Regulation by Litigation 9780300152517

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Regulation by Litigation

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A N D R E W P. M O R R I S S B R U C E YA N D L E ANDREW DORCHAK

Regulation by Litigation

Yale University Press New Haven & London

Published with assistance from the Louis Stern Memorial Fund. Copyright ∫ 2009 by Andrew P. Morriss, Bruce Yandle, and Andrew Dorchak. All rights reserved. This book may not be reproduced, in whole or in part, including illustrations, in any form (beyond that copying permitted by Sections 107 and 108 of the U.S. Copyright Law and except by reviewers for the public press), without written permission from the publishers. Set in Sabon type by Keystone Typesetting, Inc. Printed in the United States of America. Library of Congress Cataloging-in-Publication Data Morriss, Andrew P., 1960– Regulation by litigation / Andrew P. Morriss, Bruce Yandle, Andrew Dorchak. p. cm. Includes bibliographical references and index. isbn 978-0-300-12002-8 (cloth : alk. paper) 1. Industrial laws and legislation—United States. 2. Administrative procedure— United States. 3. Public interest law—United States. 4. Actions and defenses— United States. I. Yandle, Bruce. II. Dorchak, Andrew. III. Title. kf1600.m68 2008 342.73%066—dc22 2008017720 A catalogue record for this book is available from the British Library. This paper meets the requirements of ANSI/NISO Z39.48-1992 (Permanence of Paper). It contains 30 percent postconsumer waste (PCW) and is certified by the Forest Stewardship Council (FSC). 10 9 8 7 6 5 4 3 2 1

Para Carol, mi vida For Dot, who has patiently listened to talk about regulation for forty years For my parents

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Contents

Acknowledgments ix 1

Introduction 1

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The Regulator’s Dilemma 16

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Modes of Regulation 36

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Heavy-Duty Diesel-Engine Litigation 55

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Dust Litigation 93

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Tobacco Litigation 126

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What Have We Learned? 160 Notes 179 References 243 Index 267

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Acknowledgments

The authors gratefully acknowledge support from the Property and Environment Research Center (PERC) for work on chapter 4 and from the Mercatus Center at George Mason University for work on chapters 5 and 6. Research support from Dean Gerald Korngold at Case Western Reserve University School of Law and from Deans Heidi Hurd and Charles Tabb at the University of Illinois College of Law was also instrumental in making this book possible. It’s impossible to imagine more supportive deans. Support for PERC from Caterpillar, Inc., made possible our initial research on the regulation of diesel emissions. Rhein Associates generously made their invaluable research reports on the diesel-engine market available to us at a substantial academic discount. Chapter 4 draws heavily on the work we did for ‘‘Choosing How to Regulate,’’ ‘‘Regulating by Litigation: The EPA’s Regulation of Heavy-Duty Diesel Engines,’’ and ‘‘Regulation by Litigation: Diesel Engine Emission Control,’’ and we are grateful to the editors of the Harvard Environmental Law Review, the Administrative Law Review, and the Independent Review, where those articles originally appeared, for their assistance. Susan Dudley’s contributions to ‘‘Defining What to Regulate’’ make her a virtual coauthor of chapter 5; the editors of the Administrative Law Review did a wonderful job helping us with that article, and their work influenced the chapter. Joe Rotundi at the Mercatus Center helped with research assistance

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Acknowledgments

and more for chapter 6 and well deserves his status as coauthor on that chapter. Our research for that chapter inspired our article (together with Joe) ‘‘Bootleggers, Baptists & Televangelists: Regulating Tobacco by Litigation,’’ forthcoming in the University of Illinois Law Review, and we thank the editors of that journal for their assistance as well. Far too many people to name, including quite a few who prefer not to be named, at various companies, law firms, interest groups, and regulatory agencies generously gave of their time and resources to answer our questions. In particular, Margo Oge of the Environmental Protection Agency (EPA) generously took time to patiently answer questions about mobile-source air-quality regulation, despite her disagreement with much of our analysis of the EPA’s diesel regulatory activity. Their time and comments improved the manuscript immensely. Many colleagues and friends generously commented on various versions of this work. Jonathan Adler, Terry L. Anderson, Harrison Coulter, Michael Heise, Sharona Hoffman, Gilbert S. Keteltas, William Leasure, Roger Meiners, and Robert G. Natelson deserve particular mention. Participants at workshops at the Association of Private Enterprise, at the University of Texas Law and Economics Workshop, and at meetings of the Sorptive Minerals Institute also provided helpful comments on various portions of predecessor manuscripts. Dawn Richards provided invaluable help with the bibliography as well as general organizational and secretarial assistance. Chaya Compton and Olivia Odell provided helpful research assistance. The staff at the Cleveland Public Library went beyond the normal call of duty, and Mary Jane Finan and Patty Marvel at the Case Western Reserve University Law Library obtained many obscure sources. We are particularly grateful to Michael O’Malley at Yale University Press for encouraging us in this project and guiding us through the process, to Alex Larson at Yale for keeping the process running smoothly, and to Karen Schoen for painstakingly copyediting the manuscript and making it infinitely more readable. The authors thank William Morriss for proofreading the entire manuscript. All remaining errors are, of course, our responsibility.

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Introduction

The U.S. Environmental Protection Agency (EPA) sued every heavy-duty diesel-engine manufacturer and obtained major substantive regulatory concessions from the industry in settlements of lawsuits. A small number of personal-injury lawyers sued thousands of companies over asbestos exposure on behalf of hundreds of thousands of former workers and found themselves playing major roles in restructuring companies through bankruptcy proceedings. Forty-six state attorneys general sued every major cigarette company in the United States—with the assistance of many of the lawyers who pioneered the asbestos litigation—and imposed major regulatory provisions and the equivalent of a tax increase through settlement agreements. What do these events have in common? They are all examples of a new trend in regulation: regulation-by-litigation. Six years ago, we embarked on an investigation of this new form of regulation taking hold in both state and federal courts.∞ Regulation-by-litigation, as this new phenomenon became known, uses litigation and the courts to achieve and apply regulatory outcomes to entire industries. Lawyers, both private and public, were bringing suits and achieving ends that could be and traditionally had been achieved by regulatory agencies using rulemaking procedures. Indeed, in some cases, regulatory agencies were using both regulation and litigation against the same parties to achieve multiple regulatory outcomes.

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Introduction

The rise of regulation-by-litigation raises a host of questions that challenge scholars to explain what is going on. And from a policy standpoint, regulationby-litigation comes with a number of troubling issues. Chief among these is the relative lack of due process afforded when litigation supplants traditional notice-and-public-comment rulemaking, which allows for participation by all interested parties. Another concern is that regulatory agencies, which have imposed and are enforcing rules on an industry, ‘‘take another bite from the apple’’ by then bringing suit against the same industry and coercing agreement to a settlement that imposes additional regulations. For us, the three authors, regulation-by-litigation builds a mixture from two phenomena we have investigated separately. The three of us have for years studied, written about, and taught courses in regulation that focus on rules developed and enforced by regulatory agencies operating within a legislative framework that imposes accountability, boundaries, and due process on regulators. At the federal level these rules are defined largely by the Administrative Procedure Act. At the state level, various statutes accomplish similar ends. Although we sometimes are critical of regulatory outcomes that seem misguided, ineffective, or unduly costly, we nonetheless recognize that the regulatory process requires that notice be given to interested parties, that interested parties have an opportunity to participate in regulatory proceedings, that regulatory agencies provide due process, and that parties be permitted to appeal to a federal court and ultimately to the legislative body that empowers the regulator. We have also taught, researched, and written on various aspects of litigation, and we understand how regulatory agencies often bring enforcement actions against parties who fail to comply with regulations. The regulators litigate to gain compliance. We understand how private and public tort actions are brought against firms that impose harms on individuals and their agents. We recognize that successful private and public litigation does bring about changes in the behavior of defendants through injunctions and the payment of damages and might therefore be thought of as being regulatory. But although the outcome of one controversy at law may generate voluntary changes in behavior beyond the parties to a controversy, perhaps even across an industry, the litigation itself and the related court rulings cannot mandate prospective changes to an entire industry. By contrast, regulation-by-litigation can and does impose forward-looking regulatory constraints on an entire industry. In our research on regulation-by-litigation, we have found cases in which federal regulatory agencies have settled suits by imposing detailed prospective regulatory requirements on all members of an industry that is being regulated by the same regulatory agency. We have found cases in which state attorneys

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general have brought and settled coordinated suits against an industry with settlement agreements that require marketing changes and the payment of fines for indefinite periods of time. And we have found cases in which the plaintiffs’ bar has organized mass tort suits against members of an industry so that the outcomes of the suits result in total industry regulation. In organizing the regulation-by-litigation stories that fill this book we seek to do more than present a set of carefully researched episodes that describe a new regulatory phenomenon, though we have certainly endeavored to accomplish that end. It is our purpose to go beyond the presentation of facts to achieve an explanation of why, when, and how the episodes occurred. To accomplish this goal, we must consider the canons of public choice, apply theories of regulation, and use the power of economic logic to explain human behavior. Indeed, it is the application of these concepts that forms the distinguishing feature of this book. We emphasize the importance of laying a theoretical foundation that will help explain regulation-by-litigation as an alternative regulatory phenomenon. We hope that the theoretical framework we develop will prove helpful when applied to future regulation episodes. We are clearly working at the foundation level; we are not at a point where we can randomly draw a sample of such cases and test our theories. Let us now give some background on the concepts we will apply and explain how they relate to regulation-by-litigation.

Canons of Public Choice Public choice is a well-established field of inquiry that uses economic logic to explain political decision making.≤ The power of public-choice concepts to predict and explain political behavior rests on a simple notion: politicians and bureaucrats are people just like the rest of us; they carefully weigh costs and benefits when taking actions. And like the rest of us, they seek to enhance their own wealth, which is to say, they want to keep their jobs. For politicians, staying employed requires votes, and securing enough votes requires engaging in costly campaigns and advertising programs. And like the rest of us, politicians are rationally ignorant. They cannot know everything and so logically choose to become intensely informed about things that matter most to their pursuits. Generally speaking, what matters most to politicians is what matters to the special-interest groups who support the politicians’ reelection projects. Rational ignorance applies to everyone, including voters and the general public. Most people know a lot about their homes, their families, and the ins and outs of earning a living. Only a few know a lot about diesel-engine emis-

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sions standards, Federal Trade Commission (FTC) proposals for regulating warnings on cigarettes, or how insurance can be employed to cover workers who suffer from job-related silicosis. But if a diesel-engine manufacturer or a trucking company is headquartered in the politician’s state or district, one can bet that the politician will know a great deal about proposed regulations that affect the fortunes of those enterprises. The assumption of rational ignorance and specialized knowledge is an important part of public-choice analysis. Given rational ignorance and specialized knowledge, politicians can be predicted to engage in activities that provide well-identified concentrated benefits to special-interest groups, particularly those in their states or districts. Doing this becomes easier when the costs associated with the politically determined benefits are spread across a vast number of rationally ignorant citizens. Public choice tells us that concentrated benefits and diffused costs are the stock in trade of the successful politician. Public-choice concepts help define the political landscape on which regulation-by-litigation will occur. To begin with, federal regulation is generally a product of legislation that delegates to regulatory agencies the responsibility of implementing a law that Congress has written. When regulation-by-litigation is brought about by the enforcement division of a regulatory agency, the process and outcome will be significantly conditioned by legislation crafted in the environment described by public-choice theory. At times, legislators will see regulation-by-litigation as a desirable substitute for legislation; at other times, agencies may see it as a means of evading constraints imposed on them by legislatures. Indeed, regulation-by-litigation may accomplish things in the courts that politicians might normally be loathe to tackle. As we will see later, the attack on cigarette producers by the state attorneys general generated revenues without legislative bodies having to engage in the unpleasant business of raising taxes. And since most citizens were rationally ignorant about the details of the tobacco settlement, politicians could use the revenues advantageously in their search for job security. We will also see how mass tort suits coordinated by the private bar led to a regulatory outcome that solved a political problem for legislators. Indeed, politicians can plead innocence when asked about what agencies are doing in the courts yet still be in position to engage in politically valuable damage control on behalf of interest groups. The canons of public choice offer several key insights. First, all people are rationally ignorant about a vast number of subjects, but every person is intensely well informed about matters that have an immediate and direct bearing on his or her well-being. Given rational ignorance, it is possible for amazingly large benefits to be provided to well-informed special-interest groups without the majority of the population being aware that anything is going on.

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It is also possible for regulation-by-litigation to occur without generating a political backlash. Second, smaller interest groups will be more likely to have similar goals and will incur lower organizing costs than larger, more diverse groups. Turning politics on its head, public choice says that small is beautiful. Larger groups are less effective in political struggles than are smaller groups. Third, the transfer of political favors to targeted interest groups works best when the number of receivers is small and the costs of providing the favors are spread across a much larger group.

Theories of Regulation Theories of regulation help us understand the choices made by politicians and regulators when they decide to take action. Five theories offer potential explanatory frameworks. The first is public-interest theory, which holds that politicians and their appointees systematically seek to serve a broad public interest, always searching for lower-cost ways to provide public benefits rather than to advance the interests of particular groups at the expense of the public generally. If pollution, unhealthy working conditions, or teenage smoking is the problem to be addressed, then the legislature seeks to minimize global costs in reducing the cost that pollution, hazardous working conditions, or smoking imposes on the population at large. If the cost of regulating is greater than the cost imposed by harmful activities, no action is taken. Those seeking to serve the public interest will seek to build institutions that strengthen beneficial market forces so that the markets will not fail. Of course, public-interest theory recognizes that politicians are human and that, as a result, errors and even deliberate acts of chicanery will occur, but these failings are the exception, not the rule. When applied to regulation-by-litigation, public-interest theory says that regulatory agencies that seek to achieve goals by litigating may have found a flaw in the regulatory process that litigation will repair or a situation in which rulemaking alone would not reach particular firms in an industry. But instead of implying that regulation-by-litigation may be misguided or represents a somehow illegitimate second bite from the apple, public-interest theory says that regulation-by-litigation is really about improving the well-being of all parties taken together, including the litigation targets. A review of the extent to which regulation-by-litigation has accomplished its stated public-interest purpose will assist in determining the usefulness of public-interest theory as a tool for understanding regulation-by-litigation. Much regulation does not fit the public-interest theory, and dissatisfaction with its predictive ability led to the development of capture theory, a notion associated with the work of the political scientist Marver Bernstein and the

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economic historian Gabriel Kolko.≥ Capture theory builds on public-interest theory but recognizes that even the politician and the regulator dedicated to serving the broad public interest face a fundamental information problem: there is no clear-cut definition of what might be the public interest for each bill being considered in a legislative session or for each rule a regulator must devise. And the dedicated legislator and regulator find an ample supply of private- and public-sector advisers who happily recommend how best to vote or act on particular issues. The reason that so much advice is forthcoming rests on a notion that economists call ‘‘rent-seeking’’ behavior.∂ The odd name carries some very specific content. ‘‘Rent’’ in economics is a payment that goes beyond the cost of providing a service. It is akin to business profits that are more than sufficient to pay all taxes, interest, and earnings to investors in an enterprise. Most people spend a considerable amount of their lives looking for rents. We all want to be paid more than enough to get us to work each day. We are rent seekers, one and all. Seeking rents in the political arena can have a higher payoff than seeking rents in the world of work. The reason is simple: with the stroke of a pen a politician can cause vast amounts of resources to be transferred from taxpayers or consumers to the providers of politically favored services. For example, reducing automobile exhaust emissions improves air quality. By specifying that all automobiles must have catalytic converters to reduce emissions, politicians brought huge profits to the owner of patents on key technology, which happened to be General Motors (GM). Air quality improved and GM made more money. Suppose the issue has to do with setting tighter limits on the nitrogen oxide emissions from diesel engines. Which of the several standards being considered serves the public interest? Is it better to place the burden of achieving cleaner emissions on the producers of diesel fuel? On engine manufacturers? On some combination of the two? Or should the whole problem be reconsidered with a focus on human exposure and differences between urban and rural operations? Lobbyists, who are the agents of rent seekers, whether from engine or fuel manufacturers, environmental groups, organized religious groups, or regulatory agencies, will come to assist the legislator’s search for a publicinterest solution. Some will arrive with draft legislation prepared to guide the politician. And generally speaking, the information delivered by lobbyists, though highly focused, will be logical and truthful. (The penalty for misleading a politician can be extraordinarily high in terms of future opportunities forgone.) The politician’s search for the public interest is confused by the fact that many lobbyists will claim to be serving the public interest, even though there is disagreement as to which nitrogen oxide standard is most desirable and how

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best to achieve it. But time is precious and the politician has to take a position. Persuaded by some of the interest groups, the legislator takes a position that turns out to be advantageous to certain groups. Suppose the politician places the burden on fuel manufacturers. It will be up to them to provide cleaner fuel and therefore cleaner emissions. Perhaps without realizing it, the politician has been captured by the engine manufacturers, while still believing that he is serving the public interest. One may employ capture theory to explain how eastern high-sulfur-coal interests captured key members of Congress when the 1977 Clean Air Act Amendments were being developed.∑ These amendments required the use of ‘‘scrubbers’’ for removing sulfur oxides from stacks, even when cleaner lowsulfur western coal might have been used without scrubbers to accomplish the same end.∏ It might also be noted that eastern coal was produced by organized labor, whereas cleaner western coal was produced by nonunion workers. Organized workers were, yes, organized, which reduced the cost of speaking with one voice in an effort to influence the debate. Capture theory also explains how the railroads won the day when, despite organized opposition from agricultural and other shipping interests, Congress empowered the Interstate Commerce Commission (ICC) to regulate motor carriers in 1935,π after motor carriers began cutting prices for carrying freight.∫ The rail interests were successful in forcing ICC controls on truckers. But although capture theory seems to explain a good bit of regulation, it does not predict which party will ‘‘capture’’ when more than one party is in the struggle, as is generally the case. As suggested in the discussion of western and eastern coal producers, where one group of workers was organized and the other was not, one needs to know more about the characteristics of the parties to predict which of the special-interest groups will gain the day. When applied to regulation-by-litigation, capture theory suggests that an industry or components of an industry may see their situation improved by settling a suit that then directs the industry to engage in activities that lead to coordinated price increases and protection from competitive entry. Alternately, special interests may become influential within an agency’s enforcement division and see regulation-by-litigation as a way to quickly achieve goals that would take years to achieve by notice-and-comment rulemaking. Unfortunately, however, capture theory does not equip us to predict which of several competing interest groups will be successful in capturing a regulatory or litigation unit. For that, we must turn to the next theory of regulation. The special-interest or economic theory of regulation was developed by the late Nobel laureate George Stigler.Ω Professor Stigler suggested that one can make considerable progress in predicting which of several parties will prevail

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in a political struggle by imagining that the specific content of proposed legislation is simply auctioned off to the highest bidder. By focusing on which parties have the most to lose (or gain) in the struggle, one can begin to understand outcomes. But this is just a first step in the process. In order to be a viable participant in the auction, the agent doing the bidding must know the consensus position of the group it represents. It is costly to organize an interest group, and the larger and more diverse the players, the greater the cost. Once a group is organized, a consensus must be found regarding the policy outcome. And that is costly too. Now let us reexamine the Clean Air Act scrubber case. Suppose the case had simply pitted western against eastern coal producers. The eastern producers were located in relatively populous states and had been organized and working the halls of Congress for decades. They had more congressmen to confront and more supporting interest groups who wanted to keep local economies humming. The producers were not strictly homogeneous—some produced metallurgical-grade coal and some were diversified across industries—but the industry was dominated by a small number of large producers. Eastern coal workers had also been organized for decades. In discussions with politicians, the voice of the United Mine Workers came through loud and clear. Now consider the western producers. These were comparatively younger firms, with unorganized workers, located in remote corners of less populous states. They had fewer congressional supporters and less support from local economies that might be disrupted. Although the bulk of the market for western coal was in the East, most consumers and voters were rationally ignorant about where their coal came from. Pushed to pick which region mattered most, we would find that concentrated eastern interests with a lot to lose outweighed scattered western interests that had yet to enjoy the fruits of an expanded market for their coal. Using this scorecard, we could easily predict that eastern interests would carry the day. What about the truckers and rail interests? At the time, there were far fewer railroad companies than trucking firms. And the larger rail companies had been politically active for decades. They were organized and highly political. Railroad companies owned vast amounts of land in many states. These fixed assets meant that they would be around a long time, were in a position to extend significant favors, and had a long-term interest in political decisions affecting the value of their land. By contrast, the many small trucking firms had high organizing costs, had few employees, and were highly localized. They did not have a deep stake in important political territories; they also lacked experience in ‘‘working’’ Washington. The transaction costs of organizing and securing beneficial regulation were lower for railroads than for trucking interests. The railroads won the day.

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When applied to regulation-by-litigation, the special-interest theory asks us to look closely at differences within and among interest groups that may be caught in a litigation or regulatory struggle. We must also recognize that interest groups that matter go far beyond the parties directly engaged in a suit or regulatory process. Included will be those labeled public-interest groups who lobby for various causes, as well as the producers of substitute products or services that may gain or lose depending on outcomes. There is another critical group to consider when applying special-interest theory to regulation-by-litigation: the litigators. Litigators are far from neutral parties in the struggles. Whether they are located in the enforcement division of a regulatory agency, are elected state attorneys general, or are members of the private bar, litigators bring their own incentives to bear in the regulationby-litigation process. To start, litigators like to win, especially when they are seeking to build careers as litigators. And if part of a regulatory agency’s enforcement unit, litigators, unlike regulators, do not expect to have a continuous relationship with the industry being sued. They have no incentives to cooperate, to make trade-offs, or to look far ahead at long-term goals when taking on a firm or industry. Indeed, it is possible for an enforcement unit to have its own agenda as to what the agency should be doing and how it should be operating. If the litigators are attorneys general, they may be motivated to use regulation-by-litigation as a means to move up the political ladder. High-profile regulation-by-litigation victories can put an attorney general in the public eye and build a reputation for engaging in battle for the benefit of the public interest. Indeed, regulation-by-litigation offers the litigator the advantage of being portrayed as a guardian of the public wearing a white hat while doing battle with industries that are interested only in making profits. Northwestern Law School professor Fred S. McChesney has developed our fourth theory of regulation that sheds light here.∞≠ Instead of focusing on political favors that may be provided by politicians, McChesney develops a theory of political wealth extraction; it is damage control with a twist. The basic story goes like this: Begin with a group of businesses that have not yet been subject to regulation. The businesses are not organized politically, have no trade association, and provide little in the way of campaign contributions to politicians.∞∞ In a sense, there is little a politician can do to benefit or harm an unregulated industry. And that is just the point. To get the industry’s attention, a politician announces that hearings will be held on the possibility of calling for consumer-protection regulation of the industry’s main product or services. Several bills are drafted, and some of the proposed rules are rather draconian. Hoping to deflect these pending costs, the industry organizes, hires lobbyists, and makes prudent campaign contributions to strategically impor-

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tant politicians. The politicians relax the threat somewhat but leave a few clouds in the sky. Regulation has been avoided, but wealth has been extracted. There is another strategy that may develop when politicians in one camp threaten an industry, even one that has long been organized. The industry may seek regulation on more favorable terms elsewhere. The threat of state regulation of auto emissions led automakers to embrace federal regulation. Finally, Bruce Yandle’s theory of bootleggers and Baptists explains how successful lobbying efforts and durable regulation emerge when one interest group, labeled the Baptists, takes the moral high ground while another group, the bootleggers, uses the Baptists for cover as that group pursues a narrow economic end.∞≤ For the theory to work, both parties must seek the same end result, but it is clearly not necessary for the two interest groups to communicate or even show up at the same meetings. Indeed, through it all, they may literally despise each other. The name of the theory comes from the phenomenon of Sunday-closing laws, or ‘‘blue laws,’’ which limit the sale (but not the consumption) of alcoholic beverages. These laws are almost always fought for and supported by Baptists and members of other religious denominations that favor a diminution in the consumption of alcohol. The Baptists do the preaching, teaching, and protesting, but when they are successful in shutting the liquor stores on Sunday, a one-day market is provided each week for the illegal sale of alcoholic beverages, which benefits the bootleggers. Both the bootleggers and the Baptists are interested in strict enforcement of the law. But when the law is up for reauthorization or review, bootleggers never head to the capitol steps to lobby. They do not have to. The Baptists lobby for them, at least indirectly. The bootleggers-and-Baptists theory combines elements of the public-interest and special-interest theories of regulation, and sheds considerable light on a large number of regulatory episodes. Consider, for example, America’s grand experiment with Prohibition, which was finally passed into law in December 1917, after a long struggle by members of temperance leagues nationwide.∞≥ Prohibition hindered the production, distribution, sale, and consumption of alcoholic beverages. But two groups had reason to celebrate. Of course, those who favored Prohibition had good reason to cheer. They saw victory, especially when hundreds of breweries and scores of distilleries in cities nationwide were dismantled. But what about the bootleggers? They had cause for celebration too. Indeed, according to data on alcohol consumption, average intake actually increased during Prohibition, but not from the same kinds of beverages.∞∂ Beer consumption fell dramatically. But the consumption of spirits rose just as dramatically. The cost of monitoring the movement of beer barrels was much lower than the cost of

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tracking equivalent amounts of alcohol in bottles of Scotch and moonshine. And of course, if getting a given volume of alcohol was risky and therefore costly, it made sense to get it in more powerful forms. There is another bootlegger lurking in the Prohibition story.∞∑ Until 1916, the federal government received the majority of its revenues from taxes on alcoholic beverages. After the United States entered World War I, the federal government needed more revenue and imposed an income tax. The war experience taught the federal government about this reliable revenue source. Prohibition became affordable, and the politicians took the moral high ground. But then something terrible occurred, making the income tax unreliable. The Great Depression arrived, and with it, income-tax revenues plummeted. With a government to run and shrinking income-tax revenues, politicians ended the grand experiment with Prohibition in February 1933. Meanwhile, the alcohol industry had been permanently restructured by the good cause, and spirits had become the drink of choice. How might the bootleggers-and-Baptists theory apply to regulation-bylitigation? To receive public support and adulation, litigators seeking regulatory outcomes will engage in projects that appear to be righting serious social wrongs and will be portrayed as defending the rights of politically and economically weak groups. They will be working to right the wrongs that befall ordinary workers, children, the uneducated, and those unwittingly victimized by large corporations. These litigators work in the name of improving working conditions, providing appropriate payment for a host of damages imposed on innocent victims, or forcing insensitive manufacturers to do more to improve environmental quality. By doing so, and by gaining the endorsement of important public-interest groups, the litigators provide a ‘‘Baptist’’ element for the litigation. If there is an organized group of bootleggers with an interest in the issue, a coalition is possible.

What Regulation Delivers Regulations developed to address a perceived problem always generate benefits for some groups and impose costs as well. Sometimes, as in the Prohibition story, the costs and benefits are best seen in relative terms. Generally speaking, regulation is applied uniformly across firms and markets; there is a one-size-fits-all outcome. But most of the time, there are substantial differences in technologies, products, and marketing practices across firms in an industry. Some players in an industry, or some consumers, gain a relative advantage. For example, Prohibition imposed higher costs on the beer industry and beer consumers than on the distilleries and consumers of spirits, and

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regulation redefined the contours of the industries and markets that were subject to the rules. Firms are generally quick to recognize the gains that can be secured through regulation. Indeed, success in gaining just the right rules that raise rivals’ costs may lead to higher profits than working to increase market share. Recently, for example, John Deere, with the aid of environmental groups, petitioned the EPA to tighten the emission standards for small gasoline-engine landscape equipment.∞∏ That’s right, the firm wanted tighter standards imposed across the industry. It so happens that the firm holds patents on a new cleaner-engine technology. Deere can easily meet the stricter standards; its competitors cannot. A somewhat similar situation developed in 2005 when the U.S. Department of Transportation announced new fuel-economy standards for large trucks and SUVs that were popular with U.S. consumers.∞π (This was prior to the runup in gasoline prices.) The newly proposed rules allowed vehicle producers to hit an average fuel economy within truck segments, as opposed to achieving an average fuel-economy outcome across all vehicles sold. Under the former system, General Motors and Ford, for example, had to sell cheaply some of their less popular high-fuel-economy vehicles to offset the sales of their more popular low-fuel-economy SUVs. The differential effects contained in the new rules improved the outlook for General Motors and Ford while taking away an advantage enjoyed by their rival, the Toyota Motor Company. Similarly, Senator Charles Schumer (D-N.Y.) has assisted one U.S. tobacco company, Philip Morris, in its drive to have the Food and Drug Administration (FDA) regulate all tobacco companies.∞∫ Philip Morris, with half the U.S. market, wants the FDA to regulate the marketing, advertising, and entry of new cigarette companies. In an earlier 2003 effort, Philip Morris pushed for FDA regulation of health claims for ‘‘safe cigarettes.’’∞Ω Like Deere in its effort to gain a regulatory advantage over its competitors by calling for stricter emission standards, Philip Morris sought to raise competitors’ costs in making health claims. Not surprisingly, it turns out that Senator Schumer was the top recipient of tobacco money of all senators seeking election in 2004. The lessons to be learned from theories of regulation cause us to consider economic logic when seeking to understand regulation and how the rules get formed. The theories say that politicians are like brokers who seek to balance competing demands for valuable political favors. But for the brokers to survive, the balancing act must generate benefits to interest groups that are appropriately located. The theories remind us that interest groups are not created equal and that larger is not necessarily better. Those who have the most to gain or lose will stay longer and pay more when seeking political favors. And those

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groups that are smaller and more homogeneous will be better equipped to play politics than larger more heterogeneous groups. Finally, the theories tell us that interest groups will be more successful when they can use the cover of groups seeking the same outcomes, but for reasons that appeal to high moral standards. It turns out that these lessons can be applied to regulation-by-litigation. Litigation that emerges from within a regulatory agency will carry with it the agency’s brand name and imprimatur. Agencies such as the EPA, the FDA, and the Occupational Safety and Health Administration are generally given the benefit of the doubt when it comes to moral high ground. In the minds of the rationally ignorant, these social regulators are on the side of the angels. Indeed, environmental and consumer interest groups will often join litigation that goes after firms and industries. It also turns out that small is beautiful when litigators seek to regulate. It is easier to achieve a regulatory end through litigation in an industry that has a small number of larger firms as opposed to one that has a large number of small firms. Finally, it is easier to extract large fines and impose costly rules for firms that have huge markets where a vast number of rationally ignorant consumers will not be sensitive to the price increase that accompanies a regulation-by-litigation outcome.

How the Book Is Organized At first blush, many people might picture a regulator’s life as being almost humdrum. The regulator is engaged in technical work. If there is a hazard to be reduced, then the regulator must bring together the scientific and engineering knowledge, write a rule that embodies the knowledge, and, after having some hearings and comments, prepare and issue a final rule. Hazard reduced. Life is not so simple, however. There are political pressures to deal with, unhappy congressmen to soothe, and interest-group and industry leaders to deal with. In chapter 2 we take on the regulator’s problem and explain why the regulator’s life is more complicated than it first appears. It turns out that nothing is simple. The regulator has a limited number of people, a limited budget, and limited time to get the job done, and there is an almost endless call for action. How to set priorities? Which problems are most critical? What are the benefits and costs? To whom? Will the public welfare be served, or will an action simply benefit a narrow interest group? And what if the regulator chooses to leave well enough alone, to do nothing? Will that leave the citizenry living in a world filled with hazards, pollution, and lost wilderness? Are there alternatives to regulation? These are some of the topics discussed in chapter 2.

14

Introduction

A decision to regulate opens the door to another decision: Which of the available regulatory processes will the regulator choose? This is the subject of chapter 3, in which we describe and compare three possible regulatory approaches: (1) regulation-by-rulemaking, which is the approach most people think of when federal regulation is first mentioned; (2) regulation-by-negotiation, an approach developed in the 1980s that brings together regulators and representatives of those to be regulated prior to the announcement of a proposed regulation; and (3) regulation-by-litigation, where the regulator moves away totally from notice-and-comment rulemaking and brings suit against the individuals and organizations to be regulated. After describing the three processes and assessing the benefits and costs of each process, we apply public-choice and economic logic to explain why regulators prefer different approaches under different circumstances. Having set forth our model of regulation, we then turn to three case studies. The case studies do not, of course, ‘‘prove’’ our theory, even in the limited sense that statistically significant results in a regression equation ‘‘prove’’ a hypothesis. They serve two functions here. First, they illustrate the theory with concrete examples. Second, they offer a means to examine more closely how different types of ‘‘regulatory entrepreneurs’’ (federal, state, and private) are able to engage in regulation-by-litigation. Chapter 4 focuses on a late-1990s regulation-by-litigation episode initiated against all U.S. manufacturers of heavy-duty diesel engines by the enforcement division of the EPA. The diesel-engine case shows how a regulatory agency that had already imposed notice-and-comment regulations on the industry sued the firms in the industry and negotiated a consent agreement that tightened the existing regulations and imposed a large fine on the industry. The case shows how a combination of political and regulatory constraints allows room for an agency’s litigation unit to impose regulation-by-litigation. The story that unfolds illustrates that even the largest U.S. corporations can be held at bay by a federal regulator when the regulator has the power to shut down the sale of a principal product. The case also illustrates how regulation-bylitigation can sacrifice normal due process protections. The case study in chapter 5 illustrates how regulation-by-litigation can emerge when mass tort litigation affects an entire industry. The stories in chapter 5 focus on the problem that emerged from worker exposure to silica and asbestos, long-gestation illnesses that affected tens of thousands. The chapter’s stories reach back to the early 1900s and explain how legislation, regulation, and litigation interacted to yield institutions that affected workplace safety and worker compensation for injuries. Legislation and regulation ebb and flow in the story, but litigation becomes the dominant regulatory

Introduction

15

engine. We draw on theories of regulation and public choice to explain how mass torts can evolve into regulation-by-litigation. We then examine, in chapter 6, one of the most extensive examples of regulation-by-litigation, the 1998 Master Settlement Agreement (MSA) between the state attorneys general and U.S. cigarette manufacturers. The MSA settled suits brought against the four major tobacco companies by state attorneys general working with private attorneys. More than 280 pages in length, the MSA set down precise marketing regulations to be met by cigarette producers, helped firms in the industry coordinate price increases to fund more than $200 billion to the states, and raised barriers to entry for new cigarette producers that might be attracted by the higher prices and higher profits the MSA induced. In a word, the MSA cartelized the national cigarette market—and did this without a congressional vote. The MSA is a classic bootleggers-and-Baptists story that illustrates the principle of concentrated benefits and dispersed costs in a rent-seeking environment. We conclude in chapter 7 by drawing together conclusions from the earlier chapters. We warn of the weakening of due process represented by regulationby-litigation and call for a more rigorous legislative response when regulationby-litigation surfaces in the future.

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The Regulator’s Dilemma

Factory smokestacks send air pollutants into the atmosphere; municipal sewage systems dump insufficiently treated sewage into rivers; drivers toss trash out of car windows; financial services companies’ stock brokerages tout the stocks of companies that use their investment banking services; and pharmaceutical firms market drugs with potential side effects. In each case, private activity can have an impact on people other than the person who made the decision to act. The factory owner may not bear the full costs of emitting the pollutant; the city government may not suffer all the costs of the water pollution its plant produces; the stock brokerage may not pay for the reduced confidence in the stock markets that its acceptance of implicit bribes leads to; and the drug company may not suffer all the costs of a negative side effect of its drug. When these kinds of costs go unrecognized, economists label the effects ‘‘externalities.’’ Their existence is often cited as a justification for government regulation. Externalities may seem to be ubiquitous, however, and regulatory resources are not infinite, which means that regulators must choose when to act. Which externalities require regulation? Or in other words, when do the benefits of regulation outweigh its costs? Some externalities are relevant, which is to say that the cost of doing something about the externality is less than the cost of living with it. But other externalities are irrelevant—it costs more to do some-

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The Regulator’s Dilemma

17

thing about them than to just live with them. (We air-condition our homes, but we do not enclose and air-condition our towns. Dealing with external heat is relevant in one case, not so in the other.) Determining which externalities are irrelevant, which are relevant, and then among the relevant, which to attack first leads to the regulator’s dilemma. The use of the terms costs and benefits when discussing the choices a regulator might make alarms many people. Although economists have long touted the benefits of a formal cost-benefit analysis of regulations, a wide array of academics and interest groups have resisted the idea.∞ Determining whether the Occupational Safety and Health Act required or forbade a formal costbenefit analysis of proposed rules even produced a landmark pair of Supreme Court decisions.≤ And conducting a reasonably competent cost-benefit analysis itself raises a host of thorny issues, including the appropriate discount rate to use for future costs and benefits and the methodology used to value everything from the existence of spotted owls to human lives.≥ Regardless of how these particular disputes are resolved, however, the central problem of deciding which externalities are worth the effort to control in a world of limited resources must be addressed by regulators either implicitly or explicitly. Put another way, regulators will make the decision to do some things and not do others, even if they do not engage in formal cost-benefit analysis. At the end of a fiscal year, the regulator may find that one regulation can avoid a fatality at a cost of $1,000 per life, whereas another rule avoids a fatality at a cost of $10,000. If the larger community with limited means cares about avoiding fatalities, the community cannot ignore the difference in costs.∂ When to act is the regulator’s dilemma and is the focus of this chapter.

Establishing a Benchmark Economists often begin their analysis with a flawless (and wholly unreal) world of costless transactions, perfect information, and perfect competition. This world yields an efficient outcome. It cannot be otherwise. People in this perfect world never make mistakes when assessing which product to purchase or which medicine to use. If there is pollution, the parties involved can costlessly contract the problem away. And it costs nothing to call for enforcement activities. Although the perfect world may be useful as a standard for determining just how far from perfection we may be in some areas, economists know that things become interesting, and relevant, when the features of the real world enter the problem. It is then that economists identify the transaction costs, imperfect information, and imperfect competition that prevent reaching the

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The Regulator’s Dilemma

perfect-world equilibrium. It is when the real costs of doing something about real problems are confronted that we can evaluate the regulatory choices for removing the apparent ‘‘market failure’’ that seems to stand between the world we live in and the perfect world that we might devise. Much can be learned from such comparisons. (Even more can be learned by accepting Ronald Coase’s invitation to examine the impact of transaction costs.∑) However, some political voices announce a market failure and call for state intervention any time a problem is documented. In the real world, problems are innumerable. There are workplaces where ordinary people are injured, industrial plants that send emissions to the sky, lawn mowers that can injure people, cheaper appliances that use energy at a higher rate than more expensive ones, large low-mileage cars that use more gasoline than smaller high-mileage ones, presweetened foods that fatten children, and handguns that can kill. If information were perfect, some will say, these activities and products would simply not exist. Since they exist, markets have failed. When markets fail, the logic goes, government should act. Identifying a putative market failure is not enough, however. Even if the market-failure argument is correct, a serious problem will be presented when calls for government action are answered. Government activity, like market activity, is not perfect. This crucial public-choice insight reminds us that we must consider the possibility that even well-intended state interventions can make things worse. In other words, there may be a ‘‘government failure’’ as well as a market failure, and the means of properly judging the relative worth of alternative institutions is to compare the strengths and weaknesses of both rather than the strengths of state action with the weaknesses of market processes.∏ Indeed, as Professor Richard Stroup has noted, there is a strong case that good government (effective, honest, and reliable) is itself a public good underprovided in the political marketplace.π Understanding the complete set of institutional strengths and weaknesses requires that we consider the incentives created by the failures of both markets and governments.

Private Ordering as a Benchmark The most important benchmark for examining regulation is the alternative of not regulating, of leaving a problem to individuals to resolve through markets, contracts, and tort law. A choice to centrally regulate private behavior by government action displaces a mix of market, contract, and tort-law institutions that would otherwise govern the behavior of the affected parties. The analytical goal should then be to consider whether this outcome can be improved by state intervention, given the imperfections of public-sector solutions.

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Unregulated outcomes differ systematically from regulated outcomes. For example, they are likely to be more heterogeneous than regulated outcomes, as different individuals opt for diverse approaches because of the influence of local knowledge and individual preferences. The crucial point for our purposes is that the choice to address a problem through an imposed regulation indicates that the regulated outcome is preferable for at least some people— namely, the people who lobbied for the regulation or made the decision to regulate—to the mix of outcomes created by contract, tort-law, and market institutions. It does not prove, however, that the regulation is socially optimal. From the existence of a regulation we know only that the regulated outcome is preferable for the parties that drove the decision forward. Indeed, simply defining whose interests count is an unresolved issue for centrally imposed regulations. Should Ohio regulators consider the interests of Pennsylvania residents when approving electricity prices? Should U.S. regulators consider the interests of Mexican residents when establishing effluent discharge standards for the Rio Grande? Should human regulators consider the interests of animals and plants when setting agricultural production quotas? These kinds of issues have been debated for decades, and there is no sign of a consensus emerging. Although regulatory measures may be imposed because their aggregated benefits to all individuals exceed the costs of the regulatory measures, public-choice theory teaches that regulations also may be imposed because particular groups of individuals experience a net benefit and are able to persuade regulators to act despite the fact that the regulations impose an aggregate net loss.∫ The classic examples are sugar import quotas and price supports. The U.S. General Accounting Office (renamed the Government Accountability Office in 2004) (GAO) estimated that the U.S. sugar program provided approximately $1 billion in benefits to U.S. sugar producers at a cost to U.S. consumers of approximately $1.9 billion in 1998.Ω The existence of a regulation by itself thus tells us only that its benefits to the decision maker and to those who support the rule are worth the costs to the decision maker. But even when an externality problem can be addressed so that the estimated benefits exceed the costs of the government’s action, there is yet another question to be answered: Is there an even lower-cost way to accomplish the goals of the regulation? Water-pollution control offers an interesting example.∞≠ The EPA delegates the authority to control water pollution to states that meet the agency’s guidelines for delegated authority. One of the guidelines relates to abiding by the regulatory blueprint the agency has approved, which is based on technology-based, one-size-fits-all, point-source discharge standards. The EPA mandate calls for the application of end-of-pipe controls that reduce the concentration of certain pollutants that might otherwise go un-

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The Regulator’s Dilemma

treated in a river or stream. When applied to a particular river segment, the EPA approach may indeed bring new life to the river and make the waters fishable and swimmable. Indeed, meeting the EPA standard may produce benefits that are estimated to exceed the cost of the regulation when technologybased standards are used. Numerous studies, however, have shown that the cost of reducing discharge varies widely among point sources in the same river basin.∞∞ The studies tell us that if the lower-cost source took greater action to reduce pollution and the higher-cost source cut back on its cleanup, it would be possible to achieve even more stringent water-quality goals at lower cost. Even when a regulation can be shown to produce a net benefit, it is possible that even better approaches remain unused. In short, there are always alternative ways to accomplish the goal of a regulation.

The Usefulness of a Privately Ordered Benchmark Benchmarking a regulation against an unregulated alternative is appropriate for three reasons. First, leaving matters to private individuals has historically been the default position in American society. We do not disturb private choices unless those choices impose enough costs on others to justify the restraints on private liberty that regulations require. (Of course, the tricky bit comes in deciding just where to draw the line between actions whose costs merit regulatory attention and those that do not.) One reason for this default rule is that the founders recognized that public institutions were vulnerable to factions. In the Federalist No. 10, James Madison argued that relief from ills of factions ‘‘is only to be sought in the means of controlling [their] effects’’ and that political institutions could be designed to solve the problems of factions by restraining public actors from implementing the majority’s will in some instances. ‘‘If a faction consists of less than a majority, relief is supplied by the republican principle, which enables the majority to defeat its sinister views by regular vote. It may clog the administration, it may convulse the society; but it will be unable to execute and mask its violence under the forms of the Constitution. When a majority is included in a faction, the form of popular government, on the other hand, enables it to sacrifice to its ruling passion or interest both the public good and the rights of other citizens. To secure the public good and private rights against the danger of such a faction, and at the same time to preserve the spirit and the form of popular government, is then the great object to which our inquiries are directed.’’ Madison’s solution was to make it more difficult for government to act, restraining the ‘‘ruling passion or interest’’ through institutional features such as bicameralism, presidential vetoes, and the restriction of the national government to the exercise of limited, enumer-

The Regulator’s Dilemma

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ated powers. There is a theme of competition that runs through Madison’s proposals. The republic he designed recognized that men are not angels and that special-interest groups will organize to petition government. Without using the word, Madison understood the dangers of unbridled rent-seeking behavior and attempted to build a constitution that would deter rent seeking through government action by increasing its cost. The choice of a decentralized benchmark is not entirely a matter of a historical default, however. A second reason for benchmarking a regulation against an unregulated alternative, rather than the reverse, is that decentralized institutions such as markets have an important advantage over centralized institutions: they are more effective at incorporating local knowledge. The economist Friedrich A. von Hayek termed this the ‘‘knowledge problem’’ and explored in detail the role of local knowledge in making economic decisions.∞≤ Hayek made his argument in the context of debates over centralized economic planning, but his point is more generally applicable to areas beyond price controls because local knowledge is pervasive. Our earlier example about water-quality management shows why. Those who live or own land in a particular river basin have a long-term interest in finding the most effective, costbeneficial means for achieving water-quality goals. Rather than focusing on technologies and how treatment works might be designed and operated, people who live in the region are interested in outcomes. Since the mid-1990s, the EPA has moved in the direction of managing water quality at the level of river basins and water sheds. This does not mean that national standards are sacrificed. Indeed, in some cases, it means that national standards can be met. But of course, the EPA did not exist until 1970, and water-quality management has been around for more than a hundred years.∞≥ Community and private action was fundamental to making the process work. This did not mean that there were no government regulations. There was a rich institutional tapestry that included common law, local ordinances, state statutes, and multistate compacts. Invariably, this mix of institutions allowed for different approaches as well as standards that reflected the importance of achieving outcomes that mattered to the people who lived in the affected regions.∞∂ The third reason for using a decentralized solution as the benchmark is that virtually all regulations involve trade-offs. Regulatory decisions are sometimes justified by their characterization as a simple choice between the public good and a special interest, between white hats and black hats: either the government will regulate air pollution or a polluter will spew poison into the atmosphere. But regulatory choices that initially appear that simple are actually part of larger groups of decisions with a more ambiguous nature. For example, removing sulfur from diesel fuel appears to be an unambiguously positive step,

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The Regulator’s Dilemma

reducing pollution substantially. But the low-sulfur fuel is more expensive to produce, provides reduced fuel economy, and reduces the amount of diesel fuel available by demanding more from refineries. And since diesel produces fewer greenhouse-gas emissions than gasoline, raising diesel’s costs relative to gasoline also has environmental costs. Even as simple a policy decision as getting sulfur out of diesel thus turned out to involve a number of trade-offs in its implementation. Further, because regulations can both create and destroy wealth, the details of a regulation can be more hotly contested than the overall decision to regulate. Decentralized solutions offer important advantages in resolving these tradeoffs: they allow different people to make different trade-offs and satisfy diverse preferences; they restrict rent seeking by making it more costly for special interests to benefit at the expense of others; and they encourage the development of new, improved solutions by competitors in the marketplace. In short, they encourage Madisonian political competition. The first part of the answer to the regulator’s dilemma is thus to compare a proposed regulation with the option of taking no regulatory action. Doing so not only will give the regulator a means of assessing the benefits and costs of the proposed regulation but will focus attention on whether the regulator has the institutional capacity to replace the decisions private actors would make with adequate substitutes. Again, this is not a matter of accepting a world with no institutional protection of health, life, property, and environment versus endorsing a world where protection is provided by the central government. It is, rather, choosing between multiple outcomes, all of which contain institutions that regulate human behavior, according to the relative effectiveness of those institutions and the costs they impose.

Constraints on Regulators Using the decentralized outcome as the benchmark puts a different light on constraints on regulators. If regulators are simply looking out for the best interests of society, there is little reason to put procedural obstacles in the way of vigorous action. The potential for the capture of agencies and the many instances in which special interests have used regulations to benefit themselves at the expense of the general public, however, give reasons for restraining regulators. The decision to regulate is thus justifiably viewed with some suspicion because, as we pointed out in chapter 1, not all collective actions advance the collective good.∞∑ Cannot the same be said of the decision not to regulate? No. Although it is certainly possible that particular decisions not to regulate are the result of

The Regulator’s Dilemma

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special-interest influence on regulators, relying on a privately ordered society as the benchmark means that we must justify only deviations from that state of the world. This is more than definitional sleight of hand; it reflects the strong preference for private ordering built into the structure of American society. We thus use stronger institutional constraints on action than we do on inaction.

Constraints on Action The institutions that constrain political decision makers considering the imposition of regulations are not symmetric with respect to the potential errors of over- and underregulation. Mindful of these risks, lawmakers have subjected agency decisions to act to a series of procedural and substantive constraints. The Administrative Procedure Act (APA) exemplifies the former; numerous substantive provisions in regulatory-agency ‘‘organic’’ statutes (that is, the statutes that give the agencies power to address an issue) embody the latter. As Professor William Funk notes, the APA is ‘‘designed to constrain the discretion of agencies through procedural regularity and judicial oversight.’’∞∏ For example, as we discuss in chapter 4, the EPA is restricted in regulating mobile-source emissions by statutory procedural requirements for rulemaking and by the Clean Air Act’s limits on the substances the EPA can regulate, the frequency with which the EPA may change the rules, and the allocation of the power to the states to impose use restrictions. Such constraints on agencies are valuable as a means of preventing errors from improper regulatory actions. At times those restrictions become binding constraints for agencies, thus making the existence of alternative methods of regulation with fewer (or at least different) constraints on the regulator’s power valuable to the regulator.

Constraints on Inaction To prevent agencies from incorrectly screening out welfare-enhancing regulatory actions, there are also political checks and balances on agency inaction. Congress can subject agency inaction to political review as readily as it can subject agency action to such review.∞π Congress can also require agency regulatory action or simply dictate the substantive rule through statutory provisions.∞∫ The crucial point is that agencies are held politically accountable for decisions not to regulate, even if the legal mechanisms for forcing agency action are generally more limited than those for restraining inappropriate agency action. The primary legal mechanism for forcing agency action is litigation by interest groups to force the agency to interpret the statute differently.∞Ω Thus those

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The Regulator’s Dilemma

who disagree with an agency’s decision not to regulate have generally been required to turn either to the political branches of government to force an agency to act or to the courts to seek a change in an agency’s interpretation of a regulatory statute.≤≠ Notable examples of interest groups using litigation against the government to force a reluctant agency to act include the Prevention of Significant Deterioration (PSD) program under the Clean Air Act, created largely as a result of a federal district court’s decision in the privately initiated case Sierra Club v. Ruckelshaus, which in turn prompted congressional action, and the regulation of wetlands under the Clean Water Act, where rules were created in response to another federal district court’s decision in the privately initiated case NRDC v. Callaway.≤∞ In 2007, the Supreme Court held that the EPA had to address greenhouse-gas emissions from new cars as a pollutant under the Clean Air Act.≤≤ In such cases, the legal action changes the substantive constraints imposed on the agency, which alters the agency’s incentives. Regulatory action may thus occur as a result of the new constraints created by the litigation. This is not regulation-by-litigation, however, as the substantive rules are created through a separate process chosen by the agency in response to the new interpretation of the statute created by the litigation. Thus when the Sierra Club won its case in Sierra Club v. Ruckelshaus, the EPA chose to issue regulations creating the PSD program through rulemaking, and Congress amended the Clean Air Act to create a statutory framework.

The Regulator’s Calculation We would expect inaction to be the choice of a regulatory agency when the expected net returns to the agency from action are negative. Agencies may fear retribution from interest groups or political figures opposed to an action, may wish to cultivate allies among interest groups for support for other initiatives through forbearance on a particular issue, or may simply have higher priorities for the agency’s limited resources. The PSD and wetlands cases illustrate how this can occur. In the case of the PSD program, the Clean Air Act was ambiguous with respect to whether a PSD program was required.≤≥ Similarly, the Clean Water Act was ambiguous on whether wetlands were covered.≤∂ Had the EPA issued PSD regulations before the court required it to do so, it would have angered powerful congressional figures (those representing states disadvantaged by the PSD program).≤∑ Thus, even if individuals within the EPA had wanted to create a PSD program, doing so without the political cover of a court order would have exposed the agency to retaliation from Congress. In the wetlands case, the federal government had spent decades

The Regulator’s Dilemma

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destroying wetlands, viewing them as ‘‘an obstacle to progress.’’≤∏ The internal structure of the Army Corps of Engineers was set up to reward draining wetlands, not protecting them. Once the courts ruled that the programs were required, the agencies’ incentive structure changed. Western senators could not punish the EPA for creating a PSD program ordered by a court, and the Army Corps of Engineers’ interest in development projects was overridden. Conditions had changed and inaction was no longer the optimal choice from the agencies’ points of view. The key point is that regulators operate in an environment in which their choices have been constrained by legislatures in an attempt to guide regulators in their solutions to the regulator’s dilemma. These constraints are both substantive and procedural, and they change over time. Some are the result of efforts to improve the regulatory process. The APA, for example, was an effort to regularize federal administrative-agency practices as those agencies proliferated during the New Deal.≤π Others are the result of interest-group bargaining in the legislature. When these constraints are binding, regulators have an incentive to find an alternate pathway to accomplish their goals. Generally speaking, there is often enough slack for agency managers to find a way around the constraints. Put differently, there is a principal-agent problem, where Congress is the principal and the regulatory agency is the agent that is to carry out the wishes of Congress.≤∫ Since oversight cannot be perfect, agency executives will attempt to seek their own goals while keeping their principals happy, at least most of the time. These goals may be corrupt, as where agency personnel seek opportunities for implicit or explicit bribes, or they may be publicly spirited, as where agency staff attempt to outmaneuver an interest group that holds sway in the legislature. As we will see in chapters 4 through 6, the use of litigation has offered a variety of regulators the opportunity to escape such constraints.

Interest Groups and Regulation A crucial part of the public-choice explanation of regulation rests on the role of interest groups. In some cases, the interest groups are relatively easy to identify. For example, in the sugar program the benefits flow directly to U.S. sugar producers, who benefit from higher prices in the U.S. market due to the exclusion of foreign competition, and indirectly to makers of competing sweeteners (for example, corn syrup), who benefit from reduced competition from sugar. In other cases, identifying the relevant interest groups is more difficult. For example, refineries in the northern Midwest benefited from oil import quotas

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The Regulator’s Dilemma

in the 1960s, even though they did not use imported oil, because they were given quota allocations and allowed to trade them to refiners desiring to increase imports.≤Ω Another case of remote beneficiaries is seen in the support of some energy companies for the Kyoto Protocol’s call for a dramatic reduction in world carbon emissions. The supporting energy companies happened to be major producers of clean natural gas, who would benefit from regulations raising the cost of competing sources of energy such as coal.≥≠ In addition to those who benefit directly from a particular rule, four interest groups play important roles in the regulation-by-litigation case studies below: agency staff, incumbent firms, ideological pressure groups, and regulatory entrepreneurs. Agency staff are interest groups. To label them as such is not to make a pejorative characterization. Their interests are as broad as gaining resources with which to accomplish their agency’s mission (to protect the environment, promote U.S. agriculture, defend the country, and so on) or as narrow as ensuring a lucrative post at a government contractor when they leave public service. The interests of an agency’s staff are not, however, necessarily the same as the interests of the administration in which they serve or of the public as a whole. Generally we can assume that agency staff prefer that their agencies receive more resources rather than fewer, have broader authority rather than narrower, and be less constrained by the legislature rather than more. Incumbent firms in a regulated industry are interested in restricting competition, which enables them to raise prices, and in preventing new firms from entering the industry. Thus, although the stereotype is that private businesses do not like regulation, the reality is that many firms welcome regulations that disadvantage new entrants and their competitors more than they disadvantage the incumbent firms. Ideological pressure groups are also interest groups. When a group of individuals shares a point of view and organizes to lobby the government, the usual practice is to refer to it as a ‘‘public interest’’ group if it espouses a cause the author likes and as a ‘‘special interest’’ group if it espouses a less favored cause. We denominate all such groups as ideological pressure groups, regardless of whether we agree with them or not. The U.S. Chamber of Commerce, the Sierra Club, and the AFL-CIO are all ideological pressure groups in their lobbying activities. Such groups seek to use government policy to obtain something they could not obtain in the marketplace (or, at least, not obtain as cheaply): the conformity of the actions of others to the groups’ ideas of appropriate behavior. As we noted in chapter 1, these groups are an important part of bootleggers-and-Baptists coalitions and often play a key role in regulationby-litigation.

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Finally, regulatory entrepreneurs can profit from initiating regulatory activity. Some such entrepreneurs work in agencies and benefit by increasing their program’s or agency’s resources at the expense of others. Conflicts between agencies over jurisdiction can often be understood in this way. Others work outside the formal public sector but collaborate with public actors. The lawyers who handled tobacco suits for many states, for example, worked in private firms but benefited directly from the attorneys’ fees awards in the Master Settlement Agreement that ended the litigation (see chapter 6). Still others operate totally independently of the public sector, as the plaintiffs’ asbestos bar does, yet wield regulatory power (see chapter 5). These interest groups interact in the regulatory process and in the political process that produces the constraints on regulators. Auto manufacturers may lobby Congress to restrain the EPA from regulating cars; owners of coal-fired power plants will lobby for greater restrictions on auto manufacturers and fewer on power plants; environmental groups will seek to tighten restrictions on both; and auto manufacturers and owners of coal-fired power plants will prefer regulations that impede entry into their respective industries by new manufacturers. Sometimes the politics of interest groups makes strange allies. In the 1970s, for example, eastern coal-mine owners and miners allied with environmental groups to amend the Clean Air Act to disadvantage western coal-mine owners and miners, in the process creating incentives to worsen air pollution.≥∞ The results of these interactions often constrain agencies in ways the agencies dislike, and the agency staff will look for ways around the constraints.

Solutions to the Regulator’s Dilemma We will use a hypothetical to illustrate how these interest groups interact with the various substantive and procedural constraints on agency action. Creating a regulation requires the regulator to answer (implicitly or explicitly) three questions: 1. What is being regulated? 2. What behavior is required of the regulated? 3. How will new information be incorporated into the regulation in the future? WHAT IS BEING REGULATED?

