage of the Small Business Reorganization Act (SBRA)[1] in 2019, the legislature may have—unknowingly at the time—saved many small businesses from the devastating economic effects of the coronavirus. For years, critics have bemoaned the Bankruptcy Code’s (Code) rigid framework for reorganizing financially distressed companies—specifically its one-size-fits-all treatment of the corner store and the Fortune 500 conglomerate.[2] Yet the SBRA attempted to streamline the lengthy and costly reorganization process, creating a fast-track path for small businesses in Chapter 11.[3]

This Essay argues that while Congress may have gotten lucky in amending the Code prior to a flood of pandemic-induced small business bankruptcies, Congress can make additional changes to better accommodate these struggling entrepreneurs. Part II discusses historical issues with the Code’s treatment of small businesses and the stress placed upon these owners during the coronavirus pandemic. Part III introduces the provisions of the SBRA. And Part IV addresses additional changes needed to holistically improve the bankruptcy system for small business owners.

II. Small Business Bankruptcy and Times of Stress

A. Background on Small Businesses and Chapter 11

The Code offers different frameworks for individuals and businesses to file for bankruptcy. Chapter 7 is used for those who want to liquidate their assets to pay creditors and start fresh.[4] Chapter 13 applies to individuals seeking to restructure their debt payments and create a plan to pay back creditors.[5] Chapter 11 includes provisions to shepherd businesses through the reorganization process, with the intention of creating a leaner, more viable company at the end of the proceedings.[6] This last filing can result in four actions—“dismissal, conversion to Chapter 7, liquidation by sale in Chapter 11, and [reorganization plan] confirmation.”[7] “Chapter 11 reorganization is held up as the alternative to liquidation, a solution that can put more dollars in the pockets of the creditors, save more jobs, and preserve local tax bases.”[8]

One of the major critiques of Chapter 11, however, is that its rules apply to businesses of all sizes—from the pizza shop at the end of the block to Lehman Brothers.[9] While the public likely recognizes major Chapter 11 cases like Toys “R” Us or the Detroit automakers, most filings in Chapter 11 are substantially smaller. For instance, in 1994, the median total debt of all reorganization cases was $643,490, and in 2002 it was $1.8 million.[10] As defined by the Code, a small business is classified as having debt less than approximately $2.7 million, so the majority of Chapter 11 cases are smaller businesses.[11] Moreover, in 2002 more than ninety-seven percent of business Chapter 7 filings—liquidation cases—involved businesses with less than $500,000 in debt.[12]

Another critique is that Chapter 11 cases are costly. A larger corporation is more likely to pay the legal fees associated with the process to see that the business has a successful reorganization. For instance,

Chapter 11 may be sufficiently complex that only companies with substantial resources can hire the professional talent needed to negotiate a successful plan. Larger companies may also have had bigger war chests to withstand the disruptions in supplies and other economic bumps that accompany a bankruptcy filing. Big companies may be more sophisticated about considering a Chapter 11 alternative, and they may have headed to Chapter 11 earlier, before the business had completely collapsed. Workout professionals are more likely to help big businesses, and they may be especially willing to recommend bankruptcy.” [13]

Larger companies have the means to hire lawyers and bankers to assist in the restructuring, whereas smaller businesses cannot afford it or might be unaware of the menu of options.[14] In addition, Chapter 11 cases often take months, if not years, and small businesses are unlikely to absorb the costs of operation throughout that period of uncertainty. The “median time spent in Chapter 11 is about eleven months.”[15] And only about thirty-three percent of cases are dispensed with in six months or less.[16]

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), partially with the intention of accelerating the bankruptcy process.[17] But the result was more muddled. BAPCPA required “new postpetition documentation, reporting, and related requirements, while, at the same time, it invite[d] early contests where the debtor [would] bear the burden of proving its reorganizational mettle.”[18] It also failed to provide any fundamental adjustments to the process to make it easier for small businesses.[19] The same problems persisted, and as a result, most small businesses still turned to Chapter 7 liquidation or state processes in times of economic distress.[20] Approximately “540,000 small businesses closed their doors during 2003, but only 34,000 (six percent) filed petitions under the [Code].”[21] Taking all this, the only conclusion we can draw from these consequences is that the Code has proven to be an unpopular option for distressed small businesses.

B. Small Businesses and the Outsized Strain During the Coronavirus Outbreak

Beyond the obviously grave public health concerns, the outbreak of COVID-19 in 2020 shuttered the global economy, limited travel, affected hospitality and tourism, and strained financial markets.[22] Yet small businesses have been even more gravely affected as city and state lockdowns force many to close their doors.[23] A variety of businesses have been touched by the virus. Most notably, the travel, airline, and hospitality industries have fallen in the wake of shelter-in-place ordinances and shut downs.[24] Industries that involve social activity among large groups, like movie theaters, have also suffered.[25] Surveys from various city businesses have suggested that many industries have considered wage cuts and layoffs because of these closures.[26] Restaurants and small retailers have been hit especially hard.[27] For instance, the New York City restaurant industry earns nearly $50 billion annually, but analysts already predict it will shrink severely.[28] Unfortunately, this distressing trend can be observed across most American cities. [29]

The federal government has stepped up, in unprecedented fashion, to support small businesses through various programs. For instance, the Small Business Administration (SBA) is offering businesses in affected sectors up to $2 million in loans with low interest rates.[30] In addition, various unemployment insurance programs have become more flexible, and the administration has also explored various loan forgiveness options.[31] Moreover, the federal government extended tax deadlines for individuals and businesses to July 2020.[32] But despite all of these measures, it is likely that many small businesses will struggle to recover even when some semblance of normalcy returns, and widespread bankruptcies will likely occur.

III. The Small Business Reorganization Act of 2019

Oddly enough, Congress acted with forethought in the summer of 2019 to address some concerns with the small business bankruptcy process. The SBRA passed the House[33] and the Senate easily, on voice votes with little fanfare and no partisan opposition.[34] Under the Code, businesses with debt less than about $2.7 million are eligible for this new subchapter V under Chapter 11.[35] Obviously, based on debt, a larger company could be eligible under certain circumstances, but debt here becomes a strong proxy for company size.

A welcome change is the replacement of the creditor committee with a trustee, more reminiscent of the Chapter 13 process.[36] Historically under Chapter 11, a creditor committee is created to vote on and confirm the debtor’s plan. Different debt categories and subordinate interests make confirmation complicated. But with the SBRA—knowing that small business bankruptcy is drastically less complex—a trustee is appointed in each case to manage and streamline the process.[37]  In traditional Chapter 11 cases, after a period of exclusivity where only the debtor can file a reorganization plan, creditors are able to create their own plans. At this stage, executing a successful reorganization becomes challenging, as creditors vie for larger shares of the finite debtor pool of capital.[38] Under the SBRA, however, only the debtor can file a plan—again expediting the process and incentivizing cooperation between debtor and creditors.[39]

Another significant change under the SBRA involves the avoidance of disclosure statements.[40] In previous Chapter 11 cases, companies would file this extensive report, detailing their financial and credit history in excruciating detail. This process made sense for large corporations with a variety of complex creditor relationships and convoluted balance sheets, but it drowned small business owners in paperwork—inflating the costs of the bankruptcy and disincentivizing small businesses from seeking refuge in Chapter 11. Under the SBRA, though, these companies are no longer required to file a disclosure statement. Some of the pertinent information is still required, but the burden is greatly reduced.

Other important features include court acceptance of the plan without creditor agreement and the ability of the owners to retain equity in the business.[41] This promotes cooperation and passes additional discretion to the court to find meaningful solutions to support small businesses. It also spreads administrative fees out across a longer period of time, allowing the Chapter 11 filing to proceed when the debtor may be at a low point financially.

These changes are a vast improvement from the one-size-fits-all Chapter 11 process of old. They move reorganization along with greater speed and efficiency so that small businesses can get back on their feet. In addition, the straightforward paperwork reduces costs for the debtor and makes Chapter 11 a more viable option. These changes come at an opportunistic time, when small business owners across the country might look for relief from the COVID-19-stalled economy. Despite these benefits, however, more maneuvering within the bankruptcy code can be done to cover the full range of small business owners and provide the best chances for a fresh start.

IV. Additional Changes to Assist Small Businesses in Bankruptcy

The SBRA streamlined many of the crucial pain points in Chapter 11 filings for small businesses, but it did not solve every issue. The most obvious question remains: what constitutes a small business? In business terms, $2.7 million in debt is not a substantial sum of money and, despite the benefits of this new provision, it might preclude many companies from filing. To bring more businesses into the fold, the CARES Act increased this limit to $7.5 million,[42] but further increases might be prudent—perhaps in the $10 million range. And perhaps these virus-induced changes should be made permanent.

The SBRA attempts to make bankruptcy easier to navigate for smaller, less complex companies. It is likely that the financial complexity of a company with $10 million in debt is more akin to a “small business” than a large conglomerate. Therefore, this new subchapter should welcome slightly larger entities. If this solution is not palatable, it might be worth waiving the disclosure statement requirement for $10 million companies to partially speed up the process and reduce costs. Other amendments to consider include limiting the provision that requires fifty percent of debt to arise from commercial transactions, in order to account for the wide variety of businesses that may leverage this subchapter, as well as limiting the fees of the appointed trustee.

Though this new subchapter directly addresses small business entities, it still might not be the best avenue for all small business owners to take when financially distressed. Chapter 13 is reserved for individuals, which means LLCs, partnerships, and other business structures must resort to Chapter 11 to reorganize their debts.[43] On the other hand, sole proprietorships may use Chapter 13 to reorganize personal and business debts—since the business and person are one and the same. Plenty of small businesses might prefer this less complicated path toward reorganization, as opposed to even the fast-track changes brought forth under the SBRA. For instance, many small restaurants struggling during the crisis might fall into this category, so it would benefit Congress to think about how to improve Chapter 13 to give these businesses a chance to reorganize instead of liquidate.

One of the most common criticisms[44] of BAPCPA was the strict means testing required to reach Chapter 7.[45] If an individual made more than the state’s median income, he or she was forced into Chapter 13, but this test often failed to consider factors that led to bankruptcy in the first place, such as job loss. In our case, a once successful business shuttered by the economic shutdown may be forced into Chapter 13, and compelled into a grueling repayment plan. Much has been written on the means test,[46] so it is not the focus of these solutions, but suffice it to say, it should be among the provisions considered for amendment.

Additionally, critics have long complained that BAPCPA increased the filing requirements and costs of bankruptcy, creating a windfall for attorneys. Congress should consider simplifying the paper trail to make it easier for small businesses to file for bankruptcy. The SBRA reduced the paperwork for small businesses by getting rid of the disclosure statement. Congress should look through Chapters 7 and 13 to further cut unnecessary filings and ease the costs of bankruptcy. Likewise, the SBRA included provisions to pay fees and attorney expenses over time instead of at the outset—a provision that cash-strapped businesses appreciate. Congress should look at doing the same for other bankruptcy provisions.

Finally, Congress should consider restructuring Chapter 13 to specifically make room for sole proprietorships. When individual debtors enter bankruptcy, it makes most of their assets, aside from a few exempt pieces of property, available to creditors. This creates a piecemeal bankruptcy system that allows debtors to file for discrete financial problems—e.g. for a home mortgage, while other assets are protected—could greatly expedite and improve the process. An additional subchapter could be aimed specifically at business debts for individual filers. Entrepreneurs who start restaurants and open small businesses take on enormous risks, with some statistics suggesting that only about seventy percent reach the second year.[47] Congress should not create a loophole to protect all their assets and incentivize riskier behavior, but in reality, individuals starting restaurants and small retail shops understand the stacked odds against them. They should not have to fear losing their homes, cars, and other belongings because of the unpredictable nature of the pandemic. With a new Chapter 13 subchapter, it is unlikely that there is a sudden rush to open new restaurants and shops, as one study has shown that bankruptcy abuse is less common than its detractors might suggest.[48] The Code should make it easier for these individuals to discharge their debts or provide creative solutions for them to repay debts and continue operating their businesses.

V. Conclusion

No one is advocating for additional bankruptcies, nor should Congress incentivize more filings. But fears that businesses will take advantage of the bankruptcy system have proven unfounded, as research confirms that this process is used for most people as a last resort and rarely abused. With that, bankruptcy should be simplified and easier to navigate. The pandemic has devastated the small business community, especially restaurants and small retailers, who have been forced to close to slow the spread of this deadly virus. Incidentally, Congress made changes to Chapter 11 in 2019 that will streamline the bankruptcy process for many of these small businesses affected, allowing them to reorganize and remain open. Still, to weather this storm and improve the Code, Congress should consider additional changes to accommodate these owners moving forward.

 

* Law Clerk, J.D., University of Notre Dame, 2019; M.Sc., London School of Economics, 2016; B.A., University of Notre Dame, 2012.

[1] Small Business Reorganization Act of 2019 (HR 3311), Pub. L. 116-54, 133 Stat. 1079 (Aug. 23, 2019)

[2] H.R. Rep. No. 116-171, at 2–4 (2019).

[3] Id.

[4] 11 U.S.C. §§ 701–784 (2018).

[5] Id. at §§ 1301–1330.

[6] Id. at §§ 1101–1195.

[7] Elizabeth Warren & Jay Lawrence Westbrook, The Success of Chapter 11: A Challenge to the Critics, 107 Mich. L. Rev. 603, 626 (2009). Before she was a presidential candidate, Elizabeth Warren took the novel approach in legal academic circles by placing an empirical lens on bankruptcy cases. See id. at 614.

[8] Id. at 612.

[9] See James B. Haines, Jr. & Philip J. Hendel, No Easy Answers: Small Business Bankruptcies After BAPCPA, 47 B.C. L. Rev. 71, 73 (2005).

[10] Warren & Westbrook, supra note 7 at 634.

[11] See 11 U.S.C. § 101(51D)(A) (2018).

[12] Warren & Westbrook, supra note 7 at 634.

[13] Warren & Westbrook, supra note 7 at 636–37.

[14] Haines, Jr. & Hendel, supra note 9 at 89 (“There is little incentive for an experienced bankruptcy boutique or large firm with a bankruptcy department to handle these matters. They are simply not economical.”).

[15] Warren & Westbrook, supra note 8 at 626.

[16]  Warren & Westbrook, supra note 8 at 628.

[17] See Bankruptcy Abuse Prevention and Consumer Protection Act, Pub. L. No. 109-8, 119 Stat. 23 (codified as amended in scattered sections of 11 U.S.C).

[18] Haines, Jr. & Hendel, supra note 9 at 72.

[19] See Haines, Jr. & Hendel, supra note 9 at 72.

[20] Edward R. Morrison, Bargaining Around Bankruptcy: Small Business Workouts and State Law, 38 J. Legal Stud. 255, 255 (2009).

[21] Id.

[22] See Matt Apuzzo & Monika Pronczuk, Covid-19’s Economic Pain Is Universal. But Relief? Depends on Where You Live., N.Y. Times (Mar. 23, 2020), https://www.nytimes.com/2020/03/23/world/europe/coronavirus-economic-relief-wages.html [https://perma.cc/9WX6-JLBH].

[23] See Paul Davidson, It’s Not Just Restaurants and Movie Theaters Cutting Jobs. Small Business Layoffs Spread, USA Today (Mar. 24, 2020), https://www.usatoday.com/story/money/2020/03/24/coronavirus-marketing-data-firms-small-business-cut-jobs/2902286001/ [https://perma.cc/G7AE-T2T5].

[24] See Craig Karmin et al., Coronavirus Sends Travel Business and Millions It Employs Into All-Out Crisis, Wall St. J. (Mar. 17, 2020), https://www.wsj.com/articles/the-travel-business-and-the-millions-it-employs-confront-all-out-crisis-11584484867 [https://perma.cc/PG3W-WM4V].

[25] See Alex Sherman, Coronavirus could be the tipping point for movie theaters, gyms and other industries already suffering from disruption, CNBC (Mar. 16, 2020), https://www.cnbc.com/2020/03/16/coronavirus-will-most-hurt-industries-already-suffering-disruption.html [https://perma.cc/DC4B-MMAV].

[26] See Gracee Mattiace, Store and restaurant owners say COVID-19 quarantines hurting small business, 13KRCG (Mar. 19, 2020), https://krcgtv.com/news/coronavirus/store-and-restaurant-owners-say-covid-19-quarantines-hurting-small-business [https://perma.cc/63KP-CDZ3].

[27] See Austa Somvichian-Clausen, How NYC’s Restaurant Industry is Surviving Amid Coronavirus Crisis, Hill (Mar. 20, 2020), https://thehill.com/changing-america/respect/accessibility/488670-how-nycs-restaurant-industry-is-surviving-amid [https://perma.cc/W749-JQ68].

[28] See id.

[29] Jennifer Steinhauer & Pater Wells, As Restaurants Remain Shuttered, American Cities Fear the Future, N.Y. Times, (May 8, 2020), https://www.nytimes.com/2020/05/07/us/coronavirus-restaurants-closings.html [https://perma.cc/9U5R-HRV8].

[30] See Brianna McGurran, List Of Coronavirus (COVID-19) Small Business Relief Programs, Forbes (Mar. 20, 2020), https://www.forbes.com/sites/advisor/2020/03/20/list-of-coronavirus-covid-19-small-business-relief-programs/#bd3e8ae89dd0 [https://perma.cc/D6H3-NDHY].

[31] Press Release, White House, President Donald J. Trump Is Committed to Supporting Small Businesses Impacted by the Coronavirus (Mar. 23, 2020), https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-committed-supporting-small-businesses-impacted-coronavirus/ [https://perma.cc/JL7C-7X2K].

[32] Id.

[33] The SBRA was sponsored by Representatives Ben Cline (R-Va.), David Cicilline (D-R.I.), Doug Collins (R-Ga.), and Steve Cohen (D-Tenn.).

[34] See 165 Cong. Rec. H7220 (daily ed. July 23, 2019) (passing the House on a voice vote); 165 Cong. Rec. S5321 (daily ed. Aug. 1, 2019) (passing the Senate on a voice vote).

[35] 11 U.S.C. § 101(51D) (2018) (adjusted according to 11 U.S.C. § 104).

[36] 11 U.S.C. § 1302 (2018).

[37] Cf. Haines, Jr. & Hendel, supra note 9 at 72 (comparing a trustee in Chapter 11 to the process of Chapter 12 and 13).

[38] Cf. Haines, Jr. & Hendel, supra note 9 at 79 (“Under BAPCPA, statutory small business debtors are provided a 180-day exclusivity period, and are required to have filed the plan and disclosure statement within 300 days after entry of the order for relief. Both deadlines are subject to extension, but the debtor must obtain the extension by motion on notice and hearing.”).

[39] 11 U.S.C. § 1189(a) (2018).

[40] Id. at § 1187.

[41] Id. at § 1191.

[42] CARES Act, Pub. L. No. 116-136, § 1113 (2020).

[43] 11 U.S.C. § 1301–1330.

[44] See generally, David Gray Carlson, Means Testing: The Failed Bankruptcy Revolution of 2005, 15 Am. Bank. Inst. L. Rev. 223 (2007).

[45] 11 U.S.C. § 707.

[46] See, e.g., Katherine Porter & Deborah Thorne, The Failure of Bankruptcy’s Fresh Start, 92 Cornell L. Rev. 67, 118 (2006); see generally Roma Perez, Not “Special” Enough for Chapter 7: An Analysis of the Special Circumstances Provision of the Bankruptcy Code, 61 Cleveland St. L. Rev. 983 (2013).

[47] Small Business Facts, Small Bus. Admin.  (June 2012), https://www.sba.gov/sites/default/files/Business-Survival.pdf. [https://perma.cc/L9NS-CRYS]

[48] See Elizabeth Warren, The Bankruptcy Crisis, 73 Ind. L.J. 1079, 1098 (1998).

Filed Under: JOL Online, JOL Online Notes, Uncategorized

by pgoffner on May 20, 2020

Investigating the Attendant Circumstances of RICO from Its Early History and Drafting to Transnational Organized Crime and Extraterritorial Applications: A Perspective on U.S. Prosecutions, Ideology, and Globalization

By: Alina Veneziano*

Abstract

This Article traces the history of extraterritorial regulation, as applied to the Racketeer Influenced and Corrupt Organizations Act (“RICO”), through an examination of underlying domestic circumstances, such as criminal prosecutions, ideology, and globalization. Legal analyses have focused either on the problems of prosecutorial decision-making domestically or the history, shortcomings, and recommendations of RICO. This Article departs from the “either-or” approach and instead combines the two paths into a single analysis of these domestic effects on the extraterritorial regulation of RICO cases. In other words, its purpose is to analyze the phenomenon of extraterritoriality under the basic principles of criminal law, including the duties of prosecutors, the roles of courts, and the ideals that influence these respective parties. While most scholarship relating to extraterritorial applications tends to analyze such issues under international law principles, such as prescriptive jurisdiction or via international comity, sovereignty, or congressional intent, this Article strives to understand these issues on a national level.

While early judicial holdings have been mainly territorial, and courts have thus resisted utilizing extraterritorial regulation, a different situation is presented with organized crime. It is easily the case that organized crime schemes cross multiple borders, and, with the advent of technological advances and globalization, the methods of manipulation and evasion are multiplying faster than law enforcement can keep up. Congress remedied this situation by drafting RICO to target organized crime in a statute that provides for both criminal and civil suits. The problem is that the courts have interpreted this arguably clear statute in a manner that negates RICO’s original intent, force, and meaning. It is these holdings that set the stage for the next era in U.S. history in dealing with transnational organized crime and RICO. Such rationales are based on attendant circumstances such as the resources of prosecutors, ideology, and globalization.

But there is a problem within the U.S. democratic system: lack of resources, ideological inclinations, and the struggle to balance adherence to congressional intent with the consistent application of relief to injured parties. The realizations/recommendations identified by this Article are threefold: (1) to understand that is perfectly permissible for Congress to be concerned with transnational organized crime only as it applies to domestic conditions; (2) to identify a sufficient U.S. nexus requirement that is consistent in civil RICO applications and reduces the risk of foreign resentment; and (3) to implement training in local, state, and federal law enforcement regarding RICO’s intended coverage and geographic scope. While foreign nationals should demonstrate the domestic injury requirement, this same reasoning should not extend to U.S. nationals. Instead, U.S. claimants under a U.S. statute should be able to assert a civil RICO claim without the unprecedented domestic injury requirement in RJR Nabisco v. European Community.[1] The U.S. nexus requirement for U.S. nationals is found in their citizenship, which should be interpreted in a manner as to satisfy the domestic injury requirement when the private RICO claimant is a U.S. national. Such realizations reduce foreign infringement, case-by-case distinctions, and foreign-cubed transactions. Critically, such recommendations have the secondary effect of alleviating prosecutorial overload by shifting some cases to private claimants, reducing the cases that prosecutors bring that fall outside the types of cases envisioned by Congress, and providing more consistent application without the need for judicial or congressional involvement. By redefining the scope and reach of RICO, internal efficiencies are achieved and this, in turn, affects the U.S. enforcement mechanisms on the international field.

 I. Introduction

A. Outline

This article examines the Racketeer Influenced and Corrupt Organizations Act[2] (“RICO”) from before its enactment to the present day. It examines how courts have treated claims asserting RICO violations instituted by either the government or private claimants and involving domestic, foreign, or transnational crimes. The problem with recent analysis of this issue is that cases of organized crime often cross multiple borders, implicating various international law principles such as jurisdiction to prescribe and risking possible violations of international comity and foreign interference. This problem is made worse by recent judicial resistance to applying RICO abroad as well as the recent burdens the Supreme Court has imposed upon private claimants seeking to bring a civil RICO claim.

By analyzing these issues through domestic lenses, this Article demonstrates that it is imperative that the courts and political branches return to Congress’ original intent when it first enacted RICO. To do this requires the understanding that RICO not be expanded to encompass conduct not originally intended to be regulated thereby, and also the understanding that in order to combat transnational organized crime—which is the Act’s very objective—the geographic reach of RICO must necessarily not be unduly restricted. This Article promotes such an understanding of the importance of regulating transnational organized crime within the U.S. domestic system.

This Article proceeds in the following manner. Part I defines white collar crime and organized crime, traces RICO’s legislative history, and details the circumstances in the United States regarding organized crime that prompted RICO. Part II analyzes case law occurring after RICO’s enactment and how the judiciary interpreted RICO prior to Morrison v. National Australian Bank Limited’s[3] clear indication test, and then briefly explains the Morrison opinion and its effect on RICO actions. Part III proceeds to analyzes the circuit split that the Morrison opinion created, including the judiciary’s struggle to define what it means to be domestic when analyzing RICO’s focus.

Part IV briefly discusses two noteworthy earlier opinions. Part V describes the RJR Nabisco, Inc. v. European Community[4] opinion in detail. Part VI discusses the critical implications of the RJR Nabisco holding. Lastly, this Part illustrates the inconsistencies of the current process of extraterritorial extensions of RICO. Building upon these implications, Part VII discusses the current domestic situation in the United States regarding the feasibility and practicality of bringing RICO actions. This Part is offered to explain why the judiciary has tended to limit a statute that clearly applies to foreign conduct in the wake of an increasing international world with persisting transnational crime. Part VIII of this Article outlines a few solutions set forth by scholars and then provides the author’s realizations and recommendations when trying to balance transnational criminal and civil RICO actions with the internal structures of the United States. Lastly, Part IX provides the Article’s conclusions.

B. White Collar Crime and Organized Crime Defined

 1. What Is White Collar Crime?

In 1940, Edwin H. Sutherland, an American sociologist and criminologist, published a unique and revolutionary article, White-Collar Criminality, on the definition of organized crime.[5] In the article, he related crime to business in an effort to develop theories for criminal behavior.[6] White collar crimes, he continued, are not different from other crimes but must be justified and analyzed under the criteria used when dealing with other crimes.[7]

 2. What Is Organized Crime?

Donald R. Cressey, also an American sociologist and criminologist, has contributed substantially to the understanding of organized crime through his various publications. He traced the origins of organized crime to the sale of illicit goods and services, the profits of which are subsequently invested in licit enterprises.[8] It is when these licit enterprises—which operate as criminal syndicates—began to undermine the political and economic spheres “that the real trouble begins.”[9] As syndicates began to “invest in every conceivable kind of legitimate business,” substantial differences emerged between “crime” and “organized crime.”[10] What was the result? Nothing less than impairment to free competition and a monopoly on the government.[11]

Additionally, the Senate Report on the Organized Crime Control Act of 1969 noted that organized crime, including illegal gambling, narcotics trafficking, loan-sharking, and fraudulent bankruptcies, was present in both cities and suburban areas.[12] This practice, the report found, has encouraged street crime, started to infiltrate organized labor, and influenced legitimate businesses via “physical terror,” “psychological intimidation,” “economic retaliation,” and “political bribery,” amid “citizen indifference and government acquiescence.”[13] The report identified obstacles to prosecution including evidence gathering, high standards of proof, the unsuccessful use of informants, and inability to obtain documentary evidence.[14]

C. Legislative History Leading Up to RICO’s Enactment

RICO is found in Title IX of the Organized Crime Control Act of 1970.[15] The RICO legislative drafting process was focused on “certain forms of criminal conduct—violence, the provision of illegal goods and services, corruption in government and labor unions, and commercial fraud.”[16] It was well understood that RICO would be applied beyond organized crime; this idea was one of the special challenges posed by criminal law and simultaneously examined during the drafting process by Senator John Little McClellan (Chairman of the Committee), Senator Roman L. Hruska, and G. Robert Blakey (consultant and adviser to the Committee), amongst other key senators.[17] Professor G. Robert Blakey, drafter and expert on RICO, notes that the statute’s legislative history demonstrates two movements: “[o]ne direction narrowed the predicate offenses to exclude political or social demonstrations; the other enlarged the predicate offenses to include white-collar crime.”[18] A significant objective was to prevent such criminal behavior from “interfer[ing] with free competition and . . . burden[ing] interstate and foreign commerce.”[19] With this as a backdrop, courts start their analysis with the “question of whether and, if so, how a free society can protect itself when groups of people . . . turn crime into an ongoing business.”[20]

D. Context During and After RICO’s Enactment

RICO was enacted primarily to eradicate the organized crime that had perplexed U.S. law enforcement for decades and caused the loss of billions of dollars from the U.S. economy.[21] Since RICO’s enactment in 1970, the statute has been used to combat the Mafia,[22] the Latin Kings street gang,[23] and many seemingly legitimate businesses engaged in illicit activities.[24] Additionally, it has been used as a weapon against white collar crime[25] and even political movements, such as anti-abortion enterprises who lack a financial motive,[26] which is in stark contrast to RICO proceedings immediately after enactment.[27]

In fact, in 1985, the Supreme Court in Sedima v. Imrex Co.[28] stated that “[i]nstead of being used against mobsters and organized criminals, [RICO] has become a tool for everyday fraud cases brought against ‘respected and legitimate’ enterprises.”[29] Whether the Court saw this expansion as an inevitable result of RICO or perhaps as a political question, its analysis based on federalism concerns is interesting:

It is true that private civil actions under the statute are being brought almost solely against such defendants, rather than against the archetypal, intimidating mobster. Yet this defect—if defect it is—is inherent in the statute as written, and its correction must lie with Congress. It is not for the judiciary to eliminate the private action in situations where Congress has provided it simply because plaintiffs are not taking advantage of it in its more difficult applications.[30]

Finally, as enacted, RICO expressly authorized criminal and civil sanctions against all types of organized crime, such as “simple political corruption,” or “sophisticated white-collar crime schemes, as well as “traditional Mafia-type endeavors.”[31] The primary fears that RICO was an “illegitimate” litigation tool have all vanished; RICO is now regarded as the primary “tool of choice for intricate criminal and civil litigation.”[32] The legislative history briefly mentioned above adequately demonstrates the congressional intent that RICO be used to provide the “new weapons of unprecedented scope for an assault upon organized crime and its economic roots.”[33] It is now, at this stage, up to the courts to abide by such congressional intent when adjudicating cases, whether primarily within a domestic context or even when deciding cases with foreign elements.

Extraterritorial crimes receive a slightly different analysis. It has been no secret that courts have relied heavily on the “‘liberally construed’ language” to expand on the definition of possible enterprises which may fall “under the modern RICO net.”[34] However, an underestimated yet critical factor that has plagued the enforcement of RICO has been globalization. This has curtailed the statute’s power when dealing with both domestic cases as well as cases with a transnational character.[35] It is possible for transnational organized crime to span continents, with the conduct occurring, for instance, in one nation and the electronic transfer of funds taking place in another.[36] Thus, globalization has allowed the members of these organized crime schemes to capitalize on advanced technologies and operate these illicit schemes under the veil of anonymity.[37]

What has this trend meant for the United States? To start, courts have been forced to decide cases involving one or more foreign elements.[38] But this development has created a problem for the U.S. judiciary: “[W]hen is a RICO case too far removed from American soil to be decided by an American court?”[39] This question of extraterritoriality has been something that has caused confusion within the U.S. lower courts. While crimes are usually adjudicated in the place where the conduct occurs, Congress has the authority to enact laws that reach beyond the territorial borders of the United States.[40] Such power is not forbidden by the Constitution nor international law, but it is a hotly debated topic.[41]

E. RICO’s Text

While RICO was “an innovation,” it did not operate to displace or preempt other federal or state laws.[42] Under RICO, the government can bring charges against an individual or entity that has engaged in a pattern of racketeering for both civil and criminal sanctions,[43] while private civil claimants may bring a private cause of action.[44] Section 1962(a)-(d) created four criminal offenses regarding organized crime activities in relation to an enterprise.[45] First, Section 1962(a) makes it unlawful to receive income derived, directly or indirectly, through a pattern of racketeering activity in relation to an enterprise.[46] The challenge for prosecutors here is establishing the connection between this income or investment and racketeering.[47] Next, Section 1962(b) makes it unlawful to acquire or maintain, directly or indirectly, an interest in an enterprise from a pattern of racketeering activity.[48] The “indirectly” language here and in the other prohibitions indicates that mere “acquisition, maintenance, or control of an enterprise” may be sufficient.[49] Third, Section 1962(c) makes it unlawful for a person employed by or associated with an enterprise to conduct or participate, directly or indirectly, in the enterprise’s affairs through a pattern of racketeering activity.[50] Thus, the “conduct” and “participate” language require that a pattern of racketeering also be demonstrated.[51] Lastly, Section 1962(d) makes it unlawful to conspire to violate any of the above subsections.[52] While the word “conspiracy” evokes mixed feelings for prosecutors, this provision clearly criminalizes the pattern of a single conspiracy based on the “maintenance or infiltration of an ‘enterprise’ through racketeering activity.”[53] The statute makes clear that “[t]he provisions of this title shall be liberally construed to effectuate its remedial purposes.”[54]

RICO defines an enterprise as “any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.”[55] In other words, this so-called enterprise “need not be a legal entity,” but should instead be thought of as “associations in fact.”[56] For instance, “[i]f such an association-in-fact has a common purpose, continuity of structure and personnel, and a structure distinct from the pattern of racketeering, it is a RICO enterprise.”[57] While this interpretation in no doubt set the stage for the expansive readings that courts have adopted, it is nevertheless true that some enterprises are formed to engage in criminal acts but also have legitimate purposes.[58] Furthermore, the Supreme Court in United States v. Turkette[59] noted the three elements necessary to show the existence of an “enterprise” for RICO purposes: (1) an ongoing enterprise; (2) evidence that the associates function together for a common purpose; and (3) an existence of the entity “separate and apart” from the pattern of activity in which it is engaged.[60]

Next, the RICO charge must allege a pattern of racketeering activity, which the statute defines as “requir[ing] at least two acts of racketeering activity . . . within ten years (excluding any period of imprisonment) after the commission of a prior act of racketeering activity.”[61] This pattern requirement is malleable and elastic, but not vague.[62] For instance, the Supreme Court in Sedima stated that “while two acts are necessary, they may not be sufficient. Indeed, in common parlance two of anything do not generally form a ‘pattern.’”[63] The Court went on to note that legislative history concurs on this point as well.[64] Additionally, it is important to note that these offenses are not different or new crimes addressed by RICO; they are acts that are already illegal and punishable under existing state or federal law.[65] But to be actionable, there needs to be a relationship—more than a mere “single, isolated transaction”[66]—between the predicate acts, the racketeered activity and the threat of criminal activity, which usually involves factors such as “common perpetrators, methods of commission, victims, or motive.”[67]

The criminal offenses under RICO are coined “predicates,” and these predicates must be “chargeable” under State law or “indictable” under federal statutes of the U.S. code.[68] Furthermore, the operations or activities of the enterprise must affect “interstate or foreign commerce.”[69] Thus, it appears that every RICO violation requires at least two factors in addition to foreign or interstate commerce: “an enterprise and a pattern of racketeering activity.”[70]

RICO also created a private cause of action in Section 1964(c) for civil remedies that allows, or grants standing to, “[a]ny person injured in his business or property by reason of a violation of section 1962 of this chapter [18 U.S.C. § 1962] may sue therefor in any appropriate United States district court and shall recover threefold the damages. . . .”[71] The civil remedy provision is preferable for private claimants because they do not have to satisfy the strong procedural protections that apply in a criminal case for defendants such as the proof beyond a reasonable doubt standard or the strict warrant procedures.[72] It is also preferable due to the possibility of treble damages and attorney fees as remedies.[73] However, now RICO adds civil sanctions, which not only lowers the burdens for law enforcement agencies and district attorneys, but also gives “courts greater flexibility to disrupt the activities of a criminal enterprise.”[74] The Supreme Court has stated that this civil provision is meant not merely to compensate victims but also to turn them into private prosecutors “dedicated to eliminating racketeering activity.”[75]

Thus, RICO is a special statute, distinct from other civil or criminal statutes in that it focuses “not on the individuals committing criminal activities but rather on the criminal enterprises.”[76] But what happens when foreign elements are added to the mix? In RICO cases involving multiple nations, courts have adhered to the following analysis in determining the propriety of extraterritorial regulation: first, a conduct test, which asks “whether the United States has the power to reach the conduct in question under traditional principles of international law”; and second, an effects test, which asks “whether the statutes under which the defendant is charged are intended to have extraterritorial effect.”[77] The following Parts demonstrate this process.

II. RICO and the Pre-Morrison Test & RICO and Morrison

A. The Pre-Morrison Test

RICO cases prior to the 2010 Morrison decision tended to incorporate either some form of the conduct or effects tests. Whether Congress intended this statute to be applied beyond the United States was apparently unclear, despite the references to foreign commerce in the text of RICO. Nevertheless, early cases decided that there was congressional silence in RICO as to its geographic reach.[78] In United States v. Noriega,[79] decided in 1990, the district court determined that “[w]hen Congress passed RICO, it was primarily concerned with eradicating the destructive influence of organized crime on our society.”[80] How the court in Noriega explained Congress’ intention in light of RICO’s purpose is illuminating:

Keeping in mind Congress’ specific instruction that RICO be applied liberally to effect its remedial purpose, the Court cannot suppose that RICO does not reach such harmful conduct simply because it is extraterritorial in nature. As long as the racketeering activities produce effects or are intended to produce effects in this country, RICO applies.[81]

It appeared to be the effect on the U.S. society, and not the locus of the alleged criminal activity, that prompted courts to take a more active role in expanding RICO abroad despite the alleged congressional silence. The result in Noriega, which involved RICO violations in the United States and abroad, was that the court had “[j]urisdiction over Defendant’s extraterritorial conduct . . . both as a matter of international law and statutory construction.”[82]

In analyzing cases involving the extraterritorial applications of U.S. statutes in this era, such as RICO, courts have relied on the presumption against exterritoriality to determine geographic scope.[83] However, this did not yield consistent standards or procedure. Some courts and individual judges have decided that Congress did not intend for RICO to apply beyond the United States’ borders.[84] Other courts have held that even though RICO is silent as to its geographic reach, courts can look to the approaches used in other areas of law, such as securities or antitrust law,[85] which have granted extraterritorial applications in some cases. Yet some courts have incorporated forms of the conduct[86] or effects[87] tests as long as the plaintiff alleges some domestic effect on interstate commerce in their RICO claim.[88]

Thus, this era was categorized by judicial efforts to discern congressional intent by utilizing the presumption against extraterritoriality and examining the case under some form of the conduct/effects tests. Nevertheless, it was generally agreed that some U.S. nexus, such as domestic racketeering activity or domestic enterprise, was needed to adjudicate a case with foreign defendants.[89] However, such subjective analyses can lead to varying interpretations and unpredictable results, as the following Parts will prove.

