Tag Archives: Rivkin

Corporate crime and punishment

Fines levied by the SEC against a corporation for long-ago wrongdoing do not protect current investors.

By DAVID B. RIVKIN JR.  And JOHN J. CARNEY

Two weeks ago, a unanimous Supreme Court rebuffed the Securities and Exchange Commission Gabelli v. SEC. The SEC maintained that its enforcement actions for fines under the Investment Advisers Act weren’t subject to the five-year statute of limitations. This wasn’t the first time the courts have pushed back a federal agency for overreaching. It won’t be the last.

But the SEC’s audacity prompts a broader policy question: What good is accomplished by imposing monetary penalties on corporations, as the agency attempted to do in Gabelli? The answer is that when such penalties are sought by the government, they probably do more harm than good.

Monetary damages, including penalties, that are awarded in private lawsuits are an attempt to compensate victims of corporate fraud and other unlawful behavior, usually shareholders or customers, making them as “whole” as the law can approximate. The SEC doesn’t seek monetary fines in most cases—it has an array of other enforcement options including injunctive or remedial relief. When it does pursue a fine, however, the purpose is solely punitive.

In Gabelli, for example, the SEC brought two sets of claims against principals of an investment firm who countenanced a client’s “market timing” scheme. The first claim sought disgorgement of profits to the government—a remedy that Gabelli didn’t appeal. But the SEC also sought large monetary fines designed solely to punish the defendants and brand them as wrongdoers.

Who is the wrongdoer in such a situation? The company officials who made the bad decisions? The board of directors? The shareholders? Pinning a wrongdoer label on the corporation as a whole or fining a corporation in this way—years after any alleged wrongdoing—punishes current shareholders for conduct that benefited a largely different group of shareholders, if any benefit was conferred at all.

From a current shareholder’s point of view, government-imposed corporate fines are virtually indistinguishable from a tax on investing, and are thus a disincentive for doing so.

Gabelli isn’t the only case when the SEC sought penalties involving ancient conduct. In January 2006, McAfee, the software company, consented “without admitting or denying the [SEC’s] allegations” to pay a civil penalty of $50 million for unlawful conduct alleged to have occurred between 1998 and 2000.

Similarly, in August 2003, UBS PaineWebber agreed to a $500,000 fine in connection with its unacknowledged failure to supervise a former registered representative who served jail time for defrauding certain clients. The conduct ended by March 1998, approximately five and a half years before the SEC instituted administrative proceedings.

More recently, the SEC fined Eli Lilly $29 million in December 2012 for alleged misconduct that purportedly began more than a decade ago.

The principal rationale for levying fines is to deter corporate wrongdoing. The mismatch between the shareholders that benefit from misconduct and those that are ultimately punished undermines this rationale.

Corporate fines are equally problematic when considered as punishment for a manager’s bad conduct. Fine an individual for his conduct, and you are likely to deter him from doing it again. Fine a corporation, and the managers responsible for the misconduct have almost always left or been fired long beforehand. New managers are in place, and for them the tab is just a price of doing business.

Moreover, even the threat of government fines or penalties puts immediate, intense pressure on a corporation to settle, regardless of the merits. A protracted legal fight means a public-relations nightmare. It could also impinge on corporate earnings, the reputations of current executives, and relationships with regulators and other business concerns.

Whether the corporation is actually culpable of wrongdoing is a consideration, but it may not be a major one. That question can be beside the point of getting back to business and avoiding a prolonged battle with the SEC. In the large number of settlement scenarios where actual guilt isn’t the most pressing or relevant consideration, the fines don’t by definition deter any future misconduct.

In any event, when the government obtains fines from corporate wrongdoers, the monies rarely go to any ascertainable “victims”—they merely transfer funds from businesses to an already bloated public sector. With the aggregate penalties often running into the billions of dollars, the economic distortions involved are substantial.

Notwithstanding the Supreme Court’s rap on the SEC’s knuckles for its behavior in Gabelli, this agency and others, both federal and state, are increasingly aggressive in seeking fines. Last month the SEC’s website touted the $1.53 billion in penalties that it has accrued from enforcement actions related to the 2008 financial crisis. The reported monetary relief to victims amounted to $1.15 billion. Stated another way, the government recovered 33% more for itself than for investors.