It seems self-evident that the ability to regulate rests on the regulator’s ability to define what is being regulated. Defining what is regulated is a surpris-

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The Regulator’s Dilemma

ingly indeterminate task, however. Not only must the regulator offer a legal definition of the regulated substance, but the regulator must also create a means of characterizing the regulated substance such that it can be identified. This requires the ability to define the regulated substance either scientifically, in the case of a potentially hazardous substance, or practically, in the case of nonphysical definitions: a regulator of a hazardous substance must distinguish it from other unregulated substances, and a regulator of a financial product must define the characteristics of the product. For example, the lack of a coherent definition of a ‘‘hedge fund’’ is an important obstacle to the regulation of such funds. An example helps clarify the issues. Suppose a substance, kryptonite, is suspected of having deleterious health effects on humans exposed to it and on the environment if it is released into the atmosphere. An agency considers regulation to prevent human exposure and environmental degradation. The agency’s preliminary investigation reveals that kryptonite comes in two forms: a-kryptonite and b-kryptonite. From this initial investigation, it appears that only a-kryptonite causes health effects; there is no evidence that b-kryptonite is harmful to humans or the environment. There is also no evidence that b-kryptonite is not harmful, however. In short, we have reason to believe that a-kryptonite is harmful, although we do not know why it is harmful; we know only that b-kryptonite is different from a-kryptonite and that the data supporting the knowledge that a-kryptonite is harmful come from studies of a-kryptonite. A regulation of ‘‘kryptonite’’ that does not distinguish between a-kryptonite and b-kryptonite is likely to either overregulate or underregulate uses of kryptonite. If we regulate both forms of kryptonite at the level appropriate for a-kryptonite and if b-kryptonite is not harmful (or not as harmful as a-kryptonite), then we will overregulate. That is, a regulation that does not distinguish the two forms will impose unnecessary costs on users of b-kryptonite.≥≤ As a result, users of b-kryptonite will reduce output (since their costs have gone up), consumers of b-kryptonite products will face higher prices, and employment will decline in industries that use b-kryptonite or products made with b-kryptonite. If, on the other hand, the kryptonite regulation regulates both forms at a level appropriate for b-kryptonite, it will underregulate the users of a-kryptonite. That is, the regulation will fail to impose sufficient costs to produce benefits that exceed those costs. As a result, users of a-kryptonite will use too much, causing harm to employees of industries that use a-kryptonite or products made with a-kryptonite, consumers of a-kryptonite products, and the environment. Finally, a uniform standard based on an average of the two forms of kryp-

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tonite will underregulate users of a-kryptonite and overregulate users of bkryptonite. The challenge for regulators, therefore, is to properly define what they are regulating so that they avoid the twin dangers of overregulation and underregulation. In this hypothetical we assumed that both the regulators and the rest of the community know that kryptonite comes in both a and b forms, that the a-kryptonite form is hazardous, and that there is no evidence concerning the b form. It is also possible that the distinction between the a and b forms is unknown and that discovering the distinction will require substantial investment in research. Without knowledge of how a substance causes harm, it is difficult to determine which types of distinctions matter. We thus may face questions not only about a-kryptonite and b-kryptonite but also about akryptonite and a%-kryptonite. Resolving whether there is an a%-kryptonite and whether it is the distinction between a and a% forms, the distinction between a and b forms, both, or neither that matters—and doing so on the basis of ambiguous epidemiological evidence and animal studies—requires a substantial investment of both time and money in research.≥≥ Now suppose the regulator has available only a study that shows a health impact from an unspecified form of kryptonite. The regulator proposes a kryptonite exposure standard that is based on the available evidence and that, if applied, will resolve some of the uncertainties the agency faces because of otherwise incomplete evidence. During the comment period, an entity potentially subject to the new standard provides evidence that kryptonite exists in both a and b forms and that the studies on which the regulator relied measured only the impact of a-kryptonite. Because the regulator does not know the precise mechanism through which kryptonite causes harm, he cannot know with certainty whether the a-b distinction is relevant. Because the a-b distinction was previously unknown, the regulator also cannot draw on a scientific consensus about its relevance. How should the regulator respond to the new knowledge that the a-b distinction exists? Should the regulator proceed to regulate only a-kryptonite? Or does some precautionary principle shift the burden to the regulated parties to show that the a-b distinction is relevant to the harm caused by kryptonite? If so, how can the regulator develop and impose a process for distinguishing one form of kryptonite from the other? Should the regulation be delayed entirely? With respect to the b-kryptonite only? How should a court treat evidence in a tort suit seeking to impose liability based on kryptonite exposure when such a distinction is demonstrated? At some level, the burden must rest on the regulator—a showing of harm from exposure to benzene, for example, does not justify imposing regulations

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The Regulator’s Dilemma

on cotton dust, because benzene and cotton dust are easily distinguishable. But just as obviously, a showing of harm from one substance may justify regulatory action with respect to a close analog in the absence of evidence that the distinctions between the two are relevant.≥∂ We do not require individual regulations for each firm to be based on the precise chemical, physical, mineralogical, or other form of composition of its raw materials. We do require different regulations for substances that are different at a fairly crude level, even closer than the distinction between benzene and cotton dust. The question, therefore, is where regulators are to draw the line initially and what sort of evidence from the interested parties justifies shifting the line during the rulemaking process. Some interest groups will be intensely interested in the resolution of these definitional issues. Firms that can avoid regulation while ensuring that their competitors are ensnared in regulations obviously can benefit (for example, small businesses are exempted from many regulations that hinder their larger competitors). Similarly, incumbents will seek to ensure that regulations are written broadly enough to cover any potential competitor. Agency staff may seek to expand their jurisdiction, to avoid a particularly politically powerful interest group, or to secure regulatory territory from competition from another agency. Ideological groups may demand the expansion or contraction of a definition to provide themselves with a success story that can be used to raise funds or inspire members. WHAT BEHAVIOR IS REQUIRED OF THE REGULATED?

Once the regulator has decided what forms of kryptonite to regulate, it must also determine what steps kryptonite producers, emitters, and users must take to protect the public from the hazards posed by kryptonite. To ease exposition, let’s assume that kryptonite is a waste product emitted into the air by factories using it in the manufacturing process. We’ll also assume that no kryptonite contamination of the products occurs, so that we can focus on the problem of emissions. What level of emissions will be permissible? Zero emissions are impracticable for all but the most toxic pollutants, so the regulator will have to decide what constitutes a safe level, weighing the estimated cost of each increase in controls against the estimated benefits. Uncertainties abound in estimating health effects, costs, and benefits—thorny problems such as how to extrapolate from high-exposure epidemiological studies to low exposures, translate animal studies to human health predictions, anticipate changes in prices from increasing demand for materials used in control equipment, and so forth. Further, the emission level must be specified as a rate per unit of time. Will

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emissions be measured every minute? Every hour? Every day? Will measurements at different times be averaged? What tests will be used to measure kryptonite levels? What procedures must be followed in conducting the tests? Are the tests ‘‘end of the pipe’’ tests or tests of specific pieces of equipment under specified conditions? Once a permissible level of emissions is chosen, there is still the question of how regulated entities will reach that level. Will they be left to choose the appropriate control strategy, or will they be required to use a particular technology? Will emissions be measured at each smokestack or from a plant as a whole? What if a company owns adjacent plants? Or plants ten miles apart? The point is not that it is impossible to answer these questions. Regulatory agencies regularly make reasonable judgments to answer each and can specify a standard. The problem is that those decisions must be made in an environment in which interest groups play crucial roles in the decision process. Regulators need information from incumbent firms; agency staffs have agendas that may differ from those of the legislators who wrote the organic statutes and designed the procedures under which the agencies operate and even from those of the political appointees nominally in charge of the agencies themselves; ideological pressure groups have positions influenced by their need to raise funds and maintain their memberships; and regulatory entrepreneurs are looking for openings to pursue their own agendas. And small changes in the answers to any of these questions may be worth a great deal to one or more of these interest groups, attracting attention and involvement. HOW WILL NEW INFORMATION BE INCORPORATED INTO THE REGULATION IN THE FUTURE?

The academic study of regulation often focuses on explaining discrete regulations. Why was this group included or excluded from coverage? Was the correct exposure level chosen? Which interest groups swayed the regulators? Did the Office of Management and Budget review change the outcome? These are valuable studies, but they are incomplete. Regulation is a dynamic process because our knowledge about multiple facets of a regulated industry or good changes constantly. New technologies improve measurement, making it possible to measure levels of a pollutant below prior limits. New studies reveal new harms or show that a product or substance previously thought harmful is not harmful (for example, silicon breast implants≥∑). Changes in behavior make what was a minor part of the marketplace suddenly significant (for example, the growth of hedge funds). How is this new knowledge incorporated into regulations? What incentives exist to develop new knowledge about the issues that shape a regulation and to produce improvements in regulations?≥∏

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Information is constantly evolving, and, crucially, the production of information responds to incentives. When regulators adopt highly technical rules that rely on the current state of knowledge, their action reduces the flow of new information. For example, choosing catalytic converters for reducing nitrogen oxide emissions from automobiles ended an intense competitive battle among auto producers to have the winning technology. If, on the other hand, the regulators had set a performance standard, simply specifying the allowable level of tailpipe emissions, the competition would have continued. Some producers would likely have used catalytic converters, but others would just as likely have developed other technologies. If we had complete knowledge about a hazard, its risks, and its remedies, a regulator might be able to design a comprehensive regulation that perfectly aligned protective measures and hazards, striking just the right balance between the cost and the benefit of mitigation. And if we had complete information, it would be just for the moment. At any moment in time, of course, we do not have complete information about hazards and how to reduce them any more than we have it about anything else. What we do have is highly dispersed yet relevant information about some but not all aspects of the costs and benefits of a proposed regulation and alternatives. Recall Hayek’s argument that decentralized markets focus dispersed information—information that no one individual (not even a regulator) can obtain —and convey it efficiently to market participants. To understand how Hayek’s point applies to regulation, consider the financial incentives an unregulated workplace provides for protecting employees’ health and safety. First, employees have obvious incentives to protect their own health—faced with two otherwise equal jobs with different risks, employees will prefer the less risky job. Thus, informed employees will demand safeguards for health and safety. Second, even wholly self-interested employers have incentives to provide safe and healthy work environments to ensure a productive workforce.≥π Employers often have significant investments in their employees’ firm-specific human capital.≥∫ Safeguarding that investment requires reducing turnover.≥Ω Moreover, employees in riskier jobs can command higher wages than employees with equivalent skills in less risky environments, which provides financial incentives for employers to protect the health and safety of employees, even in the absence of government requirements.∂≠ Indeed, even critics of market forces concede that market responses sometimes occur before regulatory action.∂∞ For example, systematic medical exams of employees, an important tool in uncovering workplace diseases, were part of ‘‘paternalistic programs to care for workers’ broader needs, often to wean them away from trade unions.’’∂≤

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The market-failure analysis of workplace health and safety issues stresses obstacles to the operation of these incentives. For example, some argue that employees are ignorant of the true nature of the risks they face and fail to demand sufficient safety.∂≥ Similarly, others contend that employers are able to impose one-sided bargains on employees and are able to force them to accept dangerous jobs when employees would prefer safer working conditions.∂∂ As a result of these market failures, critics argue, an unregulated work environment would be hazardous to employees’ health and safety. Because employers could impose contracts including dangerous working conditions without fully compensating employees for the additional risk, employers would choose not to invest in safety, shifting the cost to employees. With respect to the problem of categorization, we can use our kryptonite example to illustrate how the incentives operate. Suppose we begin with the problem of kryptonite exposure generally, without regard to the various forms of kryptonite. Employers will have an incentive to invest in discovering whether there are relevant distinctions among forms of kryptonite (for example, á, á%, and â) because the discovery of a relevant distinction can reduce the risk premium they must pay employees. Note that this benefit of increased knowledge to employers is dependent on their convincing employees that the distinction is relevant, because they must persuade the employees to accept a lower risk premium for working with the less harmful form of kryptonite. Employers will have to make investment decisions under considerable uncertainty (since they do not even know if there are multiple forms of kryptonite, let alone whether the harm caused by the different forms, that may or may not exist, is different). The key is that the incentive exists to produce knowledge, even if the incentive is not to produce perfect knowledge. Market failures affect incentives to invest in categorization, however. If employees misperceive the risks of kryptonite generally and fail to demand an appropriate risk premium, or are unable to bargain for risk premiums at all, employers will have no incentive to invest in knowledge about kryptonite’s potential forms. Moreover, if employees misperceive risks because they are incapable of understanding scientific evidence, they will be unlikely to accurately assess the evidence produced by employers.∂∑ Employers may then invest in inaccurate evidence to mislead employees about the risks of kryptonite. If the market failures dominate the unregulated market, the incentives for investing in knowledge will be diluted or destroyed, and a perverse incentive to create junk science may exist. The choice in addressing health and safety issues is not, of course, between a comprehensive regulation and the completely unregulated marketplace. We must therefore also consider the impact of intermediate regulatory measures on workplace health and safety. Since the early twentieth century, workers’

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compensation and other forms of insurance financed through employer-paid premiums have provided incentives for workplace health and safety.∂∏ Insurance gives employers incentives to promote safety because employers with poor safety records face higher workers’ compensation insurance premiums.∂π These incentives appear to have had an impact on the workplace: the doubling of workers’ compensation premiums between 1984 ($15 billion per year) and 1991 ($31 billion), for example, led to significant improvements in worker safety. By the late 1990s, workers’ compensation premiums had fallen to $26 billion.∂∫ Research suggests that if not for workers’ compensation, occupational fatalities would be one-third higher than they are.∂Ω Workers’ compensation insurance thus has had a demonstrable impact on workplace health and safety. With respect to the incentives to understand the health impacts of potentially hazardous substances in the workplace, workers’ compensation insurance creates incentives for research by adding a repeat player concerned with lowering costs. Insurance companies profit from the difference between the claims they pay and the premiums they collect.∑≠ Workers’ compensation insurers compete for employer business by offering lower premiums.∑∞ If an insurer can discover a basis for distinguishing between high- and low-risk employers (for example, the a-b kryptonite distinction), it can offer low-risk employers lower premiums and win market share. Moreover, employers who can demonstrate that their workplaces are less hazardous than those of other firms by showing a distinction in exposures will be able to negotiate lower premiums. Thus both insurers and employers have incentives to seek to increase knowledge about the appropriate categorization of workplace hazards. A complete picture of the incentives to create knowledge of workplace hazards must include the incentives of repeat players such as insurance companies.

Choices for Regulators Confronted with a demand for action, what will regulators do? They will act, or not, depending on the costs and benefits of their actions for themselves. We mean no disrespect for agency staff or private regulators in so characterizing their actions. Regulatory-agency staff and private regulatory entrepreneurs are no better or worse than the rest of mankind. And their costs and benefits are not simply monetary. The benefits include the satisfaction agency staff receive from accomplishing their mission, and the costs include the distress occasioned by the prospect of facing an angry legislative committee chair at an oversight hearing. The costs and benefits are shaped by the interaction of interest groups of many types in the political process.

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The competition of interest groups in the political process shapes some of the constraints that help determine the interest groups. Sometimes a ‘‘bad’’ interest group prevails in the legislature. For example, a tough new environmental law is watered down to gain votes from legislators close to polluters to win passage, or a tax increase on a ‘‘sinful’’ activity like smoking is voted down because of lobbying by the cigarette manufacturers—environmental groups and antismoking activists are incensed, and environmental regulators and public-health agency staff are disappointed. Politics is not just about winning, however. There are rules to the process, and, when the votes are counted, if the ‘‘good guys’’ lack the votes, the victory of the ‘‘bad guys’’ is not illegitimate. More pollution will end up in the atmosphere and more people will smoke than in the alternative, but that’s how the system works, and the constraints on regulators that result from the political process are legitimate ones that the regulatory process ought to abide by.∑≤ In a world in which regulation resulted only from public-agency rulemaking, that would be the end of the story until those favoring additional regulation persuaded another legislature to change its mind. What if there was another way to get a regulation, one that did not rely on rulemaking? What if this alternate pathway enabled public regulators and even private individuals to sidestep some of the constraints imposed by politics? In the next chapter we examine alternative methods of creating regulations that do just that, including the method whose name is the title of this book: regulation-by-litigation.

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Modes of Regulation

When legislators and officials in regulatory agencies decide to regulate private-sector behavior, they must also choose how they will regulate.∞ They have three options. Should they impose a regulation through the rulemaking process? Negotiate a rule? Or bring suit and obtain changes in behavior as part of an injunction or settlement? Each of these choices generates a different set of political costs and benefits for the regulators and the regulated—and for the rest of society as well. And there likely will be differential effects within the affected groups as well as between groups. Using the public-choice model of behavior set out in chapter 1, we can analyze these choices, looking for incentives for regulators to choose one over the other in particular circumstances. The key to the analysis of regulators’ choices is the recognition that the government officials making the decision face a set of costs and benefits that is different from the set of costs and benefits faced by society as a whole. Indeed, the staff within one agency division may see a payoff that is different from that seen by the head of the agency itself. Just as a market decision maker sometimes acts in ways that impose costs on others, because he considers only his own costs and benefits and not the costs and benefits borne by all of society, a public-sector decision maker may impose costs on others through her choices because she considers only her own costs and benefits. When private actors do this, economists label the costs imposed on others ‘‘externalities.’’ For publicsector actors, we will call these costs ‘‘regulatory externalities.’’ 36

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As we indicated above, regulators have three choices of how to proceed: rulemaking, negotiation, and litigation. In this chapter we consider the costs and benefits of each from the point of view of the regulator and that of society as a whole. This framework will then allow us to examine the specific choices made in our three case studies in chapters 4, 5, and 6. This choice has not previously been subject to sustained scrutiny outside the context of regulation-by-negotiation, where the vigorous debate between proponents and skeptics has generated considerable scholarship (which we draw on below). Although courts and administrative-law scholars have examined in considerable depth whether agencies are required in particular circumstances to proceed by rulemaking or are free to develop policies through case-by-case adjudication of individual disputes,≤ the focus has been on whether the APA, agency ‘‘organic’’ statutes, or other sources of law require one form or another, not on the incentives for agencies when the choice is relatively unconstrained.

Regulation-by-Rulemaking Rulemaking is what most people think of when they think about regulation. Regulation-by-rulemaking typically involves notice of a proposed rule, a comment period for any and all parties to express their reactions to the agency, and a final notice of rulemaking that addresses the comments received from interested parties.≥ Of course, the details of the specific processes agencies use to create rules through rulemaking vary from agency to agency, but for our purposes these differences are less important than the similarities; virtually all rulemaking involves some form of the steps outlined above.∂ Once a rule has been issued, those affected by agency action then have an opportunity to test the agency’s rule in the courts, asking for review of procedural issues (did the agency follow the statutory process?), legal questions (does the agency’s action comport with the legislative mandate?), and some substantive points (is the agency’s decision sufficiently supported by the facts?). The distinctive characteristics of regulation-by-rulemaking are thus: 1. notice to the public of the agency’s proposed actions; 2. the creation of a record of public comments on the proposal; 3. an opportunity for anyone interested to comment on the agency’s proposal; 4. a requirement that the agency respond to significant comments; 5. political accountability for agency action; and 6. judicial review of agency action to ensure that procedural requirements were met and that the agency has followed the substantive law granting it regulatory authority.

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Both the public benefits and costs of rulemaking are the result of the open nature of the process. The multiple opportunities for public participation check the ability of agencies to act in harmful ways, but they also slow down the ability of agencies to act in beneficial ways. (Indeed, many commentators on rulemaking worry that agency rulemaking is so slow that it has become ‘‘ossified.’’∑) In the case of agencies like the Occupational Safety and Health Administration, which rarely manages to issue a substantive rule, these complaints seem justified.∏ PUBLIC PARTICIPATION

Are the public benefits worth the public cost? Consider the comment process. The ability to comment on proposed rules serves as a valuable check on agency action. Agencies may not pay close attention to every comment they receive during rulemaking, but when interest groups or affected individuals point out problems, agencies can adjust their proposals to take into account information they may not have considered sufficiently in crafting the original proposal. This is true even for self-interested outside participants in the rulemaking, as such groups often have unique access to relevant data (for example, a regulated firm) or offer a different perspective on the relative weights for various competing priorities (for example, environmental groups). We know that there is a real benefit to interest groups from participating in rulemaking because interest groups regularly invest considerable resources in ensuring that comments are placed in the rulemaking record, including both substantive comments and simple statements of support for a particular position.π Interest-group action demonstrates that the value of participation to a broad spectrum of such groups is positive. Economists refer to evidence of beliefs revealed by actions as ‘‘revealed preferences,’’ and it seems clear that the revealed preference of virtually everyone involved in most forms of regulation is to comment on the record during rulemaking. (Since actions are costly but talk is cheap, actions deserve greater weight than words.) In short, if people and organizations on all sides of a regulatory issue see value in spending their resources on participating in rulemaking, there must be value to them in the process. Even comments that do not influence an agency directly may be worthwhile. Such comments might influence political representatives exercising oversight over an agency. Comments are also an important part of the groundwork for challenges to the final rules in the courts.∫ Because failure to respond to a substantive comment can be grounds for the remand of a rule to the agency, agencies must respond in their final rule to protect their actions in any postrulemaking litigation. Even an agency that did not wish to do so must therefore pay at least some attention to public participation in rulemaking.

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Of course, as we indicated in the discussion of theories of regulation in chapter 1, value to interest groups is not the same as value to the public generally. Indeed, the regulatory process can enable an interest group to gain monopoly power or to raise competitors’ costs. However, the recognition of the value of participation by interest groups with such divergent policy goals suggests that there is a benefit beyond merely facilitating rent-seeking activities. In fact, we believe that the public-comment process exposes rentseeking behavior and therefore makes it more difficult. We think that the public benefits of the comment process justify its public costs for two reasons. First, and most importantly, people deserve a voice in the rules that affect them. From the colonial cry of ‘‘No taxation without representation’’ to today, an important American value is that people have a right to be heard in the making of government policy. Second, the comment process can improve the substantive rules by bringing new information to the attention of the agency and by giving interest groups on all sides an opportunity to critique each other’s arguments and data. POLITICAL CONSTRAINTS

Comments in rulemaking are not the only way agencies are constrained. Agency regulatory activity is also subject to additional constraints through appropriations riders, oversight hearings, and review by the Office of Management and Budget, which means that regulation-by-rulemaking is embedded in a broader political context.Ω An excellent example of political influence is the inclusion of specific language concerning diesel emissions in the 1977 amendments to the Clean Air Act. Professor David Currie quoted Supreme Court justice Felix Frankfurter when Currie described how the language, although adding little substantively to the Clean Air Act, ‘‘ ‘expressed a mood,’ that ought not be lost upon administrators and reviewing courts.’’∞≠ Another prominent example is Michigan congressman John Dingell, who for years has exerted great influence over the EPA’s regulatory efforts regarding pollution from mobile sources.∞∞ Required internal executive-branch reviews also contribute significant opportunities ‘‘for informational input and for diverse points of view to be expressed.’’∞≤ We can describe these broadly as political controls over regulators. Professors J. B. Ruhl and James Salzman list critiques of rulemaking based on ‘‘the democratic deficit of the administrative state’’ as one of the three major types of critiques offered in the legal literature.∞≥ Political constraints may be used to facilitate rent seeking rather than to promote the general welfare. Interest groups that favor more aggressive regulation of mobile sources, for example, are apt to be unhappy when the EPA listens to Representative Dingell. And it is even likely that in some of the cases in which the

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congressman intervenes, he worsens the substantive outcome.∞∂ Nonetheless, even rent-seeking behavior may serve a public purpose on occasion. Congressman Dingell’s relentless advocacy on behalf of the auto industry has undoubtedly reduced mobile-source regulation and has possibly increased air pollution. But it has also protected a major industry from some of the rent-seeking behavior of other interest groups (for example, stationary sources, proponents of subsidies to mass-transit systems, and environmental groups), and so the net impact of his efforts is not obviously negative. However, as with the comment process, the greatest value of political accountability is not that it might improve substantive policy choices. American government is filled with inefficiencies that hamper the ability of government to act, precisely because we value the prevention of harm from government action more highly than we value the prevention of harm from government inaction. Statisticians refer to an erroneous conclusion that a hypothesis is true when it is actually false as a ‘‘type I error’’ and an erroneous conclusion that a hypothesis is false when it is actually true as a ‘‘type II error.’’ Both types of errors afflict regulators’ decisions, but both are not equally valued by the political system. In pursuit of a measure that seems to its proponents to be obviously beneficial but that is blocked by political pressures, it is easy to lose sight of the larger institutional virtues that accountability to political actors introduces. If the hypothesis is that a regulatory action is needed to solve some problem identified by regulators, the type II errors are not the only mistake possible when agencies consider regulations. American government embodies in its structure the idea that avoiding type I errors is important. By harnessing special interests to test agencies’ actions through rulemaking and legal action, the rulemaking process avoids type I errors, but at the price of increasing the number of type II errors it commits.∞∑ In other words, sometimes agencies will not act when they should, because they are afraid of congressional oversight, lawsuits from affected interests, or interference by political actors elsewhere in the executive branch. This reduction in agency action helps prevent agencies from regulating when they shouldn’t, but in other instances it prevents them from regulating when they should. That is the price we pay for a system structured to avoid type I errors. LEGAL CHALLENGES AS A CONSTRAINT

Judicial review of agency compliance with procedural requirements and substantive limitations offers an additional set of constraints.∞∏ Once regulations are final, those affected by them may bring suit against the agency if there is a legal basis for doing so. For example, the agency might be charged with exceeding its legislative authority or adopting a rule when the scientific ra-

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tionale for the rule is faulty.∞π The EPA in particular is regularly sued over its regulation-by-rulemaking activities by interest groups who contend that the EPA’s regulations are too lenient, are too strict, or otherwise violate federal law.∞∫ As with political constraints, judicial review is often used to pursue special-interest agendas rather than a generalized public interest. But judicial review is vital to forcing agencies to respect the boundaries the political process has placed on their actions.∞Ω And it plays an important part in the balancing of special-interest pressures, keeping agencies to the regulatory bargains struck through the political process.≤≠ THE VALUE OF RULEMAKING’S CONSTRAINTS

There are substantive virtues to this process. Despite the self-interested nature of many, and even most, of those pressures, the combination helps prevent regulators from singling out particular industries or regions for disproportionate burdens. Indeed, competition among competing interest groups is a necessary though imperfect safeguard.≤∞ Technical flaws in agency analysis can be exposed through comments, and the open nature of the rulemaking process gives all interest groups the opportunity to test agency assumptions and analyses. Judicial review prevents agencies from ignoring flaws in their analyses identified by interest groups, and self-interest ensures that interest groups give agency analyses a hard look. The multiplicity of avenues for involvement in rulemaking—agencies, Congress, and courts—ensures that monopolizing the process is more difficult. To be sure, rulemaking has many problems, and the process can be, and often is, captured by special interests despite these checks. Our claims are modest: merely that rulemaking offers some checks on rent seeking, not that these checks are sufficient to prevent all rent seeking; that rulemaking is structured to avoid type I errors at the cost of committing more type II errors, not that it avoids all mistakes; and that the legitimacy conferred on regulations by the public process is more valuable than increasing the speed with which agencies act. Moreover, despite its imperfections, regulation-by-rulemaking has features that promote accountability for agency actions. Alternatives that offer less accountability may therefore be inferior, even if regulation-byrulemaking itself is seriously flawed. RULEMAKING’S COSTS AND BENEFITS FROM THE REGULATOR’S PERSPECTIVE

Rulemaking’s primary advantage for regulators is that it offers them an opportunity to test a proposal against the arguments interest groups can make in the legislature or the courts. The notice-and-comment process helps agen-

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cies formulate responses to interest-group data and arguments before committing to a course of action. The cost to the agency is that it leaves the agency’s decisions open to challenges in the legislature and the courts, it exposes the agency’s decision-making process to scrutiny, and it slows agency action. These are real costs for agency personnel. Agency staff are generally committed to their agency’s mission. EPA staff want to protect the environment, FDA staff want to prevent harmful drugs from reaching the market, and Consumer Product Safety Commission staff want to keep dangerous products from harming consumers. Rulemaking’s delays and compromises can easily be perceived as an obstacle rather than a benefit, particularly when agency staff view the efforts of interest groups that disagree with the agency’s position as bad behavior. In short, Congressman Dingell may be a hero in Detroit, but he is unlikely to win any popularity contests in the EPA’s air-pollution-control office. Moreover, there may be areas that agencies cannot reach through rulemaking. For example, the Clean Air Act restricts the EPA by requiring that the agency wait between changes to mobile-source regulations to allow the mobilesource manufacturers to recover their investment in meeting each new standard. (We discuss this particular limitation in chapter 4.) Sometimes authority is so fragmented across various jurisdictions and agencies that no public regulator appears capable of handling a problem. (We discuss this in chapter 5.) And sometimes agencies may also simply lack authority to act in a particular area. For example, state attorneys general have no authority to levy taxes; only state legislatures or Congress may do so. (We discuss this in chapter 6.) Rulemaking’s inability to solve some problems is a cost for the agency, even if the impediments to action have other benefits for the public at large. Although the process is constrained politically, there is enough slack between the legislative and executive branches, which control the various regulatory agencies, for regulators to pursue, at least partly, their own agendas. And regulators, like everyone else, prefer to minimize their cost of doing business. Some forms of regulation are easier for regulators to administer than others. Yet higher-cost forms of regulation from the regulators’ standpoint may be much more efficient from society’s vantage place. For example, technologybased command-and-control regulation that specifies a one-size-fits-all approach for controlling industrial water pollution reduces agency enforcement costs. If the technology is there and operating, the agency’s job is done. But a cap-and-trade property-rights approach that creates incentives to find lowercost ways to produce cleaner water can be much more beneficial from society’s standpoint.≤≤ Rulemaking thus falls prey to regulatory externalities. The benefits of rule-

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making are greater for the public at large than for the agency staff because some of the public benefits are perceived as costs by the agency staff. Because of this mismatch between private and public costs and benefits, sometimes the public will prefer that an agency engage in rulemaking when the agency staff would prefer to use an alternative method.

Regulation-by-Negotiation As a result of a number of critiques of regulation-by-rulemaking during the 1970s and 1980s, regulators established an alternative means of creating a rule: they introduced a first step in the process that brings key interest groups and regulators to the negotiating table. Much like the use of focus groups by marketing consultants to determine desirable product features, regulation-bynegotiation allows regulators to work with a subset of the regulated to narrow the range of features that might characterize a proposed final rule. This step is followed by a traditional rulemaking procedure to apply the resulting rule’s provisions generally.≤≥ Although not formalized until the Negotiated Rulemaking Act of 1990 and not permanently established until the Administrative Dispute Resolution Act of 1996, regulation-by-negotiation began to be used in the 1980s and has been used since then by a variety of federal agencies.≤∂ Measured against the volume of rulemaking generally, its use has been relatively rare. Even at the EPA, one of the most aggressive users of regulation-by-negotiation, regulation-by-negotiation makes up only a tiny fraction of all regulatory activity—less than one-tenth of one percent of all agency regulations.≤∑ What does it mean to negotiate a rule? Professor Philip Harter, the leading proponent of regulation-by-negotiation, describes the process as follows: The representatives of the interests that would be substantially affected by a rule, including the agency responsible for issuing the rule, negotiate in good faith to reach consensus on a proposed rule. The members of the negotiated rulemaking committee determine what factual information or other data is necessary for them to make a reasoned decision, develop that information (which often comes from workgroups comprised of knowledgeable and interested individuals), analyze the information, examine the legal and policy issues involved in the regulation, and reach a consensus on the recommendation to make to the agency. As part of the consensus, each private interest agrees to support the recommendation and resulting rule to the extent that it reflects the agreement, and the agency agrees to use the recommendation as the basis of its action.≤∏

From this description, we can distill some key characteristics that define regulation-by-negotiation:

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Modes of Regulation 1. Early and continuous negotiation among included affected interests over the substance of the rule 2. Unanimous consent to the final negotiated rule proposal 3. Increased costs for the agency involved 4. Use of the notice-and-comment procedures for those not participating in the negotiation

Both supporters and critics of regulation-by-negotiation agree that the requirement of unanimity in reaching a recommendation is the crucial institutional element in the process. Unanimity ensures that all the participants support the final rule.≤π The net effect of the process is to give the agency less bargaining power with respect to the interest groups participating in the negotiation process relative to its bargaining position under regulation-by-rulemaking, since any participant can veto the outcome or challenge the result in court. (The agency can, of course, always switch gears and simply issue a rule without the consensus, but it would suffer a loss of credibility with the participants if it did so too readily when an impasse was reached.) THE PUBLIC PERSPECTIVE

What are the public benefits and costs of negotiated rulemaking? The proponents of regulation-by-negotiation claim a wide range of benefits compared with traditional regulation-by-rulemaking, including reducing the time to develop regulations, reducing post-issuance legal challenges to regulations, and improving the quality of regulations issued.≤∫ Whether the process has produced any of these benefits is the subject of considerable debate.≤Ω One favorable study of the process highlighted the establishment of long-term relationships in the negotiation as an improvement over the more limited single contacts agency staff typically have with outsiders in notice-and-comment rulemaking.≥≠ On the other hand, Professor Cary Coglianese, the leading critic of regulation-by-negotiation, summarized his conclusions about the defects of the process by calling it ‘‘not really even like a house of cards, but rather like the addition of an extra room to a house with an unsteady foundation.’’ The problem, according to Coglianese, is that ‘‘[n]egotiated rulemaking adds an early attempt at consensus building to a regulatory process designed to make it difficult to sustain interest group bargains.’’≥∞ The best empirical evidence suggests that regulation-by-negotiation does not significantly reduce either the time necessary to create a final rule or the incidence of litigation over final rules.≥≤ The claim that regulation-by-negotiation produces higher-quality regulations is also hotly disputed. Critics argue that regulation-by-negotiation has perverse incentive effects on agencies and other

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participants in the process—including encouraging the selection of issues for inclusion according to the likelihood of success; reducing the willingness of participants to raise important issues that would hinder reaching consensus; encouraging ambiguity in rules to foster consensus; heightening ‘‘the sensitivity of the parties to adverse portions of the rule,’’ a ‘‘lowest-common-denominator problem’’ that makes rules less likely to promote technological innovation and is ‘‘inconsistent with the theory and principles of the APA’’; and creating an incentive to take positions on issues parties consider minor, for use in negotiations—leading to inferior outcomes.≥≥ The benefits and costs to the public are thus contested, with proponents and critics disagreeing over even the most basic issues (for example, which rules ‘‘count’’ as negotiated rulemaking) and interpretations (for example, whether the time period for negotiated rulemaking is longer or shorter than that for traditional rulemaking). We do not think it is possible to definitively state that there are (or are not) public benefits to regulation-by-negotiation as a general matter, although we think that the critics have the better empirical arguments on most points capable of measurement. To the extent that there is a scholarly consensus on regulation-by-negotiation, it is that the process is superior to ordinary rulemaking only under limited circumstances. As one government lawyer put it: ‘‘[A] reg-neg is not used for an average rule. There is usually something special about it that warrants a reg-neg.’’≥∂ Unsurprisingly, proponents and critics disagree on how often those circumstances occur. THE AGENCY PERSPECTIVE

Regardless of the relative merits of the proponents’ and the critics’ positions, negotiated rulemaking presents agencies and outside groups with a set of costs and benefits that is different from that of other forms of rulemaking. And because agencies can choose which regulatory method to apply to each regulatory proceeding, there must be instances in which negotiated rulemaking provides the agency staffs with advantages, because we observe that agencies choose to negotiate some rules.≥∑ Why do they choose to do so in some cases and not others? Proponents of the procedure argue that agencies use regulation-by-negotiation because of the value of the process.≥∏ However, research suggests that ‘‘agency staff appear not to perceive [the purported] benefits as a singularly motivating factor,’’≥π and one study of the EPA, the most frequent user of the process, found that ‘‘the negotiation process has not been as popular with EPA employees as it was originally anticipated for resolving crucial rulemaking problems.’’≥∫ In addition, in light of the lack of a demonstrated empirical

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record of success for the procedure in reducing the time to the final rule or post-rulemaking litigation, this explanation appears unlikely. Even when they do adopt regulation-by-negotiation, agencies do not do so for their most important rules, according to Professor Coglianese’s comprehensive review: ‘‘Agencies have eschewed negotiated rulemaking for federal rules having the broadest and most substantial impacts on industry and the public.’’≥Ω Again, this suggests that agencies are choosing regulation-bynegotiation not because it is a clearly superior method for rulemaking generally but because of specific advantages in particular cases. That said, there is a ‘‘generic’’ benefit to agencies of using negotiation. Doing so sends a signal to the public, interest groups, and the legislature that the agency is interested in negotiation.∂≠ This may give the agency credibility with the legislature or with interest groups. Specific situations may also provide benefits to the agency. When an agency needs to modify an existing regulatory structure to accommodate a limited set of special circumstances, affecting only a small number of regulated entities and other interests, regulation-by-negotiation may be cheaper to implement than regulation-by-rulemaking. In such a situation, having everyone concerned with the outcome in the room when the rule is drafted makes the agency’s task easier. Negotiation also may benefit an agency when there are potential gains from trade between various interest groups and the agency. For example, when the factual basis for the rulemaking is poorly understood within the agency, correctly calibrating the regulatory measure requires private information held by the regulated entities. If the agency (as well as interest groups that might challenge the rule as too lax) can learn this information, the agency can broker a compromise rule that is more effective because it is based on accurate information. To accomplish this, the agency needs a means to allow the regulated entities to make credible commitments or disclosures to enable the regulation to be recognized as generally benefiting all parties. The negotiation process itself may serve as a means for interests to explicitly bargain over the ‘‘price’’ for agreeing to a new regulatory initiative or changes in rules, allowing a more explicit deal than would be possible with indirect negotiations through the notice-and-comment process.∂∞ (The negotiated rulemaking discussed in chapter 4 is a good example of this situation.) Finally, Judge Patricia Wald of the D.C. Circuit Court of Appeals, the court with the most extensive experience with challenges to agency actions, makes the case that regulation-by-negotiation is beneficial because the process ‘‘restricts, in some measure, through its insistence on face-to-face negotiations, the intrusion of political and extra-substantive considerations at all levels of

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rulemaking, agency and White House, and from all sources, identified and unidentified.’’ The ‘‘precommitment’’ of the agency is thus, in Wald’s view, the primary benefit of the process for participants, even if this commitment is not legally enforceable should the agency decide to alter the proposed rule after the negotiations conclude.∂≤ The restriction of outside ‘‘political’’ influences would be a major benefit to the agency by keeping the decision ‘‘in house’’ at the agency. But as we indicated earlier, closing the door to political competition can sometimes be detrimental to a process that requires competition in order to be socially beneficial. On the cost side, there is good reason to think that regulation-by-negotiation is often more costly for agencies in terms of their own resources than regulation-by-rulemaking. In part, this conclusion can be derived from the hybrid nature of regulation-by-negotiation: agencies must both negotiate and conduct traditional notice-and-comment rulemaking after the negotiations conclude. Agencies must also shoulder the substantial burden of the time and expense of the negotiation itself.∂≥ Only when the notice-and-comment portion of the process requires a reduced effort, when the quality of the outcome is increased, and when the benefits to the agency, if any, outweigh the added costs of the negotiations will regulation-by-negotiation be preferred by agencies to regulation-byrulemaking. With the public costs and benefits unclear, it is hard to determine whether there are regulatory externalities with respect to regulation-by-negotiation. However, the circumstances we have identified in which it is likely to benefit the agency are not instances in which negotiated rulemaking is likely to cause costs for the public that are higher than those caused by traditional rulemaking. There thus seems to be little reason to worry that the process will be overused, a conclusion reinforced by the relative rarity of its use. And since every negotiated rulemaking incorporates traditional rulemaking, any interest group excluded from the negotiation still has an opportunity to participate in the process and present its arguments and data.

Regulation-by-Litigation Regulation-by-litigation differs significantly from these other means of creating rules because there is no rulemaking attached to it. Rather than issue a proposed rule or invite affected parties to negotiate a rule, an agency (or a private actor) sues one or more regulated entities, charging them with violation of an existing statute, regulation, or common-law rule. As we noted in chapter 1, more is required than an enforcement suit for the litigation to become regulation. Regulation comes about when the plaintiff persuades (or coerces,

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depending on your point of view) the regulated entity to agree to the imposition of regulatory provisions that serve as substantive constraints on the defendant’s behavior in the future, not simply the payment of fines for past behavior. (Those substantive constraints would have to be more than the pro forma promise not to violate the law routinely included in enforcement-suit settlements.) One distinctive characteristic of regulation-by-litigation, compared with litigation, is that it results in forward-looking substantive requirements imposed on the regulated entities through the litigation. The final outcome of regulation-bylitigation looks an awful lot like regulation-by-negotiation or regulation-byrulemaking: a set of detailed rules that constrain future behavior. In addition to being forward looking, the litigation must impose requirements on enough of the regulated industry to be an effective substitute for a generally applicable rule. Suing General Motors, for example, could affect only about a quarter of the vehicles in the U.S. market (GM’s approximate market share in 2006). To regulate cars through litigation, a plaintiff would have to sue enough automakers to cover much more of the market. A lawsuit in 1960 against General Motors, Ford, and Chrysler could have produced something like a regulation, covering most of the U.S. auto market. In 2008 such a suit would affect only about half the U.S. market and so would need to include as defendants Toyota, Honda, and other leading foreign-owned carmakers. It is important to distinguish regulation-by-litigation from litigation of enforcement actions. Enforcement actions do not lead to regulatory action but simply bring a regulated entity into compliance with existing regulations. Unfortunately, those engaged in regulation-by-litigation rarely label their actions as exceeding their mandate. Indeed, the agency may not believe that it is exceeding its statutory authority when it engages in regulation-by-litigation. How do we tell the difference between enforcement actions and regulation? One indicator that something more than a simple enforcement action is occurring is that the agency is pursuing actions against the vast majority of the regulated community. To continue with our earlier auto example, if GM disagrees with the EPA over the meaning of a Clean Air Act provision and that disagreement is resolved through an enforcement action by the EPA against GM, there has not been regulation-by-litigation. However, if the EPA disagrees with GM, Ford, Chrysler, Honda, Toyota, Hyundai, Volkswagen, and BMW and sues all of them, it is more likely that regulation is occurring through the litigation. One remaining feature is also important. When a regulator and a regulated community disagree over the meaning of a statute or a rule and litigate their differences, a court may finally decide the question or the result may be a

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settlement. Regulation-by-litigation is more likely when the result is a series of settlements than when a court conclusively interprets a statute or rule, for two reasons. First, it is only when the defendant agrees to the substantive relief demanded that the agency can exceed the unambiguous authority it has under its organic statute. If an agency asked a court in an enforcement action for relief not authorized by, or expressly forbidden by, its organic statute, the court would properly refuse to grant the requested relief. And an ambiguous statute creates additional opportunities for agencies to stretch the boundaries of their authority, as in the EPA’s New Source Review litigation. Second, the role of interest groups in settlement-approval proceedings is significantly more restricted than their role in regulation-by-rulemaking, and agencies receive substantial deference from the courts in regulatory settlements.∂∂ Regulators’ factual assumptions and policy decisions receive much less scrutiny in a settlement than they do in rulemaking and negotiation. When we put these observations together, we find that the most important features of regulation-by-litigation are: 1. a lack of public participation in creating substantive regulation through the use of settlements; 2. the elimination of political competition and the compromise of oversight by legislative and executive branches; 3. a reduced opportunity for challenges to the agency’s views of its authority and the facts, because the threat of substantial penalties is used to gain agreement by the formal parties to the lawsuit, removing them as a source of challenges; 4. the piecemeal nature of the regulatory outcome, with settlements binding only individual parties and not the public generally; and 5. litigation with sufficient coverage of the regulated industry to serve as a substitute for generally applicable rules.

These characteristics create a means of regulating that is quite different from both regulation-by-negotiation and regulation-by-rulemaking. THE PROBLEM WITH SETTLEMENTS

The legal system generally favors settlements, but they are problematic in regulation-by-litigation. In general, settlements occur because they offer the parties an alternative that is preferable to the cost and uncertainty of litigation.∂∑ In the context of private litigation, settlements are generally welfare enhancing—they make all parties better off taken together—because they represent a contractual resolution voluntarily agreed to by the parties.∂∏ Such welfare-enhancing outcomes can occur when agencies engage in enforcementrelated litigation.∂π But the presumption that settlements are welfare enhanc-

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ing is not justified generally in the regulatory context.∂∫ Where there are hotly contested issues of law or fact, and there often are,∂Ω the net welfare effect of settlements is ambiguous. Regulators can change the regulated entity’s decision through actions unrelated to the merits of their legal or factual claims. By threatening sufficiently large liability, even a tiny probability of the regulator’s success on the merits can produce an expected liability so great that the regulated entity has no choice but to settle.∑≠ For example, suppose a regulated company has a net worth of $100. An agency threatens it with a fine of $1,000,000. Even if the company estimates the agency’s chance of prevailing and imposing the fine as only 0.0001 (hence a probability of 0.9999 that the company will prevail), the expected value of the fine equals ($1,000,000 0 0.0001) + ($0 0 0.9999) = $100.∑∞ Give the regulator a larger chance to win and a larger fine, and the expected value can quickly approach the net worth of even substantial firms. Moreover, the uncertainty introduced by the regulators’ actions can itself be damaging to firms, regardless of the expected value of the suit. Regulators need not simply threaten massive fines—they can also tip the balance by threatening retaliation on other fronts (denying required permits, taking additional time to process requests from the firm, closely examining the firm’s records, creating bad publicity for the firm). Moreover, because settlements, unlike generally applicable rules, can vary the terms for different entities, holdouts risk being offered less favorable terms than those who settle early.∑≤ Regulators need not even ultimately prevail to destroy a firm.∑≥ Settlements also reduce the chances for challenges to a regulator’s extension of its authority. As Professor Paul Carrington and Derek Apanovitch noted in commenting on mass-tort negotiated settlements, ‘‘it is the nature of a settlement to sublimate questions of right and duty and to silence further consideration of the merits or the policies advanced by the agreed result.’’∑∂ For all these reasons, settlements that are part of regulation-by-litigation are not entitled to the presumption that they are welfare enhancing. PUBLIC COSTS AND BENEFITS

What is the public cost-benefit balance for regulation-by-litigation? From the public’s perspective, there are no benefits to regulation-by-litigation compared with regulation-by-rulemaking or regulation-by-negotiation, and there are substantial costs. This is a bold claim, but the argument for it is quite simple and rests on two points. First, any substantive rule imposed through litigation could be imposed through rulemaking or legislation, although in some cases a particular regulator could not impose a particular constraint (as was the situation in all three of

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the case studies we discuss in chapters 4, 5, and 6). That does not mean, however, that a different regulator could not impose the equivalent rule. For example, the tobacco Master Settlement Agreement discussed in chapter 6 imposed a hefty implicit tax on cigarettes through litigation. The state attorneys general who managed that litigation could not have imposed such a tax, but state legislatures could have. We contend that it is a negative, not a positive, attribute of regulation-by-litigation that it allows an actor to enact regulations assigned elsewhere by the political process. (This is an important point, for if the sole concern is the imposition of the constraint and the nature of the actor is irrelevant, then using litigation to make an end run around another agency may be thought a positive.∑∑) Litigation therefore does not add any additional legitimate regulatory scope. Second, regulation imposed through litigation is always less comprehensive than regulation imposed by rulemaking because it does not apply to nonparties. Note that this is problematic even if every firm in an industry is sued and agrees to the settlement, because the settlement cannot apply to new entrants. If the settlement imposes costly terms (as it surely must, for if it did not the regulator would not have had to sue to impose them), new entrants will have a cost advantage over incumbents, and the existence of the regulations imposed through litigation will encourage entry. Because settlements are not binding on nonparties, either the settlement itself must serve as a barrier to entry or some other barrier to entry must exist or be erected to prevent new entrants not bound by the settlement’s terms from using their freedom from the substantive provisions to outcompete the settling entities.∑∏ If a regulation is worth its cost to society, it should apply to all firms and individuals engaged in the regulated activity.∑π When imposed through litigation, regulations apply only to the parties to the lawsuits, leaving an opening for new entrants to the regulated activity. This not only creates an incentive for the regulation to become underinclusive over time but results in unequal treatment of participants in the regulated activity. Litigation therefore offers only a potentially less effective form of regulation. These two characteristics combined mean that any regulation imposed through litigation is at best an imperfect substitute for a regulation imposed through rulemaking or negotiation. This alone guarantees that regulation-bylitigation is less effective than regulation done by other means. There are also public costs to regulation-by-litigation. An important cost is that regulations imposed through litigation do not provide for public participation. To the extent that public participation can improve the quality of regulations by bringing new information and arguments to light, regulation imposed by litigation will be substantively worse. Further, because regulations

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imposed by litigation are often not recognized as regulation by those not directly affected, the flow of information through even informal channels is likely to be less than when rulemaking or negotiation is used. To the extent that public participation confers legitimacy on regulation, regulations imposed by litigation lack legitimacy compared with those imposed through rulemaking or negotiation. Together with the lack of public benefits, this cost makes regulation-by-litigation a net negative for the public at large. THE REGULATORS’ COSTS AND BENEFITS

For the agency or private party interested in regulation, regulation-bylitigation offers a different cost-benefit calculation. There are substantial benefits for the regulator. One important benefit is that regulation imposed by litigation is less susceptible to change brought about by changes in administrations. When presidential administrations are about to change parties, there is a significant increase in the volume of regulations, often referred to as ‘‘midnight regulations,’’ as the outgoing administration attempts to lock in policies it fears may not be continued by the incoming administration.∑∫ Litigation offers another method of locking in policies, in part because it is more difficult for a new administration to change a position officially taken in court filings than it is for the administration to alter rules. In particular, one former regulator told us that it is next to impossible for an incoming Republican administration to change positions in environmental litigation because to do so would invite a firestorm of criticism for being ‘‘soft’’ on polluters. Embedding regulatory policies in settlements better insulates them from changes in regulatory philosophy due to a change in control of the executive branch. We view this as a problematic feature of regulation-by-litigation because we think regulatory philosophies should change when there are shifts in control of the executive at the federal or state level. The details of regulatory policy are far more complex than a ‘‘pro-business’’ or ‘‘pro-environment’’ label can capture, and when a candidate who favors one set of regulatory trade-offs defeats another who prefers a different mix, regardless of the direction of the policy shift, the winner’s policy views should influence regulatory policy. Particularly where the legislature has left the executive branch with a broad range of acceptable policies, the choice of which policy to implement properly belongs with the executive. (Legislatures know how to write specific policies into law when they wish to, as Congress’s increasingly specific commands on many environmental matters to the EPA demonstrate.) Regulation-by-litigation also allows the agency to escape constraints imposed on agencies by legislatures. For example, in the heavy-duty diesel litigation discussed in chapter 4, the EPA was able to obtain greater emissions

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reductions from engines made between October 1, 2002, and January, 1, 2004, than it could have imposed by law, because the lead-time rules restricted the agency from changing its emissions standards more than once every four years and the agency had recently changed the standards. (We discuss this in detail in chapter 4.) Perhaps the EPA should have been able to change the standards; however, the political process had determined that it could not. As messy as the political process can be, results desired by one interest group or another do not justify short-circuiting the process. A third major advantage from the regulator’s perspective is that regulationby-litigation often combines large transfers of money to the government and others with its substantive regulation. The diesel-engine settlements, for example, included payments of roughly $1 billion in fines and agreed-upon offsetting actions, and the tobacco settlements gave state governments collectively more than $200 billion.∑Ω When an agency is negotiating jointly the imposition of substantive rules and financial provisions, the negotiations at least implicitly become a process of trading off the payment and the substance, with concessions in one area likely to imply a need for reciprocation in the other.∏≠ In the tobacco case, for example, agreement to the massive payments to state governments would have been impossible without simultaneous agreement to the pseudo-tax structure to shift those payments from the tobacco companies to smokers. (We discuss this in detail in chapter 6.) Sometimes a portion of the money is used to reward nongovernmental actors directly through attorneys’ fees and mandatory payments. For example, the Hudson Institute estimated that the tobacco litigation settlement will produce payments of $500 million per year to two hundred to three hundred lawyers, perhaps in perpetuity.∏∞ As Professor W. Kip Viscusi notes, the tobacco settlement ‘‘established a tax on the product payable to the plaintiff and paid for almost entirely by the consumers rather than a damages payment paid for by the defendants.’’∏≤ Other settlements have required defendants to fund interestgroup activities.∏≥ Campaign contributions from those who receive these payments are another potential benefit to politicians of choosing regulation-bylitigation, creating, at a minimum, a perceived corruption problem.∏∂ Agencies cannot use regulations to legitimately extract cash from regulated entities, although the regulatory process offers opportunities for corruption.∏∑ Regulation-by-litigation differs in kind from run-of-the-mill political corruption in that the resource grab not only is not under the table but is incorporated into official court orders. The lure of deep pockets has had an impact on regulators’ behavior: Philadelphia created a special litigation unit ‘‘to seize the potential revenue benefit that could be gained by the City of Philadelphia acting as plaintiff.’’∏∏ The monetary rewards of regulation-by-litigation thus

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distort regulatory decision making by making substantive regulations that can be imposed via litigation more attractive than they would otherwise be.∏π Regulation-by-litigation also greatly reduces the potential for challenges to the substance of the regulation and the authority of the regulator.∏∫ As Michigan Supreme Court justice Robert Young noted, the judicial process, ‘‘though public in name, is private in essence.’’∏Ω The defendants’ silence has been purchased through the settlement itself; nonparties are not required to be given notice of the action and require the court’s permission to even be heard on the merits.π≠ Another advantage for regulators is that regulating through litigation blurs responsibility for policy embodied in the regulation and allows substitution of the regulator’s preferences for public preferences.π∞ For example, the tobacco companies, the states, and the attorneys all had reasons to prefer the pseudotax structure imposed to damage awards, but it was unlikely that cigarette consumers would have agreed to the structure and unclear whether voters generally would have accepted an increase in cigarette taxes. Because smokers were not represented in the settlement process, cigarette consumers’ views did not have a place at the table and, not surprisingly, were ignored.π≤ Regulation-by-litigation offers those desiring regulations significant advantages in some cases. These advantages are not linked to advantages to the general public, however. Choosing regulation-by-litigation is thus problematic.

Choosing How to Regulate When will agencies or private litigants choose to engage in regulation through rulemaking, negotiation, or litigation? Public-choice theory tells us that they will do so when the advantages to the regulator outweigh the costs to the regulator. If there are regulatory externalities, this will not necessarily occur when the social benefits of a particular form of regulation outweigh the social costs. Our analysis suggests that there are reasons to be concerned when agencies choose litigation over rulemaking but that an agency’s choice of negotiation over rulemaking is less likely to be problematic from the public’s perspective. In the next three chapters we examine three instances of regulation-bylitigation, case studies that illuminate the more abstract description provided in this chapter. In each example, we look for the reasons the actor seeking regulation chose litigation as its preferred means of action; we identify key events or key participants that set conditions and motivations that led to regulation-by-litigation; and we offer an assessment of the relative merits of the outcome.

4

Heavy-Duty Diesel-Engine Litigation

If you drove down an American highway in the late 1960s or early 1970s and found yourself behind a tractor-trailer rig, you probably cursed the heavy black smoke that often belched from the truck’s exhaust. Through the 1970s, diesel engines suffered from incomplete combustion when accelerating or climbing hills, producing highly visible air pollution and annoying drivers of vehicles behind them. Today’s heavy-duty diesel engines are a different story, using a wide range of sophisticated technologies to dramatically reduce emissions of every major pollutant. The path from the black-smoke-belching trucks of the 1960s to the cleaner high-tech engines of today runs through every form of regulation—rulemaking, negotiation, and litigation—as well as through marketplace demands for improved engine performance. Regulators addressed pollution from heavy-duty diesel engines through notice-and-comment rulemaking that set emissions standards for each model year beginning in 1970, with the passage of the Clean Air Amendments, and continuing until the middle of the 1980s. They used negotiated rulemaking in 1985 to create ‘‘noncompliance penalties,’’ which allowed, upon payment of a penalty, the sale of engines that failed to meet the emissions targets, and then returned to rulemaking until 1995. That year the EPA, the California Air Resources Board, and the engine manufacturers negotiated a ‘‘Statement of Principles’’ governing future regulations and setting emissions-reduction tar-

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gets through model year 2004 engines. In 1998 the EPA sued all the domestic heavy-duty diesel-engine manufacturers, alleging that they illegally used electronic engine controllers as ‘‘defeat devices’’ to frustrate the emissions standards. In settling the lawsuit in October 1998, the EPA obtained regulatory concessions from the engine manufacturers, including an agreement to ‘‘pull forward’’ the model year 2004 emissions standards to October 2002 and the payment of hundreds of millions of dollars in fines. The EPA then returned to rulemaking to impose low-sulfur-fuel requirements and model year 2007 emissions standards. Understanding why the EPA chose different methods of regulation at different times gives us a window into an agency’s decision of how to regulate and illuminates when litigation is an agency’s preferred route. Studying the results of the EPA’s litigation gives us an opportunity to weigh the consequences of regulation-by-litigation. In this chapter we examine how the interaction of the structure of clean-air regulation and the details of diesel-engine technology gave the EPA incentives to adopt different methods of regulation at different times.