B. The Morrison Test

The Morrison case involved a class action lawsuit of Australian investors against an Australian bank, National Australia Bank (NAB), in connection with alleged fraudulent securities on Australian and other foreign exchanges.[90] It was a foreign-cubed transaction[91] before the Supreme Court involving allegations of fraudulent misrepresentation in the records of NAB’s U.S. subsidiary in Florida, HomeSide, which also appeared in NAB’s annual financial statements.[92] The Supreme Court, in an opinion by Justice Scalia, reinvigorated the presumption against extraterritoriality and asserted that “[w]hen a statute gives no clear indication of an extraterritorial application, it has none.”[93] Thus, if a statute is silent or ambiguous as to its geographic reach, then that particular provision does not have an extraterritorial force. At this point, courts must determine the legislative “focus” of the statute to see if the case is sufficiently domestic to allow for judicial adjudication.[94]

Little by little, courts began to narrow RICO’s reach in a way that would have been considered highly unlikely under the prior, broader interpretations attached to the definition of “enterprise.”[95]

Courts are now to look first at the statute itself to discern whether congressional intent exists as to that provision’s extraterritorial application. While it is debated what kind of evidence can be used to rebut the presumption against extraterritoriality, the Supreme Court in Morrison did assert that this is not a clear rule and that “[a]ssuredly context can be consulted as well.”[96] If none can be discerned, there is another chance for that provision to be applied abroad: the domestic focus analysis. This “focus” analysis is important when the statute is silent because it allows for U.S. adjudication only if the case presents a domestic nexus, as determined through an analysis of “the objects of the statute’s solicitude.”[97] However, cases which fail the domestic focus analysis are dismissed as an impermissible use of extraterritoriality.

But what does this mean for claimants seeking to apply RICO extraterritorially? As a starting point, by combining the analyses from pre-Morrison cases with the Morrison holding, one result is evident among the judiciary in cases prior to RJR Nabisco: RICO has no extraterritorial application.[98] Courts have come to the conclusion that it is clear that RICO is silent as to its geographic reach.[99] The question at this stage quickly became how to apply Morrison’s focus analysis to RICO. Professor Franklin A. Gevurtz nicely explains how the process proceeded for courts at this stage:

“[U]nder Morrison this requires asking whether the thing corresponding to RICO’s statutory focus was inside the United States in the case (in which event there was no extraterritoriality to trigger the presumption) or whether the thing corresponding to RICO’s focus was outside the United States in the case (in which event the presumption against extraterritoriality blocks application of RICO). Of course, to answer this question, federal courts must determine RICO’s statutory focus. . . .”[100]

In other words, what is the focus of RICO? What is “domestic” under Morrison? Unfortunately, the Supreme Court has not been very helpful in guiding the lower courts on how to discern a statute’s “focus,” especially when it had the chance to do so in Morrison.[101] This led to a split amongst the lower courts, as the next Part outlines.

III. The Post-Morrison, Pre-RJR Nabisco Split: What is Domestic?

Post-Morrison, pre-RJR Nabisco cases analyzed whether the case is sufficiently domestic by using one of four approaches: (1) the “enterprise” approach, (2) the “predicate offenses” approach, (3) the “pattern of racketeering” approach, or (4) the “predicate statute’s geographic reach” approach. These approaches, examined in this Part, represent the different ways courts have defined the focus of RICO.

A. The Contending Approaches

1. The Enterprise Approach

The “enterprise” approach is articulated best by the Second Circuit in Cedeño v. Intech Group, Inc.,[102] decided in 2010. In Cedeño, a private claimant, a national of Venezuela, sued Venezuelan government officials for laundering funds, which were obtained via “fraud, extortion, and private abuse of public authority,” through U.S. banks.[103] The defendants, the Venezuelan officials, had sought to dismiss the claim on the theory that the case is foreign and RICO does not extend beyond the territory of the United States.[104] Because this case was decided after Morrison, the court used the Morrison framework.[105] Since RICO was silent as to its geographic reach, the court determined the focus to be on the “enterprise”; specifically, the focus of RICO was determined to be the “enterprise as the recipient of, or cover for, a pattern of criminal activity.”[106] The court did not find any congressional concern regarding the conduct of foreign enterprises, and determined that RICO only applies to regulate domestic enterprises.[107] Using this “enterprise rule” as the determinative factor in this case, the court dismissed the action because the enterprise and predicate activities alleged by the claimants were entirely foreign.[108]

Also in 2010, about one month after Cedeño, the Second Circuit decided another case under this framework, Norex Petroleum Ltd. v. Access Indus. Inc.[109] Here, the complaint alleged predicate acts in the United States: the defendants participated in a money laundering scheme to gain control of the Russian oil industry and had illegally acquired plaintiffs’ controlling share in the companies.[110] As with Cedeño, the claim was dismissed because the claimants had alleged RICO violations perpetrated by a foreign enterprise.[111] The court noted that under Morrison’s reasoning, RICO only applies domestically.[112] Even RICO’s references to interstate or foreign commerce were insufficient for the Norex court, which concluded that “simply alleging that some domestic conduct occurred cannot support a claim of domestic application. . . . The slim contacts with the United States alleged by Norex are insufficient to support extraterritorial application of the RICO statute.”[113] The Norex opinion did not reference the possibility of satisfying the focus test via the domestic injuries nor an association-in-fact; it was instead fixated on Morrison’s bright-line rule for statutory interpretation.[114] Something interesting in this case is the court’s rejection of the argument that RICO does apply extraterritorially, since its predicate offenses apply to foreign conduct abroad.[115] But the main points under the Cedeño and Norex approaches are that RICO is silent as to its geographic reach and that its focus was upon the domestic enterprise. Thus, any cases that alleged violations by foreign enterprises had to be dismissed.

Courts soon realized that the question of determining whether an enterprise is foreign or domestic can be a challenging question, as enterprises can either lack or conceal a location. But because courts have been both active and creative in matters involving extraterritorial regulation, more tests were developed to remedy this shortcoming. For instance, the Eastern District of New York in European Community. v. RJR Nabisco, Inc.[116] adopted the “nerve center test” to determine the geographical location of the enterprise.[117] This test was adapted from a 2010 Supreme Court case, Hertz Corp. v. Friend,[118] which used the “nerve center” test to determine a corporation’s “principal place of business” for jurisdictional purposes.[119] Analogizing this test to RICO analyses, courts have used the “nerve center test” to discern if an enterprise is domestic and have generally held that, as per Hertz, the principal place of business is “the place where a corporation’s officers direct, control, and coordinate the corporation’s activities.”[120]

Attorney Miranda Lievsay has asserted that the “enterprise” approach “would allow a criminal enterprise to avoid liability by relocating the enterprise’s ‘brains’ outside the United States while continuing to direct racketeering activity within the United States.”[121] She has also asserted that this approach directly undermines congressional intent and RICO’s purpose, which is to “eradicate the harmful effects of infiltration as produced by all criminal syndicates;” thus, there is not a solely domestic focus when dealing with RICO.[122] Arguments on the other side contend that the “enterprise” approach is more aligned with Morrison since “RICO does not punish predicate acts of racketeering alone, but only racketeering activity as related to an enterprise.”[123]

  2. The Predicate Offenses Approach

CGC Holding Co. v. Hutchens[124] analyzed the “predicate acts” approach. Here, Canadian defendants were alleged to have committed a fraudulent loan scheme in violation of RICO.[125] Even though RICO, as acknowledged by the court, is silent as to its geographic reach, the court nevertheless stated that a sufficient RICO claim had been alleged because the predicate acts occurred in the United States.[126] The district court articulated the “predicate acts” approach, which looks to the location of the predicate offense in determining whether it qualified as domestic.[127] The defendant’s motion to dismiss was denied because the “racketeering activity . . . was directed at and largely occurred within the United States.”[128] The court distinguished Norex and Cedeño as cases “where the actors, victims and conduct were foreign, and the connection to the United States was essentially incidental.”[129] Here, by contrast, “the conduct of the enterprise within the United States was a key to its success.”[130] Thus, the court determined that the case involved a domestic application of RICO.[131]

Similarly, Chevron Corp. v. Donziger[132] used the “predicate acts” approach.[133] Here, it was alleged that a New York lawyer and others “conceived, substantially executed, largely funded, and significantly directed a scheme to extort and defraud Chevron, a U.S. company . . . .”[134] The court decided to follow the CGC Holding Co. court’s “predicate acts” approach, even though this case would have satisfied the “enterprise” approach because the actors were within the United States.[135] It determined that congressional intent was on “protecting American victims at least against injury caused by the conduct of the affairs of enterprises through patterns of racketeering activity that occur in this country.”[136] Thus, the defendant’s motion to dismiss was denied.[137]

There are also defects with the “predicate offenses” approach. Lievsay asserts that this approach is inconsistent with both RICO’s legislative history and the Morrison opinion. For instance, the “predicate offenses” approach “ignores Congress’s explicit warning that merely addressing the unlawful activities of an enterprise will fail to effectively eradicate organized crime.”[138] However, scholars have promoted this approach as the proper focus because “RICO only prohibits certain actions toward an enterprise when these involve a pattern of racketeering activities.”[139]

3. The Pattern of Racketeering Approach

The third approach is called the “pattern of racketeering” approach and is best elaborated upon by the Ninth Circuit in United States v. Chao Fan Xu.[140] In Chao Fan Xu, four Chinese nationals allegedly participated in a scheme to steal millions of dollars from the Bank of China and then fraudulently enter the United States with false immigration documents, illegal funds, and fraudulent marriages.[141] The Ninth Circuit found that RICO’s focus was the pattern of racketeering which, in that case, was “executed and perpetuated in the United States.”[142] The court acknowledged that the location of the enterprise may sometimes be relevant, but should not relevant in cases where the “‘brains’ of the operation were located overseas but the enterprise violated United States immigration law in the United States . . . . .”[143] In other words, even though the enterprise in Chao Fan Xu was overseas, the pattern of the racketeering activity occurred in the United States.[144] The court acknowledged the difficulties in applying Morrison’s focus inquiry to the RICO context and noted that courts have taken either the “enterprise” approach or “predicate acts” approach toward RICO’s focus.[145] In articulating the “pattern of racketeering” approach, the Ninth Circuit stated that this approach more accurately measures the focus of RICO since it is the pattern of racketeering activity that is the “heart of any RICO complaint” that is alleged.[146] The court examined the legislative history and RICO’s text[147]—which explicitly mention “pattern of racketeering activity” in each of the provisions—to support this new approach.[148] Finally, because the second part of the defendants’ plan took place in the United States and was essential to their fraudulent scheme, the Ninth Circuit affirmed their convictions.[149]

Like the preceding approaches, the “pattern of racketeering” approach has been admonished because it holds that RICO does not apply extraterritorially despite the strong congressional intent to the contrary.[150] However, it has also been noted, and correctly so, that this approach yields fairer results compared to the “enterprise” or “nerve center” approach. For instance, a RICO scheme conducted in the United States by a U.S. enterprise would be subject to RICO’s force under the “enterprise” approach, but a RICO scheme conducted in the United States by a foreign enterprise would escape liability under the “enterprise” approach.[151] As the Ninth Circuit in Chao Fan Xu stated, “an inquiry into the application of RICO to Defendants’ conduct is best conducted by focusing on the pattern of Defendants’ racketeering activity as opposed to the geographic location of Defendants’ enterprise.”[152]

 4. The “Predicate Statute’s Geographic Reach” Approach

In 2014, the Second Circuit, in European Community. v. RJR Nabisco, Inc.,[153] articulated a fourth approach or method of analyzing RICO: the “predicate statute’s geographic reach” approach.[154] This approach is different than the other three because it does not encompass a “focus” analysis of the “objects of [RICO’s] solicitude,”[155] but instead simply an analysis of whether the underlying predicates apply extraterritorially—Morrison’s first prong. The claims in this case, elaborated upon more below in Part VI, entail a complex money-laundering and drug sale scheme by RJR Nabisco and related entities. The Second Circuit apparently found sufficient evidence to rebut the presumption and, at the same time, obviate Morrison’s focus analysis. The court stated that RICO does apply extraterritorially “if, and only if, liability or guilt could attach to extraterritorial conduct under the relevant RICO predicate.”[156] In other words, the court asserted, “when a RICO claim depends on violations of a predicate statute that manifests an unmistakable congressional intent to apply extraterritorially, RICO will apply to extraterritorial conduct, too, but only to the extent that the predicate would.”[157] Of course, the opposite is true as well: “Conversely, when a RICO claim depends on violations of a predicate statute that does not overcome Morrison’s presumption against extraterritoriality, RICO will not apply extraterritorially either.”[158]

This case marked the first time RICO was applied to both foreign racketeering activity and foreign enterprises causing foreign activity,[159] until the Supreme Court modified this result. It has been promoted because it allows for extraterritorial application and is more aligned with congressional intent as well as the broad scope of RICO; however, several questions remained unanswered after this approach was endorsed by the Second Circuit, such as RICO’s applicability to international organizations.[160] One last question may have been whether Congress really intended RICO’s geographic reach to be dependent on those of its underlying predicate offenses, especially since RICO was regarded as a special statute that created new offenses to combat the increasingly-emerging trend of transnational organized crime.

IV. Noteworthy Earlier Holdings

 A. Charming Betsy

            Murray v. The Schooner Charming Betsy,[161] decided in 1804, is famous for its position that “an act of Congress ought never to be construed to violate the law of nations if any other possible construction remains . . . .”[162] Thus, it has been well understood that Congress does not legislate to create inconsistencies in international law, unless, of course, a contrary intent is clearly demonstrated.

 B. Bowman

In 1922, United States v. Bowman[163] held that the presumption against extraterritoriality should not apply when the court is dealing with “criminal statutes which are, as a class, not logically dependent on their locality for the Government’s jurisdiction, but are enacted because of the right of the Government to defend itself against obstruction, or fraud wherever perpetrated . . . .”[164] The opinion, written by Chief Justice Taft, went on to explain that to limit the locus of these offenses to a strictly territorial approach would “greatly…curtail the scope and usefulness of the statute and leave open a large immunity for frauds . . . .”[165] Furthermore, in these cases and with such statutes, “Congress has not thought it necessary to make specific provision in the law that the locus shall include the high seas and foreign countries, but allows it to be inferred from the nature of the offense.”[166]

Thus, it was debatable whether the presumption should apply to both criminal and civil RICO in the same manner.[167] Morrison seemed to partially overrule Bowman by requiring a clear indication regarding extraterritoriality or else the statute has no extraterritorial application. Interestingly, though, RJR Nabisco seems to revitalize Bowman through its distinction between criminal actions and civil suits, which grants more flexibility and discretion to criminal prosecutions, as opposed to civil RICO claims.

V. Breaking Down the Supreme Court’s Opinion in RJR Nabisco

A. Facts and Holding

In 2016, the Supreme Court decided the important case of RJR Nabisco v. European Community.[168] In this case, the procedural history of which spanned sixteen years, RJR Nabisco and related entities (hereinafter, “RJR Nabisco”) allegedly participated in a “global money-laundering scheme” with organized crime groups,[169] which had been “orchestrated from their U.S. headquarters.”[170] Specifically, the complaint by the European Community and twenty-six of its member states (hereinafter, “European Community”) described the scheme as the participation of Colombian and Russian drug traffickers who smuggled narcotics into Europe and sold drugs for euros which were, in turn, used to purchase large shipments of cigarettes.[171] The complaint also alleged that RJR Nabisco dealt directly with drug traffickers and money launderers in South America, sold cigarettes to Iraq, which violated international sanctions, and acquired a company to further their illegal acts.[172] Thus, the complaint properly alleged a pattern of racketeering carried out in interstate commerce, thereby qualifying RJR Nabisco as a RICO “enterprise.”[173] Furthermore, each of RICO’s substantive prohibitions, outlined in sections §1962(a)-(d), were alleged to have been violated by RJR Nabisco.[174] This resulted in an alleged harm to the European Community.[175]

The District Court agreed with RJR Nabisco and dismissed the complaint, asserting that RICO does not apply to activities outside the United States;[176] however, the Second Circuit reversed, concluding that “Congress has clearly manifested an intent that [predicates for RICO liability] apply extraterritorially.”[177] Specifically, the Second Circuit concluded that two of the predicates alleged in the complaint—the money laundering and material support of terrorism statutes—apply extraterritorially, while the other three—mail fraud, wire fraud, and violation of the Travel Act[178]—do not apply extraterritorially but that the complaint nevertheless alleges sufficient domestic violations of the predicates.[179]

RJR Nabisco pursued a request for rehearing, arguing that RICO’s civil cause of action requires a showing of a domestic injury, which the panel denied.[180] Rehearing en banc was also denied by the Second Circuit.[181] Because of lower court confusion regarding whether RICO does have extraterritorial application, the Supreme Court granted certiorari.[182] The issue before the Court was simply whether RICO applies extraterritorially.[183] In particular, the Court had to decide the geographic scope of two key provisions of RICO: (1) the substantive provisions, and (2) the civil damages action, referring to the private right of action. The Court held, in an opinion by Justice Alito, that the presumption against extraterritoriality had been overcome with respect to the substantive provisions found in § 1962 “provided that each of those offenses violates a predicate statute that is itself extraterritorial,”[184] but it had not been overcome for RICO’s § 1964(c) private right of action absent the private plaintiff proving “a domestic injury to its business or property.”[185] The holding on the substantive provisions was unanimous, but the holding on the civil private right of action resulted in a 4–3 split on the Supreme Court.

B. RICO’s Substantive Provisions

The Court began its discussion by acknowledging the presumption against extraterritoriality: “Absent clearly expressed congressional intent to the contrary, federal laws will be construed to have only domestic application.”[186] Its purpose is to “avoid the international discord that can result when U.S. law is applied to conduct in foreign countries” and reflects the notion that “Congress generally legislates with domestic concerns in mind.”[187] After briefly describing two significant prior Supreme Court cases dealing with extraterritoriality—Morrison and Kiobel[188]—the Court the articulated a two-step framework based on those cases:

At the first step, we ask whether the presumption against extraterritoriality has been rebutted—that is, whether the statute gives a clear, affirmative indication that it applies extraterritorially. We must ask this question regardless of whether the statute in question regulates conduct, affords relief, or merely confers jurisdiction. If the statute is not extraterritorial, then at the second step we determine whether the case involves a domestic application of the statute, and we do this by looking to the statute’s “focus.” If the conduct relevant to the statute’s focus occurred in the United States, then the case involves a permissible domestic application even if other conduct occurred abroad; but if the conduct relevant to the focus occurred in a foreign country, then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory.[189]

Like Morrison and Kiobel, the Court in RJR Nabisco asserted that virtually all cases should use the presumption. However, unlike those cases, the Court here found that the presumption had in fact been rebutted for the substantive prohibitions in §1962.[190] Justice Alito based this conclusion on the text of RICO, for which there are several predicates that apply to some foreign conduct.[191] Because of Congress’ incorporation of these predicate offenses into the RICO statute, the Court concluded that “RICO gives a clear, affirmative indication that §1962 applies to foreign racketeering activity—but only to the extent that the predicates alleged in a particular case themselves apply extraterritorially.”[192] Thus, this rule does not apply to all RICO predicates, only to the ones in which the RICO predicates have extraterritorial effect.[193]

Regarding the presumption once more, Justice Alito noted that only a clear indication can rebut the presumption.[194] However, a clear statement is not needed; context can be consulted.[195] And it is with this context that the Court concluded that Congress intended RICO to have extraterritorial effect; in fact, the Court noted that “[t]his unique structure makes RICO the rare statute that clearly evidences extraterritorial effect despite lacking an express statement of extraterritoriality.”[196] Thus, RICO applies to some foreign racketeering activity.[197]

RJR Nabisco contended that RICO’s focus (which was urged to be the enterprise, not the pattern of racketeering) does not apply to foreign enterprises and thus requires a domestic enterprise; therefore, according to RJR Nabisco, RICO did not reach this case.[198] In rejecting this argument, Justice Alito reasoned that the focus inquiry is relevant only at step two, which was unnecessary in this case since there was a clear indication of extraterritorialty at step one.[199] “[T]he location of the affected enterprise does not impose an independent constraint.”[200] If it did, Alito rationalized, then foreign enterprises operating in the United States would be excluded from RICO’s reach.[201] As one final matter on this holding, the Supreme Court noted that “a RICO enterprise must engage in, or affect in some significant way, commerce directly involving the United States—e.g., commerce between the United States and a foreign country,”[202] thus drawing upon Kiobel’s “touch and concern . . . with sufficient force” standard.[203] Without this “anchor to U.S. commerce, a RICO violation cannot stand.[204] Thus, the predicates alleged here, money laundering and material support of terrorism statutes, expressly provide for extraterritorial application, but the other three alleged, fraud statutes (mail fraud and wire fraud) and the Travel Act, did not contain the clear indication to rebut the presumption, but that the complaint alleged domestic violations of those statutes.[205]

C. RICO’s Private Right of Action

The Supreme Court here, in a plurality opinion, rejected the Second Circuit’s notion that the presumption did not apply to the private right of action separately from the substantive provisions and based its reliance on Kiobel’s extension of the presumption to jurisdictional statutes.[206] Because of this, Justice Alito, no longer writing for a unanimous Court, saw fit to require that the presumption be applied separately to RICO’s causes of action, and, to support this conclusion, he noted that “providing a private civil remedy for foreign conduct creates a potential for international friction beyond that presented by merely applying U.S. substantive law to that foreign conduct.”[207] The Supreme Court provided antitrust law as an example of a situation that has generated considerable controversy over the extraterritorial applications of its treble-damages provisions to conduct in other states.[208] The risks of foreign friction appeared to be too much for the Court to overlook, at least not “without clear direction from Congress.”[209] Thus, after RJR Nabisco, when there is a risk of U.S. and foreign law clashes, “the need to enforce the presumption is at its apex.”[210]

The European Community had a very compelling argument at this stage – one that entailed their consent to any resulting international friction: “the plaintiffs are not foreign citizens seeking to bypass their home countries’ less generous remedies but rather the foreign countries themselves.”[211] In rejecting this, the Court contended that it refused to adopt a case-by-case inquiry that is dependent on “consent of the affected sovereign.”[212]

Turning to the analysis of congressional intent, the Supreme Court noted that there was nothing in § 1964(c) that demonstrated a congressional intent for the private right of action to extend to injuries suffered outside the United States.[213] It was insufficient to the Court to allow the private right of action to extend abroad just because the underlying law governing the conduct extends abroad.[214] “Something more is needed, and here it is absent.”[215] Thus, the focus of the civil private right of action is the injury caused by the RICO violation.[216]

Justice Alito concluded this part of the opinion by acknowledging that this will require a civil plaintiff to prove domestic injury to business or property; alleging foreign injuries is insufficient. He also admitted that this distinction “will not always be self-evident” but that “we need not concern ourselves with that question in this case.”[217] This was because the European Community waived their damages claims for domestic injuries in the District Court, which was accepted with prejudice. Because the rest of the claims alleged damages based on foreign injury, the presumption had not been rebutted for § 1964(c) and the Court dismissed the claims.[218]

D. The Dissents

Justice Ginsburg dissented from the holding on the private right of action. She expressed her disagreement that the private right of action requires a domestic injury and does not allow for recovery for foreign injuries.[219] Instead, Justice Ginsburg would have held that RICO reaches extraterritorial injury when the claimant is a private plaintiff.[220] In fact, as she maintained, RICO’s private right of action “expressly incorporates §1962, whose extraterritoriality, the Court recognizes, is coextensive with the underlying predicate offenses charged.”[221] Most importantly, as applied to this case, Justice Ginsburg underscores why the domestic-injury requirement “makes little sense.”[222] Here, all the defendants are United States corporations with United States headquarters and are charged with racketeering activity managed from the United States involving conduct that took place in the United States. Thus, “this case has the United States written all over it.”[223]

Turning to the majority’s “international friction concerns,” Justice Ginsburg notes that it is not entirely clear that the Court’s rule would prevent “international discord.”[224] In fact, as she observes, “[m]aking such litigation available to domestic but not foreign plaintiffs is hardly solicitous of international comity or respectful of foreign interests.”[225] In addition, doctrines such as forum non conveniens and due process constraints are “controls [that] provide a check against civil RICO litigation with little or no connection to the United States.”[226] Lastly, Justice Ginsburg points out that while the majority tries to avoid creating a double standard, they have in fact created one of their own. “U.S. defendants commercially engaged here and abroad would be answerable civilly to U.S. victims of their criminal activities, but foreign parties similarly injured would have no RICO remedy.”[227]

Justice Breyer also wrote a short dissent, disagreeing with the majority’s stance on the private right of action and instead asserting, similarly to Justice Ginsburg, that §1964(c) does demonstrate the congressional intent for extraterritorial application.[228] In fact, Breyer contends, this case does not involve a case of purely foreign facts, but foreign-cubed transactions. This case has many connections to the United States and, he asserted, the majority’s conclusion that these limits would prevent the dangers of international friction is unfounded.[229]

VI. Implications

RJR Nabisco had both global and local implications.[230] The framework for deciding transnational organized crime cases now proceeds in the following matter: first, courts will determine whether Congress has indicated its intent for the statute to be applied extraterritorially. If not, then in the second step, courts will determine whether there is conduct relevant to the statute’s focus that occurred in the United States. Despite the process, the RICO statute may geographically reach both U.S. and foreign individuals abroad and hold them liable under U.S. law in U.S. courts. Thus, even though RJR Nabisco rejected the domestic enterprise requirement, it still asserted that a connection to the United States is required. This requirement is satisfied via proof that the enterprise engaged in some form of interstate or foreign commerce, regardless of the enterprise’s connection or presence in the territory of the United States. However, this does not apply to civil plaintiffs seeking to enforce RICO for non-U.S. injuries. Thus, the question of RICO’s extraterritorial reach and its attendant circumstances continues to “take… on great significance, both in the criminal and civil spheres.”[231] These implications of RJR Nabisco will be explored in this Part.

A. The Presumption Against Extraterritorially Now Applies to Virtually Any Type of Claim

In RJR Nabisco, the Court found that Congress was not concerned with only domestic conditions; since Congress affirmatively indicated that certain predicate offenses apply to foreign conduct, RICO’s substantive provisions were therefore held to also apply abroad.[232] But this was not the case with the private right of action.[233] To justify this distinction, the Court analogized from its extension, in Kiobel, of the presumption for a “judicially-crafted private right of action under the ATS,” and used this rationale to extend this reasoning to the “legislatively-crafted private right of action” in RICO.[234] The problem with this reasoning is that judicial and legislative private rights of action are not comparable. Professor Anthony Colangelo contends that concerns over excessive prosecutorial discretion were presumably taken into account via the democratic process of enacting legislation because, as is evident in RICO, Congress expressly inserted a private right of action into the statute.[235] What the Supreme Court did in RJR Nabisco was worse than creating new rights with no basis: “the Court refused to enforce legislatively created rights through an incongruous and selective application of the presumption against extraterritoriality.”[236]

It has also been pointed out that the Court’s extension of the presumption against extraterritoriality to all types of claims is in conflict with Morrison’s distinction between subject-matter jurisdiction and merits questions (legislative jurisdiction).[237] Professor Hannah Buxbaum argues that this merits-jurisdictional distinction, regarding when the presumption can and cannot be applied, does not make sense “since applying the presumption against extraterritoriality to general jurisdictional statutes would deprive federal courts of subject-matter jurisdiction Congress clearly intends them to enjoy” and likely “frustrate[s] congressional intent.”[238]

Furthermore, this case was markedly different from Kiobel. In Kiobel, the ATS created an implied private right of action, gave federal courts the jurisdiction to hear such cases, and did not provide any substantive prohibitions—whereas, in RJR Nabisco, RICO prohibits conduct and provides an express private right of action for those injured by RICO violations.[239] Thus, as Professor Gevurtz correctly asserts, “Kiobel provides limited support for the proposition that the presumption against extraterritoriality applies separately to define the reach of a statute’s substantive prohibition and to create a different additional limitation for any private remedy provision within the statute.”[240]

The Supreme Court in RJR Nabisco decided to accept the argument for extraterritoriality based on the location of the injury and rejected the location-of-the-enterprise approach. In doing so, the Court left unresolved the issue of whether it would apply the presumption against extraterritoriality separately to every element of the plaintiff’s claim—“separate application for the injury element, but not for the different elements of the substantive violation.”[241] Moreover, the Court’s extension of the presumption to the express private right of action in RICO “intensified the barriers to transnational litigation”[242] by increasing the burden that Congress must overcome in order for a statute to apply abroad, demanding that the presumption be applied to each provision of congressional statutes, and contravening the historical notion that the presumption applies only to conduct-regulating statutes.[243]

Additionally, it is unclear whether the Court really did solve the split in the lower courts addressing RICO’s focus. It is likely that this problem wasn’t even addressed since the Court’s promulgated approach now simply looks at whether the predicate offense applies to foreign conduct.[244] Professor Gevurtz thinks that the analysis here did not moot the focus question since RICO could still apply extraterritorially based on either a focus on the “pattern of racketeering” or the “enterprise.”[245] Regarding the “added injury element” for the private right of action, it is even less clear what the focus is.[246] Apparently, the Court determined that domestic injury was the focus, but the text of § 1964(c) provides recovery for injuries from RICO violations; “[s]o, is the injury the focus or is the violation the focus?”[247] These concerns remain undressed and tend to confuse scholars as well as perpetuate barriers towards multi-state cooperation.

Moreover, what does this mean for the “focus” analysis in cases where the presumption against extraterritoriality had not been rebutted at step one? A notable question that remains is whether such presumption requires some U.S. conduct that would be irrespective of the focus. Recall the two-step framework of RJR Nabisco: step one regarding the congressional indication for extraterritoriality and step two (if step one is inapplicable) to determine if the conduct relevant to the statute’s focus is domestic.[248] But does this mean that conduct in the United States needs to be alleged “even if the focus of the provision is something other than conduct?”[249] In answering in the negative to this question, Professor Dodge notes that the opinion does not mention “conduct in the United States” when analyzing the focus with respect to the private right of action.[250] Furthermore, the Supreme Court in Morrison held that the location of the conduct is irrelevant in applying the presumption against extraterritoriality and that such a rule would “thwart Congress’s purpose when the focus of a provision is something other than conduct.”[251] Thus, for those asserting civil RICO claims, it is domestic injury, not conduct, that matters.

In conclusion, the main takeaway is that RJR Nabisco mandates that the presumption against extraterritoriality “appl[y] separately to a statute’s substantive and remedial provisions.”[252] The immediate consequence of the holding is a significant reduction of the geographic reach of U.S. statutes that do not demonstrate congressional intent as to the propriety of extraterritoriality.[253] Furthermore, as Professor Carlos Vázquez notes, the opinion actually imposes an additional requirement compared to prior cases dealing with the presumption against extraterritoriality: “the outcome for statutes that do not specifically address the extraterritoriality issue . . . is that recovery is limited to cases in which both the substantive ‘focus’ of congressional concern and the injury occurred on U.S. soil.”[254]

B. The Future of the Private Right of Action Under RICO Is Significantly Curtailed

After RJR Nabisco, the private right of action was already significantly abridged. Now, even though the private right of action still exists, private claimants must prove a U.S.-related injury.[255] This effectively requires that private litigants meet higher burdens than the government must when it brings a prosecution against the defendant, even though two such cases may be based on the same conduct. As Professor Franklin Gevurtz puts it, “private claims for injuries incurred outside the United States . . . may soon be barred, even when the location of the conduct would not preclude application of the statute in a prosecution of the defendant by the U.S. government.”[256] This restriction is also unsatisfying because it emphasizes avoiding international friction, yet places no consideration on “location of the conduct, the nationality of the parties, or other factors.”[257] It also seems to slightly contradict the Supreme Court’s statement in Morrison that “[a]ssuredly context can be consulted as well,”[258] since the analyses used in RJR Nabisco regarding the private right of action ignore RICO’s text and structure and undermine the purpose of the presumption.[259]

Scholars have argued that the Court’s holding regarding the interplay between the presumption and the private right of action is in conflict with the presumption’s historic function as a “separation-of-powers and foreign relations doctrine.”[260] In fact, the opinion “reflects the Court’s use of the presumption to transform the statute that Congress enacted into one the Court would have preferred.”[261] The U.S. injury requirement is also in conflict with RICO’s policy goals.[262]

Furthermore, RJR Nabisco does not clarify the “focus” analysis for private claimants. Professor Gevurtz notes that the opinion “gives defendants in private RICO cases two bites at hiding behind the presumption against extraterritoriality—one if the pattern of racketeering activities occurs outside the United States (and does not involve predicate crimes having extraterritorial reach) and a second if the injury occurs outside the United States.”[263] Similarly, the government is affected by this holding as well. For instance, it is equally possible for a private claimant to have RJR Nabisco standing, while the government cannot. This may occur in situations where the plaintiff has a domestic injury alleged under RICO, but where the government cannot pursue a claim because the defendant acted outside the United States.[264] Gevurtz characterizes this situation as “contrary to the underlying policy of RJR Nabisco that the presumption against extraterritoriality should curb private actions more than public prosecutions.”[265]

But what about the underlying policy of RICO? When it comes to matters of extraterritorial jurisdiction, the limited remedies and jurisdictional restrictions tend to limit the number of private claimants that can recover under civil RICO lawsuits, thus “frustrat[ing] the Act’s utility in litigating against corporate multinationals.”[266] For instance, lower courts have tended to increasingly narrow civil RICO, which directly and “substantially narrows the pool of plaintiffs that can receive compensation.”[267] Justifications for this limitation appear to be based on the “injured in his business or property” language in civil RICO.[268] Scholars have pointed out that this language evinces the congressional intent that Congress intended to compensate private victims for a more narrow type of harm, such as lost profits to business owners or something else along these lines.[269] But then how does one explain the “liberally construed” mandate found in RICO?[270]

Another major concern is the applicability of RJR Nabisco’s holding to other federal statutes. It appears that, because of the holding’s emphasis on injury, other federal statutes providing for just a private cause of action will only be extended to injuries felt in the United States unless there is a clear congressional intention for that statute to apply extraterritorially.[271] Thus, a federal statute—no matter how broadly drafted—that is silent as to its geographic reach will not allow for recovery for injuries felt outside the United States for private claimants.[272]

C. International Relations and Foreign Resentment Issues Have Not Abated

The Supreme Court in RJR Nabisco supported its holding because of concerns over the “potential for international friction.”[273] But, as Professor Anthony Colangelo points out, the facts in this case raised no issues of foreign resentment because the plaintiffs did not “resent . . . the application of U.S. law” but instead “explicitly and repeatedly requested it.”[274] In fact, it was the Court’s refusal to provide these foreign states—the plaintiffs—the same access to U.S. courts that is more likely to create “unequal treatment and itself risks foreign resentment and international friction.”[275]

This leaves one wondering why the European Community[276] sought access to U.S. courts in the first place and why it decided not to rely on any local or European law. After all, “the case also has the European Union written all over it;” furthermore, the majority of criminal activities that formed the bases for the RICO violations took place in Europe.[277] One reason could be the “promise of treble damages,” which was both a lucrative and punitive legal strategy.[278] Another reason could be the fact that RJR Nabisco was a U.S. company operating in the United States.[279] Still, an important reason could be that the European Union “offers no direct equivalent to the type of private enforcement possible under RICO.”[280] Thus, the European Community initiated the proceeding in U.S. courts and knew exactly what they were getting, which was the same as what they wanted: the application of U.S. law.

How far can this consent argument be taken and who can consent? If anyone can consent and effectively waive any possible foreign friction that may result, should this be sufficient for the judiciary to extend that provision extraterritorially? What if there is consent in one case, but not in a similar, future case? Or what if the initial consent was withdrawn? Scholars have focused on this consent argument because it was the foreign sovereigns themselves that were consenting; thus, the judiciary appeared to have no just reason to deny it and have been critically admonished for doing so.[281] Perhaps this is a strong argument since no higher entity can give consent than the respective foreign governments of individual states.

But had the Court adopted this consent argument, then the law would have been even more dependent on the specific facts in every case. More distinctions are not needed. For instance, such a consent-based approach could have resulted in situations where identical cases are decided as diametrical opposites in their holdings—one where U.S. law is extended abroad and the other where the presumption had not been rebutted. The difference between these two cases? Consent. This argument does not seem so compelling on the facts of RJR Nabisco since it was the foreign states consenting; but would it be possible, under a consent theory, for private organizations or private claimants to waive foreign resentment consequences? Even if they consent, the foreign government may not be so willing, especially if the defendant is a foreign-incorporated enterprise that happened to cause domestic injury to these claimants.