The SEC has the authority to return some of those fines it collected to injured investors, but the agency website is silent on that point. Bigger fines may demonstrate an agency’s prowess or increase its bragging rights. But that has nothing to do with whether any given amount is appropriate or just punishment—or indeed, any punishment at all.

There is a better way, and it doesn’t mean letting corporations off the hook for bad behavior. In addition to victims’ private lawsuits that hold corporations accountable, government actions can pursue wrongdoers in a variety of ways, including: disgorgement of ill-gotten gains to victims, injunctions to curtail harmful conduct, and the imposition of examiners and monitors, all of which can adequately address and cure the underlying misconduct.

For any government agency—but in particular for the SEC, which supposedly seeks to protect investors—these types of equitable remedies, not punitive monetary fines, should be the remedies of first resort.

Messrs. Rivkin and Carney practice law at BakerHostetler. Mr. Rivkin served in the Justice Department and the White House Counsel’s Office in the Reagan and George H.W. Bush administrations. Mr. Carney served in the SEC’s Division of Enforcement and the Justice Department as a Securities Fraud Chief.

Source: http://online.wsj.com/article/SB10001424127887324128504578344502420815488.html?KEYWORDS=Rivkin

Obama Recess Appointments Invalid

DRIV head shot from Fox interview on gun control

Noel Canning v. NLRB: DC Circuit Court of Appeals Rules President Obama’s Recess Appointments were Invalid

On Friday, January 25, 2013, the U.S. Court of Appeals, District of Columbia Circuit, ruled that  President Obama’s “recess appointments” of three National Labor Relations Board (NLRB) members was unconstitutional.  At issue was whether the President illegally invoked the Recess Appointments clause of Article II, Section 2 of the U.S. Constitution when he filled three existing vacancies on the NLRB during pro forma sessions of Congress (President Obama had maintained that Congress was actually not in session).  Attorneys for Noel Canning argued that, since the recess appointments were illegal, the NLRB lacked a quorum when it ruled that the company violated various provisions of the National Labor Relations Act, and, therefore, the NLRB ruling was invalid and unenforceable. A three-member panel consisting of Chief Judge David Santelle, and Circuit Judges Thomas Griffith and Karen Henderson concurred.

For additional analysis, read this alert.

NOEL CANNING, A DIVISION OF THE NOEL CORPORATION, PETITIONER  v. NATIONAL LABOR RELATIONS BOARD, RESPONDENT, INTERNATIONAL BROTHERHOOD OF TEAMSTERS LOCAL 760, INTERVENOR

Argued December 5, 2012 Decided January 25, 2013 No. 12-1115

Excerpts from the ruling:

“We determine that the Board issuing the findings and order could not lawfully act, as it did not have a quorum, for reasons set forth more fully below.”

“While the posture of the petition is routine, as it developed, our review is not. In its brief before us, Noel Canning . . . questions the authority of the Board to issue the order on two constitutional grounds. First, petitioner asserts that the Board lacked authority to act for want of a quorum, as three members of the five-member Board were never validly appointed because they took office under putative recess appointments which were made when the Senate was not in recess. Second, it asserts that the vacancies these three members purportedly filled did not ‘happen during the Recess of the Senate,’ as required for recess appointments by the Constitution. U.S. Const. art. II, § 2, cl. 3. Because the Board must have a quorum in order to lawfully take action, if petitioner is correct in either of these assertions, then the order under review is void ab initio.”

“The [NLRB] Board contends that despite the failure of the President to comply with Article II, Section 2, Clause 2, he nonetheless validly made the appointments under a provision sometimes referred to as the ‘Recess Appointments Clause,’ which provides that ‘[t]he President shall have Power to fill up all Vacancies that may happen during the Recess of the Senate, by granting Commissions which shall expire at the End of their next Session.’ Id. art. II, § 2, cl. 3. Noel Canning contends that the putative recess appointments are invalid and the Recess Appointments Clause is inapplicable because the Senate was not in the recess at the time of the putative appointments and the vacancies did not happen during the recess of the Senate. . . It is this difference between the word choice “recess” and “the Recess” that first draws our attention. When interpreting a constitutional provision, we must look to the natural meaning of the text as it would have been understood at the time of the ratification of the Constitution.”