The Regulatory Decisions The Future of Diesel Engines, a comprehensive independent periodic industry survey, has regularly begun its discussion of emissions regulations by noting that ‘‘[i]t is redundant to say that almost every action taken by the diesel engine manufacturer is related to or governed by emissions issues.’’∞ The means through which regulators act and the substance of their decisions are thus central to both manufacturers and buyers of diesel engines. The EPA, like most other industrialized countries’ regulatory agencies, regulates four components of diesel exhaust: carbon monoxide (CO), hydrocarbons, particulates, and nitrogen oxides (NOx), although the primary problems are particulate and NOx emissions.≤ The first three pollutants are the result of incomplete combustion; NOx is a side effect of combustion.≥ Increasing the efficiency of combustion thus generally reduces hydrocarbon, CO, and particulate emissions while increasing NOx emissions. As a result, increasing fuel economy tends to increase NOx emissions, and controlling NOx emissions tends to reduce fuel economy.∂ As we shall see, this trade-off between fuel economy and emissions control is central to understanding the regulatory history. Heavy-duty diesel engines did not get much regulatory attention in the early days of federal air-pollution-control efforts, primarily because there were not very many of them.∑ (By comparison, in 2000 diesel engines powered 80

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percent of the heavy-duty truck transportation sector.∏) As a result, their early contributions to air pollution were minimal: only 1.75 percent of total particulates, 0.02 percent of CO, 1.9 percent of hydrocarbons, 4.8 percent of NOx, and 0.4 percent of sulfur oxides (SOx) came from heavy-duty diesels in the early 1970s.π Diesel’s minor contributions to air pollution produced correspondingly minor attention from regulators. The initial regulations issued under the Clean Air Amendments of 1970 regulated only diesel ‘‘smoke,’’ first addressing hydrocarbon, NOx, and CO emissions in 1974. Emissions were measured under these first regulations through a ‘‘steady state’’ test meant to simulate highway driving. In the steady-state test, the engine was run under conditions that approximated its operation while driving at highway speed. The method of testing engines plays a significant role in the evolution of emissions regulation, and so this initial choice was important. Choosing a steady-state test over a test cycle that simulated a more complete set of operating conditions was a somewhat surprising decision by the EPA. California, the leader in emissions regulation, had been testing automobiles and light trucks using a test cycle that included multiple conditions since 1960.∫ The steady-state test was simpler to administer, but it did not capture the environmental impact of the engines as accurately as a more complete test cycle would have. Because emissions standards are implemented through extrapolation from test results, having tests that accurately reflect engine operations is crucial if the EPA’s estimates of emissions are to reflect actual emissions. Further, the litigation in 1998 turned on the disagreement between the engine manufacturers and the EPA over whether there was an obligation to control emissions outside the test cycle as well as within it. Congress amended the Clean Air Act in 1977 (after an abortive effort the year before that collapsed in the closing minutes of the Ninety-fourth Congress). In part because of the EPA’s slowness to address diesel emissions, the 1977 amendments directed the EPA to issue regulations for heavy-duty diesel engines requiring ‘‘the greatest degree of emission reduction achievable’’ consistent with cost, technical feasibility, noise, energy, and safety factors.Ω The 1977 amendments also introduced a requirement that each new set of heavyduty diesel-engine standards apply to at least three model years, beginning no earlier than the fourth model year after the standards were promulgated.∞≠ This lead-time provision gave the engine manufacturers time to recover the costs of meeting each standard before being required to invest in meeting a newer standard. In 1979 the EPA replaced the steady-state test with a transient-engine test standard. The new Federal Test Procedure (FTP) used ‘‘a continually changing

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series of speed/torque conditions as emissions are sampled,’’ including ‘‘a second-by-second listing of prorated speeds and torques, through which the engine must be exercised within statistically acceptable limits.’’∞∞ The FTP was introduced in part because of the EPA’s concern that the 1977 amendments’ mandated emissions reductions would be difficult for the engine manufacturers to meet, creating an incentive to design around the test.∞≤ The FTP was a major change both in approach and in emissions results: comparison testing found ‘‘no general correlation’’ between performance on the new and old tests, highlighting the importance of the test specification to the real-world impact.∞≥ Over the next decade, the EPA continued to tighten heavy-duty diesel emissions standards under the transient test using rulemaking, responding in part to the increasing importance of diesel engines in the heavy-duty truck market. A key issue lurked in the background of the debate over mobile-source emissions standards: Was the EPA accurately capturing on-the-road emissions through its various testing programs? If the tests did not accurately reflect how mobile sources were used on the highway, the EPA’s air-quality predictions would be wrong and control measures would need to be revised. If the test results overpredicted controls, air quality would deteriorate; if they underpredicted controls, costs on mobile-source manufacturers would needlessly rise. The pattern of regulation through the 1980s reflected the institutional structure of clean-air regulation. Initial regulatory efforts in mobile sources focused on the largest contributor, automobiles. Further reductions in automobile emissions became increasingly costly. As a result, regulators turned to the cheaper gains in air quality possible in the comparatively unregulated and increasingly important heavy-duty diesel sector. As it tightened standards during the 1980s, the EPA modified its approach to accommodate the need for greater flexibility in engine and truck manufacturing. Initially the EPA had simply required manufacturers to meet regulatory deadlines and then fought mobile-source manufacturers’ attempts to push deadlines back. As standards tightened, the EPA accepted delays in implementation to accommodate economic conditions in the industry and manufacturers’ need for lead time.∞∂ The EPA also introduced ‘‘noncompliance penalties’’ (NCPs) that permitted the sale of engines that failed to meet the standards (but that did not pollute beyond an upper limit), the result of the EPA’s first ‘‘negotiated rulemaking’’ exercise.∞∑ The Clean Air Act Amendments of 1990 again toughened the standards applicable to emissions of hydrocarbons, CO, NOx, and particulate matter from heavy-duty vehicles and engines, and the EPA responded with rulemak-

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ing that tightened the emissions limits in the regulations.∞∏ After the 1990 amendments, the EPA added regulations forbidding the use of ‘‘defeat devices’’ that would interfere with emissions controls in automobiles and light trucks.∞π Similar regulations were added for model year 2000 heavy-duty diesel engines in 1996.∞∫ Although the process was not formally regulation-by-negotiation, the EPA engaged in further cooperative efforts with the engine manufacturers and California regulators. In 1995, the engine manufacturers, the EPA, and the California Air Resources Board (CARB) negotiated a ‘‘Statement of Principles’’ (SOP) for future regulation of heavy-duty diesel emissions.∞Ω At the time, the EPA termed the SOP ‘‘an historic agreement’’ and ‘‘an example of the type of private/public and federal/state partnership approach to environmental regulation that EPA is pursuing.’’≤≠ The SOP included commitments by the manufacturers to a 50 percent reduction in NOx and non-methane hydrocarbons by model year 2004 and by the EPA to an averaging, banking, and trading system for emissions credits, and required rules mandating improved fuel quality.≤∞ Further, in return for agreeing to the reductions in NOx, the engine manufacturers secured agreement from the EPA not to reduce particulate limits and from California to delay a further reduction in NOx limits.≤≤ Most importantly, the SOP promised the manufacturers regulatory stability. As one engine manufacturer summed up the companies’ motivation to agree to the SOP: ‘‘The rules won’t change on us part-way through the game.’’≤≥ Three years later, the EPA abandoned both the consensus-based approach of regulation-by-negotiation and traditional rulemaking, and sued the seven U.S. engine manufacturers then operating, makers of over 95 percent of U.S. heavy-duty diesel engines, arguing that the use of electronic controllers to increase fuel economy during nonurban driving conditions amounted to illegal ‘‘defeat devices’’ under the Clean Air Act.≤∂ Since the EPA’s test simulated only a limited set of driving conditions, the controllers were able to allow the engines to pass the EPA’s test without impairing long-haul fuel economy, by reducing emissions to the standard only under test conditions. Announcing the lawsuits, EPA administrator Carol Browner claimed that the engine manufacturers ‘‘programmed the engine so that it knew when it was being tested and when it was on the road,’’ estimating that the practice improved fuel economy by 4 to 8 percent.≤∑ Although the engine manufacturers denied the EPA’s claim that their use of controllers to boost fuel efficiency at the expense of emissions control outside the test cycle was illegal, the seven U.S. heavy-duty engine manufacturers settled the suits on October 22, 1998, agreeing to pay substantial fines, to retrofit many existing engines when they were rebuilt, and to ‘‘pull ahead’’ the model year 2004 standards to engines

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sold after October 1, 2002.≤∏ The engine manufacturers also agreed to a parallel settlement with California.≤π Two features of the settlement are particularly noteworthy. First, the ‘‘pull ahead’’ provisions made the model year 2004 standards applicable two years earlier than the EPA could have done through rulemaking because of the leadtime restrictions. The EPA had promulgated the model year 2004 and later diesel emissions standard on October 21, 1997, and so could not create a more stringent standard that would apply before model year 2007 engines.≤∫ Second, the EPA did not require that engines meet the test-cycle emissions level at all points during operation. Rather, for several years the settlement required only that engines meet the less stringent European emissions standards (Euro III) outside the FTP test cycle. In December 2000, the EPA issued new rules governing diesel engines for model years 2007 through 2010. The new rules further tightened emissions standards for particulates, NOx, and non-methane hydrocarbons.≤Ω The EPA also required that low-sulfur diesel fuel be introduced in 2006, dramatically cutting diesel’s sulfur content from 500 ppm to 15 ppm, with the goal of facilitating the introduction of sulfur-intolerant emissions-control technologies, such as catalytic diesel particulate filters. Although this was not a negotiated rulemaking, many participants in the rulemaking described the process to us as a return to the cooperative atmosphere of the prelitigation years. Of course, disagreements continued, including serious ones that ended up in court.≥≠ Most directly relevant to the dispute discussed here are the June 2003 settlement of a lawsuit brought by the Engine Manufacturers Association (EMA), which requires in-use emissions testing by manufacturers of model year 2007 and later heavy-duty diesel engines, and a dispute with California over the upgrading of older diesel engines.≥∞ The CARB had passed a regulation that set deadlines for upgrading engines with low NOx rebuild kits (known as ‘‘chip reflashing,’’ since it consisted largely of reprogramming the engine controllers) that were based on model year rather than requiring such chip reflashing during engine rebuilds. The Sacramento Superior Court found in favor of the EMA, holding that the chip-reflash regulations were ‘‘unlawful, unconstitutional, void, invalid and beyond the scope of [the CARB’s] authority.’’≥≤ These disputes are typical of what we see as the future of diesel-engine regulation. By 2010, diesel emissions will be so well controlled that there will be few gains possible from tightening standards further. Future regulatory directions are more likely to focus on the complete life cycle of engines and test protocols, aiming to ensure consistent emissions reductions years after the engine has left the manufacturer. The only frontier left for regulators is the introduction of detailed onboard diagnostic requirements that address engine-

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performance monitoring, the improvement of testing, and, perhaps, the adoption of new maintenance and operations standards that will require engine owners to both provide data and alter engine performance.≥≥ California’s recent efforts to require the ‘‘reflashing’’ of existing engine controllers may be just the first step in more complex requirements for vehicle owners of all types, although its loss in court suggests that such efforts will require more care to implement than the CARB exercised. Our goal is to understand the choices the EPA made over the more than thirty years from the comparatively light regulation of ‘‘smoke’’ in the 1970s through the years of increasingly stringent standards applied through rulemaking, with occasional cooperative efforts such as the NCP negotiated rulemaking in 1985 and the SOP agreement in 1995, to the 1998 litigation and the subsequent return to rulemaking. We begin with the evolution of diesel technology over the same period and then turn to the industry structure and its impact. Finally, we address the incentives created by the structure of the Clean Air Act itself. Each of these played important roles in shaping the EPA’s actions.

Diesel Engines and Air Pollution The first step in unpacking the EPA’s decisions is to understand what the agency was regulating. Eighty percent of the trucks that haul freight across the United States, and 91 percent of the ‘‘heavy-heavy’’ sector, are powered by diesel engines.≥∂ Diesel engines differ from gasoline engines in important ways, using a different fuel burned in a different combustion mechanism and producing different mixes of pollutants. For truckers, diesels have important advantages over alternatives. They are significantly more fuel efficient than gasoline engines; one reference work labels them as ‘‘the most efficient liquid fuel burning prime mover yet derived.’’≥∑ Relative to gasoline engines, diesels save truckers as much as $5.5 million in fuel costs per year, and diesels use only 70 percent of the fuel that comparable gasoline engines would need to provide the same power output.≥∏ Diesels are also easy to maintain, further endearing them to truck companies.≥π What about emissions? Diesel emissions are the result of complex, poorly understood processes and, consequently, are difficult to model.≥∫ Different engine designs and different operating conditions can dramatically change the mix and quantity of pollutants emitted by a truck; how much of each pollutant is produced and emitted depends on a variety of factors, including oxygen concentration, temperature, engine timing, the amount of mixing of fuel and air, and fuel characteristics.≥Ω In addition, as with all mobile sources, driver behavior dramatically affects emissions.∂≠ The key point is that diesel combus-

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tion has been, and continues to be, poorly understood compared with sparkignition-engine combustion, and so reductions in diesel emissions require relatively larger advances in scientific understanding than do comparable reductions in gasoline-engine emissions. In part, this is due to the later focus by regulators on diesel emissions compared with the much earlier attention to gasoline-engine emissions. Because of diesel’s advantages for truckers, diesel’s market share in trucking increased significantly beginning in the 1970s, with its share of total highway fuel use increasing from 8.9 percent in 1973 to 20.6 percent in 2000.∂∞ Not only was diesel’s share of truck traffic growing, but truck traffic itself grew rapidly as a result of the deregulation of the trucking industry in the early 1980s.∂≤ Although the resulting increase in emissions was partially offset by the shift to less polluting turbocharged after-cooled engines after the 1970s (which reduced NOx and particulate emissions per engine by approximately one-third), the large increase in diesel’s market share and its greater NOx emissions relative to gasoline engines meant that overall NOx emissions from heavy-duty engines grew in the 1980s, even as per-truck emissions fell.∂≥ The EPA’s models did not fully capture this growth in truck emissions, because they initially estimated truck traffic as a fixed percentage of automobile traffic.∂∂ In part because of customer demand for fuel efficiency, control of diesel emissions was first accomplished largely through changes in the combustion process rather than through post-combustion-stage techniques, as it had been with the addition of catalytic converters to the exhaust system of gasolinepowered cars.∂∑ This meant that the increasingly stringent emissions standards promulgated by the EPA through the 1980s and into the 1990s forced engine manufacturers to develop ever more sophisticated methods of controlling combustion.∂∏ One important result of the tighter standards was the increasing reliance on electronic controls in mobile-source engines to meet standards and improve performance. Although the first electronic controls were relatively unsophisticated add-ons to existing engines, by the mid-1980s engine manufacturers began to introduce fully integrated electronic control systems.∂π These have been, and continue to be, critical to the ability to reduce emissions from heavy-duty engines.∂∫ Electronic engine controls created an entirely new level of ability to control combustion in both diesel and gasoline engines, and did so relatively cheaply. They had important benefits beyond reducing emissions for engine manufacturers, as they also allowed the companies to tailor engine performance to their customers’ preferences and to prevent the sacrifice of fuel economy while meeting the more stringent emissions standards.∂Ω And as microprocessor costs fell, use of electronic controls became viable in increasing numbers of

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vehicles, producing what industry analysts termed revolutionary developments in diesel-engine technology.∑≠ As controllers grew more sophisticated, engines became able to satisfy both the EPA’s test requirements, by minimizing emissions when they recognized they were operating in the test cycle, and customers’ demands for fuel economy, by maximizing mileage when they were not. This was a result of the combination of the trade-off between fuel economy and emissions and the interaction of the structure of the EPA’s regulations and market forces. (Whether this practice was legal was the issue in the 1998 lawsuits.) The existence of trade-offs like the one between mileage and NOx emissions is an important, but often unacknowledged, feature of environmental policy. Consumers, manufacturers, and regulators all must choose from among a more complex set of options than ‘‘dirty or clean.’’ Public goods lie on all sides of the outcome: diesel engines’ higher mileage and lower CO emissions, for example, offer progress toward reducing greenhouse-gas emissions, increasing energy security, and reducing transportation costs, whereas their higher NOx emissions impose a different environmental cost. It is certainly not surprising that truck owners would prefer higher mileage to lower NOx emissions. It is not obvious, however, that regulators should prefer lower mileage and higher CO emissions but lower NOx emissions to the reverse. Moreover, the EPA’s regulatory choices are complicated by the fact that engine manufacturers ‘‘move last’’ in the design of engines. That is, the manufacturers make important choices about engine design after the EPA has announced regulatory requirements. Because customers demand engine characteristics different from those preferred by the EPA, market pressures will lead engine manufacturers to emphasize the features that customers desire at the expense of those that the EPA desires.∑∞ Indeed, if customers’ demands were not different from regulators’ demands, there would be no need for regulators. For example, the fuel injection timing in diesel engines is used to achieve optimum fuel consumption, power output, and emissions. However, since engines typically minimize fuel consumption, maximize power, minimize particulate emissions, and minimize NOx emissions at four different injection timings, engine designers must choose a timing that balances the four criteria.∑≤ They are likely to come as close as possible to the fuel-economy optimum for timing at highway speeds, consistent with meeting the EPA’s announced emissions tests. The increasing complexity of engine design and enhanced control over engine operation offered by the sophisticated controllers necessary for emissions reduction created new opportunities for satisfying consumer preferences at the expense of regulators’ preferences, and the test standards did not keep up by expanding the range of conditions tested.

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How did diesel technology influence the regulatory process and vice versa? Two important linkages stand out. First, diesel’s evolution from a minor factor in emissions to a major contributor was a consequence of broader trends in the economy (rising fuel prices in the 1970s spurred greater concern with fuel economy, and trucking deregulation boosted demand for heavy-duty engines) and the EPA’s initial focus on other sources, which brought the agency further up the marginal cost curve in those areas. The EPA’s increasing attention to diesel emissions over time was thus a predictable response by the agency to economy-wide trends and the differences in regulatory costs. Second, a major consequence of the EPA’s rulemaking was to spur the development of electronic engine controllers. The controllers in turn gave engine manufacturers greater control over their engines’ performance, opening a gap between the EPA’s test procedures and on-the-road operations, which the EPA did not close. In retrospect, the combination suggests that the EPA’s decision to focus on specifying tailpipe emissions limits measured under a limited set of test conditions virtually guaranteed the development of controllers programmed to match emissions reduction to test cycles and maximize mileage elsewhere.∑≥ Anticipating the electronics revolution that made this possible would have required the agency to forecast developments in computing that would have seemed like science fiction in the early 1970s. The evolution of diesel technology thus contributed in important ways to the controller dispute. Diesel’s growing market share in an expanding market meant that emissions as measured by the EPA’s air-quality models lagged actual emissions, creating a gap that the agency eventually had to close, while the growing sophistication of diesel engine controllers created an opportunity for engine improvements outside the test cycle that widened that gap still further.

The Heavy-Duty Diesel-Engine Industry The structure of the industry influenced how heavy-duty diesel engines are regulated in three important ways. First, there were only four heavy-duty engine manufacturers in the United States in 2007: Caterpillar, Cummins, DaimlerChrysler (the Detroit Diesel and Mercedes brands), and Volvo (the Mack and Volvo brands).∑∂ Although a few decades ago there were over fourteen manufacturers and importers, in 2007 these four companies produced virtually all the engines sold in the heavy-duty market.∑∑ This trend toward fewer firms is at least partly due to regulatory and competitive pressures, including regulators’ increasing demands on engine manufacturers to develop products with improved efficiency and environmental standards.∑∏ Second, heavy-duty diesel-truck manufacturing has historically not been a

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fully vertically integrated industry, although this has begun to change (in part because of the impact of emissions regulations).∑π The lack of vertical integration complicated truck manufacturing, since truck and engine designers often do not work for the same firm. Putting an engine into a truck is not simply a matter of dropping it in and tightening a few bolts; new engines often require extensive redesign of the existing truck body to fit its shape to the engine and other components, especially the cooling system, and to accommodate the location of the other engine compartment components to the engine (moving wires away from particularly hot areas, for example). As a former president of Volvo Trucks noted, ‘‘We are no longer dealing in a plug-and-play environment, where you can just drop any engine into any vehicle. It takes a very close match of components and new technology, such as new cooling systems, to meet those tough [emissions] regulations.’’∑∫ As a result, truck customers often insist on extensive testing opportunities for new models before committing to purchases.∑Ω For example, when Detroit Diesel introduced one of the first electronically controlled engines in 1985, it had done more than 19 million miles of dynamometer testing and more than 4.5 million miles of fleet service on the new engine.∏≠ An engineer reported a more dramatic example of the need for testing to us: some of the early test trucks using the engines designed to meet the terms of the 1998 settlement of the litigation produced so much heat that they melted the drivers’ shoes. Major design changes thus require lengthy lead times before they can appear in production models. For example, Detroit Diesel’s 2007 Series 60 engine was expected to have more than 14.8 million total test miles, of which 6.7 million were customer fleet testing.∏∞ The lack of vertical integration has had consequences for emissions control. Since engines and trucks are not designed together, testing actual vehicles requires significantly more testing than simply testing engines alone, because an engine might be used in multiple trucks and a truck model may be available with several different engine types.∏≤ As a result, the EPA chose to certify engines rather than trucks. The lack of vertical integration also complicates modeling; engine emissions must be measured in lab tests and then vehicle emissions estimated from test results. Such testing is not the same as measuring emissions with the engine installed in a truck, and ‘‘no effort has been made to monitor the changes in emissions from engines as they age, using the FTP. Consequently, estimates of older heavy-duty vehicles’ contributions to the emissions inventory remain suspect, and the degradation of particulate and NOx emissions performance over time remains poorly documented.’’∏≥ Most importantly, the heavy-duty diesel-engine market is different from the market for other types of engines because of the longevity of heavy-duty en-

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gines. Heavy-duty trucks using diesel engines are expensive, often costing substantially more than $50,000.∏∂ Their durability gives them exceptionally long useful lives, much longer than the Clean Air Act models and regulations assumed. The market follows the life cycle of trucks. New trucks are typically purchased by long-distance shipping companies, including the large national fleets, which typically operate the trucks through the engine warranty period.∏∑ This relieves the large fleets from having to maintain the trucks, since most work is done under warranty.∏∏ Trucks are then sold to regional trucking companies and other shorter-haul users.∏π Eventually, used trucks find their way to small companies that need occasional transport.∏∫ As trucks migrate over time from interurban long-distance hauling to short-haul work, they are more likely to be driven in urban areas where ozone and particulate problems are often more severe. The product life cycle thus puts older, dirtier trucks in more polluted areas. What can the industry structure tell us about the EPA’s choices? First, the relatively concentrated nature of the heavy-duty engine industry made litigation an option for the EPA. By suing only seven defendants in 1998, the EPA was able to influence all but a few of the engines sold domestically. Changing truck emissions by suing the engine manufacturers was thus far easier than attempting to change the behavior of trucking companies through litigation, which would have required thousands of defendants. Second, the long life cycle of trucks and the extensive used-truck market means that each model year’s engines have a long-term impact on emissions. Changes made prospectively through rulemaking therefore take years to work their way through the truck fleet and affect pollutant levels. Third, the lack of vertical integration stretches the time needed for compliance by truck and engine manufacturers when changes in regulatory requirements necessitate engine redesign.

The Clean Air Act Context To fully understand the story of heavy-duty diesel emissions regulation, we must place the regulators’ decisions in the context of the Clean Air Act, the statute that frames the environment within which the EPA’s choices were made. Three features of the Clean Air Act are critical to understanding the EPA’s choices in the heavy-duty diesel-engine regulations: the need for states to avoid nonattainment status for criteria pollutants, particularly with respect to particulates emissions, NOx emissions, and ozone levels; the structure of mobile-source regulation; and the incentives created by the statute for the evolution of emissions-control technology.

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NONATTAINMENT STATUS, PARTICULATES, OZONE, AND NOx

Beginning with the Clean Air Amendments of 1970, federal law required the newly formed EPA to establish ‘‘national ambient air quality standards’’ (NAAQS) for pollutants that endanger public health or welfare.∏Ω Since then, the EPA has finalized standards for CO, sulfur dioxide (SO2), particulates, nitrogen dioxide (NO2), ozone, and lead, which are referred to as ‘‘criteria pollutants.’’π≠ Once the EPA establishes NAAQS, states must develop a ‘‘state implementation plan’’ (SIP) describing how they will ensure that air quality meets the NAAQS within their borders.π∞ This plan must then be regularly updated to take into account new pollution sources, changed conditions, and newer data. States must keep the total emissions from all sources, including natural sources and population growth, to a level that ensures the NAAQS are met.π≤ SIPs are complex documents for which the applicable unit of measure is often ‘‘filing cabinets,’’ and they allocate valuable emissions rights among sources.π≥ If air quality deteriorates below the NAAQS for any pollutant, a region becomes a ‘‘nonattainment’’ area for that pollutant, a status with a variety of negative consequences—many of which threaten to dampen economic growthπ∂ —including increased federal regulation, the preclusion of new sources, and the loss of federal highway funds.π∑ Although the EPA has been reluctant to impose the most drastic penalties authorized by the Clean Air Act, there are negative consequences to nonattainment status that the EPA is willing to impose.π∏ Ozone has been a particularly problematic criteria pollutant.ππ Direct emissions of ozone are not the issue. Rather, it is the emission of NOx and hydrocarbons that generally produce higher atmospheric ozone levels. In 1991, 371 counties, primarily in the Midwest, the Northeast, and Southern California, as well as Dallas and Houston, were designated as nonattainment.π∫ The northeastern states blamed midwestern states for part of their problem, arguing that because of prevailing wind patterns, those states’ NOx emissions made their way to the Northeast and reduced the northeastern states’ ability to meet the ozone standard.πΩ These downwind states sought to have the EPA force the upwind states to revise their SIPs to reduce their NOx ‘‘exports’’ and also formally petitioned the EPA to limit the NOx emissions from upwind states.∫≠ And in 1997 the EPA reduced the permissible level of ozone by lowering the NAAQS, worsening the nonattainment problem.∫∞ In response, the EPA began to search for ways to procure significant NOx emissions reductions in upwind areas, including seeking to reduce mobilesource NOx emissions in both upwind and downwind areas. As a Volvo official noted, ‘‘There was a problem with the northeastern states in 1997 not

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being able to meet their clean air requirements. . . . They claimed they had done everything possible to control NOx from fixed sites and they were going to lose federal funds if they were not in compliance.’’∫≤ However, obtaining sufficient reductions to solve the problem from auto emissions and stationarysource emissions was not feasible politically or practically, in part because these sources had already been subjected to fairly stringent controls on NOx.∫≥ The EPA was thus under pressure from both the upwind and downwind states to find a means of reducing NOx levels in the nonattainment areas that did not place the burden of doing so on either the upwind or the downwind states, pressure that played a role in the EPA’s decision to focus on the regulation of diesel NOx emissions.∫∂ Ozone is also a high-profile air-pollution issue for environmental groups because of the role ozone plays in ‘‘smog,’’ the paradigmatic air-pollution issue. The American Lung Association, for example, chose ozone as ‘‘the focus’’ of its State of the Air reports, reporting on county ozone levels, and used litigation to pressure the EPA to make the ozone NAAQS more restrictive and to enforce the new stricter NAAQS by designating additional nonattainment regions.∫∑ In their campaign for reduced ozone pollution, environmental groups specifically targeted heavy-duty diesel engines.∫∏ The EPA was also in a difficult position with respect to particulate emissions. The EPA issued its first particulate standard in 1971, and tightened that standard in 1987, 1997, and 2006.∫π The tighter standard adopted in 1997 ultimately led the EPA to designate thirty-nine nonattainment areas in 2004 and 2005.∫∫ The EPA was therefore under pressure in the late 1990s from the states to take steps to alleviate the particulates problem created by the new standards. As one former EPA official explained to us, it was always better politically for the agency to have at least a partial solution available when its new standards created problems for states. Since heavy-duty diesels were a significant source of particulates, addressing diesel emissions was important for the agency. In sum, during the second half of the 1990s, there were severe NOx and particulate emissions problems around the nation. The EPA had little choice but to demand further NOx and particulate reductions, since the tightening of the ozone and particulate NAAQS had put additional areas into nonattainment status. Additional regulation of heavy-duty diesel engines offered a potentially important component of the solution. Unfortunately for the agency, it had issued a revision to the diesel regulations on October 21, 1997, for model year 2004 engines.∫Ω Because of the lead-time requirements, the agency could not further tighten emissions standards before the model year 2007 engines.

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The EPA thus could not use rulemaking to obtain further immediate reductions in either particulates or NOx. THE STRUCTURE OF MOBILE-SOURCE REGULATION

The structure of mobile source regulation affected the EPA’s incentives in two important ways. First, mobile sources are treated differently from stationary sources, and those differences have important consequences for how the EPA and the states treat mobile-source emissions. Second, air-quality regulation is implemented through computer modeling of policy choices. The specifics of the EPA’s mobile-source models helped both create the need for additional NOx emission reductions and shape the solution. The Clean Air Act has different regulatory regimes for emissions from stationary and mobile sources. Stationary sources, such as coal-fired electricity generators, are regulated through state-issued permits for emissions, and states are responsible for determining how much each stationary source is allowed to emit of each pollutant, subject to technology controls required of particular source categories by the EPA.Ω≠ For example, a coal-fired power plant must both install emissions scrubbers on its smokestacks under an EPAmandated technology standard and limit its emissions to the level specified in the relevant state SIP. Mobile sources, on the other hand, are regulated largely by requiring vehicles (passenger cars and light trucks) and engines (heavy-duty trucks) to meet federal standards. The preemption of most local mobile-source emissions standards was an important reason the automobile industry was willing to accept a major federal role in air-pollution control, a controversial issue during the late 1960s.Ω∞ California adopted mobile-source emissions standards in model year 1966, and the automakers feared a proliferation of conflicting state standards would prove costlier than a uniform federal standard. The 1970 amendments to the Clean Air Act were a compromise, allowing California to continue its independent standards while preempting other states from doing the same. (Since the 1977 amendments, the statute has allowed states to adopt the California standards, but states other than California may not develop independent standards.) State regulators do have some authority over mobile sources: controls on vehicle use are their primary tool for regulating mobile sources. Unfortunately for state regulators, such controls are politically unpopular. And when either states or the EPA have incorporated such controls in SIPs, such SIPs have generally been criticized as unrealistic. For example, the EPA’s 1975 mandate that Los Angeles reduce auto traffic by 70 to 80 percent was widely and

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correctly seen as impossible to implement.Ω≤ Even indirect controls on vehicle use, such as inspection and maintenance programs aimed at ensuring that individual vehicles’ emissions controls are properly functioning, have proven remarkably unpopular politically.Ω≥ Thus, unlike stationary sources, mobile sources are regulated primarily indirectly through the regulation of manufacturers, rather than directly through the regulation of the sources’ emissions, and are relatively unregulated by the states, largely because the political costs of use restrictions are too high for state regulators to pay. This puts pressure on the EPA to deliver mobile-source emissions reductions to help states achieve the NAAQS in their SIPs.Ω∂ And it puts mobile and stationary sources in competition over the allocation of the burden of meeting the emissions reductions necessary to meet the NAAQS.Ω∑ In many respects, both this division of authority and the EPA’s approach to mobile sources were unsurprising regulatory choices. Mobile sources are, by definition, mobile, and their contribution to pollution affects multiple states, as cars and trucks drive the nation’s highways. There are also enormous numbers of mobile sources, making individual-source-level regulation administratively costly to implement. The Clean Air Act’s approach also provides the EPA with a political benefit, since it grants the EPA authority over the relatively politically popular (at least outside Michigan) regulatory target of mobile-source manufacturers while leaving to the states the unpalatable regulation of consumers’ use of mobile sources.Ω∏ National regulation comes at a cost, however, since reducing mobile-source emissions anywhere requires reducing them everywhere, even if reductions are necessary only in some areas.Ωπ A further wrinkle is that in making these trade-offs, the EPA evaluates proposed regulations and SIP provisions with computer models. What matters is thus not actual air quality but air quality as predicted by the model. Again, choosing to rely on models was an unsurprising choice by the EPA; because of the positive costs of data collection and analysis, modeling is a cost-effective method of evaluating alternatives. Collecting sufficient accurate data on air quality to regulate the entire country’s air through command-and-control regulation would likely have been so costly as to preclude the entire effort if models had not been used.Ω∫ Modeling is thus a necessary component of command-and-control air-pollution control. (Whether the EPA has done an adequate job of modeling is another question, however.) The downside of modeling, however, is that the model, not the controls’ actual results, governs how emissions-control measures are evaluated. Because developing the data to design the model is expensive and the test procedures do not represent all driving conditions, models inevitably inaccurately

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predict emissions.ΩΩ If the model overpredicts control, the result will be dirtier air than predicted; if it underpredicts control, the result will be cleaner air than predicted. The divergence between the model and reality may result from mistakes or from incomplete knowledge. To the extent that the model’s predictions are used to target a legal standard, such as the NAAQS, inaccuracies in the model could mean the standard was not met in the model but was met in reality, or vice versa. Unfortunately, these problems are more than theoretical with respect to the EPA’s air-quality models, with studies of the models repeatedly finding problems.∞≠≠ The EPA’s mobile-source models (called MOBILE) overpredicted the effectiveness of controls on heavy-duty engine emissions in the 1990s.∞≠∞ The differences between the EPA’s models and other methods were substantial: one estimate based on fuel consumption put on-road NOx emissions at twice what the EPA predicted in 1996.∞≠≤ Moreover, the ozone-NOx relationship is complex. Research has found, for example, that daily levels of ozone exhibit different patterns in different cities and that whereas some regions experience increases in ozone from a reduction in NOx, others experience a decrease, depending on whether ozone levels are more sensitive to the levels of NOx or to the levels of volatile organic compounds (VOCs).∞≠≥ There is evidence of increases in ozone levels in some cities on weekends, when NOx levels typically fall dramatically because of the drop off in heavy-duty truck traffic but VOC levels, which are primarily from cars, do not.∞≠∂ This pattern is consistent with the hypothesis that lowering NOx levels in VOC-sensitive areas increases ozone. In short, where regions are more sensitive to VOCs than to NOx, reducing NOx levels may increase ozone levels, with the result that real-world ozone levels may rise because of NOx reduction measures even as model levels fall. There are two important consequences of the necessary simplification of modeling for the EPA’s diesel regulations. First, as a result of the differences between the models and reality, model characteristics, rather than reality, can unintentionally come to drive regulatory measures unrelated to improvements in actual environmental quality.∞≠∑ A failure to update models to incorporate new information or new knowledge of model inaccuracies can prevent states from receiving appropriate credit in their SIPs for control measures that work in reality but are not accurately reflected in the model, which can discourage effective measures.∞≠∏ Changes in models, because of improvements in modeling technology or new measurements of actual conditions, can lead to states being required to reallocate emissions in their SIPs. On the other hand, toofrequent changes in models’ parameters and assumptions would produce

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costly regulatory uncertainty for both sources and state regulators designing SIPs. The EPA thus faces an important trade-off between keeping its models current and allowing firms and states to plan effectively. Second, models’ assumptions dictate abatement strategies ‘‘because the agency’s modeling techniques determine the number of tons of emission reduction that will be credited for each measure selected.’’∞≠π For example, the EPA has discounted emissions reductions by 50 percent for inspection and maintenance programs that are conducted on a decentralized basis, compared with centralized programs, although there is little empirical basis for such a dramatic difference in treatment. This 50 percent ‘‘discount’’ was ‘‘hardwired’’ into MOBILE.∞≠∫ The EPA’s MOBILE model in the 1980s and 1990s overpredicted control of NOx from heavy-duty diesel engines, which contributed to the nonattainment of the ozone standard and presented the EPA with a regulatory problem: if the EPA revised its model to accurately predict NOx emissions from heavy-duty diesels, the nonattainment problem would get worse and affected states would have to make more cuts in other sources of NOx emissions, but if it did not revise MOBILE, the model would continue to underpredict emissions. The structure of clean-air regulation thus played an important role in putting the EPA in a difficult position in the mid-1990s. The EPA’s models had underpredicted ozone levels, creating pressure to find further emissions reductions. Yet the mobile–stationary source division of authority meant that the only practical means of reducing mobile-source emissions further lay with the EPA, not the states. THE EVOLVING TECHNOLOGY OF EMISSIONS CONTROL

Through their impacts on pollution-control technology, the Clean Air Act and the EPA’s overall regulatory strategies for air-pollution control also influence regulators’ choices. Congressional distrust of auto manufacturers’ claims about their ability to improve pollution-control technology led to a ‘‘technology-forcing’’ approach in the statute.∞≠Ω Technology-forcing regulations require the implementation of technology that does not exist when the regulations are adopted, with the intent of stimulating innovation by imposing regulatory requirements that existing technology is insufficient to meet.∞∞≠ There are powerful arguments for technology forcing, particularly within a command-and-control regulatory environment.∞∞∞ In particular, in the absence of technology-forcing elements, command-and-control regulations do not provide incentives to improve emissions-control technologies. Using regulations to force technological change has important consequences for the incentives created by regulation. Because the regulatory re-

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gime depends on predicting the pace of innovation, there is a danger that the regulators will underestimate the time necessary to produce the needed innovations, leading to widespread noncompliance with the regulations. Indeed, there have been regular battles between mobile-source manufacturers (especially automobile manufacturers), regulators, and environmental groups over whether particular deadlines were technologically feasible, with the EPA and Congress attempting to determine whether sources’ claims that a particular technology was not yet ready were legitimate or the result of underinvestment in developing the technology. Technology-forcing regulations also encourage regulated firms to invest in the political process to reduce the degree to which they must invest in new technologies (a strategy used effectively by automobile manufacturers in the 1960s and 1970s). And it provides an incentive for investment in obtaining regulatory approval for particular technologies that give specific firms a competitive advantage. The struggle for favored technologies is further complicated by the interdependent nature of mobile-source manufacturers’ choices regarding investments in technology and in efforts to delay heightened regulatory standards. Investments in the former make the latter less likely to succeed, since developing new technologies undercuts the claim that the standards are impossible to attain. As a result, the industry has an incentive to underinvest in developing new technologies in favor of investing in lobbying for delays.∞∞≤ More generally, technology forcing creates an incentive to design vehicles to meet standards rather than simply to reduce emissions.∞∞≥ In particular, as pollution-control requirements grew more stringent and emissions-control technology grew more complex, manufacturers had an increasing incentive to view federal emissions tests as the blueprint for their products. To see why, imagine you are an engineer at an engine maker. You are handed a test protocol that sets emissions levels that current engines cannot meet. You are told to design an engine that will pass this test. You will invest your time and effort in making sure the engine operates as desired on the test, rather than in ensuring overall emissions reductions, because you receive ‘‘credit’’ only for meeting the test, not for reducing emissions generally. Just as a teacher who is told that students must pass a particular statewide exam will ‘‘teach to the test,’’ so an engineer who is told that a product must meet a particular standard will ‘‘design to the standard.’’ Moreover, technology-forcing regulations require manufacturers to invest in developing features not demanded (and possibly even rejected) by customers. Truck buyers, for example, generally prefer higher mileage to reduced emissions because they reap the rewards of the fuel savings from increasing mileage, whereas the benefits of reduced emissions are shared by the popula-

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tion as a whole. The profit-maximizing strategy of manufacturers, therefore, is to attempt to minimize the negative features introduced into the vehicle by the new technology that the Clean Air Act forces them to develop, which reinforces the incentive to ‘‘design to the test.’’ One important result of technology forcing for mobile sources was to reduce mobile-source emissions. In that sense the statute achieved its goal. In both trucks and cars, the reductions came about in part through increased control over combustion. Such control promised both to reduce emissions by increasing the efficiency of combustion and to provide features desired by customers such as increased mileage.∞∞∂ Mobile-source manufacturers quickly focused on the gains this control technology made possible. As Lee Iacocca, then president of Ford, put it in 1976: ‘‘If we cannot save ourselves from unrealistic government requirements in fuel economy and emissions, our greatest hope in meeting these requirements is through electronics.’’∞∞∑ By model year 1994, almost every heavy-duty truck had an electronic controller.∞∞∏ As control over combustion developed, engine makers could improve the quality of their designs from the customers’ point of view by focusing their emissions-control efforts on the tested conditions (the only place they received rewards from the EPA for doing so) while maximizing customer-demanded characteristics such as fuel economy elsewhere in the operating cycle. In short, the technology-forcing regulations succeeded in forcing technology, and by doing so, they changed the nature of engines. The mechanically controlled engines of the 1970s could not easily vary their operations in and out of the test cycle. The electronically controlled engines of the 1990s could. Yet the EPA did not update its standards to require consistent control in and out of the existing test protocol, focusing instead on further reductions within the test cycle. A second feature of mobile sources affects the EPA’s regulatory efforts. New technologies do not get deployed instantaneously. New standards apply only to new vehicles; it often takes years before vehicles with the new technology are a majority of mobile sources on the road.∞∞π The speed of adoption depends on how quickly vehicle owners replace their vehicles and what happens to the used vehicles sold by the purchasers of new cars and trucks. For example, if a vehicle’s average life is ten years, vehicles sold in 2000 under regulations in effect at that time will be emitting pollutants until 2010, even if new vehicles sold after 2000 must meet stricter emissions levels. As a result, even though the Clean Air Act can spur innovations in emissions controls that dramatically improve individual vehicles’ emissions, reductions in total emissions are slow to appear since the new technology must be dis-

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seminated through the fleet of vehicles on the road. This is particularly important with respect to heavy-duty diesel engines, since the long useful lives of diesel engines makes fleet turnover slow.∞∞∫ To illustrate the dynamics of large-truck replacement, consider these simple ‘‘back of the envelope’’ calculations. In 1997, according to government reports, there were 4,302,915 trucks on the road in the size 6 to size 8 categories, which cover 19,5001- to 33,001-pound vehicles.∞∞Ω Over the years 1995 through 2000, there were, on average, 291,000 new vehicles purchased in the size 6 to size 8 categories. If every new truck replaced an older truck, which does not account for the expansion of the trucking fleet, it would take slightly less than fifteen years to completely replace the existing stock.∞≤≠ Fleet turnover is not quite this simple, however. Vehicle life is endogenous with respect to regulations. If new trucks are more expensive, consumers will delay purchasing new vehicles. If emissions controls increase vehicle costs, older vehicles with less effective controls will operate longer, as truckers delay purchasing new vehicles because of the additional expense.∞≤∞ Most importantly for our purposes, consumers’ choices can be affected by regulators’ behavior.∞≤≤ Turnover can be delayed by requiring new emissions controls that increase user costs or can be sped up through incentives to retire older vehicles.∞≤≥ If the purchase of a new vehicle is made more expensive or otherwise less desirable by regulators (for example, by requiring emissions controls that reduce mileage), current vehicle owners will invest in maintaining their existing vehicles. Increasing the cost of new engines by requiring stricter emissions controls thus brings new cleaner engines into the fleet but also has an offsetting impact by increasing the length of time older vehicles remain in the fleet and delaying their replacement by newer cleaner vehicles. What does all of this mean for regulators? Heavy-duty diesel engines’ cost advantages, independent of pollution-control considerations, led to a significant increase in their market share from the early days of clean-air regulation to the present. As a result, the relative importance of diesel emissions to regulators increased, making it increasingly likely that the EPA would seek to reduce diesel emissions in the 1990s. Moreover, diesel engines are relatively worse than other engines with respect to NOx and particulate emissions. The growth of diesel’s market share and of fuel use generally thus increased NOx and particulate emissions during the 1990s, when the EPA began to feel pressure to find new ways to reduce both. Unfortunately, however, the long life of heavyduty engines means that fleet turnover slows the impact of new emissions controls on real-world conditions and that if the EPA made new engines less desirable, truck owners could slow their acquisitions of new engines.

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Litigating Engine Controllers As we have suggested above, the increasingly stringent regulation of heavy-duty diesel engines from the Clean Air Amendments of 1970 through the regulations of the mid-1990s was the logical response by the EPA to the combination of the growing importance of heavy-duty diesel engines as an emissions source and the statute’s incentives to reduce mobile-source emissions primarily through design mandates imposed at the federal level. What bears additional examination is the EPA’s decision to depart from rulemaking in 1998 in the engine-controller litigation. Why did the EPA litigate then? There is much that is disputed concerning the engine litigation, with the EPA and the engine manufacturers holding divergent views on both the merits and their respective likelihoods of success on the merits. The basic facts of how the electronic engine controllers operated are relatively uncontested, however. All agree that when engines were operating under the FTP test-cycle conditions, the engines met the relevant EPA emissions standards. When the engines were operating under non-FTP conditions, particularly highway driving conditions, the engines produced higher emissions levels than under FTP conditions. The EPA alleged that this constituted a violation of the Clean Air Act’s requirements; the engine makers argued that it did not. Specifically, the EPA contended that the controllers’ operation of the engines at higher emissions levels outside the FTP made the controllers a ‘‘defeat device’’ in violation of the Clean Air Act. This was not the first ‘‘defeat device’’ case the EPA had brought. However, the EPA’s claim in this case was different from their claims in earlier ‘‘defeat device’’ enforcement actions. For example, in 1995 the EPA sued GM over the use of engine controllers in model year 1991 through model year 1995 Cadillacs with 4.9-liter engines. The Cadillac’s controller increased the ratio of fuel to air when the car’s climate-control system was turned on, producing almost three times the allowable CO emissions.∞≤∂ (The controller’s programming was prompted by consumer complaints that the engines stalled when the climate control was engaged.) GM settled the suit, paying an $11 million fine, and agreed to spend $25 million on a recall-and-retrofit program for 470,000 vehicles and $8.75 million on a vehicle-buyback program. A crucial difference between the Cadillac case and the diesel case is that in the diesel case the engine manufacturers alleged that the EPA knew about their use of electronic controllers from the beginning and had (at least tacitly) approved it each year when the EPA certified the new engines using the now-contested controllers.∞≤∑ For example, Volvo officials pointed to the existence of test results from Europe using the quite different European test protocol, which showed results dif-

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ferent from those of the U.S. tests, to demonstrate that the EPA was aware of controllers’ impact by at least 1994 because the results were presented at a meeting attended by EPA officials.∞≤∏ Environmental groups concurred, claiming that they had identified the problem in 1995 to the EPA.∞≤π The CARB also initially identified the EPA’s test procedures as a problem, and northeastern states raised the issue with the EPA in 1996.∞≤∫ A highly critical House Commerce Committee staff report, Asleep at the Wheel, set out a convincing case that the EPA had been aware of the engine controller issue for years.∞≤Ω To the engine manufacturers, the EPA’s knowledge of the practice was critical because it meant that the agency had previously certified as compliant with the Clean Air Act engines it knew had the disputed controllers. By contrast, in the Cadillac case, the agency had been unaware of the climate-control override. As a result of the EPA’s prior knowledge, the litigation was far from a slam dunk for the agency. The EPA’s willingness to settle, and its subsequent defense of the consent decrees against criticism by environmental groups and state regulators who saw the measures included in the consent degrees as too weak, supports the conclusion that an agency victory, had the cases gone to trial, was not a foregone conclusion.∞≥≠ At least some of the engine manufacturers’ counsel also told us that they believed they would have prevailed had the cases gone to trial. The question is thus, Why did the EPA wait to litigate until 1998? It could have addressed the engine-controller issue sooner (and there is ample evidence that the agency’s staff worried about engine controllers and whether mobilesource manufacturers generally were building to the test as early as the 1970s).∞≥∞ There is certainly enough merit to the engine manufacturers’ response to suggest that at least some staff at the agency were aware of the controller issue with respect to heavy-duty diesels long before 1998 and that they had not taken any steps to indicate disapproval of the controllers’ programming, which makes the shift more surprising. The decision to litigate is also puzzling in light of the cooperative relationship evidenced in the negotiated statement of principles in 1995. What changed? Interviews with a wide range of sources elicited numerous hypotheses about the rationales for the EPA’s behavior, including career-advancement strategies for particular individuals at the EPA, political pressure related to Vice President Al Gore’s campaign for president, rivalries between the air and enforcement offices, a lack of internal communication that left litigators unaware of the earlier, at least tacit, approval of the use of engine controllers to enhance fuel economy in off-test-cycle conditions, and genuine outrage by litigators and top policymakers at having failed to secure compliance by the engine manufacturers with the ‘‘spirit’’ of their regulations. No doubt each of these contributed to some degree to the decision to litigate.

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We think that the most convincing explanation for the dramatic change in approach is one that takes into account the institutional framework and the incentives facing the agency. This explanation begins with the EPA’s need in the mid-1990s to find a source of NOx and particulate reductions that could bring into compliance (or at least move them in that direction) the areas that were noncompliant with the ozone NAAQS and that had particulate levels that would render them noncompliant with the new particulate NAAQS. The EPA needed mobile-source reductions in particular because stationary-source reductions had become expensive as the EPA climbed the marginal cost curve and because the growth in heavy-duty diesel use had made diesel emissions a more significant part of total emissions. The EPA claimed that diesel engines with the disputed controllers emitted 1.3 million tons of excess NOx in 1998, 6 percent of all NOx emissions that year.∞≥≤ The gains from greater controls on heavy-duty diesels were thus large. The agency could not, however, simply revise the heavy-duty engine regulations through rulemaking, because the lead-time provisions barred a change until the 2007 model year. Even if it could have issued new regulations, a new rulemaking would have been inadequate to address the problem because of the amount of time it would have taken for cleaner engines to spread through the on-the-road fleet. Rulemaking simply could not solve the EPA’s problems. Negotiation was also not a viable option. The EPA needed expensive reductions in NOx emissions from the engine makers and had little to offer them in return. Indeed, the engine makers’ position concerning future NOx reductions at this time was that existing technology was reaching its limits with respect to lowering NOx and that future reductions were going to require new technologies. Engine manufacturers differed over which was the most promising new technology, but they all saw a need to do something more than tweak existing engines if significant NOx reductions were required. Because the EPA needed NOx reductions sooner rather than later, it could not negotiate by conceding the greater lead time that developing new technologies would demand. This was thus not a situation in which there were likely to be gains from trade or a case in which the issue was a need for the credible communication of information, the situations in which negotiated rulemaking is most effective (see chapter 3). Rather, this was a situation in which technological uncertainty existed, the new regulations would impose significant costs, and the main policy question was how painful the new regulations would be for the engine manufacturers. In addition, neither rulemaking nor negotiation could have solved the problems with the test protocols. To cut emissions, the EPA needed to revise the test procedures for heavy-duty diesel engines, because the existing protocol allowed engines too much latitude outside the test cycle, or needed to

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change the practice of meeting emissions tests only within the existing FTP test cycle. Moreover, the costs of tightening heavy-duty diesel standards fell primarily on relatively diffuse groups who lacked the organization to participate. Consumers, who would ultimately pay the price of increased transportation costs, are the classic diffuse interest group. Trucking firms, the immediate consumers of engines, are a diverse group of large and small firms located throughout the country. The only well-organized interest group affected by tightening the engine standards was the engine manufacturers. Litigation solved all these problems for the EPA. The settlements, agreed to less than five months after the lawsuits were filed, allowed the EPA not only to bring forward the model year 2004 regulations by two years but to address the test protocols as well.∞≥≥ Neither was possible in the same time frame in rulemaking because of the lead-time requirements. The settlements also allowed the EPA to gain additional emissions reductions through engine-rebuild programs, which would have been difficult to impose via rulemaking because they would have imposed costs on truck owners. The settlement helped the EPA with its ozone and particulate NAAQS problem by cutting NOx and particulate emissions. Reducing both helped in the model, although not necessarily in reality, depending on the impact on truck sales. And because of the ‘‘weekend effect,’’ reducing NOx reduced ozone in the model, although not necessarily in reality (see the discussion above regarding the ozone-NOx relationship). Almost none of the settlement provisions could have been imposed directly by the EPA through regulation, although some were relatively straightforward mitigation measures that the EPA could have bought with incentives. Every ton of NOx removed from the atmosphere through these various programs, if captured by the EPA’s models, helped reduce the NOx overload that was causing problems, without requiring states to impose additional costly controls on stationary sources. To gain such reductions without the litigation, the EPA would have had to offer something of value to the engine manufacturers and, other than relaxing other limits, the EPA had little to put on the table. Of course the EPA could have funded such projects directly, but that would have required persuading Congress to appropriate $104 million for it. By using regulation-by-litigation, the EPA shifted those costs to the industry and thus got that appropriation for free.∞≥∂ The settlement process also eliminated the industry challenges that could have been made in rulemaking. Because the EPA had not only the threat of litigation over the use of the alleged defeat devices in previous model years but also the ability to reject the certifications of the next model year’s engines for using controllers in ways that the EPA disapproved of, the agency had a big

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stick with which to threaten the engine manufacturers. Unlike in the lawsuit over past practices, in this case the EPA’s past knowledge of controller use and tacit acceptance of it would not be as powerful a weapon for the engine manufacturers if they were forced to sue the agency over a decision not to certify their engines. Moreover, it would be difficult for the group to maintain a common strategy with respect to future certifications, since any company that broke ranks and complied with the EPA’s demands and received a certification for its new engines would gain an immense competitive advantage over the others. The settlement process increased the agency’s authority relative to the environmental groups and others who might object to proposed rules, since the changes would be reviewed as part of the settlement process rather than in a challenge to a rulemaking proceeding.∞≥∑ As the EPA noted in seeking approval of the settlements, the complaints of many of the outside interest-group commentators on the settlements was ‘‘that the government did not conduct this negotiation as it does a rulemaking, bringing all ‘stakeholders’ to the table, and working out a solution in the same way that they participated in the development of the emission standards. But the fact is that this matter is far from a rulemaking. This is an enforcement action alleging longstanding violations of the law, for which prompt compliance is a necessary remedy. Although the public has an opportunity to comment on a consent decree during the comment period, it is neither feasible, necessary, nor appropriate for the public to be present in negotiations of the United States’ claims against individual defendants.’’∞≥∏ The EPA was able to gain from choosing regulation-bylitigation. The agency obtained faster gains in NOx reduction from heavy-duty engines, the ability to circumvent the Clean Air Act’s lead-time provisions, limits on environmental groups’ participation, and a public-relations coup. The EPA staff also locked in the regulatory changes imposed through the settlements. Regulatory changes made at the end of an administration are vulnerable to changes by the incoming administration; litigation is generally considered politically untouchable. All these results were valuable to the EPA and explain why litigation was an attractive option for the agency in 1998. Moreover, agencies are not monoliths. The EPA’s enforcement staff is separated internally from its program offices and has different incentives. For example, the program offices have reason to value highly their relationships with affected industries because they must work with them in repeated interactions, cooperate in the production and evaluation of data, and share information that informs the agency’s estimates of how far technology can be pushed. The enforcement office’s incentives are focused on winning discrete victories. If the controller issue went from being framed internally as a prob-

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lem to be solved looking forward to being framed as a need to punish bad past behavior, the top agency decision makers would choose different actions as appropriate.

Evaluating the Use of Litigation to Regulate We have argued that the engine-controller litigation is understandable as the reaction to a particular set of incentives, but the broader question of whether choosing to litigate was a good decision from a policy perspective remains. Did the EPA make the right choices about how to regulate when it sued the engine manufacturers? There are two areas where we need to consider the impact of the EPA’s choice. First, how did the use of litigation affect the incentives for engine manufacturers to produce cleaner engines? Second, how did it affect air quality? If the litigation produced cleaner engines and cleaner air, giving the EPA the ability to use litigation to impose substantive regulatory requirements could be a good idea. If it did not, allowing the agency to regulate through litigation is problematic. CHOICE OF TECHNOLOGY

Significant technological innovations were required to meet the model year 2004 standards, which were pulled ahead to October 1, 2002, by the consent decrees. At the time of settlement, it was unclear how the engine manufacturers would meet the October deadline. As a Cummins vice president summed it up: ‘‘This is the first time I’ve ever come before the EPA without a clear idea of exactly how we’re going to get to [the standards.]’’∞≥π The engine makers ultimately took divergent strategies toward compliance, producing what one news account headlined an ‘‘Engine War.’’∞≥∫ There were gains to be had by any firm that could break free from the pack through technological advantage, precisely the situation technology-forcing regulations are intended to create. All the U.S. engine makers except Caterpillar announced plans to develop various forms of exhaust-gas recirculation (EGR) systems to meet the October 2002 deadline, despite knowing that EGR alone would be insufficient to meet the model year 2007 standards already announced. The EGR systems had some significant drawbacks: Mack’s, for example, had a 3 percent fuelconsumption increase and added 100 pounds to the engine weight.∞≥Ω The EGR engines also increased soot, putting higher demands on the engine oil, and significantly increased demands on the engine cooling system.∞∂≠ They also cost more; the October 2002 engines cost between $3,000 and $5,000 more than the prior year’s models.∞∂∞ The most aggressive member of the EGR

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group was Cummins, which, on April 17, 2001, was the first company to announce an engine certified by the EPA for sale after October 1, 2002.∞∂≤ As one editorial in a trade journal summarized: ‘‘On the truck engine side, Cummins has gotten into everyone’s face about exhaust emissions regulations and technology.’’∞∂≥ Detroit Diesel, which ultimately did manage to introduce an October 2002–compliant engine before the deadline, argued (together with Caterpillar, which did not) in the spring of 2001 that a longer phase-in period for the new standard was appropriate, given the need for product testing and higher-than-anticipated costs associated with the new engines.∞∂∂ Caterpillar, on the other hand, abandoned its EGR research in March 2001 and focused instead on a system it called ACERT (Advanced Combustion Emissions Reduction Technology).∞∂∑ Caterpillar used a non-EGR strategy in part because its alternative could also be used to meet future emissions standards for off-road vehicles, a major business for Caterpillar.∞∂∏ Because this system would not be ready for October 2002 engines, Caterpillar developed a ‘‘bridge’’ engine that used some components of the ACERT system but that was unable to reduce emissions to the pulled-ahead model year 2004 standard.∞∂π As a result, these engines were subject to an NCP. (Caterpillar ultimately paid over $54 million in such penalties in 2002 and 2003.∞∂∫) The pull-ahead affected an additional group: foreign engine manufacturers. These companies had not been part of the litigation and were not bound by the settlement. Indeed, the EPA may have created the conditions for foreign firms to enter the U.S. market.∞∂Ω Mercedes Benz, for example, was able to sell its MBE4000 and MBE900 engines, which met only the earlier emissions standards, until January 2004, allowing it to undercut its U.S. competitors’ prices.∞∑≠ Mercedes’s sales of the MBE4000 rose from 1,764 in 2002 to 15,964 in 2003 and to 24,414 in 2005.∞∑∞ Manufacturers competed on the technology to meet the October 2002 standard, and their competition benefited the EPA. For example, Cummins advertised that its EGR technology was better because it was simpler.∞∑≤ After Cummins received its certification in April, the EPA rejected requests from Detroit Diesel, Caterpillar, and some customers to extend the deadline.∞∑≥ Cummins thus played a valuable role for the EPA, providing it with ‘‘proof’’ that the October deadline was achievable and vindicating the agency’s arguments that greater emissions reductions were possible. In the face of Cummins’s cooperation, it was impossible to imagine a court granting the other companies relief from the deadlines on the grounds of technological infeasibility or cost. The EPA’s position had a significant impact on technology. There were two paths to reducing emissions to meet the pulled-ahead standard. First, engine makers could use EGR technology to meet the October 1, 2002, deadline and

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could develop additional technology to meet the October 1, 2007, standard. Second, engine manufacturers could find an alternative set of technologies that would enable them to meet both the pulled-ahead 2002 and the 2007 standards. The EPA’s regulatory decisions favored the companies that adopted the EGR route.∞∑∂ There are reasons to think that the EPA may have made a mistake in putting its weight behind the EGR path. Although the EGR companies managed to solve some technical problems, there were several unresolved problems for EGR engines. The EPA seemed amenable to the use of ‘‘auxiliary emission control devices’’ (AECDs) to solve these problems by turning off the EGR systems, for engines produced between October 1, 2002, and January 1, 2004, in three situations: to protect the engine against condensation at temperatures between 25 and 50 degrees Fahrenheit if sensors reported condensation was occurring; to protect against overheating when engine temperatures rose above a set limit; and to protect the air-handling system at certain temperatures and altitudes.∞∑∑ (Although the EPA had initially stated in a letter dated January 19, 2001, that AECD use would require modification of the consent decrees, it later reversed that position and approved AECD use by engine manufacturers using EGR technology.∞∑∏) The EPA asserted that its goal in approving AECDs was ‘‘to ensure that the technologies needed to comply with the pull-ahead requirements on the Federal Test Procedure and the supplemental tests—without the use of defeat devices—are developed, demonstrated and deployed.’’ To accomplish this, the EPA evaluated proposed AECD use by looking to see if a ‘‘manufacturer has pursued diligent and continuous efforts to reduce the need for the problematic AECDs and has achieved results in this regard consistent with the utilization of all reasonably available technology given the time between the January 19th letter and the date of the certificate application.’’∞∑π However, Caterpillar claimed that some of the other engine manufacturers using EGR technology were unfairly allowed to use electronic controllers as defeat devices, turning off the EGR system up to 30 percent of the time.∞∑∫ The EPA’s motive in approving the AECD engines, Caterpillar charged, was to ‘‘claim compliance with the Consent Decree by engine manufacturers who would otherwise not have compliant engines.’’∞∑Ω The EPA had an incentive to ensure that as many of the engine manufacturers as possible were found to have complied with the terms of the agreement. In particular, the agency needed to have at least one major engine manufacturer certify an engine as quickly as possible to head off the campaigns mounted by Caterpillar and Detroit Diesel to alter the consent decrees’ deadlines.∞∏≠ Without examining nonpublic data on those engines, it is impossible to

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know whether Caterpillar’s claims are correct. What we find troubling is that the EPA’s performance cannot be evaluated, because the answer to the question of which technology was superior and whether the AECD was simply what the EPA had previously called a defeat device or was instead a legitimate technical solution to a temporary problem cannot be analyzed with publicly available data. Given that the EPA had an incentive to portray the settlements as a success, independent analysts need to be able to evaluate the agency’s position on the AECD engines. Unfortunately, the litigation-settlement process does not offer such opportunities; rulemaking, however, would have. The EPA’s AECD decision put a court in the position of evaluating the technical merits of a dispute over fairly complex engineering questions. One important problem with consent decrees is that they create such conflicts. IMPACT ON AIR QUALITY

Did the choice of regulation-by-litigation improve air quality? Remember, the EPA claimed that diesel engines with the alleged defeat devices emitted 1.3 million tons of excess NOx in 1998, a staggering 6 percent of all NOx emissions that year.∞∏∞ A static analysis of the pull-ahead therefore suggests that the consent decrees unambiguously improved air quality starting October 1, 2002, as the new cleaner engines came into use. A dynamic analysis shows that the question is more complicated because truck buyers perceived the new engines as undesirable. The October 2002–compliant engines were unpopular with engine buyers because they involved new technology and new designs, were more expensive, and were relatively untested. For example, the inability to get engines in time to complete testing before October 1 meant that Schneider, one of the larger trucking companies, decided to prebuy trucks in advance of its needs and to buy used trucks to avoid the October 1 engines until it could get sufficient experience with them to add them to its fleet in large numbers.∞∏≤ An editorial in Transport Topics predicted that large fleets would buy only a ‘‘few’’ new engines when they became available to test them for up to a year before integrating them into fleets.∞∏≥ Fleet Owner quoted an anonymous vice president for maintenance and equipment at ‘‘one of the nation’s largest tank-truck carriers’’ in favor of avoiding the post–October 2002 engines: ‘‘The way we figure it . . . the ’02 engines will add about $4,000 to the cost of the trucks. Then we’ll lose another $4,000 to $5,000 on decreased fuel efficiency. That puts us $10,000 in the hole. And that’s without figuring in the uncertainty of engine performance. Yes, those engines will be under warranty. But any downtime they pile up won’t.’’∞∏∂ Trucking firms had three options for avoiding the new engines: keeping

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existing trucks longer, buying used equipment, or ‘‘prebuying’’ pre–October 2002 engines. All three involved increased costs. The substitution of existing used trucks for new purchases was made possible by a glut of used trucks in 2001, but adding used trucks or extending an existing fleet meant higher maintenance costs.∞∏∑ The problems with prebuying include obtaining sufficient capital to make the purchases and uncertainty over future needs and fleets’ need for customization.∞∏∏ Moreover, the overall size of the prebuy was limited by production capacity. Prebuy engines had to be manufactured before October 1, limiting the total number that could be purchased before the deadline.∞∏π Nonetheless, despite these costs, trucking companies opted to avoid the new engines. The prebuy began in earnest in early 2002, with sales of new trucks doubling in the first quarter and increasing 70 percent in March alone. Industry observers, examining overall market conditions, saw those sales figures as twice the expected demand.∞∏∫ Looking back, we can see the dramatic change in the production of engines in 2002, a boom-and-bust cycle for engine manufacturers that impressed independent observers as a major event.∞∏Ω Importantly, however, analysis with the MOBILE6 model did not show increased emissions as a result of the prebuy, and so the EPA did not count the increased emissions as a result in its analysis of SIPs.∞π≠ In short, the EPA (and the states) got credit for the cleaner post–October 2002 engines but did not offset the effects of the cleaner engines by effects of the increase in the number of dirtier pre–October 2002 engines. All the strategies for postponing the acquisition of October 2002–compliant engines put a bulge of ‘‘dirtier’’ trucks in the distribution of trucks on the road. If enough engines were added through prebuys or enough older engines continued to be used past their useful lives in the absence of the consent decrees, the net effect on air pollution might be to increase it, rather than to decrease it, in the short run. The prebuy became an issue in the post-settlement court proceedings. Caterpillar sought a delay in the pull-ahead because of a prebuy; the EPA rejected the company’s claim that a prebuy would occur or influence emissions significantly. As a result, the parties turned to the court overseeing the settlement to resolve a technical dispute over how best to model truck buyers’ behavior. Whether the pull-ahead would result in more or less NOx in the coming years depended on differing assumptions in the EPA’s and Caterpillar’s economic and emissions modeling. Resolving that dispute is not our point here. What is important is that a court was asked to resolve a complex—and contentious—technical point, a dispute that the EPA could expect to win because of courts’ deference to agencies on technical issues. For example, the EPA’s response to Caterpillar’s arguments generated a series of letters and affidavits from trucking-industry