But this, too, creates too many distinctions based first on the claimant (foreign government vs. private party), then on consent, and then on the facts of the case. Such multi-layer steps and categorical distinctions will soon become too awkward. Viewed in this manner, the Court’s rejection of the consent-based approach is both sound and logical.

But why, then, did the Supreme Court not stop at their rejection of the consent-based approach but instead also differentiate between government actions and those brought by private parties? A prominent theory involves the sensitivity of foreign policy issues when in the hands of people not accountable to foreign governments.[282] Scholars have contended that this distinction has to do with the responsibility that U.S. prosecutors are given and the considerations they must weigh when initiating proceedings, which is something not demonstrated by private claimants.[283] This means that “private litigants . . . can undertake suits that may benefit themselves personally but produce public harm.”[284] Private claimants, such as attorneys handling class action suits, would normally be more concerned about getting paid and tend to lack the accountability to the public for the foreign complications resulting from their actions.[285] It seems to be likely that the Court in RJR Nabisco based its reasoning on these considerations. Thus, the judiciary tends to assert that it prefers foreign policy matters to be dealt with “by political actors who must face political accountability for their choices, not by litigants and judges who have no such responsibility.”[286]

However, is it really true that prosecutors are more likely to consider accountability issues and foreign policy than private attorneys? It could equally be possible that prosecutors are influenced by their workload, resources, success rates, etc. to the same extent as private attorneys representing private claimants or class actions suits. There is no guarantee that this is the case, nor is it a fair conclusion.

Other scholars, as well, have opposed this stance because the issue in RJR Nabisco was not foreign infringement. It has been contended that there is little evidence that comity was undermined by RICO analyses prior to Morrison.[287] Furthermore, “comity does not require that the United States tolerate or protect racketeering conduct that emanates from or has significant effects within its borders . . . .”[288] Then when is international comity affected? This is the key question but one that the Supreme Court did not address, leaving to the lower courts or to another Supreme Court decision the task of identifying when a private claim alleging foreign conduct will cause friction with foreign states.[289]

Nevertheless, the Court in RJR Nabisco asserted that even though conflict with foreign law is not a prerequisite for utilizing the presumption against extraterritoriality, “where such a risk is evident, the need to enforce the presumption is at its apex.”[290] Thus, the presumption has been supported as a valuable tool to help minimize foreign infringements and to prevent extraterritorial applications of U.S. law when there is insufficient congressional indication for that provision to extend abroad. These concerns are valid, and this validly perhaps justified the Court’s expanded application of the presumption against extraterritoriality not only to conduct-regulating provisions, but also to jurisdictional statutes and private causes of action.[291]

But if this is true, then it must also be true that where the presumption is rebutted, the result is a permissible form of extraterritoriality. However, recent Supreme Court cases, such as Morrison, Kiobel, and RJR Nabisco, have not dealt with the issue of whether permissible extensions of U.S. jurisdiction cause international friction.[292] Thus, the presumption definitely talks the talk about preventing excessive unilateral extensions of U.S. law, but it is not certain or guaranteed in any way that the presumption walks the walk at achieving this. The holdings of Morrison, Kiobel, and RJR Nabisco do not appear to represent sufficient or satisfactory safeguards.[293] This is due perhaps to the ineffective system in place for deterring the propriety of extraterritorial regulation or futility in the current use of the presumption as a deterrence. Only future cases that involve permissible extensions will reveal this answer,[294] since it has been either unaddressed or inapplicable.[295]

Notwithstanding whether the debates either supporting or denouncing RJR Nabisco’s reliance on avoiding international friction are correct, it remains to be seen whether this opinion was a good decision for the United States domestically. To determine this answer, it must be remembered that the people of the United States reside in an ever-expanding global community where technology can simultaneously connect people from around the world in a single click. That same technology can also supply the opportunity for massive transnational organized crime schemes that can involve conduct as well as effects in multiple states. Thus, does this emphasis on territorialism work well in 2020?[296] It has been asserted that RJR Nabisco promotes “litigation isolationism” in that it prevents the regulation of transnational enterprises by the United States, forces foreign nations to attempt to regulate these schemes, and causes problems—including the lack of protection from U.S. law—for U.S. nationals abroad.[297] Not only does this affect international comity,[298] but it also interferes with Congress’s ability to extend protections to its nationals in certain cases concerning transnational organized crime abroad.[299] Furthermore, an internal struggle is created between the judiciary and the political branches since RJR Nabisco’s holding “not only empowers, but arguably requires lower courts to push away transnational litigation involving conduct that Congress intended to regulate through a host of statutes.”[300]

D. Illustrating the Inconsistencies

As the law currently stands, there is a differentiation between cases brought by the government and those brought by private claimants: private claimants must prove a domestic injury before they can bring a civil RICO claim. As for the government, RICO will apply abroad only to the extent that the underlying substantive predicates do. If a prohibition extends extraterritorially, so too will the claim under RICO; however, it is less clear what happens when a substantive prohibition does not apply abroad. Under Morrison, it appears that the domestic focus inquiry would need to be utilized. But as applied to such suits brought by the government, what is the focus? Is it conduct in the United States or is it a domestic injury (effects) requirement, similar to that required for private civil claimants? This answer is unclear in RJR Nabisco. Perhaps this was because RJR Nabisco was a civil suit; nevertheless, the negative consequences from this unanswered question are far-reaching.

Because of this, it is possible for one situation to yield a claim for the government but not civil claimants and vice versa. This is true even if the claims of both the government and private claimants are linked to the same illegal conduct of the same defendant(s). The table below displays these situations with oversimplified examples.

 

Government Prosecution** Private Civil Claimant
Situation 1 ·      U.S. injury suffered by claimant*

·      foreign illegal conduct by Defendant

·      underlying RICO predicate not applied extraterritorially

(a) No RICO

Standing

[301]

(b) RICO

Standing

[302]

Situation 2 ·      foreign injury suffered by claimant*

·      foreign/domestic illegal conduct by Defendant

·      underlying RICO predicate extends extraterritorially

(c) RICO

Standing

[303]

(d) No RICO

Standing

[304]

*Note that the citizenship of the claimant is irrelevant

**It is unclear whether conduct/injury in the United States will allow for extraterritorial application when the underlying predicate offense does not apply extraterritorially. If conduct in the United States is a sufficient focus, the government’s prosecution under “(d)” can proceed, but if injury in the United States is a sufficient focus, the government’s prosecution under “(a)” can proceed.

 

Before analyzing the results of the table above, note that the location of the enterprise is irrelevant under the RJR Nabisco analysis for U.S. prosecutions: “[T]he location of the affected enterprise does not impose an independent constraint.”[305] For government prosecutions, all that is needed to extend RICO abroad would be for the underlying predicate to apply extraterritorially or for the court to conclude that the claim satisfies the domestic focus of RICO. Additionally, even if the claim satisfies this provision, the “RICO enterprise must engage in, or affect in some significant way, commerce directly involving the United States.”[306] For private civil RICO actions involving the propriety of extraterritorial applications, there is similarly no enterprise requirement. RJR Nabisco concluded that “[i]rrespective of any extraterritorial application of §1962, we conclude that §1964(c) does not overcome the presumption against extraterritoriality. A private RICO plaintiff therefore must allege and prove a domestic injury to its business or property.”[307]

As shown in the table, whether the substantive provision applies extraterritorially is usually the determining factor for U.S. prosecutions, but under private civil actions, it is the domestic injury that is required to rebut the presumption against extraterritoriality. This creates a problem in that the same conduct can be actionable where—or if—the U.S. government brings a prosecution against a defendant, [308] but not actionable if a private claimant wants to bring the claim.[309] The opposite is also true.[310] For instance, in Situation 1 in the table above, the government will likely not have standing where the underlying predicate does not extend extraterritorially (and has failed the focus analysis), but, if domestic injury is shown by a private civil claimant, then the presumption would be rebutted as to their claim.[311] Similarly, in Situation 2, the government is able to bring a RICO prosecution where the substantive predicate applies extraterritorially—thus rebutting the presumption—but the private civil claimant is precluded if there is no domestic injury alleged.[312] Thus, regardless of the conduct, nationality, or respective proceeding brought by the U.S. government, the private claimant’s suit will be dismissed if it is based entirely on foreign injury. This produces an awkward distinction. The private claimants with foreign injuries can hope that the prosecutor will take on their case and prosecute the defendant, but this is unlikely. Additionally, sometimes it is possible for civil claimants to bring a case but not the government in cases where the defendant clearly falls within the types of cases originally intended by Congress. But these distinctions and layers of analyses are what characterize the process of determining the propriety of extraterritorial extensions of RICO.

Note that the Noriega court’s result is not overruled. Even though the case involved violations of statutes (such as predicate offenses under RICO which did not apply extraterritorially),[313] the case alleged effects within the United States to rebut the presumption under the Morrison’s focus analysis. Even if the statute at issue does not apply extraterritorially as per Morison, if the complaint “alleges domestic violations of those statutes,” the focus test is met.[314] In other words, “foreign enterprises will qualify only if they engage in, or significantly affect, commerce directly involving the United States.”[315] Thus, Noriega’s result still stands, but its reasoning that in applying RICO liberally, “the Court cannot suppose that RICO does not reach such harmful conduct simply because it is extraterritorial in nature” appears to be overruled since it is contrary to Morrison’s clear indication of extraterritorial application in the statute.[316]

VII. The Harsh Reality: Politics, RICO Prosecutions, and Private Criminal Activity in 2020

A. Present-Day Status of RICO

Amending RICO, either to more accurately reflect congressional intent as to its extraterritorial reach or to better prioritize its intended scope of encompassed crimes, are both options that may resolve a majority of academic debates. However, a more difficult question concerns whether this is likely to happen. In other words, though desirable, is it even feasible at this moment to do this? Part VIII aims at illuminating this question.

A useful starting point is to examine how the United States has responded to this problem in the past. For instance, the steps articulated in the Senate Report of 1969 on the Organized Crime Control Act articulated both federal measures[317] and state and local measures[318] that were taken to combat organized crime. Critically, however, the Report concluded that “[f]ederal activity must be dramatically increased if we expect progress. More men and money, new administrative actions, and new legal authority are needed.”[319] This aggressive attitude needs to be adopted today, especially in light of the recent cut backs in extending RICO to foreign elements.

Prosecutors are given a great deal of discretion in the U.S. legal system. The power to bring charges carries with it the authority to make tough policy decisions, especially since so many laws are written broadly.[320]

As a starting point, Professor Blakey observes that crime cannot be analogized to conscious choice, but instead is more appropriately analogized to “poverty, passion, discrimination, or mental disease,” making “[r]eform of these social or economic conditions, or of the offender, [the] prime goals,” as opposed to “[i]ssues of legal theory or governmental

Alternatively, people today are reluctant to come to one another’s aid or to report criminal activity.[324] But this gets us back to the question of what crime is in this context. When people refer to modern organized crime, they are referring to more than just cartels, but also to “para-governments within our society” such as narcotics traffickers, loan sharks, or illegal gambling operators.[325] Furthermore, this type of crime affects people’s very lives since criminals can sometimes develop illicit agreements with the “police, the prosecutors, the courts, and the legislators,” making organized crime “the most sinister kind of crime in America.”[326] But the police, prosecutors, and the courts are the ones the U.S. people depend on to bring justice.

In reality, sadly, resources are scarce and local law enforcement personnel are poorly paid, undertrained, and “[a]ll too often, politics, if not corruption, taints their work.”[327] Society needs the help of local and state agencies to assist in the problem of organized crime.

What about the courts? Are they the forum where “the forces of good and evil” battle to the finish line and where “rights are vindicated and justice done”?[328] The answer to this question is unfortunately no. The solution will likely not be found by looking to the judiciary, but instead through political branch action and “[b]etter police training, higher pay, and attitudes of fair-minded professionalism.”[329]

B. As Applied to This Analysis

The focus of this Article has been to examine these local realities and their effects on an international scale. So what happens when international organized crime is added to the picture?[330] Professor Blakey asserts that “one size will not fit all” and that the roles of the courts, legislatures in enacting rules, or law professors are secondary to the more critical role of the legislatures in “providing necessary resources and executives in exercising wise administrative and prosecutorial discretion.”[331] And how is this undernourishment fixed?[332] By focusing on the administration of the U.S. criminal justice system in prosecuting crimes.[333] This is true even if the case at hand involves foreign elements, the adjudication of which would involve issues of extraterritorial application.

Why, then, have courts slowly narrowed the reach of U.S. statutes? What are they afraid of? Take RJR Nabisco as an example. The foreign resentment arguments are unpersuasive because the foreign governments requested the imposition of U.S. law. Neither do the domestic concern assertions carry any weight since no consideration is given to a claimant’s nationality. The only reasoning that has support in the case appears to be the desire to place the responsibility for dealing with partly foreign cases in the hands of the government/prosecutors and take it away from private claimants.

But there is an inherent contradiction in this argument. By taking away, or substantially narrowing, the ability of private civil RICO claimants to bring cases, they are lodging more power with the government/prosecutors. Prosecutors already have too much discretion in bringing the cases they want against whom they want. Additionally, the attendant circumstances of prosecutors are characterized by limited resources. In other words, there is an inability to prosecute all the crimes that are occurring in the United States, regardless of whether the issue deals with only a domestic case or a transnational case of organized crime. RJR Nabisco’s limitation of the private right of action further exacerbates this problem.

Thus, it appears that these recent limits—from Morrison to Kiobel and now to RJR Nabisco—make less sense. Add technology and globalization to the manipulation potential and evasion abilities of criminals with regards to new forms of crimes and society is left with a counterintuitive state of affairs of illusory borders but limited U.S. regulatory power. But what was going on in this era? Morrison was decided in 2010, only a couple of years after the 2008 Recession. Was Morrison, as the first major Supreme Court decision cutting back on the elasticity of extraterritorial regulation, a reaction to the U.S. market crash of 2008?[334] Maybe the United States couldn’t afford— literally—to get involved in the regulation of foreign affairs via the extraterritorial regulation of foreign nations/states. Or perhaps the United States, via the Supreme Court, was afraid to accept the consequences—foreign resentment, comity concerns, or infringements of international sovereignty—in doing so. Plausibly, and more simply, it could be the result of a majority conservative bench. No matter the reason for the Court’s curbed approach to extraterritorial regulation, it has still refused to adopt broad interpretations of statutes, even if that meant delivering decisions that turned U.S. nationals away from U.S. courts or made it significantly harder for them to state a claim.

VIII. Recommendations

Courts should not be the institution to set forth different interpretations for different provisions in a statute regarding its geographic. “[C]ourts lack sufficient observations to know whether Congress normally intends courts to separately evaluate the extraterritoriality of different sections of a statute or elements of a claim.”[335] Nevertheless, this characterized the Court’s reasoning in RJR Nabisco. Perhaps they thought they had sufficient observation to know what Congress thought on the matter. Does the fact that there has been no congressional amendment subsequent to the decision make the decision align with congressional intent? After all, when Congress disagrees with a Supreme Court decision, it has on prior occasions amended the relevant provision to either reverse the Supreme Court holding on that matter or change it.[336] Apparently Congress has not and will likely not react to the opinion, making the critical question, instead: what can be done at this stage? This Part intends to elaborate upon the various arguments and possible recommendations.

A. Recommendations Suggested by Other Scholars

While applying RICO, a U.S. statute, to foreign states constitutes a violation of sovereignty, the United States must protect its territory from foreign threats.[337] Also, as applied to other statutes, if the focus of the provision occurs in the United States—“be it conduct, or injury, or a transaction”—this should be sufficient to create the domestic application needed under the RJR Nabisco analysis, as some scholars have asserted.[338] On the other hand, there is the very logical argument that these “fragile policy questions in the realm of international relations are best left to Congress’s unique capabilities and vantage point,”[339] and thus are improper matters for the judiciary to be considering. RICO is, after all, a statute that encompasses the “international nature of some organized crime” and thus the “inherently international aspect” of the predicate acts.[340]

The United States must also consider international concerns such as multi-lateral cooperation. Because the presumption is “merely a judicial invention,” some scholars have suggested that it should be inapplicable in situations where its use would enhance foreign relations interference and that the United States needs to take account of the identity and status of the claimant. [341] This is important because multi-lateral cooperation needs the consent of all parties involved. Other scholars, however, have asserted that RICO’s private right of action must be limited to domestic injuries “to avoid overextending the already expansively applied statute”[342] that could otherwise result if too many foreign factors are present in U.S. courts. Here, it has been contended that a RICO claim is domestic if it alleges “either a domestic enterprise or a domestic pattern of racketeering activity.”[343]

It appears that the majority of scholars are against the Court’s distinction between applying the presumption to RICO’s substantive prohibitions and then applying it separately to RICO’s private right of action.[344] Such dissatisfaction likely stems from the current inability to reconcile the Court’s interpretation of RICO’s provisions to RICO’s intended purpose to combat organized crime, which now includes transnational organized crime.[345] Further, Congress could not have been any clearer regarding RICO’s extraterritorial scope than its use of “interstate or foreign commerce” directly in the text[346]

The question thus becomes how to proceed to rectify these political hindrances in order to better approach the international considerations that accompany regarding extraterritorial regulation It has been suggested that Congress intervene to take away the excess discretion that the courts have acquired[347] and subsequently that courts have used to first broaden the scope of RICO and then limit its geographic reach. Congress must provide a clearer definition of “enterprise” and, in doing so, remain aware of the rationale behind RICO’s enactment, including Congress’s fear “that organized crime would destabilize the American economy and possibly even undermine the justice system through the use of bribery and intimidation.”[348] As the law stands right now, the court’s broad interpretation of “enterprise” includes defendants who are associated with “non-organized-crime-type criminal organizations,” while simultaneously “taking away the government’s ability to prosecute dangerous groups that actively engage in racketeering activity, but do not have this mafia-style structure.”[349] This is contrary to the original intent of RICO and produces unfair results where courts set forth inconsistent holdings, prosecutors are free to run the show as they please, and organized crime perpetrators manipulate the law to avoid RICO’s reach; thus, a statutory amendment to clarify the interpretation of RICO’s original intent has been the suggested solution.[350]

But a statutory amendment is not the answer because Congress is not likely to amend it. Professor Blakey suggests that the answer lies not in statutory amendments but in a more efficient administration and selection of our justice system.[351]

B. Realizations/Recommendations of This Analysis

Congressional intent must be followed; if not, courts begin to engage in “rogue policymaking” and “expand the scope of a statute.”[352] This is a slow process but gradually implicates both the domestic and international levels. For instance, “[t]he drafting of RICO began, but did not end, with an effort to sanction organized crime’s traditional activities.”[353] Now, the scope of RICO’s coverage has been substantially broadened but its geographic reach has been significantly curtailed.

It is perfectly permissible for Congress to be concerned with transnational organized crime only as it applies to domestic conditions. The Supreme Court in RJR Nabisco was correct in limiting the scope of the private of action to avoid unnecessary foreign resentment concerns, but they went too far when they similarly limited it as against U.S. nationals. Keeping this in mind, the solution should entail an approach that keeps domestic concerns primarily in mind. Thus, the private right of action for foreign claimants should require that a domestic injury be shown; however, civil RICO claims for U.S. nationals should not be similarly restricted. Therefore, the U.S. nexus for the foreign nationals would be the domestic injury requirement, while the U.S. nexus for the U.S. nationals would be their citizenship. RJR Nabisco should be interpreted in this respect, as it is consistent with the notion that Congress legislates primarily with domestic conditions in mind and is consistent with the goal of reducing foreign interference.

The effects of this approach are that it ensures that the United States is adjudicating cases with a connection to its territory as opposed to deciding he cases of other nationals either for or against foreign states. If it’s a U.S. nexus requirement that the Supreme Court is seeking, this is the answer. It is also a compromise in that it limits excessive foreign transactions in U.S. courts while also alleviating prosecutorial burden. It limits excessive foreign transactions by ensuring that the United States is somehow connected to the transaction, either via their U.S. nationals or an injury occurring within the territory of the United States. Also, should the private right of action no longer require that domestic injury be shown by U.S. nationals, the discretion associated with prosecutorial decision-making is lightened.

This approach respects international comity and reduces foreign infringement since fewer foreign-cubed transactions will be adjudicated in U.S. courts; in fact, it appears they may only be brought if the government initiates the prosecution, not private civil claimants. Lastly, there will be no distinctions based on who consents nor unfair results from the overly restrictive approach that currently faces U.S. nationals asserting a civil RICO violation. Law enforcement agencies at all levels—local, state, and federal—need to be educated on the proper interpretation of RJR Nabisco. Regarding the private cause of action, the injury requirement should be implied from a U.S. national’s citizenship because their citizenship provides the sufficient U.S. nexus in lieu of asserting an injury within the United States; however, a foreign national should demonstrate the U.S. injury to assert that connection to the United States. This helps form that connection to the United States, reduce some of the burden for prosecutors in initiating these claims, and provides a fairer application amongst claimants injured by transnational organized crime.

IX. Conclusion

This study has presented an in-depth analysis of the history of RICO including original congressional intent, the circumstances prompting RICO’s enactment, and how RICO was enforced in the judicial system. It also examined some basic concepts of criminal procedure, prosecutorial discretion, and the capabilities of domestic law enforcement agencies – local, state, and federal. Then, extraterritoriality was added to the analysis. The purpose of this study was to understand how to best deal with the concept of extraterritorial applications of RICO by looking to how matters can be improved on the domestic level. Early caselaw has tended to be territorial. However, this trend slowly lost force when technology and globalization was on the rise. Despite the legislative history to the contrary and nature of organized crime, courts have generally held that RICO was silent as to its geographic reach.

Thus, the judiciary has slowly adopted the practice of extraterritorial regulation when cases presented some combination of either foreign parties or foreign defendants but have been inconsistent in doing so. Pre-Morrison cases tended to rely on some form of the conduct or effects tests when determining whether RICO should extend abroad. After Morrison, courts have struggled with how to determine what the focus of RICO encompassed. Because of this, the lower courts in post-Morrison cases have articulated about four different focuses of RICO. Depending on what claim a court was brought, the focus of RICO was construed differently, and thus similar cases were decided differently.

In extending RICO abroad, the judiciary has been responsible for two developments that have distorted RICO’s purpose and strength: (1) the judiciary has broadened the scope of the statute’s encompassed acts; and (2) the judiciary has limited the geographic reach of the statute’s enforcement. Despite the rationales of adhering to congressional intent and reducing foreign infringement, this is not reflected in modern jurisprudence. These two movements have been urged as contrary to the original intent of the drafters since the text of RICO explicitly mentions “foreign commerce” and organized crime has traditionally and continues to be regarded as involving the types of acts that transcend multiple borders.

The Supreme Court’s decision in RJR Nabisco was significant for several reasons. The holding extended the presumption against extraterritoriality to express legislative private causes of action, curtailed the private of action for civil RICO claimants due to the added domestic injury requirement, and increased foreign tensions from the inconsistent application of U.S. laws abroad. Now, it is quite possible for many credible cases of organized crime to slip through the cracks based on the senseless formalities of RICO’s new interpretations.

While the Court was correct to limit the private of action to foreign nationals, it should not have done so with respect to U.S. nationals. As applied to foreigners, the domestic injury requirement for civil RICO ensures that the United States is adjudicating cases with some connection to the territory of the United States. However, as applied to U.S. nationals, this interpretation need not extend so far. Therefore, U.S. nationals should have an implied U.S. nexus found through their citizenship to the United States. This is how RJR Nabisco needs to be interpreted.

When developing a solution or recommendation, it is important when proceeding with extraterritorial decisions to realize that it is permissible for Congress to legislate on an international issue but be concerned with its effects on a domestic level. It is also important to adequately describe a U.S. nexus requirement for both foreign nationals and U.S. nationals when dealing with civil RICO. As mentioned, foreign nationals should demonstrate the domestic injury, but U.S. nationals are already impliedly connected to the United States via their citizenship. How can these realizations be reached? Local, state, and federal law enforcement efforts need to be strengthened and revitalized. These are the domestic forces that are most important in the U.S. system, which, in turn, affect the international system.

Adequate training as to the proper scope and geographic reach of RICO will help systemize prosecutions and private rights of actions. It is highly unlikely that Congress will set out to amend RICO, nor is there hope in obtaining clarification of the statute’s scope and geographic reach from another Supreme Court decision. Furthermore, by eliminating the extra obstacle (the domestic injury requirement) for private U.S. civil RICO claimants, some of the excess burdens and discretion are taken away from prosecutors, who tend to already be plagued by limited resources. This innovative interpretation for civil RICO—the implied U.S. nexus in citizenship for U.S. nationals—is a compromise, one that alleviates prosecutorial overload, grants standing to U.S. nationals from a U.S. statute, and provides more consistency in RICO’s operation both domestically and internationally. For there to be international harmony, there must first be harmony at the domestic level. This includes proper training, allocated workloads, dependable and predictable standards, and swift action. Finally, such compromise will better adhere to the original congressional intent without overuse or misuse of RICO’s provisions to encompass more of the unintended acts or not enough of the intended acts. With these realizations in mind, the United States can proceed to combat cross-border organized crime as it currently stands today in 2020.

 

* Alina Veneziano, Ph.D. Candidate, King’s College London, UK; LL.M., New York University School of Law, 2019; J.D., Georgetown University Law Center, 2018; M.B.A., Western Governors University; B.S., Accounting, Western Governors University. Alina Veneziano is a registered attorney of the Bar of the State of New York. She thanks Professors Ronald Goldstock and G. Robert Blakey for their feedback and advice in developing this paper and is grateful to the Harvard Journal on Legislation team for their incredible edits throughout the publication process. She also thanks her family for their endless support.

[1] RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090, 2102 (2016).

[2] See 18 U.S.C. §§ 1961–1968 (2018).

[3] 561 U.S. 247 (2010).

[4] 136 S. Ct. 2090, 2090 (2016).

[5] Edwin H. Sutherland, White-Collar Criminality, 5 Am. Soc. Rev. 1 (1940).

[6] See id. at 1 (“This paper is . . . a comparison of crime in the upper or white-collar class, composed of respectable or at least respected business and professional men, and crime in the lower class, composed of persons of low socioeconomic status.”).

[7] Id.

[8] See Donald R. Cressey, Theft of the Nation: The Structure and Operations of Organized Crime in America 1 (1969).

[9] Id. (“And the real trouble has begun in the United States.”).

[10] Id. at 1–2 (“It is one thing to make a few dollars selling illegal lottery tickets, but it is another thing to achieve a monopoly on illegal gambling services by means of a simple weapon, a gun. It is one thing to bribe a policeman to overlook gambling, but it is another thing to dictate the actions of a state legislator or federal congressman or senator. It is one thing to amass a fortune by importing narcotics, but it is another thing to use this fortune to buy immunity from prosecution for murder.”).

[11] Id. at 3.

[12] S. Rep. No. 91-617, at 35 (1969).

[13] Id.

[14] Id. at 44.

[15] See Pub. L. No. 91-452, 84 Stat. 922 (with the stated purpose “[r]elating to the control of organized crime in the United States”).

[16] See G. Robert Blakey, RICO: The Genesis of an Idea. Trends in Organized Crime, 9 Trends In Organized Crime 8, 13 (2006).

[17] Id.

[18] Id.

[19] See United States v. Forsythe, 429 F. Supp. 715, 720 (W.D. Pa. 1977).

[20] See United States v. Elliott, 571 F.2d 880, 884 (5th Cir. 1978).

[21] See Miranda Lievsay, Containing the Uncontainable: Drawing RICO’s Border with the Presumption Against Extraterritoriality, 84 Fordham L. Rev. 1735, 1737 (2016); see also Gideon Mark, RICO’s Extraterritoriality, 50 Am. Bus. L.J. 543, 604 (2013).

[22] See, e.g., United States v. Gotti, 413 F. Supp. 2d 287 (S.D.N.Y. 2005).

[23] E.g., United States v. Tello, 687 F.3d 785 (7th Cir. 2012).

[24] See, e.g., United States v. Turkette, 452 U.S. 576 (1981).

[25] See Papai v. Cremosnik, 635 F. Supp. 1402, 1411, (N.D. Ill. 1986); see also Bennett v. Berg, 685 F.2d 1053, 1063 (8th Cir. 1982).

[26] See Nat’l Org. for Women, Inc. v. Scheidler, 510 U.S. 249, 252–53, 259, 262 (1994).

[27] See Emily A. Donaher, From the Sophisticated Undertakings of the Genovese Crime Family to the Everyday Criminal: The Loss of Congressional Intent in Modern Criminal RICO Application, 28 St. Thomas L. Rev. 197, 211 (2016) (“When Congress drafted the RICO statute, it intended to target the Mafia . . . . Courts today, however, read the statute broadly . . . .”); see also G. Robert Blakey & Brian Gettings, Racketeer Influenced and Corrupt Organizations (RICO): Basic Concepts—Criminal and Civil Remedies, 53 Temp. L.Q. 1009, 1011 (1980) (“Largely ignored at first, today RICO is widely employed by federal prosecutors, not just by organized crime strike force attorneys, but by prosecutors in United States Attorney’s offices . . . .”).

[28] 473 U.S 479 (1985).

[29] See id. at 499 (quoting Sedima, S.P.R.L. v. Imrex Co., 741 F.2d 482, 487 (2d Cir. 1984)).

[30] Id. at 499–500 (emphasis added) (As demonstrated in Part V, RJR Nabisco completely disregards this passage regarding the Court’s refusal to change or eliminate the private right of action.).

[31] United States v. Cauble, 706 F.2d 1322, 1330 (5th Cir. 1983).

[32] See G. Robert Blakey & Michael Gerardi, Eliminating Overlap, or Creating a Gap? Judicial Interpretation of the Private Securities Litigation Reform Act of 1995 and RICO, 28 Notre Dame J.L. Ethics & Pub. Pol’y 435, 443 (2014).

[33] See id.

[34] Donaher, supra note 27, at 220.

[35] See Lievsay, supra note 21, at 1737.

[36] See Victoria L. Safran, RICO’s Extraterritorial Reach: The Impact of European Community v. RJR Nabisco, 4 Stan. J. Complex Litig. 47, 48 (2016).

[37] See Lievsay, supra note 21, at 1737.

[38] Id.

[39] Id.

[40] See Charles Doyle, Extraterritorial Application of American Criminal Law 1 (2016), http://www.fas.org/sgp/crs/misc/94-166.pdf [https://perma.cc/2K6Q-JBWU].

[41] See id.

[42] G. Robert Blakey, Foreword: Debunking RICO’s Myriad Myths, 64 St. John’s L. Rev. 701, 705 (1990).

[43] Id. at 707 (“The criminal enforcement mechanism of RICO provides for imprisonment, fines, and criminal forfeiture.”).

[44] See G. Robert Blakey, Time-Bars: Rico-Criminal and Civil Federal and State, 88 Notre Dame L. Rev. 1581, 1604 (2013) (“The government and private parties may bring civil suits”); see also Blakey, supra note 42, at 707 (“The civil enforcement mechanism of RICO provides for injunctions, treble damages, and counsel fees.”).

[45] See 18 U.S.C. § 1962(a)–(d) (2018).

[46] See 18 U.S.C. § 1962(a).

[47] See G. Robert Blakey & Ronald Goldstock, “On the Waterfront”: RICO and Labor Racketeering, 17 Am. Crim. L. Rev. 341, 357 (1980).

[48] See 18 U.S.C. § 1962(b).

[49] Blakey & Goldstock, supra note 47, at 358.

[50] See 18 U.S.C. § 1962(c).

[51] See Blakey & Goldstock, supra note 47, at 359.

[52] See 18 U.S.C. § 1962(d).

[53] Blakey & Goldstock, supra note 47, at 360.

[54] Pub. L. No. 91-452, 84 Stat. 922, 947 (1970).

[55] See 18 U.S.C. § 1961(4).

[56] Blakey & Gettings, supra note 27, at 1024–25.

[57] See Instituto Nacional de Comercializacion Agricola (Indeca) v. Continental Illinois Nat’l Bank & Trust Co., 576 F. Supp. 991, 999 (N.D. Ill. 1983).

[58] Blakey & Gettings, supra note 27, at 1025; see also S. Rep. No. 91-617, at 158 (1969) (describing the possibility that legitimate groups can engage in criminal acts under RICO).

[59] 452 U.S. 576 (1981).

[60] Id. at 582–83.

[61] 18 U.S.C. § 1961(5).

[62] See Uniroyal Goodrich Tire Co. v. Mutual Trading Corp., 749 F. Supp. 869, 874 (N.D. Ill. 1990) (noting that the pattern requirement is not vague where the allegations would satisfy the pattern requirement and represent the type of scenario envisioned by Congress to be within RICO’s coverage).

[63] Sedima v. Imrex Co., 473 U.S. 479, 496 n.14 (1985).

[64] Id. (“The legislative history supports the view that two isolated acts of racketeering activity do not constitute a pattern.”).

[65] See Blakey & Goldstock, supra note 47, at 348.

[66] Secon Serv. Sys. v. St. Joseph Bank & Trust Co., 855 F.2d 406, 420 (7th Cir. 1988) (citing Skycom Corp. v. Telstar Corp., 813 F.2d 810, 818 (7th Cir. 1987) (“[A] single, isolated transaction does not satisfy the RICO requirement of a ‘pattern’ of racketeering activity.”)).

[67] See Graham v. Slaughter, 624 F. Supp. 222, 225 (N.D. Ill. 1985); see also United States v. Elliott, 571 F.2d 880, 899 n.23 (5th Cir. 1978) (“Thus, the Act does require a type of relatedness: the two or more predicate crimes must be related to the affairs of the enterprise but need not otherwise be related to each other.”).

[68] See 18 U.S.C. § 1961(1).

[69] See 18 U.S.C. § 1962(a)–(d).

[70] See Lievsay, supra note 21, at 1743; see also Blakey & Goldstock, supra note 47, at 348 (“Conviction under RICO requires that the prosecution must prove, not only that the defendant committed an offense, but also that he did so as a member of a group engaged in a pattern of racketeering activity.”).

[71] See 18 U.S.C. §1964(c).

[72] See Daniel Hoppe, Racketeering After Morrison: Extraterritorial Application of Civil RICO, 107 NW. U. L. Rev. 1375, 1382 (2013).

[73] Id.

[74] Id. (“The broad range of civil remedies thus allows a judge to determine the most effective way to stop the criminal activity.”).

[75] See Rotella v. Wood, 528 U.S. 549, 557 (2000).

[76] See Hoppe, supra note 72, at 1383.

[77] See United States v. Noriega, 746 F. Supp. 1506, 1512 (S.D. Fla. 1990).

[78] See United States v. Philip Morris USA, Inc., 477 F. Supp. 2d 191, 197 (D.D.C. 2007) (There is an “absence of dispositive Supreme Court case law on the subject of RICO’s extraterritoriality.”); see also Doe I v. State of Israel, 400 F. Supp. 2d 86, 115 (D.D.C. 2005) (“RICO does not indicate whether it is limited to the domestic borders of the United States.”); Poulos v. Caesars World, Inc., 379 F.3d 654, 663 (9th Cir. 2004) (“RICO itself is silent as to its extraterritorial application.”); North South Fin. Corp. v. Al-Turki, 100 F.3d 1046, 1051 (2d Cir. 1996) (“The RICO statute is silent as to any extraterritorial application.”).

[79] 746 F. Supp. 1506 (S.D. Fla. 1990).

[80] Id. at 1516.

[81] Id. at 1517.

[82] Id. at 1519.

[83] See EEOC v. Arabian American Oil Co., 499 U.S. 244 (1991); see also United States v. Noriega, 746 F. Supp. 1506, 1515 (S.D. Fla. 1990) (“Where a statute is silent as to its extraterritorial reach, a presumption against such application normally applies.”); William S. Dodge, The Presumption Against Extraterritoriality in Two Steps, 110 Am. J. Int’l L. Unbound 45, 45 (2016).

[84] See Butte Mining PLC v. Smith, 76 F.3d 287, 291 (9th Cir. 1996) (“We do not suppose that Congress in enacting RICO had the purpose of punishing frauds by aliens abroad even if peripheral preparations were undertaken by them here.”); see also Jose v. M/V Fir Grove, 801 F. Supp. 349, 357 (D. Or. 1991) (“[T]he language and legislative history of RICO fail to demonstrate clear Congressional intent to apply the statutes beyond U.S. boundaries. . . . RICO has been broadly construed to cover a wide array of conduct in light of the expansive language found within section 1962, but geographically, the procedural mechanisms contained within section 1965 are, on their face, limited to U.S. territory.”); see also Brink’s Mat, Ltd. v. Diamond, 906 F.2d 1519, 1524 (11th Cir. 1990) (Aldisert, J., dissenting) (“It was not Congressional intent, nor would it be proper were that the case, to deter the conduct of parties unconnected to the United States, or to provide windfall civil judgments to citizens of any country who sue citizens of another country for fraudulent transactions which only casually touch upon the United States. Congress only intended to deter the conduct of individuals within the borders of this country.”).

[85] See North South Fin. Corp. v. Al-Turki, 100 F.3d 1046, 1052 (2d Cir. 1996) (“Although there is little caselaw in this Circuit regarding the extraterritorial application of RICO, guidance is furnished by precedents concerning subject matter jurisdiction for international securities transactions and antitrust matters.”).