“All this points to the inescapable conclusion that the Framers intended something specific by the term ‘the Recess,’ and that it was something different than a generic break in proceedings.”

“Not only logic and language, but also constitutional history supports the interpretation advanced by Noel Canning, not that of the Board. When the Federalist Papers spoke of recess appointments, they referred to those commissions as expiring ‘at the end of the ensuing session.’ The Federalist No. 67, at 408 (Clinton Rossiter ed., 2003). For there to be an ‘ensuing session,’ it seems likely to the point of near certainty that recess appointments were being made at a time when the Senate was not in session — that is, when it was in ‘the Recess.’ Thus, background documents to the Constitution, in addition to the language itself, suggest that ‘the Recess’ refers to the period between sessions that would end with the ensuing session of the Senate.”

“As the Supreme Court observed in Freytag v. Commissioner of Internal Revenue, ‘The manipulation of official appointments had long been one of the American revolutionary generation’s greatest grievances against executive power, because the power of appointment to offices was deemed the most insidious and powerful weapon of eighteenth century despotism.’ 501 U.S. 868, 883 (1991) (internal quotation marks and citation omitted). In short, the Constitution’s appointments structure — the general method of advice and consent modified only by a limited recess appointments power when the Senate simply cannot provide advice and consent — makes clear that the Framers used ‘the Recess’ to refer only to the recess between sessions.”

“As Chief Justice Marshall made clear in Marbury v. Madison, ‘[i]t is emphatically the province and duty of the judicial department to say what the law is. Those who apply the rule to particular cases, must of necessity expound and interpret that rule. If two laws conflict with each other, the courts must decide on the operation of each.’ 5 U.S. (1 Cranch) at 177. In Marbury, the Supreme Court established that if the legislative branch has acted in contravention of the Constitution, it is the courts that make that determination. In Youngstown Sheet & Tube Co. v. Sawyer, the Supreme Court made clear that the courts must make the same determination if the executive has acted contrary to the Constitution. 343 U.S. 579 (1952). That is the case here, and we must strike down the unconstitutional act.”

“. . .the President made his three appointments to the Board on January 4, 2012, after Congress began a new session on January 3 and while that new session continued. 158 Cong. Rec. S1 (daily ed. Jan. 3, 2012). Considering the text, history, and structure of the Constitution, these appointments were invalid from their inception. Because the Board lacked a quorum of three members when it issued its decision in this case on February 8, 2012, its decision must be vacated.”

“The Constitution’s separation of powers features, of which the Appointments Clause is one, do not simply protect one branch from another. See Freytag, 501 U.S. at 878. These structural provisions serve to protect the people, for it is ultimately the people’s rights that suffer when one branch encroaches on another. As Madison explained in Federalist No. 51, the division of power between the branches forms part of the ‘security [that] arises to the rights of the people.'”

” . . . the filling up of a vacancy that happens during a recess must be done during the same recess in which the vacancy arose. There is no reason the Framers would have permitted the President to wait until some future intersession recess to make a recess appointment, for the Senate would have been sitting in session during the intervening period and available to consider nominations.”

David Rivkin BBC/NPR appearance on gun control transcript

David Rivkin on Gun Control and the Second Amendment

The following is a transcript of David Rivkin’s appearance on the BBC Newshour radio broadcast on December 17, 2012.  The show was a direct response to the shootings at Sandy Hook Elementary School in Newtown, CT.

Host: David Rivkin joined us from the Washington studio and on the line from San Francisco I also spoke to Clara Jeffrey who is coeditor of Mother Jones a left leaning investigations magazine, does she think that this is a turning point?

Clara Jeffery: I think it could be, I think this has outraged the country. It’s one of many mass shootings this year.  The numbers keep getting worse and worse. We’ve had twice as many casualties as in any year past and I think it will behoove ordinary people to organize and responsible gun owners to step forward and say that they too support reasonable restrictions.  We need to put the wind behind politicians to make the change.

Host: And why this incident? Is it because it involved very young elementary school age children?

Clara Jeffery: Of course because it makes it even more horrific and something that every parent certainly can relate to. You know we’ve had so many this year, each one seemingly worse than the other.  They are all horrible.  And I think the country is really just waking up to that this is a pattern. That there are more and more guns. There are people who are not getting the mental health care that they need.  And we just can’t continue to live in a society that where we put our children and our citizens at such great risk.

