PUBLIC CONTROL OF BUSINESS REVISITED

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Barnard Gilbert
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1 PUBLIC CONTROL OF BUSINESS REVISITED David Boies Before Paul Verkuil was Dean of the Cardozo School of Law, Dean of Tulane University Law School, Dean of the University of Miami School of Law, President of the College of William & Mary, or President of the American Automobile Association; before he had become a leading scholar in administrative law and constitutional law, and authored or co-authored ten books and more than sixty-five law review articles; before he had been a Special Master for the United States Supreme Court in New Jersey s case against New York over sovereignty over Ellis Island or a Special Master for the judges of the Fifth Circuit responsible for desegregation of higher education in Louisiana; before he was nominated by President Obama and confirmed by the Senate as Chairman of the Administrative Conference of the United States; Paul and I were young associates at Cravath, Swaine & Moore in New York City. In the late summer of 1967 we were both newly married, living in Manhattan for the first time, and trying to figure out how, if at all, it was possible to balance the demands of private practice and new families with our shared interest in fighting injustice (not to mention the attraction of New York nightlife and perhaps, if we still had time, continuing the research and writing that we had enjoyed in law school). At the time, we were too young, naïve, and successful to believe we could not do everything equally well. And while we gradually learned the need and importance of prioritization, one of the four things that I still find most remarkable about Paul is how many different endeavors he does so well and so calmly and apparently effortlessly. Much of what we did separately and together in the first several years we were friends seems, in retrospect, a little (or more than a little) rash. Although some of what we did was considerably riskier, probably nothing was more rash than our decision in 1970 to write a law school textbook on public control of business. 1 Each of us was interested in, and had studied, economic regulation in law school and graduate school. However, what we did not know about the area vastly outweighed what we knew, we were both working Founding Partner, Boies, Schiller & Flexner LLP. 1 DAVID BOIES & PAUL R. VERKUIL, PUBLIC CONTROL OF BUSINESS (1977). 2177

2 2178 CARDOZO LAW REVIEW [Vol. 32:6 full-time (which limited our time for research and writing, let alone reflection), and we both were determined to continue to devote time to civil rights cases. 2 We have wondered over the years how we could have thought we would ever have the time or the knowledge under those circumstances to write a book. However, as we sat one night over drinks at the Village Gate, a block from my apartment in one direction and a couple of blocks from NYU (where I was teaching part-time) in the other direction, we both concluded we had something to say about government regulation of private enterprise, and about the historical and proper intersection of private markets and public control, that was worth saying. I still think we were right about that. Where we were wrong was in greatly underestimating the work involved and the time it would take. 3 With a combination of optimism and hubris we agreed that we should be sure to teach a course in regulated industries in the fall of 1972, a little more than two years from our Village Gate seminar, so that we could teach from our own book. (I planned to continue teaching part-time and Paul was then beginning to plan to teach full-time.) We figured that it would take six to twelve months, but allowed ourselves twelve, to write the book, and because we had heard that law text publishers were notoriously slow in producing a book after the manuscript was complete, we allowed another year for that. The book was finally published in The publishers took a little less time than we had estimated. We took five to ten times more. The problem was not the difficulty in articulating the basic principles that we concluded should be used to determine the relative roles of government regulation and private markets; what took time was applying those principles to the complex set of markets that make up the American and global economies. It has long been accepted that unregulated competitive markets maximize an efficient allocation of society s scarce resources and consumer welfare. There are also good reasons to believe that minimizing government economic controls reinforces democratic institutions. Accordingly, government regulation of a particular industry or market historically has been based on the assumption that particular industry or market characteristics made effective competition impractical. In the absence of effective competition, government 2 In fact, we both worked on cases arising from the injuries and deaths caused to students of Jackson State and Kent State Universities by state officials. See Paul R. Verkuil, Immunity or Responsibility for Unconstitutional Conduct: The Aftermath of Jackson State and Kent State, 50 N.C. L. REV. 548 (1972). 3 We also explored consumer protection law through a survey of the availability of supermarket sales items that Paul carried out with his law students at the University of North Carolina School of Law. See David Boies & Paul R. Verkuil, Regulation of Supermarket Advertising Practices, 60 GEO. L.J (1972).