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entities contesting the EPA’s interpretation of their reports, comments, and positions.∞π∞ Resolving disputes over such technical details is not an institutional strength of the courts. Moreover, the dispute highlights the importance of the EPA’s model in determining the impact of regulatory changes, as the dispute centered on the appropriate inputs to the model, not the appropriate measures of air quality. The court’s resolution of the dispute, focusing on the contractual nature of the settlements, did not allow for review of the substance of the engine makers’ arguments, since the court focused on the question of whether the heightened legal standard for modification was met rather than the issue of whether the underlying policies made sense. Did the EPA make the right choice in refusing to extend the deadline in the face of the prebuy? No definitive answer is possible, since calculating emissions in the absence of the October 2002 deadline is ultimately speculative. However, there are reasons to suspect that the EPA made the wrong decision and to be doubtful that the agency’s incentives would have led it to make the correct decision. First, the EPA analyzed the impact of the prebuy using the MOBILE model, which did not accurately forecast heavy-duty truck emissions. The traditional warning of ‘‘garbage in, garbage out’’ thus applies. Second, the EPA had an enormous investment in the consent decrees succeeding, biasing the agency against altering the deadlines. Third, the EPA and its consultants did not appear to grasp the differences between the 2002 prebuy and earlier regulatory-deadline prebuys. The October 2002 engines were different from the other new engines introduced after regulatory changes—in this case, engine manufacturers were adding EGR, with its demands on cooling, oil, and turbochargers, rather than tweaking combustion, and the EPA was significantly changing the test protocols. When earlier-model engines were introduced, there had also been more lead time, allowing greater testing by buyers before committing to a new engine. And earlier deadlines had not gone into effect between model years, a feature of the 2002 transition that added uncertainty for the buyers. Finally, other upgraded engines had brought with them improvements in fuel economy as side effects of the controller technology necessary to meet the EPA’s earlier deadlines. The October 2002 engines, in contrast, brought with them worsened fuel economy. All of this, combined with the weak economy in the period leading up to the deadline, gave engine customers a stronger-than-usual incentive to avoid the new engines. The EPA’s analysis of the prebuy did not incorporate these differences. The litigation itself increased the prebuy. Prebuys are possible only when there is advance notice that a potential problem exists with the new products. Moreover, because of the complexity and expense of heavy-duty diesel engines, prebuying engines requires considerable planning by the buyer (arrang-

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ing financing, arranging to integrate new trucks into the fleet, disrupting planned acquisition schedules, and so on). Because of the public disputes between the EPA and the engine manufacturers over the feasibility of the settlement, the extent of the technological improvements required, and the shortened testing period, engine consumers had both sufficient information to become alarmed and time to plan a prebuy. Looking back, we see that the EPA’s assumptions were wrong. As one independent industry analyst summarized the impact of the consent decrees: ‘‘The emissions regulations of October 2002 have created one of the biggest boom and bust scenarios for the diesel engine manufacturer. . . . The prebuy happened and devastated the diesel engine manufacturers during the last quarter of 2002 and the first quarter of 2003.’’∞π≤ And a 2004 GAO report determined that eight of ten major trucking companies had avoided the new 2002 engines.∞π≥ Compare this situation with how the EPA might have handled the issue through rulemaking. To pull the model year 2004 standards ahead to October 2002, the EPA would have had to offer the engine makers incentives, since the Clean Air Act’s lead-time provisions otherwise barred a pull-ahead. Similarly, a radical change in test protocols would have required compliance with the lead-time rules. An incentive structure would have compensated engine makers for reducing emissions toward the model year 2004 standards early, possibly by postponing the model year 2004 standards through emissions credits.∞π∂ Such an approach would have encouraged engine makers to adopt technologies that produced cost-justified improvements in emissions as soon as possible. Some might have used EGR technology, but others besides Caterpillar might have developed new technologies. Engine customers might also have been offered the opportunity to earn credits by accepting low-NOx upgrades to their controllers in existing engines. If the price was right, these upgrades could have been worth the fuel-economy penalty the upgrade caused. Such a program would have been adopted in the light of day, with full public comment. If the EPA was wasting resources on expensive NOx reductions in the heavy-duty diesel sector instead of buying cheaper reductions elsewhere, commentators would have pointed this out. If the EPA was paying too little for the credits, diesel users would have objected. An incentive approach would have also produced benefits immediately in 1998, without waiting until October 2002. Rulemaking is not a panacea, of course. The 2007 standards adopted through rulemaking appear to have produced a prebuy of their own. In 2004, the GAO issued a report suggesting that the EPA should take additional steps to aid the implementation of the 2007 emission standards—namely, the creation of an independent technology review panel and an offer of financial

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incentives for truck companies to purchase trucks with the new 2007 engines. Trucking companies wanted eighteen months to test the 2007 engines under a variety of conditions. They were also concerned about the cost, durability, and maintenance of the 2007 engines. The trucking industry was certainly aware of the new model year 2007 emission standards. Kirk Thompson, CEO of J. B. Hunt, said: ‘‘Nobody is going to buy those trucks [with the model year 2007 engines].’’∞π∑ The 2004 GAO report predicted that if truckers’ concerns about the performance and reliability of the new 2007 engines were not allayed, nine of ten trucking companies likely would avoid the 2007 engines.∞π∏ The GAO’s predictions of a prebuy appear to have been borne out by events. Although there are other relevant factors, such as the robust economy and aging truck fleets, class 8 truck sales rose from 141,964 in 2003 to 203,197 in 2004 to 252,792 in 2005.∞ππ Sales of class 8 trucks in 2006 (through November) were outpacing the record sales of heavy-duty trucks in 1999. Medium and heavy-duty (classes 4–8) U.S. factory truck sales rose 10.1 percent in 2005.∞π∫ In another parallel to the 2002 prebuy, sales of used class 8 trucks were ‘‘booming’’ in 2006 and were expected to be ‘‘good’’ in 2007 as well.∞πΩ Estimates of used class 8 truck sales for 2006 ranged from 250,000 to 350,000, with one analyst expecting another 250,000 plus to be sold in 2007.∞∫≠ Confirming dire forecasts of plunging truck sales and announced layoffs in the trade press, sales of heavy-duty trucks soared to a record level in the run-up to 2007 and then fell by more than 40 percent.∞∫∞ Whatever the extent of what sales figures suggest was a strong prebuy in 2006, it is beyond dispute that over half a million new diesel trucks with model year 2004 emissions technology were added to the nation’s roads from 2005 to 2006. As one industry analyst concluded, ‘‘The Environmental Protection Agency has replaced the economy as the agent dictating the tune [the industry is] dancing to.’’∞∫≤ Since the controller dispute, the EPA has begun to address the testing issue that was the core of the dispute with the engine manufacturers. A new test procedure, cooperatively developed with the EMA and the CARB, will add on-the-road tests designed to verify that laboratory tests are accurate.∞∫≥

Cooperative Efforts The EPA has made substantial efforts to reduce emissions from existing diesel trucks through a variety of voluntary programs. The most obvious and potentially useful program is the EPA’s voluntary diesel retrofit program, addressing the more than 11 million heavy-duty diesel engines currently in operation.∞∫∂ As we alluded to earlier, because of cost and other factors, retrofitting is not high on many trucking companies’ agendas. The EPA’s effective, but

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underfunded, retrofit grant program was aided by the Energy Policy Act of 2005, which allocated $100 million for fiscal years 2006 through 2008 and ‘‘[s]uch sums as are necessary’’ for each of fiscal year 2009 and fiscal year 2010 for diesel-truck retrofit grants.∞∫∑ Overall authorizations for the Diesel Emissions Reduction Act, which was added as an amendment to the Energy Policy Act, total $1 billion over five years.∞∫∏ The EPA’s ideal goal would be to retrofit ‘‘all diesel engines . . . where it is feasible’’ by 2014. Although the focus would be on voluntary incentives programs, the EPA has not ruled out ‘‘regulatory measures as another possible tool’’ if the Clean Air Act allows the EPA such action.∞∫π The CARB has said that ‘‘both voluntary and regulatory programs are needed’’ and that California ‘‘would need $2.5 billion from the federal government to meet the retrofit goal [on its estimated 1.2 million diesel engines] using incentives alone.’’∞∫∫ Jeff Mandel, president of the EMA, was more direct: ‘‘[R]egulations to push the retrofit effort would not work and could be counterproductive. . . . [T]he key to retrofitting existing diesel engines is funding, funding, funding.’’∞∫Ω The EPA also established the SmartWay Transport Partnership, which ‘‘establishes incentives for fuel efficiency improvements and greenhouse gas emissions reductions.’’∞Ω≠ In targeting unnecessary truck idling, SmartWay tries to offset the cost of new equipment with even greater savings on fuel costs for the truck companies that purchase the equipment. SmartWay echoes the EPA’s new, more holistic approach to diesel emissions reduction, targeting not just engines but also unnecessary truck idling, low-rolling tires, and improved truck aerodynamics. The EPA has also committed to working on a voluntary model truck-idling law to address the ‘‘patchwork’’ of state legislation that is trying to reduce or limit truck idling.∞Ω∞ Another example of the EPA-industry collaboration is the ‘‘21st Century Truck Partnership,’’ which addresses both environmental and industry concerns in developing commercially viable technology.∞Ω≤ An alternative hybrid diesel delivery truck designed by UPS and the EPA saves enough fuel to recoup its premium cost within three years.∞Ω≥ The EPA even announced a ‘‘publicprivate agreement’’ with BorgWarner in which it will share its patents and resources to try to develop engine parts (such as advanced turbochargers) for the next generation of diesel and gas engines.∞Ω∂ An even more counterintuitive example of collaboration has arisen in the race to reduce diesel emissions. FedEx and Environmental Defense have designed delivery trucks that ‘‘save fuel and dramatically reduce emissions’’ without jeopardizing performance or cost competitiveness.∞Ω∑ These examples offer an alternative path toward the ultimate goal of cleaner air.

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Conclusion Air pollution in the late 1960s was a textbook case for a regulatory solution. A large number of varied sources emitted a wide range of pollutants whose impacts included both dramatic examples of problems visible to the naked eye and less visible long-term health problems. In short, the atmosphere was treated as a common resource for the disposal of waste, with the predictable result that a ‘‘tragedy of the commons’’ developed.∞Ω∏ The Clean Air Amendments of 1970 and the Clean Air Act’s subsequent modifications in 1977 and 1990 were far from models of a transparent legislative process. Yet when Congress debated these laws, the affected industries and all other interested parties had access to the debate. And although the ever-expanding list of regulations implementing the law, both from the EPA and from state agencies drafting SIPs, are themselves often impenetrable or appear to favor special interests—or both—when the EPA and state agencies engaged in regulationby-rulemaking and regulation-by-negotiation, the affected industries and all other interested parties had access to the regulatory process and to the courts if the regulatory process was seen as improper. For all their flaws, both the statutory provisions and the regulations have a key strength that is missing from the heavy-duty diesel-engine litigation—both were adopted through public processes in which all concerned could be heard. Neither Congress nor the EPA, of course, need agree when an affected party speaks, but at least they must listen. By contrast, the litigation-settlement process provides no guarantees that those affected will be heard. Moreover, government officials may ultimately be held responsible for both legislation and regulations. Senators and congressmen must vote ‘‘aye’’ or ‘‘nay’’ on bills; agencies must issue final rules. Although both regulators and politicians excel at evading responsibility for costly decisions, the political process provides at least some degree of accountability. In the late 1990s the EPA, as a regulator, faced a political challenge. On the one hand, the northeastern states, which faced the cost of nonattainment status, demanded action, and the administration wished to be recognized as being tough on polluters in the run-up to the 2000 elections. The EPA also had to recognize that its own past estimates of improvements in air quality were faulty and had played a role in creating the crisis. If the EPA recognized that the problem stemmed from its faulty predictions and modeling and granted relief to the upwind states, it would anger northeastern voters whose states would then require increased stationary-source restrictions, and the EPA would look soft on pollution nationally. If it attempted to reduce restrictions on both the northeastern states and the upwind states, it would anger voters

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concerned with environmental issues. If it required tighter stationary-source controls in upwind states, there would be important political costs to pay there. Mobile-source regulation offered a way out of this dilemma. On the other hand, the EPA was constrained from taking swift action through the issuance of new standards by the lead-time restrictions and the effect on emissions of a slow fleet turnover. By employing regulation-by-litigation and circumventing the lead-time restrictions, the EPA was able to do what Congress had said the agency could not do—it tightened mobile source emissions standards sooner than it could have through regulation-by-rulemaking. Environmentalists would be happy with the ‘‘tough’’ action, northeastern states would get relief as the model predicted lower emissions from the stricter emissions standards, and upwind states would not be required to reduce their emissions. The solution was ‘‘winwin’’ for everyone except the firms that made or used the engines. In other words, the benefits were concentrated on environmental groups and state regulators, whereas the costs were spread among essentially all consumers, since transportation services affect most products. Moreover, by employing litigation the agency insulated its regulatory action from changes in the executive branch. A new administration might consider rolling back a regulation, but it would be unlikely to return to court to seek to reduce the burdens of a ‘‘voluntary’’ settlement agreed to by sources alleged to have committed significant wrongdoing. Moreover, as we suggested earlier, the structure of the agency may have contributed to the choice of litigation. Separating enforcement staff from program staff organizationally encourages litigation by creating an institutionalized voice for litigation within the agency. It also creates an opportunity for an institutional entrepreneur to influence policy. This separation has advantages, as it reduces the opportunities for capture by the regulated. Those advantages must be weighed against the costs, however. The cost of this episode cannot be reckoned solely in terms of the magnitude of the settlement, which was a transfer from the producers of diesel engines to federal taxpayers. Nor can it be reckoned just in terms of its effects on the cost of diesel engines and related effects on transportation and other activities powered by large diesel engines. These are clearly costs to consider and to be minimized if possible. The more serious cost of the diesel regulation-bylitigation relates to the integrity of the regulatory process itself and the effect of regulation-by-litigation on the behavior of participants in future regulatory episodes. The lessons of the diesel regulatory story for regulation-by-litigation generally are threefold. First, the EPA’s varied choices of how to proceed shed

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considerable light on the factors that influence the agency’s decision as to the appropriate method. Although we lack sufficient data points for any sort of formal statistical analysis, the EPA’s shifts from rulemaking to negotiation to litigation and back fit the general framework we outlined in chapters 1 through 3 sufficiently well that we can have greater confidence in our theoretical framework. Second, the diesel story confirms the importance of the benefits and costs of regulation-by-litigation for the agency (or particular personnel or program offices within the agency) for the analysis. The EPA’s choice to litigate over engine controllers is difficult to explain without such considerations, given the cooperative atmosphere embodied by the Statement of Principles, the lack of environmental benefits as a result of the predictable prebuy, and the long history of EPA knowledge of controller use. Understanding regulation-bylitigation requires close attention to agency incentives. Finally, regulation-by-litigation is not inevitable. The EPA chose litigation regarding heavy-duty diesel engines only once. If regulation-by-litigation is undesirable because of its institutional effects, as we argue throughout this volume, we can draw some comfort from its relative rarity.

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Private parties as well as government actors can regulate through litigation. As we discussed earlier, to be regulation, private litigation must go beyond suits by the injured for compensation and become a vehicle for forcing individuals or firms to change their behavior in the future, and must do so more directly than simply providing an incentive to choose one course of action over another.∞ It must directly involve outsiders, whether private parties or state actors, in ordering the affairs of private actors. Private litigation has done so in a number of instances, including through lawsuits over dust hazards since the late 1920s. Law professor Richard Nagareda’s survey of mass torts generally argues that ‘‘[i]n effect, mass torts have endowed with a power of governance the agents who design the transactions to resolve mass torts on a comprehensive basis.’’≤ Large numbers of claims over diseases caused by exposure to airborne dust and fibers in the workplace were brought at three different times during an eighty-year period. Suits over silica-related lung diseases date to the 1930s and began to reappear en masse in the 1980s. Asbestos litigation began in earnest after the Fifth Circuit’s 1973 decision in Borel v. Fibreboard Paper Products Corp., which established a products-liability theory that enabled injured workers to avoid the exclusive remedy of workers’ compensation systems, and spread rapidly through the U.S. legal system thereafter.≥

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All three branches of government—courts, legislatures, and executivebranch regulatory agencies—have addressed or attempted to address the issues posed by silica and asbestos exposure. In the 1930s, a tidal wave of silica litigation was displaced by the expansion of workers’ compensation programs to cover occupational diseases and the promulgation of regulations by state labor-standards agencies. In the asbestos cases after 1973, litigation dominated, supplanting legislation and rulemaking almost entirely and creating interest groups capable of defeating legislative efforts to shift the problem out of the courts. The result was regulatory, not simply in effectively banning most uses of asbestos in the U.S. market but in transforming a wide range of firms, some only peripherally involved in asbestos exposure, into de facto insurers of asbestos-linked illnesses and even the chance of future illnesses. Silica litigation reappeared in the first years of the twenty-first century, in a form that led some to predict that it would be ‘‘the next asbestos.’’∂ The discovery in 2004 of significant problems with thousands of plaintiffs’ diagnostic records has, at a minimum, made that a much less likely result and may have forestalled it entirely. In this chapter we examine the role of private parties’ litigation in regulation, using the three instances of dust litigation—silica in the 1930s, asbestos after 1973, and the recent silica litigation—to examine the incentives for private actors, how the legal system reacts to private attempts to engage in regulation-by-litigation, and the implications of allowing regulation to proceed by private litigation. Whereas the asbestos story is a tale of regulation-bylitigation, the 1930s silica story gives an example of the failure of similar litigation to turn into regulation-by-litigation, and the modern silica story offers some insights into how some types of regulation-by-litigation can be avoided. The private-litigation examples discussed here highlight the crucial role of information in creating both the underlying health problems and the regulatory impact. Mass torts are possible only when many people are exposed to harmful substances, a situation that occurs only when there is widespread ignorance about the potential harm. Litigation that acts as de facto regulation occurs only when an interest group is able to entrench itself to block the political process from addressing the underlying problem. Such entrenchment is more likely when information about the extent and impact of the litigation is scattered among multiple courts, leaving no one with a complete picture of the situation until the situation is out of control. Focusing on the role of information offers an opportunity to avoid the excesses of regulation-bylitigation while preserving the ability of the injured to seek redress.

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Litigation That Leads to Regulation: Silica from 1900 to the 1940s As silica is the second most common mineral in the earth’s crust, it is hardly surprising that silica dust is a common workplace hazard.∑ Silica comes in several varieties, the most dangerous of which is crystalline silica.∏ Prolonged exposure to crystalline silica dust causes scarring of the lungs and can produce chronic silicosis, a progressive, incurable disease. Chronic silicosis takes years to develop, with exposed individuals seldom exhibiting symptoms in fewer than five years. Extremely high exposures can produce acute silicosis, which leads to rapid death. Some airborne workplace hazards, such as gases that are potentially carcinogenic at low concentrations, are difficult to detect without specialized equipment; silica dust is not. Silica dust is both common and visible to the naked eye, and the obviousness of the hazard allowed even premodern observers to draw a connection between some forms of lung disease and dust exposure and sources as early as the sixteenth century, when a treatise on mining, De Re Metallica, noted the hazards of silica dust.π Although early observers noted that workers in dusty trades had high incidences of lung diseases, they were hampered by the lack of diagnostic and scientific tools that made it possible later to understand how dust particles caused lung diseases.∫ And although miners and workers in a few other occupations had been exposed to silica dust and had experienced diseases for centuries, it was only after the development of power tools and other new technologies that the scope of dust exposure increased—and the size of particles to which workers were exposed decreased—dramatically for employees in a wide range of industries.Ω A widespread industrial-disease problem understood as related to dust thus did not appear until three things had occurred: increased exposure, improved medical knowledge, and the passing of sufficient time for dust exposures to produce chronic symptoms. These three came together for the first time in the 1930s, when the United States saw a wave of lawsuits over workplace silicia exposure. PRECURSORS TO THE FIRST SILICA CRISIS

Silica dust in the workplace increased sharply in the early years of the twentieth century, after the invention of the pneumatic hammer drill (1897) and sandblasting (1904).∞≠ New technologies like these both increased the amounts of dust in the workplace and changed the composition of the dust to include larger proportions of smaller particles.∞∞ Although there were no systematic measurements of exposure then, one indication of the problem’s magnitude is that studies of mines in Joplin, Missouri (1914–1915) and Butte,

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Montana (1916–1919) by the U.S. Bureau of Mines found dust levels at more than a hundred times the levels later allowed under the Occupational Safety and Health Administration (OSHA) standards imposed in the 1970s.∞≤ One result of the industrial revolution was thus widespread exposure to silica dust, although the long latency periods for many dust-related diseases meant that the results of the increased exposures did not appear immediately. Increased dust exposures were not the only change in the workplace produced by industrialization. One immediate consequence was a sharp increase in accidental deaths and injuries.∞≥ As Americans grappled with the appropriate response to the rising number of workplace injuries in the late nineteenth and early twentieth centuries, the problem of workplace disease took second place to the more immediate problems of lost limbs and broken bones.∞∂ The initial response to the increased accident rate was an ‘‘outpouring’’ of new tort litigation, despite the prevalence of restrictive legal rules such as the fellow-servant doctrine that made suits difficult for plaintiffs to win. For example, between 1870 and 1910, tort cases in New York City grew from 4.2 percent to 40.9 percent of the trial court caseload.∞∑ This sharp increase spurred complaints about the plaintiffs’ bar, often in alarmist tones. Reports on the rising accident litigation included laments about the ‘‘barratrous speculations,’’ ‘‘communistic tendencies,’’ and ‘‘enormous verdicts,’’ contributing to the denigration of ‘‘manly and professional dignity’’ at the bar.∞∏ At least partly in reaction to these suits, a broad coalition developed in favor of a legislative solution.∞π Employees demanded more-certain compensation; employers and insurance companies wanted limits on their liability; and social reformers sought greater state intervention in the workplace. As a result, American states began to create workers’ compensation systems for industrial accidents, beginning with Maryland in 1902. The new laws were a political compromise, one that reduced employers’ liability through limitations on recovery while increasing employees’ chance of recovery by shifting the issue from the courts to an administrative system and eliminating several commonlaw defenses.∞∫ The first wave of statutes did not address work-related diseases, however, focusing instead on the more immediate problem of workplace injuries. Workers’ compensation laws had two important consequences for industrial diseases. First, the new statutes increased both the demand for and the supply of knowledge about workplace health. On the demand side, they inspired workers’ compensation insurers to seek better information on the risks they faced, prompting greater data collection and analysis. They also spurred states to begin to gather statistics on the causes of injuries, moving ‘‘analysis of work accidents from the close specificity of individualized inquiries into par-

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ticular accident cases to a higher plane of statistical generality.’’∞Ω On the supply side, the statutes apparently encouraged companies to hire plant physicians; a Public Health Service study in 1919 found that 69 percent of the plants surveyed had bought at least some medical services from a doctor.≤≠ Second, the statutes provided a model solution for workplace health issues, involving a compromise among employers, employees, and insurance companies that largely replaced litigation with an administrative process. When events later brought industrial diseases to the top of the agenda, legislators and interest groups had a ready source of policies with which to attend to the problem of occupational diseases. Developments in medicine were also an important prerequisite for addressing dust-related industrial diseases. The limits of pre-twentieth-century medical knowledge had significantly hampered medical diagnosis of dust-related injuries. For example, before the development of X-ray technology, doctors had little ability to examine the lungs of living patients, and prior to the discovery of germ theory, doctors lacked an understanding of tuberculosis, which hindered their ability to understand all lung disorders.≤∞ As medical knowledge become more science based and made greater use of technology, accurate diagnosis of lung conditions became possible.≤≤ And the expansion of information technology, such as punch cards, enabled the tracking of patterns of disease.≤≥ The pre-twentieth-century understanding of dust hazards was primitive by modern standards, and improvements in that understanding resulted from both technological change and scientific breakthroughs in medicine.≤∂ Even though many of the individual pieces necessary were in place by 1900, it took time for their combination to yield results. Thus, although X-ray technology spread to America almost overnight after its discovery—machines were for sale in the United States for $50 within a short time after the discovery of the technique in Germany, and more than a thousand articles and forty-nine books on the topic appeared in the first year after its discovery—it was not immediately accepted as a vital part of diagnosis, even for conditions such as broken bones, for which its use was comparatively obvious.≤∑ Finally, the major innovations in reducing the cost of radiography did not appear until World War I boosted demand for the treatment of injured soldiers.≤∏ Dust hazards were first documented in the context of high-exposure occupations (mining and milling) where new production techniques heightened the hazard just as the new medical technology and knowledge made diagnosis possible. The immediate reaction to the new knowledge about dust hazards was greater demand for knowledge. As early as 1911, an insurance-company statistician pushed for a federally funded study into the health of metal min-

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ers.≤π Insurance policies for factory workers had boomed in the preceding decades—estimates run as high as 3.5 million policies issued by 1900—giving the insurance industry a keen interest in understanding the impact of working conditions on their policyholders’ health.≤∫ By the 1920s medical knowledge had advanced sufficiently that silicosis was recognized as an important industrial disease, a growing category of concern for life insurers.≤Ω Further, dust exposures from the new machinery, exposures that began in the first part of the century, were by then beginning to produce chronic conditions. CHANGES IN THE WORKPLACE

The same industrial innovations that produced greater quantities of smaller, more dangerous dust particles also dramatically increased labor productivity and caused significant dislocations in many industries.≥≠ For example, mold making was a skilled occupation supported by a great deal of semiskilled and unskilled labor in the nineteenth-century foundry industry. In the early twentieth century much of the support work was mechanized and output soared. A single worker with a machine mixer was able to produce as much sand for molds in two hours as two workers could have mixed by hand in an entire day. Pneumatic tools for cleaning cast items made the mold makers even more efficient, as did the addition of power tools to the finishing stages of polishing and grinding. Unfortunately, all these innovations also created greater dust exposure.≥∞ In this environment, it is not surprising that occupational-disease issues became an important bargaining tool for unions.≥≤ The same changes that threatened union members’ positions within firms threatened the health of their members. Health issues were important for unions, as opposing technological change was difficult without a non-Luddite rationale; health issues provided unions with arguments they needed to support their efforts to control technology in the workplace. Similarly, as the number of small foundries grew in the late nineteenth and early twentieth centuries, health issues served as an effective means of limiting their ability to compete with larger unionized shops, for smaller shops often could not afford to follow the safety standards set by the larger firms.≥≥ Other interest groups also took an interest in occupational disease. The 1906 organization of the American Association for Labor Legislation (AALL) created a lobbying group seeking labor legislation and supporting its demands through conferences, investigations, and reports, and it was not long before the AALL took up industrial-disease issues.≥∂ World War I also stimulated interest in industrial hygiene to improve productivity in war industries.≥∑ As a result, the first decades of the twentieth century saw the creation of numerous

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state laws and agencies regulating factory conditions and occupational health, part of the Progressive Era’s massive deployment of expert agencies in support of public policy. State factory inspectors grew in number, from fewer than 300 in 1907 to 425 in 1911.≥∏ By 1914 there were factory inspection bureaus in thirty-three states; fifteen states had passed legislation requiring the reporting of occupational diseases by all physicians; and twenty-four had workers’ compensation statutes.≥π Although the capabilities of these first agencies were rudimentary, their creation meant that there was now a state bureaucracy invested in documenting occupational diseases. By the 1920s, almost all the pieces were in place for a silica-dust crisis. Exposures had increased during the preceding decades, and sufficient time had passed for chronic conditions to begin to appear. Interest groups, from insurance companies to labor unions to state labor agencies, had reason to pay attention to occupational-disease issues. Medical advances made it possible to link chronic conditions to exposure. Yet no crisis was immediately forthcoming. Why? Part of the explanation lies in the prosperity of the 1920s, a time of economic growth and advancement for most Americans. Industrialization brought new material wealth to a broad spectrum of the population. Prices of consumer goods fell rapidly, putting them within the reach of an ever-widening proportion of the country’s population.≥∫ ‘‘Throughout the 1920s surveys of consumer habits marveled at the wide range of purchases made by working-class people, many of them involving durable goods such as radios, washing machines, and even automobiles. . . . All experts agreed that by the end of the 1920s, the nation’s working people had greater access to health care, recreational and cultural facilities, public services, and education than ever before.’’≥Ω ‘‘Welfare capitalism’’ prompted employers to take the initiative in addressing a wide range of issues for employees, defusing employee interest in initiating workplace reforms, and labor peace largely prevailed, with strike activity reaching historic lows.∂≠ In a time of unparalleled prosperity, relatively few dust claims appeared. It was not until after the Depression began that silica suits became sufficiently widespread to attract national media attention. Two paths were open for addressing the problem. On the one hand, the first response to industrial accidents had been private tort litigation, and that option remained available for disease claims. On the other hand, the experience with workers’ compensation and industrial accidents offered an example of a successful legislative compromise between employers and employees if statutes were amended or reinterpreted to cover disease claims.

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The employers’ side of the workers’ compensation bargain was the exclusive-remedy provision, which required claims for covered conditions rather than lawsuits. Because most of the first wave of workers’ compensation legislation had explicitly excluded, or at least not explicitly included, industrial-disease claims, workers who became ill as a result of dust exposure were able to seek relief through tort suits.∂∞ Lawsuits over silicosis from workplace exposures began to proliferate in the 1930s; the filing of thousands of such suits created a liability crisis and made silicosis ‘‘an issue of national import.’’∂≤ More than $1 billion of silicosis suits were pending in 1934, the equivalent of over $14 billion of claims in 2007 dollars.∂≥ Insurers reported that they faced ‘‘the most serious claim problem ever encountered’’ as a result of silicosis suits.∂∂ A variety of factors might explain the explosion of silicosis litigation in the 1930s. One is undoubtedly that silicosis’s long lead time meant that incidence of the disease lagged the introduction of dust-producing equipment in various industries. Silicosis was less well understood than many other industrial diseases, as ‘‘researchers had great difficulty devising experiments or other kinds of investigations that persuasively established the chain of events between contact with silica dust and actual symptoms.’’∂∑ The lag between exposure and symptoms seems too long to be the primary explanation, however, as widespread exposure began in the first decade of the twentieth century. We think that the key contributing factor was the Great Depression’s creation of economic conditions that led ‘‘workers to use the issue of industrial illness as a means of achieving social welfare objectives.’’∂∏ For many, silica suits offered an economic means of surviving the Depression, converting tort law into a rudimentary social-welfare system.∂π ‘‘And as workers won their suits, it emboldened more of the unemployed and their lawyers.’’∂∫ Although some of these suits involved genuinely injured individuals who had suffered real damages and who properly sought compensation through the tort system, others did not. Silicosis suits brought with them bitter clashes over allegations of fraudulent claims, such as those detailed in articles like ‘‘The Dust Hazard Racket’’ in legal publications, and caused disputes between insurance companies and their insured over coverage.∂Ω Some experts felt that too many doctors were willing to support doubtful claims based on unskilled readings of radiographs.∑≠ Other observers blamed differences in state laws. As one observer in the 1930s complained, people without injuries took advantage of some states’ looser standards to bring fraudulent claims: ‘‘Missouri is a paradise for this type of racketeering. Under its law 9 jurors out of 12 may decide a case. Though the laws against barratry and champerty are still in existence

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they are apparently forgotten. Plaintiffs’ attorneys have employed runners, or solicitors to comb the state, paying particular attention to the unemployed. As much as $25 a case is paid to solicitors for every signed contract brought in. Cases are taken on a 50 per cent contingent basis and notices under the attorney’s lien law are promptly served on the employer. At first the solicitors confined themselves to cases where some disability existed. More lately solicitation has been carried on among workers still engaged in active work, who have no more outward appearance of disability than the dust on their clothes and some outward appearance of age.’’∑∞ Certainly, the problem of the ‘‘dust rackets’’ was due in part to the lagging medical technology for determining causation. Without the diagnostic tools to definitively attribute illnesses to exposures, the tort system risked both underand overinclusiveness. Where rigorous causation standards applied, even plaintiffs genuinely injured by an occupational exposure were unlikely to prevail; where the plaintiffs’ bar gained relaxed proof and pleading standards, de facto, if not de jure, fraudulent claims could prevail as well as legitimate ones. In the economic crisis of the 1930s, it is hardly surprising that courts chose to overinclude rather than to underinclude. Once that became apparent, it is also unsurprising that marginal claims would increase. The tort crisis abated when silicosis claims (and, in many states, other occupational-disease claims as well) were added to the workers’ compensation system beginning in the mid-1930s.∑≤ What brought about the change? In some states, court rulings forced legislators’ hands. In California, for example, a ruling by the state supreme court that the limitation period for occupationaldisease claims would be based on when the disease was discoverable, not when the exposure occurred, led liability insurers to seek substantial rate increases (from $11 per $100 of payroll to $22.25 per $100 of payroll in the case of underground gold mines, for example) and prompted legislative action as employers sought relief from the higher premiums.∑≥ In other states, joint pressure from employers, employees, and insurers led to legislative responses. The wave of suits made liability insurers anxious to add workers’ compensation insurers to the defense team.∑∂ Life insurance companies worried that they had coverage of people now likely to die far earlier than the companies had predicted. Adding industrial diseases to workers’ compensation coverage was in the interest of a wide range of groups, including both employees and employers.∑∑ The growing experience with workers’ compensation accident coverage inspired confidence that those systems could successfully absorb disease claims. And finally, the results of the increased exposures to dust and other workplace disease agents was now producing enough injured employees to

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attract attention. In particular, the Gauley Bridge disaster put a spotlight on silicosis. A horrific series of five hundred deaths (out of two thousand employees) from acute silicosis during a 1929 tunnel project in Gauley Bridge, West Virginia, sparked national interest in the problem of occupational disease.∑∏ Indeed, some federal officials felt that the Gauley Bridge disaster advanced passage of occupational-disease legislation by ‘‘almost a decade.’’∑π The tunnel route ran through a vein of almost pure quartz, producing extremely high exposures—a rare situation that led to acute silicosis.∑∫ The story broke nationally in January 1936.∑Ω Congressional hearings on Gauley Bridge were held a few months later, and the federal Department of Labor convened a series of national conferences on the topic to encourage legislation in the states, beginning just three weeks after the congressional hearings concluded.∏≠ By creating a national debate over silicosis in particular and occupational diseases generally, and by bringing together labor and industry representatives, the federal government attempted to make it possible for the parties to bargain their way to a mutually advantageous solution. This approach was in keeping with the Roosevelt administration’s generally corporatist approach to labor issues.∏∞ The combination of the silica suits pending against employers, ambiguity in some state workers’ compensation laws concerning occupational-disease coverage, problematic causation issues for plaintiffs, and union interest in using the issue to expand the role of unions in the workplace made gains from cooperation possible.∏≤ The immediate impact of the federally sponsored conferences was to add urgency to the political struggle for control of the workplace.∏≥ Faced with the possibility of moves to create another of the New Deal ‘‘alphabet’’ agencies (the leading congressional figure in the Gauley Bridge hearings advocated a federal solution), employers rallied behind the devil they knew: workers’ compensation.∏∂ At the beginning of 1936, fifteen state workers’ compensation systems covered some occupational diseases; by the end of the year, forty-six of the forty-eight states had programs that included workers with silicosis, and some included other occupational diseases as well.∏∑ Workers’ compensation had several advantages for handling occupationaldisease claims. First, it created a role for a repeat player with an incentive to learn more about how to prevent occupational diseases: insurance companies. As the source of the funds that would have to pay for successful silicosis claims, workers’ compensation insurers had a reason to push their insured to reduce risks and to learn about how their insured could do so. Second, by leaving the details of the response to the individual workplace, workers’ compensation allowed local knowledge to play a role in crafting individual solu-

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tions. Third, by shifting disputes out of the courts, workers’ compensation reduced transaction costs. It was not a perfect solution, however: the system could still cost too much; causation was still a problem in many cases; incentives were not perfect for anyone; and regulation of insurance markets diluted some of the incentive-producing aspects of the system. There is little doubt, however, that it represented a major improvement over what had existed before it. THE ROLE OF LITIGATION IN SPURRING REGULATION

The silicosis litigation of the 1930s could have metamorphosed into de facto regulation. The volume of tort suits was more than the legal system could handle effectively, and the plaintiffs’ claims made evidentiary demands that stretched the institutional capacity of the courts. This combination had the potential to force fundamental changes in the structure of the ‘‘dusty trades’’—as happened decades later with the asbestos suits. However, had the tort suits continued unabated, a broad range of industries would have faced a choice between making an increasingly risky gamble on successful defenses of silicosis suits and obtaining protection by ceding a greater degree of control of the workplace to trade unions or regulators. Instead, the extension of workers’ compensation to cover silicosis prevented the litigation from becoming regulation. Had the tort suits never been brought, finding a means of compensating the injured individuals might not have been as urgent a problem for the political process. Common-law suits thus played a role in focusing the political process on a problem without subverting the democratic accountability that the political process, however imperfectly, provides. Why didn’t these lawsuits become regulation? The short answer is that the litigation spurred the political process to address the issue and to create a solution that displaced litigation. Politicians saw a chance to gain by mediating between the interest groups involved and creating a solution. In other words, policy entrepreneurs spotted a market and responded. The solution was far from perfect, but politics rarely produces perfection. It accomplished the primary goal of compensating the most severely injured, it created incentives for employers to reduce the hazards from silica dust, and it produced demand for learning more about the problem. Most importantly, it was a solution debated by public officials who voted for it and who could be held responsible for their decisions at the ballot box. Moreover, the solution appeared about the time that it should have. Although the notion that breathing dust was unhealthy had been recognized much earlier, it was not until industrialization greatly increased dust exposures (and other hazards) that American jurisdictions adopted regulatory

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measures aimed at workplace hazards generally or silica dust in particular. The increased injury rates of the newly mechanized factories, mines, and other workplaces helped produce a broad coalition that demanded legislation to spread the costs, precisely because the number of people affected had dramatically increased. In a compromise between labor and management interests, workers’ compensation systems spread the costs of accidents. Eventually, the increase in industrial diseases, especially silicosis, led to their inclusion in the system as well. This latter development did not occur until the financial pressure of silicosis lawsuits produced a broad coalition in favor of action. This lag is no surprise: politicians respond to demands from constituents, and it took broad public awareness to create the demand for action that made it worthwhile for political entrepreneurs to invest in solving the problem. When a wide range of industrial interests found workers’ compensation coverage less of a threat than the numerous suits brought by alleged silicosis victims and the possibility of federal intervention, they acted and brought forth a solution. Finally, it took the development of knowledge to create a solution for silica exposure. Dust hazards may seem obvious in retrospect, but they were less obvious at the time because of the limits of the then-current scientific knowledge, the medical technology for diagnosis and analysis, and the information technology for detecting patterns in records.

Private Regulation as Litigation: Asbestos Litigation Asbestos, a naturally occurring mineral, has been widely used as a fire retardant in construction and consumer products.∏∏ Because asbestos is abundant and inexpensive to process, its use expanded to a wide variety of industrial and even residential products by the early 1970s.∏π Unfortunately, asbestos is also a potent carcinogen that causes mesothelioma, a form of lung cancer associated almost entirely with asbestos.∏∫ Asbestos exposure can also produce other debilitating lung conditions. The dangers of asbestos use were known before World War II, but neither asbestos firms nor the government warned asbestos workers of those dangers.∏Ω The result was ‘‘the worst occupational health disaster in U.S. history.’’π≠ Beginning in the mid-1970s, litigation over asbestos-exposure claims exploded; by the twenty-first century, more than 850,000 individual claimants had sued over 8,400 defendants, including manufacturers, distributors, installers, and sellers of asbestos-containing products and owners of properties in which asbestos was present.π∞ Given the widespread exposure to asbestos in the United States, some estimates suggest that there could ultimately be as many as a million claimants by the middle of the twenty-first century.π≤ Unlike

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the silica litigation we discussed previously, asbestos litigation became a form of regulation as it spread to affect virtually every corner of the American economy, resulting in major resource reallocations, directly inserting the plaintiffs’ lawyers in the bankruptcy reorganizations of many defendants, dramatically changing the interpretation of private insurance contracts, and producing significant shifts in a surprisingly large number of legal doctrines and procedures.π≥ THE CRISIS

Asbestos litigation is now ‘‘the longest running mass tort in U.S. history.’’π∂ One commentator compared it to ‘‘a massive, unending river’’; another termed it ‘‘a malignant enterprise’’; a third predicted it would remain ‘‘unending and infinite in magnitude.’’π∑ It has spread far beyond the original suits against the manufacturers of asbestos products to ‘‘virtually all parts of the U.S. economy,’’ involving defendants in seventy-five of the eighty-three two-digit SIC codes, although the majority of claims are against firms in eight codes.π∏ The scale of its economic impact dwarfs that of natural disasters, the most significant rulemakings, and even terrorist attacks; former attorney general Griffin Bell contends that estimates of asbestos litigation’s costs to the economy are greater than the estimates of the costs of ‘‘all Superfund cleanup sites combined, Hurricane Andrew, or the September 11 terrorist attacks.’’ππ Going well beyond creating incentives to limit asbestos use and exposure, asbestos litigation has become regulation in three ways. First, more than seventy defendants have gone bankrupt because of asbestos claims.π∫ The asbestos plaintiffs’ bar plays a pivotal role in the reorganization of these companies through its control of many of the claims against the bankrupt firms. Second, asbestos claims have so overwhelmed the courts that the traditional adversarial legal process has been replaced in most asbestos cases by negotiated administrative processes that yield settlements in the overwhelming majority of cases. Rather than courtroom contests, asbestos cases evolved into administrative transfers of resources. Third, the net result of asbestos litigation has been to create an administrative compensation system, funded by an ever-widening pool of defendants—many of whom are only tangentially connected to asbestos use—for anyone with at least a minimally credible claim to asbestos exposure. We can evaluate the regulatory impact of asbestos litigation much as we would evaluate a regulatory system such as workers’ compensation, namely, by asking three questions: (1) Does it accomplish a desirable end, or in other words, do sick people get appropriate compensation for their injuries? (2) Does it efficiently accomplish its desirable ends or are the administrative costs

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so high that the gain is not worth the cost? (3) Are the creators of the regulations accountable for their choices? We will argue below that asbestos litigation fails all three of these tests. CREATING THE ASBESTOS CRISIS

Although there are disputes about the precise degree of culpability of asbestos-product manufacturers with respect to their failure to warn of the dangers posed by their products, there is little doubt that the firms knew of problems surrounding asbestos use well before many of the people who worked with asbestos on the job did. The existence of a connection between asbestos exposure and lung diseases, including cancer, had long been suspected, although the link between asbestos and mesothelioma was firmly established only after epidemiological studies were conducted in the 1960s and 1970s.πΩ Once the dangers of asbestos exposure became publicly known, the use of asbestos in the United States fell dramatically, with new uses essentially stopping in the early 1970s.∫≠ Clearly, the manufacturers should have warned those working with asbestos of its hazards sooner. Less frequently mentioned is the fact that the federal and state governments also failed to identify the hazards and to warn the public of the dangers. The litigation story only begins with the withdrawal of asbestos products from the marketplace, however. In 1973 the Fifth Circuit Court of Appeals issued an opinion in Borel v. Fibreboard Paper Products Corp. approving a products-liability theory in asbestosis claims.∫∞ Borel allowed employees with asbestosis to sue the manufacturers of the asbestos products used in their workplaces, avoiding the workers’ compensation exclusive-remedy provisions that barred suits against the exposed employees’ employers. One of the weaknesses of the workers’ compensation solution forged out of the silicosis crisis of the 1930s had been how to address occupational-disease claims when employees were exposed to multiple sources of disease agents at a variety of employers over the course of decades. Because of the asbestosproduct manufacturers’ concealment of the dangers of their products, Borel initially appeared to be an important doctrinal innovation that would solve the legal problems facing individuals suffering from serious harms. Unintentionally, however, the Fifth Circuit’s decision opened the proverbial floodgates, and the subsequent deluge transformed the American legal system.∫≤ Borel was a critical turning point on the road to regulation-by-litigation. As two legal commentators later noted, the asbestos litigation originated when courts ‘‘lost confidence in workers’ compensation schemes’’ and substituted products-liability tort remedies.∫≥ In pursuit of the commendable goal of compensating severely injured individuals for harms the defendants could have

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avoided, the courts set about correcting the flaws in workers’ compensation on their own rather than deferring to the legislature. No doubt moved by the human tragedies before them, courts went beyond their institutional competence in making what was effectively a major amendment to the workers’ compensation statutes. Not every doctrinal innovation leads to regulation, of course, and the common law is an evolutionary process. Why did the asbestos-litigation innovations produce regulation? One important factor was that asbestos cases produced an interest group whose efforts pushed the litigation well beyond where readers of Borel in 1973 likely imagined it could go. It did so because the initial asbestos products-liability claims were extremely financially risky, requiring the plaintiffs’ lawyers to expend considerable resources to develop facts, law, science, and tactics to prevail against well-funded defendants who energetically defended themselves.∫∂ The financial risk and innovation necessary to succeed in asbestos litigation meant that the plaintiffs’ bar became a ‘‘small but sophisticated’’ group.∫∑ Without the development of an organized interest group, there would have simply been tens of thousands of plaintiffs with potential claims against thousands of defendants. In those circumstances there would have been no repeat player capable of engaging in regulatory behavior. The costly and risky investment necessary to succeed in the initial asbestos cases yielded an organized interest group by creating a barrier to entry by other law firms. The substantial rewards for successful firms created the incentive for those firms to organize to protect their future income streams. A key innovation came in the 1980s, when several firms found that they were most successful when they filed large numbers of claims against a defendant and then negotiated a group settlement. To generate the volume of claims needed to succeed with this strategy, these firms began using mass screenings to identify potential plaintiffs.∫∏ (As we shall see later, mass screenings also play an important role in the modern silica litigation.) THE FLOOD

In the decades after Borel, the scale of asbestos litigation and the amount of money involved grew at a pace unanticipated by even the most farsighted of the early analysts. A RAND Corporation study of the litigation in 1983 made what it termed a ‘‘shocking’’ prediction that the litigation would cost $1 billion in compensation and litigation expenses through 2001, with more than twenty-one thousand lawsuits and three major corporations in Chapter 11 bankruptcy.∫π Other analysts predicted that the total costs could ultimately reach as much as $38 billion.∫∫ All these predictions substantially underestimated the impact of the litiga-

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tion. The RAND Corporation’s 2005 study estimated that $70 billion had been spent on compensation and litigation costs through 2002.∫Ω Reasonable estimates of the total costs of asbestos litigation now range from $200 to $265 billion, a more than fivefold increase over the course of twenty years.Ω≠ These estimates may still understate the ultimate cost. Asbestos litigation did not grow uniformly across jurisdictions. The caseload migrated over time, shifting to Mississippi, New York, West Virginia, Ohio, and Texas during the 1990s from California, New Jersey, Pennsylvania, and Illinois, where the majority of the claims had been filed in the 1970s and early 1980s. Representing 60 percent of total cases in the period 1970–1987, claims in the latter group of states fell to 7 percent of cases in the period 1998– 2000; the former group’s share rose from 9 percent to 66 percent during those same periods.Ω∞ Within states, a small number of counties attracted a disproportionate share of filings: two counties in Mississippi had more than 10 percent of all cases filed between 1998 and 2000, and three counties in Texas received more than 25 percent of all state court filings in the country as a whole.Ω≤ Filings also moved from federal to state courts, with federal filings accounting for approximately half the claims until the late 1980s, but only 13 percent by the late 1990s.Ω≥ There are undoubtedly multiple factors that influenced these shifts. However, given the magnitude of the changes, it is hard to escape the conclusion that forum shopping by the plaintiffs’ bar played a major role. Joinder and venue rules that allowed the filing of claims by nonresident plaintiffs against nonresident defendants when joined to a claim by a resident facilitated this forum shopping.Ω∂ Defendants’ eagerness to settle claims administratively played a role in allowing the forum shopping to continue, as did courts’ unwillingness to police their dockets as long as cases regularly settled without making demands on judicial resources. Asbestos litigation changed markedly in character as well as in location. From litigation by plaintiffs who had contracted a rare form of cancer closely linked to asbestos exposure against the manufacturers of asbestos products who had concealed the dangers of their products, litigation ‘‘spread to touch almost every type of economic activity in the U.S.’’ and to include plaintiffs without any symptoms but with a history of exposure and a medical opinion stating that their lungs showed some sign of changes associated with asbestos exposure.Ω∑ (Whether all these plaintiffs actually have the claimed changes in their lungs is open to question, after a variety of studies found that the positive evaluations of many plaintiffs’ radiographs could not be replicated.Ω∏) By the start of the twenty-first century, the dominant claims were no longer by plaintiffs with cancer; 65 percent of compensation went to nonmalignant claimants.Ωπ Professor George Priest aptly summarized the situation by writing that

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‘‘we see today, in asbestos litigation, cases that would have been inconceivable thirty years ago and cases that are still inconceivable in any context other than asbestos.’’Ω∫ Over the course of this litigation, plaintiffs’ firms evolved from small operations into firms and alliances capable of funding large-scale litigation.ΩΩ As they did so, they also developed new methods of identifying clients. Crucially, the asbestos bar developed mass-screening techniques to identify tens of thousands of potential plaintiffs, what law professor Lester Brickman, a persistent critic of the asbestos bar, termed ‘‘an entrepreneurial model of nonmalignant claim generation.’’∞≠≠ Mass numbers of claims allowed the plaintiffs’ bar to convert its doctrinal success into economic success. The number of defendants sued by each plaintiff soared from twenty in the 1980s to sixty to seventy in the 1990s.∞≠∞ From a problem of large manufacturers of asbestos, asbestos litigation has grown into a problem for smaller firms that simply used asbestos products.∞≠≤ In the early 1980s, ‘‘traditional’’ asbestos defendants (that is, asbestos manufacturers) made about 75 percent of asbestos litigation expenditures; by the early 1990s, over 60 percent of litigation expenditures were by ‘‘nontraditional’’ defendants.∞≠≥ Claims became concentrated in a few plaintiffs’ firms. The top ten firms filed a quarter of the cases in 1985; in 1992, the top ten firms filed half of the new cases, and the share of the top ten firms remained at least that high through the end of the decade.∞≠∂ (The firms in the top ten changed over time, and so the top ten in one year were not necessarily the same in another year.) This concentration made the firms that controlled large numbers of claims powerful. It enhanced their negotiating position with defendants, gave them significant voices on the creditors’ committees for the defendants in bankruptcy, and provided them with substantial economic rewards. These firms became a significant interest group with the tools to defend itself. As the plaintiffs’ bar moved away from simply representing individuals to running businesses that stretched from plaintiff identification through mass screenings to dominating the bankruptcy proceedings of some defendants and threatening others with insolvency, the litigation became regulation. THE IMPACT OF CHANGES IN THE LEGAL SYSTEM

Professor Frances McGovern, who has both studied asbestos litigation as an academic and served as a special master for courts handling asbestos cases, argues that ‘‘[a]sbestos litigation is virtually unique in its high degree of elasticity. There is elasticity in the sense of a nearly inexhaustible pool of plaintiffs and defendants. There is also elasticity in the procedural and substantive law to allow rapid processing of claims, thereby modifying the economics

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of tort recovery and accelerating the demand for new filings.’’∞≠∑ We will examine the impact of the ‘‘nearly inexhaustible pool of plaintiffs and defendants’’ on the legal system in a moment. First, however, we need to consider what prompted this ‘‘elasticity’’ in the substantive and procedural law. One key factor was a shift in tort law after the Restatement (Second) of Torts was published in 1965, to focus more on policy and less on doctrine. Reflecting on the change in practice introduced by the second restatement, McGovern commented that after 1965, ‘‘[i]t was all public policy. It didn’t make any difference what the law was. In the latter part of the 60s and the 70s and into the 80s, there wasn’t any precedent. . . . The plaintiff’s lawyer didn’t pay any attention to the doctrine because the answer was always public policy. I remember judges—when I did Hopkins v. General Motors [while in private practice] and argued it was a misuse case, where the only case out there was a Fifth Circuit case and the state judge in Houston said, ‘Well, I don’t think they’re right; I think the policy should go the other way.’ We had an entire generation of lawyers who didn’t really—didn’t make a lot of difference what the doctrine was, but if the policy was good, they’d go for it.’’∞≠∏ Although it is stretching the point to say that today doctrine makes no difference in tort cases, there was an important shift in tort law after the second restatement, and that shift loosened the constraints that doctrine imposed on legal entrepreneurs. Other areas of the law also experienced similar relaxations of doctrinal constraints. Professor Priest summarized the impact of asbestos litigation on the substantive law, saying that ‘‘the laws of substantive torts, procedure, insurance, and bankruptcy, among others, have been relaxed in order to facilitate recovery of asbestos-related claims.’’∞≠π In but one example, the courts essentially imposed on the insurance industry an expansion of insurance policies to provide unlimited coverage for asbestos claims.∞≠∫ The unintended consequence of the reinterpretation of insurance contracts was to give both the asbestos plaintiffs’ bar and the asbestos defendants incentives to cooperate that undermined the adversarial relationship on which the American legal system depends to test the strength of claims.∞≠Ω The changes in substantive law also set the stage for changes in how cases were processed through the legal system. Some degree of elasticity of procedure and substance is vital to the evolutionary capacity of the common law. Without it, the law could not adapt to new circumstances or find its way out of doctrinal dead ends.∞∞≠ On the other hand, too much elasticity undermines certainty, a key component of the rule of law, and leaves judges open to the charge that their decisions are motivated only by their personal biases. How much elasticity is ‘‘too much’’ or ‘‘too little’’ depends in part on the circumstances and the incentives for interest

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groups within the legal system. In asbestos litigation, however, the elasticity seems to be too high, with litigation continually ‘‘reshaped’’ by new developments.∞∞∞ This has opened the door wide enough to allow interest groups to manipulate the legal system. INTEREST GROUPS, INCENTIVES, AND ASBESTOS

Three key features distinguish asbestos litigation from the mass of ordinary tort suits. First, the staggering number of cases means that asbestos cases rarely go to trial.∞∞≤ What Professor McGovern termed the ‘‘nearly inexhaustible pool of plaintiffs and defendants’’ quickly overwhelmed the court system, making trials impossible. For example, in the early 1980s, a judge with a caseload of 126 asbestos cases was thought to have a heavy load; twenty years later, ‘‘maybe 126,000 might get [courts’] attention.’’∞∞≥ As Judge Richard Posner, of the Seventh Circuit, noted, such volumes ‘‘exert a well-nigh irresistible pressure to bend the normal rules.’’∞∞∂ Instead of trials, quasi-administrative proceedings emerged to handle claims in bulk.∞∞∑ Those procedures made it possible to keep cases moving toward settlement, but they also meant that the checks imposed by the adversarial nature of the litigation process were absent. Second, because the vast majority of cases were handled by just a few plaintiffs’ firms and featured the same defendants over and over, the adversarial process changed from what economists call a ‘‘one-time game’’ into what they term a ‘‘repeat-player game,’’ that is, from a situation in which parties had no reason to expect to see one another again to a situation in which the lawyers on both sides knew they would be dealing with the same opposing counsel on future cases for years to come. Repeated interactions can lead to beneficial cooperation but can also undermine institutional constraints that rely on an adversarial relationship∞∞∏ —particularly when repeat players find themselves on the same side of a contest. Not surprisingly, in the asbestos cases the result was ‘‘standing settlement agreements’’ between the plaintiffs’ bar and the major defendants.∞∞π Not only did these agreements lower costs for the existing players, but they constituted a significant barrier to entry, helping maintain the concentration of cases in a small number of firms. This concentration of claims meant that asbestos cases became a highly profitable business for the law firms involved: the Dallas law firm of Baron & Budd alone had reportedly grossed more than $800 million from asbestos cases by 1998.∞∞∫ Asbestos litigation was dominated by a small group of firms with the intellectual capital in methods of locating plaintiffs, developing and filing cases, and settling them in short order. The result was the creation of a powerful economic interest: the asbestos plaintiffs’ bar.∞∞Ω These firms became significant actors both in the political process and in

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bankruptcy proceedings involving defendants.∞≤≠ Further, given the firms’ considerable investments in developing expertise in asbestos-related matters, they naturally sought to increase the return on their investment by expanding the range of claims, claimants, and defendants.∞≤∞ This dynamic can be seen in the expansion of claims to include nonmalignant and asymptomatic claims, the aggressive search for claimants, and the extraordinary expansion of activities that led firms to be sued in asbestos litigation.∞≤≤ As we discuss below, it also led some plaintiffs’ firms to invest in expanding into silica litigation. In retrospect, it is clear that the plaintiffs’ bar had an incentive to invest in developing evidence and legal theories, since both could be used in multiple cases.∞≤≥ They had the incentive to search for the most favorable jurisdictions for asbestos suits, jurisdictions with rules that eased procedural problems— exactly what we have observed. Moreover, asbestos defendants did not have the usual incentives to vigorously defend themselves against the claims. Rather, their main incentive was to find an accommodation with the plaintiffs’ bar that enabled the firms to manage their liabilities so that they could survive. The structure of asbestos litigation gives the plaintiffs’ bar several significant advantages. First, by overwhelming the courts, plaintiffs’ attorneys are freed from the close supervision of their fees and settlement practices that courts normally employ to control potentially abusive practices.∞≤∂ Second, the volume creates a demand by the courts for innovative means of processing cases to reduce costs. These innovations have lowered the cost of litigation, in turn attracting additional cases.∞≤∑ Third, the defense bar is unable to adopt vigorous tactics because it is overwhelmed by the volume. Fourth, the small number of major asbestos firms on the plaintiffs’ side of the litigation have acquired substantial resources, which can be deployed to influence courts and legislators to protect the steady income stream these cases provide.∞≤∏ Fifth, because of the massive numbers and indefinite nature of many of the claims, individual plaintiffs have little control over their attorneys, putting the lawyers in charge.∞≤π Finally, ‘‘[i]n practice . . . mass tort litigation is reduced to battles between repeat players who have litigated and negotiated settlements in similar cases many times in the past.’’∞≤∫ Converting the process into a repeatplayer game weakens the check on plaintiffs’ counsel provided by the adversarial system.∞≤Ω One important vehicle for this regulation-by-litigation has been the bankruptcy process. Many asbestos defendants have been forced into bankruptcy by the overwhelming liability stemming from the asbestos suits.∞≥≠ Once in bankruptcy, the plaintiffs’ bar dominates the restructuring process.∞≥∞ The result is an administrative process for providing compensation for various types of claims according to a pre-agreed formula.∞≥≤ Another is the resort to

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consolidation of multiple cases into single trials, an unprecedented procedural innovation introduced in the 1990s. For example, in a 1994 trial in Maryland, almost ten thousand plaintiffs’ claims were consolidated into a single proceeding. One stunning indicator of the courts’ loss of control is that in deciding the appeal, the Maryland Court of Appeals could not determine how many claims were before it.∞≥≥ Through both bankruptcy proceedings and mass consolidations, the plaintiffs’ bar acquired extensive and unprecedented influence over the substantive behavior of the firms in question outside the traditional litigation context. THE IMPACT OF REGULATION-BY-LITIGATION

Given the clear hazards of asbestos use, its pervasive presence, and the seemingly endless growth in asbestos suits with their wide-ranging impact on American businesses, one might have expected legislative reforms to solve the problem, as with the 1930s silicosis suits. Not so. Proposed federal legislative solutions have been unsuccessful, despite repeated efforts to find legislative solutions to the asbestos crisis, with the first proposed federal legislation introduced in 1977.∞≥∂ Regular attempts have been made ever since, but none has been successful.∞≥∑ As Professor Priest noted, ‘‘Asbestos use has been generally prohibited, but in all other respects, government regulation is generally irrelevant.’’∞≥∏ Instead, it is the litigation that has regulated a broad cross section of American businesses. Efforts to address asbestos issues through federal legislation have been stopped by the influence of the asbestos bar in Congress, influence made possible by the asbestos bar’s considerable economic power. Asbestos litigation has not simply severely restricted the use of asbestos but has effectively regulated wide swaths of American industry. A strong case could be made that a ban was a good step, although such a reduction surely could have been accomplished more cost-effectively through a statute or rulemaking.∞≥π Asbestos litigation’s larger impact has been to effectively turn firms into insurers not just of occupational diseases related to asbestos but also of even minor lung-tissue changes and of the possibility that an asbestos-related disease might develop in the future. Moreover, it has turned firms with only peripheral involvement in asbestos use into such insurers, undercutting tort law’s general deterrence role. As the RAND Corporation’s study of asbestos litigation concluded, ‘‘If business leaders believe that tort outcomes have little to do with their own behavior, then there is no reason for them to shape their behavior so as to minimize tort exposure.’’∞≥∫ Is the conversion of so many firms into insurers of asbestos-connected conditions a bad thing? Earlier, we suggested three questions to measure the desirability of the regulation-by-litigation associated with the asbestos suits:

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(1) Does it accomplish a desirable end, or in other words, do sick people get appropriate compensation for their injuries? (2) Does it efficiently accomplish its desirable ends, or are the administrative costs so high that the gain is not worth the cost? (3) Are the creators of the regulations accountable for their choices? Let us examine each in turn. Does It Accomplish a Desirable End? Here the answer is clear: no. The bundling of litigants into groups of claims to be settled together tends to overcompensate plaintiffs with few or no symptoms and undercompensate those with the most serious illnesses.∞≥Ω This allocation of resources is both unjust and inefficient. Further, the proportion of total resources devoted to asbestos issues because of the litigation is far larger than it would be under an alternative allocation that took into account the existence of other priorities. Because litigation offers no opportunity to evaluate relative resource allocations that is comparable even to the limited versions provided by the rulemaking and statute-writing processes, resource allocations depend almost entirely on factors unrelated to the merits of the issues. Does It Effectively Accomplish Its Desirable Ends? Even if the system worked better than the evidence suggests it does at delivering appropriate compensation to injured individuals, the staggering cost of asbestos litigation would make it questionable whether the litigation was justified.∞∂≠ Litigation’s costs divert enormous resources from firms engaged in productive activity not to injured victims but to lawyers, experts, and others associated with processing the caseload.∞∂∞ (The 2005 RAND Corporation study estimated that plaintiffs had received only $30 billion of the $70 billion spent on asbestos cases through 2002.∞∂≤) These transaction costs produce no benefits and represent a pure transfer of income from productive uses and injured parties to economically unproductive uses. It is almost impossible to imagine a program with such high transaction costs being approved by any legislative body by an affirmative vote. If these costs were being incurred in an effort to achieve a just outcome in each individual case, it might be argued that the cost was worthwhile. However, despite the expenditure of large amounts of resources, the mass nature of asbestos litigation means that ‘‘individualized justice is a myth.’’∞∂≥ Are the Creators of the Regulations Accountable for Their Choices? Legislatures are accountable at each election for their actions during the preceding sessions. Such accountability is imperfect, of course. In the absence

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of a better alternative, however, electoral accountability is a vital check on the power of government. Courts are more difficult to hold accountable. Nineteenth-century reformers introduced judicial elections precisely to give judges democratic legitimacy by making them accountable.∞∂∂ Today the wisdom of electing judges is less clear. Nonetheless, through the legislature’s oversight of changes in the law, courts can be accountable even when judges are not elected, although it is far more difficult to infer public approval from a legislative failure to act to overturn a judicial decision. Neither legislatures nor courts are playing a meaningful role in directing the regulatory aspects of asbestos litigation. Although asbestos litigation has produced substantive legal changes, most of the problematic changes are procedural ones concerning case management or decisions made in the context of consolidated mass actions or bankruptcy court proceedings, where the lawyers’ actions are not generally susceptible to meaningful oversight. The driving force in this regulation-by-litigation has been the asbestos’ plaintiffs’ bar, which not only is unaccountable for its actions but is an interest group whose participation in the political process stalls change. In light of the asbestos experience, privately initiated regulation-by-litigation has little to recommend it. It is costly, is implemented through an unaccountable process, and does not deliver benefits to the people most in need.

