This working paper is available here in Adobe Acrobate PDF format. 

Abstract:

"Government by Indictment" provides a critical analysis of national policymaking by state attorneys general. Increasingly, state AG investigations and prosecutions of major corporations go beyond the objective of punishing individual wrongdoing, or even of changing the conduct of corporate entities. Nowadays, many AG campaigns--which increasingly take the form of multistate actions--attempt to “reform” the internal operations and business models of major American industries. To that end, attorneys general file indictments that are designed to exact settlements from defendants who cannot afford to bet the company. “Government by Indictment” is a fitting description of this style of law enforcement.

The adverse consequences of AG activism reach beyond “mere” economics; they affect the integrity of American political institutions at all levels. Unchecked AG activism will spell:

• The re-regulation of major sectors of the U.S. economy; 
  
• The cartelization of major American industries; 
  
• The increased dominance of the plaintiffs’ bar over American politics; and 
  
• Substantial wealth transfers from productive enterprises to plaintiffs’ lawyers and advocacy organizations with an aggressive agenda to re-regulate the economy.

"Government by Indictment" reviews AG initiatives in areas from antitrust and airline deregulation to the pharmaceutical and financial industries. It describes the roots of AG activism; its rise and internal dynamics; and its consequences.

Primarily, the paper emphasizes the constitutional dimensions of AG activism. In the aftermath of the New Deal, the U.S. Supreme Court not only expanded the powers of Congress but also, and simultaneously, authorized the states to regulate conduct beyond their boundaries. Extraterritorial regulation is the true source of AG activism. It is antithetical to constitutional federalism and destructive of sensible regulation.

First, extraterritoriality poses a grave danger that the regulating state will export the costs of regulation to citizens in other states. There will be far too much regulation, and too little state-based democratic governance.

Second, extraterritoriality inverts the competitive federalist order. If corporations and their shareholders and customers could choose an exclusive state law regime by contract (as is still the case in corporate law), they would choose a sensible regulatory regime. States would compete by offering laws that promise to maximize the number of productive transactions within their jurisdictions. In contrast, when every state can regulate transactions across the country, the most aggressive regulator--and the most ambitious, entrepreneurial state attorney general--will dictate the terms of regulation. The inevitable result is excessive regulation.

"Government by Indictment" offers five pragmatic, meaningful reform options:

1. Consider extending the competitive federalism model of corporate law into other areas, especially securities regulation.

2. Overturn the 1998 “Master Settlement Agreement,” through which attorneys general, trial lawyers, and tobacco firms imposed a $240 billion national excise tax and which has since become a template for multistate prosecutions and settlements.

3. Enact a Federal Compact Clause Enforcement Act, providing that multistate settlements shall require congressional approval (as the Compact Clause of Article I, Section 10 of the Constitution provides).

4. Adopt Judge Richard Posner’s proposal to abolish the states’ parens patriae authority to enforce federal antitrust law.

5. Explore means of strengthening the hands of attorneys general who dissent from the activist AG agenda.

Michael S. Greve is the John G. Searle Scholar at AEI.