Host: David Rivkin, do you see it that way? Do you see that this could be a turning point in the debate and real changes to the laws governing gun ownership could be in the pipeline?

David Rivkin: I do not.  It is a tragic event, it tugs very powerfully at the emotional heartstrings of our soul.  But we need to understand several points what happens here, is that proponents in this debate on both sides, run to their favorite talking points.  I would say a few reasons why it would not lead to fundamental change.  First of all, there are constitutional realties, based on the second amendment as reflected in a couple of recent Supreme Court decisions.  One is called Heller, another one is MacDonald, that put very strong limits on what can be done as far as curtailing firearm ownership.  In addition to that there are serious restrictions based upon our structural separation of powers as to what the federal government, as distinct from what states can do, because criminal law matters are very much reserved for the states.  So, the federal government can certainly ban certain types of guns from interstate and intrastate commercial traffic.

But frankly it would make absolutely no difference, because the reason we have these types of tragedies is not a reflection of some magic firearm in somebody’s hand.   Look, you can pull out how many guns are semi automatic guns, a person armed with a couple of regular hunting rifles and a couple of hand guns would be able to inflict the same type of damage.  Remember what happened in Norway, that virtually has an absolute ban on gun ownership and I think he killed over 60 people.  So all these notions that if you just have some regulatory regime that you would put in place as a silver bullet– it’s just absurd.  It’s not going to make any difference.

Host: I just wonder at this point whether it’s worth reminding people what the second amendment says.  I’ll just read it out. “A regulated militia is necessary to the security of the free state. The right of the people to keep and bear arms shall not be infringed.”  Why is that such an absolute. I just wonder whether you can explain that to our listeners?  Why Perhaps could it not be changed or reinterpreted.

David Rivkin: The reason it could not be reinterpreted is the Supreme court in the last several terms has said very clearly that that language establishes a constitutionally protected right to own guns at the individual level,quite aside from militia, and if I had 40 minutes, I could describe those details.

Host: Sure, I know it’s very complicated.

David Rivkin: Let me say this: you can’t really get there without a constitutional amendment and a constitutional amendment is unthinkable, given how difficult it is to pass. And despite what my colleague says, a large majority of Americans even after terrible tragedies like this understand it is not about gun ownership– it is about mental illness.  The real way of solving those problems is to go back with some of the excess of the sixties and seventies where a lot people were deinstitutionalized and so that it’s virtually impossible to commit somebody.

One unifying feature of all these tragedies was they were committed by mentally unbalanced people who need to be confined both for their own protection and the protection of those around us.  This person could have had a homemade bomb and could have blown up the whole school.  You can’t possibly come up with some sort of mechanical ways of keeping this from happening.

Host: Alright Clara Jeffery, would you agree with that? That it’s not just about gun ownership.

Clara Jeffery: It’s not just about gun ownership.  Certainly we need more mental health care and which has been slashed recently in the United States in the last few decades.  But the fact remains that if you walk into a classroom with a semiautomatic assault rifle, you can inflict a lot more damage a lot more quickly.  That was the gun he used to butcher these children.  Those weapons repeatedly, again and again, we see when we analyze 63 mass shootings in America over the last couple of decades, assault weapons are the weapons of choice.  Because people who want to do this kind of thing want an arsenal that only a member of the military should have.

David Rivkin: Let me pose a questions to my colleague, do you really think if assault weapons were banned, you walk into a school where not a single teacher has any firearms and no police officers.  If you had two regular hunting rifles which even the biggest proponent of gun control is not thinking about banning, that he could not have killed as many children as he did? A regular hunting rifle and a couple of pistols, that would not suffice?

Clara Jeffery: The ability to fire off a barrage of bullets, to not have to reload, yes it’s simple math, you can kill more people quicker.  But the assault weapons aside, what we also need to change in this country is the culture of gun ownership.  I am not saying that is ever going to happen maybe ever and certainly not overnight that we would have some kind of outright ban on guns. There is a second amendment provision and I mean the interpretation of the second amendment can change overtime in the courts.  We’ve interpreted other parts of the constitution differently in different eras.  But what could change is the way that the NRA and other gun ownership affiliates basically bullying people into thinking that any discussion of how people should use, store guns is not up for discussion.