Preventing Regulation from Becoming Litigation: Silica after the 1980s Silica suits began to reappear in U.S. courts in the last part of the twentieth century, many brought by lawyers with successful asbestos plaintiffs’ practices. More than ten thousand plaintiffs filed silica cases in Mississippi in the early years of the twenty-first century, for example. Because as many as 1.7 million Americans are exposed to respirable crystalline silica on the job, silica suits had the potential to turn into another asbestos.∞∂∑ They have not, however, and the differences between the modern silica and asbestos litigation suggest ways to avoid regulation-by-litigation in private suits. THE RETURN OF SILICA LITIGATION

Between the 1930s expansion of workers’ compensation legislation and the passage of the Occupational Safety and Health Act (OSHAct) in 1970, there was relatively little regulatory or legal activity related to silica exposure.∞∂∏ After the passage of the OSHAct, as in the 1930s, the combination of improved medical knowledge, increased exposure, and the passing of suffi-

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cient time for dust exposures to produce chronic symptoms led to an increase in silica-related lawsuits. Improvements in medical knowledge appeared in part as a result of efforts by the National Institute for Occupational Safety and Health (NIOSH) to secure a more restrictive regulation on silica. In 1974 NIOSH issued a ‘‘criteria document’’ recommending that the OSHA silica exposure standard be halved.∞∂π Although in 2007 as we write this, OSHA has not yet revised its regulations in response to the 1974 criteria document, NIOSH’s effort provided scientific support for claims that even silica exposures that met the existing OSHA standard were hazardous.∞∂∫ In another parallel to the 1930s, the primary federal response to news of the problem was to convene a national conference on the subject. The conference, held in 1997, focused attention on silica.∞∂Ω Exposures increased in part because higher oil prices in the late 1970s spurred a renewed oil boom in the West Texas oil fields, which required extensive reconditioning and cleaning of pipelines, storage tanks, and equipment; much of this work was done with silica abrasives.∞∑≠ Many of the workers lacked proper safety equipment and, as had happened in the 1930s at Gauley Bridge, their exposure to high silica levels produced cases of acute silicosis. The acute cases then drew attention to the chronic problem.∞∑∞ More recently, surveys of medical records of deceased high-risk workers suggested that silicosis may be underdiagnosed.∞∑≤ That the problem appeared in Texas was important because Texas law imposed on suppliers of hazardous products an affirmative duty to warn.∞∑≥ Injured workers were thus able to escape the workers’ compensation exclusiveremedy provisions by suing suppliers, just as Borel had allowed asbestos claimants to do.∞∑∂ The exposures and legal climate, together with Texas’s reputation for large jury awards in personal-injury cases, made the state a natural location for a renewed interest in silica cases. As time elapsed and more chronic silicosis cases appeared, litigation over silica exposure expanded in scope. In asking whether silica was ‘‘the next asbestos,’’ one commentator noted that ‘‘[b]y the late 1990’s, silicosis concerns seem to have been revitalized.’’∞∑∑ The asbestos plaintiffs’ bar expanded into silica litigation in the 1990s, using some of the techniques it had perfected in asbestos cases ‘‘to keep the asbestos-litigation gravy train alive.’’∞∑∏ Silica plaintiffs could be located using techniques similar to those used to find asbestos plaintiffs. Mobile screening clinics at locations where there were large numbers of potentially exposed workers took radiographs, which were then sent to ‘‘B-readers’’ for evaluation. (A ‘‘B-reader’’ is a physician who has passed a NIOSH certification test to ‘‘demonstrate proficiency in the classification of chest radiographs for the pneumoconioses using the International Labour Office (ILO) Classification

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System.’’∞∑π) If the B-readers concluded that a radiograph showed signs of silicosis, the person was referred to the law firm that sponsored the mobile clinics. And the silica plaintiffs’ bar used the ‘‘[s]ame methodology, same screening companies, [and the] same B-readers’’ as had been used in asbestos cases, according to a defense attorney.∞∑∫ Silica litigation soon expanded dramatically. For example, U.S. Silica, a major supplier of industrial sand, reported that pending claims against it grew from 3,505 in 2002 to 22,000 by June 30, 2003.∞∑Ω Perhaps because they had learned from the asbestos experience, the defendants in silicosis suits proved more resistant to the litigation, defending cases more vigorously than the asbestos firms had done during the later stages of that litigation. And in early 2005 the asbestos-style approach of several prominent plaintiffs’ firms ran into trouble in a multidistrict litigation (MDL) proceeding in front of a medically sophisticated federal district court judge, Janis Graham Jack.∞∏≠ As a result of those proceedings, whether the asbestos model can be sustained in silica cases is questionable. Although one leading defense attorney has said that he thinks ‘‘silicosis is a dying mass tort,’’ silica cases continue to be filed, suggesting that the final impact of silica suits has not yet been determined.∞∏∞ THE TEXAS MDL PROCEEDINGS

As silica litigation boomed, courts took steps to manage their growing dockets efficiently. In Mississippi, a jurisdiction whose rules were particularly friendly to plaintiffs, litigation grew quite rapidly. Many of the suits filed there were removed to federal court by the defendants on diversity-jurisdiction grounds. A dispute over whether jurisdiction in federal court was appropriate then developed, with the defendants arguing that the cases (which combined claims from between 1 and 4,280 plaintiffs against between 6 and 134 defendants) should be divided into individual actions in which the diversity of citizenship could be evaluated and the plaintiffs contending that when the cases were evaluated as a group, there was no basis for diversity jurisdiction and the cases should be remanded to the state courts.∞∏≤ In September 2003, the Judicial Panel on Multidistrict Litigation centralized twenty-two lawsuits from various federal courts in Mississippi because of common questions of fact. The panel assigned the combined cases to Judge Janis Graham Jack of the U.S. District Court for the Southern District of Texas. Despite their origins in Mississippi courts, the cases were sent to Judge Jack in Texas because of her experience with multidistrict litigation and because her docket allowed her the time to handle the cases, as the panel had found that there was no court that was a ‘‘focal point’’ for the litigation.∞∏≥ An additional 95 cases were

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added later, bringing the total litigation before Judge Jack for pretrial proceedings to more than 11,000 plaintiffs and 250 corporate defendants.∞∏∂ With motions to remand to the various state courts pending in each of the removed actions, the parties agreed to submit sworn ‘‘fact sheets’’ on each plaintiff and each defendant to enable the court to assess the validity of the claims for removal to federal court. The discovery process proved contentious; the parties were unable to agree on a case-management plan for the MDL cases, a striking contrast to the more cooperative approach to case management in the later asbestos cases. After an extended period of motion practice and discovery, the court prepared to address the pending remand motions. It also had before it defense motions for sanctions against the plaintiffs based on allegations that the diagnoses of silicosis in many of the plaintiffs were fraudulent. The court then conducted a Daubert hearing on the admissibility of the scientific evidence offered and allowed depositions of the plaintiffs’ diagnosing experts as part of its evaluation of the motions for sanctions, prior to considering the motions to remand.∞∏∑ The combination of this procedural posture and a medically sophisticated judge was wholly fortuitous. In the course the Daubert hearings, Judge Jack uncovered a pattern of improper diagnoses of silicosis across the cases based on inadequate medical evidence and the use of mass screenings. Tulane law professor Edward Sherman later noted in congressional testimony that ‘‘Judge Jack was able to make the connection between the dramatic rise in silicosis claims and screening/ diagnosis practices because such a large number of cases had been transferred to her. Silicosis cases are usually filed in state courts, where a single judge does not have a large enough sample to make such a connection.’’ This gave her the ‘‘rare opportunity to see the big picture.’’∞∏∏ The problems with the diagnoses appeared when the fact sheets on the individual plaintiffs were compared. Approximately nine thousand of the more than eleven thousand plaintiffs submitted fact sheets. These fact sheets listed more than eight thousand different doctors who had treated the various plaintiffs for non-silicosis-related conditions, yet showed that just twelve physicians diagnosed nine thousand of the plaintiffs with silicosis. ‘‘In virtually every case, these doctors were not the Plaintiffs’ treating physicians, did not work in the same city or even state as the Plaintiffs, and did not otherwise have any obvious connection to the Plaintiffs. Rather than being connected to the Plaintiffs, these doctors instead were affiliated with a handful of law firms and mobile x-ray screening companies.’’∞∏π The defendants then sought to depose nine of these physicians and representatives of three screening companies. The plaintiffs objected, arguing that the doctors were protected from discovery because they were (to some unspecified extent) nontestifying experts and that

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producing records on the numerous plaintiffs would be unduly burdensome for the physicians.∞∏∫ Before the court ruled on the plaintiffs’ objections to the depositions, however, the defendants deposed Dr. George Martindale, who was listed as the diagnosing physician on 3,617 plaintiff fact sheets. Contrary to the plaintiffs’ privilege claim, Dr. Martindale testified that he was not an expert for the plaintiffs and that he had not diagnosed any of the plaintiffs with any disease but had merely provided a confirmatory ‘‘B-read’’ of a radiograph in support of what he claimed he thought was a diagnosis by another physician. However, a document purporting to be a ‘‘diagnosis’’ had been prepared by the screening company that hired Dr. Martindale and stamped with his signature, apparently with his approval, and then submitted to the court.∞∏Ω Following this deposition, the court overruled the plaintiffs’ objections to the testimony of the remaining physicians. Four more were deposed (four others had responded that they had no documents concerning the plaintiffs and so were not deposed), and two of these depositions produced further testimony that the doctors in question had not diagnosed silicosis in the plaintiffs and that they had not been retained as experts by the plaintiffs.∞π≠ Among the many problems uncovered in the course of reviewing the medical basis for the silicosis claims were ∞ the diagnosis of multiple plaintiffs with both silicosis and asbestosis, sometimes by the same physician in different cases, despite the major differences a radiograph shows for the two diseases;∞π∞ ∞ rapid (measured in minutes) diagnoses and radiograph readings;∞π≤ ∞ one doctor’s failure to follow the procedures as documented in academic writings he authored;∞π≥ and ∞ improper financial incentives (doctors and screening companies being paid only for positive diagnoses).∞π∂

Moreover, as Judge Jack noted, the pattern of silicosis claims before her was anomalous when population and regional variations in silica exposure were considered.∞π∑ Somewhat sarcastically, the judge marveled that the astonishing rate of silicosis in Mississippi represented by these cases had attracted no press or regulatory attention.∞π∏ The court concluded that the clear motivation for [plaintiff’s attorney, the O’Quinn firm’s] micromanagement of the diagnostic process was to inflate the number of Plaintiffs and claims in order to overwhelm the Defendants and the judicial system. This is apparently done in hopes of extracting mass nuisance-value settlements because the Defendants and the judicial system are financially incapable of examining the merits of each individual claim in the usual manner.

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Dust Litigation The Court finds that filing and then persisting in the prosecution of silicosis claims while recklessly disregarding the fact that there is no reliable basis for believing that every Plaintiff has silicosis constitutes an unreasonable multiplication of the proceedings. When factoring in the obvious motivation— overwhelming the system to prevent examination of each individual claim and to extract mass settlements—the behavior becomes vexatious as well.∞ππ

Although the observation was not part of the court’s analysis of the validity of the expert testimony, the court did note that ‘‘[i]f searching for an explanation in the legal field, one might focus on the fact that most of the cases were filed just prior to the effective dates of a series of recent legislative ‘tort reform’ measures in Mississippi. One might also focus on the decline in asbestosis lawsuits, leaving a network of plaintiffs’ lawyers and screening companies scouting for a new means of support.’’∞π∫ After the conclusion of the Daubert hearings, the court determined that the vast majority of the cases did not belong in federal court and remanded them to the various state courts. Because the court held that it lacked jurisdiction in all the cases except those originally filed in the Southern District of Texas, no final ruling was entered on the question of the admissibility of most of the medical evidence. In the one case (with a hundred plaintiffs) originally filed in the Southern District of Texas, the court ruled that the testimony of both of the doctors used by the plaintiffs would be excluded.∞πΩ In the aftermath of the proceedings in front of Judge Jack, Congress took up the issue, and a House subcommittee held hearings on silica suits over several months in 2006. In testimony at those hearings, Professor Sherman said: I think some of the expectation of the parties involved in this [the MDL silica cases before Judge Jack] was that if you can get a whole inventory of a large number of cases, and you can join them and file them amass [sic], that there will be an impetus to settle those as a group without individual scrutiny of each one and this is what I was talking about earlier, the settlement process in which both plaintiffs’ and defendants’ lawyers at times have been complicit. The reason these cases were not really thrown out, what happened I think, is that a number of them were dismissed after Judge Jack brought this to light, and there were voluntary dismissals on the recognition that they would not stand up, and that was a courageous judge who, on a jurisdictional issue, was able really to bring about the demise of those cases.∞∫≠

After Judge Jack remanded the vast majority of the cases before her to the state courts as inappropriate for an MDL proceeding, many of the more than 10,000 cases were dismissed, including 4,200 voluntarily dismissed by the leading silicosis law firm of Campbell Cherry Harrison Davis Dove from the Mississippi state courts.∞∫∞ Mississippi and Texas regulators also opened in-

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vestigations into the screening companies and doctors who had worked for them in both states, finding a number of regulatory violations.∞∫≤ THE ECONOMICS OF SILICA LITIGATION

The House subcommittee hearings provided a rare glimpse at how entrepreneurial law firms approached mass tort cases. In some instances firms handling asbestos claims simply expanded into silicosis claims. In others, firms divided silicosis and asbestos claims between them.∞∫≥ To obtain sufficient plaintiffs for the asbestos model to work, the lawyers turned to the mass-screening techniques used successfully in asbestos cases. They also went back to their asbestos clients with informational mailings. For example, the Campbell Cherry law firm in Mississippi sent mailings to approximately twenty thousand of its existing asbestos clients informing them of the availability of silicosis screenings.∞∫∂ The structure of the screening, done in some cases by independent firms who were reimbursed by the attorneys only if a client was referred to the firm with a positive diagnosis, created a financial incentive for the screening firms to find positive diagnoses. The screening process itself is a classic example of a regulatory failure. The use of radiographic equipment is regulated by state agencies charged with monitoring the operation of equipment and the behavior of physicians. Although both Texas and Mississippi allowed ‘‘healing arts screenings’’ without an individual prescription from a doctor, such screenings do require the operator to obtain permission from the appropriate agency and neither state agency had authorized mass screening for silicosis.∞∫∑ Yet neither state took serious action before the MDL hearing documented the problem.∞∫∏ One reason is that the state agencies appear not to have engaged in much proactive oversight. For example, the Mississippi state agency monitoring radiographic equipment learned that there were screenings going on in 2002 when it received inquiries from screening firms about authorization to operate, but it did not discover on its own that these firms had later engaged in mass silicosis screening in the state.∞∫π Once potential plaintiffs had had radiographs taken, the next step was to obtain a diagnosis of their condition. Again, the mass-screening process did not follow standard medical practices. A medical expert noted in the congressional hearings that ‘‘[a]n appropriate screening program for lung disease is X-ray, exposure history, symptom review, spirometry, and physical examination.’’∞∫∫ This does not seem to have occurred in more than a tiny fraction of the MDL cases. The obviously frustrated committee chair, Representative Joe Barton (R-Tex.), summarized the results of the hearings as follows: ‘‘A common theme emerging in this Committee’s investigation is that, with minor

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exceptions, there seems to have been an apparent ‘misunderstanding’ between the doctors, lawyers, and screeners about whether the doctors’ opinions in this case were actual medical diagnoses. Where there was pretty straightforward diagnosing language in two sets of reports, the doctors have claimed that someone apparently slipped the language into the reports and they were too busy to notice it when they were signed. What’s going on here?’’∞∫Ω As Representative Barton’s comments indicate, several of the physicians involved backed away from the plaintiffs’ counsels’ claims that the physicians had ‘‘diagnosed’’ silicosis.∞Ω≠ (It is hard to tell about all the others, as several refused to testify on Fifth Amendment grounds.) The result was that when the committee attempted to pinpoint who was responsible, it found ‘‘doctors, screening companies and lawyers all standing in a circle, each one pointing to the next as the responsible party.’’∞Ω∞ Representative Barton complained, ‘‘Between the doctors who have taken the Fifth before this Committee and the doctors who now claim they never meant to diagnose anyone, I count as many as 5,000 people whose diagnosis is now questionable or unsupported. Can this be right? How did this happen?’’∞Ω≤ Once a group of plaintiffs was identified and suits filed, the plaintiffs’ settlement offer explicitly traded on the costs of a defense. For example, a settlement proposal from the group of plaintiffs’ attorneys in Texas MDL cases sent in April 2004 estimated the cost of even minimal defense measures at $1.5 billion for deposing plaintiffs, corporate representatives, doctors, coworkers, and fact and expert witnesses; obtaining records; drafting reports; hotel and travel expenses; and pretrial motion practice in federal court.∞Ω≥ After noting that this estimate did not include the expenses for actual trials, the lawyer offered the defendants a framework for settlement based on the ‘‘traditional values’’ of silica cases ranging from an average of $50,000 for plaintiffs with a ‘‘1/0’’ B-read (the lowest reading consistent with exposure) to between $150,000 and $750,000 for those with a ‘‘2/1’’ B-read and $250,000 to $2,000,000 for a ‘‘complicated’’ condition.∞Ω∂ The average settlement offer per case, using these ‘‘traditional values,’’ was $100,000. There are two ways to view the Texas MDL proceedings. One is that they uncovered a shocking breakdown of the legal system. The other is that they illustrate the legal system’s capacity for self-correction.∞Ω∑ Although we give Judge Jack and the legal system credit for uncovering the problems in the Texas MDL cases, we lean toward the former interpretation. Judge Jack’s medical expertise and the unplanned nature of the case assignments to her court mean that the resulting proceedings were not the result of institutional safeguards likely to be replicated. Yet there is one hopeful sign. A critical reason for the success of the Texas

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MDL proceeding was that the economics of mass torts changed as a result of the asbestos experience. The economic logic of the settlements the plaintiffs proposed did not consider the long-term cost of acquiescing in the creation of a new asbestos-like process. With their success in the Texas MDL proceedings in documenting what were, at best, questionable practices by the plaintiffs’ bar, the defendants rejected the quasi-administrative frameworks used in the asbestos litigation. Denied, at least temporarily, the ability to use package settlements to persuade companies to cooperate, the plaintiffs’ bar has thus far been unable to gain sufficient economic clout to force the silica companies to agree to the implicit regulation that the plaintiffs’ bar has imposed with respect to asbestos.

Private Parties and Regulation-by-Litigation Our three examples provide three quite different outcomes. Silica litigation in the 1930s served primarily as a motivating force to persuade a wide range of interest groups to agree to a legislative solution, the expansion of workers’ compensation to cover occupational diseases. Asbestos litigation after 1973 evolved into a costly quasi-administrative compensation system of questionable efficiency and fairness, placing a small number of plaintiffs’ firms in the position of regulators through their domination of the litigation and bankruptcy processes. The more recent wave of silica litigation has, for now, foundered on Judge Jack’s exhaustive opinion, which eviscerated the massscreening process and rapid-diagnosis procedures upon which the asbestosstyle system depends. What do these three examples, viewed together, tell us about private-party regulation-by-litigation? The first lesson is that it is much harder for private litigation than it is for public litigation to create an effective substitute for regulation. The asbestos suits became truly regulatory only when the volume of claims began to force otherwise healthy companies into bankruptcy, giving the plaintiffs’ bar an effective lever with which to force acceptance of their interests by the companies. In both silica examples, the litigation did not develop into anything approaching regulation. It is not impossible for the silica litigation to develop into regulation, however, and so we need to worry that some private litigation, particularly mass torts, will turn into regulation-by-litigation. The second lesson is that when private interests do acquire quasi-regulatory power through litigation, it can be much more damaging than when public regulators do so. The interests of the asbestos plaintiffs’ bar have almost no connection to the public interest at large. Their immediate interest is to maximize their own income. Even if we expand the definition of self-interest to

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include concern for their clients’ well-being, the plaintiffs’ bar has no reason to take into account the needs of others: the employees and customers of the defendants, the larger social interest in economic success, or even the proper functioning of the deterrent function of tort law. The asbestos litigation has proved costly in each of these areas. By forcing companies into bankruptcy, for example, the asbestos suits have reduced investment in productive activity and employment.∞Ω∏ By stretching causation well beyond its normal bounds, asbestos litigation has significantly reduced the deterrence that tort awards are intended to provide. The third lesson is the crucial role that ignorance plays in creating the opportunities for private litigation to mushroom out of control. As the RAND Corporation survey of asbestos litigation noted, there is almost no information on the extent of asbestos injuries.∞Ωπ Similarly, data on the extent of silica exposure or silicosis are based mostly on estimates and conjectures. Even the extent of the current silica litigation is not well documented. Indeed, it was only the fact that so many cases from Mississippi ended up in the Texas MDL proceeding—essentially an accident—that sparked judicial interest in exploring why there was such a great difference between Mississippi and the rest of the nation in silicosis. And it was only the fortuitous decision by the judge in that case to require ‘‘fact sheets,’’ with information on physicians, that revealed the underlying pattern of flawed diagnoses before the decision to remand the cases to Mississippi was made. Because private litigation depends on financial incentives to a greater extent than does public litigation, and because the flaws in the legal system that allowed the asbestos litigation to spin so completely out of control are related to the financing of lawsuits, private regulation-by-litigation may be easier to prevent than the public variety. In his testimony before the House subcommittee investigating the silica suits, Professor Sherman advocated requiring plaintiffs in mass tort cases to provide individualized information early because such a requirement tells ‘‘the lawyer that the lawyer is going to have to invest some time and some money. The lawyer will not do that if it is a case that is so questionable if it is a one shot case, many lawyers recognize that they are not prepared to do that. They are prepared to do it if they can just bundle those cases and settle 10,000 of them at a time, but if they know that there is going to be this kind of individual requirement, even if they are joined cases, there is going to be that requirement early on, and they are going to have to spend some time and effort, that, seems to me, is a weeding process. Good lawyers will not pursue those cases in recognition that it is good money passed down the drain.’’∞Ω∫ Procedures such as this would eliminate much of the financial incentive to pursue weak cases, while leaving the incentives to pursue meritorious claims relatively unaffected.

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Preventing private-party regulation-by-litigation is both easier and harder than controlling public agencies’ efforts. It is easier because private parties have fewer opportunities to ‘‘mass up’’ claims against an entire industry than do public entities, which can assert ‘‘the public interest’’ without having an actual client. It is harder, however, because private parties are subject to significantly less oversight by both courts and legislatures, and so identifying efforts at regulation-by-litigation launched by private parties is more difficult than spotting similar efforts by public entities.

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Tobacco Litigation

There is no more far-reaching example of regulation-by-litigation than the November 1998 Master Settlement Agreement (MSA) between forty-six state attorneys general and the four major U.S. cigarette manufacturers.∞ The MSA ended more than five years of litigation by the states against Brown and Williamson Tobacco Corp., Lorillard Tobacco Company, Philip Morris, and R. J. Reynolds Tobacco Company. Using novel legal theories, the attorneys general, with the legal and financial assistance of entrepreneurial plaintiffs’ attorneys, sued for the recovery of state government (Medicaid) expenditures on health care caused by cigarette smoking. The suits were politically controversial (Mississippi’s governor sued his own attorney general in an attempt to block the litigation) and in some instances became possible only because of laws passed specifically to facilitate the suits.≤ The MSA was regulatory because it included provisions restricting tobacco companies’ future behavior. It was also regulatory because the MSA’s substantial ‘‘damages’’ payments, which ultimately provided states with an average annual revenue stream of more than $180 million each, were more of a tax than traditional tort damages. The payments were tied not to estimates of past harms to individuals but to the future sales of cigarettes. It is impossible to avoid the conclusion that the payments were simply a thinly disguised implicit tax on tobacco.

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Unlike the examples of regulation-by-litigation we discussed in chapters 4 and 5, the MSA regulated in ways that benefited the regulated industry by allowing it to raise prices. As Walter Olson notes, ‘‘[T]he irony is that had cigarette executives met privately among themselves to raise prices, freeze market shares, confine small competitors to minor allocations on the fringe of the market, and penalize defectors and new entrants, they could have been sent to prison as antitrust violators—quite possibly by the very same attorneys general who sued them in this case.’’≥ Increased revenue from the higher prices more than offset the negative impact on cigarette unit sales resulting from the settlements’ marketing regulations, and the implicit tax proved easy to bear because demand for cigarettes is relatively inelastic in the short run, allowing the companies to pass the costs on to smokers.∂ Within days of signing the MSA, two cigarette manufacturers announced the largest price increase in history; the others soon followed.∑ Over the next five years, fourteen industry-wide price increases were announced.∏ By 2001, the firms had more than doubled the wholesale price of a pack of cigarettes. Moreover, the MSA reduced the companies’ litigation risks in the United States while leaving their growing foreign markets untouched.π If there was any doubt about whether the MSA benefited the tobacco companies, an empirical study found that the tobacco firms generated higher and increasing returns for investors in the post-MSA period, while the equity market overall was moving in the opposite direction.∫ In short, the MSA created a tobacco pricing cartel, making the big industry players far more profitable than they would otherwise have been. By providing long-term payments from cigarette producers to the states, the MSA also formed a revenue-enhancing cartel for the states. Margaret Little terms the settlement ‘‘the largest privately negotiated transfer of wealth arising out of litigation in world history.’’Ω The MSA bound the state governments to the cigarette companies by giving them a vested interest in ensuring the companies’ continued financial viability. Behind the MSA was a powerful bootleggers-and-Baptists political engine.∞≠ Just one group bore the cost of all of this: the millions of tobacco-product consumers, 23 percent of the U.S. population, who saw prices surge but who received few, if any, benefits.∞∞ Using our public-choice perspective, we discuss how regulation-by-litigation created these cartels. We begin by outlining an economic framework, based on cartel theory, for thinking about the MSA episode and then provide a brief description of the key interest groups involved in the story. We next describe the maze of tobacco regulations that laid the foundation for the MSA and discuss the key events leading up to the settlement. That is followed by a discussion of the formation of the MSA and the subsequent threats to it. Finally, we examine

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how the MSA process allowed regulation-by-litigation to take place and then focus on lessons learned from this remarkable bootleggers-and-Baptists story.

Cartel Theory, Bootleggers, and Baptists Economic theory provides a rich collection of models that address imperfect competition. Although most of these models are used to assist antitrust authorities in attacking firms that attempt to cartelize markets, we will call upon them to explain the reverse: regulatory efforts by government that cartelize an industry. The cigarette industry is well suited to such analysis because it is made up of a small and shrinking number of dominant firms. After the breakup of the tobacco trust in 1911, six firms dominated the U.S. market. By 2004, just two, Philip Morris and R. J. Reynolds, had a combined market share of over 80 percent.∞≤ The demand curve for cigarettes is quite steeply downward sloping, so significant price increases lead to relatively insignificant reductions in the quantity of cigarettes purchased.∞≥ The steep demand curve means that an increase in price generates a net increase in revenues (and hence profits) because the increase in price more than offsets the loss in quantity due to the higher price. The price rise is sustainable, however, only if all producers raise their prices on a coordinated basis and all maintain the increase. A single producer that raises its price alone will suffer a loss in market share, and a consequent reduction in revenues and profits, as consumers switch to cheaper brands. And of course, if one producer cuts its price after all have agreed to keep prices high, the price cutter can expand its market share at the expense of the others.∞∂ This is the central problem for cartels: maintaining collusion when the incentive is to defect. Where colluding producers share in the resulting industry profits following a coordinated price increase, there is a meaningful incentive to keep promises. For the cartel to stay together, the gains from sticking with the deal for any individual cartel member must exceed the gains from reneging by cutting its price and gaining market share.∞∑ Collusion thus works best when there are relatively few producers. The cartel’s problem is that collusion to restrain trade is illegal. The Sherman Act, which the U.S. Department of Justice (DOJ) and the FTC enforce at the federal level and state attorneys general enforce at the state level, makes per se illegal any activities that sellers engage in with the purpose of coordinating price increases. Just the act of getting together to talk about prices is illegal. Other laws or regulations may exempt pricing cartels from antitrust prosecution under certain circumstances. For example, producers of agricultural products are directed by federal agents to restrict production acreage and

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manage market shipments in order to keep prices higher. Indeed, nonparticipating producers may be subject to penalties when they fail to act in accord with the government-mandated cartel.∞∏ Since the end of the New Deal’s corporatist National Recovery Administration codes, however, governmentpromoted direct collusion to raise prices has been comparatively rare outside of agriculture. There is another way to collude. As we noted in chapter 1, firms sometimes seek regulation as a way to gain a government-sanctioned means to implicitly coordinate behavior.∞π As we will discuss later, various forms of tobacco regulation have provided such opportunities for cigarette manufacturers. One key impact of the MSA was to serve as precisely such a cartel-enhancing coordination device, with the tobacco companies and states sharing the revenue, a win-win arrangement. What about the antitrust problem? The MSA implicitly provided antitrust immunity. The state attorneys general who orchestrated the MSA are the same officials who would bring antitrust action against the tobacco companies within any particular state. An agreement with them provided implicit protection.∞∫ Moreover, federal authorities have traditionally deferred to the states on such matters, further strengthening the protection. There is still the nettlesome problem of preventing entry by new competitors. When large cigarette producers raise prices, higher profits result. These higher profits invite new competitors that are able to undercut the existing companies on price and thus gain market share at the MSA-producers’ expense. And since the MSA settled lawsuits against existing firms over their past behavior, there was no obvious way to make a new tobacco company adhere to the higher price. The MSA attempted to solve the new-entrant problem. It requires new cigarette producers to make payments, based on sales and proportional to the payments of the original MSA participants, to the MSA escrow accounts in each state.∞Ω In essence, new entrants are treated as if they had produced some of the cigarettes that gave rise to the Medicaid expenditures by the states for smoking-related diseases; in short, they are treated as if they had produced cigarettes even before the new firms existed.≤≠ This would have been impossible in a traditional common-law suit. But there is still a piece missing from the story. We know that firms prefer higher to lower profits and that state governments prefer higher to lower disposable revenues. We also understand how a tobacco pricing cartel might emerge, courtesy of a coordinated effort by state attorneys general. But an explicit agreement by the states and the tobacco companies to raise cigarette prices and share the increased revenue would be politically unacceptable. To

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make all of this happen, there has to be a public-interest rationale, a reason for organizing a profit-sharing cartel that will make the entire venture appear legitimate to the public at large. We must find some Baptists to bless the bootleggers’ agreement with the states, to complete a bootleggers-and-Baptists explanation. As we discussed in chapter 1, success in many social-regulation episodes is ensured when there are two well-organized interest groups that seek the same outcome. Not just any two interest groups will do, however. One group can be in it for the ultimate improvement in wealth or profit, but the other must be in the game for a noble purpose. Bootleggers like state laws that shut down liquor stores on Sunday. So do Baptists. Because of this, bootleggers do not have to lobby openly to get Sunday-closing laws on the books. The Baptists do it for them. The health interest groups are the Baptists who bring the high purpose to the MSA story. Calls by organizations like the American Cancer Society, the American Medical Association, and the American Lung Association for payments to the states linked the states’ profit to the harm caused by smoking. This connection allowed the attorneys general to make the tort-like theme that tobacco must pay for the damage it caused the message of the state lawsuits.≤∞ State health agencies, eyeing the potential increased budget resources the MSA promised, sang in the choir. Let us summarize. First, there are a few large cigarette producers. Coordination among them is illegal. Then, there is agreement among the attorneys general. Add a bevy of private litigators who can gain richly when engaged in the fray and who represent multiple states. Coordination is not costly. Both sides can reach an agreement. Next, there is an inelastic demand curve. Higher prices produce larger revenues and profits. By wrapping the deal in the settlement of lawsuits with the states, the tobacco companies solve their antitrust problem. Finally, the health interest groups provide at least a partial publicinterest blessing for the arrangement. Why impose this through litigation? Why not simply cut a deal with state legislatures? As we discuss below, litigation offered important advantages to several parties to the MSA. First, only through litigation could the state attorneys general lead the process. As political entrepreneurs, the state attorneys general had an opportunity to profit politically through litigation but not through more traditional regulation.≤≤ Second, litigation offered the states an important tool with which to extract better terms from the tobacco companies, since the states’ negotiating position was enhanced by the prospect of enormous damage awards, the potential for which was depressing the stock prices of the tobacco companies.≤≥ Third, the litigation context allowed private lawyers, attorneys general, and tobacco companies to cut a deal without direct participation by health interest groups, thus increasing the gains avail-

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able to the MSA parties. Rulemaking and legislation would have allowed the health interest groups greater influence, diminishing the gains from cartel creation available for the MSA parties to divide. Finally, approaching the issues through legislation and rulemaking likely would have produced different outcomes in different states, reflecting policy differences among the states, just as states tax tobacco at different rates. The deal’s value to the tobacco companies increased as its coverage grew. The structure of the MSA allowed the early settling states to create powerful incentives for all the other states to join the cartel, increasing the size of the pie for all to divide.

The Tobacco Regulation Maze Regulation, whether through litigation or other means, never occurs in a policy vacuum. Today’s regulatory choices are influenced by yesterday’s regulatory and business decisions. In this section we briefly explore the complex network of interest groups and the history of tobacco regulation that set the stage for the attorney-general tobacco suits and the MSA. THE INTEREST GROUPS

Five types of interest groups play important roles in the tobacco story. The first type is made up of those who have a vested interest in continued tobacco production and sale. Cigarette manufacturers top this list. Although more than a score of fringe tobacco-product manufacturers were in the market in 1998, four major producers—Brown and Williamson, Lorillard, Philip Morris, and R. J. Reynolds—accounted for more than 97 percent of cigarette production. With decades of experience operating in a politically risky, regulated environment, these firms were well organized through industry-wide organizations like the Council on Tobacco Research and the Committee of Counsel, which coordinated joint efforts to defend the industry’s interest before regulators and legislators.≤∂ This organization put the industry in a strong position to secure regulatory benefits and deflect regulatory costs, and allowed it to spread the costs of its political activity over a huge consumer base. Not only did the industry have a track record of substantial campaign contributions, but the regional specialization of industry production gave it particular clout with southern congressmen and senators like ‘‘the congressman from Philip Morris,’’ Representative Thomas Bliley Jr. (R-Va.).≤∑ Tobacco interests also included the more politically appealing tobacco farmers. In 1998 there were approximately ninety thousand tobacco farmers spread across sixteen states, with the majority of production occurring in North Carolina, Kentucky, Tennessee, Virginia, and Georgia.≤∏ Although comparatively numerous, tobacco farmers had been organized since the 1930s

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to protect their interests in federal agriculture price floors and acreage restrictions.≤π From time to time, tobacco interests added allies elsewhere. Newspapers and other recipients of tobacco advertising dollars regularly supported tobacco interests’ resistance to regulation, for example.≤∫ In all, from a publicchoice perspective, cigarette producers and tobacco farmers were well represented politically and well positioned to profit in any deal. The second type of interest group consists of smokers, who have two important interests. On the one hand, they dislike taxes on tobacco and regulations that make tobacco harder to purchase or use.≤Ω On the other hand, they have an interest in avoiding the health and financial consequences of their tobacco use. Unfortunately for smokers, they are a diffuse and unorganized group, precisely the type of interest group that public-choice theory predicts will be unsuccessful in protecting their interests in the political process. Even worse, smokers are also a declining group domestically: 52 percent of American men smoked in 1965, but by 1995 that number had fallen to 25 percent.≥≠ In addition, individual smokers are likely to be rationally ignorant concerning the politics of tobacco. They therefore have three strikes against them: they are costly to organize, they are of declining political importance, and they are politically uninformed. Theory predicts, and experience confirms, that they fare poorly in the political process. As the funding source for the increased tobacco-company profits and MSA payments to the states, and without any significant offsetting benefits from the MSA provisions, smokers were the biggest losers from the MSA. The third interest group is made up of the ‘‘health interest groups.’’≥∞ Although there is a history of antismoking activity that reaches back to before the nation’s founding, the most significant efforts by antitobacco groups began when the first major medical evidence on smoking’s dangers appeared in the 1950s.≥≤ Some, like the American Cancer Society and the American Lung Association, are well organized and well funded. Other groups are bit players, and some fall between the two extremes. As organizations with broad missions, the major organizations historically were no match for the highly focused tobacco interests. Even the best-funded organizations spent comparatively little on tobacco until the 1970s.≥≥ The major groups also ‘‘had no experience at, and little stomach for . . . political crusading; what they shared was a determination to avoid controversy’’ and activities like lobbying that might threaten their tax-exempt status.≥∂ Jealous of their support, they were also reluctant to pool their efforts. Not until the late 1970s did they form a common front on tobacco, the Coalition on Smoking or Health.≥∑ Their inability to work together limited their influence—Richard Kluger’s comprehensive history notes that a key advantage for the tobacco industry in fending off regulation in the 1960s was the lack of a ‘‘discrete ‘health lobby.’ ’’≥∏

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These groups played the role of the ‘‘Baptists’’ in the bootleggers-andBaptists coalition that initially supported the MSA. Importantly, these Baptists had some ‘‘intradenominational’’ differences. Some were ‘‘Sunday-only Baptists,’’ rationally ignorant participants who wanted to see tobacco regulated but were unwilling to invest to learn the details because their primary focus was elsewhere. Others were ‘‘fundamentalist and evangelical Baptists,’’ passionate about tobacco rather than health issues more generally. They were determined to spread their particular ‘‘gospel’’ of antitobacco measures and ensure that the outcomes met their particular tests of ‘‘theological’’ purity. An important part of the explanation of the failure of the initial national settlement brokered by the attorneys general lies in the defection of the more zealous Baptists from the coalition. Regulators form the fourth type of interest group. At the federal level, this group includes regulators such as the FTC, the FDA, and the Federal Communications Commission (FCC).≥π State health agencies also had an interest in the outcome, particularly in gaining control of the new resources the MSA offered the states. The state attorneys general had the crucial ability to bring lawsuits on behalf of the states and were often politically ambitious individuals hoping to use the visibility obtained from the suits as a gateway to higher office.≥∫ For example, one sympathetic account described Mississippi attorney general Michael Moore, the first attorney general to file suit, as ‘‘an activist who loved causes that grabbed publicity.’’≥Ω State and federal regulators shared some common interests, but their interests also diverged in important ways. The divergence played an important role in the breakdown of the comprehensive state-federal tobacco settlement that preceded the MSA. Similarly, the interests of the state attorneys general were not identical, with some preferring more vigorous regulation of tobacco and some preferring less, depending on their individual political needs and philosophies. The final type of interest group is the entrepreneurial plaintiffs’ lawyers, the private litigators who did much of the work in litigating the attorney-general suits. Several of these lawyers were crucial players in initiating the suits and played a major role in the negotiations by representing multiple entities, and these lawyers were often closely tied politically and financially to the attorneys general. For example, Mississippi lawyer Richard ‘‘Dickie’’ Scruggs persuaded Moore to file the first of the Medicaid-recovery lawsuits in 1994.∂≠ Scruggs was an asbestos litigation veteran who had worked with Moore on lawsuits to recover the state’s costs of remediation on asbestos-contaminated state buildings, taking home 25 percent of the $20 million recovery, and who generously contributed to Moore’s campaigns, including allowing Moore to use his private plane.∂∞ His firm—Scruggs, Millette, Bozeman & Dent, based in Mississippi—ultimately represented sixteen parties to the MSA. A firm led by

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Scruggs’s ally Ron Motley represented twenty-three parties.∂≤ Other lawyers joined the process comparatively late in an attempt to claim a share of the money available, and a veritable industry of cigarette litigators emerged.∂≥ In all, the private litigators received more than $11 billion in fees.∂∂ Motley’s firm alone received more than $1 billion.∂∑ These interest groups competed in the political and legal arenas and created the MSA. The competition took place against a long history of government involvement in tobacco production and use, a background that had important influences on the MSA. We now turn to a brief history of tobacco regulation to set the stage for the MSA. THE EARLY YEARS

The tobacco-flower motif throughout the Capitol building in Washington, D.C., speaks to the historic importance of tobacco in American life. Almost from the start, tobacco was a political issue, with the first government efforts to control tobacco consumption in what is now the United States dating at least to 1629, when the colonial authorities in Massachusetts Bay prohibited settlers from planting tobacco except in small quantities used for medicinal purposes.∂∏ Health interest groups have a long history of activism as well; there were several hundred anticigarette leagues in the United States with more than 300,000 total members by the turn of the nineteenth century.∂π Despite some initial regulatory successes—twenty-six states banned the sale of cigarettes to minors by 1890 and sixteen states totally prohibited cigarette sales by the end of 1909—tobacco interests were also powerful.∂∫ As a result of extensive lobbying by tobacco producers, by 1927 all the state bans on sales to minors had been repealed. As bans declined, state taxes appeared, beginning in 1921 in Iowa and spreading to ‘‘nearly all’’ states by 1960.∂Ω The importance of this early history of tobacco regulation is that tobacco’s fortunes have long been intimately associated with government. As a result, both tobacco interests and their opponents have been engaged in a continuing political battle over the appropriateness of individual tobacco use. Regulationby-litigation offered a way to make an end run around this political process for those unhappy with its outcome. FEDERAL REGULATION OF TOBACCO BEFORE THE SURGEON GENERAL’S REPORT

The most logical place to look for federal regulation of tobacco is the FDA. Congress has consistently denied the FDA explicit authority over tobacco. The statute creating the FDA, the Pure Food and Drug Act of 1906, granted the agency jurisdiction over drugs but defined them as only ‘‘(1) medi-

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cines and preparations recognized in the United States Pharmacopoeia or National Formulary . . . and (2) any substance or mixture of substances intended to be used for the cure, mitigation, or prevention of disease.’’∑≠ Because tobacco was removed from the Pharmacopoeia just before the passage of the 1906 statute, it failed to meet the first definition. Tobacco companies’ avoidance of health claims kept it out of the second.∑∞ Congress expanded the FDA’s jurisdiction with the Food, Drug, and Cosmetic Act (FDCA) of 1938, adding a third definition of drugs: ‘‘articles (other than food) intended to affect the structure or any function of the body.’’∑≤ Even after this amendment, the FDA continued to consistently disclaim jurisdiction over tobacco.∑≥ The FDA’s position was confirmed by Congress’s repeated rejection of proposals, beginning in 1938, to give the agency explicit jurisdiction over tobacco, which precluded any agency from exercising significant policymaking authority in the area.∑∂ Until the 1990s, the FDA did not play an active role in tobacco regulation, although fear of FDA activity lurked in the background. Although antitobacco groups have targeted both cigarettes’ tar and nicotine content and the marketing practices employed by cigarette producers since the 1930s, the tobacco lobby consistently prevailed until the first surgeon general’s report in 1964.∑∑ Tobacco’s success was at least partly due to the power of seniority in the Senate, where long-serving senators from tobacco-producing states were able to block efforts by health interest groups to extend FDA jurisdiction to tobacco.∑∏ In addition, before the 1950s, antitobacco groups were not politically savvy—they were largely ‘‘moralizing tub-thumpers who repeated, to no enduring effect, that tobacco was inherently dirty and ungodly and encouraged crime.’’∑π For a time cigarette manufacturers even advertised the purported weight-control benefits of their brands (‘‘Reach for a Lucky instead of a sweet’’).∑∫ In the 1950s, scientific information on the health effects of smoking altered the debate. Studies like the ‘‘mouse-painting’’ study released in 1953, showing a connection between tar and cancer, attracted attention. Popular media began to publicize these studies. For example, the New York Times ran a lengthy series of articles on smoking and health during 1953 and 1954.∑Ω This led the FTC in the 1950s to begin to use its enforcement powers to target tobacco advertising claims, particularly those concerning tar.∏≠ Tobacco’s political power remained potent, however. The first serious proposal in Congress to regulate tobacco, an attempt to give the FTC powerful injunctive powers for deceptive tobacco advertising and to limit tar and nicotine content, ended in ignominious failure, with the House sponsor losing his subcommittee chairmanship and having his subcommittee abolished.∏∞

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The medical evidence did lead the FTC to negotiate a ban on tar and nicotine advertising in 1960.∏≤ The agency chairman called the ban ‘‘a landmark example of industry-government cooperation in solving a pressing problem.’’∏≥ Somewhat ironically given the agency’s stated desire to improve the market for safer cigarettes, the FTC’s action meant that competition within the industry both to produce lower-tar cigarettes and to advertise them as being healthier halted.∏∂ By limiting competition regarding health claims, the agreement benefited the existing producers. Overall, the pre-1964 regulatory environment is best described as characterized by ‘‘a spirit of friendly and quiet cooperation between Congress, the bureaucracy, and the interest group community.’’∏∑ There were Baptists to bless regulatory deals, but they were quiet ones, not passionate revivalists. THE SURGEON GENERAL’S REPORT PROVOKES ACTION

In June 1961, several national organizations concerned with the health effects of smoking—the American Cancer Society, the American Heart Association, and the National Tuberculosis and Respiratory Disease Association— requested the appointment of a commission to examine tobacco’s health hazards and to propose solutions. These groups were cautious, in part because they feared antagonizing contributors that smoked, but the medical studies that appeared in the 1950s were enough to get them to take this small step.∏∏ At about the same time, Senator Maureen Neuberger (D-Ore.) introduced a resolution calling for a presidential commission. Her resolution received virtually no support in the Senate.∏π In 1962, however, a reporter surprised President John F. Kennedy at a live, televised news conference by asking him about tobacco and health, a question he was unable to answer with his usual standard of wit and knowledge. Shortly afterward, the surgeon general, Dr. Luther Terry, announced that he was establishing an ‘‘expert committee to undertake a comprehensive review of all data on smoking and health,’’ and at a later news conference, Kennedy cited Terry’s action as answering the reporter’s question.∏∫ The committee consisted of esteemed scientists who had never before expressed opinions on the connection between tobacco and human health.∏Ω The committee’s report dramatically changed the political debate over tobacco. ‘‘After 1964 there was no serious scientific controversy about whether smoking caused lung cancer,’’ and the idea of government intervention in tobacco was legitimized.π≠ The report concluded that ‘‘cigarette smoking contributes substantially to mortality’’ from a wide range of diseases, including lung cancer, chronic bronchitis, and coronary disease, and called for regulatory action on smoking.π∞ The surgeon general’s report gave the FTC the

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justification for action. Four days after the report was published, the FTC announced that it would issue rules to require health warnings on all cigarette packages and in all cigarette advertisements, suggesting that the agency had been prepared for the report.π≤ On July 2, 1964, the FTC issued the final version of its Trade Regulation Rule on Cigarette Labeling and Advertising, which required all cigarette ads as of January 1, 1965, and all cigarette packages as of July 1, 1965, to carry a stern warning: ‘‘Cigarette Smoking is Dangerous to Health and May Cause Death from Cancer and Other Diseases.’’π≥ The cigarette industry immediately ‘‘mobilized in earnest,’’ creating a voluntary advertising code and hiring former New Jersey governor Robert Meyner to enforce it, giving him the authority to levy fines of up to $100,000.π∂ And following a pattern that was to regularly characterize tobacco regulatory activities, Congress assessed the politics and intervened. On August 19, at the request of the then chairman of the House Committee on Interstate and Foreign Commerce, Representative Oren Harris (D-Ark.), the FTC delayed the effective dates of the trade regulation rule to allow Congress to act.π∑ The House committee began hearings on bills to regulate cigarette packaging and advertising and produced a bill acceptable to the tobacco industry.π∏ In the Senate, Commerce Committee chair Warren Magnuson (D-Wash.) acceded to most of the House’s provisions, in part because he was eager to get his name on a bill that would be seen as pro-consumer, and in part because of the influence of the tobacco lobbyist, and Lyndon Johnson crony, Abe Fortas.ππ Congress passed the Federal Cigarette Labeling and Advertising Act (FCLAA), a statute that served as ‘‘a severe rebuke’’ to the FTC.π∫ Although the statute gave the FTC specific authority for regulating cigarette advertising as that advertising related to health claims and nicotine content, it provided the tobacco industry much more and was ‘‘a victory for cigarettes.’’πΩ The statute watered down the FTC warning to ‘‘Caution: Cigarette Smoking May Be Hazardous to Your Health.’’∫≠ Even more importantly, the statute preempted any further mandated warnings by the FTC or state or local governments on cigarette packages and prohibited any warning requirement in cigarette advertising until 1969.∫∞ Finally, the statute required annual FTC reports to Congress evaluating the effectiveness of the warning label and providing recommendations for appropriate legislation.∫≤ This episode set the pattern for future regulatory efforts. Following a triggering event that created political pressure in the White House (the reporter’s question to Kennedy), the executive branch deflected the pressure by calling for a report by experts (the surgeon general’s panel). The experts’ report then provided cover for policy entrepreneurs at an agency to attempt to advance their agenda (the FTC’s proposed rule). Tobacco fought back in Congress, and

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a compromise emerged that appeared to accomplish a health policy goal but actually aided the tobacco interests in reducing competition while avoiding seriously damaging regulatory measures. The continued appearance of adverse health data led Senator Magnuson to press the FTC to reverse its ban on tar- and nicotine-level advertising and to set up a laboratory to provide standard measures.∫≥ The FTC then required that all advertisers use the agency’s data. Manufacturers were restricted to describing their products in terms that accorded with the results of the FTC’s newly developed smoking machine’s measurements.∫∂ The FTC’s publication of tar and nicotine data led to an agreement among the companies in 1971 to disclose tar and nicotine levels in their advertising.∫∑ From the industry’s point of view, publishing federally certified tar and nicotine numbers meant that it was able to imply that the federal government ‘‘was exercising oversight of the cigarette industry and therefore . . . the yields listed were not likely to represent a terrible health hazard.’’∫∏ And working with the FTC helped stave off the more threatening possibility of FDA regulation.∫π Once again, regulation helped rather than hurt tobacco. THE FAIRNESS DOCTRINE

In June 1967 the FCC ruled that the ‘‘fairness doctrine’’ applied to cigarette commercials. Under this regulatory doctrine (in effect between the creation of the Federal Radio Commission in 1927 and the repeal of the doctrine by the FCC in 1987), the FCC required broadcasters to provide airtime for opposing viewpoints whenever they broadcast controversial opinions.∫∫ In the case of tobacco, a citizen petition filed by New York lawyer John Banzhaf III prompted the FCC to mandate that radio and television stations airing cigarette advertisements provide each week ‘‘a significant amount of time for the other viewpoint’’ free.∫Ω As a result, health groups and the Public Health Service were able to air announcements on television and radio about the dangers of tobacco use. In 1968 alone, the three major networks aired 1,300 antismoking messages.Ω≠ These ads appear to have been effective, with a 5.7 percent drop in per capita cigarette sales between 1967 and 1970.Ω∞ When courts upheld the fairness doctrine’s application to cigarettes, both the FCC and the FTC put forward additional proposals designed to restrict cigarette advertising and consumption.Ω≤ In February 1969, the FCC issued a notice of proposed rulemaking to completely prohibit cigarette advertising on television and radio.Ω≥ In May 1969, the FTC issued a notice of proposed rulemaking to require that all cigarette advertising (both broadcast and print) contain a more direct warning: ‘‘Cigarette Smoking Is Dangerous to Health and May Cause Death from Cancer, Coronary Heart Disease, Chronic Bronchitis, Pulmonary Emphysema, and Other Diseases.’’Ω∂

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Congress again intervened. In April 1969, representatives of tobaccoproducing states introduced a series of bills in the House to prevent the stronger warning label and make permanent the temporary ban on state and federal regulation of cigarette advertising. But the political climate had changed, and some members now saw ‘‘that legislation backing consumer interests was becoming good politics,’’ as Senator Magnuson’s successful use of consumer issues in boosting his public image and Ralph Nader’s early successes demonstrated.Ω∑ Further, the health groups had an improved bargaining position; ‘‘for once they could advance their cause by seeing that Congress failed to act,’’ since that would allow the more stringent agency proposals to go into effect.Ω∏ After extensive negotiations, a compromise bill emerged that banned all cigarette advertising on electronic media after January 1, 1971, and mildly strengthened the package warning, requiring that all cigarette packages include the statement ‘‘Warning: The Surgeon General Has Determined That Cigarette Smoking Is Dangerous to Your Health.’’Ωπ Yet once again the restrictions in the new statute appear to have helped the industry in several ways. First, as some tobacco executives apparently recognized, banning television ads eliminated the public service announcements mandated by the fairness doctrine.Ω∫ One unnamed executive was quoted in Business Week in 1968 as saying that ‘‘I’d like to see us legislated out of TV. Then the networks would not be compelled to run these anti-smoking spots— and that would help a great deal.’’ΩΩ Second, eliminating television ads saved the companies the more than $200 million they were spending annually on television in 1969.∞≠≠ Third, the television-ad ban enabled producers of existing brands to maintain market share and created substantial barriers to the entry of new brands by denying them an effective means of establishing a brand.∞≠∞ Sales figures support the interpretation that the bill helped tobacco. Cigarette sales increased following the legislation. Total U.S. cigarette consumption rose steadily from 536.4 billion units in 1970 to 621.5 billion in 1979.∞≠≤ (Consumption per capita for the above-eighteen population rose from 3,985 in 1970 to 4,122 in 1975 and then began to decline somewhat.∞≠≥) In short, once again the major tobacco firms benefited from a bootleggers-andBaptist coalition. Until the FDA efforts in the 1990s to regulate tobacco, federal regulators were relatively quiet after this, except with respect to efforts to reduce smoking by children.∞≠∂ An important reason was that the tobacco industry continued to wield substantial clout in Washington, particularly in the Senate. For example, in 1974 Senator Frank Moss (D-Utah), a determined tobacco opponent, attempted to get the Consumer Product Safety Commission to assert jurisdiction over tobacco, what the FDA had continued to refuse to do. Moss had a clever legal argument to support his position, and when the commission

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rejected his petition, he brought suit and persuaded ‘‘a friendly U.S. district judge’’ to accept his argument and order the agency to act.∞≠∑ The tobacco industry did not appeal the district court ruling but instead went to freshman senator Wendell Ford (D-Ky.), who quickly added tobacco to a bill excluding guns, ammunition, and pesticides from the Consumer Product Safety Act. Ford was able to do this in part because he had managed to get a seat on the Senate Commerce Committee, an impressive feat for a new senator since the committee was already two members larger than its allotted membership. By 1979, Ford was the chair of the subcommittee with jurisdiction over tobacco products. Similarly, the industry was able to get considerable support from the Carter White House in reining in regulatory efforts, as President Jimmy Carter sought southern support for his reelection bid.∞≠∏ When Ronald Reagan defeated Carter in 1980, his comment during the campaign that ‘‘my own Cabinet officers will be far too busy with substantive matters to waste their time proselytizing against the dangers of cigarette smoking,’’ and general opposition to expanding federal regulatory activity, meant that no agency was likely to venture into the controversial area of tobacco regulation.∞≠π STATE REGULATION

Efforts to regulate cigarette consumption at the state level focused primarily on tobacco taxes, age limits on purchases, restrictions on the locations of vending machines and sales outlets (to limit underage smoking), and increasingly stringent bans on smoking in a variety of designated areas from restaurants to workplaces.∞≠∫ The age and sales-location restrictions embodied an important goal of health interest groups: to cut off the supply of new smokers. Relying on studies showing that the majority of smokers begin smoking before adulthood, antitobacco groups reasoned that if they could prevent young people from gaining access to cigarettes, over time the number of smokers would decrease substantially.∞≠Ω In pursuit of this goal, health interest groups sought a wide range of restrictions, such as bans and limits on vending-machine sales. Because the tobacco companies’ public position was that smoking was an adult choice, they had trouble resisting such proposals on the merits. Retailers and vendingmachine operators who profited from tobacco sales resisted such restrictions, but they too were hard-pressed to articulate a principled case against restrictions aimed at protecting minors. By 2003, some thirty-nine states restricted vending-machine sales to adult locations; two states totally banned the sale of tobacco products through vending machines; and only two states, Alabama and South Carolina, and the District of Columbia had not passed any legislation that restricted youth access.∞∞≠

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Restrictions on smoking in public places had also grown more stringent over time.∞∞∞ The first wave of such restrictions focused on requiring businesses like restaurants to provide nonsmoking areas.∞∞≤ Although tobacco interests fought back with statutes forbidding employment discrimination against smokers, this did not blunt the expansion of ‘‘no smoking’’ areas.∞∞≥ Beginning in the late 1990s, a second wave banned smoking in a wide range of public places. Often justified as public-health measures to protect those who work in businesses frequented by smokers, these measures deny businesses the ability to cater to smokers, insisting that all covered facilities be smoke free. Many of these more stringent restrictions have been imposed through initiative and referenda campaigns, bypassing state legislatures.∞∞∂ Tobacco taxes were the weak point for cigarette interests at the state level. Such taxes are lucrative for state governments. In the fiscal year ending in 2003, for example, state and local governments took in over $11.8 billion in tobaccotax revenue.∞∞∑ Unlike other proposed antitobacco regulatory measures, about which the general public was often indifferent or only marginally interested (for example, vending-machine regulation), tobacco taxes gave state governments revenue with which to reward other interests when the state ‘‘did the right thing’’ and raised taxes. As the proportion of the electorate that smoked fell, the ability to increase tobacco taxes rose. Only nine states charged the same centsper-pack excise tax as of January 1, 1990, that they had levied as of January 1, 1980.∞∞∏ And because of cigarettes’ short-term price inelasticity, tax increases boosted total revenue, at least for a time.∞∞π However, neighboring states’ tax rates can also limit a state’s ability to increase tax rates. If tobacco taxes rise too far ahead of other jurisdictions’ rates, smuggling and arbitrage efforts may undercut overall revenue.∞∞∫ Cigarette taxes (and other so-called sin taxes such as taxes on alcohol) have become a favored means for legislatures to increase state revenues, since the ‘‘virtuous’’ majority is happy to have sinners pay for the new programs the revenues allow. Sin taxes still pose some political problems, however. Because poor people have higher smoking rates than wealthier groups, taxes on cigarettes are regressive.∞∞Ω Particularly where tobacco taxes are funneled to services aimed at the middle class, the unfairness of the tax risks making it unpopular. And tobacco-tax increases are still tax increases and can carry a political cost for the legislatures that pass them and the governors who sign them.∞≤≠ State officials thus do not have a free hand in raising tobacco taxes. Perhaps most importantly, the revenue from excise taxes (and now the MSA) is as addictive for state governments as nicotine is for smokers, revealing a key political truth about tobacco: states have an interest in its use.∞≤∞

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Tobacco Litigation THE POLITICS OF COMPROMISE

The consistent theme of these regulatory efforts was compromise among health interest groups, regulators, and tobacco interests that paired the extension of limited restrictions sought by health interest groups with measures that enabled the tobacco interests to flourish under the restrictions. Warning labels were added, albeit with weaker warnings than the health interest groups initially sought, but the tobacco interests got preemption of alternative sources of regulation that made their national marketing easier. Tar and nicotine information was required, but in a form and paired with advertising restrictions that reduced competitive pressures to develop a less hazardous cigarette. In short, the net effect of each regulation was to reduce the margins on which tobacco companies could compete, benefiting the companies already in the field by making their products less vulnerable to attack in the marketplace. As an antitobacco activist summarized the history through the 1970s, with just a touch of overstatement, ‘‘There had never been a piece of antismoking legislation passed that the industry didn’t want.’’∞≤≤ Federal regulation in particular gave tobacco companies the ability to act as a quasi cartel by mandating behaviors that limited competition. At the state level, the politics were different. Tobacco interests steadily lost ground on restrictions limiting smoking that were aimed at protecting the interests of nonsmokers and on tax issues. As disappointing as some of these outcomes were to the health interest groups, these outcomes are the results of a political process in which those opposed to increased tobacco regulation had legitimate interests as well. Particularly given the lack of knowledge at the time of the tobacco companies’ active concealment of health data, it is hard to fault the political process for protecting the interests of millions of smokers, tobacco farmers, and employees and shareholders of cigarette companies. The process of special-interest lobbying and legislative horse trading was not pretty, but the outcomes it produced were as legitimate as any other product of the legislative and rulemaking process. Although tobacco remained strong enough politically to fend off major federal regulatory efforts, it suffered numerous smaller defeats at the state level.