[86] See Leasco Data Processing Equipment Corp. v. Maxwell, 468 F.2d 1326, 1334 (2d Cir. 1972) (developing the conduct test and defining it conduct within the U.S. territory sufficient to form jurisdiction in instances where “there has been significant conduct within the territory”).

[87] See Schoenbaum v. Firstbrook, 405 F.2d 200, 206 (2d Cir. 1968) (developing the effects test and allowing for extraterritorial jurisdiction “to protect domestic investors who have purchased foreign securities on American exchanges and to protect the domestic securities market”).

[88] See Poulos v. Caesars World, Inc., 379 F.3d 654, 663 (9th Cir. 2004) (“RICO itself is silent as to its extraterritorial application. Although the RICO and the securities fraud contexts are not precisely analogous, the [conduct and effects] tests used to assess the extraterritorial application of the securities laws provide useful guidelines . . . .”).

[89] See Lievsay, supra note 21, at 1747.

[90] See generally Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247 (2010).

[91] See Morrison v. Nat’l Austl. Bank Ltd., 547 F.3d 167, 172 (2d Cir. 2008) (noting that a foreign-cubed transaction involves “a set of (1) foreign plaintiffs . . . suing (2) a foreign [defendant] in an American court for violations of American . . . laws . . . in (3) foreign countries”).

[92] See Morrison, 561 U.S. at 251–52.

[93] Id. at 255.

[94] See id. at 266.

[95] See Julian Simcock, Recalibrating After Kiobel: Evaluating the Utility of the Racketeer Influenced and Corrupt Organizations Act (“RICO”) in Litigating International Corporate Abuse, 15 CUNY L. Rev. 443, 465 (2012) (“Although the expansive scope of RICO’s ‘enterprise’ once suggested that courts might draw a wide net over players involved at the periphery of an enterprise’s activities, domestic case law has substantially curtailed this reach.”).

[96] Morrison, 561 U.S. at 265.

[97] Id. at 284.

[98] See Lievsay, supra note 21, at 1767 (“[C]ourts widely agree that RICO does not apply extraterritorially . . . .”); see also Mark, supra note 21, at 604 (“Thus far, in the post-Morrison era federal courts have applied the presumption against extraterritoriality that was endorsed by the Supreme Court in that case, and in so doing they have unanimously concluded that RICO has no extraterritorial application.”).

[99] See Safran, supra note 36, at 48–49 (“[T]hese cases all have found that Congress did not clearly express an intention for RICO to have extraterritorial reach, and, thus, that courts . . . must apply a presumption against extraterritoriality, and ascertain RICO’s ‘focus’ for purposes of determining whether a particular application of RICO is domestic or extraterritorial.”).

[100] See Franklin A. Gevurtz, Building a Wall Against Private Actions for Overseas Injuries: The Impact of RJR Nabisco v. European Community, 23 U.C. Davis J. Int’l L. & Pol’y 1, 8 (2016).

[101] Id. at 7 (“After Morrison, we are bereft of further guidance from the Supreme Court on how to determine the focus of a statute for purposes of the presumption against extraterritoriality.”).

[102] 733 F. Supp. 2d 471 (S.D.N.Y. 2010).

[103] Id. at 472.

[104] Id. at 472.

[105] Id. at 473.

[106] Id. at 474.

[107] Id.

[108] Id. (“RICO does not apply where, as here, the alleged enterprise and the impact of the predicate activity upon it are entirely foreign.”).

[109] 631 F.3d 29 (2d Cir. 2010).

[110] Id. at 31.

[111] Id. at 33 (“The slim contacts with the United States alleged by Norex are insufficient to support extraterritorial application of the RICO statute.”).

[112] Id. at 31.

[113] Id. at 33.

[114] Id. at 32.

[115] Id. at 33 (“Morrison similarly forecloses Norex’s argument that because a number of RICO’s predicate acts possess an extraterritorial reach, RICO itself possesses an extraterritorial reach.”).

[116] 2011 U.S. Dist. LEXIS 23538 (E.D.N.Y. Mar. 8, 2011).

[117] See id. at *18.

[118] 559 U.S. 77 (2010).

[119] Id. at 81–82; see also 2011 U.S. Dist. LEXIS 23538 at *18.

[120] See Hertz Corp., 599 U.S. at 78; see also 2011 U.S. Dist. LEXIS 23538 at *18.

[121] Lievsay, supra note 21, at 1769.

[122] Id. (emphasis added).

[123] Safran, supra note 36, at 56 (emphasis added).

[124] 824 F. Supp. 2d 1193 (D. Colo. 2011).

[125] Id. at 1200–03.

[126] Id. at 1209.

[127] Id. at 1209–10.

[128] Id. at 1209.

[129] Id. at 1210; see also Norex Petroleum Ltd. v. Access Indus. Inc., 631 F.3d 29 (2d Cir. 2010); Cedeño v. Intech Group Inc., 733 F. Supp. 2d 471 (S.D.N.Y. 2010).

[130] CGC Holding Co., 824 F. Supp. 2d at 1210.

[131] Id.

[132] 871 F. Supp. 2d 229 (S.D.N.Y 2012).

[133] Id. at 236.

[134] Id.

[135] Id. at 244, 254; see also CGC Holding Co., 824 F. Supp. 2d at 1210.

[136] Donziger, 871 F. Supp. 2d at 245.

[137] Id. at 246 (“Accordingly, insofar as the Donziger Defendants’ motion seeks dismissal of the RICO claims under Morrison, their motion must be denied.”).

[138] See Lievsay, supra note 21, at 1770.

[139] E.g., Gevurtz, supra note 100, at 11.

[140] See 706 F.3d 965, 975 (9th Cir. 2013) (abrogated by RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090 (2016)).

[141] Id. at 972–73.

[142] Id. at 979.

[143] Id. at 977.

[144] Id. (“Therefore, an inquiry into the application of RICO to Defendants’ conduct is best conducted by focusing on the pattern of Defendants’ racketeering activity as opposed to the geographic location of Defendants’ enterprise.”).

[145] Id. at 975–76.

[146] Id. at 977 (quoting Agency Holding Corp. v. Malley-Duff & Associates, Inc., 483 U.S. 143, 154 (1987)).

[147] 18 U.S.C. § 1962(a)-(d) (2018) (emphasis added).

[148] 706 F.3d at 977–78 (“Given this express legislative intent to punish patterns of organized criminal activity in the United States, it is highly unlikely that Congress was unconcerned with the actions of foreign enterprises where those actions violated the laws of this country while the defendants were in this country. Thus, to determine whether Defendants’ count one convictions are within RICO’s ambit, we look at the pattern of Defendants’ racketeering activity taken as a whole.”).

[149]See id. at 978, 994 (“The second part, however, bound the Defendants’ enterprise to the territorial United States. This second part involved racketeering activities conducted within the United States including the commission of RICO predicate crimes based on violations of United States immigration laws . . . .”).

[150] See RJR Nabisco, 136 S. Ct. at 2102.

[151] See United States v. Chao Fan Xu, 706 F.3d 965, 977 (9th Cir. 2013).

[152] Id.

[153] 764 F.3d 129 (2d Cir. 2014).

[154] Id. at 138.

[155] See Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247, 284 (2010) (Stephens, J., concurring).

[156] European Cmty., 764 F.3d at 136.

[157] Id.

[158] Id.

[159] See Lievsay, supra note 21, at 1767.

[160] Id.

[161] 6 U.S. 64 (1804).

[162] Id. at 118.

[163] 260 U.S. 94 (1922).

[164] Id. at 98.

[165] Id.

[166] Id. (emphasis added).

[167] See Mark, supra note 21, at 585.

[168] 136 S. Ct. 2090, 2090 (2016).

[169] Id. at 2098.

[170] Id. at 2112 (Ginsburg, J., concurring in part and dissenting in part).

[171] Id. at 2098 (majority opinion).

[172] Id.

[173] Id. (“The complaint alleges that RJR engaged in a pattern of racketeering activity consisting of numerous acts of money laundering, material support to foreign terrorist organizations, mail fraud, wire fraud, and violations of the Travel Act. RJR, in concert with the other participants in the scheme, allegedly formed an association in fact that was engaged in interstate and foreign commerce, and therefore constituted a RICO enterprise . . . .”).

[174] Id.

[175] Id. (“These violations allegedly harmed respondents in various ways, including through competitive harm to their state-owned cigarette businesses, lost tax revenue from black-market cigarette sales, harm to European financial institutions, currency instability, and increased law enforcement costs.”).

[176] Id. at 2099; see European Cmty. v. RJR Nabisco, Inc., No. 02-CV-5771-NGG-VVP, 2011 WL 843957, at *7 (E.D.N.Y. Mar. 8, 2011).

[177] European Cmty. v. RJR Nabisco, Inc., 764 F.3d 129, 133 (2d Cir. 2014).

[178] 18 U.S.C. § 1952 (2020).

[179] RJR Nabisco, 764 F.3d at 139–42.

[180] Id. at 150–51 (“The panel denied rehearing and issued a supplemental opinion holding that RICO does not require a domestic injury. If a foreign injury was caused by the violation of a predicate statute that applies extraterritorially, the court concluded, then the plaintiff may seek recovery for that injury under RICO.”).

[181] European Cmty. v. RJR Nabisco, Inc., 783 F.3d 123, 124 (2d Cir. 2015).

[182] RJR Nabisco, 136 S. Ct. at 2099.

[183] See id.

[184] Id. at 2103.

[185] Id. at 2106.

[186] Id. at 2100.

[187] Id. (quoting Smith v. United States, 507 U.S. 197, 204 (1993)).

[188] Kiobel v. Royal Dutch Petroleum Co., 133 S. Ct. 1659 (2013).

[189] RJR Nabisco, 136 S. Ct. at 2101 (emphasis added).

[190] Id.

[191] Id. at 2101–03.

[192] Id. at 2102 (“To give a simple (albeit grim) example, a violation of §1962 could be premised on a pattern of killings of Americans abroad in violation of §2332(a)—a predicate that all agree applies extraterritorially—whether or not any domestic predicates are also alleged.”).

[193] Id.

[194] Id.

[195] Id.

[196] Id. at 2103 (“Congress has not expressly said that §1962(c) applies to patterns of racketeering activity in foreign countries, but it has defined ‘racketeering activity’—and by extension a ‘pattern of racketeering activity’—to encompass violations of predicate statutes that do expressly apply extraterritorially. Short of an explicit declaration, it is hard to imagine how Congress could have more clearly indicated that it intended RICO to have (some) extraterritorial effect.”).

[197] Id.

[198] Id.

[199] Id.

[200] Id. at 2104.

[201] Id. (“Congress, after all, does not usually exempt foreigners acting in the United States from U.S. legal requirements.”).

[202] Id. at 2105.

[203] Kiobel v. Royal Dutch Petrol. Co., 569 U.S. 108, 124–25 (2013).

[204] RJR Nabisco, 136 S. Ct. at 2105.

[205] Id.

[206] Id. at 2106.

[207] Id.

[208] Id.

[209] Id. at 2107.

[210] Id.

[211] Id.

[212] Id. at 2108 (“Respondents suggest that we should be reluctant to permit a foreign corporation to be sued in the courts of this country for events occurring abroad if the nation of incorporation objects, but that we should discard those reservations when a foreign state sues a U.S. entity in this country under U.S. law—instead of in its own courts and under its own laws—for conduct committed on its own soil. We refuse to adopt this double standard.”).

[213] Id.

[214] Id.

[215] Id. at 2108.

[216] Id. at 2109.

[217] Id. at 2111.

[218] Id.

[219] Id. at 2112–13 (Ginsburg, J., concurring in part and dissenting in part) (“One cannot extract such a limitation from the text of §1964(c), which affords a right of action to ‘[a]ny person injured in his business or property by reason of a violation of section 1962.’”).

[220] Id.

[221] Id. at 2113.

[222] Id. at 2114

[223] Id. at 2115 (emphasis added).

[224] Id.

[225] Id.

[226] Id.

[227] Id. at 2115–16.

[228] See id. at 2116 (Breyer, J., concurring in part and dissenting in part).

[229] Id.

[230] See generally Maggie Gardner, RJR Nabisco and the Runaway Canon, 102 Va. L. Rev. Online 134 (2016).

[231] See Safran, supra note 36, at 48.

[232] See Anthony J. Colangelo, The Frankenstein’s Monster of Extraterritoriality Law, 110 Am. J. Int’l L. Unbound 51, 54 (2016).

[233] Id. (“But as to the private right of action, the Court was not willing to look through RICO to the predicates in order to discern the statute’s geographic scope.”).

[234] Id.

[235] Id.

[236] Id.

[237] See Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247, 253–54 (2010); see also Hannah L. Buxbaum, The Scope and Limitations of the Presumption Against Extraterritoriality, 110 Am. J. Int’l L. Unbound 62, 64 (2016); Gevurtz, supra note 100, at 16 (“No prior decision ever suggested that the presumption separately applied both to the substantive prohibitions of a statute and any remedy provision the statute contained.”).

[238] Buxbaum, supra note 237, at 64.

[239] See Gevurtz, supra note 100, at 16–17.

[240] Id. at 17–18.

[241] Id. at 19.

[242] Pamela K. Bookman, Doubling Down on Litigation Isolationism, 110 Am. J. Int’l L. Unbound 57, 57 (2016).

[243] Id. at 57–58.

[244] See Gevurtz, supra note 100, at 19 (“The Court seems to think it mooted this issue by finding that RICO’s inclusion of predicate crimes, which can take place outside of the United States, rebutted the

presumption against extraterritoriality.”).

[245] Id. at 20 (“It could be that the pattern of racketeering activities is RICO’s focus and that the inclusion of some predicate crimes intended to have extraterritorial reach among the list of racketeering activities rebuts the presumption against extraterritoriality for a pattern of racketeering involving those predicate crimes. Alternately, however, it is equally plausible that the enterprise is RICO’s focus and Congress felt at liberty to include among the predicate crimes ones that could occur abroad, because, so long as the enterprise was in the United States, there is no extraterritoriality for RICO as a whole even when the pattern of racketeering activities occurs abroad.”).

[246] Id. at 21.

[247] Id. at 23.

[248] RJR Nabisco, 136 S. Ct. at 2101; see also Dodge, supra note 83, at 49.

[249] Dodge, supra note 83, at 49.

[250] Id.

[251] Id. at 50.

[252] Carlos M. Vázquez, Out-Beale-ing Beale, 110 Am. J. Int’l L. Unbound 68, 70 (2016).

[253] Id. at 71.

[254] Id. at 72.

[255] See Colangelo, supra note 232, at 53 (“RJR’s most significant holding is that RICO creates a private right of action only for injuries suffered on U.S. territory.”).

[256] See Gevurtz, supra note 100, at 2.

[257] Id.

[258] See Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247, 265 (2010).

[259] See Colangelo, supra note 232, at 56 (“Recognizing the extraterritorial scope of RICO’s private right of action would not only have comported with the statute’s text and structure, but also would have effectuated one of the presumption’s key purposes.”).

[260] Id.

[261] Id.

[262] See Gevurtz, supra note 100, at 14 (“Most critically, the injury to business or property language in RICO has nothing to do with the policy rationale behind the Court’s decision.”).

[263] Id. at 15.

[264] See Gevurtz, supra note 100, at 15.

[265] Id.

[266] See Simcock, supra note 95, at 454.

[267] Id. at 455.

[268] 18 U.S.C. § 1964(c).

[269] See, e.g., Simcock, supra note 95, at 455.

[270] Pub. L. No. 91-452, 84 Stat. 922, 947 (1970); see also Simcock, supra note 95, at 455 (noting that the injury restriction in civil RICO “sits in contrast, however, to an uncodified portion of the RICO statute in which Congress articulates its intention that RICO “be liberally construed to effectuate its remedial purposes”).

[271] See Gevurtz, supra note 100, at 16.

[272] Id. at 16, 29 (“While nominally just a decision about the scope of RICO, RJR Nabisco casts a shadow over future lawsuits to recover damages under the express or implied private causes of action for violation of numerous federal statutes when the injury occurs outside of the United States.”).

[273] RJR Nabisco, 136 S. Ct. at 2106.

[274] See Colangelo, supra note 232, at 55.

[275] Id. (“The curious wrinkle in RJR when it comes to the foreign relations rationale is that judicial application of the presumption was far more likely to cause foreign relations friction than to avoid it.”).

[276] See Gevurtz, supra note 100, at 12 n.70 (The European Community is “the collective of European nations from which the English just voted to exit. At the time this lawsuit commenced, the EC was one of the components of the European Union, a distinction that ended when the EC merged into the EU under the Lisbon Treaty.”).

[277] See Stephanie Francq, A European Story, 110 Am. J. Int’l L. Unbound 74, 74 (2016).

[278] Id.

[279] Id.

[280] Id. at 78.

[281] See Paul B. Stephan, Private Litigation as a Foreign Relations Problem, 110 Am. J. Int’l L. Unbound 40, 43 (2016) (“If a foreign sovereign embraces U.S. regulation, why does it fall to the Supreme Court to deny it?”); see also Colangelo, supra note 232, at 55 (“Thus we have affirmative evidence that the relevant foreign nations wanted RICO’s private right of action to extend into their territories.”).

[282] See Gevurtz, supra note 100, at 29 (“The essential idea behind this foreign relations rationale is that applying U.S. law to events outside the United States can upset other countries, which is a risk courts should interpret statutes to avoid absent evidence that Congress really wants to take this risk.”).

[283] See Gevurtz, supra note 100, at 25 (“Government prosecutors presumably will take into account potential foreign relations problems when exercising their discretion about bringing an action involving events outside the United States, whereas there is little incentive for private parties to do so.”); see also Stephan, supra note 281, at 42 (noting that “prosecutors must internalize the effect of their decisions on other countries and their governments,” but that “[p]laintiffs and their lawyers may have multiple interests . . . but none normally takes into account the foreign relations goals of the United States”).

[284] Stephan, supra note 281, at 42.

[285] Id. (“We may tolerate paying this price when it comes to our domestic political economy, but foreign relations costs may fall into a different category.”).

[286] Id. at 43.

[287] See Mark, supra note 21, at 590.

[288] Id.

[289] See Gevurtz, supra note 100, at 26 (“[T]he Court does not ask when a private claim with some overseas aspect will, by virtue of that aspect, potentially cause friction with other governments.”).

[290] See RJR Nabisco, 136 S. Ct. at 2107.

[291] Id. at 493 (“We must ask this question regardless of whether the statute in question regulates conduct, affords relief, or merely confers jurisdiction.”).

[292] See Buxbaum, supra note 237, at 66 (noting that, in Kiobel, the ATS lacked extraterritorial reach and failed the U.S. touch and concern requirement and that, in Morrison, Section 19(b) lacked extraterritorial application and was outside the statute’s reach since it was based on foreign conduct. Similarly, she observes, in RJR Nabisco, the plaintiffs had all waived their claims to domestic injuries and thus could not assert a civil RICO claim. None of these cases resulted in the extension of U.S. law, so there was no chance to evaluate the resulting implications.).

[293] See Gevurtz, supra note 100, at 7 (“Be this as it may, it is difficult to escape the suspicion that how strict the Court is in its demands for clear evidence depends upon how much the Court desires to confine the particular statute before the Court to domestic events.”).

[294] Id. (“[T]here may be situations in which a permissible application of U.S. law to foreign conduct might nevertheless create jurisdictional conflict. The Court’s recent extraterritoriality jurisprudence has not confronted this question.”).

[295] See RJR Nabisco, 136 S. Ct. at 2096–97. Justice Alito poses a related inquiry and answer in the opinion: “[w]hat if we find at step one that a statute clearly does have extraterritorial effect? Neither Morrison nor Kiobel involved such a finding.” Id. at 2101. RJR Nabisco also was irrelevant since the claimants had waived their domestic injury damages claims.).

[296] See Buxbaum, supra note 237, at 66 (contending that “this form of territorialism is simply incompatible with the effective operation of regulatory statutes in today’s economy, and fails to capture the ways in which domestic and foreign regulatory interests coincide and overlap with each other”).

[297] See Bookman, supra note 242, at 57.

[298] See id. at 59 (noting that RJR Nabisco may seem that it serves international comity, “but it is questionable whether it does so”).

[299] Id. at 59.

[300] Id. at 61.

[301] See RJR Nabisco, 136 S. Ct. at 2102. (“If a particular statute does not apply extraterritorially, then conduct committed abroad is not ‘indictable’ under that statute and so cannot qualify as a predicate under RICO’s plain terms.”).

[302] See id. at 2106.

[303] See id. at 2102 (“Congress’s incorporation of these (and other) extraterritorial predicates into RICO gives a clear, affirmative indication that § 1962 applies to foreign racketeering activity—but only to the extent that the predicates alleged in a particular case themselves apply extraterritorially.”).

[304] See id. at 2111 (“Section 1964(c) requires a civil RICO plaintiff to allege and prove a domestic injury to business or property and does not allow recovery for foreign injuries.”).

[305] Id. at 2104 (“RICO—or at least §§1962(b) and (c)—applies abroad, and so we do not need to determine which transnational (or wholly foreign) patterns of racketeering it applies to; it applies to all of them, regardless of whether they are connected to a “foreign” or “domestic” enterprise.”).

[306] Id. at 2105.

[307] Id. at 2106 (emphasis in original).

[308] See id. at 2102.

[309] See id. at 2110–11.

[310] See id. at 2102; 2105.

[311] See id.

[312] See id. at 2102, 2111.

[313] See United States v. Noriega, 746 F. Supp. 1506, 1510 (S.D. Fla. 1990).

[314] See RJR Nabisco, 136 S. Ct. at 2105.

[315] Id. at 2094.

[316] See Noriega, 746 F. Supp. at 1517.

[317] See S. Rep. No. 91-617, at 45–46 (1969) (revealing that the President, in the Senate Report of 1969, has “authorized the Attorney General to engage in wiretapping of organized racketeers” and “establish a unique Federal-State Racket Squad in New York City,” has “asked the congress to increase the fiscal 1970 budget by $25 million” and “to approve a $300 million appropriation in the 1970 budget,” and has furthermore “directed the Attorney General to mount our Federal anti-organized crime offensive and to coordinate the Federal effort with State and local efforts where possible,” amongst other steps on the federal level).

[318] Id. at 46 (noting that state and local measures enacted to combat organized crime in the 1969 Senate Report included the “exchange [of] recent knowledge,” “technical assistance and financial help” by the Justice Department, “fostering cooperation and coordination between States and between communities,” and “providing Federal aid” to make people aware of the nature and scope of organized crime, amongst other measures identified in the Senate Report).

[319] Id.

[320] See Anthony S. Barkow & Rachel E. Barkow, Prosecutors in the Boardroom: Using Criminal Law to Regulate Corporate Conduct 1 (2011).

[321] See G. Robert Blakey, Federal Criminal Law: The Need, Not for Revised Constitutional Theory or New Congressional Statutes, But the Exercise of Responsible Prosecutorial Discretion, 46 Hastings L.J. 1175, 1179 (1995).

[322] Id.

[323] Id. (“Viewed through an ideological framework, proposals from each side are too often viewed as mutually exclusive alternatives. Debate becomes emotional and polarized. Division, deadlock, and delay are the result.”).

[324] Id. at 1184 (noting that “[t]he normal bonds of community seem to be breaking up”).

[325] Id. at 1197.

[326] Id. at 1198.

[327] Id. at 1201.

[328] Id. at 1208.

[329] Id. at 1210.

[330] Id. at 1214 (“[I]nternational organized crime is the challenge of the future for criminal justice.”).

[331] Id. at 1216.

[332] Id. at 1218 (“Every part of our systems of criminal justice is undernourished. Personnel are insufficient, poorly paid, untrained, and unorganized.”).

[333] Id. (asserting that “we must focus principally on questions of administration, not theory” and that “[i]t is time we start asking the right questions.”).

[334] See Phil Angelides et al., The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States xvii–xxv (2011) (noting the major findings and conclusions as pertaining to the 2008 Recession:

  • “We conclude this financial crisis was avoidable.”
  • “We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets.”
  • “We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis.”
  • “We conclude a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis.”
  • “We conclude the government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets.”
  • “We conclude there was a systemic breakdown in accountability and ethics.”
  • “We conclude collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis.”
  • “We conclude over-the-counter derivatives contributed significantly to this crisis.”
  • “We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction.”).

[335] See Gevurtz, supra note 100, at 25.

[336] For the Supreme Court decision and subsequent congressional amendment in Dodd-Frank reversing the holding regarding the extraterritorial reach of the anti-fraud provisions of the Exchange Act, see Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247 (2010); Dodd-Frank Wall Street Reform and Consumer Protection Act, § 929P(b), Pub. L. No. 111-203, 124 Stat. 1376 (2010). For the Supreme Court’s holding on the geographic scope of Title VII and Congress’s amendment of Title VII reversing the opinion, see EEOC v. Arabian Am. Oil Co., 499 U.S. 244 (1991); 42 U.S.C. §2000e-1(b).

[337] See Hoppe, supra note 72, at 1399.

[338] See Dodge, supra note 83, at 50.

[339] See Lievsay, supra note 21, at 1752.

[340] See Hoppe, supra note 72, at 1397.

[341] See Colangelo, supra note 232, at 55.

[342] See Lievsay, supra note 21, at 1771–72.

[343] Id. at 1772.

[344] See Colangelo, supra note 232, at 55; see also Lievsay, supra note 21, at 1771–72.

[345] See Mark, supra note 21, at 606.

[346] See 18 U.S.C. § 1962(a)–(d).

[347] See Donaher, supra note 27, at 232.

[348] Id.

[349] Id.

[350] Id. (“This will ensure fairness throughout criminal prosecutions, a more confident application by prosecutors, and better guidance for the judiciary.”).

[351] See Blakey & Gettings, supra note 27, at 1012 n.13 (“Administrative abuse is an incident of administration; it is not necessarily caused by poor statutory draftsmanship, and its cure usually lies in careful selection of administrative personnel, not more legislation.”).

[352] See Donaher, supra note 27, at 229 (“With the RICO statute, courts have engaged in a regime of impermissible judicial lawmaking in the way in which they ignore congressional intent by implementing their own views.”).

[353] See Blakey, supra note 42, at 709.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Filed Under: JOL Online, JOL Online Article

by pgoffner on February 25, 2020

Chairpointment: Rethinking the Appointment of Independent Agency Chairpersons

Chairpointment: Rethinking the Appointment of Independent Agency Chairpersons

Samuel Rubinstein*

The modern independent agency chairperson possesses great executive and administrative power.  Among other things, she usually can appoint and supervise officials, preside at meetings, and distribute the work among her fellow commissioners or board members.  Given this increased power as the chairperson, she is still just one vote.  Despite this, as the “head” of the agency, she is the face of the agency when dealing with other governmental bodies and the public.  However, her appointment procedure is inconsistent—sometimes the President can choose an incumbent commissioner without Senate approval, sometimes the President needs to go back to the Senate for approval, and in rare instances, the board members get to choose the chair themselves—and entirely unstudied.

This Article examines “chairpointments” in the context of the powers of an independent agency chairperson.  In doing so, the Article determines whether chairpersons are principal or inferior officers and the consequences of either result.  Finally, the Article addresses how chairpointments should to be reorganized and harmonized.

 

Introduction

On May 7, 2012, the United States Senate confirmed Ajit Pai to be a Federal Communications Commission (FCC) Commissioner.[1]  Then, when President Trump commenced his presidency, he designated Pai as Chairman without the Senate’s approval.[2]  This designation power is a fairly common process that legal scholars and judges have considered to be part of agency design and have taken it for granted.  This Article is the first to explore the interaction between chairpersons of independent multimember agencies and the Appointments Clause.  In doing so, I seek to answer two questions: (1) are chairpersons of independent multimember agencies “officers of the United States”; and (2) if so, are they principal or inferior officers?

The chairperson is considered the chief executive and representative of their respective agency, but unlike the appointment process for Secretaries of executive departments, the appointment process for chairpersons of independent agencies fluctuates.  Some chairpersons need to go through senatorial “advice and consent” after their initial appointment, but many more can be designated as chairperson by the President or their fellow board members immediately upon the initial appointment.[3]

The process is inconsistent and incohesive.  In this Article, I both identify the fundamental problem and challenge the underlying assumption that it is trivial that chairpersons can be appointed without “advice and consent.”  Considering the vast power variations among agency chairpersons, this Article expects that confirmation requirements also vary.  For those chairpersons who function as “first among equals,” there is no need for further Senate confirmation if the President elevates an agency member to the chair position; however, for other chairs with powers sufficient to establish them as “principal officers,” further Senate confirmation is necessary.  Although there is a concern that “advice and consent” burdens government efficiency, especially in a hyper-partisan era where nominees undergo serious vetting, the Appointments Clause is an essential tool drafted by the Framers in ensuring checks and balances.[4]  One legislative fix to harmonize the appointment process is to subject all chairperson appointments to “advice and consent,” but allow a President to confirm a nominee as both chairperson and commissioner, something that Presidents have already adhered to.[5]

If a legislative fix is not possible, litigation is an available tool.  In recent years, there has been a trend of parties using the Appointments Clause as a sword against the government.  In Lucia v. SEC, the recipient of an unfavorable ruling successfully challenged the Administrative Law Judge’s appointment.[6]  Additionally, a group of disgruntled Senators challenged the appointment of an Acting Attorney General.[7]  Therefore, it is not inconceivable to imagine future litigation surrounding the appointment of agency chairpersons, and this Article hopes to provide a resolution to the issue.

The constitutional status of agency chairpersons can impact chairperson succession during vacancies.  Recently, in English v. Trump,[8] a district court had to determine the appropriate acting Director of the Consumer Financial Protection Bureau.[9]  Similarly, future disputes can arise as to who gets to temporarily lead a multimember agency when the Federal Vacancies Reform Act is triggered, thus showing that even acting chairpersons matter.

Part I looks at incumbent elevation and the historical basis surrounding agency chairpersons.  Part II summarizes the Appointments Clause case law.  Part III undergoes an extensive analysis to list all of the powers of chairpersons in different agencies, as well as applying the Appointments Clause doctrine and exploring its consequences.  Part IV concludes with a proposal for fixing the discrepancies in chairperson appointments.

      I. Incumbent Elevation Generally

When the Senate confirms a nominee to serve as Deputy Attorney General, Deputy Secretary of Labor, or Deputy Secretary of Education, it does not imply that the Senate abdicated its advice and consent power should a vacancy arise in the Attorney General, Secretary of Labor, or Secretary of Education.[10]  In other words, the President cannot elevate a Deputy Attorney General to Attorney General without Senate confirmation.[11]  The same is true with the Supreme Court.  An incumbent Supreme Court Associate Justice cannot become Chief Justice without Senate approval.[12]  Both instances allow the Senate to review the nominee’s performance before possibly elevating them.

Accordingly, it begs the question why we treat heads of independent multimember agencies differently.  For the most part, the President is able to designate a chairperson among the various members of the agency without Senate approval.[13]  Although some chairpersons are Presidential Appointments requiring Senate confirmation (PAS) positions, it does not make sense to treat the Federal Deposit Insurance Corporation (FDIC) Chairperson (PAS position) as any different from the FCC Chairperson (a non-PAS position).[14]  Inconsistency among the various independent agencies is common, and much of this inconsistency is due to the way in which Congress chose to structure each agency.[15]  Still, the Supreme Court has been clear: the Appointments Clause always applies even if it less efficient.[16]

One way to avoid an Appointments Clause problem is by simultaneously nominating someone to serve as a member of the body and as its head.  For example, Securities and Exchange Commission Chairperson Jay Clayton was nominated and confirmed by the Senate as both a Commissioner and the Chairperson, even though the current law allows the President to bypass the Senate in designating a Chairperson.[17]  This practice is also seen on the Supreme Court with the appointment of a nominee to serve on the court and as its head (Chief Justice).[18]  Conversely, a nominee cannot be appointed both Deputy Attorney General and Attorney General.

In some ways, the Supreme Court is more closely analogous to independent, multimember agencies: the head has equal voting power to other members, but the head has additional responsibilities and powers.delegates the day-to-day administrative and executive functions of the judiciary branch to the Director and Deputy Director of the Administrative Office of the United States Courts, both of whom are appointed and subject to removal by the Chief Justice.[19]  He also appoints “members of the committees that do much of the initial work in formulating policy for the Article III judiciary” and judges to sit on various specialty courts in the United States.[20]  Both the Chief Justice and chairpersons of independent agencies wield important appointment, executive, and administrative powers.[21]  However, the parameters of the comparison need to be limited considering that the Supreme Court is a substantially different government organ than an independent agency.  Therefore, instead of looking outward, the role of agency chairpersons should be examined at the source.

      a. The Interstate Commerce Commission

The historical practice of independent multimember agencies is relevant.  Similar to how actions of the First Congress are used in statutory and constitutional interpretation, actions of the first independent agency should be used as a source in understanding how to view the role of agency chairpersons.[22]  In 1887, the Interstate Commerce Commission (ICC) was the first multimember independent regulatory agency established in the United States.[23]  The original Interstate Commerce Act allowed the ICC to select its own chairman.[24]  Judge Thomas Cooley headed President Cleveland’s list of appointees to the new agency, but he did not become chairman until he was elected at the ICC’s first meeting.[25]  Then, through 1910, the ICC would elect chairmen who would serve in that role so long as they remained a member of the body.[26]  Starting in 1911, however, the chairmanship was in yearly rotation based on service seniority.[27]  This practice of allowing the ICC to elect its own chairman remained in place for nearly sixty more years, but there were growing political criticism about agency capture.[28]  A common claim was that government became “bloated, fat, and lazy” since many agencies were headed by cronies and not professionals.[29]  As a result, both consumer advocates like Ralph Nader and free-market economists agreed that the ICC was “captured by” the industries it regulated, causing the ICC to become “an elephant’s graveyard of political hacks.”[30]  Many scholars noted that because independent agencies are not accountable to the President as executive departments, they are more susceptible to agency capture.[31]  Congress responded by giving the President the power to designate the chairman, and therefore, making the ICC more accountable to the President.[32]  Over time, political dissatisfaction with the ICC grew so much so that the ICC Termination Act of 1995 abolished the agency altogether and transferred its powers to the Department of Transportation and the new Surface Transportation Board (STB).[33]

      b. The Reorganization Plans

After World War II and the expansion of the federal government during the New Deal, there were calls to organize the Executive Branch.[34]  Critics were concerned due to the increased number of federal agencies and federal workers, coupled with overlap of functions and services of the different agencies.[35]  In 1947, Congress established the Commission on Organization of the Executive Branch of the Government in order to promote “economy, efficiency and improved service” among the federal agencies.[36]  The Commission was tasked with investigating the “present organization and methods of operation of” the Executive Branch, as well submitting a report of its findings and recommendations to Congress.[37]  Former President Herbert Hoover was elected chairperson of this bipartisan commission.[38]  As a result, some saw Hoover’s position on the commission as a way for Presidents to strengthen their managerial abilities over the federal bureaucracy because he “recommended that all administrative responsibility at multi-member agencies be vested in the chairman of the agency.”[39]  These plans “(1) statutorily granted more authority to the chair to appoint and supervise personnel and to oversee agency expenditures, and (2) transferred the power to designate the chair typically from the agency to the President.”[40]

Presidents Truman and Kennedy used Hoover’s recommendations to present a series of reorganization plans to Congress.[41]  While plans were passed for the Federal Trade Commission (FTC), Federal Power Commission (FPC), and Securities and Exchange Commission (SEC) in 1950, they failed for the ICC, FCC, and the National Labor Relations Board (NLRB).[42]  Senator Edwin C. Johnson argued that this would create “one-man agencies” subject to the President’s direct control.[43]  President Kennedy would later submit plans that would “further extend the power of the chair to include the power to delegate work to commission personnel, including other commissioners,” but his plans failed for the FCC and SEC while passing for the FTC and the Civil Aeronautics Board.[44]  Although none of the reorganization plans affected the voting procedures, “something was at stake beyond voting.”[45]  Specifically, chairpersons accumulated alternative power “such as supervisory authority over staff, agenda control, oversight over expenditures, and the power to represent the Commission publicly.”[46]

      II. Independent Agencies within the Constitutional Framework

As an overarching analytical framework, it is valuable to see how chairpersons of independent agencies fit within the constitutional framework established by the Appointments Clause, the Opinion Clause, and the Twenty-Fifth Amendment.[47]  Although this Article focuses primarily on the Appointments Clause, a constitutional discussion of the Opinion Clause and the Twenty-Fifth Amendment is valuable in determining whether chairpersons of independent agencies qualify as heads of executive Departments.

      a. Independent Agencies and the Constitution

While the three constitutional provisions sound similar, the Supreme Court has looked at the interaction between them to establish the constitutional status of agencies and chairpersons.

The Appointments Clause provides:

[The President] shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the Supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.[48]

 

The Opinion Clause provides:

[The President] may require the Opinion, in writing, of the principal Officer in each of the executive Departments, upon any Subject relating to the Duties of their respective Offices[.][49]

 

The Twenty-Fifth Amendment, Section 4 provides:

Whenever the Vice President and a majority of either the principal officers of the executive departments or of such other body as Congress may by law provide, transmit to the President pro tempore of the Senate and the Speaker of the House of Representatives their written declaration that the President is unable to discharge the powers and duties of his office, the Vice President shall immediately assume the powers and duties of the office as Acting President.[50]

The constitutional status of independent agencies relates to the constitutional status of chairpersons.  If the chairperson qualifies as a “head” or the “principal officer” of the executive Department, then that would give her new constitutional powers and responsibilities.  She may be granted the power to exclusively appoint inferior officers and be involved in presidential removal, but at the same time, the President may direct her to provide him opinions on relevant topics.  However, one first needs to establish that an independent agency is a “Department” or “executive Department.”