Host: That was Clara Jeffery of the website Mother Jones. I was also talking to the Constitutional Lawyer David Rivkin in Washington.  Well, you can find more about the debate on gun laws in America and some statistics on the number of fire arms murders in the U.S. if you go to our website, a special website that’s been set up about this story it’s bbc.com/newtown and we’ll be coming back to this story after the news at half past.  Were going be hearing from the head teacher in Texas who says that giving teachers guns is the best way to keep children safe.  You’re listening to Newshour of the BBC World Service.

Rivkin and Casey: The myth of government default

The Constitution commands that public debts be repaid. There is no such obligation to fund entitlement programs.

By DAVID B. RIVKIN JR. AND LEE A. CASEY

Three false arguments, pushed hard by the Obama administration and accepted on faith by the media and much of the political establishment, must be laid to rest if the American people are to understand the issues at stake in the federal “debt ceiling” debate.

The first is that Congress’s failure to raise the debt ceiling—the amount of money the federal government is authorized to borrow at any given time—will cause a default on the national debt. The second is that federal entitlement programs are constitutionally protected from spending cuts. The third is that the president can raise the debt ceiling on his own authority.

To take up the first canard: Contrary to White House claims, Congress’s refusal to permit new borrowing by raising the debt ceiling limit will not trigger a default on America’s outstanding public debt, with calamitous consequences for our credit rating and the world’s financial system. Section 4 of the 14th Amendment provides that “the validity of the public debt of the United States, authorized by law . . . shall not be questioned”; this prevents Congress from repudiating the federal government’s lawfully incurred debts.

The original concern of this provision was to guarantee the integrity of federal debts incurred during and immediately after the Civil War (while the debts of the Confederacy were nullified permanently), and to ensure that a newly “reconstructed” Congress—to which the Southern states were readmitted—would not reverse these decisions. However, the amendment’s language was not limited to the Civil War-related debts. In Perry v. United States (1935), the Supreme Court made clear that the provision “indicates a broader connotation” protecting the nation’s debts as a whole.

This means that a failure to raise the debt ceiling—to prevent new borrowing—does not and cannot put America’s current creditors at risk. So long as this government exists, and barring a further constitutional amendment, those creditors must be paid.

Nor are they at risk in practice, since the federal government’s roughly $200 billion in tax revenue per month is more than sufficient to service existing debts. If the executive chose to act irresponsibly and unconstitutionally and failed to make any debt payments when they come due, debt-holders would be able to go to the Court of Federal Claims and promptly obtain a money judgment.

These basic facts should inform any credible decisions by credit-rating agencies in establishing the government’s creditworthiness. Significantly, these agencies have traditionally acted favorably when heavily indebted countries have not defaulted on their debt but cut deeply their public spending.

Second, despite White House claims that Congress must raise the debt ceiling to pay the bills it has incurred, the obligations protected as “debts” by the 14th Amendment do not include entitlement programs such as Medicare and Social Security. These programs are not part of the “public debt,” which consist of loans that are made to the federal government through bonds and similar financial instruments. Entitlement programs are instead political measures that are fully subject to the general rule that one Congress cannot, by simple legislation, prevent a future Congress from making cuts.

This fundamental and vital distinction is clear from both the text and the drafting history of the 14th Amendment’s Section 4. The wording of the section was revised before its enactment and ratification to replace the term federal “obligations” with that of “debts,” a far more narrow (and manageable) category.

The distinction was recognized by the Supreme Court in Flemming v. Nestor (1960), which involved the power of Congress to modify Social Security benefits. The court noted that entitlements and “contractual arrangements, including those to which a sovereign itself is a party, remain subject to subsequent legislation by the sovereign.”

Congress can reduce a wide range of payments to various beneficiaries at any time by amending the statutes that authorize them or simply by failing to appropriate sufficient funds to pay for them. Nor does Congress have any legal or constitutional obligation to borrow money to pay for entitlements.

Third, assertions, most recently made by Nancy Pelosi, that the president can rely on Section 4 as a pretext for raising the debt ceiling by himself are manifestly incorrect and constitutionally dangerous. Section 4 grants no power whatsoever to the president—instead, the 14th Amendment grants Congress the “power to enforce, by appropriate legislation, the provisions of this article.”