3 2011] PUBLIC CONTROL OF BUSINESS 2179 regulation of business is seen as a means of protecting consumers from the higher prices and inferior quality that suppliers, disciplined neither by private competition nor public regulation, might otherwise charge and provide. Our first principle was that regulations should rarely, if at all, restrain competition. Although this principle might be seen as naturally flowing from the fact that regulation is based on the impracticality of effective competition, many regulations at the time directly limited new entry, expanded service, and even lowered prices on the theory that otherwise improvident, ruinous, or predatory competition would harm consumers in the long run. Paul and I were convinced that our contrary principle was justified by both economics and history. From an economic perspective, the circumstances that could theoretically justify restrictions on entry or expansion are virtually nonexistent in the real world (and the danger of inhibiting consumer welfare-enhancing new entry or service far outweighs any possible benefit from such restrictions). 4 Also from an economic perspective, any possible issue arising from predatory price competition is satisfied by generally applicable antitrust laws and does not require industry-specific regulation. From a historical perspective, experience teaches that regulators of particular industries tend to become captives of the companies they regulate. However high-minded the initial impulse to regulate may be, over time regulators are increasingly likely to protect, and identify with, the companies they regulate rather than consumers. This is in part because the regulators come to rely on the companies for data the regulators need, in part based on the revolving door of government service, and in part simply because companies repeatedly appear before the regulators with every incentive (and with the resources) to cultivate good relations. Consumers, by comparison, generally lack the access, data, and resources to play a significant role in regulation. The second principle was that the historical justification for regulation that competition would not work because an industry was a natural monopoly was inapplicable to most of the industries so characterized, and that even where a natural monopoly did exist in a market within an industry, other markets that are not natural monopolies should not be regulated merely because they are in the same industry. For example, even if it were concluded that local distribution of electric power was a natural monopoly, that would not justify regulation of electric power generation. (Applying our first principle, any regulation of a natural monopoly should be directed at preventing the monopolist 4 See David Boies, Jr., Experiment in Mercantilism: Minimum Rate Regulation by the Interstate Commerce Commission, 68 COLUM. L. REV. 599 (1968).

4 2180 CARDOZO LAW REVIEW [Vol. 32:6 from using its power to raise prices and reduce output, and should not be used to protect the monopolist from new competition.) Our third principle was that the most important rationale for regulation is the existence of significant externalities or non-transaction costs or benefits. Competition maximizes consumer welfare because it works to equate the incremental costs of an economic activity to the incremental benefits of the activity or, put differently, competition tends to drive prices down to the economic costs incurred and provides suppliers with the incentive to improve product quality and performance. This only works, however, where both the costs and benefits of a product or service are mainly borne by the parties to the transaction the sellers and buyers of the product or service. Where substantial costs of a product or service are borne not by the seller but by persons who are not parties to the sale, unregulated competition will result in serious resource misallocations by artificially increasing output and by shifting output methods from more efficient (i.e., methods with fewer non-transactional costs) to less efficient methods (i.e., methods with more non-transactional costs). (It will also result in a transfer of wealth from the parties bearing the nontransactional costs to the sellers and buyers of the product or service.) Today, we are increasingly aware of the distortions caused by industries that pollute the environment, transferring much of the costs of their product or service to the public at large. While these distortions were recognized in 1970, Paul s framework for analyzing how to evaluate the extent of such distortions, and how to minimize them, was substantially ahead of his time (and substantially ahead of much of the current debate about environmental issues). A similar distortion occurs where the rewards of economic activity are captured by the direct participants but the risks are borne at least in material part by the government or the public. I cannot say that forty years ago Paul foresaw the specific danger that the ability of large financial institutions to pass much of their costs of failure on to the government and public meant that regulation to prevent excessive risks that could lead to such failures was necessary, but he was certainly alert to the general problem and working to identify possible manifestations. Paul s fourth principle was that where competition did not work because of a lack of information (competition requires both competing suppliers and adequate information to enable consumers to choose intelligently among them), the remedy in almost all cases should be greater disclosure rather than a regulation of the products and services themselves. The main exceptions are those limited products or services where fair and accurate disclosures are not likely to be understood by typical consumers or where the consumer responsible for a decision to

5 2011] PUBLIC CONTROL OF BUSINESS 2181 purchase is not the main person using, or affected by, the product or service. While 1967 was just the beginning of our friendship, and Public Control of Business was just the beginning of more than four decades of contributions Paul would make as a legal scholar, teacher, and administrator, it was a memorable time for us both. For me it was the first and last time I would undertake such a project, but I have the satisfaction of having participated in the effort that was the first step in the extraordinary body of work Paul has created. Nevertheless, it is not Paul s professional insights and accomplishments that to me most define who Paul is, or even what is most remarkable about him. And while those insights and accomplishments contribute to people wanting to know and talk to him, they do not account for his many close friends many of whom have known Paul for decades; and they do not account entirely, or even mainly, for why every university, school, and business he has ever led has been unhappy to see him go. People admire Paul for his intelligence, integrity, and judgment. They follow him in part for those reasons, but also in part because of his objectivity, patience, and genuine interest in other people s needs and views; he primarily leads by example and consensus, not by fiat. Those characteristics, together with his loyalty and slowly-developing sense of humor, also make him a great friend.

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