United States v. Germaine was the earliest Supreme Court case that found that “‘department’ in both instances [Appointments Clause and Opinion Clause] clearly means the same thing, and the principal officer in the one case is the equivalent of the head of department in the other.”[51]  Over a century later, in Freytag v. Commissioner, a unanimous Supreme Court looked to Germaine and the then-enacted Twenty-Fifth Amendment for guidance.[52]  Unlike the Appointments Clause and Opinion Clause, the legislative intent behind the Twenty-Fifth Amendment was clear: the drafters meant to include at least the Presidential appointees who direct the executive departments and possibly other cabinet members.[53]

The majority in Freytag held that “Heads of Departments” are “executive divisions like the Cabinet-level departments,” and that Germaine “limited the meaning of ‘Executive Departmen[t]’ to the Cabinet members.”[54]  The four-Justice concurrence, written by Justice Scalia, disagreed that “the Heads of Departments” are Cabinet members.[55]  For them, “‘Heads of Departments’ includes the heads of all agencies immediately below the President in the organizational structure of the Executive Branch.”[56]

Nearly two decades later in Free Enterprise Fund v. Public Company Accounting Oversight Board,[57] the Supreme Court determined that the Securities Exchange Commission (SEC) was a “Department” under the Appointments Clause because it “is a freestanding component of the Executive Branch, not subordinate to or contained within any other such component”.[58]  However, in a footnote, the Free Enterprise Fund Court did not address whether the Securities Exchange Commission was an “executive Department” under the Opinion Clause or the Twenty-Fifth Amendment.[59]  In addition, the majority did not find the Chairman to be the “Head” of the “Department”; rather the Commission as a whole was the “Head.”[60]  Interestingly enough, the majority assumed that the presidential designation of the Chairman was valid, going against the crux of my argument in this Article.[61]  Still, since neither side argued this point, the Court did not have to analyze the issue, thus leaving the designation’s validity unresolved.

A consequence of Free Enterprise Fund is that its rationale can be extrapolated to other independent agencies.  If the SEC is a “Department,” then so should the FCC or the NLRB.  But, by finding the Commission as a whole as the “Head,” and not just the chairperson, this approach limits how we view chairpersons in the constitutional scheme.  Instead, we need a new procedure to determine the constitutional status of chairpersons.

This is where the Appointments Clause comes in.  It is already an available tool for litigants against the government.  Rather than dealing with a case or government action directly on the merits, an Appointments challenge allows a party to delay a proceeding.[62]  The very nature of an Appointments Clause challenge is for the Court to analyze and determine the government official’s constitutional status.

      b. Officers of the United States

In determining the constitutional status of multimember agency chairpersons under the Appointments Clause, the first step is to establish whether chairpersons are “Officers of the United States” or employees that are “lesser functionaries subordinate to officers of the United States.”[63]  If the former, then we need to see if they are principal or inferior officers.  If the latter, then there is no Appointments Clause issue.  As applied to chairpersons, they would likely be classified as officers because of their influence in management and executive matters.[64]

In United States v. Hartwell and United States v. Germaine, the Supreme Court ruled that the term “officer” “embraces the ideas of tenure, duration, emolument, and duties.”[65]  In addition, the Court noted that the duties should be “continuing and permanent, not occasional or temporary.”[66]

Then in Buckley v. Valeo, the Court interpreted “officer” under Article II.[67]  Breaking away from Hartwell and Germaine, the Buckley Court offered the significant authority standard: “any appointee exercising significant authority pursuant to the laws of the United States is an ‘Officer of the United States,’ and must, therefore, be appointed in the manner prescribed by § 2, cl. 2, of that Article.”[68]  In a footnote, the Court tried to differentiate between employees and officers by highlighting that “[e]mployees are lesser functionaries subordinate to officers of the United States . . . whereas the Commissioners, appointed for a statutory term, are not subject to the control or direction of any other executive, judicial, or legislative authority.”[69]

Recently, in Lucia v. SEC, the Supreme Court combined the Germaine and Buckley tests to determine whether SEC Administrative Law Judges (ALJ) were officers.[70]  The court found that (1) “the individual must occupy a ‘continuing’ position established by law”; and (2) they must “exercise[e] significant authority pursuant to the laws of the United States.”[71]  The Court acknowledged that one day it might need to refine the “significant authority” test, but it was not necessary for the present case since it had applicable precedent.[72]  Within the decision, three different views of “significant authority” emerge.

Justice Thomas promotes the broad end of “significant authority.”  His view aligns with Jennifer Mascott’s originalist view that at a minimum, the term “encompass[es] all federal civil officials who perform an ongoing, statutory duty—no matter how important or significant the duty.”[73]

Justices Sotomayor and Ginsburg align with the narrower end of the spectrum.  They believe that one necessary requirement is that the officer has final decision-making authority, which was not present in the case.[74]

The majority opinion, written by Justice Kagan, is in the middle of the two views.  The Court did not hold that final decision-making authority is a prerequisite to being an officer. Rather, its inquiry “focuse[s] on the extent of power an individual wields in carrying out his assigned functions.”[75]  Here, the Supreme Court was persuaded that the ALJs were officers because they have “duties and powers . . . in conducting adversarial inquiries.”[76]  As explained below, chairpersons do not have final decision-making authority on policy positions, but they do have “duties and powers” in management and executive matters that can have an impact on policymaking.[77]  Thus, chairpersons are likely to satisfy Lucia’s middle-view approach.[78]

      c. Principal or Inferior Officers

Even if a chairperson is an officer, the next step in the chairperson’s constitutional status analysis is to determine what type of officer she is.  The Constitution prescribes two types of officers: principal and inferior.[79]  If one is a principal officer, then she is appointed by the President with Senate confirmation.[80]  If one is an inferior officer, then she may still be appointed by the President with Senate confirmation, but Congress may statutorily vest the appointment “in the President alone, in the Courts of Law, or in the Heads of Departments.”[81]  The Constitution does not provide guidance on distinguishing between the two types of officers, and the Supreme Court has “not set forth an exclusive criterion” for differentiating between the two.[82]  As applied to chairpersons, the Court’s current frameworks do not produce a clear answer about whether chairs in general are principal or inferior officers.[83]

In Morrison v. Olson, the Supreme Court wrestled with the question of whether the independent counsel created by the Ethics in Government Act of 1978 was an inferior or principal officer.[84]  Helpful to its argument, the majority relied on four factors: (1) removability by a higher official; (2) scope of duties; (3) scope of jurisdiction; and (4) scope of office’s tenure.[85]  The independent counsel was determined to be an inferior officer because she was subject to removal by the Attorney General, she performed only specific, limited duties, her office was limited in jurisdiction, and her office was limited in tenure.[86]

The dissent, authored by Justice Scalia, attacked the majority’s ruling and proposed a different test.[87]  For one, it appeared that the source of these four factors came from Germaine’s “tenure, duration, emolument, and duties,” which are supposed to determine whether someone is an officer in the first place, and not whether they are inferior or principal.[88]  To Justice Scalia, the real test is whether someone was “subordinate to any officer in the Executive Branch.”[89]  If not, then she is an inferior officer.

Nearly a decade after Morrison, Justice Scalia wrote the majority in Edmond v. United States, which dealt with whether the Secretary of Transportation could constitutionally appoint civilian members to the Coast Guard Court of Criminal Appeals (CCA).[90]  Although the majority referenced Morrison, it quickly noted that “Morrison did not purport to set forth a definitive test for whether an office is ‘inferior’ under the Appointments Clause.”[91]  Instead, “‘inferior officers’ are officers whose work is directed and supervised at some level by others who were appointed by Presidential nomination with the advice and consent of the Senate.”[92]  In addition, the “power to remove officers . . . is a powerful tool for control.”[93]  Critically, it was significant “that the judges of the Court of Criminal Appeals have no power to render a final decision on behalf of the United States unless permitted to do so by other Executive officers.”[94]

Over a decade after Edmond, the Supreme Court in Free Enterprise Fund v. Public Company Accounting Oversight Board was again presented with an inferior officer question, and this time it applied to board members of the Public Company Accounting Oversight Board (PCAOB), a government entity that regulates the accounting industry.[95]  Despite the tension presented by Morrison and Edmond, the Supreme Court reiterated the Edmond holding, but did not overrule Morrison.[96]  Significantly, the majority found that the PCAOB members were inferior officers because the SEC can remove the PCAOB members at will and the SEC had oversight power.[97]  Thus, the Court adopted Edmond’s analysis of the officer’s removability.

Shortly after Free Enterprise Fund, the Office of Legal Counsel (OLC) weighed in on whether the Special Master for Troubled Asset Relief Program Executive Compensation was a principal or inferior officer by applying both Morrison and Edmond frameworks.[98]  While OLC’s opinion-writing function does not have the same relevance or precedential value as Supreme Court or Circuit Court decisions, its importance here is to show how Executive Branch lawyers analyze whether an officer is principal or inferior.[99]  In the Special Master opinion, OLC considered both the Morrison factors and the Edmond inquiry, and in both instances, the Special Master was an inferior officer.[100]  In particular, with the Edmond analysis, OLC highlighted that “the level of direction and supervision exercised by a superior over a subordinate need not be total for the subordinate to qualify as an inferior officer.”[101]  But, it categorized the Edmond inquiry into two factors: (1) removability “by an officer other than the President”; and (2) work subjected to “some level” of “direct[ion] and supervis[ion]” by an official appointed by the President with Senate confirmation.[102]  In a recent decision by the D.C. Circuit upholding the Special Counsel’s appointment, the court viewed Edmond as applying three distinct characteristics: “degree of oversight, final decision-making authority, and removability.”[103]

Moving forward, it is not clear whether Morrison is still good law after Edmond.  Some believe that it is part of the anti-canon.[104]  Justice Thomas, for one, has expressed his doubts about Morrison.[105]  Whereas Morrison focused on authority, Edmond focused on hierarchy.[106]  However, despite the tension between the two, the First Circuit recently applied both Morrison and Edmond in determining whether the Financial Oversight and Management Board Members, a body established by Congress to help Puerto Rico with its financial crisis, were principal officers.[107]  On June 20, 2019, the Supreme Court granted the petition for a writ of certiorari for the First Circuit case, and it may present an opportunity for the Court to formally overturn Morrison.[108]  Until the Supreme Court provides more clarification, any future Appointments Clause litigation should argue that a chairperson is a principal officer under both the Morrison and Edmond inquiries.[109]  As explained below, chairpersons would likely qualify as principal officers under Morrison, but it is indeterminate under Edmond due to the relative weight given to the President’s power to remove chairpersons.  

      III. Analytical Framework of Chairs

Unsurprisingly, not all chairpersons have the same responsibilities and powers, but most of them control “the day-to-day administration of the agency, agency personnel, and the agency’s agenda.”[110]  As compared to other board members or commissioners, the chair has the same regulatory capacities, but she also administers the law in her executive capacity similar to the head of a department.[111]

Generally speaking, “chairs matter” and they are viewed as presidential proxies.[112]  Scholars and former chairpersons have noted that the chair is an important position,[113] but no one has questioned whether Congress can delegate the appointment to the individual members or the President alone.[114]  Chairpersons are generally not only a first among equals: many wield specific authority due to their position and are compensated at a higher level than other members on a board.  As reported in Table 1, nearly 74% of the multimember independent agencies listed do not require the chair to go through further Senate confirmation.[115]

      a. Chairperson versus Board

Table 2 reiterates that not all chairs are equal.  A major distinction is the statutory authority (if any) of chairs.  For example, 46 U.S.C. § 301 elaborates on the Federal Maritime Commission (FMC) chairperson’s general and particular powers.[116]  On the other hand, the NLRB chairperson’s power is not even mentioned in the statute; it only states that the President can designate the chair.[117]  Sometimes, the statute is ambiguous about the extent of the chair’s powers: the Federal Labor Relations Authority (FLRA) chairperson is “the chief executive and administrative officer of the Authority.”[118]  In addition to statutes, there are numerous agency regulations that attempt to fill in any gaps.[119]  Looking back at the NLRB, its rules and regulations do provide slightly more clarity on actual responsibilities,[120] but just as the Board promulgated these regulations, it can revise them as well, subject to any statutes about the Board’s rulemaking authority.

As a result, the division of power between chair and the other board members is murky.  In one instance, the NLRB chair issued a directive to the Executive Secretary to publish an internal document regarding which board members have cases pending.[121]  The full Board responded by voting to countermand the directive.[122]  While it did not escalate into a greater legal fight, other occasions required OLC to step in as an adjudicator to resolve these disagreements.[123]  When it comes to intra-agency disputes, OLC opinions have greater relevance because “there is no official forum (such as a court) for regular resolution of intra-agency management questions.”[124]

In one instance, the former chair (but still a current member) of the Chemical Safety and Hazard Investigation Board argued that the chair essentially has “complete authority over all aspects” except for a few matters that the Board must vote on.[125]  OLC refused to adopt the former chair’s view, and generally found that “the day-to-day administration of Board matters and execution of Board policies are the responsibilities of the chairperson, subject to Board oversight, while substantive policymaking and regulatory authority is vested in the Board as a whole.”[126]  Furthermore, when there is a dispute “over the allocation of authority in specific instances, the Board’s decision controls, as long as it is not arbitrary or unreasonable.”  However, the opinion notes the tension present and how hard it is to draw the line between chair and board (or commission) functions:

Some degree of managerial discretion is inherent in the concept of an executive or administrative office, and the statutory assignment of the Board’s executive and administrative functions to the chairperson necessarily vests the chairperson with a degree of managerial autonomy on which the Board, in the proper exercise of its powers, cannot trench. Likewise, some day-to-day aspects of Board affairs may be so unrelated to the Board’s effective execution of its statutory responsibilities that they cannot be said to be proper objects of the full Board’s authority. At the same time, however, any number of Board activities or day-to-day aspects of Board business, while at least in part administrative and even seemingly mundane, may involve or affect the Board’s duties and functions in ways that are of legitimate concern to the Board as a whole. Where that is the case, it is the prerogative of the Board to pass upon such issues in ways appropriate to its function as a policymaking and rule-setting body.[127]

The former chair also tried to make a comparison with the NTSB chair, who allegedly “is the chief moving force on the NTSB and principally responsible for executing its policies,” because the Board’s legislative history indicated that it would be modeled after the NTSB.[128]  OLC rejected this parallel argument, and distinguished NTSB based on the grounds that this “is a matter of the development, through collegial practice and over time, of the NTSB’s own internal policies concerning delegation of authority to the NTSB chairperson, the NTSB’s acquiescence in the chairperson’s assertion of authority over certain substantive areas, and the general evolution of the NTSB’s current allocation of responsibilities.”[129]

In a more recent OLC opinion, a Board member of the Defense Nuclear Facilities Safety Board sought to view written performance appraisals of senior employees.[130]  The agency’s Office of General Counsel believed that this was exclusively in the chairperson’s authority, but OLC rebutted that view.[131]  In a footnote, OLC reiterated that there are some executive and administrative manners that the Board cannot trench, but the opinion did not have to examine the scope of the chair’s autonomy.[132]

The anecdote about the NTSB shows that statutes are only one part of the story.  Inner workings of a body, while rarely on full display, provide more insight on a chair’s role.  For instance, the NLRB chair has no statutory duties, and as a former chair recounted, “the chairmanship—given the authority of the general counsel to appoint regional staff and recommend regional directors to the entire Board (not just to the chairman)—is more like a bully pulpit than a position of authority.”[133]  In contrast, a former FCC commissioner recounted: “From personal experience I can report that the FCC’s Chairman and a handful of staff—usually selected by the chair—can and usually do exercise nearly total control over that agency’s basic policy agenda.”[134]  Except for interviews and future OLC opinions, it is nearly impossible to decipher internal agency policy and how it relates to a chair’s power.

      b. Salary

One form of congressional control over agencies is that Congress can create, design, and even destroy agencies.[135]  More specifically, Congress determines the salary level for a chairperson and her members.  Any difference—or lack of one—sheds light on how Congress perceives the relationship between the chair and individual members.

After each presidential election, the Senate Committee on Homeland Security and Governmental Affairs and the House Committee on Oversight and Government Reform alternately publish the Plum Book, a publication on the major leadership positions in the legislative and executive branches, including their salaries and pay rates.[136]  According to the Plum Book, many, but not all, chairs are classified as PAS positions even if the statute implies that a chair is a non-PAS position.[137]  In addition, many chairpersons are paid under the Executive Schedule (EX), the pay levels reserved to the top federal executives in the government.[138]  For some agencies like the African Development Foundation and the Corporation for National and Community Service, their chairpersons do not receive compensation.[139]  On the other hand, the chairperson of the National Council on Disability receives a per diem salary, while the chairpersons of the United States Postal Service, Federal Retirement Thrift Investment Board, and Tennessee Valley Authority are compensated on another pay plan. [140]  Table 3 looks only at chairpersons compensated under the EX, and how their salaries compare with other members.[141]

Where a chair is paid the same amount, it can indicate that chair is essentially a “first among equals” with no additional substantive responsibilities.  It is understandable that the chairs of the EAC and FEC are paid the same as members because there is an annual rotation of the chairmanship.[142]  It is unclear, however, why the chair of the Defense Nuclear Facilities Safety Board and the chair of the Chemical Safety and Hazard Investigation Board are paid the same as their respective members.[143]  For remaining agencies, the differences in payment schemes can bolster the point that the chairperson is a PAS position.

      c. Comparison with PAS positions

Finally, it is valuable to compare the varying levels of authority for non-PAS and PAS chairs.  If there is no distinguishable difference between the two, then there is no reason why we should have this inconsistency.  As demonstrated above, not all non-PAS chairs are the same, and the best way to have a comparison with PAS chairs is by including only non-PAS chairs that have statutory duties and an EX pay plan that is greater than her fellow members.  Specifically, the chairs of the Federal Energy Regulatory Commission (FERC), FMC, FTC, Nuclear Regulatory Commission (NRC), Occupational Safety and Health Review Commission (OSHRC), Postal Regulatory Commission (PRC), STB, Equal Employment Opportunity Commission (EEOC), Farm Credit Administration (FCA), Federal Communications Commission (FCC), International Trade Commission (ITC), National Credit Union Administration, and SEC are particularly relevant.

From here, it is valuable to see how the varying levels of authority that any of the chairs listed compare with a PAS chair.  Table 4 shows this evaluation by considering the following statutory or regulatory powers of a sample group of non-PAS chairs with a sample of PAS chairs: (1) Appointment and Supervision; (2) Distribution of Business; (3) Expenditure of Funds; (4) Represent the Agency; (5) Debt or Claim Collection/Settlement Authority; (6) Production of Documents; (7) Appeals; and (8) Preside at Meetings.  These parameters are drawn from common chairperson powers found in the different statutes and regulations.  Arguably, the authority conferred by statute is paramount to authority conferred by regulation because unlike the congressionally enacted statute, the independent agency could engage in rulemaking to enlarge or diminish the chairperson’s current authority.  However, this difference does not impact the chairperson’s existing powers, and most of the authority conferred came from statutes.

Table 4 shows that the Appointment and Supervision power is nearly consistent throughout both PAS and non-PAS groups.  As for other powers, distributing the business and representing the agency is the next most common.  After that, no other pattern emerges.

While these eight categories represent common chairperson powers, many non-PAS chairs wield additional unique powers not listed in the table.  For example, the ITC chairperson can fire specific employees and formulate the ITC’s annual budget.[144]  The NRC chairperson can also remove certain officers and has “ultimate authority for all NRC functions pertaining to an emergency involving an NRC Licensee.”[145]  Finally, the FERC chairperson wields power over the procurement of experts and consultants, while the FCC chairperson has authority to take final “actions of routine character” and final “actions of non-routine character which do not involve policy determinations.”[146]  In all, a non-PAS chair could wield significantly more control over executive and administrative matters than a PAS chair.

      d. Application of Officers Analysis

As mentioned, the first step in an Appointments Clause challenge to an action by a chairperson is to determine whether the chairperson is an employee or officer.[147]  There is reason to believe that everyone will agree that chairpersons are officers.  For one, many of the statutes already name the chair as the “chief executive officer” or “chief administrative officer” of the agency.[148]  Thus, by putting “officer” in the description of the chairperson, Congress’s intent was also to make chairs officers.  Although there are several statutes that do not list their chairpersons as “officers,” it still would seem problematic for the government to argue that, for example, the FERC chair is not an officer.[149]  Even so, the Lucia analysis proves that chairpersons are officers.

Under Lucia, chairpersons must have a “continuing” role, and not “occasional or temporary.”[150]  Instead, the chairperson is a permanent position in any executive agency because she is tasked with running the executive and administrative operations of her respective agency.  While not all statutes specify the “duties, salary, and means of appointment” of chairs, this should not disqualify a chair, especially when duties may be prescribed by internal policies.[151]

The chair must also “exercis[e] significant authority pursuant to the laws of the United States.”[152]  Assuming that the phrase “laws of the United States” only applies to statutes and not regulations, chairs normally have some version of these four basic statutory functions: (1) appointment and supervision of employees and/or officers; (2) distribution of business among the agency units; (3) expenditure and supervision of funds; and (4) representation of the agency.[153]  Arguably, the chair’s appointment power should be sufficient since it allows the chair to appoint and oversee staff or officials who would execute the agency’s functions even though the appointment decision is not final.[154]  Moreover, each agency may have specific powers that suggest significant authority.  For example, the FERC and ITC chairs can bind their respective agencies because they have procurement power.[155]  Therefore, chairpersons would satisfy Lucia.

      e. Application of Principal or Inferior Officer Analysis

Once it is established that a chair is an officer, the next step is to determine whether a chair is a principal or inferior officer.  If the chairperson is a principal officer, then she would have to be appointed by the President and confirmed by the Senate.  It appears that Edmond replaced Morrison as the test, but since OLC and the First Circuit recently applied both Edmond and Morrison, both tests will be utilized until the Supreme Court provides further clarification.[156]

Morrison looks at four factors: (1) removability by a higher official; (2) scope of duties; (3) scope of jurisdiction; and (4) scope of office’s tenure.[157]  Only the President remove a chair; she has “administrative duties outside of those necessary to operate her office,” such as hiring staff for the agency as a whole and not just for the chairperson’s office; her jurisdiction is over an entire agency; and her office is not limited in duration like a temporary special counsel.[158]  These factors apply for the non-PAS chairs listed in Table 4 and are sufficient to pass the Morrison test.

Edmond looks at whether a chair’s “work is directed and supervised at some level by others who were appointed by Presidential nomination with the advice and consent of the Senate.”[159]  Free Enterprise Fund adopted this view and took into consideration the officer’s removability.[160]  As summarized by OLC, Edmond looks at if a chair is “removable by an officer other than the President and whether the officer’s work is subject to ‘some level’ of “direct[ion] and supervis[ion]’ by an official appointed by the President, with the advice and consent of the Senate.”[161]  In a recent decision by the D.C. Circuit upholding the Special Counsel’s appointment, the court viewed Edmond as evaluating three distinct characteristics: “degree of oversight, final decision-making authority, and removability.”[162]

Applying Edmond to the non-PAS chairs in Table 4 does not produce a clear result because of the unequal weight given to the factors.[163]  The Supreme Court has given special emphasis to the removal power because it is a “powerful tool for control.”[164]  The Board or Commission cannot remove a chair; that power belongs to the President.[165]  However, the multimember body does supervise the chair.[166]  It is possible that the body also controls the chair because there are some instances where the Board can control a chair’s actions.[167]  Besides the President ultimately having control over the chair, another difference from the previous cases is that a chairperson also sits as a member of the body that is supposed to be “directing and supervising” the chairperson.  Although this is not entirely self-regulation, the chairperson does have a vote (and other levers of influence) in determining internal agency policies that affect her own executive and administrative functions.[168]

Finally, it is not clear what final decision-making authority the chair has without looking at the inner workings of each respective agency.  Regardless, as stated, the three factors are not supposed to be weighed “independently and equally.”[169]  Even if degree of oversight and final decision-making go against chairs being considered as principal officers, it does not seem plausible to overcome the President’s removability of the chair as a “powerful tool for control.”[170]  The Edmond factors, unlike the Morrison factors, are not as conclusive; thus, the consequences of whether chairs in general are principal or inferior officers are important for either determination.

      f. Chair as Inferior Officer Consequences

If the result were that the chairs of the FCC, FERC, or NRC (non-PAS chairs) are inferior officers, then there is no reason why that rationale would not extend to the chairs of the Consumer Product Safety Commission (CPSC), Merit Systems Protection Board (MSPB), or National Transportation Safety Board (NTSB).  As shown by Table 4, PAS chairs do not contain any more authority than their non-PAS equivalents such that would elevate them as principal officers.[171]  Thus, should Congress act, it could alter the PAS status of those chairs.[172]

However, the result would be counterintuitive.  The dual designation means that a chair is an inferior officer subject to removal at will by the President, and also a principal officer (as a member of the body) subject to removal for good cause by the President.[173]  There is “a measure of the status and prestige associated with the position of chairperson,” and it seems odd that this promotion to the dominant role of chairman from member would correspondingly demote someone to an inferior officer.[174]  While this may not impact the chairmanship role in agencies, it would cement the President’s influence in being able to select (and remove) the chair.[175]

The only other instance where an Executive branch officer can serve as both a principal and inferior officer is in the cases of Acting Department Heads.  For example, the Deputy Attorney General is a principal officer, but Acting Attorney General is considered an inferior officer under OLC.[176]  The rationale is that because a “subordinate officer is charged with the performance of the duty of the superior for a limited time, and under special and temporary conditions, he is not thereby transformed into the superior and permanent official.”[177]  Even if OLC’s analysis was correct, it would not apply to chairpersons because their duties are not temporary nor are there special circumstances.

A dual designation of chairs would be followed with litigation.  This past term, the Supreme Court heard an Appointments Clause challenge to a judicial officer’s dual service.[178]  A military judge on the Court of Military Commission Review (CMCR), a principal officer, also sat on the Court of Criminal Appeals (CCA), a body composed of inferior officers.[179]  The Court rejected the Clause’s application: “This Court has never read the Appointments Clause to impose rules about dual service, separate and distinct from methods of appointment.”[180]  However, the Court left open the possibility to consider dual service restrictions under the Appointments Clause.[181]  In what was likely dicta, the Court noted that there was no plausible way that the principal officer’s service on the CMCR would “undu[ly] influence” his inferior officer colleagues on the CCA.[182]  Furthermore, the courts did not have any overlapping jurisdiction.[183]  When comparing this to the relationship between chairs and their members, distinctions are present.  A chair does have overlapping jurisdiction with members, and there is nothing stopping members from “undu[ly] influenc[ing]” their chairs.[184]  Thus, when Chairman Pai sits as a FCC Commissioner, he is different from other FCC Commissioners, but it does not appear that the Court would want to entertain a dual service case any time soon.

      g. Chair as Principal Officer Consequences

If the chair is a principal officer then she automatically holds a PAS position under the Constitution, triggering the Federal Vacancies Reform Act (FVRA).[185]  Normally, the FVRA governs how the President chooses an acting head.[186]  Yet, the FVRA does not apply to “any member who is appointed by the President, by and with the advice and consent of the Senate to any board, commission, or similar entity that . . . is composed of multiple members; and governs an independent establishment.”[187]  Many, if not all, of the entities listed in the Tables govern an independent establishment, but it is unclear whether the exclusion applies to chairpersons.[188]

OLC previously held that the chairperson of the Chemical Safety and Hazard Investigation Board does fall under this exclusion.[189]  This determination makes sense because a chair has to be a member of the body.  Moreover, there is no functional difference if the chair was simultaneously appointed as member or whether she was elevated to chair.  However, OLC disregarded the fact that a chair can resign from her position and still be a member of the body, which is exactly what happened when the chairperson of the Chemical Safety and Hazard Investigation Board resigned but was still a Board member.[190]  There is good reason in limiting the exclusion to “any members,” but considering that a vacancy in the chairmanship does not necessarily result in a vacancy in the membership, the FVRA could apply in these limited circumstances where the chair resigns only from the chairmanship.

Assuming the FVRA does apply, it can impact how acting chairpersons are selected.  Currently, OLC holds the position that when the FVRA does not apply and in absence of a specific statutory provision, “it should be assumed that the power to designate an [a]cting [c]hair[person] remains in the President.”[191]  But when the FVRA applies and there is a statutory provision on vacancies, OLC and a recent District Court case adopted the view that depending on the statute, the FVRA allows the President to depart from the statutory succession order.[192]

In English v. Trump, there was a dispute over who was the acting Director of the Consumer Financial Protection Bureau (CFPB).[193]  The President and the outgoing Director both named different acting Directors.[194]  The President cited his authority under the FVRA, but the Deputy Director (who the outgoing Director selected as his successor) cited the Dodd-Frank Act because it entitled her to be acting Director.[195]  In examining the Dodd-Frank Act, the court noted the law was silent on the President’s ability to appoint an acting Director, making it “impossible to conclude that Dodd-Frank expressly makes the FVRA’s appointment mechanisms unavailable.”[196]  The Deputy Director argued that the Act’s use of the word “shall” implies that her appointment is “mandatory” and “unqualified.”[197]  The court acknowledged that “shall” is a semantic mess and that other statutory provisions point to a seemingly required appointment.[198]

Moving to principles of statutory construction, the court relied on the harmonious-reading canon, the presumption against implied repeals, and the canon of constitutional avoidance.[199]  First, “when two statutes are capable of coexistence, it is the duty of the courts, absent a clearly expressed congressional intention to the contrary, to regard each as effective.”[200]  Here, the FVRA and the Dodd-Frank Act were capable of co-existence.[201]  Second, the Deputy Director was effectively seeking a partial repeal of the FVRA, and the repeal is not presumed “unless the `intention of the legislature to repeal [is] clear and manifest.’”[202]  Finally, the Deputy Director’s interpretation of the Act would have likely impaired the President’s obligation to “take care that the laws be faithfully executed” because a “key means” of doing so is “the power of appointing, overseeing, and controlling those who execute the laws.”[203]  Using these canons, the court upheld the President’s use of the FVRA to appoint the acting Director.[204]

Like the CFPB, agencies such as the FCC, FDIC, and NRC have statutory succession provisions in place for chairpersons.  The FCC and NRC provisions are weaker than the CFPB’s: “In the case of a vacancy in the office of the chairman of the [FCC], or the absence or inability of the chairman to serve, the Commission may temporarily designate one of its members to act as chairman until the cause or circumstance requiring such designation shall have been eliminated or corrected”,[205] and “The Chairman may from time to time designate any other member of the [NRC] as Acting Chairman to act in the place and stead of the Chairman during his absence.”[206]  In contrast, the FDIC’s provision is closer in language to the CFPB’s: “In the event of a vacancy in the position of Chairperson of the Board of Directors or during the absence or disability of the Chairperson, the Vice Chairperson shall act as Chairperson.”[207]  In none of these statutes, however, is there a clear congressional intent to displace the FVRA.

Where the FVRA is applicable, even with a statutory succession provision, it would be hard to fight the FVRA’s effect.  Moreover, the FVRA can possibly lead to an unprecedented situation where a non-member serves as acting chair.[208]

      IV. Conclusion

The current appointment process of multimember independent agency chairpersons is inconsistent and incoherent.  Depending on the body, a non-PAS chair wields significantly more control over executive and administrative matters than a PAS chair.  Yet, despite the extensive literature on independent agencies, scholars have failed to focus on whether the presidential designation of chairs is constitutional.  Put simply, if chairs matter, then the Appointments Clause should matter too.

In this Article, I have sought to address the issue head on by taking a historical, comparative, and functional perspective about agency chairs.  To avoid any Appointments Clause concerns, Congress should harmonize the appointment process by subjecting all chairperson appointments to “advice and consent,” but allow a President to confirm a nominee as both chairperson and commissioner.  The option for a simultaneous confirmation would allow the Senate to be involved in the chairperson appointment process and give the President the flexibility to choose who she wants to head an agency.  A legislative fix is encouraging, but the true impetus for Appointments Clause challenges has been through the courts and not the legislature.  For example, shortly after Buckley v. Valeo invalidated the appointments of certain FEC commissioners, the Court encouraged Congress to act, which it did by amending the Federal Election Campaign Act and converted all FEC commissioners into PAS positions.[209]

Considering the reactive nature of Congress, successful Appointments Clause litigation could push Congress to act.  Whether it is an action taken by the chairperson or someone that the chair appointed, a conflict between the chair and the members, or a group of Senators (or the Senate) disappointed that the chairperson bypassed “advice and consent,” the possibilities for litigation are endless.  In bringing a suit, there needs to be special consideration of the specific agency’s impact on Americans and its statutory regime surrounding chairpersons.

Even if the Appointments Clause question is resolved, other legal questions will arise.  More specifically, courts should clarify the relationship between a chairperson and agency members, whether a dual office claim could apply, and how the FVRA fits into this scheme.  This Article cannot address all the concerns raised by the appointment procedure of chairs, but its hope is to awaken scholarly interest in doing so.

Appendix

Table 1 – PAS Chairs versus Non-PAS Chairs

PAS Non-PAS
Chemical Safety and Hazard Investigation Board; Consumer Product Safety Commission (CPSC); Federal Reserve; Merit Systems Protection Board (MSPB); National Transportation Safety Board (NTSB); Administrative Conference of the United States (ACUS); Advisory Council on Historic Preservation; Commodity Futures Trading Commission (CFTC); Federal Deposit Insurance Corporation (FDIC); Railroad Retirement Board[210] Commission on Civil Rights; United States Election Assistance Commission (EAC); Federal Election Commission (FEC); Federal Energy Regulatory Commission (FERC); Federal Maritime Commission (FMC); Federal Labor Relations Authority (FLRA); Federal Trade Commission (FTC); Mine Safety and Health Review Commission; National Labor Relations Board (NLRB); National Mediation Board (NMB); Nuclear Regulatory Commission (NRC); Occupational Safety and Health Review Commission (OSHRC); Postal Regulatory Commission (PRC); Surface Transportation Board (STB); Defense Nuclear Facilities Safety Board; Equal Employment Opportunity Commission (EEOC); Farm Credit Administration (FCA); Federal Communications Commission (FCC); United States International Trade Commission (ITC); National Credit Union Administration; National Council on Disability; Securities and Exchange Commission (SEC); United States Postal Service (USPS); African Development Foundation; Corporation for National and Community Service; Federal Retirement Thrift Investment Board; Tennessee Valley Authority (TVA)[211]

 

Table 2 – Chairpersons with Statutory Duties[212]

PAS Non-PAS
Chairpersons with specific statutory duties

 

CPSC; Federal Reserve; MSPB; NTSB; ACUS; Advisory Council on Historic Preservation; CFTC; FDIC[213]

 

 

 

FEC; FERC; FMC; FTC; NRC; OSHRC; PRC; STB; Defense Nuclear Facilities Safety Board; EEOC; FCA; FCC; ITC; National Credit Union Administration; National Council on Disability; SEC; Corporation for National and Community Service; Federal Retirement Thrift Investment Board[214]
Chairpersons with vague or no statutory duties Chemical Safety and Hazard Investigation Board; Railroad Retirement Board[215] Commission on Civil Rights; FLRA; Mine Safety and Health Review Commission; NLRB; NMB; EAC; USPS; African Development Foundation; TVA[216]

 

Table 3 – EX Pay Plan Chairperson Salary Comparison with Members

  PAS Non-PAS
Chairperson Salary Higher Advisory Council on Historic Preservation; CPSC; Federal Reserve; MSPB; NTSB; ACUS; CFTC; FDIC; Railroad Retirement Board[217] FERC; FMC; FLRA; FTC; Mine Safety and Health Review Commission; NLRB; NMB; NRC; OSHRC; PRC; STB; EEOC; FCA; FCC; ITC; National Credit Union Administration; SEC[218]
Chairperson Salary Equal Chemical Safety and Hazard Investigation Board[219] Commission on Civil Rights; EAC; FEC; Defense Nuclear Facilities Safety Board[220]

 

Table 4: Comparison of Chairperson Powers from Statutory and Regulatory Authorities[221]

FCC FCA FERC FMC NRC FDIC CPSC NTSB MSPB
PAS position? X X X X
Appointment and Supervision S S S S S S S S
Distribution of Business S S S S S
Expenditure of Funds S S S S
Represent the Agency S S S S S
Debt or Claim Collection/Settlement Authority R R R R
Production of Documents R
Appeals R R R R
Preside at Meetings S S R S

S = Statutory

R = Regulatory

 

* B.B.A., Baruch College, 2016; J.D., Harvard Law School, 2019. The author would like to thank Intisar Rabb, Professor of Law at Harvard Law School, and Shalev Roisman, Associate Professor of Law at James E. Rogers College of Law, for helpful comments and conversations on this Article. The author also thanks the staff and editors at the Harvard Journal on Legislation for their extremely careful and thoughtful edits to the Article.

[1] Ajit Pai FCC Chairman, Fed. Commc’n Comm’n, https://www.fcc.gov/about/leadership/ajit-pai [https://perma.cc/ER2L-GUL2].
 