More fundamentally, this argument—which has been tentatively advanced and then tentatively withdrawn by the White House, both during the 2011 debt-ceiling battle and in the last several weeks—is contrary to the language, structure and history of the Constitution.

Like the British Parliament before it, Congress controls the power of the purse—the authority to raise taxes, borrow money and direct how revenues are spent. In particular, Article I, Section 2, grants to Congress the power “to borrow money on the credit of the United States.” There is no similar grant to the president. Any effort by the chief executive to borrow money without congressional action would be every bit as injurious to our constitutional system as presidentially ordered taxation.

True enough, the “debt ceiling” is not a constitutional requirement. Congress could choose instead—as used to be the case during most of our history—to vote separately on the issuance of each federal debt instrument. However, nowhere in the Constitution is the president authorized to borrow or spend money without congressional action, except insofar Congress itself may permit.

Once these false arguments are cleared away, the real issue in the debt-ceiling debate becomes clear: the proper level of federal spending. Should Congress fail to increase the debt ceiling as much as the president wants, the effective result would be major government spending cuts, with payments on public debt excluded.

This is tough medicine and not to be administered lightly. If Republicans are serious about winning this debate, they must strive to convince the American people that such spending cuts are necessary, given President Obama’s openly articulated unwillingness to implement any meaningful spending cuts other than defense and his clear preference for limitless borrowing.

Whether they can succeed in this task is unclear. But the public must at least be allowed to ponder these vital issues without being misled by false claims involving debt default, the nature of federal obligations, and which branch of government is in charge of the public fisc.

Messrs. Rivkin and Casey are partners in the Washington, D.C., office of Baker Hostetler LLP and served in the White House and Justice Department during the Ronald Reagan and George H.W. Bush administrations.

Source: http://online.wsj.com/article/SB10001424127887324081704578232080227662110.html#articleTabs%3Darticle

The opening for a fresh ObamaCare challenge

By defining the mandate as a tax, one that will not be uniformly applied, the Supreme Court ran afoul of the Constitution.

By DAVID B. RIVKIN, JR. AND LEE A. CASEY

ObamaCare is being implemented, having been upheld as constitutional by the Supreme Court in June in a series of cases now known as National Federation of Independent Business v. HHS. It is becoming increasingly clear, however, that the court took a law that was flawed but potentially workable and transformed it into one that is almost certainly unworkable. More important, the justices also may have created new and fatal constitutional problems.

ObamaCare, or the Affordable Care Act, was conceived as a complex statutory scheme designed to provide Americans with near-universal health-care coverage and to effectively federalize the nation’s health-care system. The law’s core provision was an individual health-insurance purchase mandate, adopted by Congress as a “regulation” of interstate commerce. The provision required most Americans to buy federally determined minimum health-care insurance, or to pay a penalty more or less equivalent to the cost of that coverage.

Equally important were provisions requiring creation of state-run health-care insurance exchanges (where middle-income earners could obtain the prescribed coverage) and an expanded Medicaid program (also administered by the states) to cover people with incomes up to 133% (later upped to 138%) of the federal poverty level. An income of up to $31,809 for a family of four would qualify for Medicaid. States that failed to join in the Medicaid expansion were threatened with the loss of all federal Medicaid dollars, nearly a quarter of all state expenditures.

In the ObamaCare ruling, the Supreme Court correctly held that Congress could not impose the individual mandate as a constitutional regulation of interstate commerce and that Congress could not constitutionally use its spending power to coerce the states to expand Medicaid. Rather than strike down the law, however, the court construed the insurance-purchase mandate and its penalty as a “tax” on the failure to have health insurance. The justices also interpreted the Medicaid-expansion requirements as optional—permitting states to opt out of these provisions while staying within the traditional Medicaid program. Given that interpretation, the court’s majority upheld the statute as constitutional.

The court’s determination to preserve ObamaCare through “interpretation” has exacerbated the law’s original flaws to the point that it has become palpably unworkable. By transforming the penalties for failing to comply with the law’s requirements into a “tax,” the court has given the public a green light to ignore ObamaCare’s requirements when it is economically beneficial. Law-abiding individuals, who might otherwise have complied with the law’s expensive purchase mandate to avoid being subjected to financial penalties, can simply now choose to pay a tax and not sign up for coverage. There is certainly no stigma attached to simply paying a tax, and noncompliance with the law’s other requirements—such as those imposed on employers—is arguably made more attractive on the same basis. This effect fundamentally undercuts Congress’s original purpose, which was to expand health-care coverage to the greatest number of people, not to improve federal revenues.