Private Tobacco Litigation The tobacco industry has been defending itself in court from suits by private plaintiffs since the 1950s. For the most part, these have been traditional common-law suits seeking damage compensation, not regulation. The suits break roughly into three ‘‘waves’’ and played a crucial role in creating the attorney-general lawsuits. The first wave began in 1954 and followed the early laboratory research

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linking smoking to cancer in mice and a flood of negative publicity in the popular press. The subsequent flurry of suits yielded at least 11 published judicial opinions and an estimated 100 to 150 other filings that ‘‘were simply dropped at some point without formal disposition.’’∞≤≥ The legal theories available to plaintiffs at the time were negligence, breach of implied warranty, and breach of express warranty.∞≤∂ Professor Robert Rabin argues that the main reason these lawsuits failed was that tobacco companies hired the most prestigious law firms in the country and outlitigated and outspent their usually small-firm personal-injury lawyer opponents.∞≤∑ This first wave ended in the mid-1960s with complete victory by the tobacco companies.∞≤∏ The second wave began in 1983, when an entrepreneurial group of attorneys filed a new set of lawsuits adding claims based on new legal theories (strict liability and failure to warn) and information on the health effects of smoking that had been unavailable to the first wave of litigants.∞≤π Although the plaintiffs’ lawyers pooled their resources more effectively than had the plaintiffs’ attorneys in the first wave, numerous tactical and strategic errors marred the trials.∞≤∫ The tobacco companies continued their all-out defense efforts, no doubt motivated in part by the experience of asbestos firms with contemporaneous litigation.∞≤Ω As a result, the second wave ended with the same result as the first: the tobacco companies prevailed in every case. In particular, they had great success before juries with the assumption-of-risk defense, ironically now bolstered by the federally mandated warning provisions.∞≥≠ But the second wave did make an enormous number of industry documents public, largely through the efforts of Northeastern University law professor Richard Daynard. This exposure started to erode the public’s acceptance of the tobacco companies’ behavior.∞≥∞ The third wave of tobacco litigation began in 1992, relying on both new legal theories and important new factual material. By claiming damages for clients who alleged injuries caused by smokers’ use of tobacco but who were not smokers themselves, these suits circumvented the question of the assumption of risk by the smokers.∞≥≤ Moreover, the suits applied the tactical lessons of the asbestos litigation (see chapter 5), massing large numbers of claims together through procedural devices like class-action suits, and thereby providing the plaintiffs’ lawyers with the potential for large aggregate damages even though each individual’s claim was relatively small.∞≥≥ The third-wave suits accumulated rapidly: in 1993 there were forty-eight suits pending against Philip Morris; by 1999 there were eight hundred around the world.∞≥∂ These suits were costly to defend, with the six largest tobacco companies spending $600 million per year on legal bills by the middle of 1997.∞≥∑ In the third-wave suits the plaintiffs’ lawyers had incriminating documents

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leaked by tobacco-industry insiders available for use.∞≥∏ These documents confirmed what health advocates and many consumers had suspected: the tobacco companies had long known of the health dangers of smoking and had actively attempted to conceal them.∞≥π These documents severely undermined the position that had been taken by cigarette companies in both trials and congressional testimony.∞≥∫ The New York Times ran a series based on the documents in 1994, putting public pressure on the industry.∞≥Ω Even more importantly, by the late 1990s the accumulated evidence made it possible to ‘‘build a case against the industry on the voluminous document discovery in the state health care cost recovery suits and the class action litigation, as well as the earlier caches of whistleblower revelations.’’∞∂≠ The new documents and the attendant publicity produced the largest tobacco suit of all, a class action on behalf of all American smokers filed by New Orleans plaintiffs’ lawyer Wendell Gauthier, Castano v. American Tobacco Co.∞∂∞ Gauthier assembled a coalition of five dozen elite plaintiffs’ firms (requiring an initial commitment of $100,000 per firm per year), which included then First Lady Hillary Clinton’s brother, Hugh Rodham.∞∂≤ As Professor Rabin noted, ‘‘Clearly, a cooperatively financed tobacco tort venture drawing on the resources of so many well-established plaintiffs’ lawyers marked a sharp departure from the past.’’∞∂≥ To avoid causation issues, Gauthier sued only for damages for the smokers’ addiction. Although this restricted the damages per plaintiff to a few thousand dollars, the aggregate damages would be ‘‘billions.’’∞∂∂ The lawyers’ goal was to apply the mechanics of mass actions learned in the asbestos and other products-liability suits of the previous decades to tobacco. ‘‘With the firepower of sixty-odd law firms, Castano had the troops to muster its own wall of flesh, could spend millions a year without breaking a sweat and go toe-to-toe with the industry indefinitely.’’∞∂∑ The first crack in tobacco’s defense appeared when the smallest tobacco company, Liggett Tobacco Company, settled in 1996 with the Castano group (and with the five attorneys general then suing the companies).∞∂∏ Although the Fifth Circuit Court of Appeals rejected the certification of a national class in Castano two months later, the settlements with Liggett produced more internal documents, bolstering the other third-wave cases, and the consortium filed a series of ‘‘son of Castano’’ suits in various state courts.∞∂π In August 1996 an individual plaintiff won a $750,000 jury award in another of the third-wave suits.∞∂∫ For the first time, the tobacco companies faced the realistic prospect that they might lose liability suits. The distinctive feature of the third wave was the combination of the treasure trove of internal documents and the robustness of the secondhand-smoke claims against the traditional assumption-of-risk defense. But the third-wave

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suits were still traditional private actions aimed at recovery of damages, albeit sometimes in huge amounts, even if some of the lawyers saw themselves on a crusade against tobacco. If successful, the litigation would provide incentives through tort judgments, not by imposing ongoing regulation on the industry. Even Castano may have been primarily ‘‘high stakes poker’’ for the plaintiffs’ attorneys, ‘‘gambling that certification at the trial court level, which did in fact occur, would create sufficient unpredictability about a potentially catastrophic loss to persuade the industry finally to consider the prospect of settlement.’’∞∂Ω The most important impact of the third wave was to put the plaintiffs’ bar in the position of directing the assault on tobacco, leaving the traditional nonprofit health interest groups on the sidelines.∞∑≠ The third wave of litigation prompted the initial investment by entrepreneurial lawyers with resources like Scruggs and Motley. The ever-increasing flood of documents gave them the confidence that tobacco was vulnerable. Despite the continued lack of success in the courtroom, the entry of well-financed entrepreneurial lawyers was the watershed moment in the move from traditional common-law litigation to regulation-by-litigation.

The Federal Government Returns Spurred by the same factual revelations that played a role in the thirdwave suits, the federal government once again began to take steps toward regulation in the 1990s. The EPA issued a report labeling secondhand smoke a carcinogen in 1992.∞∑∞ The FDA initiated efforts to regulate tobacco beginning in 1994 and focused on claims that the tobacco companies manipulated nicotine levels.∞∑≤ On August 10, 1995, President Clinton publicly attacked teen smoking, and the following day the FDA proposed regulations that would govern the marketing of tobacco products to children and adolescents.∞∑≥ On August 28, 1996, the FDA issued final rules derived from its proposed regulations, asserting that it had jurisdiction to regulate tobacco products themselves.∞∑∂ Since Congress would not pass enabling legislation allowing the FDA to regulate tobacco, the FDA simply claimed the authority. Why did the FDA act in 1996? There are three reasons. First, after the Republican victories in the 1994 midterm elections, the Clinton administration had been hamstrung by Congress’s refusal to expand the administration’s regulatory authority in a number of areas and turned to executive-branch actions as a means of advancing its policy agenda without the need to secure congressional support.∞∑∑ The politics of tobacco were also changing. Scruggs and Motley, two of the lawyers behind the Mississippi attorney-general suit, paid for Clinton’s pollster, Dick Morris, to do public-opinion research to help

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persuade Clinton to tackle the issue.∞∑∏ And tobacco interests were shrinking, with fewer ‘‘tobacco states’’ than in the past, as the industry consolidated and tobacco production shifted overseas.∞∑π Further, the alliance between the tobacco farmers and cigarette manufacturers began to fray, as the latter shifted ever more to cheaper imported tobacco.∞∑∫ Second, since 1990 the FDA had been headed by Commissioner David Kessler, a physician turned regulator with a strong antipathy for tobacco. Professor Martha Derthick tells how Kessler was emboldened by both the fallout from the leaked documents and the administration’s earlier inclusion in the now-stalled Clinton health-care program of a substantial tobacco tax, which he read as suggesting a White House willingness to oppose the industry.∞∑Ω The evidence in the leaked documents that the tobacco companies controlled the level of nicotine and the petitions that the Coalition on Smoking or Health filed demanding action gave the FDA an opening that Kessler was willing to exploit.∞∏≠ Third, the tide of public opinion was shifting against the tobacco companies. This was partly because of the extensive news coverage of the leaked documents connected with the third wave of lawsuits and partly because ABC News, working with some of the lawyers involved in the third-wave and Medicaid suits, aired a story accusing the cigarette manufacturers of manipulating nicotine levels in their products.∞∏∞ And at the same time, Representative Henry Waxman (D-Cal.), ‘‘probably the most anti-tobacco congressman in living memory,’’ held multiple hearings on tobacco during 1994.∞∏≤ All these factors came together to prompt the regulatory Baptists to launch a revival campaign. Kessler’s antitobacco zeal was clearly genuine, as was that of other antitobacco interest groups. And for the health interest groups generally, the political process’s accommodation of tobacco was anathema, causing thousands of preventable cases of disease and deaths annually. To Kessler and others in the antitobacco camp, compromises with tobacco interests were signs of unacceptable dysfunction rather than accommodation of legitimate differences.∞∏≥ In short, by the 1990s the health interest groups were no longer just Baptists, they had become evangelical and fundamentalist Baptists gripped with a fervent desire to spread their gospel. Indeed, one tobacco executive described Kessler as ‘‘like a revival preacher.’’∞∏∂ As we will see, fervent Baptists are less useful to bootleggers than are those with less passion. Not surprisingly given Kessler’s hostility, tobacco interests were not willing to quietly accept an expansion of FDA authority. In the fall of 1995, the advertising, tobacco, and convenience-store industries filed suit in the U.S. District Court for the Middle District of North Carolina seeking an injunction to prevent the FDA from asserting jurisdiction over tobacco regulation.∞∏∑

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Although the district court denied most counts in the plaintiffs’ summaryjudgment motion, the Court of Appeals for the Fourth Circuit reversed and granted summary judgment to the plaintiffs on November 10, 1998, denying the FDA authority to issue the rules.∞∏∏ The Supreme Court granted certiorari and ultimately rejected the FDA’s attempt to regulate tobacco in 2000.∞∏π Although the FDA’s attempt to expand its regulatory authority over tobacco ultimately failed, this was not a foregone conclusion in 1996. With newly energized regulatory Baptists conducting a revival at the White House, new vulnerability on liability, and increasing pressure from the states, tobacco interests needed a new strategy. Cooperation with the lawyers working on the attorney-general suits was a natural step.

Private Litigators and the Attorney-General Suits The secondhand-smoke suits solved the assumption-of-risk problem, but only by excluding damages for smokers themselves, the largest and most lucrative group of potential plaintiffs. Including damage claims for harm to smokers would dramatically increase the potential damages. The solution was to sue on behalf of the states, claiming damages based on the states’ payment (through Medicaid) of health costs for smokers.∞∏∫ In particular, Scruggs convinced his law school classmate Mississippi attorney general Michael Moore to file the first Medicaid-reimbursement suit in May 1994.∞∏Ω The suit aimed to be regulatory from the start, as Moore was focused on adding restrictions to cut sales to minors.∞π≠ Mississippi made an ideal venue for the new theory because, unlike most states, it had separate equity courts where the case could be heard by a judge without a jury. Since juries had been a problem for tobacco suits, the plaintiffs’ lawyers wanted to avoid a jury trial.∞π∞ That plaintiffs’ lawyers sought early resolution of whether the case could be tried in chancery court illustrates the importance of this issue; as Scruggs noted, ‘‘[I]f we were going to lose, we wanted to lose early and cheap.’’∞π≤ Mississippi was followed by Minnesota and West Virginia in 1994 and by Florida and Massachusetts in 1995.∞π≥ Thirteen more states filed suit in 1996 and twenty more in the first six months of 1997. The size of the payoff for states and the lobbying by the private attorneys propelled the process forward despite philosophical opposition in some states.∞π∂ Moore and the various private attorneys worked hard to recruit additional attorneys general to increase the pressure on the defendants.∞π∑ The motives for the suits were mixed. Tobacco was undoubtedly a personal crusade for many of the lawyers and attorneys general, but it was also ‘‘Mount Everest, or maybe Fort Knox.’’∞π∏ Not only did the lawsuits offer a high-profile

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publicity opportunity for a crusading attorney general with higher office on his mind, but they allowed the attorneys general to reward their friends and supporters in the bar. The private lawyers stood to make millions of dollars and to win reputations as the superstars who finally humbled tobacco. A crucial factor in making the attorney-general suits possible was the participation of the private attorneys. Most of the attorneys general had neither the staff nor the budgets to prosecute such suits on their own.∞ππ Even more importantly, all but a few lacked the specialized knowledge and staff necessary to handle cases built around millions of documents. Because of this, most brought in outside counsel, some on a contingency-fee basis and others with the expectation that a claim for attorneys’ fees would be made against the defendants if the states prevailed.∞π∫ By using private attorneys working on a contingency-fee basis, they were able to, as Walter Olson colorfully put it, turn ‘‘the office of attorney general into a sort of profit center within state government’’ and free themselves from the ‘‘cranky appropriations chairman in their state legislature.’’∞πΩ As might be expected, politics, friendship, and trust entered the picture when private attorneys were invited to join the effort. A few examples of arrangements made with outside counsel illustrate. In July 1996, Connecticut’s attorney general signed a contingency-fee agreement for 25 percent of any future recovery with the attorney general’s former law firm, Silver Golub & Teitell, and an out-of-state firm that had been active in asbestos litigation.∞∫≠ The agreement was later amended to add two additional firms: Emmett & Glander, whose first named partner was married to David Golub of Silver Golub & Teitell, and Carmody & Torrance, whose managing partner was the personal counselor to Republican governor John Rowland.∞∫∞ In Louisiana, a law firm described as having close ties to Attorney General Richard Ieyoub was awarded the state contract and ultimately received ‘‘more than $120 million.’’∞∫≤ When time came for the payment of MSA fees, the Louisiana lawyers told MSA fee arbitrators that they had worked 85,000 hours on the tobacco litigation but that they had not kept time sheets. Attorney General Ieyoub vouched for his outside counsel: ‘‘I had a good sense of how hard they were working.’’∞∫≥ The alliance of the private attorneys and the state attorneys general was crucial to the transformation of damages suits into regulation-by-litigation. Through their alliance with the attorneys general, the private attorneys expanded their goals beyond claims for compensation (however huge) into suits to regulate future conduct. No private plaintiff would have had standing to demand changes in marketing practices or advertising strategies. By contracting out the risk of loss, the costs of preparation, and the development of

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expertise, the attorneys general evaded the usual controls their legislatures had over their offices through the control of budgets.

Settling the Medicaid-Reimbursement Suits Both sides faced considerable risks. As the number of Medicaid-reimbursement suits increased, the tobacco companies found themselves facing not just a well-financed group of plaintiffs’ counsel but a growing number of state governments. When settlement talks began, twenty-two state attorneys general had filed suit against the tobacco companies.∞∫∂ By the summer of 1997, forty had done so.∞∫∑ The states faced a vigorous defense by the companies, and a victory by the states was by no means assured. The attorneys general too had a strong reason to prefer a settlement. Indeed, the attorney-general suits suffered some serious reversals along the way.∞∫∏ The suits were based on theories that were creative but ‘‘rested on a shaky foundation,’’ making them risky.∞∫π For the private lawyers, trials represented an enormous risk. They had invested considerable resources in the suits and were anxious to earn a return on their investments. Facing the growing risks of the proliferating private third-party suits and state attorney-general Medicaid suits, as well as the hostile zeal of Kessler and the other ‘‘fundamentalist’’ health groups, the tobacco industry made a strategic decision to negotiate a comprehensive settlement with the state attorneys general and their lawyers.∞∫∫ As a tobacco executive summarized it, ‘‘After a while it was no longer a question of winning lawsuits. It became a question of obtaining permission from society to continue to exist.’’∞∫Ω Settlement discussions between the tobacco companies and the state attorneys general and plaintiffs’ lawyers began in early 1997. Looming over the talks was the upcoming trial date in Mississippi.∞Ω≠ Professor Rabin termed the 1997 agreement ‘‘a testament to the awesome threat posed by the litigation strategy.’’∞Ω∞ The talks eventually produced an initial settlement agreement (the Resolution) on June 20, 1997, among three sets of parties: many (but not all) of the state attorneys general, their private lawyers, and the tobacco companies.∞Ω≤ The lawyers involved in the ‘‘son of Castano’’ class actions were involved in the settlement talks as well so that, as Scruggs put it, ‘‘they wouldn’t come in afterward and try to sabotage it.’’∞Ω≥ The coalition was strained at times over tactics and the relative weight to put on regulatory changes and cash payments, but it managed to secure an agreement among most parties.∞Ω∂ Some attorneys general, notably Minnesota’s Hubert H. Humphrey III, opposed the proposed settlement as insufficiently stringent.∞Ω∑ Others, like Alabama’s William H. Pryor Jr., opposed it as inappropriately regulatory and

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infringing on legislative territory.∞Ω∏ However, the attorneys general favoring the Resolution structured the finances to encourage the dissenting attorneys general on both sides to agree to the settlement.∞Ωπ They also attempted to bring the health interest groups on board, looking for support in selling the Resolution to Congress, whose approval was needed for the various federal portions of the settlement and under the Constitution’s compact clause.∞Ω∫ The tobacco companies were willing to concede a great deal (including points that they had vigorously contested a short time before in the litigation with the FDA) but insisted on protection from future lawsuits and limits on regulation as the quid pro quo.∞ΩΩ The protections they sought went beyond the authority of the state attorneys general to offer, however, and congressional approval was required for those portions of the deal protecting the tobacco interests from future efforts by the FDA and health interest groups at the federal level. The settlement also got ‘‘many of the biggest, most dangerous plaintiff’s firms out of large-scale tobacco litigation, probably forever.’’≤≠≠ As Professor Rabin concluded, ‘‘What the industry was willing to buy, at a very considerable price, was relief from litigation uncertainty.’’≤≠∞ That relief was valuable. Three weeks after news of the settlement negotiations broke, Philip Morris’s stock-market value had increased by more than $10 billion, a testament to the value of ending the liability problem.≤≠≤ It went up another 11 percent when the Wall Street Journal reported an outline of what became the Resolution several weeks later.≤≠≥ For the states, the Resolution provided an annual payment by the participating tobacco companies. Tobacco companies were to pay $10 billion to the states up front and to make inflation-adjusted annual payments totaling $358.5 billion over twenty-five years, with payments of $15 billion per year in perpetuity thereafter. Although substantial, these payments were less onerous than the numbers suggest. Because of the relative price inelasticity of tobacco sales, companies would be able to pass their payments on to consumers as higher prices.≤≠∂ Further, tobacco companies would be able to deduct the annual payments as ordinary and necessary business expenses on their incometax returns, thus reducing their tax liabilities.≤≠∑ The monetary payments envisioned by the Resolution were thus primarily a promise of a transfer to the states from future smokers (through higher prices) and taxpayers generally (through the deductibility of the payments) rather than from the tobacco companies’ shareholders.≤≠∏ For the FDA, the Resolution offered the authority to classify nicotine as a drug and cigarettes as a drug-delivery device, albeit with some restrictions on agency action; the power to regulate health-claim advertising; and the ability to treat tobacco-product approvals in much the same way the agency treated

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new drug approvals. The Resolution also contained detailed rules that affected marketing, advertising, and underage tobacco restrictions.≤≠π The Resolution’s drafters understood that it could be undermined by the entry of new tobacco companies, which would have a competitive advantage if exempt from the costly payments.≤≠∫ Finally, the tobacco companies entered into separate settlements with the four states closest to trial (Mississippi, Florida, Texas, and Minnesota), including in those settlements incentives for the early settlors, such as a ‘‘most favored nation’’ clause in Mississippi’s settlement.≤≠Ω The Resolution left out two important interest groups, however. First, the primary gain for the federal government was the tobacco companies’ acquiescence in FDA regulation. But the tax deductibility of the payments meant that the settlement could be a net revenue loss to the federal government, and since the state attorneys general would reap most of the credit for the deal, it offered little political gain for either the Clinton administration or Congress. Moreover, some politicians saw tobacco as a useful issue they did not want taken off the table.≤∞≠ As a result, the pro-settlement group of attorneys general was unable to persuade the White House to endorse the deal and ran into trouble in Congress. Second, the health interest groups were horrified by the Resolution’s entrenchment of the cigarette business. Having preached the gospel of the evils of tobacco, they were not prepared to accept the Resolution’s toleration of continued tobacco marketing and restrictions on regulators’ authority. Having been burned in prior political deals with tobacco over regulations, this time they demanded much larger penalties and tougher regulations than the Resolution included.≤∞∞ Because the Resolution provided little for Congress or the administration, the health interest groups found a ready audience for their efforts to change the terms.≤∞≤ Congress began deliberations nearly a year after the Resolution was signed; by that time, it was apparent that the general mood was for the industry to feel pain.≤∞≥ Both Clinton and Congress wanted to pass a tobacco reform bill for the potentially huge amount of funds it would garner and were willing to compromise with tobacco to get a deal.≤∞∂ As one commenter put it, ‘‘a tobacco deal was supposed to show that Clinton was still in the game, while also funding programs for child care and education that he had laid out in January. That’s why Clinton had been so willing to compromise on everything from tax cuts to liability limits.’’≤∞∑ But Clinton was not strong enough to close the deal. Amendments turned the legislation implementing the Resolution into a bill to end the marriage penalty, to increase farm subsidies, and to stop illegal drugs from entering the United States, costing the Resolution some support.≤∞∏ And Clinton’s allies were divided. The health interest groups seemed to agree that

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some form of the bill needed to pass, but they disagreed on how harsh was harsh enough.≤∞π As the legislation introduced by Senator John McCain (RAriz.) moved through the Senate Commerce Committee, which had jurisdiction over the matter, the payments required from the tobacco companies were raised to $516 billion from $365 billion over twenty-five years, a $1.10 increase in the federal cigarette tax over five years was added, a higher level of FDA regulation was allowed, and litigation immunity was eliminated.≤∞∫ Not surprisingly, the price became too high, given the reduced benefits for the industry, and the tobacco companies rejected the revised proposal.≤∞Ω Once the tobacco companies turned against the proposal, they launched a massive advertising campaign to kill the bill,≤≤≠ successfully shifting public opinion. A tobacco-industry-funded poll distributed to Senate Republicans in early June showed that voters rejected the McCain bill 57 percent to 34 percent, prompting Republicans to kill the bill.≤≤∞ With the failure of the federal legislation in the Senate, the tobacco industry and the state attorneys general who had not yet settled returned to negotiations. Using the settlement with the initial four states as a model, the tobacco companies and the attorneys general of the other forty-six states negotiated a revised settlement agreement without the federal portion of the deal and signed what is now known as the MSA on November 17, 1998. The revised deal did not address warning labels (where the FDA had exclusive jurisdiction), include any expansion of FDA authority, or provide the crucial national immunity provisions, all of which would have required congressional approval.≤≤≤ Reflecting the lower value of the deal to the tobacco companies, the expected flow of payments from the industry to the states dropped from $365 billion to $200 billion.≤≤≥ In addition to approval by the courts in which the various suits were pending, the agreement called for each state to pass a ‘‘Qualifying Statute’’ and provided a model in an appendix to the MSA.≤≤∂ At this point, however, the deal was done. The judicial review and the passage of model statutes did not approach the due process requirements that would have been associated with the passage of a comparable federal statute. Public scrutiny was hampered by what appears to have been an intentional strategy to avoid public debate over the provisions.≤≤∑ Despite the collapse of the original deal in Congress, the federal government was not yet done with the tobacco industry. The lure of the substantial amount of money the proposed settlement had offered and the continued desire of the FDA to increase its authority over tobacco products meant that the administration was not prepared to simply walk away from the issue.≤≤∏ The administration’s first response to the MSA was to attempt to take for federal use some of the funds allocated to states.≤≤π When this maneuver was blocked in

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Congress, the administration decided to sue the tobacco companies on behalf of the federal government. President Clinton recognized that such a suit targeting an unpopular group could be politically useful.≤≤∫ Reversing the position Attorney General Janet Reno had taken in 1997 congressional testimony that the federal government did not have an independent claim against the tobacco industry, Clinton announced in his 1999 State of the Union address that he was directing the DOJ to develop a ‘‘litigation plan’’ to sue the cigarette companies.≤≤Ω In September 1999, the DOJ filed suit against nine tobacco companies seeking both to recover lost Medicare payments and to force the industry to disgorge past profits under the Racketeer Influenced and Corrupt Organizations Act (RICO).≤≥≠ The DOJ originally demanded disgorgement of all tobacco profits from 1954 to the present, a total of over $700 billion, which would have bankrupted the industry.≤≥∞ The federal claims did not fair well in court, however. On September 28, 2000, the court granted the defendants’ motion to dismiss the Medicare claims but allowed the RICO claim to go forward.≤≥≤ The change in administrations after the 2000 election also prompted a reduction in the disgorgement claim. Although the Bush administration continued the litigation, it reduced the demanded disgorgement to under $300 billion.≤≥≥ In August 2006, the district court granted the government injunctive relief (in a 987-page opinion) but awarded no disgorgement of past tobacco-industry profits.≤≥∂ The MSA also alarmed U.S. tobacco growers.≤≥∑ Fearful that their political protection was ebbing, farmers sought to cash out the value of their price supports and quotas. Joined by cigarette producers interested in seeing an end to government programs that kept a floor under tobacco prices, the farmers negotiated for redemption of their government-created tobacco-growing quotas and compensation for the end of government price-support programs.≤≥∏ Holders of tobacco quotas received some $6.7 billion to retire their rights. Tobacco-farm operators (many of whom leased quotas) received $2.9 billion. The revenues to fund the retirement and buyouts came from government sources and, as might be expected, from the cigarette producers, who nudged cigarette prices upward again to generate a contribution of $5.5 billion toward buyouts.

Efforts to Break the MSA As we indicated earlier, the parties to the MSA anticipated the problem of competitive entry by new cigarette producers and importers and included provisions intended to protect the cartel members. But the lure of the profits available to a competitor that could avoid the MSA’s provisions led to multiple

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efforts to avoid those restrictions. The market share of firms outside the ‘‘big four’’ tobacco companies grew from 2 percent in 1997 to over 10 percent by 2004.≤≥π One response has been a series of legal challenges to the MSA. Initial challenges to the MSA in the federal courts, on a variety of legal issues, lasted nearly a decade.≤≥∫ Plaintiffs include consumer groups, smokers, cigarette manufacturers, cigarette distributors, cigarette importers, and other parties. The cases allege violations of a mix of antitrust law, state constitutional provisions, and the federal Constitution. The federal constitutional challenges focus on the commerce clause (alleging that the MSA improperly regulated commerce among the several states, infringing on Congress’s enumerated power to do so), the compact clause (claiming that the MSA was an agreement among the states and required congressional approval), the due process clause (alleging that consumers affected by the MSA were not represented in the negotiations), the First Amendment (claiming that the MSA restrictions on advertising violated the First Amendment’s protection of speech), and the Tenth Amendment (arguing that the powers not delegated to the federal government are left to the states, not to a coordinated effort by the attorneys general). The antitrust challenges allege that the settling tobacco companies agreed to pay approximately a quarter trillion dollars in return for permission to collude to raise prices and protect market share.≤≥Ω The plaintiffs allege that the settling companies agreed to equalize per-cigarette damages and protect their respective market shares from competition with one another.≤∂≠ Under the MSA, settling tobacco companies allocated damages according to their current market shares.≤∂∞ At the time the MSA took effect, there were scores of small cigarette companies that did not participate in the MSA scheme, though the exact number was unknown.≤∂≤ The MSA took away any competitive advantage from nonparticipating manufacturers; they could either pay into the settlement fund on a market-share basis and meet the MSA’s other requirements, like the original signers, or be banned from the tobacco business for two years.≤∂≥ In practice, because of difficulty in enforcement, the nonparticipating manufacturers have largely succeeded in avoiding liability for taking market share from the original MSA signers.≤∂∂ As a result, Philip Morris was forced to cut prices, and profits at R. J. Reynolds and Brown and Williamson plummeted as well.≤∂∑ In response to the antitrust claims, the tobacco companies have raised two theories of immunity from antitrust law. The first is based on the NoerrPennington doctrine, which holds that individuals are immune from antitrust liability when their challenged action involves merely petitioning the government, initiating suit in court, or facilitating communication with government

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decision makers.≤∂∏ Because the MSA was approved by each state’s high court and produced qualifying statutes passed by each state’s legislature, the MSA participants argue that the alleged anticompetitive conduct was protected conduct. Thus far, all the courts that have addressed this argument have agreed that the tobacco companies were merely ‘‘petitioning’’ the government to pass legislation and so are entitled to antitrust immunity. The second theory is based on the state-action exemption, which comes from the Supreme Court’s 1943 decision in Parker v. Brown.≤∂π In that case, the Supreme Court held that federal antitrust laws do not apply to a state ‘‘as sovereign’’ when that state imposes certain anticompetitive restraints ‘‘as an act of government.’’≤∂∫ However, in a later case, the Court narrowed the interpretation of state action to actions of the government itself.≤∂Ω In cases like A. D. Bedell Wholesale Co. v. Philip Morris, Inc. and Mariana v. Fisher, courts have found that the act of entering into and executing the MSA, along with state passage of the qualifying statutes, does not constitute state action under the Parker test.≤∑≠ Despite attacks, the MSA cartel has thus far remained relatively durable— and for good reason. The MSA is a cash cow for the states and a source of funding for health interest groups. It has enriched the private attorneys who battled in court to bring tobacco to bay. MSA cash flows are now woven inextricably into the finances of all fifty states, national interest groups, and private litigators who guard the gates, and these groups are not likely to allow their streams of funds to dry up.

Conclusion American governments have regulated tobacco products in various ways for centuries. In the twentieth century, tobacco-product manufacturers and tobacco growers managed to successfully resist regulations that would harm their business, and tobacco firms even turned some regulatory efforts to their own advantage, as with the first rounds of advertising restrictions. Faced with a renewed regulatory attack at the federal level, the threatening third wave of litigation that was poised to exploit new cracks in the industry’s longrunning successful defense, and the coordinated attack from the state attorneys general, the industry sued for peace and embraced regulation-bylitigation.≤∑∞ The resulting MSA established a regulatory cartel that brought increased profits to the industry and revenues to the states, the political dividends of white-knight reputations to state attorneys general, wealth to the owners of tobacco quotas and farms, and billions of dollars for the private litigators who fought the industry in the courts. When the smoke cleared, the

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millions who legally smoke cigarettes were left to pay the tab and to carry the MSA burden constructed by a bootleggers-and-Baptists coalition. In effect, one of the largest excise-tax increases in history was imposed on tobacco consumers without opportunities for meaningful political participation by the affected. The cartel itself was not a creature of a legislature or regulatory agency but a product of litigation and the courts whose details were virtually invisible to rationally ignorant voters and consumers. Moreover, the MSAcoordinated price increase was not an action taken by federal or state governments, so there was no way to vote the rascals out. The MSA’s most important beneficiaries are the tobacco companies, the politicians who pioneered the state lawsuits, and the attorneys who collected the substantial fees after the settlement. The tobacco companies won barriers to entry by new competitors and a means of substantially raising their prices, and they bought off some of their most dangerous enemies. The politicians won publicity and a platform for future campaigns.≤∑≤ The private attorneys got rich. In telling the MSA story, we have made much of the point that the MSA is a prominent example of regulation-by-litigation, that it is not a litigation story about recovering damages for harmed individuals. But when the rationale for the action is examined, can it be argued that this regulation-by-litigation episode still represents the application of a rule of law to facts where a huge number of people have been damaged? At first blush, the theory of the Medicaidreimbursement suits appears to be a logical basis for a mass tort action. If a product found to be sold deceptively has tortiously imposed costs on the consumers who purchased the product, then damages and an injunction against the product’s use or the producer’s marketing practices are surely appropriate remedies. Why shouldn’t a state that has paid costs be able to make a similar claim? The problem with this account is that the MSA litigation was not about recovering damages for a harmed population; it was about obtaining a stream of revenues to support future state expenditures along with a host of regulations that would affect cigarette-marketing practices.≤∑≥ Instead of settling a suit based on past harms to consumers who may have unwittingly consumed a harmful product, as might be brought at common law, the MSA mandates payments to states based on future cigarette sales. Moreover, those payments are unrelated to nicotine content or other proxies for different cigarette brands’ connection to the harms.≤∑∂ And unlike judgments in tort suits, the MSA’s regulations apply to future entrants to the tobacco market, firms that did not exist at the time of the settlement and could not have caused any harm, making the result radically different from a judgment in a traditional lawsuit between identifiable parties over the harm one has caused the other.

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A more accurate picture of the suits is that members of the state executive branch, the attorneys general, effectively imposed a hidden excise tax on a consumer product and a set of regulations on an industry without first having an open legislative debate or a vote of the state legislatures. In short, we (along with quite a few others) contend that the MSA is primarily about generating a huge increase in cash flow to the individual states. Seen in this light, the litigators, both public and private, were more like tax farmers of Roman times than agents of injured parties in pursuit of a remedy. In a constitutionally troublesome sense, the state attorneys general took on the combined function of the legislative and executive branches when they set the equivalent of a tax on future cigarette sales across the nation and developed and imposed a system of industry regulations that would affect all present and future producers. Even those provisions of the MSA that attempted to achieve non-revenue-related goals in health policy are problematic because they were imposed through litigation rather than rulemaking and legislation. Even the American Cancer Society, a consistent supporter of the regulation of cigarette sales, was troubled by the means used, intervening to oppose the settlement of the attorney-general suit in Oregon.≤∑∑ As an attorney for the organization put it, ‘‘[L]itigation is simply not an appropriate vehicle for setting health care policy with[in] a state and across a nation.’’≤∑∏ If we compare the MSA to earlier regulatory efforts, we can see a clear difference. Although individual policy entrepreneurs—like Michael Pertschuk, who served as antitobacco senator Maureen Neuberger’s legislative assistant in the early 1960s, as chief counsel of the Senate Commerce Committee, as chief of staff to Senator Warren Magnuson, and as FTC commissioner and chair— played important roles in the regulatory history of tobacco, their individual initiatives were ultimately subject to the checks and balances of the political process.≤∑π John Banzhaf may have spurred the FCC to apply the fairness doctrine to tobacco ads with his petition, but the result was tested in the courts, and Congress reshaped the issue of advertising regulation. The MSA skipped this process almost entirely. States were faced with the choice between acquiescing in the deal by adopting the model statute and approving the settlements and thus receiving the immense revenue it promised or forgoing the payments while still burdening their citizens with the higher prices the MSA would produce for the benefit of other states.≤∑∫ In essence, the attorneys general and their private attorneys bought themselves out of the political process. What can we learn from this extraordinary experience? First, we learn the power of a coalition of bootleggers and Baptists in pursuit of huge amounts of politically transferred wealth in a world of rationally ignorant voters and consumers. The larger the prize, the greater the incentive to stick it out to the end. Each step of the way brought a significantly improved

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settlement for one key party or another. Yes, trade-offs were made along the way, but the end result was wealth enhancing for the rent-seeking interest groups. Second, we see the power delivered by actions that produce concentrated benefits (or that avoid concentrated costs) paid by a huge number of widely diffused consumers. In a world where prices rise for all kinds of reasons, few cigarette smokers would know that the higher prices they paid resulted from actions coordinated by the National Association of Attorneys General. Third, we are left with an important concern: how to preserve political competition so that interest groups, consumers, firms, and organizations that wish to gain political favors or impose political remedies to problems will have to struggle in the competitive arena where due process is accorded to one and all. It is true that the MSA required the state courts to review and approve the agreement, and this provided some room for countersuits and opposition.≤∑Ω But as we noted in chapter 4, settlement proceedings operate under rules that differ from those for rulemaking and legislation, reducing the opportunities for public participation and changing the standard by which the objections are evaluated. Further, if a state abandoned the MSA cartel, that state’s citizens would still pay higher prices for cigarettes but would receive no revenue enhancements. The final ratification placed the state legislative bodies in an inferior position to the attorney-general-controlled settlement process that generated the MSA. Indeed, the MSA authors (including the private litigators) behaved more like a supergovernment than like a part of tripartite state governments. Individual legislative bodies had much to gain by endorsing the final package and much to lose if they did not endorse it. The ratification process did not provide due process for affected parties. There is one last question: Did the MSA accomplish a public-interest goal? The public-interest inspiration for the initial deal was focused on reducing smoking and recouping state Medicaid expenditures. By the time the deal had been made concrete in the MSA, however, much of that was lost.≤∏≠ The promise of devoting MSA revenues to smoking-reduction programs has not been met. The results of the MSA indicate that the majority of the proceeds have been devoted to other activities. Only about one-third of the revenue has been spent on health-enhancement or cancer-prevention programs and little has been spent on efforts to reduce teenage smoking, which had been one of the main public causes associated with the MSA.≤∏∞ Indeed, a November 2006 joint report by the American Heart Association, the American Cancer Society, the American Lung Association, and the Campaign for Tobacco-Free Kids described the situation this way: ‘‘Since the November 1998 multi-state tobacco settlement, we have issued regular reports assessing whether the states

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are keeping their promise to use a significant portion of the settlement funds— expected to total $246 billion over 25 years—to attack the enormous public health problem posed by tobacco use in the United States. . . . In the current budget year, Fiscal Year 2007, only three states—Maine, Colorado, and Delaware—are funding tobacco prevention programs at CDC [Centers for Disease Control and Prevention] minimum levels.’’≤∏≤ How much did the states spend on tobacco cessation programs? In fiscal year 2006, the states were to collect $21.3 billion in settlement funds and tobacco taxes. To meet the CDC’s recommended expenditure levels, the states would have had to spend 7.5 percent of this on tobacco cessation programs. Collectively, the states appropriated only 2.8 percent of the $21.7 billion in tobacco-generated revenues for tobacco prevention programs.≤∏≥ If not on cessation programs, what is the money being spent on? In 2006 the GAO reported on fiscal year 2005 and expected fiscal year 2006 allocations made by the states, finding that in both years only 32 percent of the proceeds were allocated for health-related purposes.≤∏∂ The next-largest allocation (24 percent in fiscal year 2005 and 29 percent in fiscal year 2006) was for debt service on bonds issued for early spending in anticipation of the MSA revenues. (MSA payments that helped cover state budget shortfalls from 2000 to 2004 were reallocated, in part, for debt service on securitized funds in 2005 and 2006; these expenditures had little to do with smoking, Medicaid reimbursement, or health care.≤∏∑) The GAO found that 44 percent of the MSA revenues in fiscal 2004 were allocated to cover budget shortfalls; funds spent that year on health fell to just 20 percent of the proceeds. Indeed, since 1999 no more than 38 percent of the MSA proceeds have been allocated for health purposes in any year. The MSA episode is rooted in a centuries-long story of tobacco regulation and struggles by different interest groups to gain in the process. Along the way, every possible form of regulation emerged at every level of government. As new knowledge about tobacco evolved and the stake for interest groups grew, the regulation debate intensified, ultimately becoming a national litigation struggle that delivered the MSA.

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What Have We Learned?

We have covered much ground since we introduced regulation-bylitigation and described the public-choice and economic logic we would use to illuminate the book’s three case studies. Along the way, we focused on the regulator’s dilemma, noting the difficulties regulators face when seeking to serve the public interest. We also discussed the choice of methods available to politicians and regulators. Making a decision to regulate is just the first step. Once embarked on a regulatory path, the decision maker must select the instrument to use. Will it be regulation-by-rulemaking? Will the regulator seek to negotiate a regulatory outcome? Or will the regulator allow lawyers to sue and embody forward-looking industry regulation in the final settlement? Does the choice affect the outcome, or will the outcome be the same regardless of the path chosen? Does it really matter which regulatory instrument is chosen? Of course, we realize that we have framed the choice problem in a highly stylized way. Most regulatory decisions are not so crisp. The approach taken follows a winding path as particular regulations evolve, with regulators responding to political and economic forces conditioned by institutional constraints that set limits on different legal processes. The three case studies we chose for in-depth discussion were selected with a good bit of care. We wanted to consider cases that had substantial economic or industry effects. We wanted cases with a sizable record so that we could probe

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the data and highlight the power of public-choice analysis to provide logical explanations for actions taken, their turns, and timing. And we wanted three cases that were distinctive, in both the primary movers in the regulatory undertaking that emerged and in the final form that regulation-by-litigation took. We hope you agree that we were at least successful in selecting cases that satisfied those three goals. Now, for those who have made it this far, we provide a brief summary of each case, highlighting the public-choice interpretation and offering one last critique of the outcomes. We then conclude with an assessment of the role of regulation-by-litigation and some policy suggestions to avoid the problems we have uncovered.

Heavy-Duty Diesel Engines The diesel-engine case illustrates how a federal regulatory agency fully engaged with an industry chooses to obtain regulation-by-litigation instead of using its regulation-by-rulemaking powers to accomplish a similar goal. The public-choice diesel-engine story reduces to the following: 1. The EPA issues annual permits that certify diesel engines for the U.S. market. Without permits, a producer cannot sell engines. The U.S. market is always at risk for producers. EPA holds trumps—the EPA’s ability to deny certification threatens any manufacturer with a catastrophic outcome that they must avoid at all costs. 2. There were only a few major U.S. diesel-engine producers; the litigation target was small in number. The cost to be imposed could be spread over a huge consumer base that was not well organized politically. The regulatory opportunity was ripe for getting concentrated regulatory benefits with costs spread widely across the economy. 3. Unlike the EPA staff in the regulation unit, those in the enforcement division—the litigators—have no ongoing relationship with the regulated industry. The litigators have no incentive to take the sort of long-run view that often tempers the wild spirits that might otherwise inspire a regulator to take extreme actions. 4. When altering engine emission standards, the agency was constrained by federal statute; a four-year lead time was required for altering emissions standards. The agency needed faster action. Faster action could not be obtained by rulemaking. 5. Faster action was needed because of errors in the agency’s air-quality model and the model’s inability to accurately forecast outcomes based on emissions standards and transportation and industry activity. When forecast met reality, reality trumped. The ambient level of NOx in northeastern states far exceeded the predicted amount, which placed those states in

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6.

7.

8.

9.

10.

jeopardy of having tough penalties imposed. The EPA was not strong enough politically to sustain the pressures that would follow a widespread assignment of nonattainment status without being able to offer some hope to the nonattainment regions. Litigation was favored for another reason: a presidential election would take place soon. Regulations in the pipeline could be reversed by a new administration; positions taken in court would be harder to reverse. Improvements in air quality could be obtained several ways. Emissions controls could be tightened for some combination of stationary and mobile sources, and each could be tightened in varying degrees. Stationary-source regulations were already severe; the incremental cost of getting additional reductions was relatively high. Automobile emissions standards were so tight that hardly any gains were available from further tightening. Heavyduty diesel engines were the low-hanging fruit. New regulations could produce improvements in emissions, but the improvements would be slow to appear, as the life cycle of heavy-duty diesel engines is a long one. Rulemaking could not solve the EPA’s immediate problem. The EPA had nothing to offer manufacturers in negotiations, as it needed immediate, expensive changes in emissions from heavy-duty trucks. Time to adjust to new standards would delay the solution of the ozone and particulate problems. Negotiation could not solve the EPA’s immediate problem. Litigation offered the fastest changes in emissions. But success in obtaining the regulatory settlement that occurred did not automatically mean success in obtaining cleaner air. Two problems remained. First, the settlement applied only to domestic engine producers. Foreign producers could and did ship engines to the U.S. market. As a result, the population of dirty engines increased. Second, domestic purchasers of new trucks could and did prebuy. The prebuy magnitude was large, and the population of dirty engines increased. For a period of time, air quality deteriorated. It cannot be determined if, at the end of the story, the EPA’s regulation-by-litigation actually improved the air relative to what might have happened under regulation-by-rulemaking.

Considering these key points, we can make a final assessment of the diesel story. The cost imposed on the economy by the litigation was not trivial. The engine producers paid large fines, which transferred wealth from their shareholders and customers to U.S. taxpayers. Trucking companies engaged in a significant prebuy effort and altered their new-truck purchase patterns, which increased their costs. This in turn increased the cost of moving goods in the U.S. economy. Finally, and in our view most importantly, the episode denied affected parties the due process that could have been obtained through

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regulation-by-rulemaking. Regulation-by-litigation strengthened the already strong hand of the regulator. The relative strength of the isolated purchasers of trucks and engines—the consumer—was weakened. On a net basis, the episode was costly for the U.S. economy and eroded the protections that rulemaking normally affords U.S. citizens. Yet we cannot conclude that anyone outside the agency, including the environment itself, gained by the event. We believe that regulation-by-rulemaking would have been a superior alternative to regulation-by-litigation.

Silica and Asbestos The long history of litigation related to the human health effects of exposure to silica dust and asbestos illustrates how private litigation sometimes turns into regulation-by-litigation and sometimes does not. The first phase tells how the growing incidence of workplace injuries led first to an explosion of tort actions and then to the development of workers’ compensation programs. The second phase of the story involves asbestos and an accumulation of individual suits followed by mass tort litigation that led to the demise of an entire industry and thus to regulation of that industry via bankruptcy and settlements. The third phase involves a buildup of a large and specialized litigation industry that became focused on suits involving silicosis and the related industries and firms. Again, the litigation engine began to drive a process involving tens of thousands of claims represented by a few highly specialized law firms. Ultimately, of course, the scope of the litigation involved hundreds of thousands of plaintiffs and defendants. And ultimately, the process led to regulation-by-litigation. The public-choice silica- and asbestos-litigation story reduces to the following: 1. Worker exposure to harmful dusts accelerated in the late nineteenth and early twentieth centuries with the economy’s industrialization and, importantly, with the development of new technologies that gave workers greater power in drilling, grinding, cutting, and polishing hard, gritty materials. With more powerful technology came finer and more harmful dust particles. 2. A fundamental knowledge problem existed. Harm to human health from silica and other abrasive dusts, except in extreme cases, has a long gestation period. Medical science, like any science, can move only as fast as accumulated data allow. With decades-long gestation, the linkage to the cause of harm is difficult to establish. As knowledge accrued, additional players began to take action on dust hazards.

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What Have We Learned? 3. Health interest groups and lobbying organizations emerged in the early twentieth century with recognition of workplace health hazards. These trends produced state factory regulation, including the adoption of workers’ compensation plans. Marketplace pressures from insurance companies drove increased interest in understanding and preventing workplace health hazards. World War I production demands brought greater demand for improved industrial hygiene. 4. By 1920, health interest groups, labor organizations, state workplace regulation, new medical knowledge, and workers compensation plans were in place. The prosperous economy reduced interest by unions, workers, and employers in addressing dust hazards, however. 5. The Great Depression shocked the economy, displaced the industrial workforce, and generated a huge jobless population. Thousands of lawsuits over work-related illnesses were filed. By 1934, more than $1 billion in silicosis suits were pending, threatening the financial viability of employers and insurers. A high-profile industrial disaster provoked federal interest, with the threat of federal regulation. After political debate sparked by the litigation crisis, silicosis was added to the workers’ compensation system, and silicosis suits came to an end. 6. The increasing use of asbestos produced a similar disease footprint in the late 1960s and early 1970s. Innovative lawyers discovered a means around the workers’ compensation exclusive-remedy bar by persuading the Fifth Circuit to allow suits against suppliers. Other entrepreneurial lawyers discovered the ‘‘massing up’’ technique that allows them to raise the stakes so high that companies are willing to accept an administrative settlement rather than risk a catastrophic defeat in court. The use of asbestos was sufficiently widespread that the supply of both plaintiffs and defendants was virtually inexhaustible. By the mid-1970s, there were 850,000 individual claimants suing 8,400 defendants. 7. The major litigators are repeat players, which, together with the catastrophic risk to the defendants, allowed the creation of standing settlement agreements with all the elements well known to the repeat players. The specialized asbestos bar flourished. With growing specialization and litigation expertise, the asbestos bar expanded the range of asbestos-related claims it would litigate and found low-cost jurisdictions for bringing suits. Mass tort suits expanded. Suits involving tens of thousands of individual claimants were settled. 8. Asbestos litigation, which generated litigation costs of over $200 billion and a specialized private-litigation industry, led to the withdrawal of asbestos from the marketplace. The size of the asbestos plaintiffs’ massed claims allowed asbestos lawyers to threaten defendants with bankruptcy and to control creditors’ committees in bankruptcy proceedings. The result was the creation of a social-welfare system effectively designed by

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plaintiffs’ lawyers for virtually anyone who worked in a job where there was any asbestos exposure. 9. The asbestos plaintiffs’ lawyers invested heavily in the technology of diagnosing and settling masses of lung-disease cases. The asbestos apparatus can be cheaply redeployed to silica-dust exposure and silicosis. Thousands of new lawsuits have been filed, and the asbestos-litigation machine has transformed itself into a silica-litigation machine. 10. The coincidence of the assignment of thousands of claims to a medically sophisticated federal judge and the procedural posture created by pending motions revealed potential fraud relating to the mass screenings and diagnosis of silicosis claims. This has led to a breakdown of the mass suit process and may stall the further expansion of silica litigation.

What can we conclude about the silica and asbestos episodes? There are two important elements that emerge from the three ‘‘dust’’ stories. First, an explosion of civil suits relating to a common injury or claim can result in the invention of new institutions that reduce the overall cost of living in a high-risk environment. Rapid industrialization led to increased exposure to workplace hazards and injuries and, at the same time, increased average income. Higher incomes provide a basis for supporting new institutions that may reduce the cost of managing new risks. Without the litigation component, workers’ compensation likely would not have emerged when it did. The silica suits in the 1930s produced a signal to the political system, and the political system responded. Of course, the solution was not perfect, reflecting the horse trading that is an inevitable part of politics. It was, however, legitimate. It reflected the results of a political process in which accountable individuals took action to address a problem. Second, the rise of a highly specialized litigation industry represents a critical difference between the stories. The first wave of silica suits did not produce one; the asbestos suits, however, did, and the asbestos plaintiffs’ bar produced the second wave of silica suits. What was different? One key difference was the more flexible nature of the legal system in the 1970s compared with that in the 1930s. In the 1970s it was possible not only to create the new legal doctrines that avoided both the traditional tort rules and the workers’ compensation exclusivity provisions that blocked asbestos suits against employers but also to innovate in creating procedures to allow the ‘‘massing up’’ of claims. Once the asbestos plaintiffs’ bar discovered how to create conditions in which settlements became an economic necessity, it was able to convert the litigation into a privately ordered transfer of wealth with only minimal oversight by the courts. Because the lawyers received a substantial cut of the transfers, a new interest group was born. Like good entrepreneurs, the asbestos bar hunted for new

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investment opportunities and found them in silica (and tobacco, as we discuss below). Mass tort activities generated a form of regulation. When litigators represent tens of thousands of claims involving virtually every firm in an industry, litigation success can lead to a bankrupt industry. Bankrupt firms are not a desirable outcome. Restructured and reorganized bankrupt firms may be. Winning litigators can find themselves in the novel position of quasi managers of a post-bankruptcy industry. In a similar way, winning litigators can be a force that affects future labor contracts, insurance policies, and marketing practices. How do we assess these experiences with harmful industrial dusts in terms of benefits and costs as best they can be reckoned? Did the litigation, as costly as it may have been, lead to an outcome that reduced social and private costs? We believe that the first silica story is one that produced a positive outcome. Litigation triggered the political process to expand workers’ compensation laws across the states. Critically, the solutions that emerged did so at the state level in a competitive federal system. People and firms can vote with their feet in selecting places to live and work. The legal environment for dealing with worker illnesses and injuries is one of many important elements of choice when selecting locations. The regulation that resulted from the first wave of silica is competitive regulation among jurisdictions, a key limit to prevent regulation from going too far astray. We are not able to reach the same happy conclusion for the asbestos story. Again an industrial health problem produced litigation. This time, however, rather than provoking a political settlement, courts repeatedly innovated substantively and procedurally in an effort to find a solution to the problem. Unfortunately, the innovations weakened the adversarial nature of the system, allowing the ‘‘massing up’’ of claims and the emergence of the routine settlement of asbestos claims. The litigation engine spread claims throughout the economy and drove many asbestos-affected firms to the wall, following them into bankruptcy. Regulation-by-litigation followed, as defendants surrendered rather than contest claims. We are convinced that a better outcome could have emerged to deal with asbestos claims if the 1930s pattern had been repeated. One form of a better result would have been a specialized workers’ compensation program for asbestos, partially funded by the federal government because of its involvement in creating and concealing asbestos hazards in shipyards, and based on medical standards for screening asbestos claims, with a schedule of payments to be applied administratively. The rise of the asbestos plaintiffs’ bar created an interest group with the resources to block a political solution.

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The second wave of silica suits illustrates the dangers of entrepreneurially driven regulation-by-litigation. What appears in retrospect to have been massive fraud was uncovered through the happenstance of the assignment of a medically sophisticated judge to an MDL proceeding with a procedural posture that allowed discovery on the substantive medical issues. One policy question is how to build the expertise and procedural posture of the proceedings that were before Judge Jack into the tort system. Tort-reform advocates have a long laundry list of proposals that might reduce the chance of an asbestos or modern silica outcome. Many of these likely have some merit. For example, the English rule on attorneys’ fees would no doubt make ‘‘the next asbestos’’ less likely to emerge. But these tort reforms also have costs, reducing access to the legal system for everyone, not just for the fraudulent claimant. To some extent, the lesson of the two waves of silica suits and asbestos is not that we need additional reforms but that we need to undo some of the past reforms. The first wave of silica suits provoked the political system to respond because the litigation overwhelmed the courts and gave everyone an interest in resolving the problems outside of litigation. Asbestos did not provoke a similar response because the legal system created the mass asbestos action before the political pressures yielded action. Even worse, asbestos produced a well-funded repeat player, the asbestos plaintiffs’ bar. Although it is tempting to regard the rise of resource-rich plaintiffs’ firms as simply ‘‘leveling the playing field’’ with the defense bar, the appropriate analogy is not of a football game, where evenly matching the skill of the opposing teams produces a better game. A better analogy is the Great Plains, with its mix of predators and prey. Herds of defendants, fat with resources, graze the economic landscape. Occasionally one is ‘‘sickened’’ by liability, cut out of the herd by the predator litigators, and consumed. Balance exists. The rise of the asbestos plaintiffs’ bar is an event like the introduction of the rifle and hide hunters into Great Plains buffalo hunts. Mass extinction followed the rifle and the hide trade; the buffalo were replaced by more docile cattle, managed by cowboys. We risk turning productive sectors of the economy into cattle to be managed by litigators. How can we avoid an economic outcome analogous to the destruction of the buffalo? The second wave of silica suits was at least slowed by the discovery of the fraud through the use of the fact sheets in the MDL proceeding. Procedural reforms that require more data in mass tort suits and allow the market to provide services that can uncover fraud, such as central clearinghouses for data, can help. Restrictions on ‘‘massing up’’ claims would also reduce the ability of firms to create privately directed regulation-by-litigation. If there are ten thousand plaintiffs alleging injury from silica exposure in Mississippi, for

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example, the State of Mississippi has an obligation to provide the resources to offer those ten thousand plaintiffs a realistic trial date or to provide a reasonable alternative to litigation. Forcing mass torts back into the judicial system as individual tort suits could restore the signaling function of litigation served by the first wave of silica suits.

Tobacco Our first two case studies dealt with regulators (diesel) and private entrepreneurs (dust). The tobacco-settlement case study shows how the two can unite to cooperatively organize litigation to engage in regulation-by-litigation. Massive in its impact, the MSA set in motion a ‘‘taxing’’ scheme that will yield an estimated flow of $200 billion in total revenue to the states for many years to come while simultaneously imposing stringent conditions on how tobacco products are marketed in the United States. The MSA generated some $75 billion in legal fees for the private attorneys who assisted the industry prosecution, and it provided a cash buyout for tobacco farmers. The resulting MSAcreated cartel laid a foundation for a huge increase in tobacco profits. The public-choice tobacco story reduces to the following: 1. Tobacco has been controversial since its introduction in colonial times. Before the 1950s, antitobacco groups were largely ineffective, however. Tobacco interests had considerable political power, particularly at the federal level, through the seniority of tobacco-state senators and representatives. 2. Scientific evidence of the dangers of smoking began to appear in the 1950s, culminating in the 1964 surgeon general’s report. A variety of federal agencies initiated regulatory efforts concerning cigarette advertising, health warning labels, and public service announcements on networks that allowed cigarette advertising. However, the political power of the tobacco interests allowed them to form successful bootlegger-and-Baptist coalitions to ensure that the regulations benefited the industry. 3. The wealth of the tobacco companies regularly drew attacks by the plaintiffs’ bar. Tobacco won convincing victories in these suits, using a defense of consumer choice and assumption of risk. 4. Tobacco’s political power declined in the 1970s. Scientific evidence of the harms of smoking reduced the number of smokers. Increasing imports of tobacco reduced the number of ‘‘tobacco states.’’ When documents showing efforts to conceal the health effects became public as a result of whistleblowers and the creation of document archives by a few entrepreneurs, political support for tobacco interests declined further. The documents gave renewed hope to plaintiffs’ lawyers, who redoubled their assault on the industry. The assumption-of-risk defense remained potent, however.