[2] Id.
 
[3] See infra Table 1; see also infra Part I.
 
[4] See also NLRB v. SW Gen., Inc., 137 S. Ct. 929, 935 (2017) (“The Senate’s advice and consent power is a critical ‘structural safeguard[] of the constitutional scheme.’” (quoting Edmond v. United States, 520 U.S. 651, 659 (1997))).
 
[5] For example, the Securities and Exchange Commission chairperson was appointed and confirmed as both a Commissioner and the chairperson even though the statute does not mandate it.  See Chairman Jay Clayton, U.S. Sec. & Exch. Comm’n, https://www.sec.gov/biography/jay-clayton [https://perma.cc/CQM5-FNRS]; see also Reorganization Plan No. 10 of 1950 § 3, 64 Stat. 1265.
 
[6] See generally 138 S. Ct. 2044 (2018).
 
[7] See Complaint for Declaratory and Injunctive Relief, Blumenthal v. Whitaker, No. 1:18-cv-02664 (D.D.C. Nov. 19, 2018).
 
[8] 279 F. Supp. 3d 307 (D.D.C. 2018).
 
[9] Id. at 311.
 
[10] 28 U.S.C. § 504 (2018) (Deputy Attorney General); 29 U.S.C. § 552 (2018) (Deputy Secretary of Labor); 20 U.S.C. § 3412(a) (2018) (Deputy Secretary of Education).
 
[11] Current Attorney General William P. Barr served as Deputy Attorney General from 1990 to 1991 before his first tenure as Attorney General from 1991 to 1993.  See Attorney General William Pelham Barr, U.S. Dep’t of Justice, https://www.justice.gov/ag/bio/barr-william-pelham [https://perma.cc/LYW7-ANTX].  Once he was elevated, then-Deputy Attorney General Barr had to testify at his Senate confirmation hearings.  See Ronald J. Ostrow, Barr Opposed to Roe vs. Wade Decision : Justice Dept.: The attorney general-designate tells Senate panel right to privacy does not extend to obtaining an abortion, L.A. Times (Nov. 14, 1991), https://www.latimes.com/archives/la-xpm-1991-11-14-mn-1917-story.html [https://perma.cc/K5ND-CR8Z].
 
[12] Since the Founding of the country, there have been five incumbent associate justices who went through a separate confirmation hearing for the Chief Justice position.  They include Justices William Cushing, Edward White, Harlan Stone, Abe Fortas, and William Rehnquist. See Supreme Court Nominations: Present-1789, U.S. Senate, https://www.senate.gov/pagelayout/reference/nominations/Nominations.htm#10 [https://perma.cc/FCB6-NUT6].
 
[13] Infra Table 1.  Members include the other board members or commissioners of an agency.
 
[14] Arguably, from statutory and regulatory sources, the FCC chairperson wields more power than the FDIC chairperson.  See infra Table 4.
 
[15] See Kirti Datla & Richard L. Revesz, Deconstructing Independent Agencies (and Executive Agencies), 98 Cornell L. Rev. 769, 797 (2013); see also Marshall J. Breger & Gary J. Edles, Established by Practice: The Theory and Operation of Independent Federal Agencies, 52 Admin. L. Rev. 1111, 1173 (2000).
 
[16] See, e.g., Lucia v. SEC, 138 S. Ct. 2044, 2053–54 (2018) (invalidating the appointment of SEC Administrative Law Judges); Freytag v. Comm’r, 501 U.S. 868, 880 (1991) (“The structural interests protected by the Appointments Clause are not those of any one branch of Government but of the entire Republic.”); Buckley v. Valeo, 424 U.S. 1, 143 (1976) (invalidating the Federal Election Commission’s structure under the Appointments Clause); see also NLRB v. SW Gen., Inc., 137 S. Ct. 929, 948 (2017) (Thomas, J., concurring) (recognizing that the “Appointments Clause is not an empty formality” even though the “burdens on governmental processes” may “often seem clumsy, inefficient, even unworkable” (quoting INS v. Chadha, 462 U.S. 919, 959 (1983))).
 
[17] See Chairman Jay Clayton, U.S. Sec. & Exch. Comm’n, https://www.sec.gov/biography/jay-clayton [https://perma.cc/A5H9-F8GL]; see also Reorganization Plan No. 10 of 1950 § 3, 64 Stat. 1265.
 
[18] Chief Justice Roberts was originally nominated to replace Justice O’Connor, but when then-Chief Justice Rehnquist died, Roberts’ nomination was withdrawn and he was subsequently renominated for the Chief Justice position.  See Barry J. McMillion and Denis S. Rutkus, Supreme Court Nominations, 1789 to 2017: Actions by the Senate, the Judiciary Committee, and the President, Cong. Res. Serv. 11 n.36 (2018), https://fas.org/sgp/crs/misc/RL33225.pdf [https://perma.cc/XQN4-H565].  If he had first been appointed as Associate Justice, a hypothetical Justice Roberts would have needed to go through “advice and consent” again for the Chief Justiceship.  See infra Part I(a).
 
[19] See U.S. Const. art. I, § 3, cl. 6 (“When the President of the United States is tried, the Chief Justice shall preside”); 28 U.S.C. § 601 (2018).
 
[20] James E. Pfander, The Chief Justice, the Appointment of Inferior Officers, and the “Court of Law” Requirement, 107 Nw. U. L. Rev. 1125, 1132–34 (2013).
 
[21] See infra Part III; see also infra Table 4.
 
[22] See Myers v. United States, 272 U.S. 52, 136 (1926) (explaining why the decisions of the First Congress “must necessarily constitute a precedent”).
 
[23] Paul S. Dempsey, The Rise and Fall of the Interstate Commerce Commission: The Tortuous Path from Regulation to Deregulation of America’s Infrastructure, 95 Marq. L. Rev. 1151, 1151–52 (2012).
 
[24] Clarence A. Miller, Interstate Commerce Commissioners: The First Fifty Years: 1887 – 1937, 5 Geo. Wash. L. Rev. 580, 594 (1937).
 
[25] Id.
 
[26] Id. at 589–90.
 
[27] Id. at 590.
 
[28] See Robert C. Fellmeth, The Interstate Commerce Omission: The Public Interest and the ICC 20–39, 311 (1970); see also Dempsey, supra note 23, at 1174.
 
[29] Fellmeth, supra note 28, at 311.
 
[30] Id.
 
[31] See Susan B. Foote, Independent Agencies Under Attack: A Skeptical View of the Importance of Debate, 1988 Duke L.J. 223, 223 n.5.
 
[32] See Dempsey, supra note 23, at 1182–83 (noting that independent agencies were still under the influence of the “revolving door”).
 
[33] ICC Termination Act of 1995, Pub. L. No. 104-88, 109 Stat. 803. At that point, the ICC was showing elements of “de facto deregulation and de jure regulation” to the dissatisfaction of Congress. Dempsey, supra note 23, at 1185.
 
[34] Henry B. Hogue, Presidential Reorganization Authority: History, Recent Initiatives, and Options for Congress, Cong. Res. Serv. 18 (2012), https://fas.org/sgp/crs/misc/R42852.pdf [https://perma.cc/7RBX-WQ56].
 
[35] S. Rep. No. 80-344, at 4 (1947).
 
[36] Act of Jul. 7, 1947, Pub. L. No. 162-80, 61 Stat. 246 (codified in scattered sections of 5 U.S.C.); see also John W. Lederle, The Hoover Commission Reports on Federal Reorganization, 33 Marq. L. Rev. 89, 91 (1949).
 
[37] For the establishment of the Commission on Organization of the Executive Branch of the Government, 61 Stat. 246, 248 § 10 (1947).
 
[38] Lederle, supra note 36, at 91.
 
[39] Breger & Edles, supra note 15, at 1166; see also Hogue, supra note 34, at 19; Commission on Organization of the Executive Branch of the Government, The Independent Regulatory Commissions 5–6 (1949) (“Administration by a plural executive is universally regarded as inefficient. . . . [T]hose cases where administration has been distinctly superior are cases where the administrative as distinguished from the regulatory duties have been vested in the chairman.”).
 
[40] Daniel E. Ho, Measuring Agency Preferences: Experts, Voting, and the Power of Chairs, 59 DePaul L. Rev. 333, 359 (2010).
 
[41] Breger & Edles, supra note 15, at 1166.
 
[42] See Ho, supra note 40, at 359.  Professor Ho notes that at that time the President already had the power to designate the chairs of the FCC and NLRB. Id.
 
[43] Id.; see also Senate Kills ICC and FCC Revamping, Wash. Post, May 18, 1950, at 1.  For a more detailed look at the Senate’s consideration of the Reorganization Plans, see Authority of the President to Designate Another Member as Chairman of the Federal Power Commission, 1 Op. O.L.C. Supp. 206, 234–36 (1961).
 
[44] Ho, supra note 40, at 359–60; see also Senate Upholds Kennedy Plans for the F.T.C. and the C.A.B., N.Y. Times, June 30, 1961, at 10.
 
[45] Ho, supra note 40, at 360.
 
[46] Id.; see also infra Part III.
 
[47] Although the Constitution does not mention independent agencies, these are among the few sections that talk about executive Departments.
 
[48] U.S. Const. art. II, § 2, cl. 2 (emphasis added).
 
[49] Id. § 2, cl. 1 (emphasis added).
 
[50] Id. amend. XXV, § 4 (emphasis added).
 
[51] 99 U.S. 508, 511 (1879).  The Twenty-Fifth Amendment was not adopted then.
 
[52] 501 U.S. 868, 886–87 (1991).
 
[53] See id. at 887; see also H.R. Rep. No. 203 at 3, 89th Cong., 1st Sess. (1965) (“[O]nly officials of Cabinet rank should participate in the decision as to whether presidential inability exists . . . . The intent . . . is that the Presidential appointees who direct the 10 executive departments named in 5 U. S. C. 1 [now codified as § 101], or any executive department established in the future, generally considered to comprise the President’s Cabinet, would participate . . . in determining inability.”).  President Trump’s Cabinet includes the Vice President, heads of the fifteen executive departments, the White House Chief of Staff, and heads of the Environmental Protection Agency, Office of Management and Budget, United States Trade Representative, Central Intelligence Agency, Office of the Director of National Intelligence, and Small Business Administration.  The Cabinet, The White House, https://www.whitehouse.gov/the-trump-administration/the-cabinet/ [https://perma.cc/AVV8-WV96].
 
[54] Freytag, 501 U.S. at 886.  The Freytag Court also relied on Burnap v. United States, 252 U.S. 512, 515 (1920), to support the view that “head of a Department means . . . the Secretary in charge of a great division of the executive branch of the Government, like the State, Treasury, and War, who is a member of the Cabinet.”  501 U.S. at 886.
 
[55] Freytag, 501 U.S. at 916 (Scalia, J., concurring).  Justices O’Connor, Kennedy, and Souter also joined in the concurrence.
 
[56] Id. at 918.
 
[57] 561 U.S. 477 (2010).
 
[58] Id. at 511.
 
[59] Id. at 511 n.11.
 
[60] Id. at 512–13.
 
[61] Id. at 512 (citing Reorganization Plan No. 10 of 1950, § 1(b)(1)).
 
[62] In Lucia v. SEC, the petitioner successfully challenged his administrative proceeding because the ALJ was not properly appointed.  See 138 S. Ct. 2044, 2055–56 (2018).  In NLRB v. Noel Canning, the respondents successfully challenged an NLRB order because three members were not properly appointed under the Recess Appointments Clause, a qualified exception to the Appointments Clause.  See 573 U.S. 513 (2014).  After Matthew Whitaker was appointed Acting Attorney General, a series of lawsuits were filed by different parties affected by his actions contending that the appointment was not constitutional.  Victoria Clark, What’s Happening in the Litigation Over Matthew Whitaker’s Appointment?, Lawfare (Dec. 7, 2018), https://www.lawfareblog.com/whats-happening-litigation-over-matthew-whitakers-appointment [https://perma.cc/QRL2-9A52].
 
[63] Buckley v. Valeo, 424 U.S. 1, 126 n.162 (1976).
 
[64] See infra Part III(a).
 
[65] United States v. Germaine, 99 U.S. 508, 511 (1878); United States v. Hartwell, 73 U.S. 385, 393 (1867).  In both Hartwell and Germaine, the Court defined “officer” under the respective statutes.
 
[66] Germaine, 99 U.S. at 511–12.
 
[67] Buckley, 424 U.S. at 125.
 
[68] Id. at 126.
 
[69] Id. at 126 n.162.
 
[70] 138 S. Ct. 2044, 2051 (2018).
 
[71] Id.  Both parties had agreed that the ALJs “hold a continuing office.”  Id. at 2053.
 
[72] Id. at 2051–52.  One view of “significant authority” is “(i) the power to bind the government or private parties (ii) in her own name rather than in the name of a superior officer.”  Id. (citations omitted).  Another view is “‘the power to bind the government or third parties on significant matters’ or to undertake other ‘important and distinctively sovereign functions.’”  Id. (citations omitted).
 
[73] Id. at 2056 (Thomas, J., concurring); see also Jennifer Mascott, Who Are “Officers of the United States”?, 70 Stan. L. Rev. 443, 564 (2018); NLRB v. SW Gen., Inc., 137 S. Ct. 929, 946 (2017) (Thomas, J., concurring).
 
[74] Lucia, 138 S. Ct. at 2065 (Sotomayor, J., dissenting).
 
[75] Id. at 2051.
 
[76] Id. at 2053.
 
[77] See infra Part III; see also infra notes 106, 130.
 
[78] See infra Part III(c).
 
[79] U.S. Const. art. II, § 2, cl. 2.
 
[80] Id.; see also Buckley v. Valeo, 424 U.S. 1, 132 (1976).
 
[81] U.S. Const. art. II, § 2, cl. 2.
 
[82] Edmond v. United States, 520 U.S. 651, 661 (1997).
 
[83] See infra Part III(e).
 
[84] 487 U.S. 654 (1988).
 
[85] Id. at 671–72.
 
[86] Id.
 
[87] Id. at 719 (Scalia, J., dissenting).
 
[88] Id.
 
[89] Id.
 
[90] 520 U.S. 651, 653 (1997).
 
[91] Id. at 661–62.
 
[92] Id. at 663.
 
[93] Id. at 664.
 
[94] Id. at 665.
 
[95] 561 U.S. 477, 479 (2010).
 
[96] Id. at 510.
 
[97] Id.
 
[98] Whether the Special Master for Troubled Asset Relief Program Executive Compensation is a Principal Officer Under the Appointments Clause, 34 Op. O.L.C. 1, 1 (2010) [hereinafter Special Master].
 
[99] For a scholarly analysis of OLC, see Daphna Renan, The Law Presidents Make, 103 Va. L. Rev. 805, 810 (2017) (“Rather than OLC supremacy, legal views are developed by a collection of administrative actors. OLC usually has a seat at the table. But it is no longer the decider.”); Harold H. Koh, Protecting the Office of Legal Counsel from Itself, 15 Cardozo L. Rev. 513, 514 (1993) (“OLC has developed its own informal procedural norms both to protect its independence and to ensure that the Office will pursue what Professor McGinnis dubs a ‘court-centered’ or ‘independent authority’ model of government lawyering instead of the ‘opportunistic’ model of a private lawyer.” (internal citations omitted)).
 
[100] Special Master, supra note 98, at 10.
 
[101] Id. at 9.
 
[102] Id. at 8–9.
 
[103] In re: Grand Jury Investigation, 916 F.3d 1047, 1052 (D.C. Cir. 2019).
 
[104] Adrian Vermeule, Morrison v. Olson Is Bad Law, Lawfare (June 9, 2017), https://www.lawfareblog.com/morrison-v-olson-bad-law [https://perma.cc/345M-ZPVM].
 
[105] NLRB v. SW Gen., Inc., 137 S. Ct. 929, 947 n.2 (2017) (Thomas, J., concurring) (“Although we did not explicitly overrule Morrison in Edmond, it is difficult to see how Morrison’s nebulous approach survived our opinion in Edmond.”).
 
[106] See Stephen G. Breyer, et. al, Administrative Law and Regulatory Policy 111 (8th ed. 2017).
 
[107] See Aurelius Inv., LLC v. Puerto Rico., 915 F.3d 838, 861 (1st Cir. 2019).
 
[108] Aurelius Inv., LLC v. Puerto Rico, 139 S. Ct. 2736 (2019).
 
[109] See infra Part III(e).
 
[110] Datla & Revesz, supra note 15, at 796; see also Rachel E. Barkow, Insulating Agencies: Avoiding Capture Through Institutional Design, 89 Tex. L. Rev. 15, 38–39 (2010) (equating the chair’s administrative responsibilities with policymaking); Breger & Edles, supra note 15, at 1168 (same); Peter L. Strauss, The Place of Agencies in Government: Separation of Powers and the Fourth Branch, 84 Colum. L. Rev. 573, 590–91 (1984) (same).
 
[111] See Authority of the President to Reassign the Chairmanship of the Federal Power Commission, 1 Op. O.L.C. 206, 238–39 (1961).  But see Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477, 512–13 (2010) (“[W]e see no reason why a multimember body may not be the “Hea[d]” of a “Departmen[t]” that it governs.”).  For the purposes of this Article, a “board member” of an agency is synonymous with a “commissioner” of a commission.
 
[112] See Ho, supra note 40, at 358; Datla & Revesz, supra note 15, at 796, 819, 820 (noting that chairs are removable at the will of the President and that there are political rewards for chairs).
 
[113] See Breger & Edles, supra note 15, at 1164 (“There is no doubt that the chair of a multi-member agency is ordinarily its most dominant figure.”); Breyer et. al, supra note 106, at 147; see also Glen O. Robinson, Independent Agencies: Form and Substance in Executive Prerogative, 1988 Duke L.J. 238, 245.
 
[114] See Strauss, supra note 110, at 591 (“These administrative responsibilities, corresponding to presidential responsibilities for the government as a whole, doubtless underlie Congress’s general recognition of the President’s special claim to have his own choice as chairman.”); Datla & Revesz, supra note 15, at 797 (assuming that Congress can delegate the selection of a chair to the President alone or other members of the agency).
 
[115] Many of the agencies used in the Tables were the same ones used by Datla and Revesz. See Datla & Revesz, supra note 15, at 793 (Multimember Structure Column of Table 3).
 
[116] See 46 U.S.C. § 301(c)(2)–(3) (2018).
 
[117] See 29 U.S.C. § 153(a) (2018) (“The President shall designate one member to serve as Chairman of the Board.”).
 
[118] 5 U.S.C. § 7104(b) (2018).
 
[119] 29 C.F.R. § 2201.10(c) (2019) (allowing the OSHRC chair to decide a FOIA appeal); 49 C.F.R. § 800.22(b) (2019) (allowing the NTSB chair to delegate her functions to the Managing Director); 47 C.F.R. § 0.211(d) (2018) (allowing the FCC chair to act “upon tort claims directed against the Commission where the amount of damages does not exceed $5,000”).
 
[120] 29 C.F.R. § 102.119(f)(1)(iv) (2019) (allowing the NLRB chair to review the request of documents in a limited situation); 29 C.F.R. § 102.118(b) (2019) (allowing the NLRB chair or the Board to consent to testimony from a present or former employee where the knowledge came from their capacity).
 
[121] Interview with Marshall B. Babson, former Member, NLRB (Nov. 29, 2018).
 
[122] Id.
 
[123] Authority of the Chairman of the Defense Nuclear Facilities Safety Board to Disclose Performance Appraisals of Senior Executive Service Employees, 39 Op. O.L.C. 1, 2 n.1 (2015) [hereinafter Defense Nuclear Facilities Safety Board] (“The Board has agreed to be bound by our decision.”); Division of Powers and Responsibilities Between the Chairperson of the Chemical Safety and Hazard Investigation Board and the Board as a Whole, 24 Op. O.L.C. 102, 103 n.1 (2000) [hereinafter Division of Powers and Responsibilities] (“Both have agreed to be bound by our opinion.”).
 
[124] Breger & Edles, supra note 15, at 1176.  Although agencies are not required to solicit advice from OLC, they will seek advice if it “otherwise might expose them to subsequent legal risk or embarrassment.”  Id. at 1180 n.343.  For inter-agency disputes, see Jody Freeman & Jim Rossi, Agency Coordination in Shared Regulatory Space, 125 Harv. L. Rev. 1131, 1176 (2012) (“In this way, OLC likely helps to resolve interagency conflicts on a regular basis by providing opinions, both formally and informally.”).
 
[125] Division of Powers and Responsibilities, supra note 123, at 107.
 
[126] Id. at 103.
 
[127] Id. at 105.
 
[128] Id. at 108.
 
[129] Id.  For an earlier analysis of the division of power between a chair and her board, see a 1974 opinion (and an amendment issued months later) by the Comptroller General dealing with the EEOC.  Breger & Edles, supra note 15, at 1168–70.
 
[130] Authority of the Chairman of the Defense Nuclear Facilities Safety Board to Disclose Performance Appraisals of Senior Executive Service Employees, 39 Op. O.L.C. 1, 1 (2015).
 
[131] Id. at 2–3.
 
[132] Id. at 3 n.2.
 
[133] William B. Gould, Labored Relations: Law, Politics, and the NLRB–A Memoir 52 (MIT Press 2001).
 
[134] Robinson, supra note 113, at 245 n.24; see also Miles W. Kirkpatrick, Nineteenth Annual Antitrust Spring Dinner Address, 40 Antitrust L.J. 328, 332 (1971) (former FTC chair observing that “[m]anagement of the Commission, save for the appointment of the top policy making positions and policy decisions having to do with the allocation of major resources, is placed squarely in the Chairman”).
 
[135] Todd Garvey & Daniel J. Sheffner, Congress’s Authority to Influence and Control Executive Branch Agencies, Cong. Res. Serv., at 4–5 (2018), https://fas.org/sgp/crs/misc/R45442.pdf [https://perma.cc/3WKN-DUKE]; see generally Jack M. Beermann, Congressional Administration, 43 San Diego L. Rev. 61 (2006).
 
[136] U.S. Gov’t Policy & Supporting Positions, Staff of S. Comm. on Homeland Sec’y & Governmental Affairs 114–26, 114th Cong. (2016) (“Plum Book”).
 
[137] See id. at 162 (listing the FCA and FCC chairs as “PAS” appointments).  But see id. at 164 (not listing the position of chair for the FEC); id. at 208 (same with EAC); id. at 167 (listing the Mine Safety and Health Review Commission chair as a non-PAS appointment).
 
[138] 5 U.S.C. §§ 5311–5318 (2018).
 
[139] See Plum Book, supra note 136, at 147 (African Development Foundation); id. at 152–53 (Corporation for National and Community Service).
 
[140] Id. at 178 (National Council on Disability); id. at 211 (USPS); id. at 168 (Federal Retirement Thrift Investment Board); id. at 205 (TVA).
 
[141] See infra Table 3. A chairperson’s pay plan by no means serves as proxy for whether someone is a principal officer.  In Aurelius Inv., LLC v. Puerto Rico, the First Circuit held that the Financial Oversight and Management Board Members were principal officers even though they did not receive compensation for their service.  915 F.3d 838, 861 (1st Cir. 2019), cert. granted, 139 S. Ct. 2736 (2019); see also 49 U.S.C. § 2121(h) (2018).
 
[142] See 52 U.S.C. §§ 20923(c), 30106(a)(5) (2018).
 
[143] See infra Table 3.  Even the NLRB chair, a position with little statutory duties, is paid more than the individual board members.  Id.
 
[144] 19 U.S.C. § 1331(a)(2)(A)–(B) (2018).  Both of these powers are still subject to approval by the other commissioners.  Id.  However, it is worth noting that most of the ITC chairperson’s statutory powers are only “subject to disapproval by a majority vote,” in stark contrast to other agency chairpersons. Id. § 1331(a)(1)(A)–(C).
 
[145] 10 C.F.R. § 1.11(a) (2019); see also Reorganization Plan No. 1 of 1980 §§ 1(b)(1)–(2), 2(a), 3(a)–(d), 94 Stat. 3585.  While this is beyond the scope of the Article, the chairperson’s power to remove employees or officers who have “good cause” protection is likely constitutional because the chairperson serves at the will of the President. See Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477, 492 (2010) (“We hold that the dual for-cause limitations on the removal of Board members contravene the Constitution’s separation of powers.”).  Post-Free Enterprise Fund, there is an incentive for a chairperson to be granted removal power.
 
[146] 42 U.S.C. § 7171(c) (2018) (“The [FERC] Chairman shall be responsible . . . with respect to . . . the procurement of services of experts and consultants in accordance with section 3109 of Title 5”); see also 47 C.F.R. § 0.211(a)–(b) (2019).  As for “[a]ctions of an important character or those which involve policy determinations . . . the Chairman will develop proposals for presentation to the Commission.”  Id. § 0.211(c).  Unfortunately, there is no information present that defines what counts as an action of “routine character” or “non-routine character.”
 
[147] See Lucia v. SEC, 138 S. Ct. 2044, 2051 (2018).
 
[148] See, e.g., 42 U.S.C. § 7412(r)(6)(B) (2018) (“The Chairperson shall be the Chief Executive Officer of the [Chemical Safety and Hazard Investigation] Board and shall exercise the executive and administrative functions of the Board”); 15 U.S.C. § 2053(f)(1) (2018) (“The Chairman of the Commission shall be the principal executive officer of the [Consumer Product Safety] Commission, and he shall exercise all of the executive and administrative functions of the Commission”); 46 U.S.C. § 301(b)(1) (2018) (“The Chairman is the chief executive and administrative officer of the [Federal Maritime] Commission”); 5 U.S.C. § 7104(b) (2018) (“The Chairman is the chief executive and administrative officer of the [Federal Labor Relations] Authority.”).
 
[149] See 42 U.S.C. § 7171(c) (2018) (not using “officer” to describe the FERC chairperson); 12 U.S.C. § 1812(b)(1) (2018) (same with the FDIC chairperson); 49 U.C.C. § 1301(c) (2018) (same with the Surface Transportation Board chairperson).  In Estes v. Department of the Treasury, 219 F. Supp. 3d 17 (D.D.C. 2016), the government did not argue that the Fiscal Assistant Secretary was an employee; instead it went into the principal versus inferior officer analysis, id. at 36–39.  Likewise, it would appear difficult to argue that the FERC chair is an employee, and it would make more sense to argue the principal versus inferior officer distinction.
 
[150] Lucia, 138 S. Ct. at 2051.
 
[151] Compare 47 U.S.C. §§ 154(a), 155(c)(2) (2018) (listing the “[specific] duties, salary, and means of appointment” of the FCC chair) and 54 U.S.C. §§ 304101(e), 304105(a),(c) (2018) (same with the chair of the Advisory Council on Historic Preservation), with 42 U.S.C. § 7412(r)(6)(B) (2018) (not listing specific duties, but only the “means of appointment” of the Chemical Safety and Hazard Investigation Board), and 42 U.S.C. § 2000e-4(a) (2018) (only not listing the salary of the EEOC chair). The Executive Schedule, however, lists the pay levels of the agency chairs. 5 U.S.C. §§ 5311–17 (2018).
 
[152] Buckley v. Valeo, 424 U.S. 1, 126 (1976).
 
[153] There is some reason to doubt that the phrase only applies to statutes. In Lucia, the Court referred to both statutes and regulations that governed ALJs.  See Lucia, 138 S. Ct. at 2053. As seen in Table 4 below, there are regulations that give chairpersons the power to collect claims or decide appeals, which could show further sign of “exercising significant authority.”  See infra Table 4; see also Buckley, 424 U.S. at 126.
 
[154] Most appointments by the chairperson are subject to approval by the Board or Commission.  See 47 U.S.C. § 155(e) (2018) (“The Commission shall have a Managing Director who shall be appointed by the Chairman subject to the approval of the Commission.”).
 
[155] 42 U.S.C. § 7171(c) (2018) (“The [FERC] Chairman shall be responsible . . . with respect to . . . the procurement of services of experts and consultants in accordance with section 3109 of Title 5.”); 19 U.S.C. § 1331(a)(1)(A)(ii) (2018) (“[T]he chairman of the [ITC] shall . . . procure the services of experts and consultants in accordance with the provisions of section 3109 of title 5.”).
 
[156] In Aurelius Inv., LLC v. Puerto Rico, the First Circuit applied both the Morrison and Edmond tests.  915 F.3d 838, 861 (1st Cir. 2019), cert. granted, 139 S. Ct. 2736 (2019).
 
[157] 487 U.S. 654, 671–72 (1988).
 
[158] Datla & Revesz, supra note 15, at 819 (“The chair of a multimember agency usually holds the position of chair—but not as a member of the agency—at the will of the President.”).
 
[159] 520 U.S. 651, 663 (1997).
 
[160] 561 U.S. 477, 510 (2010).
 
[161] Special Master, supra note 98, at 10.
 
[162] In re Grand Jury Investigation, 916 F.3d 1047, 1052 (D.C. Cir. 2019).
 
[163] In Estes, the court found that the plaintiffs erred in “presuming that all three of the Intercollegiate factors are to be weighed independently and equally.”  Estes v. U.S. Department of Treasury, 219 F. Supp. 3d 17, 38 (D.D.C. 2016); see also Intercollegiate Broad. Sys., Inc. v. Copyright Royalty Bd., 684 F.3d 1332, 1338 (D.C. Cir. 2012) (summarizing the Edmond factors).
 
[164] Edmond, 520 U.S. at 664.
 
[165] Datla & Revesz, supra note 15, at 796.
 
[166] Many of the statutes that give chairs specific powers are “frequently subject to some form of agency approval.” Breger & Edles, supra note 15, at 1173.
 
[167] Within the OLC opinion on the Defense Nuclear Facilities Safety Board, the memorandum cites to this reply by the agency’s Office of General: “[b]y stating that the Chairman exercises his administrative duties subject to the Board’s policies, Congress maintained some level of Board control over the Chairman.”  Defense Nuclear Facilities Safety Board, supra note 123, at 4.
 
[168] Ho, supra note 40, at 360 (“Chairs may exercise power via alternative channels to voting, such as supervisory authority over staff, agenda control, oversight over expenditures, and the power to represent the Commission publicly.”).
 
[169] Estes, 219 F. Supp. 3d at 38.  Estes v. U.S. Department of Treasury, 219 F. Supp. 3d 17, 38 (D.D.C. 2016).
 
[170] While beyond the scope of the Article, if a Board’s control over its chair is greater than the President’s control, then it could implicate the President’s “take care” obligations.  See U.S. Const. art. II, § 3 (“[H]e shall take care that the laws be faithfully executed.”).
 
[171] See infra Table 4.
 
[172] It is not mandatory for inferior officers to be PAS positions.  See U.S. Const. art. II, § 2, cl. 2.
 
[173] See Datla & Revesz, supra note 15, at 796 (“Chairs are typically seen as a presidential proxy because they usually hold their position as chair (but not as members of the agency) at the will of the President.”).  While removal from the chairperson position is at will, the removal as a member from the agency is usually for “good cause.”  Id. at 788.
 
[174] Authority of the Chemical Safety and Hazard Investigation Board to Delegate Power, 26 Op. O.L.C. 29, 31 (2002) (“The title would suggest a measure of the status and prestige associated with the position of chairperson.”). But see Edmond v. United States, 520 U.S. 651, 662–63 (1997) (“Whether one is an ‘inferior’ officer depends on whether he has a superior. It is not enough that other officers may be identified who formally maintain a higher rank, or possess responsibilities of a greater magnitude.”).
 
[175] See Datla & Revesz, supra note 15, at 787.
 
[176] See Designating an Acting Attorney General, 42 Op. O.L.C. 1, 9 (2018) [hereinafter Acting Attorney General]; see also Designation of Acting Director of the Office of Management and Budget, 27 Op. O.L.C. 121 (2003).
 
[177] Acting Attorney General, supra note 176, at 20 (quoting United States v. Eaton, 169 U.S. 331, 343 (1898)).
 
[178] See Ortiz v. United States, 138 S. Ct. 2165, 2170 (2018).
 
[179] Id. at 2171.
 
[180] Id. at 2183.
 
[181] Id. (“And if we were ever to apply the [Appointments] Clause to dual office-holding, we would not start here.”).
 
[182] Id.
 
[183] Id.
 
[184] The Board or Commission can limit the chairperson’s appointment power.  See 42 U.S.C. § 5841(a)(4) (2018) (“The appointment by the Chairman of the heads of major administrative units under the Commission shall be subject to the approval of the Commission.”).  A chairperson’s power can also be limited by internal agency policies that the Board or Commission establishes.  See Division of Powers and Responsibilities, supra note 123, at 108 (comparing the NTSB chairperson with the Chemical Safety and Hazard Investigation Board chairperson).
 
[185] See U.S. Const. art. II, § 2, cl. 2.; 5 U.S.C. §§ 3345–3349 (2018).
 
[186] Id. § 3345(a).
 
[187] Id. § 3349(c)(1).
 
[188] The FVRA also excludes commissioners of the FERC because FERC is organized part of the Department of Energy.  Id. § 3349(c)(1); Organizational Chart, U.S. Dep’t of Energy, https://www.energy.gov/leadership/organization-chart [https://perma.cc/M666-AVK5].
 
[189] See Division of Powers and Responsibilities, supra note 123, at 102; Authority of the Chemical Safety and Hazard Investigation Board to Delegate Power, supra note 174, at 29.
 
[190] See Authority of the Chemical Safety and Hazard Investigation Board to Delegate Power, supra note 174, at 29.
 
[191] Id.  The Board can name someone to exercise the functions of a chair, but they cannot name an acting chair. Id. at 31.  Currently, the Chemical Safety and Hazard Investigation Board has an Interim Executive Authority who serves as de facto chair.  Interim Executive Authority Kristen Kulinowski, The Chemical Safety & Hazard Investigation Bd., https://www.csb.gov/about-the-csb/board-members/board-member-kristen-kulinowski-/ [https://perma.cc/H9DZ-EDZZ].
 
[192] See Acting Attorney General, supra note 176, at 1. However, if the FVRA does not apply and there is a specific statute on successions, then the statute trumps the FVRA.
 
[193] 279 F. Supp. 3d 307, 311–12 (D.D.C. 2018).
 
[194] Id. at 314–15.
 
[195] Id. at 312–13.

[196] Id. at 322 (internal quotation omitted).
 
[197] Id. at 323.

[198] Id.
 
[199] Id. at 324–29. The Court relied primarily on the first two principles.
 
[200] Id. at 324 (quoting J.E.M. Ag Supply, Inc. v. Pioneer Hi-Bred Int’l, Inc., 534 U.S. 124, 143–44 (2001)).
 
[201] Id.
 
[202] Id. (quoting Nat’l Ass’n of Home Builders v. Defs. of Wildlife, 551 U.S. 644, 662 (2007)).
 
[203] Id. at 327 (internal citations omitted); U.S. Const. art. II, § 3.
 
[204] See English, 279 F. Supp. 3d at 329.
 
[205] 47 U.S.C. § 155(a) (2018) (emphasis added).
 
[206] 42 U.S.C. § 5841(a)(1) (2018) (emphasis added).
 
[207] 12 U.S.C. § 1812(b)(3) (2018) (emphasis added).
 
[208] 5 U.S.C. § 3345(a)(1)–(3) (2018) provide options for who a President can appoint on an acting basis. Besides employees, the President can appoint anyone outside of the agency who has a PAS position to be acting chair.  That is exactly what happened in English v. Trump because the President appointed the Office of Management and Budget Director to be acting chairperson of the Consumer Financial Protection Bureau.
 
[209] See generally Federal Elections Campaign Act Amendments of 1976, Pub. L. No. 94–283, 90 Stat. 475 (1976).
 
[210] 42 U.S.C. § 7412(r)(6)(B) (2018) (Chemical Safety and Hazard Investigation Board); 15 U.S.C. § 2053(a) (2018) (CPSC); 12 U.S.C. § 242 (2018) (Federal Reserve); 5 U.S.C. § 1203(a) (2018) (MSPB); 49 U.S.C. § 1111(d) (2018) (NTSB); 5 U.S.C. § 593(b)(1) (2018) (ACUS); 54 U.S.C. § 304101(e)(1)(A) (2018) (Advisory Council on Historic Preservation); 7 U.S.C. § 2(a)(2)(B) (2018) (CFTC); 12 U.S.C. § 1812(b)(1) (2018) (FDIC); 45 U.S.C. § 231f(a) (2018) (Railroad Retirement Board).
 
[211] 42 U.S.C. § 1975(d)(2) (2018) (Commission on Civil Rights); 52 U.S.C. § 20923(c)(1) (2018) (EAC); 52 U.S.C. § 30106(a)(5) (2018) (FEC); 42 U.S.C. § 7171(b)(1) (2018) (FERC); 46 U.S.C. § 301(c)(1) (2018) (FMC); 5 U.S.C. § 7104(b) (2018) (FLRA); 15 U.S.C. § 41 (2018) (FTC); 30 U.S.C. § 823(a) (2018) (Mine Safety and Health Review Commission); 29 U.S.C. § 153(a) (2018) (NLRB); 45 U.S.C. § 154 (2018) (NMB); 42 U.S.C. § 5841(a)(1) (2018) (NRC); 29 U.S.C. § 661(a) (2018) (OSHRC); 39 U.S.C. § 502(d) (2018) (PRC); 49 U.S.C. § 1301(c)(1) (2018) (STB); 42 U.S.C. § 2286(c)(1) (2018) (Defense Nuclear Facilities Safety Board); 42 U.S.C. § 2000e-4(a) (2018) (EEOC); 12 U.S.C. § 2241(a) (2018) (FCA); 47 U.S.C. § 155(a) (2018) (FCC); 19 U.S.C. § 1330(c)(1) (2018) (ITC); 12 U.S.C. § 1752a(b)(1) (2018) (National Credit Union Administration); 29 U.S.C. § 780(c) (2018) (National Council on Disability); 15 U.S.C. § 78d (2018) (SEC); 39 U.S.C. § 202(a)(1) (2018) (USPS); 22 U.S.C § 290h–5(a)(1) (2018) (African Development Foundation); 42 U.S.C § 12651a(b)(1) (2018) (Corporation for National and Community Service); 5 U.S.C. § 8472(b)(1) (2018) (Federal Retirement Thrift Investment Board); 16 U.S.C. § 831a(2) (2018) (TVA).
 