Similarly, having reviewed the likely costs and benefits, states are now taking advantage of the court-granted flexibility. Seven states, including Texas, Mississippi and Georgia, have so far opted out of the Medicaid-expansion provisions, and eight (with more certain to come) are refusing to create the insurance exchanges, leaving this to a federal bureaucracy unequipped to handle these new administrative burdens. As a result, a growing number of low-income Americans will be unable to obtain the free or cost-effective insurance that Congress originally meant them to have, although they remain subject to the mandate-tax.

Policy problems aside, by transforming the mandate into a tax to avoid one set of constitutional problems (Congress having exceeded its constitutionally enumerated powers), the court has created another problem. If the mandate is an indirect tax, as the Supreme Court held, then the Constitution’s “Uniformity Clause” (Article I, Section 8, Clause 1) requires the tax to “be uniform throughout the United States.” The Framers adopted this provision so that a group of dominant states could not shift the federal tax burden to the others. It was yet another constitutional device that was simultaneously designed to protect federalism and safeguard individual liberty.

The Supreme Court has rarely considered the Uniformity Clause’s reach, but it cannot be ignored. The court also refused to impose meaningful limits on Congress’s power to regulate interstate commerce for decades after the 1930s, until justices began to re-establish the constitutional balance in the 1990s with decisions leading up to the ObamaCare ruling this summer. And although the court has upheld as “uniform” taxes that affect states differently in practice, precedent makes clear that a permissible tax must “operate with the same force and effect in every place where the subject of it is found,” as held in the Head Money Cases (1884). The ObamaCare tax arguably does not meet this standard.

ObamaCare provides that low-income taxpayers, who are nevertheless above the federal poverty line, can discharge their mandate-tax obligation by enrolling in the new, expanded Medicaid program, which serves as the functional equivalent of a tax credit. But that program will not now exist in every state because, as a matter of federal law, states can opt out. The actual tax burden will not be geographically uniform as the court’s precedents require.

Thus, having transformed the individual mandate into a tax, the court may face renewed challenges to ObamaCare on uniformity grounds. The justices will then confront a tough choice. Having earlier reinterpreted the mandate as a tax, they would be hard-pressed to approve the geographic disparity created when states opt out of the Medicaid expansion. But that possibility is inherent in a scheme that imposes a nominally uniform tax liability accompanied by the practical equivalent of a fully off-setting tax credit available only to those living in certain states. To uphold such a taxing scheme would eliminate any meaningful uniformity requirement—a result that the Constitution does not permit.

ObamaCare was always a poorly conceived and constitutionally deficient statute. The Supreme Court’s ruling upholding the law has simply made it worse. In the future, that decision is likely to be seen as a prime reason that the federal courts should judge and never legislate—even in the cause of rescuing an otherwise unconstitutional law from oblivion.

Messrs. Rivkin and Casey are lawyers in the Washington, D.C., office of Baker & Hostetler LLP. They pioneered the constitutional arguments against the individual mandate and represented 26 states in challenging ObamaCare before the trial and appellate courts.

A version of this article appeared December 6, 2012, on page A17 in the U.S. edition of The Wall Street Journal, with the headline: The Opening for a Fresh ObamaCare Challenge.

Source: http://online.wsj.com/article/SB10001424127887324705104578151164101375482.html?mod=djemEditorialPage_h

Plenty of debates, not much about states

Democrats regard federalism as quaint, Republicans at least pay lip service to it

By DAVID B. RIVKIN JR. AND ELIZABETH PRICE FOLEY

In the presidential debates, Barack Obama and Mitt Romney ranged across dozens of topics, but an important one didn’t come up: federalism. And no wonder.

The idea that the Constitution grants only limited and enumerated powers and leaves the remainder to the states is foreign to those who believe that the national government should or even could address voters’ every concern. But contrary to the view widely shared by the political class, Washington—in particular, Congress—does not have the power to pass any law it wants in the name of the “general welfare.”