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5. Entrepreneurial lawyers sought plaintiffs not subject to the assumption-ofrisk defense, and brought suits on behalf of groups exposed to secondhand smoke, applying lessons from earlier mass tort litigation to ‘‘mass up’’ a large number of low-value claims. 6. Other entrepreneurs joined forces with ambitious state attorneys general to bring suits seeking recovery from tobacco companies of publicly provided health-care expenditures spent on ill smokers. The private litigators brought expertise, capital, and drive. The attorneys general brought the appearance of a public purpose. 7. In the early 1990s, a new FDA commissioner, emboldened by the changing litigation environment, proposed action to subject cigarettes to FDA regulation. 8. With the FDA closing in from one direction and attorney-general suits and private litigation attacking from another, the tobacco industry sought peace and negotiated a compromise with the attorneys general and private litigators. This came in 1997 in the form of a proposed settlement presented to Congress for passage into law that would provide the states with money, grant the FDA limited jurisdiction over the industry, and give the industry immunity from further suits. The private litigators, attorneys general, and tobacco interests neglected to include in the deal sufficient benefits for Congress or the White House, however, and the proposed deal collapsed as the federal players raised the price for the tobacco industry and reduced the benefits provided by the deal. 9. A new deal among the state attorneys general, some of the private litigators, and the tobacco companies emerged instead. The 1998 MSA provided revenues to the states and allowed the tobacco companies to behave like a cartel in raising prices. The deal was enacted into law by the various state governments given the ‘‘take it or leave it’’ nature of the deal, which offered states a choice between, on the one hand, accepting the deal and, on the other, not receiving payments while still having higher cigarette prices imposed on their citizens to pay for the benefits for other states. 10. Health interest groups later denounced the MSA for preserving the tobacco companies’ ability to profit from the sale of cigarettes. Their ire was further raised by the diversion of MSA funds from antismoking programs into general revenue by most states. New firms were attracted to the cigarette industry and attempted to undermine the MSA provisions aimed at raising the costs of new entrants.

In light of the facts, what final assessment can we make of the MSA? Did it achieve its intended effect, which was to alter marketing practices, provide funds to states to offset health-care expenditures related to smoking and to support programs that would reduce teen smoking, and achieve other healthcare goals? There is no doubt that the MSA altered the marketing practices of cigarette producers. On supporting health-care and teen-smoking prevention,

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however, the evidence is clearly negative. Funds from the MSA have not been used significantly for those purposes. Our bottom-line assessment of the tobacco episode is negative. Given the historical complexities of tobacco regulation, the FDA’s inability to obtain regulatory jurisdiction, and the importance of preserving the freedom of consumers to purchase and consume legally sold products, we believe that the tobacco episode is a clear case of government failure, with the unsuccessful attempt to gain congressional approval of the 1997 proposed settlement the critical element of the failure. In short, taxation should be under the purview of the people’s elected representatives, and industry cartelization should be prevented by, not assisted by, the nation’s chief law-enforcement officers.

Theories of Regulation All three of our case studies support the use of a public-choice framework to understand regulators’ actions. The heavy-duty diesel story illustrates how regulatory externalities influence regulators’ choices of how to regulate, choices that have significant consequences for society at large. The dust stories show how the creation of an interest group changes the outcome. The tobacco story demonstrates how bootleggers and Baptists can manipulate the regulatory environment to their mutual benefit and to the detriment of the public at large. What are the consequences of adopting a public-choice framework? Viewing regulation through this particular lens does not mean that all regulatory efforts are illegitimate. It does mean that those with the responsibility of reviewing regulatory activity, from the courts to the public to the legislatures, must scrutinize regulators’ behavior carefully. Copious quantities of sunshine are an irreplaceable component of a healthy regulatory environment. Transparency, opportunities for comment and review, agency responses to comments, data availability—all of these are essential if we are to avoid blessing deals between bootleggers and Baptists that are masquerading as steps to advance the public interest. Unfortunately, all those features are largely missing from regulation-bylitigation. Rulemaking offers numerous opportunities for public input and scrutiny. Judicial review of agency action can play an important role in keeping agencies on the straight and narrow. And although we are skeptical of the magnitude of the claimed benefits of regulation-by-negotiation, that process adds to the opportunities for review instead of reducing them. These advantages come at a price, of course. Rulemaking’s procedures and judicial review mean that agencies are slower to respond to problems than they

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would be if left unconstrained. Avoiding those constraints by resorting to regulation-by-litigation is a powerful temptation for agencies trying to improve the public welfare, particularly where the constraints look like a political deal to protect a bad actor. The EPA needed reductions in NOx emissions to protect the public health. It couldn’t get those reductions via rulemaking. The engine manufacturers appeared to have been engaged in at least slightly dodgy behavior in their use of controllers. Workers with asbestosis were suffering terrible fates, and workers’ compensation awards were inadequate. Asbestos manufacturers had been less than open about the dangers of their products. The state attorneys general and FDA commissioner David Kessler were no doubt frustrated by tobacco’s ability to block regulatory activity (or worse, to reshape it to benefit the industry) through its influence in Congress and the White House over the years. In each of our three case studies, regulation-by-litigation was used to sidestep a constraint—the Clean Air Act’s lead-time rules, the workers’ compensation system, tobacco’s political power—that no doubt seemed to the well-meaning individuals involved to be an illegitimate constraint stopping them from accomplishing an important public-policy goal. Even when the litigation side step results in a positive outcome—and in each of these three cases we have outlined reasons to believe that the outcomes did not serve the public interest—we do not believe that regulation-by-litigation is appropriate. The constraints that frustrate would-be regulators, public or private, are the product of the political process. In a society governed by the rule of law, only the products of that process can claim the legitimacy necessary to justify overturning private decisions and imposing a regulatory solution. Politics is not pretty, but it is legitimate, and that makes all the difference. By sidestepping the political process, regulation-by-litigation loses legitimacy for its regulatory outcomes. Of course, sometimes this means that regulators will not be able to act when it might be better if they could. Given that the design of the American political system embodies the idea that avoiding type I errors is more important than avoiding type II errors, this result is inevitable.

Policy Proposals There are no simple fixes for the problems we have identified. Regulation-by-litigation is the result of agencies and other regulatory entrepreneurs avoiding constraints imposed through constitutions and statutes. Simply proposing a new hurdle may reduce the problem on the margins if the hurdle is sufficiently high, but unless the hurdle is a towering wall that stretches to the horizon, it will not eliminate the problem. There are ways to improve the outcomes, however. To enforce rules, agencies have to litigate. To protect their

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rights, individuals must be able to sue for damages when they are injured and for injunctive relief in a wide variety of circumstances. How do we separate legitimate enforcement and tort actions from regulation-by-litigation? We have three suggestions. MORE TRANSPARENCY ABOUT LITIGATION AND SETTLEMENTS BY REGULATORS

Regulation-by-litigation succeeds in part because it excludes from participation many individuals and firms affected by the regulatory portion of the settlements. This is dramatically illustrated in different ways by all three of our case studies. In the heavy-duty diesel story, engine and truck-transportation consumers were excluded from direct participation in the settlement discussions. Both groups could have offered important information about the impact of the settlement, as both did after the fact when asked to support the petitions for extensions of deadlines by some engine manufacturers. In the asbestos suits and the second wave of silica suits, there was no involvement by public officials in problems that touched every corner of the American economy. Recall Judge Jack’s observation that no public-health officials seemed aware of the silicosis crisis implied by the filing of thousands of suits in Mississippi. Contrast this with the response of public officials to the first wave of silica suits and the creation of occupational-disease coverage under workers’ compensation statutes. Finally, in the tobacco case, state officials without authority to set tax rates or regulate health matters created a national regulatory framework for cigarette sales. Aside from the dubious constitutionality of what is effectively a nationwide agreement without congressional approval as required under the compact clause, the MSA rode roughshod over the checks and balances in state governments. Relatively simple changes could get more information from affected groups into the record. Recall that the truck manufacturers attempted unsuccessfully to intervene in the diesel settlements. Proposed settlements could be given widespread publicity through the publication of proposed settlement agreements in the Federal Register, and standing rules for participation in settlement proceedings could be relaxed. Interest groups, from environmental groups to those more skeptical of government action, could be encouraged to file comments on proposed settlements, and the parties could be required to respond to the comments, much as agencies must respond to comments in rulemaking. In the short time since the diesel and tobacco settlements, the accessibility of information via electronic resources has expanded almost exponentially. Even accounting for the occasional crackpot, such transparency and functionality offers the possibility of more thoughtful and innovative

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regulations than those regulations hammered out via the print Federal Register in the not-so-distant past primarily by parties with vested interests. Blogs and the Internet can publicize issues (even ‘‘confidential’’ settlements) and mobilize vigilant citizens to act. Legislatures could engage in more aggressive oversight of litigation and settlements, regularly holding hearings on regulatory settlements at which public comment could be invited. The House Commerce Committee report Asleep at the Wheel, critical of the diesel litigation, demonstrates the value of congressional oversight. Similarly, it was the sunlight shone on the second wave of silica suits by Judge Jack’s opinion and the subsequent congressional hearings that has at least slowed, if not stopped, this effort to replicate the asbestos disaster in a new industry. Settlements of suits involving federal agencies could receive review by the Office of Information and Regulatory Affairs (OIRA), located within the Office of Management and Budget—just as regulations do now—ensuring that a repeat player was inserted in the process to examine the regulatory impacts. The OIRA’s comments could then be filed with the court charged with approving the settlement. Where regulation-by-litigation includes an element of cartel formation, as it did in the tobacco case, greater public exposure of the settlement details can help derail the underlying bargain. It seems trivial to suggest that settlement documents be made available in searchable and indexed form, that accurate summaries be prepared, or that widespread electronic distribution be required, but these are steps that would have been useful in uncovering the problematic nature of the MSA. Requiring FTC or Justice Department antitrust review of proposed settlements involving significant portions of industries, and the filing of the FTC and Justice Department comments with the reviewing court, would also help prevent cartel formation from being incorporated into a regulation created by litigation. Because state attorneys general are the primary enforcement agents for antitrust laws at the state level, either federal review or the appointment of an independent reviewer would be necessary if review was desired at the state level. Even when a cartel is not explicitly formed, greater accessibility can help. More public access would have likely drawn more attention to the consequences of the EPA’s actions in the heavy-duty diesel case, and had there been more public commentary, the EPA might have taken more seriously the problems raised by the prebuy. In the asbestos and silica litigation, the value of information can be seen both from the relatively slow development of knowledge about the extent of asbestos litigation and from the impact of collecting data on the plaintiffs’ diagnoses in the Texas MDL proceeding. Courts have considerable powers to

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address the types of abuses that occurred in these cases if they learn of the problems. Given the extent of the problems of regulation-by-litigation that we have documented, it appears anticlimactic to suggest that better collection of statistical data, made available to the public, is a key part of the solution, but more exposure is a critical part of solving the problem. REDUCE REGULATORS’ ABILITY TO THREATEN CATASTROPHIC OUTCOMES

Regulation-by-litigation cannot succeed unless the regulator can threaten the private parties with a sufficiently catastrophic outcome. In the diesel case, the EPA could threaten not to certify the next year’s engines unless the engine manufacturers agreed to settle the litigation on favorable terms. In the asbestos suits and the second wave of silica suits, the private attorneys perfected the ‘‘massing up’’ technique to threaten financial calamity. In the tobacco case, the combination of the state suits and the third wave of plaintiffs’ litigation meant that the industry risked its survival with each verdict. Reducing regulators’ ability to threaten catastrophes would make the regulated entities more likely to be able to resist efforts to impose regulation through litigation. Protecting firms against private would-be regulators requires restrictions on ‘‘massing up’’ suits. In the occupational-health area in particular, enforcing existing state rules on the use of diagnostic equipment such as mobile X-ray machines and requiring state medical authorities to exercise control over the ‘‘diagnosing’’ physicians would reduce the influx of individuals with dubious claims that enable the ‘‘massing up.’’ More generally, joinder rules could be made more restrictive, and devices like the fact sheets required in the silica MDL cases could be used to ensure that screening of meritless claims occurs early. Specifying a generic ‘‘silver bullet’’ solution is impossible because of the varied nature of the claims underlying regulation-by-litigation suits. Courts have tools, as Judge Jack demonstrated, to address problematic suits; the problem is getting courts to apply those tools. The asbestos litigation has being going on for decades, yet no serious efforts have been made to address the problems caused by the self-perpetuating litigation engine on the plaintiffs’ side. Indeed, the academic and media praise in the area has gone largely to ‘‘innovative’’ judges who attempt procedural innovations to speed the resolution of asbestos cases. Yet increasing the throughput of the litigation machine not only fails to address the underlying problems but actually may have worsened them by increasing the volume of cases the major plaintiffs’ firms could process. Protecting firms against public regulators is still more difficult. Two changes in policy could offer some protection. First, a shift from command-and-

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control to performance-based regulations would reduce the opportunities for regulators to apply pressure. If the engine manufacturers had been paying fees based on engine emissions, rather than seeking a permit to sell engines, most of the controversies over the AECDs, pull ahead, and controllers would have been beside the point. Regulation-by-litigation is harder to sustain when there are fewer potential rewards for regulators to offer via the settlements. Second, to the extent that a command-and-control approach remains in place, an explicit presumption that prior regulatory approval of a particular technology constitutes an approval of the technology would prevent the changes in regulatory interpretation despite prior approvals that took place in the diesel case. The courts have been reluctant to apply collateral-estoppel theories against the government in regulatory contexts; being more willing to do so could help reduce regulation-by-litigation by narrowing the government’s ability to coerce settlements. RESTRICT THE OPPORTUNITIES FOR CASH TRANSFERS

One important lure of regulation-by-litigation is that it offers regulators, both public and private, the opportunity to demand substantial cash transfers as part of the deal. The attractiveness of these transfers could be reduced through a general rule that all such cash transfers must be turned over to the legislature for allocation through the normal appropriations process. This rule would undercut regulators’ ability to claim a public-interest purpose for their litigation, as occurred with the attorney-general tobacco litigation, and would recognize the reality that promises made in the settlement process about how the money will be spent are not binding. If nothing else, this rule would decrease the likelihood that Baptists would bless certain coalitions with bootleggers. Certainly the health interest groups would have opposed the MSA more vigorously if they knew in 1998 that states would divert the MSA payments away from health programs and into general revenue. The cash available plays a key role in attracting private litigators into regulatory roles. Perhaps the single most surprising fact to us about the asbestos disaster is that the share of dollars that goes to the plaintiffs’ bar has not declined over time, despite the evolution of asbestos suits from risky lawsuits into a routine, administrative process, even as the share to the defense bar has declined substantially. There are no easy answers here. Attorneys, even the ones we do not like, deserve compensation for their efforts. But there are two steps that might reduce the attractiveness of regulation-by-litigation to the private bar. First, where private attorneys work with governments, there needs to be much greater transparency in fee arrangements. Not only should the contracts

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between governments and law firms be available for public inspection, but competitive bidding—rather than the cozy political deals that occurred in many states in the tobacco litigation—should be used to award contracts. The information on the contracts should include estimates of the hourly rate and total fees to be awarded, with parties subject to the same principle of disclosure as that used under the federal truth-in-lending statute and regulations for consumer loans. Moreover, the legislature, not the agency, should have final approval of the fee arrangements, and a public, recorded vote on approval should be required. In addition, courts should closely scrutinize fees in settlements, including appointing special masters to review the details of billing arrangements, such as the adequacy of billing records. Federal and state courts have considerable experience with awards of attorneys’ fees, and that experience should be used to keep fee awards proportional to the actual work performed and risk borne by the plaintiffs’ attorneys. Second, where private attorneys engage in regulation-by-litigation on their own, the massive cash transfers that result have the unfortunate effect of creating an interest group capable of blocking a public response to the signal sent by mass litigation. As we indicated in chapter 5, this explains why asbestos litigation did not follow the example of the first wave of silica suits and produce a negotiated solution. No global solution suggests itself, and we must fall back on a call for transparency. Courts could exercise substantially more control over their dockets, including attorneys’ fees awards, and insist on ensuring that more of the money finds its way to injured individuals and less to attorneys. Legislatures could hold hearings to document the costs of private efforts at regulation-by-litigation, as a subcommittee of the House Commerce Committee did in the second wave of silica suits. Once the asbestos suits became routine, for example, light should have been shone on the lack of an adjustment in the fees paid to the plaintiffs’ bar.

The Future of Regulation-by-Litigation Does regulation-by-litigation have a future? Unfortunately, we think so. It is hard to see why, once agencies and entrepreneurial private attorneys discovered the rewards of using litigation to regulate, they would abandon the tool. Regulation-by-litigation is possible, however, only under limited conditions. First, the defendants must be a concentrated group to enable regulation to be effective without the transaction costs of the multiple lawsuits making the effort too expensive. A small number of firms constituted the entire domestic heavy-duty diesel-engine market, and only a small number of firms produced virtually all the cigarettes sold in the United States. Asbestos suppliers, the

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initial target of those suits, were also a small group. Second, the would-be regulator-by-litigation must be able to coerce a settlement by threatening a catastrophic outcome. Third, the ultimate deal must protect the settling firms against new entrants who could otherwise undercut the settlors on price because they are not bound by the regulation imposed through litigation. This last condition offers the one hope for limiting regulation-by-litigation. Regulatory outcomes can be the result of bootleggers-and-Baptists coalitions, as with tobacco and the MSA; can be imposed on the regulated with little benefit to them, as in the heavy-duty diesel case; or can be pure rent seeking, as in the asbestos suits and the second wave of silica suits. In every case, however, the deals would be less attractive to the regulated if new entrants could seize market share from the entities regulated as a result of the regulation-bylitigation. Indeed, such challenges may ultimately undermine the MSA. Legislatures and courts can prevent the evolution of enforcement and tort suits into regulation by refusing to approve settlement provisions designed to prevent entry into settling industries. The three of us may not have ‘‘The Solution’’ to regulation-by-litigation’s flaws, but we are confident that an important aspect of the solution is to promote greater discussion of the phenomenon, a key reason we wrote this book. We are optimistic that a thoughtful conversation about regulation-bylitigation among those who agree with us that it is problematic and those who disagree will contribute toward developing measures that address the features that are most troublesome. Ultimately, preventing regulation-by-litigation’s harmful aspects from spreading requires more of the same things in short supply in government generally: transparency, the public interest, and a willingness to put self-interest aside for the greater good. In chapter 2, we noted Professor Stroup’s observation that good government is the ultimate public good. Unfortunately, we know that public goods are underprovided in the marketplace. We are left, therefore, with Thomas Jefferson’s injunction: ‘‘The price of freedom is eternal vigilance.’’

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Notes

Chapter One: Introduction 1. Among the results of our regulation-by-litigation project are works by Yandle, Morriss, and Kosnik (2002); Yandle and Morriss (2004); and Morriss, Yandle, and Dorchak (2004, 2005). 2. Public-choice analysis was pioneered by James M. Buchanan, a Nobel laureate in economics, and Gordon Tullock. See generally Buchanan and Tullock (1962); M. Olson (1965). For a comprehensive survey of public-choice analysis, see Mueller (2003), and for an important addition to the body of literature, see Buchanan, Tollison, and Tullock (1980). 3. Bernstein (1955); Kolko (1963). 4. The seminal work on the topic is found in Buchanan, Tollison, and Tullock’s book (1980). 5. Ackerman and Hassler (1981). 6. Scrubbers are massive machines whose operations can require 10 percent of the energy produced in a typical coal-fired plant. 7. Motor Carrier Act of 1935, 49 Stat. 543. 8. Felton and Anderson (1989, 10). 9. Stigler (1971). 10. F. McChesney (1991). 11. F. McChesney (1991) applies his logic to an early FTC effort to regulate funeral homes and used-car dealers, two highly fragmented industries that had never been subject to federal regulation.

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12. Yandle (1983). 13. Boudreaux and Pritchard (1994). 14. Gifford (1997, 66). 15. Boudreaux and Pritchard (1994). 16. Skrzyeki (2000, C1). 17. Meckler and Lundegaard (2005, B1). The report notes that charts prepared by the administration to illustrate the effects of the rules demonstrated particular aid to General Motors, which had the most trouble meeting the then current standard. 18. Carney (2006). 19. Kaufman (2003, A3).

Chapter Two: The Regulator’s Dilemma 1. The literature is enormous, and we will not attempt to survey it comprehensively. For a recent critique of cost-benefit analysis, see Driesen (2006). For clear (if qualified) defenses, see Sunstein (2002) and Adler and Posner (1999). 2. See American Textile Manufacturers Institute, Inc. v. Donovan, 463 U.S. 29 (1983); Industrial Union Department, AFL-CIO v. American Petroleum Institute, 448 U.S. 607 (1981). 3. See Layard and Glaister (2005) for an overview of the technical issues involved in conducting a cost-benefit analysis. 4. Law professors Louis Kaplow and Steven Shavell, two leading law-and-economics scholars, make this point clearly in their article Fairness Versus Welfare, in which they note that if we do care about saving lives and reducing pain, there is a virtue in formal policy analysis being explicit about the valuations to be used. If tradeoffs are to be made consistently—which is necessary if one wishes, for example, to save more rather than fewer lives—one must know what those tradeoffs are. The now-familiar example is that some government regulations save a statistical life at costs of a hundred thousand dollars and others at costs in the billions; if the regulations were rationalized to use a consistent implicit valuation and if they continued to require the expenditure of the same total amount of resources, many more lives would be saved. The reason is that reallocating expenditures from places where they have a very low payoff in terms of saving lives to places where they have a very high payoff will greatly increase the number of lives saved. The use of seemingly coldhearted language in academic papers and technical reports, written and read primarily by experts who analyze such problems, would have to count as a huge social detriment per se to outweigh these benefits. Kaplow and Shavell (2001, 1369) (citations omitted). 5. See Coase (1960). 6. The canonical work on this issue is by Komesar (1994). Komesar (21) notes that ‘‘our question is not whether market performance improves or deteriorates with larger number of parties, but rather whether the market works better or worse than the courts.’’ 7. Stroup (2000).

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8. Ruhl and Salzman (2003, 760) note that ‘‘the most prevalent alleged rule defect’’ is that ‘‘total costs to society exceed total benefits.’’ 9. GAO (2000b). For a general historical analysis of sugar programs, see Monahan (1992). 10. See Yandle (1997). 11. Riggs and Yandle (1997) discuss this issue. See also Morriss, Yandle, and Meiners (2001/2002). 12. Hayek (1945). More recently, Sowell (1996) examined the problems of dispersed knowledge. 13. The cooperation between the U.S. and Canadian governments over Great Lakes water quality, via the International Joint Commission established by the 1909 Boundary Waters Treaty, 36 Stat. 2448 (1909), is an excellent example of early cooperation outside the framework of the Clean Water Act. See also Ceplo and Yandle (1997) (discussing prefederal experience in the United States). 14. See Ceplo and Yandle (1997); Riggs and Yandle (1997). 15. We note that defining the ‘‘collective good’’ is also an unresolved problem. Should regulators act only when they can bring about Pareto improvements? Or does the looser restraint of Kaldor-Hicks optimality suffice? Or are actions justified when particularly deserving groups or individuals benefit despite net losses overall? 16. Funk (1997, 1379). 17. Professor Jonathan Cannon (2001, 10,943) describes how Democratic Congresses used their oversight power to force Republican EPA officials to be more aggressive: ‘‘ ‘Beating up on EPA’ is a tradition on Capitol Hill. The Agency is within the jurisdiction of some 90 congressional committees and subcommittees. Agency officials appear in hearings before those committees and subcommittees dozens of times during each Congress, in addition to responding to extensive requests for documents, submitting congressionally mandated reports, and attending informal meetings with members or congressional staff. The hearings have often been used to chastise and correct Agency officials.’’ 18. Pedersen (2001, 1086 n. 49) discusses agency forcing. More generally, Lazarus (1991, 320, 341) sums up the reauthorizations of the major environmental laws between 1977 and 1990 as overall providing less EPA discretion, more deadlines, and more prescription with the goal of minimizing ‘‘the possibility of bureaucratic neglect and compromise and of agency capture by regulated industry.’’ 19. Courts generally grant agencies substantial discretion in determining when to regulate. Aside from any formalities involved in rejecting a petition to regulate in a particular area, agencies need do little when they opt not to regulate. Aman and Mayton (1993, 379) note that ‘‘[f ]or various reasons . . . courts will act only sparingly to compel agency action.’’ In environmental law, some statutes have provisions for citizen suits against agencies to force action, although these have led to considerable confusion in case law over when an agency can be sued for refusing to act. See Selmi (1996). 20. Many statutes have action-forcing provisions and citizen-suit provisions to facilitate this behavior. Adler (2001, 41–51) describes the use of such provisions. A good example of Congress forcing an action is its direct specification of a maximum nitrogen oxide level for model year 1998 and later heavy-duty trucks. 42 U.S.C. § 7521(a)(3)(B)(ii). 21. Sierra Club v. Ruckelshaus, 344 F. Supp. 253 (D.D.C. 1972), aff’d, 4 Env’t Rep.

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Cas. (BNA) 1815 (D.C. Cir. 1972), aff’d sub nom. Fri v. Sierra Club, 412 U.S. 541 (1973). For a history of the PSD issue in the courts and Congress, see Oren (1988, 10–13) and Hines (1977, 664–668). NRDC v. Callaway, 392 F. Supp. 685 (D.D.C. 1975). 22. Massachusetts v. EPA, 127 S. Ct. 1438 (2007). See Morriss (2007) for an interestgroup-based analysis of this opinion. 23. We say the statutes were ambiguous because the agency’s first interpretation was that the program was not required by the statute, but the courts then determined that the programs were required. Although this could be because the court made an error and read a statute that unambiguously did not require agency action to require agency action, since we are not trying to explain the behavior of courts, we will not enter into a debate over whether the courts were correct in their reading of the statutes. Thus ‘‘ambiguous’’ is a broad term, referring to cases in which courts read statutes differently from agencies. The ambiguity can be seen from the D.C. Circuit’s affirmance of the lower court without an opinion and the Supreme Court’s affirmance without opinion of the D.C. Circuit because it was equally divided. Sierra Club v. Ruckelshaus, 344 F. Supp. 253 (D.D.C. 1972), aff’d, 4 Env’t Rep. Cas. (BNA) 1815 (D.C. Cir. 1972), aff’d sub nom. Fri v. Sierra Club, 412 U.S. 541 (1973). Hines, who is sympathetic to the PSD program, notes (1977, 667) that ‘‘the Sierra Club decision appears not to be sustainable on normal principles governing judicial review of legislative and agency actions.’’ 24. In the wetlands case, a federal district court ruled that the term ‘‘navigable waters’’ includes wetlands even where they are not navigable. NRDC v. Callaway, 392 F. Supp. 685 (D.D.C. 1975). (For a summary of the debate over the reasonableness of this opinion, see Adler (1999, 25–26).) The Army Corps of Engineers declined to appeal and proceeded to exercise the jurisdiction the district court had granted it. Adler (1999, 25). 25. For a discussion of the politics of the PSD issue, see Oren (1988, 10–13). Hines (1977, 663) notes that the EPA had initially given ‘‘strong testimony in favor of a federal nondegradation policy’’ before the 1970 Clean Air Amendments but abandoned that position. 26. Adler (1999, 19–20) notes that ‘‘for many decades it was active government policy to destroy wetlands.’’ 27. McNollgast (1999) explains the origins of the APA in public-choice terms. 28. DeShazo and Freeman (2003) provide a comprehensive analysis of the principalagent relationship between Congress and agencies and how committees can (and cannot) resolve the problem. 29. Morriss and Stewart (2007). 30. Yandle and Buck (2002). 31. Ackerman and Hassler (1981) document this in detail. 32. Remember, we specified that we do not know if b-kryptonite is harmful or not. We call regulation of b-kryptonite ‘‘overregulation’’ because the justification of regulation rests on the studies linking the harm to a-kryptonite. 33. See Jasanoff (1995, 120–121) and Barth (1980, 28–29), who describe issues in epidemiological studies. Goldstein and Henifin (2000, 406–409) describe the assumptions in extrapolating data from animal studies to assess human health risks. Green, Freedman, and Gordis (2000, 346) discuss the disadvantages of animal toxicity studies for assessing human health risks. Although his article is somewhat dated, Krages (1987)

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gives a thorough analysis of potential reliability problems with animal studies. The costs of animal studies are measured in the hundreds of thousands of dollars. Krages (1987, 234 n. 25). 34. This principle can also be seen in operation in the regulation of drugs. See Derzko (2005, 216–217). 35. The legal system’s difficulties with science in the silicon breast-implant cases is chronicled in Walker and Monahan’s article (2000, 803–807). 36. One interest group’s improvement is another’s disaster, of course. At a minimum, increasing the benefits without increasing the costs or decreasing the costs without decreasing the benefits should count as ‘‘improvements’’ under any metric. 37. Of course, employers may also have moral reasons to wish to provide a safe work environment. It is curious that those who readily attribute benevolence to governments and recoil from the public-choice assumption that self-interest guides politicians and bureaucrats rarely concede even an enlightened version of self-interest to those involved in private enterprise. 38. See Becker (1975, 15–44). 39. Professor Christopher Sellers, no apologist for corporate America, noted that corporate interest in industrial medicine soared during labor shortages after World War I, as a means of reducing turnover. Sellers (1997, 145). 40. Smith (1776, 117–118); Hersch and Viscusi (1990). 41. For example, Sellers (1993, 235) notes that ‘‘mining and railroad companies recognized particular health hazards associated with their industries many years before the turn of the [twentieth] century and began hiring their own physicians to treat employees.’’ 42. Sellers (1993, 237–238). 43. Barth (1980, 53) quotes workers in Anaconda, Montana, who, when informed of the risk of arsenic poisoning from copper smelter work, continue to work there because ‘‘What bothers me is not what happens twenty years from now, but how I feed my kids tomorrow.’’ Similarly, Witt (2004, 32) notes that ‘‘an important obstacle to workplace safety [in the early twentieth century] was the persistent and usually irrational optimism that workingmen seemed to bring to estimations of the risks they faced.’’ 44. McGarity and Shapiro (1993, 17) argue that ‘‘the history of occupational safety and health regulation is as much a story about workers seeking government help in adjusting the balance of power in the employer-employee relationship as it is a chronology of scientific discoveries concerning the cause and prevention of workplace injuries and diseases.’’ 45. For example, the Mine Safety and Health Administration’s hazard communication standards are premised on a concern that in the absence of regulation, ‘‘many operators and miners are not as aware of the presence and nature of hazardous chemicals as they should be.’’ Hazard Communication (HazCom), 67 Fed. Reg. 42,314 (June 21, 2002). 46. Viscusi, Vernon, and Harrington (2000, 794). Sellers (1997, 114) concludes that ‘‘[t]he compensation systems not only helped spur the new round of corporate medical hiring, they also attuned many more managers and owners to what some of their number had already realized: that corporate doctors, if properly employed, could have a measurable effect on the bottom line.’’ 47. Viscusi, Vernon, and Harrington (2000, 794); Barth (1980, 61).

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48. Viscusi, Vernon, and Harrington (2000, 794). 49. Viscusi, Vernon, and Harrington (2000, 794). 50. Abraham (1990, 838). 51. They do not compete in North Dakota, Ohio, Washington, West Virginia, or Wyoming, where the state operates a monopoly insurer. Demeritt and Guppy (2004). 52. Of course, there is always the chance to try again in the next legislative session or the next time the agency considers the topic. Politics is a dynamic process.

Chapter Three: Modes of Regulation 1. Private regulatory entrepreneurs either must convince a public-sector actor to regulate or must litigate. 2. This is illustrated by the D.C. Circuit’s opinion in National Petroleum Refiners Association v. FTC, 482 F.2d 672 (D.C. Cir. 1973), cert. denied, 415 U.S. 951 (1974), and the Supreme Court’s multiple opinions in NLRB v. Wyman-Gordon Co., 394 U.S. 759 (1969). See also Diver (1981); Scalia (1981). 3. On notice, see 5 U.S.C. § 553(b), requiring that general notice be published in the Federal Register; 5 U.S.C. § 553(c), requiring a ‘‘concise general statement of a basis and purpose’’ for rulemaking; and Aman and Mayton (1993, 51–54). On comments, see 5 U.S.C. § 553(c), providing that ‘‘the agency shall give interested persons an opportunity to participate in the rulemaking through submission of written data, views, or arguments,’’ and Aman and Mayton (1993, 58–63). On the final notice, see Associated Industries of N.Y. State, Inc. v. U.S. Department of Labor, 487 F.2d 342 (2d Cir. 1973), holding that where agency action was challenged in comments on ‘‘substantial’’ grounds, the agency ‘‘has the burden of offering some reasoned explanation,’’ and Aman and Mayton (1993, 56), explaining that ‘‘[t]he courts will not credit rulemaking as ‘fully reasoned’ unless the agency takes into account the data and critical analysis and identification of interests and priorities offered by public comment.’’ 4. As Professor Cary Coglianese notes (1997, 1331), ‘‘the term ‘conventional rulemaking’ is itself a misnomer because agencies use a wide array of procedures short of negotiated rulemaking for involving the public in the rulemaking process.’’ 5. University of Texas law professor Thomas McGarity has developed this theme at length. See, e.g., McGarity (1992, 1997). In these and other works, McGarity makes a persuasive case that rulemaking is not working as it should. (Professor William Jordan has done a thorough critique of the claim that courts are responsible for the ossification of rulemaking. See Jordan (2000).) We have no doubt that rulemaking could be improved. And although our preferred remedies might differ somewhat from Professor McGarity’s, his work makes a number of constructive suggestions for improving the process. Improving rulemaking is, however, another project. 6. McGarity and Shapiro (1993, 112–114) give a particularly telling example concerning the Occupational Safety and Health Administration’s (OSHA’s) ‘‘lock out’’ rule, which specified how machines were to be locked out during servicing. Revision of the rather straightforward rule took more than ten years. OSHA’s record is discussed at some length by Morriss and Dudley (2006, 322–328). 7. Coglianese (1996, 740–741) notes that ‘‘most [interest] groups file comments on

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the rules in which they are involved.’’ Morriss, Meiners, and Dorchak (2003, 739) describe one campaign to encourage public comments opposing revision of a regulation in 2001 that generated over 47,000 messages that simply stated opposition to change without offering further substance. 8. Indeed, some commentators have characterized the notice-and-comment portion of rulemaking as ‘‘primarily a method for compiling a record for judicial review.’’ Elliott (1992, 1494). 9. The oversight process is described in detail by Morriss, Meiners, and Dorchak (2003, 704–705). 10. Currie (1979, 850). 11. Congressman Dingell has attracted considerable scholarly attention for his efforts. Economists Paul L. Joskow and Richard Schmalensee (1998) describe his pivotal role in clean-air legislation in the 1980s and 1990s. Law professor Richard J. Lazarus (1991) does the same. The popular press has also discussed his influence. For example, Dingell attracted page-one coverage of his role in slowing down acid-rain controls in the New York Times in 1997. Cushman (1997); see also A. Little (2006). 12. Viscusi (2002a, 51). 13. Ruhl and Salzman (2003, 761). 14. We don’t mean to pick on Representative Dingell. He is merely among the most well-known and consistent advocates in regulatory matters for a particular interest group. There are countless examples of such intervention by both members of Congress and executive-branch officials. 15. Many regulatory statutes provide for agencies to take emergency actions when the need for quick action is greatest. See, e.g., 7 U.S.C. § 136p (emergency registrations for pesticides); 29 U.S.C. § 655(c) (OSHA authority to issue emergency standards). 16. The APA’s judicial-review provisions are found at 5 U.S.C. §§ 701–706 and are discussed in Aman and Mayton’s hornbook on administrative law (1993, 437–439). Agencies have significant discretion in some matters under the somewhat inconsistent application of the Chevron doctrine. See Schuck and Elliott (1990). 17. A prime example of the former is Solid Waste Agency of Northern Cook County v. U.S. Army Corps of Engineers, 531 U.S. 159 (2001), in which the Supreme Court held that the Army Corps of Engineers’ definition of navigable waters under the Clean Water Act exceeded the agency’s authority under statute. A clear example of the latter is Horsehead Resources Development Co. v. Browner, 16 F.3d 1246, 1269 (D.C. Cir. 1994), in which the D.C. Circuit held that the EPA ‘‘was relying on pure speculation when it decided’’ on a particular pollution-control standard. A thorough review of the EPA’s record on science issues in the courts that illustrates the problem in general can be found in Schroeder and Glicksman’s article (2001). 18. Chris Kirtz, then the director of the EPA’s Regulatory Negotiation Project, claimed that ‘‘[e]ighty percent of our final regulations are litigated’’ as justification for the EPA’s interest in regulation-by-negotiation. K. Schneider (1986, 7). Similar claims are made in scholarly literature. For example, in his comprehensive analysis of the Clean Air Act Amendments of 1990, Gary Bryner (1995, 210) states that ‘‘virtually every major EPA regulation has been challenged in federal courts.’’ However, Professor Coglianese (1997, 1296) suggests that the amount of litigation is considerably less.

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19. Professor William Landes and Judge Richard A. Posner’s article (1975) is the canonical source on the role of the judiciary in reviewing agency actions in a publicchoice framework. See also Eskridge (1988). One of the most articulate critics of judicial review of agency rulemaking is Professor Frank Cross. See Cross (1999). 20. The classic formulation of this argument is by Landes and Posner. They argue that ‘‘[t]he element of stability or continuity necessary to enable interest-group politics to operate in the legislative arena is supplied, in the first instance, by the procedural rules of the legislature, and in the second instance by the existence of an independent judiciary.’’ Landes and Posner (1975, 878). 21. We do not intend to endorse the interest-representation view of the administrative process that relies on interest-group participation to constrain agency actions in the absence of a definable public interest, although our approach does not appear to us to be inconsistent with that theory. Professor Richard Stewart (1975, 1682–1683) gives a succinct description of that theory. 22. Morriss, Yandle, and Meiners (2001/2002). 23. Regulation-by-negotiation primarily grew out of work by Philip Harter. One of his earliest attempts to articulate the regulation-by-negotiation process is a 1982 law-review article. Harter (1982). Regulation-by-negotiation thus has the distinction of being a procedure based on an academic, theoretical analysis of the problems of rulemaking rather than on existing practices. A thorough and skeptical account of the history of negotiated rulemaking is provided by Funk (1997, 1351). 24. Negotiated Rulemaking Act of 1990, 5 U.S.C. §§ 561–570; Administrative Dispute Resolution Act of 1996, 5 U.S.C. §§ 571–584. The use of regulation-by-negotiation during the Clinton administration is described by Harter (1997, 1472–1474; 2000, 37– 39). The first negotiated rulemaking was done by the Federal Aviation Administration in 1983. Coglianese (2001, 392). 25. Coglianese (2001, 393); Ryan (2001, 225); Coglianese (1997, 1276). 26. Harter (2000, 33) (citations omitted). Formally, the agency determines to use negotiated rulemaking, issues a notice of intent to do so in the Federal Register and elsewhere, describes the committee to be formed, and invites applications to join the committee. See also Susskind and McMahon (1985, 133). 27. Harter (2000, 34); Coglianese (1997, 1334). 28. Harter, a key figure in establishing negotiated rulemaking and an able and articulate advocate for its use, summarized its advantages as follows: ‘‘Negotiating has many advantages over the adversarial process. The parties participate directly and immediately in the decision. They share in its development and concur with it, rather than ‘participate’ by submitting information that the decisionmaker considers in reaching the decision. Frequently, those who participate in the negotiation are closer to the ultimate decisionmaking authority of the interest they represent than traditional intermediaries that represent the interest in an adversarial proceeding. Thus, participants in negotiations can make substantive decisions, rather than acting as experts in the decisionmaking process. In addition, negotiation can be a less expensive means of decisionmaking because it reduces the need to engage in defensive research in anticipation of arguments made by adversaries.’’ Harter (2000, 53). 29. Two of the main figures in the debate are Professors Coglianese and Harter. See

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Coglianese (1997); Harter (2000) (responding to Coglianese); Coglianese (2001) (responding to Harter). The judicial reaction to the debate is surveyed by Funk (1997). Freeman and Langbein (2000, 68–71) give a clear account of the debate. 30. Ryan (2001, 226). 31. Coglianese (1997, 1329). 32. On time, see Coglianese (1997, 1309), arguing that ‘‘[n]egotiated rulemaking saves no appreciable amount of time.’’ Professor Harter contests Professor Coglianese’s conclusions, arguing that ‘‘[p]roperly understood, negotiated rulemaking has been remarkably successful in fulfilling its promise. In particular, the EPA’s experience with reg-neg has produced a one-third reduction in time.’’ (Harter 2000, 40–41). Part of the conflict appears to be definitional: Coglianese counts as negotiated rulemakings instances that Harter does not. The sample-selection issues discussed by Coglianese seem to us to resolve this point in his favor. On challenges, see Coglianese (1997, 1286–1309), reviewing the litigation record of traditional and negotiated rulemaking by EPA and concluding that ‘‘[a]s a means of reducing litigation, negotiated rulemaking has yet to show any demonstrable success.’’ See also Coglianese (2001, 416), finding that six of twelve EPA negotiated rulemakings resulted in legal challenges, ‘‘a litigation rate higher than that for all significant rules under EPA’s major statutes and almost twice as high as that for EPA rules generally.’’ This somewhat counterintuitive finding is likely due to the creation of additional issues for litigation, such as exclusion from a negotiating committee. See Coglianese (2001, 427–428). Overall litigation rates for the EPA are between 19 percent and 35 percent depending on the source of data and the definition of ‘‘major rule’’ used. Coglianese (1997, 1298–1300). The most notable defects of regulation-by-negotiation in this regard are the introduction of conflict over the membership of the negotiating committee (which appears to be a significant problem, with 12 percent of the respondents in one survey saying that they had to ‘‘press’’ the EPA to allow them to participate), disputes over the meaning of the final agreement, and disputes over whether the agency has lived up to the final agreement in the subsequent rulemaking. Coglianese (1997, 1322–1325). As with the conclusions on time saved, Professor Harter disagrees with Professor Coglianese. See Harter (2000, 41). As with the time-saved issue, sample selection again is the key to determining who is correct, and Coglianese’s approach is, we think, the more appropriate means of addressing sample selection. 33. These criticisms are taken from Coglianese (2001, 439–442; 1997, 1325–1332) and Funk (1997, 1374). Indeed, the critics even argue that alleged advantages, such as the lack of conflict, may play an important role in creating inferior rules, because ‘‘[t]he full articulation of opposing views, even structured in an adversarial process, may yield more useful information on which to construct public policy than a truncated discussion between individuals who are striving to achieve consensus.’’ Coglianese (2001, 440). 34. Neil Eisner, assistant general counsel for regulation and enforcement, U.S. Department of Transportation, and chair, President’s Committee on Negotiated Rulemaking, quoted in Harter (2000, 44 n. 65). Even advocates for negotiated rulemaking, such as Harter, have argued that it should be used only under the circumstances that improve the likelihood of success. Harter (1982, 31). 35. Rules are ‘‘purposely selected [for regulation-by-negotiation] in most cases by the

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very same agency managers who conducted or oversaw the rulemaking proceedings.’’ Coglianese (1997, 1312). Professor Coglianese made this observation in the course of discussing the problem for his empirical study that rules were not randomly allocated between methods of rulemaking. He further noted that ‘‘the nonrandom assignment of rules to negotiated rulemaking introduces the possibility that the rules chosen for negotiated rulemaking were ones that already had either a greater or lesser need for time, or a greater or lesser propensity to be litigated, at least when compared with the average rule implemented through informal rulemaking.’’ Coglianese (1997, 1312). Agencies also control which regulations continue through the negotiated rulemaking process, sometimes pulling regulations back onto the traditional-rulemaking track. In a footnote, Coglianese lists instances of rules the EPA withdrew from negotiated rulemaking. Coglianese (1997, 1312 n. 256). 36. Professor Harter argues, for example, that ‘‘[n]egotiated rulemaking has proven enormously successful in developing agreements in highly polarized situations and has enabled parties to address the best, most effective, or most efficient way of solving a regulatory controversy. Agencies have therefore turned to it to resolve particularly difficult, contentious, issues that have eluded closure by means of traditional rulemaking procedures.’’ Harter (2000, 38). An alternative possibility is that agencies were originally mistaken about the costs and benefits of the new procedures. For example, the Reagan administration focused on the potential of regulation-by-negotiation to keep issues out of the courts. Coglianese (2001, 418). After agencies learned how the procedure actually worked, and after the development of the empirical evidence described above that called into question the proponents’ claimed advantages for rulemaking-by-negotiation, agencies would be expected to reduce their use of the procedure. This explanation is consistent with the sharp drop-off in the EPA’s use of the technique after 1993, although it does not account for why agencies chose to select particular rulemakings for regulation-bynegotiation before changing their view of its value. This explanation is also consistent with Professor Coglianese’s conclusion in his original empirical study, where he noted that although the investment in the extra effort required by negotiated rulemaking ‘‘might once have been thought sound in light of the benefits promised from a speedier, less contested regulatory process[,] [i]n the absence of these promised benefits, agencies’ continued reliance on public participation methods which do not depend on consensus would appear the more sensible approach to making regulatory decisions.’’ Coglianese (1997, 1336). 37. Coglianese (1997, 1276). 38. Brian Polkinghorn, quoted in Coglianese (1997, 1276–77). 39. Coglianese (2001, 439). The rules chosen for regulation-by-negotiation ‘‘have stood at least a notch below [the EPA’s] large programmatic rules in terms of their scope and importance. Each of the negotiated rules has affected only a limited number of parties, at times just a single industry, precisely as the agency’s own guidelines suggest. Instead of selecting the most challenging rules, the agency has used negotiated rulemaking for what an earlier EPA report called ‘second-tier rules’ or those rules ‘affecting program implementation—rather than rules establishing program structure.’ ’’ Coglianese (1997, 1319) (footnotes omitted). 40. The EPA has gone to some length to encourage the public perception that regulation-

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by-negotiation is successful at the agency, including altering which regulations it considered conducted by negotiation to present a more favorable picture of the process. Professor Coglianese, for example, describes how the EPA altered the public list of negotiated rulemakings to remove a particular rulemaking from the list after he published a study critical of the EPA’s record in negotiated rulemakings. Coglianese (2001, 403–404). 41. Information exchange is sometimes cited as a rationale for negotiated rulemaking. For example, one account from 1999 noted that ‘‘[t]he negotiation process itself emerges as a powerful tool for learning what the participants in the process value. Many types of information are exchanged. . . . [The EPA] believes it is a great regulatory development tool that helps foster positive relationships among affected parties.’’ Hesse (1999, 305–306). 42. Wald (1997, 1470). 43. Coglianese (2001, 415). 44. For an overview of the issues in approval of settlements in environmental litigation involving the government, see Dinkins (2001) and Callies (1992). The First Circuit, in approving a CERCLA (Comprehensive Environmental Response, Compensation, and Liability Act) case settlement, noted that the ‘‘policy of the law to encourage settlements . . . has particular force where, as here, a government actor has pulled the laboring oar in constructing the proposed settlement. . . . Respect for the [executive-branch] agency’s role is heightened in a situation where the cards have been dealt face up and . . . sophisticated players, with sharply conflicting interests, sit at the table. . . . The relevant standard, after all, is not whether the settlement is one which the court itself might have fashioned, or considers as ideal, but whether the proposed decree is fair, reasonable, and faithful to the objectives of the governing statute.’’ United States v. Cannons Engineering Corp., 899 F.2d 79, 84 (1st Cir. 1990). Agencies with particular expertise in a technical field are also due considerable deference from the courts in reviewing settlements. See United States v. Akzo Coatings of America, Inc., 949 F.2d 1409, 1436 (6th Cir., 1991). 45. See Cooter and Rubenfeld (1989, 1075–1076). 46. Professor Owen Fiss has some objections to settlements generally, arguing that ‘‘[s]ettlement is for me the civil analogue of plea bargaining: Consent is often coerced; the bargain may be struck by someone without authority; the absence of a trial and judgment renders subsequent judicial involvement troublesome; and although dockets are trimmed, justice may not be done. Like plea bargaining, settlement is a capitulation to the conditions of mass society and should be neither encouraged nor praised.’’ Fiss (1984, 1075). Whatever the merits generally, this seems to apply with considerable force in the particular case of regulation-by-litigation suits. 47. A regulated entity may, of course, simply be conceding the inevitable when confronted by the agency with proof of the regulated’s wrongdoing and may settle to save litigation costs or as part of a strategy of seeking leniency. For example, the SEC imposed a lower penalty on an energy trading company because the company cooperated with the agency. Power Markets Week (2003). Such settlements increase net welfare compared with litigation, because the ultimate outcome is not in doubt and the settlement saves both parties the litigation costs. 48. For example, the FTC and the Department of Justice (DOJ) are concerned that settlements in intellectual-property disputes can diminish competition. DOJ and FTC (1995, § 5.5).

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49. There are often are such issues. As Professors Ruhl and Salzman note (2003, 761), ‘‘[o]ne need not toil long in any regulatory field before finding that agencies often produce rules that are complicated, difficult to understand, ambiguous, or contradictory.’’ Under such rules, there are often major differences between agency and outsider views of how to read the law and facts. 50. Of course, a private litigant can also claim huge damages and produce a large expected liability, even if its chance of success is small. We discuss just such a case in chapter 6. We contend that it is much harder for private litigants to make a credible threat of total destruction, however, because they lack the resources and range of claims available to public-sector actors. 51. We ignore the possibility of a lesser fine to simplify the example. Similar criticisms have been made of the impact of the increased negotiating power given to prosecutors under the federal Sentencing Reform Act of 1984. Alschuler (1987, 462) describes how sentencing guidelines enhance prosecutors’ ‘‘leverage,’’ and Morvillo and Bohrer (1995, 152) describe the consequences of the Sentencing Reform Act as ‘‘enhancing prosecutors’ ability to establish the parameters of plea bargaining and to force persons to cooperate.’’ 52. Plaintiffs will often settle against some defendants to fund litigation and gain assistance against others. See, e.g., Parsons and Williams (1992). Bernstein and Klerman (1995) explain how plaintiffs can use agreements with individual defendants to fund litigation. 53. Arthur Andersen was convicted of criminal charges in connection with the Enron fraud. The conviction was overturned by the Supreme Court, but by the time the firm’s conviction had been reversed, the firm was defunct. See Arthur Andersen, LLP v. United States, 544 U.S. 696 (2005). 54. Carrington and Apanovitch (1997, 464). A similar criticism of negotiated rulemaking has been made by Professor William Funk. In rulemaking ‘‘[t]he statute is not just a brake or an anchor on agency autonomy, it is the source and reason for the agency’s action.’’ In negotiated rulemaking, by contrast, Funk writes, ‘‘[t]he law is now merely a limitation of the range of bargaining. The parties to the regulation are not serving the law, and the outcome of the negotiation is not legitimized by its service to the law.’’ Funk (1997, 1374–1375). The rulemaking that follows negotiated rulemaking provides a check on this, although if no one challenges the negotiated rule in the rulemaking process or in court, then the agency could exceed its statutory mandate as Funk suggests. Because of the potential check offered by the rulemaking after the negotiation, however, this is less of a concern in our opinion than the problems with regulation-by-litigation. 55. Indeed, if ‘‘politics’’ is seen as a dirty word, then political obstacles to a policy goal are to be overcome by any means available. While we are skeptical of politics, we are even more skeptical of the absence of politics, since that removes all constraints on the political actors. 56. See G. Schwartz (2002, 351). These factors raise important questions about the settlements’ impact on antitrust laws. G. Schwartz (2002, 351). 57. Of course, regulations might exempt some firms or individuals from coverage. Small businesses, for example, are routinely exempted from regulatory provisions. 58. Morriss, Meiners, and Dorchak (2003). 59. See chapters 4 and 6.

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60. Of course, agencies sometimes fine regulated entities for violations of rules. Such fines can be substantial. For example, the EPA imposed a $5.25 million civil fine to resolve some ozone-regulation violations in 2003, a clear case of enforcement rather than regulation. See, e.g., Pang (2003). Imposition of a fine alone, or a fine in combination with an agreement to correct clear violations of existing regulatory regimes, differs from combining the imposition of new substantive rules and the payment of substantial fines. 61. Fund and Wooster (2000, 9); U.S. Senate (2000, 1–3) (statement of Senator John McCain, chairman of the Committee on Commerce, Science, and Transportation) (citing a Hudson Institute study). 62. Viscusi (2002a, 3). 63. For example, a wetlands regulatory case was settled by the defendant’s agreeing to donate $62,500 to ‘‘a nonprofit conservation group.’’ J. Montgomery (2003). 64. For example, ‘‘contingency fee contracts were awarded without competitive bidding to attorneys who often bankrolled state political campaigns. In Mississippi, attorney general Mike Moore selected his number one campaign contributor, Richard Scruggs, to lead the Medicaid recovery suit. In Texas, attorney general Dan Morales chose five firms for the state’s multibillion-dollar tobacco litigation; four of the five firms contributed a total of nearly $150,000 to Morales from 1990 to 1995.’’ Levy (1998, 54). Not all analysts concur that corruption is a major ongoing problem. Professor David Dana, for example, argues that ‘‘[t]he corruption explanation is . . . unpersuasive’’ because ‘‘not all AGs are elected [as are Mississippi’s and Texas’s], so at least the campaign contribution concern may be limited in geographic scope’’ and ‘‘the Texas AG has lost office and is now under criminal investigation, which suggests that AGs will now expect to experience some political and perhaps legal punishment if they allocate what turn out to be extremely large contingency fees to known political allies.’’ As a result, ‘‘in the wake of tobacco litigation, it seems likely that the retention of private contingency fee counsel will be subject to new ex ante controls, such as public disclosure and competitive bidding. Thus, contingency fee agreements in the future are not likely to be a particularly easy or low-cost means for AGs to secure illicit benefits, even assuming this was previously the case.’’ Dana (2001, 319). 65. Perhaps the most infamous example is the Nixon administration’s use of the threat of OSHA regulation to secure campaign funds, which is described in McGarity and Shapiro (1993, 37). 66. City of Philadelphia Five Year Plan (FY2002–FY2006) (2001) quoted in Lutter and Mader (2002, 107). As Professors Lutter and Mader concluded in their review of leadpaint litigation (2002, 124), ‘‘the primary rationale for government agencies to sue companies associated with lead-based paint appears reminiscent of Willie Horton’s famous rejoinder about why he robbed banks: that’s where the money is.’’ 67. Professor Bruce Benson and others have documented a similar distortion in lawenforcement efforts where civil forfeiture laws grant law-enforcement departments a portion of the property forfeited, producing a shift of resources toward crimes that yield forfeitures. Benson (1998); Mast, Benson, and Rasmussen (2000). 68. It does not completely eliminate the potential for such challenges, of course. The tobacco settlements were challenged by a variety of groups, for example. 69. Quoted in Wootton (2002, 305).

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70. Fed. R. Civ. P. 24 (stating conditions for intervention as of right and permissive intervention). 71. Viscusi (2002a, 1). 72. Viscusi (2002b, 52).