[212] “Statutory duties” is a broad term, but the goal of this Table is to identify agency chairs that have specific statutory duties, no matter how significant, as opposed to broad or no language.  For example, the only reference to the chair of the Chemical Safety and Hazard Investigation Board is vague language that the chair “shall be the Chief Executive Officer of the Board and shall exercise the executive and administrative functions of the Board.”  42 U.S.C. § 7412(r)(6)(B) (2018).  Although regulations may provide more clarity, the fact that OLC only looked at the statute is instructive. See Division of Powers and Responsibilities Between the Chairperson of the Chemical Safety and Hazard Investigation Board and the Board as a Whole, 24 Op. O.L.C. 102, 103 (2000).
 
[213] 15 U.S.C. § 2053(f) (2018) (СPSC); 12 U.S.C. §§ 225b(a), 347b(b)(2)(A)(ii) (2018) (Federal Reserve); 5 U.S.C. § 1204(i)–(j) (2018) (MSPB); 49 U.S.C. § 1111(e) (2018) (NTSB); 5 U.S.C. § 595(c) (2018) (ACUS); 54 U.S.C. § 304105(a) (2018) (Advisory Council on Historic Preservation); 7 U.S.C. § 2(a)(6) (CFTC); 12 U.S.C. § 1831z(b) (2018) (FDIC).
 
[214] 52 U.S.C. § 30107(a)(3) (2018) (FEC); 42 U.S.C. § 7171(c) (2018) (FERC); 46 U.S.C. § 301(c)(3) (2018) (FMC); Reorg. Plan No. 8 of 1950, §1(a), 64 Stat. 1264, reprinted in 5 U.S.C. app. at 127 (2018) (FTC); 42 U.S.C. § 5841(a)(1)–(4) (2018) (NRC); 29 U.S.C. § 661(e) (2018) (OSHRC); 39 U.S.C. § 504(a) (2018) (PRC); 49 U.S.C. § 1301(c)(2) (2018) (STB); 42 U.S.C. §§ 2286(c)(2)–(3), (7)(A)–(B) (2018) (Defense Nuclear Facilities Safety Board); 42 U.S.C. § 2000e-4(a) (2018) (EEOC); 12 U.S.C. § 2244(a)–(c) (2018) (FCA); 47 U.S.C. § 155(a),(e) (2018) (FCC); 19 U.S.C. § 1331(a) (2018) (ITC); 12 U.S.C. § 1752a(e) (2018) (National Credit Union Administration);  29 U.S.C. § 783(a)(1) (2018) (National Council on Disability); Reorg. Plan No. 10 of 1950, §1(a), 64 Stat. 1264, reprinted in 5 U.S.C. app. at 127 (2018) (SEC); 42 U.S.C. § 12651b(c)(1) (2018) (Corporation for National and Community Service); 5 U.S.C. § 8476(a)(2) (2018) (Federal Retirement Thrift Investment Board);
 
[215] 42 U.S.C. § 7412(r)(6)(B) (2018) (Chemical Safety and Hazard Investigation Board); 45 U.S.C. § 231f(a) (2018) (Railroad Retirement Board).
 
[216] 42 U.S.C. § 1975(d)(2) (2018) (Commission on Civil Rights); 5 U.S.C. § 7104(b) (2018) (FLRA); 30 U.S.C. § 823(b)(2) (2018) (Mine Safety and Health Review Commission); 29 U.S.C. § 153(a) (2018) (NLRB); 45 U.S.C. § 154 (2018) (NMB); 52 U.S.C. § 20923(c)(1) (2018) (EAC); 39 U.S.C. § 202(a)(1) (2018) (USPS); 22 U.S.C § 290h–5(a)(1) (2018) (African Development Foundation); 16 U.S.C. § 831a(2) (2018) (TVA).
 
[217] While the law explicitly changed the pay plan of the Chairperson of the Advisory Council on Historical Preservation, current Council Members are presumed to still be compensated under the PD pay plan.  54 U.S.C. § 304101(e)(1)(D) (2018); Plum Book, at 147; id. at 152 (CPSC, higher EX level than members); id. at 168 (Federal Reserve, higher EX level than members); id. at 175 (MSPB, higher EX level than members); id. at 186 (NTSB, higher EX level than members); id. at 147 (ACUS, only chair gets a salary); id. at 151 (CFTC, higher EX level than members); id. at 164 (FDIC, higher EX level than members); id. at 195 (Railroad Retirement Board, higher EX level than members).
 
[218] Id. (FERC, higher EX level than members); id. at 167 (FMC, higher EX level than members); id. at 166 (FLRA, higher EX level than members); id. at 168 (FTC, higher EX level than members); id. at 167 (Mine Safety and Health Review Commission, higher EX level than members); id. at 180 (NLRB, higher EX level than members); id. at 181 (NMB, higher EX level than members); id. at 187 (NRC, higher EX level than members); id. at 189 (OSHRC, higher EX level than members); id. at 194 (PRC, higher EX level than members); id. at 126 (STB, higher EX level than members); id. at 160 (EEOC, higher EX level than members); id. at 162 (FCA, higher EX level than members); id. (FCC, higher EX level than members); id. at 210 (ITC, higher EX level than members); id. at 178 (National Credit Union Administration, higher EX level than members); id. at 195 (SEC, higher EX level than members).
 
[219] Id. at 150 (Chemical Safety and Hazard Investigation Board, same EX level as members).
 
[220] Id. (Commission on Civil Rights, same EX level as members); id. at 208 (EAC, same EX level as members); id. at 164 (FEC, same EX level as members); id. at 154 (Defense Nuclear Facilities Safety Board, same EX level as members).
 
[221] For the FCC Chairperson, see 47 U.S.C. §§ 155(a),(e) (2018) and 47 C.F.R. §§ 0.211(d),(f) (2019).  For the FCA Chairperson, see 12 U.S.C. §§ 2244(a)(3), 2245(b), 2270 (2018) and 12 C.F.R. §§ 602.23(b) (2019), 12 C.F.R. § 608.805(b)–(c) (2019), 12 C.F.R. § 608.839(a) (2019).  For the FERC Chairperson, see 42 U.S.C. §§ 7171(c), (e) (2018) and 18 C.F.R. §§ 3b.224(e), 3b.221(e) (2019).  For the FMC Chairperson, see 46 U.S.C. § 301(c)(3)(A) (2018) and 46 C.F.R. §§ 501.5(a), 503.67(c)–(d), 505.3(a)–(c) (2019).  For the NRC Chairperson, see 42 U.S.C. § 5841(a)(1)–(2) (2018).  For the FDIC Chairperson, see 12 U.S.C. § 1831z(b) (2018).  For the CSPC Chairperson, see 15 U.S.C. § 2053(f)(1) (2018) and 16 C.F.R. §§ 1014.8(c)–(d), 1052.4(a) (2019). For the NTSB Chairperson, see 49 U.S.C. § 1111(e) (2018).  For the MSPB Chairperson, see 5 U.S.C. § 1204(j) (2018) and 5 C.F.R. §§ 1205.32(a), 1207.170(c)(6), 1215.32(a), 1215.7(a)(1), 1215.23 (2019).

Filed Under: JOL Commentary, JOL Online Article, Uncategorized

by jbakst on August 31, 2019

The Standard Business Deduction

The Standard Business Deduction

Kathleen DeLaney Thomas*

In 2017, Congress passed the most sweeping tax reform bill[1]the country has seen in over 30 years.[2]The new legislation responded to many long-held concerns about the U.S. tax system, particularly that taxes were too high and that the corporate and international tax regimes were not competitive.[3]In response to those concerns, Congress lowered individual income tax rates, drastically reduced the corporate tax rate from 35% to 21%, and shifted away from a worldwide system of international taxation.[4]The bill also lowered taxes for pass-through businesses, such as partnerships, S-corporations, and sole proprietorships, by offering a new deduction for up to 20% of the business’s net earnings.[5]

In the months leading up to the tax reform bill, members of Congress also promised much needed simplification of the U.S. tax system, even going so far as to suggest that future tax returns would fit on a postcard.[6]In one respect, Congress delivered on this promise to simplify the tax system. The new legislation doubled the standard deduction, from roughly $6,000 to $12,000 for a single individual.[7]This means that individuals will now claim itemized deductions (e.g., charitable contributions or mortgage interest) only if, in the aggregate, those deductions exceed $12,000 ($24,000 for a married couple filing jointly). The higher standard deduction essentially means that fewer taxpayers will itemize their deductions, which saves time and simplifies tax return preparation.[8]

However, while the 2017 Tax Reform Bill simplifies personal deductions, the legislation does virtually nothing to simplify the tax rules for businesses. Small business owners will not see any reduction in complexity for reporting income, tracking expenses, or preparing tax returns. Instead, the new pass-through deduction only adds further complexity by inserting more steps into the process of calculating a business’s net income.

In short, Congress failed to deliver on its promise to provide simplification when it comes to small business owners. Congress could do more to reduce the complexity faced by these taxpayers, who must pay estimated taxes, track business expenses, and file complicated tax returns. To that end, this essay proposes a “standard business deduction.”[9]

A standard business deduction (“SBD”) would work like the regular standard deduction. The latter is a fixed amount that is claimed in lieu of itemized deductions (i.e., non-business deductions like charitable contributions, mortgage interest, or state and local taxes). The SBD would be a fixed amount claimed in lieu of deducting businessexpenses. Taxpayers claiming the SBD would report their gross business earnings, subtract the SBD, and arrive at net business income. No Schedule C would be necessary. Like claiming the standard deduction, claiming the SBD would be optional for the taxpayer. If a taxpayer’s actual business expenses exceeded the SBD, she could instead opt to claim those expenses.

The SBD could revolutionize tax return filing for small businesses. Imagine, for example, an independent contractor who, under the current system, must track numerous business expenses during the year and spend time filling out a Schedule C when she files her tax return. If that taxpayer’s gross earnings were reported on a Form 1099, she could automatically import that amount into a tax software program. The software could apply the SBD and calculate her net business income for both income and self-employment taxes within a matter of seconds. If she then claimed the regular standard deduction, her entire tax return could be prepared in minutes.

The discussion below outlines the following features of an SBD:

  • Based on a fixed percentage of gross receipts (e.g., 60%);
  • Offered only to individuals with gross business receipts less than $100,000 and total adjusted gross income less than $150,000;
  • Offered only to individuals who earn income subject to Form 1099 reporting (i.e., not cash-based businesses);
  • Not offered to labor-only businesses with little or no expenses (e.g., consulting, childcare).

 

Amount of SBD

 

The most important issues in implementing an SBD are determining the amount of the deduction and determining which taxpayers could claim the deduction. Because an SBD would be optional (like the regular standard deduction), setting the deduction too high would result in large windfalls for taxpayers and revenue loss for the government. This is because taxpayers with expenses below the SBD would claim it, while those with expenses well in excess of the SBD may continue to claim their actual expenses. On the other hand, an SBD set too low would not provide significant simplification benefits because most taxpayers would forego it.

Ideally, an SBD would roughly approximate business expenses for most taxpayers, although a slight windfall may be acceptable, as it would act as a subsidy for small businesses. The best way to approximate actual expenses would be to set the SBD as a fixed percentage of gross receipts, rather than a flat dollar amount (like the regular standard deduction). For example, an SBD of 60% would allow taxpayers to deduct 60% of their gross receipts as business expenses and report 40% as net business income. This would mean an independent contractor earning $50,000 per year would claim a $30,000 SBD (60% of $50,000) and report $20,000 of net business income on her tax return. This amount would then be subject to further reduction for itemized deductions or the regular standard deduction.

In earlier work, I proposed a 60% deduction for gig economy workers based on historic average profit ratios for small sole proprietorships.[10]Further study may reveal a more appropriate percentage.[11]Of course, different industries will have different profit ratios: some lines of business involve numerous expenses, and some involve very few expenses. Although developing separate SBDs for each industry would be more accurate, it would create too much complexity and would also create more opportunities for taxpayers to “game” the system by trying to characterize themselves as part of a more favorable industry.

Notwithstanding the simplicity of a single SBD, another good alternative would be two SBDs. Certain businesses that rely heavily on services and generally do not involve significant expenses, such as childcare, could be identified and given a very low SBD between zero and 10%. Or, these labor-only businesses could be made ineligible for the SBD altogether. Businesses with significant expenses (e.g., an Uber driver who incurs gasoline and car maintenance expenses) would be given a higher SBD (e.g., 60%). The rate of the SBD could be set by Congress, or it could be delegated to Treasury to determine and adjust the percentage as necessary.

 

Scope of the SBD

 

At a certain level of earnings, taxpayers presumably have better capacity to efficiently track and manage their business expenses. The SBD should therefore be limited to taxpayers with gross business receipts below a certain threshold, for example $100,000. This income cap would also mitigate potential revenue loss, making implementation of the SBD less costly: only taxpayers earning relatively low amounts of income and claiming relatively low expenses would be eligible. A cap on total adjusted gross income may also be desirable, such as a $150,000 maximum. This would prevent a high-income wage earner with a small side job (e.g., a professional earning a large salary who also takes on a small consulting project) from claiming the SBD and ensure that it is targeted only at truly “small” business owners.

Further, the SBD should be limited to those situations where taxpayers are likely reporting their gross receipts accurately. It would be undesirable, for example, to offer a 60% SBD to a cash business[12]that was reporting only half of its gross receipts to the government and was fraudulently concealing the rest. To limit the SBD to highly compliant taxpayers, it should be available only when taxpayers’ business income is reported on a Form 1099. Studies show that the vast majority of income reported on a Form 1099 is reported accurately,[13]and thus limiting the SBD to 1099 earnings would be an effective way to target compliant taxpayers.[14]

Limiting the SBD to workers who receive a Form 1099 also has the effect of limiting it to individual taxpayers and not corporations, since the 1099 rules exempt corporations.[15]This limitation makes sense. Individual business owners are most likely to have a difficult time managing their tax obligations and are more likely to have to spend resources on tax compliance that are disproportionate to their income. This group would most benefit from the SBD. Businesses operating as corporations, or in another entity form, are presumably more sophisticated because forming those entities entails legal requirements (e.g., articles of incorporation) not required of sole proprietors.[16]

An SBD would work well with gig economy workers who are paid by online platform companies (e.g., Uber, Task Rabbit, Etsy) and who, studies show, would greatly benefit from tax simplification.[17]However, the deduction could also apply to other independent contractors who otherwise fall under the income threshold and receive a Form 1099.[18]

 

Potential Costs         

 

One concern policymakers may have in implementing an SBD is potential revenue loss, since many taxpayers who claim it will deduct a higher amount than their actual expenses. There are several reasons, however, that this potential cost does not detract from the desirability of an SBD. First, limiting the SBD to taxpayers below a certain earnings threshold will minimize revenue loss. Second, not all taxpayers claiming the SBD will receive a windfall. Some taxpayers will opt to claim the SBD even when their actual expenses are more than the SBD, simply to avoid the hassle of tracking and reporting expenses.[19]Even an SBD that generated net revenue loss may be justified because it would reduce the wasteful social cost of taxpayers tracking and reporting business expenses when relatively minor amounts of tax revenue are at stake.

Further, an SBD implemented in conjunction with 1099 reporting should result in better voluntary tax compliance and less evasion overall. Taxpayers accurately report 1099 income the vast majority of the time,[20]and requiring 1099 reporting as a condition of claiming the SBD may encourage taxpayers to demand more information reporting from payers. An SBD should also reduce the over claiming of expenses,[21]further improving compliance with the tax law.An SBD would also reduce IRS enforcement costs, since the IRS would not have to monitor taxpayers with 1099 income who claim the SBD.

Potential behavioral distortions must also be considered and weighed against the SBD’s benefits. If taxpayers engage in gaming techniques, the cost of an SBD may be higher than anticipated. For example, taxpayers may bargain to share deductible costs with another party, thereby reducing their actual business expenses while still maintaining the same SBD.

Consider a housepainter who typically is paid $1,000 per job, $200 of which is spent on paint and $400 of which is spent paying an assistant. Since his expenses would normally be $600 per job, a 60% SBD would be appropriate. Under normal circumstances, the painter should net $400 per job. But if the painter knew he could claim the 60% SBD no matter what, he might instead ask the homeowner to buy the paint directly and agree to reduce his $1000 fee to $800 to compensate. In that case, the painter would earn $800 in gross receipts, and claim $480 (60% of $800) as his SBD. With no change in the economics of the arrangement, he would have reduced his taxable income from $400 to $320 ($800 gross receipts minus $480 SBD).

Much of this gaming potential should be eliminated by the 1099 requirement. For example, a painter who paints residences and who doesn’t accept credit cards or online payments would not receive a 1099 and therefore wouldn’t qualify for the SBD.

What about workers who get paid by large platform companies, who do receive 1099s and would qualify for the SBD? Cost-sharing techniques are less likely to occur in that setting, because the more costs the payer takes on, the more the payer would look like an employer for tax purposes.[22]Generally, platform companies want to avoid employer characterization because it brings with it a number of costs and legal obligations that are avoided through independent contractor classification, such as labor and employment law protections and employment taxes. Thus, if Uber wants to continue to treat its drivers as independent contractors rather than employees for tax law purposes, it is unlikely to start paying for gas and car maintenance expenses for its drivers.

This still leaves the issue of the housepainter who accepts credit card payments and therefore receives a 1099-K, but who could also engage in cost-sharing with his customers to game the SBD. The number of taxpayers who fit into this group may be insignificant. If not, one solution might be to offer the SBD only to taxpayers who receive 1099s from large payers (like internet platform companies), who would be less willing to enter into these cost-sharing arrangements. For example, the SBD could be limited to gig economy workers only.

The SBD would also make independent contractor work more attractive from a tax perspective than employment (since employees would not be offered an SBD), which may have undesired consequences. However, independent contractor status has always offered tax advantages over employment status, such as the ability to deduct business expenses in full[23]and greater ease in concealing earnings from the IRS. The recent tax reform bill has made independent contractor status even more favorable, particularly by bestowing the section 199A deduction[24]upon independent contractors but not employees, and by repealing the deductibility of employee business expenses. With these differences already embedded in the tax law, it is unclear how much influence—if any—the SBD would have on taxpayers’ employment decisions. There are also many non-tax benefits that come with employment that influence taxpayers’ decisions, such as the right to overtime, minimum wage, and health benefits.

 

Important Caveats

 

There is currently a major gap in the information reporting rules,[25]which must be fixed in conjunction with implementing an SBD. Specifically, the Form 1099-K rules provide that certain online intermediaries (e.g., platform companies like Uber, Etsy, or TaskRabbit) need not report payments to a worker until a threshold of $20,000 and 200 transactions is reached.[26]This threshold is far too high, as a significant number of gig economy workers do not earn enough to reach it and therefore do not receive 1099s.[27]Any proposal to offer these workers an SBD must also require that workers earning over $600 receive a Form 1099, which is consistent with the reporting threshold for independent contractors under the Form 1099-MISC rules.[28]

Although not mandatory for an SBD, Congress would also be well advised to consider implementing non-employee withholding in conjunction with these proposals. A withholding regime would eliminate the need for independent contractors to make quarterly estimated payments and would also reduce taxpayers’ concerns about properly budgeting for taxes. If small business owners could avoid having to remit tax themselves and avoid tracking expenses, their interactions with the tax system would be vastly simpler. Withholding would also have the added benefit of promoting better compliance and enhancing revenue collection for the government.[29]

 

***

In sum, an SBD would greatly simplify the tax system for small business owners. Taxpayers who chose to claim it could be relieved of the burden of tracking business expenses during the year and could self-prepare their tax returns without the need for expensive tax preparation assistance. Not only would the SBD reduce socially wasteful taxpayer compliance costs, it would also reduce IRS enforcement costs. Such simplification should be attractive to policymakers on both sides of the aisle and would benefit the government and taxpayers alike.

* George R. Ward Term Professor of Law, University of North Carolina School of Law. B.S., The College of William & Mary, 2001; J.D., New York University School of Law, 2005; LL.M. (Taxation), New York University School of Law, 2010.  The author is grateful to David Walker and participants at a tax workshop at Columbia Law School for helpful discussions about this essay.
 
[1] Tax Cuts and Jobs Act, Pub. L. No. 115-97, 131 Stat. 2054 (2017).
 
[2] William G. Gale et al., Tax Policy Ctr., Effects of the Tax Cuts and Jobs Act: A Preliminary AnalysisII (2018), https://www.brookings.edu/wp-content/uploads/2018/06/ES_20180608_tcja_summary_paper_final.pdf [https://perma.cc/YWJ4-FE3M].
 
[3] See, e.g.,U.S. Dep’t of Treasury, Unified Framework for Fixing Our Broken Tax Code 2 (2017), https://www.treasury.gov/press-center/press-releases/documents/tax-framework.pdf[https://perma.cc/JNK3-Q2CC];Task Force on Poverty, Opportunity, and Upward Mobility, A Better Way: Our Vision for a Confident America 9-10 (2016), https://www.heartland.org/_template-assets/documents/publications/abetterway-poverty-policypaper.pdf[https://perma.cc/CJW4-ZXSK].
 
[4] Gale et. al., supranote 2, at 1–2, 5–6.
 
[5] See id. at 4; I.R.C. § 199A (2018).
 
[6] See, e.g.,Task Force on Poverty, Opportunity, and Upward Mobility, supra note 3, at 16.
 
[7] Gale et al., supranote 2, at 3.
 
[8] See id. The tax reform bill also reduced or eliminated some itemized deductions. Id.
 
[9] The Hillary Clinton campaign similarly proposed a “standard business deduction” in 2016, though it does not appear that any details about how the deduction would work were ever released. See Office of Hillary Rodham Clinton, https://www.hillaryclinton.com/issues/small-business/[https://perma.cc/B87F-G3E3].
 
[10] Kathleen DeLaney Thomas, Taxing the Gig Economy, 166 U. Pa. L. Rev. 1415, 1464 (2018).
 
[11] See, e.g.,Alastair Fitzpayne et al., Tax Simplification for Independent Workers, The Aspen Institute 4 (2018), https://assets.aspeninstitute.org/content/uploads/2018/09/Tax-Simplification-for-Independent-Workers_September-2018_Aspen-Institute-Future-of-Work-Initiative.pdf?_ga=2.113571655.1732760245.1563945034-138726258.1563945034[https://perma.cc/VM2D-JKNN] (suggesting 20%).
 
[12] Cash economy businesses are notoriously noncompliant. I use the term “cash” here to mean not just businesses that operate all in cash, but businesses that earn income that largely goes unreported to the IRS.  For example, a plumber may take checks from customers but still not report that income to the IRS. But if a plumber primarily uses credit cards, he may receive a Form 1099-K from the credit card company, and would therefore not be a cash economy business.
 
[13] See, e.g., Internal Revenue Serv., Tax Gap Estimates for Years 2008-2010 5(2016) https://www.irs.gov/pub/newsroom/tax%20gap%20estimates%20for%202008%20through%202010.pdf[https://perma.cc/MHM9-FGFD] (reporting a 93 percent compliance rate when “substantial information reporting” is present).
 
[14] One issue is how to treat taxpayers who earn multiple types of income, some of which is reported on a Form 1099 and some of which is not. One approach would be to allow the taxpayer to claim the SBD as long as more than half of his gross business receipts are reported on a Form 1099. Although this would encourage some taxpayers to underreport cash to ensure that the 1099 threshold is met, underreporting cash is already such a pervasive problem that this is unlikely to move the needle. Under the current system without an SBD, taxpayers already have a large incentive to report their 1099 earnings but not report some (or all) of their non-1099 earnings.
 
[15] The 1099-MISC rules generally do not require reporting of payments to C corporations and S corporations, however there is no exception for payments made to LLCs taxed as partnerships. See, e.g., Instructions Form 1099-MISC (2019), Internal Revenue Serv. (Nov. 28, 2018)https://www.irs.gov/instructions/i1099msc [https://perma.cc/6W2B-YGLS]. Although this essay generally advocates offering an SBD only to those businesses operating as individuals (not multiple-member entities), in theory, members of an LLC taxed as a partnership could each claim the SBD on their share of the business’s income.
 
[16] Single-member entities could be allowed to opt in. However, it’s likely that most low-earning small businesses do not operate in entity form.
 
[17] See, e.g.,Caroline Bruckner, Kogod Tax Pol’y Ctr, Shortchanged: The Tax Compliance Challenges of Small Business Operators Driving the On-Demand Platform Economy3 (May 23, 2016), https://www.american.edu/kogod/research/upload/shortchanged.pdf [https://perma.cc/CE3L-2G5K].
 
[18] However, as mentioned above, independent contractors in labor-only industries, who incur little to no business expenses, should either be excluded from the SBD or permitted to take only a small SBD.
 
[19] There is evidence that taxpayers do this when it comes to claiming the regular standard deduction instead of itemizing. See, e.g.,Mark M. Pitt & Joel Slemrod, The Compliance Cost of Itemizing Deductions: Evidence from Individual Tax Returns, 79 Am. Econ. Rev. 1224 (1989); Youssef Benzarti, How Taxing is Tax Filing? Leaving Money on the Table Because of Compliance Costs (Mar. 2015),https://site.stanford.edu/sites/default/files/how_taxing_is_tax_filing_benzarti_v7.pdf [https://perma.cc/E3ZD-ZMWQ].
 
[20] See supra note 14.
 
[21] See, e.g.,Joel Slemrod et al., Nat’l Bureau of Economic Res., Does Credit-Card Information Reporting Improve Small-Business Tax Compliance? 21412 (2015), https://www.nber.org/papers/w21412.pdf[https://perma.cc/8SXE-TJSL](discussing the over-claiming of expenses in response to 1099-K reporting).
 
[22] See Rev. Rul. 87-41, 1987-1 C.B. 296 (“If the person or persons for whom the services are performed ordinarily pay the worker’s business and/or traveling expenses, the worker is ordinarily an employee.”). However, determining whether a worker is an employee or an independent contractor for tax purposes depends upon the application of numerous factors, as developed by the common law, no one of which is controlling.
 
[23] Prior to the recent tax reform bill, employee business expenses were “miscellaneous itemized deductions,” which meant they were subject to an income floor and only available to taxpayers who itemized their deductions. Under the new rules, employee business deductions are entirely nondeductible through the end of 2025. Tax Cuts and Jobs Act, Pub. L. No. 115-97, §11045, 131 Stat. 2054, 2088 (2017).
 
[24] Taxpayers could be offered boththe SBD (an above line deduction that reduces gross income) and the section 199A deduction (a below the line deduction that reduces adjusted gross income in arriving at taxable income). Although the combination of the two could result in significant tax benefits for eligible taxpayers, it is important to remember that the SBD would only be offered to workers earning less than $100,000 in gross receipts, many of whom would not be able to deduct the full 20 percent under section 199A. In a sense, offering an SBD to truly small businesses in addition to section 199A would put these workers on a more level playing field with larger businesses that likely benefit much more from the 199A deduction.
 
[25] See, e.g.,Thomas, supra note 10, at 1426–28; Shu-Yi Oei & Diane Ring, Can Sharing Be Taxed?,93 Wash. U. L. Rev. 989, 1037 (2016); Kelly Phillips Erb, Credit Cards, the IRS, Form 1099-K and the $19,399 Reporting Hole, Forbes (Aug. 29, 2014, 11:13 AM), http://www.forbes.com/sites/kellyphillipserb/2014/08/29/credit-cards-the-irs-form-1099-k-and-the-19399-reporting-hole/#3c532d86c37b [https://perma.cc/V9EZ-3PC3].
 
[26] See I.R.C. § 6050W(a), (e) (2018).
 
[27] For further discussion, see Thomas, supra note 10, at 1427–28.
 
[28] See I.R.C. § 6041(a) (2018).
 
[29] See Kathleen DeLaney Thomas, The Modern Case for Withholding, 53 U.C. Davis L. Rev. (forthcoming 2019).

Filed Under: JOL Commentary, JOL Online

by on November 6, 2018

WARNing: The “Liquidating Fiduciary” Exception Should Not Exist

WARNing: The “Liquidating Fiduciary” Exception Should Not Exist

Jonathan C. Gordon*

 

Abstract

The Worker Adjustment and Retraining Notification Act requires employers of a sufficient size to provide sixty days’ notice to employees affected by plant closings or mass layoffs. The Department of Labor, meanwhile, said that fiduciaries that are liquidating a business do not have to comply with that notice requirement. Courts have uniformly held that such a “liquidating fiduciary” exception exists. I disagree; there is no such exception.

Using traditional tools of statutory interpretation, I submit that Congress did not mean for such an exception to apply. Thus, Congress should clarify the WARN Act and make clear that there is no exception for “liquidating fiduciaries.” Until then, however, courts should stop applying the exception.

 

Introduction

Congress passed the Worker Adjustment and Retraining Notification Act (the “WARN Act” or “WARN” or the “Act”) in 1988.[1] The Act requires certain employers to provide sixty days’ notice to employees affected by plant closings or mass layoffs.[2] The Act defines “employer” as “any business enterprise that employs—(A) 100 or more employees, excluding part-time employees; or (B) 100 or more employees who in the aggregate work at least 4,000 hours per week (exclusive of hours of overtime).”[3]

If an employer fails to give proper notice, the “employer . . . shall be liable to each aggrieved employee who suffers an employment loss as a result of such closing or layoff for” backpay and benefits.[4] That backpay is “a statutory form of severance pay.”[5] More specifically, because severance pay comes in two forms—(i) pay in lieu of termination notice and (ii) pay based on the employee’s length of service—WARN backpay is “severance pay in lieu of notice, imposed by statute.”[6] As one bankruptcy court explained:

WARN gives the employer a choice—it may provide 60 days’ notice of closing or layoff to its employees, keeping the business open and incurring operating expenses during that period; or it may shut down its operations with little or no notice to its employees, saving operating expenses, but providing back pay to its employees, in compensation for the lack of notice, in accordance with a statutory formula.[7]

The Act further requires that the Department of Labor (the “Department”) “prescribe such regulations as may be necessary to carry out” the Act.[8] In the Department’s Analysis of the Final Rule, the Department commented that a “liquidating fiduciary” does not satisfy the Act’s definition of “employer.”[9] Specifically, the Department wrote:

[A] fiduciary whose sole function in the bankruptcy process is to liquidate a failed business for the benefit of creditors does not succeed to the notice obligations of the former employer because the fiduciary is not operating a “business enterprise” in the normal commercial sense. In other situations, where the fiduciary may continue to operate the business for the benefit of creditors, the fiduciary would succeed to the WARN obligations of the employer precisely because the fiduciary continues the business in operation.[10]

A proper understanding of the “liquidating fiduciary” exception first requires a proper understanding of a liquidating fiduciary. When a business is financially distressed, it may choose to file for bankruptcy protection under the United States Bankruptcy Code. Typically, the business has two options: chapter 7 or chapter 11.[11]

If a business files under chapter 7, then a trustee is automatically appointed[12] to replace the debtor’s management and to liquidate the business.[13] Thus, the “liquidating fiduciary” exception is most applicable in chapter 7 bankruptcies—where a trustee (a fiduciary) is appointed to liquidate the business.[14]

If a business files under chapter 11, however, then a trustee is not automatically appointed.[15] Rather, the debtor’s management stays in possession of the business,[16] provided that the management does not engage in fraud or gross mismanagement.[17] As such, the debtor is called a “debtor in possession.”[18] The debtor in possession, however, has all the duties and responsibilities of a trustee.[19] Thus, just like trustees, debtors in possession are also fiduciaries.[20]

But in chapter 11, the debtor is not required to liquidate, though it may choose to do so.[21] Rather, chapter 11 permits the debtor to continue operating the business as a going concern while it restructures its debts.[22] Thus, it is not clear whether the “liquidating fiduciary” exception applies to chapter 11 debtors because the “sole function”[23] of a debtor in possession is not to liquidate.[24] Regardless, though courts dispute the proper contours of the exception, they do not dispute the exception’s existence. All the courts that have considered whether a “liquidating fiduciary” exception exists for fiduciaries in bankruptcy have uniformly answered in the affirmative.[25] Humbly, I submit that those courts have uniformly erred.

This Article proceeds in three parts. Part One examines some of the precedent on the “liquidating fiduciary” exception. Part Two presents my thesis—traditional tools of statutory interpretation prove that the WARN Act includes businesses being liquidated by fiduciaries, contrary to what courts uniformly have held. And Part Three explains that judicial deference to the Department’s interpretation is not warranted.

 

Part One: Examining the Precedent

Unfortunately, due to limited space, I cannot discuss all the cases that address the “liquidating fiduciary” exception.[26] That said, nothing in them would materially alter this discussion. Instead, I want to focus on two particular cases, In re Hanlin Group, Inc.[27] and In re United Healthcare Systems, Inc.[28]—each of which is noteworthy for a unique reason. Hanlin was the first court to determine whether a fiduciary in bankruptcy is subject to the WARN Act requirements. And United Healthcare, a decision from the Third Circuit, is the leading authority on the issue.

          I. Hanlin (Bankr. D.N.J. 1995)

Hanlin Group filed for bankruptcy protection under chapter 11 and, as a result, became a debtor in possession.[29] After filing its bankruptcy petition, Hanlin Group terminated employees without providing sixty days’ notice, as required by the WARN Act.[30] The employees’ union sought $1.2 million in damages for the layoffs.[31]

The court first looked at whether the debtor in possession was an employer under the WARN Act.[32] The court’s entire (and limited) analysis on the issue relied on the Department’s commentary.[33] The court did not refer to the statutory definition of “employer,” nor did the court consider what constitutes a “business enterprise.”[34] Rather, the court quoted the Department’s “liquidating fiduciary” exception before holding that Hanlin Group qualified as an employer because it “continued to operate the business as a whole for the benefit of all parties in interest.”[35] The court, thus, clearly adopted the exception to determine what qualifies as a WARN Act employer, even if the court found the exception inapplicable due to the specific facts.

In short, the first court to use the “liquidating fiduciary” exception to determine the status of an employer in bankruptcy, for purposes of the WARN Act, did so without an iota of statutory interpretation.

          II. United Healthcare (3d Cir. 1999)

Courts widely consider the Third Circuit’s decision in United Healthcare to be the leading authority on the issue.[36] United Healthcare featured a non-profit corporation (United Healthcare System, Inc.) in financial distress.[37] Because of its financial troubles, United Healthcare did the following:

  • United Healthcare’s board voted to sell the company’s assets and shut down the hospital.[38] As part of the shut down, the hospital surrendered its certificates of need to the New Jersey Department of Health and advised the department that it was closing.[39]
  • The hospital then voluntarily filed for chapter 11 bankruptcy relief.[40]
  • On the same day as its bankruptcy petition, the hospital, pursuant to the WARN Act, gave 60 days’ notice of termination to its approximately 1,300 employees.[41] The notice stated that the employees should continue reporting to work until the termination date (60 days).[42]
  • Because the hospital no longer had patients, however, employees did not perform their regular duties.[43] Rather, they “cleaned, took inventory and prepared the company’s assets for sale.”[44]
  • Within a month after the bankruptcy petition, the Official Committee of Unsecured Creditors of United Healthcare System (the “Committee”) asked the bankruptcy court “to order United Healthcare to terminate all employees immediately.”[45]
  • Before the court ruled on the Committee’s motion, United Healthcare dismissed 1,200 employees, forty-four days before the termination date.[46]

United Healthcare and the Committee then disputed whether these 1,200 employees were entitled to WARN Act back pay for the remaining forty-four days of the notice period.[47] The hospital believed that it did owe the employees for the back pay, but the Committee argued otherwise.[48] The Committee believed that United Healthcare was no longer a WARN Act “employer” because the hospital had surrendered its certificates of need with the aim to liquidate.[49]

The bankruptcy court, guided by the Department’s commentary, agreed with the hospital.[50] Because the hospital was still operating the business for the benefit of creditors,[51] the court held that the hospital’s employees were entitled to WARN Act back pay for the early termination.[52] The district court affirmed.[53] On appeal, the Third Circuit faced one question: “whether the [lower courts] correctly concluded United Healthcare continued as an ‘employer’ within the meaning of the WARN Act after filing for Chapter 11 bankruptcy . . . .”[54]

The court first turned to the Act’s definition of employer.[55] But the court found the definition “general and not especially helpful in determining whether a particular employer is subject to WARN.”[56] Nonetheless, the court pulled two requirements out of the definition: an employer (1) must employ a certain number of employees and (2) must be a “business enterprise,” which the court noted is not defined by the Act.[57] The court found that United Healthcare clearly met the first requirement, but it was less clear that United Healthcare remained a business enterprise.[58] The court pointed to the hospital’s contrasting activities. On one hand, the company had

surrendered its certificates of need, stopped treating patients, and entered bankruptcy to liquidate its assets. Each of these events precluded United Healthcare from performing the everyday business functions of a hospital and health care service. On the other hand, despite those events, United Healthcare remained a corporation that employed for sixteen days a substantial number of employees to whom it assigned various tasks all related to shutting down its operations.[59]

Because of this perceived ambiguity,[60] and because the term “business enterprise” had no statutory definition, the court quickly turned to the Department’s commentary for guidance.[61] The court found the commentary persuasive and adopted the Department’s “liquidating fiduciary” exception.[62] The relevant test, thus, was whether United Healthcare had continued “operating its business as a going concern.”[63]

The court’s initial finding of ambiguity, however, seems to rest on the assumption that a business enterprise is one performing “everyday business functions.”[64] This assumption is wrong.[65] Had the court interpreted the term “business enterprise,” instead of quickly turning to the Department, it would have found that the term does not require “everyday business functions.”[66] Rather, it would have found that the term’s meaning is clear.[67]

***

A common theme runs through the two above cases. Neither interpreted the statute to determine what constitutes a WARN employer. Hanlin does not refer to the statutory definition and gives no thought to what constitutes a “business enterprise.”[68] And while United Healthcare at least looked at the definition of “employer,” the court then assumed that a business enterprise must be “performing everyday business functions.”[69] Other than noting that the Act did not define “business enterprise,” the court did not do any other statutory interpretation before turning to the Department’s commentary.[70]

If either of these courts (or the other courts that have uniformly adopted the exception)[71] had more rigorously applied the traditional tools of statutory interpretation to the statute—rather than turning quickly to the Department’s commentary—they would have found that the WARN Act unambiguously includes businesses being liquidated by a fiduciary.