Politicians should take heed. Voters are increasingly focused on the proper role of government in society: Witness the rise of the tea party and unease over the massive debt caused by entitlements and other government handouts. The continuing loud objection to ObamaCare’s takeover of health care shows that voters want to preserve the Constitution’s architecture of limited federal power.

Keeping the federal government within its proper constitutional sphere is critical to all Americans, regardless of their political allegiance. This is because federalism is not about protecting “states’ rights” but about preserving individual liberty. In the words of a unanimous 2011 Supreme Court decision, Bond v. United States, by “denying any one government complete jurisdiction over all the concerns of public life, federalism protects the liberty of the individual from arbitrary power. When government acts in excess of its lawful powers, that liberty is at stake.”

Federalism also allows states to craft policies that best suit the preferences and needs of their citizens, who can always vote with their feet. Likewise, leaving key policy choices to state governments benefits voters through sheer proximity to decision makers. State legislators are often part-timers who work and live in our communities and are more palpably accountable to us.

State-level reform thus comes more swiftly and better reflects the desires of ordinary constituents. States in recent years have led the way in reforming welfare, health care, education and regulatory policies. They have cut deficits, balanced budgets, reformed tax codes and produced jobs.

Federalism also benefits the national government. By having up to 50 different approaches to an issue, Congress can see what works.

Despite federalism’s many virtues, it is not much in vogue. Democrats view it as a quaint, 18th-century relic, another disposable constitutional concept that stands in the way of “progress.” The Obama administration has been particularly disdainful of federalism, with ObamaCare unconstitutionally coercing states into fundamentally revising their Medicaid programs and compelling individuals—under the guise of regulating interstate commerce—to buy a government-approved health-insurance policy.

Republicans pay lip service to federalism but too often toss it aside to achieve their own policy goals. For example, many congressional Republicans, concerned about abusive lawsuits, would nationalize many aspects of medical malpractice, an area of law traditionally reserved to the states.

Meanwhile big-spending states such as California and Illinois have been lobbying Congress for a federal bailout of their unfunded pensions. From the federalist perspective, it is appropriate that the promiscuous spending of some states makes it difficult for them to borrow more money. Such consequences, while dire, provide the political leverage that citizens living within those states need to force their elected representatives to reform.

Yet Washington may well end up rescuing these nearly bankrupt states—because some states will compromise their own sovereignty when the price is right, and the federal government is only too happy to take over and claim political credit. For there is no more assiduous underminer of federalism than the federal government itself. Every session of Congress and every administration adds to the existing voluminous body of federal law that continues to federalize wide swaths of traditional state authority. This must stop.

There was one glimmer of hope for federalism in the third presidential debate, when Mitt Romney talked about saving Medicaid by making block grants to states. “We’ll take that health-care program for the poor and we give it to the states to run because states run these programs more efficiently,” he said. “As a governor, I thought please, give me this program. I can run this more efficiently than the federal government and states, by the way, are proving it.”

If Mr. Romney succeeds in his race for the White House, let’s hope he doesn’t forget that states can be trusted to run their own affairs.

Mr. Rivkin served in the Justice Department under Presidents Reagan and George H.W. Bush and represented 26 states in challenging ObamaCare. He has advised the Romney campaign. Ms. Foley is a law professor at Florida International University College of Law and author of “The Tea Party: Three Principles” (Cambridge, 2011).

Source: http://online.wsj.com/article/SB10000872396390443328404578022821421131956.html 

Failed U.S. leadership in foreign policy

Ali Musa DaqduqUnfortunately, examples of failed U.S. leadership in foreign policy continue to increase in both frequency and gravity:

  1. We have failed to stop Iran’s nuclear-weapons program.
  2. We have failed to punish Tehran for facilitating the deaths of American soldiers
  3. We have failed to punish them for plotting to assassinate the Saudi ambassador to Washington.

In the aftermath of September 11, 2012, an even more tragic failure,the Obama administration failed to have Iraq extradite Hezbollah terrorist Ali Musa Daqduq to the U.S. for trial. The president continues to reinforce the impression of American impotence. In December 2011, nearly a year ago, we predicted that the failure to extradite Daqduq would “have serious repercussions, measured in diplomatic defeats and lost lives.”

Did the fact that an Iraqi court cleared Daqduq of all charges embolden the attackers on Benghazi last month?