 

Part Two: Statutory Interpretation

Because the WARN Act defines “employer” to be “any business enterprise that employs” a certain number of people, the issue faced is first and foremost one of statutory interpretation—what does the term “business enterprise” mean under section 2101(a)(1) of the WARN Act?[72]  More specifically, does it include a business that is being liquidated by a fiduciary? Based on traditional tools of statutory interpretation,[73] the answer should be yes. Irrespective of the Department’s guidance, the Act’s text should control because of the Act’s (i) plain language, (ii) structure, (iii) legislative evidence, and (iv) purpose.

          I. Plain Language

Interpreting a statute requires first looking at the statute’s language.[74] Section 2101(a)(1) of the Act defines an employer as “any business enterprise that employs” 100 or more employees. The Act does not, however, define “business enterprise.”[75] “When Congress has not supplied a definition, [the Supreme Court] generally give[s] a statutory term its ordinary meaning.”[76] I suggest that the ordinary meaning of “business enterprise” is a business entity[77]—whether it be a large public corporation or a small private partnership. Under such an ordinary meaning, a business in bankruptcy is still a business enterprise even though it may be liquidating.

Critics of my interpretation may wonder why Congress would use redundant language; if Congress said “any business enterprise” then surely it meant something other than “any business” because Congress explicitly added another word.[78] Congress’ language, however, may be understandable as a term of art. Congress has used “business enterprise” when writing other laws[79] and has routinely referred to a “business enterprise” as a business:

  • Section 1221 of title 15 defines “automobile manufacturer” as “any person, partnership, corporation, association, or other form of business enterprise . . . .”[80] Thus, the language implies that a business enterprise is defined as a business, whether it be a partnership, corporation, or association.
  • Section 7108 of title 15 defines “women’s business enterprise” as “(A) a business or businesses owned by a woman or a group of women; or (B) the establishing, maintenance, or development of a business or businesses by a woman or a group of women . . . .”[81] Here, the language clearly equates “business enterprise” with “business.”
  • Section 3102 of title 22 defines “business enterprise” as “any organization, association, branch, or venture which exists for profitmaking purposes or to otherwise secure economic advantage . . . .”[82] This definition is synonymous with—arguably, even broader than—a for-profit business.
  • Section 1452 of title 28, in governing class action removals, excludes certain class actions that relate “to the internal affairs or governance of a corporation or other form of business enterprise . . . .”[83] A corporation, thus, is one form of a business enterprise. Other forms presumably include other business entities such as associations, partnerships, LLCs, etc.
  • Section 6705 of title 42 defines “minority business enterprise” to be “a business at least 50 per centum of which is owned by minority group members . . . .”[84] Yet again, the legislature has explicitly equated “business enterprise” with “business.”
  • Section 7141 of title 42 defines “minority business enterprise” to be a “firm, corporation, association, or partnership which is at least 50 percent owned . . . .”[85] A business enterprise, thus, includes corporations and other business entities.

In a similar vein, one district court, in giving jury instructions for a case on illegal gambling activity, explained that “a business enterprise usually involves a continuing course of conduct by persons associated together for a common purpose.”[86] On appeal, the Eighth Circuit found no error with the instructions.[87]

A business in liquidation could meet that definition: the business is a group of persons associated together (whether it be directors, managers, shareholders, or employees) continuously working together in a course of conduct—albeit that conduct is to further liquidation, rather than operations.[88] But even if that argument is not persuasive, a business in liquidation could still satisfy the definition of a business enterprise in United States v. Scavo.[89] Scavo only said that “a business enterprise usually involves a continuing course of conduct by persons associated together for a common purpose.”[90] So even if a debtor’s liquidation is not a continuous course of conduct, it is possible that the debtor is still a business enterprise, outside the usual universe suggested by Scavo.

Indeed, the Department itself even implied as much—that a liquidating business is still a business enterprise. The Department commented that a liquidating business is not a “‘business enterprise’ in the normal commercial sense.”[91] This language implies that a liquidating company is a business enterprise in some kind of non-normal or non-commercial sense. Likewise, the Third Circuit in United Healthcare found ambiguity because the company was not performing “everyday business functions.”[92] In making such a finding, the court implicitly limited the Act to normal, operating businesses.

The WARN Act, however, does not restrict the definition of “employer” to only functioning business enterprises of a normal or commercial sense. Nor does the Act define “employer” to be an operating business enterprise. Under either definition, the Department’s interpretation (and the Third Circuit’s analysis) would be more meritorious. The Department’s exception, however, improperly adds those qualifications to the Act’s definition. The WARN Act solely defines “employer” as “any business enterprise.”[93]

In response, the Department may argue that such qualifications (i.e., requiring that the business be operating in a normal commercial sense) are implicit—that Congress implied that a business enterprise must be operating because the prototypical business enterprise is one in operation.[94] The Act’s definition, however, does not say “a business enterprise,” which could suggest a prototypical interpretation. Rather, the definition of “employer” says “any business enterprise”[95]—regardless of whether that business is operating or liquidating. “As [the Supreme Court] ha[s] explained, ‘the word “any” has an expansive meaning, that is, “one or some indiscriminately of whatever kind.”’”[96] Courts must adhere to the WARN Act’s broad language—with its expansive meaning—and refrain from adding the Department’s restrictions.

In sum, the language of section 2101(a)(1) is clear. The term “business enterprise”—with its ordinary meaning and similar usage in other legislation—is synonymous with the term “business.”[97] And the WARN Act broadly states that “any business enterprise” (thus, “any business”) of the required size must adhere to the notice requirements.[98] Because the word “any” requires an expansive reading, it does not matter whether that business is liquidating or functioning in the normal commercial sense.[99] Holding otherwise would be adding words to the statute and legislating from the bench.

          II. Structure and Interpretative Canons

Sticking with the text, “[w]hen Congress provides exceptions in a statute, it does not follow that courts have authority to create others. The proper inference . . . is that Congress considered the issue of exceptions and, in the end, limited the statute to the ones set forth.”[100] That inference stems from the expressio unius canon of statutory interpretation: “expressing one item of [an] associated group or series excludes another left unmentioned.”[101]

Explicitly providing exceptions thus excludes unmentioned exceptions. The Act explicitly provides for three exceptions. Under the “faltering company” exception, an employer does not need to give the required notice if the employer “was actively seeking capital or business” which would have allowed the employer to avoid layoffs, and the employer believed that “giving the notice required would have precluded the employer from obtaining the needed capital or business.”[102] Under the “unforeseeable business circumstances” exception, an employer need not give the required notice if the layoffs are “caused by business circumstances that were not reasonably foreseeable” at the time notice was required.[103] Last, under the “natural disaster” exception, an employer is not required to give notice if the layoff is due to a natural disaster.[104]

Indeed, the Act’s “faltering company” exception considers financially troubled employers. The proper inference, thus, is that Congress considered how the WARN Act would affect financially troubled employers and decided not to provide another shield for bankrupt employers.  Had Congress intended a safe harbor for employers liquidating in bankruptcy, it could have done so explicitly.

Admittedly, the expressio unius canon is not absolute. It “is only a guide, whose fallibility can be shown by contrary indications”[105] to “all other textual and contextual evidence of congressional intent.”[106] Here, however, there are no contrary indications. All tools of statutory interpretation point in the same direction. The Act’s language is clear and further supported by the legislative evidence and overall purpose.

          III. Legislative Evidence

The legislative history of the WARN Act is convoluted, but the meaning of “business enterprise” is not. As discussed below, Congress meant for “business enterprise” to be “synonymous with the terms company, firm or business.”[107]

The WARN Act traces its roots to the Omnibus Trade and Competitiveness Act of 1987 (the “Omnibus Act”),[108] intended to “enhance the competitiveness of American industry.”[109] The bill did not contain any provisions related to the WARN Act, however.[110] The Senate, unhappy with the House bill, introduced a bill of amendments to the Omnibus Act.[111] Among many other changes to the House bill, the Senate amendments added a new section titled “Advanced Notification of Plant Closings and Mass Layoffs.”[112]

That section was the foundation of today’s WARN Act and defined an “employer” as “any business enterprise that employs—(A) 50 or more full-time employees; or (B) 50 or more employees who in the aggregate work at least 2,000 hours per week (exclusive of hours of overtime).”[113] That definition is the same definition found in the WARN Act, except the minimum number of required employees has been upped to 100.[114] The WARN Act, thus, started as a subsection of amendments to the Omnibus Act.

In attempts to reconcile the Omnibus Act Senate amendments with the original House bill, the two houses formed a conference and filed an agreed-upon conference report.[115] A conference report “is generally the most reliable evidence in legislative history of congressional intent because it represents the final statement of the terms agreed to by both houses.”[116] With regards to the WARN Act, the conference report “retain[ed] the Senate Amendment language that the term ‘employer’ means a business enterprise.”[117] Further, the conference report added that “‘business enterprise’ be deemed synonymous with the terms company, firm or business.”[118]

The President eventually vetoed the Omnibus Act.[119] In response, the Senate introduced the WARN Act as a separate bill, retaining the same language that “employer” means “any business enterprise.”[120] Like the Omnibus Act, the Senate’s introduced bill did not define business enterprise.[121] Within a month, the House and Senate had passed the bill.[122] And within two months, the bill became law.[123] A conference between the two houses thus was unnecessary, so there is no conference report specific to the WARN Act. As a result, and because the language of “employer” did not change, the conference report to the Omnibus Act provides the best indication of what “business enterprise” means. It means a company, firm, or business.

As discussed earlier, when Congress has used “business enterprise” in other legislation, it has statutorily defined “business enterprise” to be synonymous with those terms. The legislative evidence here, thus, proves that the WARN Act is no different and confirms the earlier textual analysis. As a result, any company, firm, or business that satisfies the defined size must adhere to the Act’s notice requirements—regardless of whether that business is liquidating or operating in a normal commercial sense.

          IV. Purpose

Last, the purpose[124] of the WARN Act is to protect employees and their families from being unexpectedly laid off.[125] By providing notice, employers give employees the opportunity to pursue other employment and relocate, if necessary.[126] Excusing fiduciaries from providing notice does not protect employees.

Consider the practical implications of the Department’s exception. Imagine a company, BigBiz. BigBiz is in financial distress. It is working with bankruptcy lawyers and is preparing to file for chapter 7 bankruptcy relief—say, on Tuesday. The company knows it will be shutting down. And so on Monday, the CEO of BigBiz contemplates terminating a substantial number of employees. After all, there is no need for them because the company is shutting down. But, the company never gave proper WARN notice, so it would face certain WARN liabilities.

On the other hand, the company realizes that the company would face no WARN liability if the employees were terminated during the bankruptcy liquidation. Under the purported “liquidating fiduciary” exception, the bankruptcy trustee would not be subject to the same notice requirements that the company’s management had a second before the bankruptcy filing.

To reiterate, if the CEO of BigBiz terminated BigBiz employees on Monday, without any notice, then BigBiz would be liable for sixty days’ back pay to those affected employees. But if BigBiz files for chapter 7 bankruptcy Tuesday morning, and the appointed trustee of BigBiz terminates the employees without any notice on Tuesday afternoon, then BigBiz has no liability. This stark dichotomy could motivate businesses to not give any notice of terminations if a liquidation is on the horizon.[127]

The WARN Act essentially gives employers a choice: (1) they can provide proper notice while continuing to operate and bear related operational expenses or (2) they can shut down without proper notice and save on operational expenses, but provide back pay to employees to compensate for the lack of notice.[128] Essentially, the optimal solution is a mathematical equation—until the “liquidating fiduciary” exception is applied. With the exception, businesses can enjoy the fruits of option two (shut down with no operational expenses) while bearing none of the costs (back pay in lieu of notice). Who, then, bears those costs? The employees. This lack of protection for employees stands strictly at odds with the purpose of the WARN Act.

One could (rightly) argue that it would be inequitable to hold a liquidating fiduciary liable when it had no prior involvement with the business and was appointed solely to sell company assets. However, and I stress this point as it seems to have become convoluted due to the Department’s language, the trustee would not be the party liable. WARN Act liability falls on the employer, the business enterprise—not its managers or executives or trustees or any other individuals.[129]

More specifically, the debtor’s bankruptcy estate would bear the costs of WARN liability because all assets and liabilities of the employer are part of an estate in bankruptcy.[130] One could then argue that it would be unfair to hold the estate (which includes creditors and other parties in interest) liable. But if that is the exception’s purpose, then there should also be an exception for companies that violate the WARN Act while operating as a going concern during bankruptcy (i.e. reorganizing rather than liquidating). When a debtor is forced to pay WARN liabilities to employees, the estate has less money available to pay creditors—regardless of whether the debtor is liquidating or reorganizing. Thus, because the Department’s exception only concerns liquidations, I doubt that the exception’s concern is that creditors are harmed indirectly. If that were true, there would also be an exception for reorganizations.

***

In addition, the WARN Act “is a remedial statute and must be construed broadly.”[131] As a result, exceptions must be “narrowly construed” and “the employer has the burden to prove the exception applies.”[132] Coupled with this high burden, the statutory analysis demonstrates that no “liquidating fiduciary” exception exists.

 

Part Three: But What About Judicial Deference?

When a court is tasked with interpreting an administrative agency’s law, and the agency has offered its interpretation, the court must determine if that interpretation is entitled to judicial deference—whether it be Chevron (strong) deference or Skidmore (weak) deference.[133]

          I. Chevron deference

Though Chevron is under attack by judges, academics, and legislators,[134] it remains good law and must be dealt with.[135] Under Chevron, deference is required when (i) a statute’s meaning is unclear and (ii) the agency’s interpretation of that statute is reasonable.[136] This Chevron framework generally applies to interpretations that are offered through notice-and-comment rulemaking.[137] But Chevron can also apply elsewhere.[138]

To determine whether the Chevron test applies to a guidance document outside notice-and-comment rulemaking—like the Department’s Analysis, at issue here—courts look at various factors: “‘the interstitial nature of the legal question, the related expertise of the Agency, the importance of the question to administration of the statute, the complexity of that administration, and the careful consideration the Agency has given the question . . . .’”[139]

Here, however, those factors do not require analysis because even if the Chevron test does apply, deference would still not be warranted. If Chevron applies, then analysis begins with the first step—is the statute’s meaning clear, as determined by “traditional tools of statutory construction”?[140] As discussed in Part Two of this Article, the WARN Act is clear and includes businesses being liquidated by fiduciaries.[141] Because the first step is answered affirmatively, the Chevron test ends.[142] The test never reaches the second step (deference).[143]

          II. Skidmore deference

Skidmore deference is weaker.[144] Unlike Chevron deference, Skidmore deference is not binding.[145] Rather, Skidmore interpretations are “entitled to respect” and can be looked upon for guidance.[146] But because the WARN Act is clear enough to overcome Chevron deference, it would also overcome the weaker Skidmore deference. Whatever respect the Department’s commentary deserves, it is not enough to overcome the WARN Act’s unambiguous language.

 

Conclusion

The WARN Act requires “any business enterprise” that meets certain size requirements to give sufficient notice to employees before a mass layoff or plant closing.[147] In its Analysis on the Final Rule, the Department of Labor purportedly created a “liquidating fiduciary” exception on the grounds that a “liquidating fiduciary” would not be operating a company in the normal commercial sense. Courts have uniformly adopted that exception.

Those courts, however, have uniformly erred. As the text, structure, legislative evidence, and purpose of the WARN Act make clear, the Act does not exempt businesses being liquidated by fiduciaries. Any business of the required size is subject to the Act’s notice requirements—regardless of whether that business is liquidating or operating. Thus, irrespective of the Department’s commentary, the WARN Act is clear and its meaning must control: there is no “liquidating fiduciary” exception.

* University of Notre Dame (B.B.A. cum laude, 2015); Northwestern University (J.D. cum laude, 2018). Special thanks to Andrew Dawson, David Neff, and Victoria Nourse for helpful feedback. Thanks also to Katherine Drews and Louis Murray for valuable editing.

[1] 29 U.S.C. §§ 2101–2109 (2012).

[2] 29 U.S.C. § 2102(a) (“An employer shall not order a plant closing or mass layoff until the end of a 60-day period after the employer serves written notice of such an order . . . .”); see §§ 2101(a)(2) and (3) for definitions of “plant closing” and “mass layoff,” respectively.

[3] 29 U.S.C. § 2101(a)(1) (emphasis added).

[4] 29 U.S.C. § 2104(a)(1).

[5] In re ContinentalAFA Dispensing Co., 403 B.R. 653, 658 (Bankr. E.D. Mo. 2009); see also In re Hanlin Grp., Inc., 176 B.R. 329, 334 (Bankr. D.N.J. 1995) (same quote); In re World Mktg. Chicago, LLC, 564 B.R. 587, 596 (Bankr. N.D. Ill. 2017) (citing ContinentalAFA, 403 B.R. at 658) (“There is little question that WARN Act claims are in the nature of severance.”).

[6] In re Cargo, Inc., 138 B.R. 923, 927 (Bankr. N.D. Iowa 1992).

[7] Hanlin, 176 B.R. at 334; see also John-Ethan Gionies, Note, The Liquidating Fiduciary: A Hidden Exception to WARN Act Liability, 31 Hofstra Lab. & Emp. L. J. 273, 285–86 (2013) (explaining the “liquidating fiduciary” exception and analyzing how it would apply in bankruptcy proceedings, but not questioning its existence).

[8] 29 U.S.C. § 2107.

[9] Worker Adjustment and Retraining Notification, 54 Fed. Reg. 16,042, 16,045 (Apr. 20, 1989) (analyzing a portion of the final rule later codified at 20 C.F.R. pt. 639.3(a)).

[10] Id.

[11] See 11 U.S.C. §§ 701–84 (2012); 11 U.S.C. §§ 1101–1174. The business may also file for chapter 12 if it is a family corporation or partnership engaged in fishing or farming. Id. § 101(19A)(B).

[12] See 11 U.S.C. §§ 701–02.

[13] The trustee may, however, operate the business for a limited period, provided that doing so is “consistent with orderly liquidation of the estate.” 11 U.S.C. § 721.

[14] See In re World Mktg. Chicago, LLC, 564 B.R. 587, 599 (Bankr. N.D. Ill. 2017) (“As such, a chapter 7 trustee is just the sort of liquidating fiduciary that is contemplated in the Department of Labor commentary.”).

[15] 11 U.S.C. §§ 1106, 1107.

[16] Id.

[17] Id. § 1104(a).

[18] Id. § 1101(1).

[19] Id. § 1107(a).

[20] Commodity Futures Trading Comm’n v. Weintrauf, 471 U.S. 343, 355 (1985) (“[I]f a debtor remains in possession—that is, if a trustee is not appointed—the debtor’s directors bear essentially the same fiduciary obligation to creditors and shareholders as would the trustee for a debtor out of possession.”).

[21] World Mktg. Chicago, 564 B.R. at 600 (“The sole function of the debtor in possession and chapter 11 trustee is not to liquidate.”).

[22] 11 U.S.C. § 1108.

[23] 54 Fed. Reg. 16,045 (1989).

[24] Compare World Mktg. Chicago, 564 B.R. at 600 (suggesting that the “liquidating fiduciary” exception should never apply in a chapter 11 case because the sole function of a debtor in possession is not to liquidate and the debtor in possession may continue to operate the business) (a prospective approach focused on the debtor’s statutory powers) with In re United Healthcare Sys., Inc., 200 F.3d 170, 178 (3d Cir. 1999) (applying the exception in a chapter 11 case because the debtor in possession demonstrated a clear intent to liquidate) (a retroactive approach focused on the debtor’s actions).

[25] See United Healthcare, 200 F.3d at 177, 179 (“It is appropriate, therefore, to consider agency regulations and comments as well as the case law. . . . In conclusion, we do not believe United Healthcare continued as an ‘employer’ within the meaning of the WARN Act when it assumed the role of fiduciary following the filing for bankruptcy. At that time, it ceased operating its business as a going concern and was simply preparing itself for liquidation.”); In re Century City Doctors Hosp., LLC, 2010 WL 6452903, at *7 (B.A.P. 9th Cir. Oct. 29, 2010) (“Given that the Ninth Circuit already has used the DOL Commentary for the same purpose, the bankruptcy court did not err when it relied on the DOL Commentary to determine whether the Trustee qualified as an employer under the WARN Act.”); World Mktg. Chicago, 564 B.R. at 599 (“The bankruptcy courts that have considered the specific question of whether a liquidating fiduciary exception to the WARN Act applies have uniformly concluded that it does. . . . In light of the foregoing, the court has little hesitation in holding that there is indeed a liquidating fiduciary exception to the WARN Act in the manner set forth in the Department of Labor commentary.”); In re Dewey & LeBoeuf LLP, 487 B.R. 169, 175 (Bankr. S.D.N.Y. 2013) (stating that “[a] liquidating fiduciary principle has developed, pursuant to which a liquidating fiduciary in a bankruptcy case does not fit the definition of an employer for purposes of the WARN Act” and continuing to apply the exception); In re MF Glob. Holdings Ltd., 481 B.R. 268, 280, 282 (Bankr. S.D.N.Y. 2012) (“[T]he Court is persuaded that the ‘liquidating fiduciary’ principle is applicable in these proceedings.”); In re Century City Doctors Hosp., LLC, 417 B.R. 801, 805 (Bankr. C.D. Cal. 2009), aff’d, 2010 WL 6452903 (B.A.P. 9th Cir. Oct. 29, 2010) (finding no WARN liability because “the trustee acted solely as a ‘liquidating fiduciary,’ rather than an employer ‘operating a business enterprise in the normal commercial sense’”); In re Jamesway Corp., 1997 WL 327105, at *12 (Bankr. S.D.N.Y. June 12, 1997) (“Thus, liquidating fiduciaries need not provide notice to terminated employees under the WARN Act.”); Hanlin, 176 B.R. at 332 (quoting the Department’s commentary and then holding that the debtor was a WARN employer because it “continued to operate the business as a whole for the benefit of all parties in interest”).

[26] See supra note 25.

[27] 176 B.R. 329 (Bankr. D.N.J. 1995).

[28] 200 F.3d 170 (3d Cir. 1999).

[29] Hanlin, 176 B.R. at 332.

[30] Id.

[31] Id. at 332.

[32] Id.

[33] Id.

[34] Id.

[35] Id.

[36] See, e.g., World Mktg. Chicago, 564 B.R. at 600 (“The Third Circuit’s United Healthcare case is th[e] leading authority on the issue.”); MF Glob. Holdings Ltd., 481 B.R. at 280 (“The United Healthcare case is particularly instructive.”).

[37] In re United Healthcare Sys., Inc., 200 F.3d 170, 172 (3d Cir. 1999).

[38] Id. at 173.

[39] Id.

[40] Id.

[41] Id.

[42] Id.

[43] Id.

[44] Id.

[45] Id.

[46] Id.

[47] Id. at 173–74.

[48] Id. at 174.

[49] Id.

[50] Id.

[51] Id.; see also 54 Fed. Reg. 16,045 (1989).

[52] United Healthcare, 200 F.3d at 174.

[53] Id. at 175.

[54] Id.; Gionies, supra note 7, at 289–90.

[55] United Healthcare, 200 F.3d at 176.

[56] Id.

[57] Id. (“‘[B]usiness enterprise’ [is] a term the statute does not define.”).

[58] Id.

[59] Id. (emphasis added).

[60] Id. at 176–77 (“Addressing the facts here in context, we do not believe WARN’s plain language resolves whether United Healthcare was an ‘employer’ required to provide sixty days notice prior to its termination of the 1,200 employees.”).

[61] Id. at 177 (“It is appropriate, therefore, to consider agency regulations and comments as well as the case law.”).

[62] Id. at 179 (“[W]e do not believe United Healthcare continued as an ‘employer’ within the meaning of the WARN Act when it assumed the role of fiduciary following the filing for bankruptcy. At that time, it ceased operating its business as a going concern and was simply preparing itself for liquidation.”).

[63] Id.

[64] Id.

[65] Infra Part II.

[66] Id.

[67] Id.

[68] In re Hanlin Grp., Inc., 176 B.R. 329, 332 (Bankr. D.N.J. 1995)

[69] United Healthcare, 200 F.3d at 179.

[70] Id. at 177.

[71] See supra note 25.

[72] 29 U.S.C. § 2101(a)(1) (2012) (emphasis added).

[73] See Gen. Dynamics Land Sys., Inc. v. Cline, 540 U.S. 581, 600 (2004) (looking at the “text, structure, purpose, and history” of a statute to interpret its meaning); see also Sir William Blackstone, 1 Commentaries on the Laws of England 58–61 (Cooley ed. 1876) (1765-69) (“The fairest and most rational method to interpret the will of the legislator is by exploring his intentions at the time when the law was made, by Signs the most natural and probable. And these signs are either the words, the context, the subject-matter, the effects and consequence, or the spirit and reason of the law.”).

[74] See, e.g., Barnhart v. Sigmon Coal Co., 534 U.S. 438, 450 (2002) (“As in all statutory construction cases, we begin with the language of the statute.”).

[75] United Healthcare, 200 F.3d at 176 (“‘[B]usiness enterprise’ [is] a term the statute does not define.”).

[76] See Lopez v. Gonzales, 549 U.S. 47, 53 (2006) (“The everyday understanding of [the word at issue] should count for a lot here, for the statutes in play do not define the term, and so remit us to regular usage to see what Congress probably meant.”) (emphasis added).

[77] For example, Merriam-Webster defines “enterprise” as “a unit of economic organization or activity; especially a business organization.” Enterprise, Merriam-Webster Dictionary (2018), https://www.merriam-webster.com/dictionary/enterprise [https://perma.cc/9XMP-QQ5M]. In a similar manner, Black’s Law Dictionary defines “business enterprise” as “a for-profit company, business, or organization that provides financial, commercial, or industrial goods and services.” Business Enterprise, Black’s Law Dictionary (10th ed. 2014). A business being liquidated still provides goods and services—just not for much longer. For example, when retailers (such as Toys R Us) liquidate under chapter 7, they continue to sell any remaining inventory. See Joan Verdon & Nathan Bomey, How Chapter 7 Liquidation Works: Toys R Us Preps Going-Out-of-Business Sales, USA Today (Mar. 9, 2018), https://www.usatoday.com/story/money/2018/03/09/chapter-7-bankruptcy-liquidation/409239002/ [https://perma.cc/XHR9-LLQP].

[78] See Brett M. Kavanaugh, Fixing Statutory Interpretation, 129 Harv. L. Rev. 2118, 2161–62 (2016) (“Judges say that we should not interpret statutes to be redundant. But humans speak redundantly all the time, and it turns out that Congress may do so as well. Congress might do so inadvertently. Or Congress might do so intentionally in order to, in Shakespeare’s words, make ‘double sure.’”).

[79] See W. Virginia Univ. Hosps., Inc. v. Casey, 499 U.S. 83, 88–89 (1991) (looking at the “record of statutory usage” across various titles of the United States Code to determine that expert fees are not included in “attorney’s fees”).

[80] 15 U.S.C. § 1221(a) (2012).

[81] 15 U.S.C. § 7108(7) (2012).

[82] 22 U.S.C. § 3102(6) (2012).

[83] 28 U.S.C. § 1452(d)(2) (2012).

[84] 42 U.S.C. § 6705(f)(2) (2012).

[85] 42 U.S.C. § 7141(f) (2012).

[86] United States v. Scavo, 593 F.2d 837, 842–43 (8th Cir. 1979).

[87] Id. at 843.

[88] See In re United Healthcare Sys., 200 F.3d 170, 176 (3d Cir. 1999) (employees had “various tasks all related to shutting down . . . operations”) (emphasis added); see also In re Fairfield Sentry Ltd., 714 F.3d 127, 137 (2d Cir. 2013) (holding that a debtor’s “liquidation activities and administrative functions” may be considered to determine the debtor’s center of main interests for purposes of a chapter 15 cross-border bankruptcy) (emphasis added).

[89] 593 F.2d 837 (8th Cir. 1979).

[90] Id. at 842–43 (emphasis added).

[91] 54 Fed. Reg. 16,045 (1989).

[92] 200 F.3d at 176.

[93] 29 U.S.C. § 2101(a)(1) (2012) (emphasis added).

[94] See Victoria Nourse, Two Kinds of Plain Meaning, 76 Brook. L. Rev. 997, 1000 (2011) (“As linguist Larry Solan has written, ordinary meaning is prototypical meaning—that is, meaning focusing on a core example, rather than reaching the conceptual or logical extension of the term. Prototypical meaning picks the best example, not the peripheral one.”) (emphasis added).

[95] Id.

[96] Dep’t of Hous. & Urban Dev. v. Rucker, 535 U.S. 125, 131 (2002) (quoting United States v. Gonzales, 520 U.S. 1, 5 (1997)).

[97] Supra Part II, Section I.

[98] 29 U.S.C. § 2101(a)(1) (emphasis added).

[99] Rucker, 535 U.S. at 131.

[100] United States v. Johnson, 529 U.S. 53, 58 (2000).

[101] N.L.R.B. v. SW Gen., Inc., 137 S. Ct. 929, 940 (2017) (quotations omitted) (citing Chevron v. Echazabal, 536 U.S. 73, 80 (2002) (quoting United States v. Vonn, 535 U.S. 55, 65 (2002))).

[102] 29 U.S.C. § 2102(b)(1).

[103] Id. § 2102(b)(2)(A).

[104] Id. § 2102(b)(2)(B).

[105] United States v. Vonn, 535 U.S. 55, 65 (2002) (citing Pauley v. Beth Energy Mines, Inc., 501 U.S. 680, 703 (1991)).

[106] Burns v. United States, 501 U.S. 129, 136 (1991).

[107] H.R. Rep. No. 100-576, at 1046 (1988) (Conf. Rep.).

[108] Omnibus Trade and Competitiveness Act of 1987, H.R. 3, 100th Cong. (1987).

[109] H.R. Rep. No. 100-576, at 1 (1988) (Conf. Rep.).

[110] H.R. Rep. No. 100-576, at 1045 (1988) (Conf. Rep.) (“The House bill contains no comparable provision” to the section “Advance Notification of Plant Closings and Mass Layoffs[.]”).

[111] Omnibus Trade and Competitiveness Act of 1987, S. 1420, 100th Cong. (1987).

[112] Id. at 609.

[113] Id.

[114] 29 U.S.C. § 2101(a)(1) (2012).

[115] H.R. Rep. No. 100-576 (1988) (Conf. Rep.).

[116] Auburn Hous. Auth. v. Martinez, 277 F.3d 138, 147 (2d Cir. 2002).

[117] H.R. Rep. No. 100-576, at 1046 (1988) (Conf. Rep.).

[118] Id.

[119] See Actions Overview of H.R. 3 – 100th Congress (1987-1988), Congress.gov, https://www.congress.gov/bill/100th-congress/house-bill/3/actions?q=%7B%22search%22%3A%5B%22hr3%22%5D%7D&r=1616) [https://perma.cc/PYH4-6M59].

[120] Worker Adjustment and Retraining Notification Act, S. 2527, 100th Cong. § 2(a)(1) (1988).

[121] Id. § 2(a).

[122] Worker Adjustment and Retraining Notification Act, S. 2527, Roll Vote Nos. 225, 229.

[123] Worker Adjustment and Retraining Notification Act, Pub. L. No. 100-379, § 102 Stat. 890 (1988).

[124] Dolan v. U.S. Postal Serv., 546 U.S. 481, 486 (2006) (“Interpretation of a word or phrase depends upon reading the whole statutory text, considering the purpose and context of the statute, and consulting any precedents or authorities that inform the analysis.”) (emphasis added); McCreary Cty., Ky. v. Am. Civil Liberties Union of Ky., 545 U.S. 844, 861 (2005) (“Examination of purpose is a staple of statutory interpretation that makes up the daily fare of every appellate court in the country.”) (emphasis added).

[125] In re APA Transp. Corp. Consol. Litig., 541 F.3d 233, 239 (3d Cir. 2008), (“The purpose of the WARN Act is to protect workers by obligating employers to give their employees advanced notice of plant closings.”); Bader v. N. Line Layers, Inc., 503 F.3d 813, 817 (9th Cir. 2007) (“The purpose of the Act is to give advance notice to workers and the community so that workers can prepare to seek alternative employment and communities can prepare for the economic disruption of a mass layoff.”).

[126] Bader, 503 F.3d at 817.

[127] Gionies, supra note 7, at 285 (“But now, in light of United Healthcare and Jamesway, it is possible that employers, under certain circumstances, might be wise to instead delay their layoffs or plant closings until after filing a petition in bankruptcy in hopes of completely relieving themselves of WARN Act liability by qualifying as liquidating fiduciaries instead of business enterprises.”).

[128] See In re Hanlin Grp., Inc., 176 B.R. 329, 334 (Bankr. D.N.J. 1995).

[129] 29 U.S.C. § 2104(a)(1) (2012).

[130]11 U.S.C. § 541 (2012) (defining the estate to include “all legal or equitable interests of the debtor in property as of the commencement of [a] case”).

[131] Solberg v. Inline Corp., 740 F.Supp. 680, 685 (D. Minn. 1990) (citing Belland v. Pension Benefit Guar. Corp., 726 F.2d 839, 844 (D.C. Cir. 1984)).

[132] Snider v. Commercial Fin. Servs., Inc., 288 B.R. 890, 895 (N.D. Okla. 2002) (citing Carpenters District Council of New Orleans & Vicinity v. Dillard Dept. Stores, Inc., 15 F.3d 1275, 1282 (5th Cir. 1994)) (“Exceptions to the sixty day notice requirement are to be narrowly construed and the employer has the burden to prove the exception applies.”).

[133] See Hale Melnick, Note, Guidance Documents and Rules: Increasing Executive Accountability in the Regulatory World, 44 B.C. Envtl. Aff. L. Rev. 357, 373–75 (2017).

[134] Kent Barnett & Christopher J. Walker, Chevron Step Two’s Domain, 93 Notre Dame L. Rev. 1441, 1441 (2018) (“An increasing number of judges, policymakers, and scholars have advocated eliminating or narrowing Chevron deference . . . .”); see generally Christopher J. Walker, Attacking Auer and Chevron Deference: A Literature Review, 16 Geo. J.L. & Pub. Pol’y 103 (2017).

[135] Pereira v. Sessions, 138 S.Ct. 2105, 2129 (2018) (Alito, J., dissenting) (“[U]nless the Court has overruled Chevron in a secret decision that has somehow escaped my attention, it remains good law.”).

[136] Chevron v. Natural Resources Defense Council, 467 U.S. 837, 842–43 (“If the intent of Congress is clear, that is the end of the matter; . . . [but] if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency’s answer is based on a permissible construction of the statute.”).

[137] Melnick, supra note 133, at 373.

[138] Id. at 378 (“The Court in Barnhart announced that Chevron deference does not apply only to rules promulgated through notice-and-comment rulemaking.”) (citing Barnhart v. Walton, 535 U.S. 212, 221–22 (2002)).

[139] Id.).

[140] 467 U.S. at 843 n.9; see also Gen. Dynamics Land Sys., Inc. v. Cline, 540 U.S. 581, 600 (2004) (“Even for an agency able to claim all the authority possible under Chevron, deference to its statutory interpretation is called for only when the devices of judicial construction have been tried and found to yield no clear sense of congressional intent.”).

[141] Supra Part II.

[142] 467 U.S. at 842 (“If the intent of Congress is clear, that is the end of the matter . . . .”).

[143] Id.

[144] Melnick, supra note 133, at 375.

[145] Id.

[146] Id.; Skidmore v. Swift, 323 U.S. 134, 140 (1944).

[147] 29 U.S.C. § 2101(a)(1) (2012) (emphasis added).

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