Chapter Four: Heavy-Duty Diesel-Engine Litigation 1. Rhein Associates (2006, 16). 2. Diesel contains various other pollutants that are of concern as well. See Environmental Defense (2005). However, the major issues concern NOx, particulates, and CO. 3. Challen and Baranescu (1999, 479). 4. The fuel economy–emissions trade-off is discussed in Mori et al. (2000, 39) and Moser, Sams, and Cartellieri (2001, 53). 5. There were only 416,454 diesel trucks in use in the United States as of 1967; 16,998,546 total trucks (gas and diesel) were in use in 1968. U.S. National Air Pollution Control Administration (1970, 2–4, table 2-1). 6. Charles River Associates (2000, 10). 7. Henein (1973, 211). 8. Myers, Uyehara, and Newhall (1973, 27–28). 9. On the EPA’s lack of early action on diesel emissions, see Currie (1979, 848) and Reitze (2000, 402). Congressional findings in the 1977 amendments included a statement that ‘‘heavy-duty truck and bus emissions have not been adequately reduced.’’ U.S. House (1977, 271–272). The statutory quote is from Pub. L. No. 95-95, § 224(a), 91 Stat. 685, 765 (1977). 10. 42 U.S.C. § 7521(a)(3)(C). 11. Clark and McKain (2001, 433). 12. Morriss, Yandle, and Dorchak (2004, 463–476) discuss the adoption of the test at length. 13. National Research Council (1981, 8). 14. 48 Fed. Reg. 1406, 1406–1408 (Jan. 12, 1983). 15. 50 Fed. Reg. 35, 374, 35,375 (Aug. 30, 1985). 16. Pub. L. No. 101-549, § 201, 104 Stat. 2399, 2472; 42 U.S.C. § 7521(a)(3)(A)(i); 40 C.F.R. § 86.098-11 (heavy-duty diesel emissions standards effective model year 1998); see also 40 C.F.R. § 86.094-11 (1994) (heavy-duty diesel emissions standards effective model year 1994). 17. 40 C.F.R. § 86.094-16(a) (effective model year 1994). 18. 40 C.F.R. §§ 86.000-16(a) (effective model year 2000), 86.004-16(a) (effective model year 2004). 19. Control of Air Pollution from Heavy-Duty Engines, Appendix: Statement of Principles, 60 Fed. Reg. 45,580, 45,602–45,604 (proposed Aug. 31, 1995). 20. EPA (1995b). 21. 60 Fed. Reg. at 45,597–45,604. 22. Energy Report (1995). 23. Energy Report (1995) (quoting Daniel Ustian of Navistar International Corp. of Chicago). When the EPA later proposed additional regulations, however, the engine

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makers felt ‘‘a sense of betrayal’’ and called on the EPA to honor its ‘‘gentleman’s agreement.’’ Kisiel (1997, 34). 24. The EPA’s allegations are described in detail in the individual consent decrees signed with each company. See, e.g., United States v. Caterpillar, Inc., Civ. Action No. 98-2544-HHK (D.D.C. July 1, 1999) (order approving consent decree), available at http://www.epa.gov/compliance/resources/decrees/civil/caa/caterpillall-cd.pdf. For a journalistic summary, see J. Kennedy (1998b, 1285). 25. Quoted in J. Johnson (1998, 1). On the fuel-economy point, see J. Kennedy (1998b, 1285). Astonishingly, the EPA then claimed that removing the programming from the electronic controllers would not affect fuel economy, since it would be done when the engine was rebuilt and rebuilding engines would improve fuel economy. J. Kennedy (1998b, 1285). Since the rebuilding is independent of the controller changes, the correct measure would be whether a rebuilt engine without the controller change would have superior fuel economy to a rebuilt engine with a controller change, not a comparison of a rebuilt engine with the controller change and an un-rebuilt engine with the original controller. The American Trucking Association claimed a loss of 10 percent in fuel economy would result. J. Johnson (1998, 120). Retrospective numbers proved elusive to find, as none of the participants apparently saw a gain sufficient to warrant the costs from investigating the impact of the change. 26. J. Kennedy (1998b, 1285). The fines were based on sales of engines alleged to violate the rule and totaled: Caterpillar Cummins Mack Trucks Detroit Diesel Volvo Navistar International

$60,000,000 $60,000,000 $31,000,000 $24,500,000 $14,000,000 $2,900,000

J. Johnson (1998, 120). To reduce emissions from the existing engines, the EPA and the engine manufacturers agreed to a ‘‘Low NOx Rebuild Program’’ that would cover engines manufactured between 1993 and 1998. The settlement included a choice of rebuild programs, allowing engine manufacturers to include either 1993–1998 or 1994–1998 engines, with a slightly stricter standard applying to the shorter period. Under this program, the engine manufacturers provided to those who rebuild engines (including independent firms) free rebuild kits that ‘‘significantly’’ reduced emissions ‘‘from current actual levels.’’ Several manufacturers also committed to specific product recalls and retrofitting programs. Memorandum of Law of the United States in Support of Motion to Enter Consent Decree and Response to Public Comments at 21–23, United States v. Caterpillar, Inc., Civ. Action No. 98-2544-HHK (D.D.C. April 30, 1999). The emissions standards applied under the settlement became stricter over a two-year period, requiring engines used primarily under urban driving conditions and manufactured after November 1, 1998, to meet both a 4.0 g/bhp-hr standard under the FTP and a 6.0 g/bhp-hr standard under the ‘‘Euro III’’ test. After July 31, 1999, emissions had to fall to 4.0 g/bhp-hr on both tests, and by October 1, 2002, had to meet the standard the EPA

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had imposed for October 1, 2004, through rulemaking, a 2.4/2.5 g/bhp-hr NOx plus NMHC on both the FTP and Euro III tests. For engines for vehicles used primarily on the highway, a longer phase-in was allowed, giving the engine manufacturers until the end of 1998 to meet the 6.0 g/bhp-hr Euro III test and October 1, 2002, to meet the 2.4/2.5 g/bhp-hr NOx plus NMHC standard on both the FTP and Euro III tests. Memorandum of Law of the United States, supra, at 15–16. In sealed portions, the consent decrees also identified ‘‘those strategies that the United States [allowed] . . . each engine manufacturer to use in the interim period’’ until October 2002, to allow an orderly transition to the new engines required after that date. Memorandum of Law of the United States, supra, at 17. ‘‘Any strategy not listed and which does not independently satisfy EPA’s screen for defeat devices, is not allowed.’’ Memorandum of Law of the United States, supra, at 17. Finally, the engine manufacturers agreed to an additional set of programs to offset the ‘‘excess’’ emissions caused by their controllers. One portion canceled the emissions credits that manufacturers had previously earned for overcomplying engines, which under the settlement’s terms were no longer in compliance. The engine manufacturers also agreed to meet model year 2006 nonroad-equipment standards by model year 2005. Finally, each company agreed to spend specified sums on projects that offset excess emissions: Caterpillar, $35 million; Cummins, $35 million; Detroit Diesel, $12 million; Mack/Renault, $13 million; and Volvo, $9 million. Memorandum of Law of the United States, supra, at 23–24. The rebuild program later produced litigation between the CARB and the engine manufacturers when rebuilds occurred more slowly than the agency thought they should. The engine manufacturers succeeded in overturning a CARB rule requiring faster rebuilds. EMA v. CARB, No. 05AS01133 (Cal. Sup. Ct., Sacramento County Oct. 16, 2006; Dec. 7, 2006). 27. J. Kennedy (1998a, 1285). 28. Federal law guarantees that emissions standards applicable to heavy-duty vehicles or trucks ‘‘shall apply for a period of no less than 3 model years beginning no earlier than the model year commencing 4 years after such revised standard is promulgated.’’ 42 U.S.C. § 7521(a)(3)(C). 29. The particulate standard went into full effect in 2007; the NOx and NMHC standards are phased in between 2007 and 2010. 40 C.F.R. § 86.007-11 (emissions standards); see also 40 C.F.R. § 80.520 (effective June 1, 2006) (diesel fuel standards). For extensive background information, see the final rule published at 66 Fed. Reg. 5002 (Jan. 18, 2001). For detailed information about the testing procedures for heavy-duty diesel emissions as of 2007, see 40 C.F.R. part 86, subpart N (exhaust test procedures) and subpart T (manufacturer-run in-use testing) (2007). 30. These disputes included National Petrochemicals & Refiners Ass’n v. EPA, 287 F.3d 1130 (D.C. Cir. 2002), in which the court upheld the 2007 diesel fuel and emissions standards, and Crete Carrier Corp. v. EPA, 363 F.3d 490 (D.C. Cir. 2004), in which the court upheld both the 2004 diesel emissions standards and the nonconformance penalties the EPA had set for engines not meeting emission standards pulled forward from 2004 by the 1999 consent decrees. Consent-decree disputes included payment by Caterpillar of $128 million in penalties in fiscal year 2003. Ferullo (2004, 9). The Department of Justice entered into an agreement with Detroit Diesel and two agreements with Cummins over alleged failure to comply with the 1999 consent decree. Detroit Diesel agreed to recall

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and fix almost 25,000 ‘‘white smoke’’ auxiliary emission control devices (AECDs) and all model year 2003–2004 urban bus engines that were emitting excess particulate matter (PM), reduce at least 8,000 tons of NOx emissions through its ‘‘early low NOx rebuild,’’ and pay a $535,000 penalty. Notice of Proposed Agreement Resolving Dispute under Consent Decree in United States v. Detroit Diesel Corporation, 70 Fed. Reg. 77,189 (Dec. 29, 2005). In its first agreement, Cummins agreed to continue a recall to fix or disable ‘‘overheat’’ AECDs, recoup excess NOx emissions in violation of the consent decree, and pay a $950,000 penalty for various alleged infractions under the Consent Decree. Notice of Proposed Agreement regarding Alleged Non-compliance with Consent Decree in United States v. Cummins Engine Company, Inc., 71 Fed. Reg. 61,508 (Oct. 18, 2006). In the second agreement, Cummins agreed to retire improperly generated credits plus a premium and pay the United States a $2,170,000 penalty for its alleged improper generation of NOx and PM credits and its failure to complete or submit work plans for offset projects approved by the EPA under the 1999 consent decree. Notice of Proposed Second Agreement regarding Alleged Non-compliance with Consent Decrees in United States v. Cummins Engine Company, Inc., 71 Fed. Reg. 66,197 (Nov. 13, 2006). These settlements are more transparent than some out-of-court settlements, in that notice was given in the Federal Register and the agreements are made available (via the Internet and other means, at least during a public comment period) for public scrutiny. 31. Such tests are intended to more accurately assess ‘‘real-world’’ emissions levels. The agreement resolved the EMA’s challenge of the EPA’s legal authority to regulate various types of diesel engines (highway, maritime, and nonroad) and the EMA’s challenge of the technical feasibility of the not-to-exceed (NTE) emissions testing program. EPA (2003). Apparently forgetting the statement of principles, the EPA called this a ‘‘largely unprecedented example of proactive government and industry cooperation.’’ EPA (2003, 2). The EPA, the CARB, and the EMA agreed to collaborate on developing a similar program for nonroad equipment. EPA (2003, 2005). The resulting program went through the traditional rulemaking process as well, when the EPA introduced a ‘‘new steady state certification test and a new ‘not to exceed’ (NTE) approach to assure in-use compliance’’ (effective in model year 2007). Control of Emissions of Air Pollution from 2004 and Later Model Year Heavy-Duty Highway Engines and Vehicles; Revision of Light-Duty OnBoard Diagnostics Requirements, 65 Fed. Reg. 59,896, 59,899, 59,901 (Oct. 6, 2000). This rule also finalized model year 2004 heavy-duty diesel-engine emission standards, as was necessary to cover engines produced by manufacturers not subject to the 1999 consent decree. 65 Fed. Reg. at 59,900; see also U.S. Environmental Protection Agency, Heavy Trucks, Buses, and Engines, http://epa.gov/otaq/hd-hwy.htm. 32. EMA v. CARB, No. 05AS01133 (Cal. Sup. Ct., Sacramento County Oct. 16, 2006, Dec. 7, 2006). The regulation is available at http://www.arb.ca.gov/regact/chip04/fro1 .pdf. The CARB Web site, http://www.arb.ca.gov/homepage.htm, has additional information. 33. Onboard diagnostic systems, to make sure emissions equipment is operating correctly, are required for light-duty diesel vehicles and trucks and heavy-duty vehicles and engines 14,000 pounds or less. Control of Emissions of Air Pollution from 2004 and Later Model Year Heavy-Duty Highway Engines and Vehicles; Revision of Light-Duty On-Board Diagnostics Requirements, 65 Fed. Reg. 59,896 (Oct. 6, 2000). The EPA

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proposed extending the OBD requirement to all heavy-duty vehicles as part of its fall 2006 regulatory agenda. 71 Fed. Reg. 73893 (Dec. 11, 2006). 34. Charles River Associates (2000, 10). 35. Challen and Baranescu (1999, 5). 36. The trucking industry uses over $11 million worth of diesel fuel annually. Charles River Associates (2000, 58). Without the fuel-efficiency savings, that figure would have been over $16.5 million. (The difference ($5.5 million) was calculated at an average U.S. gasoline price of $1.34 per gallon. Data for the calculation come from the Energy Information Administration, http://www.eia.doe.gov, and http://tonto.eia.doe.gov/dnav/pet/ pet—pri—gnd—dcus—nus—w.htm (online data for U.S. petroleum sales from 1994 to 2002)). The 70 percent figure (mentioned in the text) is from Lloyd and Cackette (2001, 810). 37. Webster (1999, 356). 38. As a survey of modeling issues noted, ‘‘[t]he task of emissions modeling is quite complex given the high number of factors that affect the emissions signature of an engine during operation. Clearly an engine’s emissions will vary as a function of engine operating conditions (i.e. speed, load, and their transients), engine operating temperature, ambient atmospheric conditions, engine control, and fuel. Design variations between different engine models such as port and piston-head geometry, fuel injectors, and fuel injection control strategies will also effect emissions. Research . . . showed emissions to vary slightly for the same engine exercised through the same test cycle with a different stock electronic controller.’’ Clark et al. (2001, 122). 39. Henein (1973, 228); Myers, Uyehara, and Newall (1973, 11); Challen and Baranescu (1999, 461); International Programme on Chemical Safety (1996, 1); Lloyd and Cackette (2001, 813); Lee, Pedley, and Hobbs (1998, 14). 40. International Programme on Chemical Safety (1996, 92); Lenz and Cozzarini (1999, 96–97). 41. See tables MF-21 and MF-33E, for various years, of the annual publication Highway Statistics, published by the U.S. Department of Transportation, Federal Highway Administration, Office of Highway Policy Information, and available at http://www.fhwa .dot.gov/policy/ohpi/hss/hsspubs.htm. This increase is virtually entirely due to improvements in truck engines. See U.S. House (1998b, 1–3) (testimony of Dan Reicher, Department of Energy). Whereas the use of diesel engines and diesel fuel in passenger cars has virtually ceased in the United States since 1988, their use in the trucking industry has increased. At the time of this writing, in 2007, 100 percent of class 8 trucks are diesel, and classes 1–7 are increasingly diesel. Diesel use grew significantly in a relatively short period—a study of Los Angeles trucks, for example, found that 47 percent were diesel in 1971, up from only 22 percent in 1959. Smith & Associates (1974, 23–25). During the 1970s diesel-powered heavy-duty trucks grew from 133,065 in 1972 to 210,144 at the end of the decade, whereas gasoline-powered heavy-duty trucks fell from 433,105 to 322,015 over the same period. EPA (1981, 36–37). 42. Truck registrations grew by 70 percent between 1970 and 2006, and both miles traveled and fuel used more than doubled. See tables MV-1, VM-1, and MF-27, for various years, of Highway Statistics, available at http://www.fhwa.dot.gov/policy/ohpi/ hss/hsspubs.htm. Freight activity through the single-mode transportation of trucks grew

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20.6 percent between just 1993 and 1997. U.S. Department of Transportation (1999, 9, table 1b). 43. Sawyer and Johnson (1995, 79); Lloyd and Cackette (2001, 827). 44. Dreher and Harley (1998, 352). 45. Challen and Baranescu (1999, 555); Henein (1973, 260); Sawyer and Johnson (1995, 73). 46. The relationship between emissions regulations and controllers is noted regularly in the trucking literature, from the 1970s to the 1990s. See, e.g., Business Week (1976, 91); Mele (1997, 64). 47. Brady (1997, 817–818). 48. Moser, Sams, and Cartellieri (2001, 53); Zelenka et al. (1992, 5); Verbeek, Aken, and Verkiel (2001, 91); Sturgess (2002, 27); OECD (1993, 54); International Programme on Chemical Safety (1996, 92); Sawyer and Johnson (1995, 76); National Research Council (1981, 24); Webster (1999, 362). 49. Cummins (1997, 5); Moncelle and Fortune (1985, 10). 50. See Business Week (1976, 91–92); Challen and Baranescu (1999, 556). 51. There are a number of trade-offs to be made in designing engines: ‘‘In designing a heavy-duty diesel, the picture becomes complicated by the question of—what customer does one design the engine/truck package for? An owner-operator may be willing to compromise on fuel economy in return for higher performance and better passing and hill-climbing ability, while the owner of a fleet of 50 or 100 trucks, with an annual fuel bill in the hundreds of thousands of dollars, is likely to be much less concerned with saving a few minutes of trip time than with squeezing the maximum number of miles out of a tank of fuel. The fleet driver, on the other hand, is inclined to favor (and perhaps take better care of) trucks with higherpowered engines which can reduce his gear-shifting effort, get him home to his wife and children earlier, and generally provide better driveability.’’ Givens (1976, 31). A European engine manufacturers’ association paper noted the importance of the test cycle in engine design in 1994: ‘‘The final choice always results from a compromise between environmental targets (low exhaust emissions) and users’ requirements (power availability, fuel consumption). The tool available to development engineers for the definition of this compromise is the test cycle. The test cycle identifies the engine operating conditions under which emission aspects must take the predominant role in selecting the technological solutions. Different test cycles often result in different technological solutions and as a consequence different engine performance.’’ Association des Constructeurs Européens d’Automobiles (1994, 2). 52. Virk and Lachowicz (1995, 169). 53. Could things have evolved differently? Imagine if the EPA had had the ability in 1970 to put a tamper-resistant meter on individual trucks’ tailpipes and charge a fee per unit of pollutants emitted. Faced with a cost for emissions, customers would have demanded engine controllers that offered them the ability to balance emissions control and mileage to minimize total operating costs. Did such technology exist in 1970? No, but more limited metering of selected trucks could have been accomplished with similar effects, and so our hypothetical is not entirely fanciful. 54. Rhein Associates (2006, 10–11). 55. Heavy Duty Trucking (2000, 78).

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56. Rhein Associates (2006, 10). 57. Some firms manufacture only heavy-duty diesel engines (e.g., Caterpillar, Cummins, and Detroit Diesel), some manufacture only truck bodies (e.g., Ford, GM, PACCAR, and Western Star Trucks), and some manufacture both (e.g., Volvo). Some firms offer truck lines with a choice of engines from different manufacturers (e.g., Navistar). The industry is changing, however, in part because of the costs of the R&D necessary to meet new standards and because of the increased difficulty in integrating new engines into trucks. ‘‘The advent of emissions regulations that started with the Clean Air Act of 1990 has led to a flurry of R&D activity that requires cash. Without sufficient volume to write-off these expenses, many companies would be going out-of-business and some have. As a result, major worldwide manufacturing companies are increasing their captive and committed volume by mergers, acquisitions and joint ventures.’’ Rhein Associates (2003, 10). 58. Sparkman (2001, 42). 59. Truck makers and purchasers made this point in the litigation in support of engine manufacturers’ attempts to extend the pull-ahead deadline. See Declarations of Steven D. Duley at 3, Steven Matsill at 10, and Michael von Mayenburg at 10, United States v. Caterpillar, Civ. Action No. 98-2544-HHK (D.D.C. Nov. 27, 2002). 60. Hamilton and Henjum (1985, 58). 61. Leavitt (2006, 52). 62. Challen and Baranescu (1999, 473). 63. Clark and McKain (2001, 432). 64. U.S. House (1998b, 31) (testimony of Robert J. Crites, Condor Freight Lines). 65. Thomas and Berg (2001, 48). 66. Sparkman (2001, 44). 67. Kilcarr (2000, 18). 68. Overdrive (2000, 1-S); U.S. House (1998b, 32) (testimony of Robert J. Crites, Condor Freight Lines). 69. 42 U.S.C. § 7408(a)(1). 70. 40 C.F.R. part 50 (standards as of 2008). 71. 42 U.S.C. § 7410(a). For an overview of the SIP process, see Morriss (2000, 263). Professor Jonathan Adler (1998, 618) summarizes the process as follows: All states with metropolitan areas that do not attain the National Ambient Air Quality Standards (NAAQS) for criteria air pollutants must develop SIPs which they submit to the EPA for its approval. Among other things, an adequate SIP must include ‘‘enforceable emission limitations . . . as well as schedules and timetables for compliance,’’ monitoring systems, a fee-based permitting system for stationary sources, an enforcement program, and provide for sufficient public participation in the SIP process. The 1990 Amendments also added Title V, which requires states to develop an omnibus permitting program for stationary sources, complete with permit fees deemed sufficient by the EPA to cover the cost of implementation, and outlined numerous specific control measures that non-attainment areas must include in their SIP. . . . Failure to submit an adequate SIP by the appropriate deadlines results in the imposition of federal sanctions, including the loss of federal highway funds, increased offset requirements for new development, and the im-

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position of a Federal Implementation Plan (FIP) that the EPA will enforce. Moreover, local transportation projects cannot receive federal funding unless they conform to an EPA-approved SIP. 72. There are also ‘‘prevention of significant deterioration’’ requirements to prevent cleaner areas where air quality exceeds the NAAQS from polluting more and thereby reducing air quality to the levels required by the NAAQS. See 42 U.S.C. §§ 7470–7479. Their qualitative impact is similar to the NAAQS-nonattainment dynamic, however, so we need not consider further the additional levels of complexity they introduce. 73. Morriss (2000). 74. 42 U.S.C. § 7410(a)(2). 75. 42 U.S.C. § 7509.There are other negative consequences as well. Professor Arnold Reitze describes these as ‘‘[t]he amount of emissions necessary to qualify as a major source drops for ozone nonattainment areas classified as serious. . . . This has the effect of expanding the number of stationary sources subject to the more stringent emission limitations imposed on major sources.’’ Reitze (1996, 1479). 76. Reitze (1996, 1477–1481). Consider the following description of the steps necessary in ozone nonattainment regions: Ozone nonattainment areas are subject to SIP revisions to meet CAA requirements. Moreover, the northeastern states, from northern Virginia to Maine, are subject to ozone transport region requirements. Facilities located upwind of a nonattainment area for ozone that are in a [sic] ‘‘ozone transport region’’ may be subject to controls if the facility emits more than fifty tons per year of NOx. Since 1990, O≥ nonattainment areas require the use of stringent controls on Volatile Organic Compounds (VOC) and NOx sources. Moderate or worse O≥ nonattainment areas require the use of reasonably available control technology (RACT) on existing sources. For areas that are serious or worse, a 9% reduction of VOC or NOx emissions for each three-year period from 1996 through the attainment date is required. For extreme areas, additional NOx controls are required. CAA section 182(f) imposes on the states a duty to control emissions of NOx unless reductions would not contribute to the attainment of the ozone standard. Reitze (2002, 377) (citations omitted). 77. Parker and Blodgett (2001); Cook (2001, 34). 78. U.S. Environmental Protection Agency, ‘‘Ozone & Health—A Timeline,’’ http:// www.epa.gov/ozonedesignations/timeline.htm (accessed Jan. 4, 2007). 79. C. McChesney (1999) surveys the interests of the various players in the 1990s ozone dispute. 80. Michigan v. EPA, 213 F.3d 663, 672 (D.C. Cir. 2000), describes the dispute and the SIP call. Appalachian Power Co. v. EPA, 249 F.3d 1032 (D.C. Cir. 2001), describes the section 126 actions. Reitze (2000, 411) describes the petitions and their results. 81. National Ambient Air Quality Standards for Ozone, 62 Fed. Reg. 38,856 (July 18, 1997). 82. Parker (1998, 25). The EPA and northeastern state officials denied the charge. Parker (1998, 25).

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83. Air-pollution-control officials thought that it would be ‘‘politically and logistically improbable’’ to make up lost emissions controls resulting from mobile-source excess emissions from cars and businesses. Bowman (1997). 84. In issuing the final rule, the EPA noted the importance of reducing NOx emissions to assist ten areas with compliance with NAAQS for ozone and to ‘‘avoid more costly measures’’ of NOx reduction. See Control of Emissions of Air Pollution from 2004 and Later Model Year Heavy-Duty Highway Engines and Vehicles; Revision of Light-Duty On-Board Diagnostics Requirements, 65 Fed. Reg. 59,896, 59,904 (Oct. 6, 2000). 85. American Lung Association (2003, 17, 22, 23). 86. The groups ran a ‘‘Dump Dirty Diesels’’ campaign. Clemings (2002, 20). 87. EPA (2004, 1: 1–6); National Ambient Air Quality Standards for Particulate Matter, 71 Fed. Reg. 61,144 (Oct. 17, 2006). 88. Proposed Rule to Implement the Fine Particle National Ambient Air Quality Standards, 70 Fed. Reg. 65,984 (proposed Nov. 1, 2005). 89. Control of Emissions of Air Pollution from Highway Heavy-Duty Engines, 62 Fed. Reg. 54,694 (Oct. 21, 1997). 90. A caveat or two is needed about the many layers of control imposed by the Clean Air Act. To the extent that they are relevant, we will deal with those later. Our intent here is to present the broad picture. 91. Morriss (2000). 92. McNiven (1992, 1279–1280). 93. T. Stewart (2001). 94. State regulators looked ‘‘to the national mobile source emission control program as a necessary complement to their efforts to reduce NOx, PM, HC, and other emissions.’’ 60 Fed. Reg. 45,580 (Aug. 31, 1995). Similarly, the EPA’s ‘‘mobile source tech review subcommittee’’ examined ways to cut heavy-duty diesel emissions to help states earn SIP credits, which can be used to allow new stationary sources or to maintain current stationarysource emission levels. Diesel Fuel News (2001b, 6). The Engine Manufacturers Association executive director commented in 1997 that ‘‘[w]e very strongly suspect that various states will want to hit the bank and go for more reductions from mobile sources.’’ Kisiel (1997, 34). 95. Where nonattainment provisions mean reductions in emissions, ‘‘affected sources can be expected to attempt to shift the required reduction to some other sources or category of source using the political, administrative, and judicial forums that may be available.’’ Reitze (1996, 1480). Truckers argued against new fuel regulations in 2001, claiming that regulators ‘‘ignored other measures—such as tougher electric utility emissions controls in areas upwind of major cities—that would do far more to cut NOx without causing fuel-supply crises or disrupting interstate truck commerce.’’ Diesel Fuel News (2001a, 1, 5). 96. L. White (1982, 68). 97. L. White (1982, 67). 98. For example, the National Research Council committee reviewing the EPA’s modeling of mobile sources summarized the information demands for air-pollution regulation as follows: ‘‘An effective air-quality improvement program requires the identification, inventory, and control of emissions sources, including mobile sources. This requires not

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only a broad understanding of which pollutants are derived from which sources, but also details about their spatial and temporal variation, the contributions of subsets of sources, the chemical and physical characteristics that determine their propensity to form secondary pollutants, their levels of exposures and toxicity, and the actual effectiveness of strategies to control emissions. The large number of individual sources, the large variability of emissions characteristics among these sources, and the need for emissions estimation methods to fulfill many applications creates daunting challenges.’’ National Research Council (2000, 20–21). 99. Sawyer et al. (2000, 2173). 100. As a 1998 review concluded, ‘‘[a]t present, large and significant uncertainties exist in the estimates of the mobile source emissions inventory. These uncertainties exist for all vehicle types and classes throughout North America.’’ Sawyer et al. (2000, 2178). Similarly, another study concluded that ‘‘[i]n recent years, it has become very obvious that significant improvements are needed in the characterization of emissions from heavyduty vehicles (HDVs) operating in real-world conditions, and in the models used to generate mobile source emissions inventories. Emissions inventories have grossly underestimated the emissions from mobile sources.’’ Gautam et al. (1998, 400). 101. This overestimate has been old news for quite some time, as most of the research that uncovered it was funded by either the EPA or California’s air regulators. For heavyduty engines, the EPA’s models (as well as California’s separate models) were relatively inaccurate, because ‘‘little effort has been made to describe truck travel explicitly within travel demand models. In current modeling practice, it is common to estimate heavy-duty truck travel as a fixed percentage of predicted traffic volumes’’ despite differences in traffic patterns from light-duty traffic. Dreher and Harley (1998, 352) (footnote omitted). Although ‘‘billions of dollars per year in transportation funding are linked to air quality attainment plans,’’ National Research Council (2000, 1), the EPA’s models were labeled ‘‘geriatric’’ in 2001 by the head of the EPA’s Office of Air Quality and Monitoring. Tierney (2002). A committee appointed by the National Research Council to review MOBILE concluded that ‘‘[q]uestions have been raised about MOBILE’s capability to evaluate reliably the impacts of air-quality-improvement initiatives. . . . Previous and current versions of the model have been criticized for their lack of adequate documentation on underlying methodologies and data. There has also been criticism by the U.S. General Accounting Office that EPA’s policy on peer review had not been fully followed during the development of current and past versions of MOBILE.’’ National Research Council (2000, 2). The EPA’s then-current model was explicitly criticized in 2000 for its inaccurate modeling of heavy-duty vehicle emissions because those emissions were ‘‘expected to be a major target’’ of SIP revisions. National Research Council (2000, 9). Criticism of the models are detailed by Lloyd and Cackette (2001, 830); Harrington, McConnell, and Cannon (1998); and Pierson et al. (1999). Specific problems with the models’ prediction of heavy-duty diesel emissions are described by Yanowitz, Graboski, and McCormick (2002, 270). See also Clark et al. (2001, 121; 2002, 84, 92); Yanowitz et al. (1999, 215); Clark and McKain (2001, 437). 102. Kean, Sawyer, and Harley (2000, 1937). 103. Pun, Seigneur, and White (2001). 104. Marr and Harley (2002, 2334).

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105. Refiners and truckers argue that inaccuracies in the EPA’s model of the impact of fuel characteristics caused states to adopt specific fuel requirements for diesels that actually detracted from environmental quality. Diesel Fuel News (2001a, 1). Similarly, the GAO noted that states receive SIP credit for instituting inspection and maintenance programs for motor vehicles, but that these credits are ‘‘based solely on EPA’s model— not on validating actual emissions testing.’’ GAO (2000a, 25). 106. The review of the EPA’s models noted that ‘‘emissions inventories and control strategies being developed are based on out-of-date assumptions and inaccurate predictions, perhaps resulting in the selection and propagation of inefficient or ineffective controls.’’ Further, the committee found that ‘‘[t]he development of SIPs requires accuracy in emissions inventories and crediting of emissions reductions from controls, both of which are particularly sensitive to errors. Little has been done to address this issue. . . . Users need updates [of MOBILE] that incorporate the latest findings on factors that affect emissions and the effectiveness of control strategies so that SIPs can be based on the most accurate information.’’ National Research Council (2000, 11, 51). This also applies to transportation plans that states are required to develop under the Intermodal Surface Transportation Efficiency Act of 1991, where ‘‘[s]pecific out-year technological assumptions used when MOBILE5 was developed in 1993 may not accurately represent current assumptions. This could cause an unnecessary strain on regions, as they are forced to meet transportation plan budget tests based on outdated forecasts.’’ National Research Council (2000, 54). 107. Reitze (1996, 1482). 108. J. Schwartz (1995, appendix A). 109. Crandall et al. (1986, 1). 110. Currie (1979, 902). 111. Wagner (2000). 112. Lawrence J. White discussed this incentive in his examination of early emissionscontrol efforts in California: ‘‘In the case of emissions control, it is clear that the industry’s joint interests lay in discouraging research, delaying the development of control technology, and controlling the flow of information to outsiders, especially to government officials who might impose regulation. Since emissions control could only add to the cost of a vehicle or degrade its performance, the industry’s interests were in making control look as impracticable and costly as possible.’’ L. White (1982, 13). 113. Reitze (2000, 327). 114. Electronic controllers increased fuel economy 7 to 15 percent. Berg (1996, 9). 115. Business Week (1976, 90). 116. Stadder (1994, 54). 117. Owners can be required to upgrade engine controllers and other technology, of course. California has unsuccessfully tried this with heavy-duty diesel engines. See supra note 32 and accompanying text. 118. T. Johnson (2001, 29). Heavy-duty diesel engines have remained in service up to thirty years. Sawyer and Johnson (1995, 75). 119. U.S. Bureau of the Census (1997). 120. If only the larger size 8 vehicles are considered, there were 2,211,283 on the road in 1997. U.S. Bureau of the Census (1997). Our calculation underestimates the time for turnover, since in 1997 the average age of a truck was 8.3 years, and 19 percent of the

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trucks were more than 15 years old. Sawyer et al. (2000, 2163). Then, on average, there were 205,000 trucks added each year in that category between 1995 and 2000. Again, a rough calculation indicates that it would take slightly more than ten years to turn over the existing stock on the road in 1997. 121. Crandall et al. (1986, 116). 122. Gruenspecht (1982, 330–331). 123. Emissions regulations ‘‘have had the effects of new source performance standards —differentially increasing the costs of new vehicles, discouraging their purchase, and encouraging the retention of the older vehicles that are the heavy emitters in the fleet.’’ L. White (1982, 68). Buyback programs can remove older dirtier vehicles from fleets. This has been successfully done with automobiles. Dolan and Chedekel (2001, A1); Santa Barbara County Air Pollution Control District, ‘‘Old Car Buy Back Program,’’ http:// www.sbcapcd.org/ocbb.htm (accessed June 28, 2002). 124. EPA (1995a). 125. Galligan (1998, 30). 126. J. Parker (1998, 1). ‘‘Documents from the [1991] Geneva meeting, attended by EPA, state that the agency’s ‘transient cycle’ test was already known to grossly underestimate emissions of NOx at highway speeds.’’ Parker and Johnson (1998, 47). This was confirmed by the U.S. House (2000, 14–15), which also noted that Inside EPA’s Mobile Source Report had included information on the software in a 1994 article. (The article is reprinted in the U.S. House report (2000, appendix K).) A January 27, 1994, memo from Thomas M. Baines, senior technical advisor in the Office of Mobile Sources, to the office director confirms that the EPA knew of the results presented at the Geneva meeting. (The memo is reprinted in the U.S. House report (2000, appendix H).) 127. A Natural Resources Defense Council senior attorney stated that ‘‘[a]nybody involved in the regulation of diesel emissions—whether in government, industry, an environmental group, or a state organization—knew that there was a disconnect between certification emissions and in-use emissions, and frankly I’ve been raising that issue since 1995 with the agency.’’ Parker and Johnson (1998, 47). 128. Inside Cal/EPA (1998, 2); Northeast States for Coordinated Air Use Management, letter to Mary Nichols, assistant administrator, Office of Air and Radiation, Sept. 11, 1996, at 8. Supporting the engine manufacturers’ claim was a comment from the chief deputy executive officer of the CARB in 1997: ‘‘I would like to have seen them minimize emissions no matter how the engines operate, but they weren’t required to do that.’’ Quoted in Bowman (1997). 129. U.S. House (2000). 130. Memorandum of Law of the United States, supra note 26, at 90. 131. Morriss, Yandle, and Dorchak (2004, 483–493) discuss this issue in depth. 132. EPA (1998). 133. With respect to the test protocols, the consent decrees added several supplemental tests, including the Euro III test, which examines ‘‘13 test points representing different steady state conditions . . . within the normal operating range of the engine’’ and covers conditions ‘‘more representative of extended highway driving.’’ Another required test imposed a ‘‘not to exceed’’ limit over a specified range of operations, set at about 1.25 times the applicable FTP standard. Memorandum of Law of the United States, supra note 26, at 21–23. A ‘‘Transient Not-to-Exceed Limit’’ covered short bursts of emissions

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during conditions such as accelerating after traffic stops and went into effect after October 2002. Memorandum of Law of the United States, supra note 26, at 18–19. Finally, the consent decrees imposed a ‘‘Smoke or Opacity Limit’’ on particulate and smoke emissions to prevent trade-offs of NOx and particulate emissions. In-use testing was also required to ensure engines ‘‘continue to meet the reduced emissions limits and other requirements throughout their useful lives.’’ Memorandum of Law of the United States, supra note 26, at 19. The in-use testing program is quite complex, but we omit the details here, as what matters most is that the EPA now sought to match in-use testing to the prior engine-only tests. In short, the consent decrees created an entirely new set of test protocols layered on top of the FTP that addressed the FTP’s shortcomings. The imposition of transient limits, testing over a wider range of operating conditions, and the addition of in-use testing to the out-of-chassis testing transformed the FTP into a wholly new test protocol. Engines designed for sale after October 1, 2002, could not have used the prior strategy that the EPA alleged constituted a defeat device. Of course, the EPA could have modified the FTP to adopt additional test procedures at any time without suing the engine manufacturers. Had it done so, however, the EPA would have been required by the notice-and-comment procedure to allow public comment on the modifications, including public discussion of the costs and benefits of the various changes. It is likely also that the changes in the FTP would have been found sufficiently major to involve the Clean Air Act’s lead-time provisions. To justify such changes, the EPA would also have had to explain why the earlier FTP was inadequate—conceding at least implicitly that the agency had failed to adequately design the FTP to cover actual driving conditions. By adopting these changes through the consent decrees, the EPA avoided the embarrassment of such an admission of regulatory failure and avoided an extended public debate (and a likely set of court challenges by affected parties and environmental groups) over its testing methodology. For example, the chief engineer of General Motors, a truck manufacturer but not an engine manufacturer for heavy heavy-duty engines, noted in a filing in a consent decree proceeding that [t]he imposition of these arbitrary numerical limits over a wide range of engine operating conditions greatly restricts an engine’s allowed operating characteristics. Traditionally, under the FTP test, emissions were permitted to vary in response to engine operating conditions so long as the emissions over a typical driving cycle (the FTP) did not exceed the emissions limits. Under EPA’s interpretation of the new supplemental test procedures, these limits must be met under nearly all engine operating conditions. Thus, it makes no difference whether the engine is being operated up a steep hill, into the wind, at high altitude, with a full load, on a hot day. That engine must meet the same numerical emission limits as when it is operated with virtually no load, down hill, at sea level, on a cool day. No allowance is made for differing engine conditions. The imposition of the supplemental testing requirements results in the need to design engines that exhibit different emission profiles. Lower emissions are now required under a wide variety of engine operating conditions and cannot just be lowered proportionately to meet the FTP limits. Declaration of Steven Matsill, supra note 59.

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134. The EPA also essentially paid Congress not to object by directing the fines into the federal treasury. As the State of New York, which objected to the consent decrees, noted, those fines could have been allocated for additional NOx reductions, but the EPA chose not to do so. Memorandum of Law of the United States, supra note 26, at 87. 135. A comparison of the EPA’s responses to the comments opposing portions of the settlements with the EPA’s responses to comments in rulemaking proceedings shows the EPA’s reduced concern over potential challenges. The responses in the former are shorter and less detailed than the EPA’s responses to significant comments in rulemakings. 136. Memorandum of Law of the United States, supra note 26, at 38. 137. Kilcarr (2001, S11). 138. Ladwig (2002b). 139. Starling (2002, 35). Similar decreases in fuel economy occurred for the other EGR manufacturers’ engines. Starling (2002, 35). 140. Deierlein (2003). 141. Wislocki (2002, 35). 142. Statement of Position of the United States (pull-ahead dispute) at 10, United States v. Caterpillar, Inc., Civ. Action No. 98-2544-HHK (D.D.C. June 18, 2002). 143. Osenga (2002, 2). 144. CCJ, ‘‘Engine Update,’’ http://www.etrucker.com/apps/news/article.asp?id=195 98 (accessed Apr. 22, 2007). Environmental groups were critical of the requests. Clean Air Trust (2002). 145. Steve Brown, memorandum to Caterpillar field force, ‘‘Additional Information for Dealer and Customer Questions,’’ May 23, 2002; see also Morriss, Yandle, and Dorchak (2004, 494). 146. Ladwig (2002a). 147. Steve Brown, memorandum to Caterpillar field force, May 23, 2002; see also Morriss, Yandle, and Dorchak (2004, 495). 148. Rhein Associates (2003, 18). 149. As the EPA noted in its court filing in support of the settlements, ‘‘[t]hese emission limits and test protocols [in the consent decrees] do not impose any additional requirements on non-signatories to the decrees.’’ Memorandum of Law of the United States, supra note 26, at 99. 150. Rhein Associates (2003, 21). As the Rhein report explained, ‘‘The MBE4000 was not a non-compliant diesel and did not have to meet the 2004 emissions regulations until January 2004. The non-compliant diesels had to meet the 2004 regulations in October 2002. This gave the MBE4000 a price advantage in 2003 compared to the diesels using cooled EGR or ACERT.’’ Rhein Associates (2006, 23). 151. Rhein Associates (2006, 23). 152. One ad stated, ‘‘Compare our Holset Variable Geometry Turbocharger to all the others, and you’ll be convinced that its simpler design is your best choice.’’ Cummins Cooled EGR and VG Turbocharger Technology, http:// www.everytime.cummins.com/ every/pdf/3606481.pdf. 153. Statement of Position of the United States (pull-ahead dispute), supra note 142, at 11. 154. The EPA made a crucial decision that favored the EGR engines over alternatives.

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The agency proposed NCPs that were dramatically different from those used in prior years. The original ‘‘default’’ consent-decree NCPs were set using ‘‘cost of compliance values and factors 1.5 times the existing NCP values and factors.’’ Statement of Position of Caterpillar (NCP dispute) at 2, United States v. Caterpillar, Inc., Civ. Action No. 98-2544-HHK (D.D.C. May 10, 2002). The EPA subsequently proposed setting the NCP at five times the ‘‘default’’ NCPs. Statement of Position of Caterpillar, supra, at 2. The difference was striking: ‘‘a 3.3 gram NOx + NMHC heavy heavy-duty diesel engine would be subject to an NCP of about $2,000 under the Decree, but would rise to almost $7,500 under EPA’s NCP proposal.’’ Statement of Position of Caterpillar, supra, at 8. A critical step by the EPA in the post-consent-decree period was to propose a dramatic increase in NCPs for engines that did not meet the model year 2004 standard (‘‘pulled ahead’’ to October 2002 by the consent decrees). To do so, the EPA proposed using significantly higher costs of compliance to calculate the NCPs, raising the life-cycle cost from $879, Control of Emissions of Air Pollution from Highway Heavy-Duty Engines, 62 Fed. Reg. 54,694, 54,711 (Oct. 21, 1997), to $8,940, Notice of Proposed Rulemaking, 67 Fed. Reg. 2,159, 2,165 (Jan. 16, 2002). The EPA’s final rule set the NCP at $6,810, still well above the original ‘‘default’’ value. Control of Air Pollution from New Motor Vehicles and New Motor Vehicle Engines; Non-Conformance Penalties for 2004 and Later Model Year Emission Standards for Heavy-Duty Diesel Engines and Heavy-Duty Diesel Vehicles, 67 Fed. Reg. 51,464, 51,468 (Aug. 8, 2002). 155. Steven A. Herman, Office of Enforcement and Compliance Assurance, EPA, letter to Douglas Grandstaff, general counsel, Caterpillar, Inc., Jan. 19, 2001, at 4–5. 156. Statement of Position of Caterpillar (NCP dispute), supra note 154, at 5. 157. Sylvia K. Lowrance, Office of Enforcement and Compliance Assurance, EPA, letter to Douglas Grandstaff, general counsel, Caterpillar, Inc., Jan. 19, 2001, at 2. 158. Statement of Position of Caterpillar (AECD dispute) at 4, United States v. Caterpillar, Inc., Civ. Action No. 98-2544-HHK (D.D.C. May 10, 2002); Statement of Position of Caterpillar (NCP dispute), supra note 154, at 1. Depending on the amount of time the controllers shut down the EGR system, the Caterpillar engine not certified as compliant could emit less total NOx than an engine certified compliant with the 2.5 g/bhp-hr standard. Statement of Position of Caterpillar (AECD dispute), supra, at 4. Caterpillar argued that if 2 g/bhp-hr EGR engines turned off the EGR systems 8 percent of the time, they would produce more NOx than a non-EGR engine that met only a 3.5 g/bhp-hr standard. Ladwig (2002d). 159. Statement of Position of Caterpillar (NCP dispute), supra note 154, at 1. 160. The timing of the certification of the Cummins EGR engine certainly suggests that this may be what happened. While Caterpillar and Detroit Diesel were pushing for more time, and thinking that they might be able to negotiate an extension, Caterpillar announced its ACERT technology. Faced with what it feared was a technological advantage by a competitor, Cummins announced that it would meet the deadline the next day. Once Cummins had done so, it became impossible for the EPA to grant an extension to the other manufacturers. 161. EPA (1998). 162. Ladwig (2002c). 163. Transport Topics (2002, 8).

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164. Cullen (2002, 22). Truck-engine consumers expressed skepticism about the new engines, with prebuying taking place while model year 2001 engines were still available. D. Schneider (2002, 9); Ball (2002, A12). The EPA’s response was to launch an investigation into whether the prebuy violated the terms of the consent decree, under which engine manufacturers could not encourage such behavior, and to express concern that the prebuy would jeopardize air-quality goals. Whitten (2002, 33); Cullen (2002, 22). As an article on the new engines in the April 2002 issue of Fleet Owner summarized the problem: ‘‘The negatives already associated with the ’02 engines—even before they hit the market—are considerable. First, it’s expected that the new technology engine makers will deploy to get down to the requisite EPA emissions limits will add $3,000 to $5,000 to the cost of a new vehicle. What’s more, engine makers concede fuel efficiency will likely be compromised and maintenance schedules may have to be modified. Bad as that news is, what is most disconcerting to new truck buyers is the simple fact that they don’t know how these new engines will perform, that is, how much they will break down.’’ Cullen (2002, 21). 165. On the glut, see Declaration of Steven D. Duley, supra note 59, at 5, and Morriss, Yandle, and Dorchak (2004, 501). On overhauling cost, see Cullen (2002, 24). 166. Heavy Duty Trucking (2002). 167. Reiskin (2002); Condra (2002). Given the short-term nature of any increase in demand, the engine makers were limited in their ability to expand production to accommodate increased demand. 168. Reiskin (2002). 169. Rhein Associates (2006, 37). 170. ICF Consulting (2002, 17). The EPA was not unaware of the potential problems for air quality caused by a prebuy, as Caterpillar raised the issue in a request for a modification of the consent decree. Caterpillar had argued in its dispute with the agency that the cost of the October 2002 engines was higher than initially predicted by the EPA and that this higher cost would both increase the incentive for prebuying and harm the engine makers, who would have to absorb some of the costs. Moreover, Caterpillar argued that its bridge engines would have ‘‘actual emissions . . . in the same range as the actual emissions of engines EPA approves with overheat, air handling and condensation AECDs.’’ Statement of Position of Caterpillar (NCP dispute), supra note 154, at 2. 171. Declaration of Thomas A. Rhein, United States v. Caterpillar, Civ. Action No. 98-2544-HHK (D.D.C. June 28, 2002); Peter Vroom, letters to John Pemberton, June 27, 2002, and Christine Todd Whitman, EPA administrator, June 27, 2002; Declaration of Glenn F. Brown, United States v. Caterpillar, Civ. Action No. 98-2544-HHK (D.D.C. June 8, 2002); Affidavit of Karel Znamenacek, United States v. Caterpillar, Civ. Action No. 98-2544-HHK (D.D.C. June 27, 2002); Affidavit of Dwayne O. Haug, United States v. Caterpillar, Civ. Action No. 98-2544-HHK (D.D.C. June 27, 2002); Declaration of Steven D. Duley, United States v. Caterpillar, Civ. Action No. 98-2544-HHK (D.D.C. June 27, 2002); Affidavit of Patrick E. Quinn, United States v. Caterpillar, Civ. Action No. 98-2544-HHK (D.D.C. June 28, 2002); see also Morriss, Yandle, and Dorchak (2004, 504). 172. Rhein Associates (2003, 29–40). Class 8 truck sales dropped from 146,031 in 2002 to 141,964 in 2003. Automotive News (2006, 26). 173. GAO (2004). The EPA strongly disagreed with these findings, both in its written

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response to the GAO (included in the report) and its own (second) progress report on the 2007 standards, also issued in 2004. 174. The EPA took precisely this approach in the model year 2007 standards. 40 C.F.R. § 86.007-11(g) (phase-in options, effective 2007); 40 C.F.R. § 86.007-15 (averaging, trading, and banking of NOx and particulate emissions credits, effective 2007). 175. Reddy and Kiel (2006, 1). 176. GAO (2004). 177. Automotive News (2006, 26). Gilroy (2006, 29) cites the economy as the main reason for the high sales number. 178. Total sales were 425,183 in 2005 and 386,258 in 2004. Ward’s Motor Vehicle Facts & Figures (2006, 2). 179. Kiel (2006, 1, 31). 180. Kiel (2006, 31). 181. Reiskin (2007, 1; 2008, 14). 182. Bearth (2007, 2). 183. Fischer (2006, 5). 184. See, e.g., EPA Retrofits (2005). The EPA maintains diesel-retrofitting information on its Web site, http://www.epa.gov/cleandiesel/. 185. 42 U.S.C. § 16092. 186. Cook (2005, 1449). President George W. Bush proposed spending $49.5 million on diesel emissions reductions in his 2007 budget. Scott (2006, 277). Of course the funds authorized must actually be appropriated. See note 191. 187. Bruninga (2004, 1252). At least one environmental group believes that the EPA could use its authority to ‘‘regulate rebuild practices and emissions for heavy-duty on road engines, under 42 U.S.C. § 7251(a)(3)(D).’’ Clean Air Task Force (2005, 8). 188. Bruninga (2004, 1252). 189. Bruninga (2004, 1252). 190. U.S. Environmental Protection Agency, SmartWay Transport Partnership, http:// www.epa.gov/smartway/swplan.htm. By 2012, SmartWay hopes to save up to 200,000 tons of NOx and 150 million barrels of oil annually and an even more impressive amount of carbon dioxide. 191. Day (2005a, 531). Wal-Mart agreed to reduce idling of its approximately 7,000 trucks at 4,000 facilities in a settlement with the EPA, which was enforcing state antiidling rules that were part of the Connecticut and Massachusetts SIPs. Wal-Mart Agrees (2005, 2248). As part of the Diesel Emissions Reduction Act, Congress appropriated to the EPA administrator the following sums to reduce extended idling from heavy-duty vehicles: $19.5 million (fiscal year 2006), $30 million (fiscal year 2007), and $45 million (fiscal year 2008). 42 U.S.C. § 16104(b)(4)(B)(i). 192. Najor (2005, 970). 193. Day (2006, 1362). Although these examples are not directly applicable to onhighway diesel trucks since they rely on recapturing the braking energy expended in urban driving, the projects do demonstrate the value of teamwork (EPA patents tossed in do not hurt, either). Also, the collaborations prove that environmental gains need not necessarily imply reduced performance or a competitive disadvantage. 194. Ware (2006, 835).

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195. Day (2005b, 721). 196. Goklany (1999) suggests that the Clean Air Act had less of an impact than has been commonly accepted.

Chapter Five: Dust Litigation 1. The standard law-and-economics analysis of accident law focuses on these incentive effects. See Shavell (1987). 2. Nagareda (2007, ix–x). 3. Borel v. Fibreboard Paper Products Corp., 493 F.2d 1076 (5th Cir. 1973). The impact of Borel is described by Coffee (1995, 1385); Baron (1981, 2); and Carroll et al. (2005, 21–23). 4. Creswell (2006); Shapiro (2005, 988). 5. U.S. Department of the Interior (1992, 4). The most common form of silica (SiO≤) in nature is quartz. U.S. Department of the Interior (1992, 4). 6. See Morriss and Dudley (2006, 272–274) for a discussion of the various forms of silica. 7. ‘‘[T]he dust which is stirred and beaten up by digging penetrates into the windpipe and lungs, and produces difficulty in breathing, and the disease which the Greeks call ásyma. If the dust has corrosive qualities, it eats away the lungs, and implants consumption in the body.’’ Agricola (1556, 214). 8. Despite widespread general knowledge that there were risks to dust exposure, there was little specific knowledge concerning the types of risks with which we are concerned today. Nineteenth-century and earlier observers could see dust in the air in mines and other workplaces and observe that some of the employees working in those locations became sick. They had little accurate knowledge about why the employees became ill, why some did and some did not, or how the dust they observed was connected to the illness. We remember the successful identification of the association between dust and silicosis, forgetting the many similar theories that have since been proved wrong (e.g., the connection between ‘‘miasmas’’ and disease). E. Cooper (2001, 881–883) discusses changes in theories of disease. 9. Rosner and Markowitz (1991, 38, 41) and Derickson (1988, 40) describe the rise in hazards. 10. U.S. Department of the Interior (1992, 25). 11. Derickson (1988, 41). 12. Derickson (1988, 42). 13. Witt (2004, 22). 14. Witt (2004, 37). 15. Witt (2004, 59). 16. Witt (2004, 62) (quoting original sources). 17. Rosner and Markowitz (1997, 478). 18. Barth (1980, 61). Crystal Eastman’s report for the Russell Sage Foundation, which helped build public support for workers’ compensation systems, explicitly discussed the quid pro quo. Eastman (1916, 216–220). Public-interest-regulation theorists suggest that workers’ compensation legislation developed out of state legislators’ concern for employees, ‘‘many of whom were recent immigrants or former slaves and hardly in a posi-

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tion to strike hard bargains with the industrial tycoons of the day.’’ McGarity and Shapiro (1993, 17). Left unspecified, however, is how these powerless employees convinced legislators to defy the industrial tycoons and pass legislation against the tycoons’ interests. The public-choice account is superior, in our view, because it explains the rise of the legislation without resort to episodic defiance by legislatures of powerful interests who are otherwise thought to control events. Interest in such issues remained at the state level, in part because the federal government had not yet become large enough to make a difference. ‘‘State and local government expenditures were about five times larger than the federal budget in 1929’’—federal expenditures were a mere 3 percent of gross national product that year. D. Kennedy (1999, 55). 19. Witt (2004, 127, 142). 20. Sellers (1993, 246). 21. On X-ray technology, see Rosner and Markowitz (1991, 32); on germ theory, see Sellers (1997, 114–115). 22. Howell (1995, 3–5). 23. Howell (1995, 41–42). The use of such methods reflected more than technological change; it also reflected the growth of the same scientific management techniques reorganizing factories. Howell (1995, 42, 55). 24. Howell (1995, 103); Gostin (1995, 4–7). 25. Howell (1995, 104, 108–109). 26. Howell (1995, 118–119). 27. Howell (1995, 33); see also Sellers (1997, 60–61); Barth (1980, 6). 28. Sellers (1997, 25). 29. Rosner and Markowitz (1991, 48). 30. Sellers (1997, 109). 31. Rosner and Markowitz (1991, 51–62). 32. Rosner and Markowitz (1991, 60, 63, 73); Derickson (1988, 162). The unions also used the health issue in part to eliminate competition from women, arguing that female workers should be excluded from jobs with dust exposures to protect their health. For example, ‘‘[a]t its annual convention in 1912, the [mold makers] union resolved ‘to use every effort to bring about the elimination’ of the employment of women in foundries because ‘twentieth century civilization is not in favor of dragging down American womanhood so that the foundrymen can increase their profits.’ ’’ Rosner and Markowitz (1991, 61). 33. Rosner and Markowitz (1991, 64–65). 34. Corn (1989, 5, 50–53). 35. Corn (1989, 8). 36. Sellers (1997, 72). 37. Sellers (1993, 236–238). 38. For example, ‘‘[a] car that cost the average worker the equivalent of nearly two years’ wages before the First World War could be purchased for about three months’ earnings by the late 1920s.’’ D. Kennedy (1999, 21). 39. Zieger (1994, 5–6). 40. D. Kennedy (1999, 27); D. Montgomery (1979, 33); Zieger (1994, 6). Unions were preoccupied with declining membership—a sympathetic observer says the AFL ‘‘lan-

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guished in torpor and apathy throughout the 1920s’’—and losing ground because they had not yet cracked the mass production industries. Zieger (1994, 23). Most important in explaining the lack of state interest in issues like silicosis, the AFL unions under Samuel Gompers’ philosophy of ‘‘voluntarism’’ largely shunned involvement with the government. D. Kennedy (1999, 25). 41. Barth (1980, 92–93). 42. Rosner and Markowitz (1991, 165). 43. Davis, Salmonsen, and Earlywine (1935, 75). 44. Davis, Salmonsen, and Earlywine (1935,79) (quoting Employer’s Mutual’s twentyfifth annual report). 45. Sellers (1997, 204). 46. Rosner and Markowitz (1991, 5). 47. Rosner and Markowitz (1991, 78–79); Barth (1980, 4). 48. Rosner and Markowitz (1991, 81). 49. Davis, Salmonsen, and Earlywine (1935, 52); Kellog (1935, 1); Rosner and Markowitz (1991, 70). 50. Sellers (1997, 204). 51. Davis, Salmonsen, and Earlywine (1935, 33). 52. See U.S. Department of Labor (1938, 1–3). 53. Marsh v. Industrial Accident Commission of California, 18 P.2d 933, 938 (Cal. 1933); Time (1936, 58); N.Y. Times (1936, 22). 54. A representative of the Association of Casualty and Surety Executives, for example, reported that silicosis costs ‘‘threaten[] the ruin of many American industries.’’ Literary Digest (1934, 15). 55. Monthly Lab. Rev. (1936, 1546). 56. Virtually all the remaining workers were eventually disabled from chronic silicosis. Balaan and Banks (1998, 435). Civil suits by the workers were largely settled out of court. Newsweek (1936, 34). 57. Skinner (1936, 4). 58. Balaan and Banks (1998, 435) (deaths); U.S. Department of the Interior (1992, 25) (pure quartz). The most thorough account is that by Cherniack (1986). Cherniack notes (41) that estimates of the silica content was at least 90 percent. He also suggests (104) that the death toll may have been as high as 764. 59. The story of Gauley Bridge came to light when a ‘‘young New York playwright’’ traveling through West Virginia gave a ride to a miner and learned of the ‘‘village of the living dead,’’ where many surviving tunnel workers with silicosis lived. He wrote a story of a dying miner for the New Masses, a radical paper, and for the People’s Press, a labor paper, and then published a nonfiction account. Representative Vito Marcantonio (RN.Y.), whose biography termed him ‘‘frequently the sole spokesman in Congress for America’s radical left’’ from 1936 to 1950, then launched a congressional investigation. Schaffer (1966, 1); Literary Digest (1936, 6). (Marcantonio switched from the Republican Party to the American Labor Party after 1937.) 60. U.S. House (1936). The conferences are described by the U.S. Department of Labor (1938, 5); Cherniack (1986, 109); and Monthly Lab. Rev. (1936, 1546). 61. Brinkley (1995, 35, 40).

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Notes to Pages 102–105

62. On the ambiguities in workers’ compensation statutes, see U.S. Department of Labor (1938, 4) and Rosner and Markowitz (1991, 86). On the difficulties in diagnosis, see Rosner and Markowitz (1991, 86). On unions’ involvement, see Rosner and Markowitz (1991, 7); Sellers (1993, 237); D. Montgomery (1979, 163); and Morton (1954, 83). 63. Rosner and Markowitz (1991, 133). 64. Skinner (1936, 4). The threat was probably seen as significant. Roosevelt’s rhetoric had taken a hard turn left in 1935, and ‘‘he now brandished the mailed fist of open political warfare’’ at business. D. Kennedy (1999, 278). The main threat to Roosevelt lay to the left in 1935, and so his shift leftward was aimed at rising political figures such as Father Charles Coughlin and Gerald L. K. Smith, the successor to the assassinated Huey Long’s political program. Roosevelt may not have meant it, as Kennedy notes that FDR often ‘‘substituted insult for injury,’’ but his rhetoric was undoubtedly alarming at the time. D. Kennedy (1999, 284–285). 65. Skinner (1936, 4); Cherniack (1986, 110). 66. Jasanoff and Perese (2004, 622). 67. Carroll et al. (2005, 11–12). 68. For a thorough summary of the literature on asbestos and cancer, see Carroll et al. (2005, 12–19). 69. Carroll et al. (2005, 12). 70. Cauchon (1999). McGovern (2002, 1724–1726) sets out the plaintiffs’ and the defendants’ versions of the asbestos story. 71. Brickman (2005, 992); Carroll et al. (2005, 40, 49). The study noted that this was probably an underestimate. 72. American Academy of Actuaries (2001). 73. Keene Corp. v. Insurance Co. of North America, 667 F.2d 1034 (D.C. Cir. 1981). Keene’s significance is discussed by Brickman (1992, 1832; 2003, 55–56). Professor Brickman summarizes the changes in the law as follows, which we quote at length to provide a clear sense of the magnitude: Special asbestos law included: a redefinition of injury to allow unimpaired persons to bring suit; a highly relaxed standard for proving that exposure to a specific defendant’s products caused plaintiff’s injury, a critical element of proximate cause; changes in measurement of damages; the promiscuous availability of multiple punitive damage awards punishing defendants again and again for identical conduct as a way of herding cash cows to the settlement pasture; procedural rule changes including allowing enormous aggregations that created bet-the-company scenarios that forced defendants to settle cases that they often would have won had they been tried and cases that would never have even been filed but for the aggregations; allowing plaintiff lawyers to effectively control courts’ calendars, select the specific cases to be tried from among the many filed, and allow multiple suits against a defendant in several different courts simultaneously in order to maximize pressure on defendants to settle scores and even hundreds of cases which were typically aggregated and which usually included a few seriously ill claimants with the remainder unimpaired; resulting in large scale acquiescence by defendants to settlement policies demanded by plaintiff lawyers that allowed enormous numbers

Notes to Pages 105–108

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of claimants without any illness to be mass processed in so-called inventory settlements and ‘‘settlement programs’’ to settle future inventories of cases. Brickman (2003, 56–57) (notes omitted). 74. Carroll et al. (2005, v). 75. Coffee (1995, 1384); Brickman (2003, 35); Priest (2003, 261). 76. Carroll et al. (2005, 49, 85). 77. Quoted in Schwartz, Behrens, and Tedesco (2003, 862). 78. Carroll et al. (2005, xxvii). 79. Stengel (2006, 227). 80. Stengel (2006, 227). 81. Borel v. Fibreboard Paper Products Corp., 493 F.2d 1076 (5th Cir. 1973). 82. See Coffee (1995, 1385); Baron (1981, 2) (noting that before Borel ‘‘occupational disease law amounted to a group of cases and articles discussing recovery under the various state workers’ compensation acts’’); Stengel (2006, 230) (noting that before Borel plaintiffs had little success in asbestos suits). 83. Hanlon and Lehrman (2004, 162). 84. Brodeur (1985) describes the plaintiffs’ attorneys battles in (sometimes overly dramatic) detail. Nagareda (2007, 14–19) concisely summarizes the financial risks for the plaintiffs’ firms in new mass torts. 85. Carroll et al. (2005, 23). 86. Carroll et al. (2005, 23). 87. Kakalik et al. (1983). 88. Carroll et al. (2005, 6). 89. Carroll et al. (2005, 92). Another measure of the unexpected size of awards for asbestos is the rapid exhaustion of the $5 billion Manville Trust, which was set up to fund payments to claimants against asbestos manufacturer Johns Manville Co.; less than two years after it started payments in 1988, the trust was effectively insolvent. Coffee (1995, 1387). 90. Carroll et al. (2005, vii). Asbestos litigation has costs well beyond the payments by individual defendants. The financial weakening of the defendants resulted in estimated job losses ranging from 128,000 to 423,000 and billions in lost investment capital. Carroll et al. (2005, 73–74). 91. Carroll et al. (2005, 31). 92. Carroll et al. (2005, 63). 93. Carroll et al. (2005, 61). 94. For example, Texas passed a statute that gave asbestos cases special access to the Texas courts during the 1990s, a statute drafted in part by one of the leading asbestos lawyers. Biederman et al. (1998). A 1998 news report on the statute found that the exception ‘‘quickly became a gaping hole.’’ In 1990 there were 580 claims filed by nonresidents; by the end of 1995 there had been more than 35,000 nonresident asbestos-related claims filed in Texas. The ‘‘loophole’’ was closed in 1997, leaving ‘‘nearly 42,000 asbestos claims filed in Texas by out-of-state plaintiffs awaiting resolution.’’ Biederman et al. (1998); see also Dow Chemical Co. v. Castro Alfaro, 786 S.W.2d 674 (Tex. 1990); Acts 1993, 73rd Leg., ch. 4, § 1 (codified at Tex. Civ. Prac. & Rem. Code Ann. § 71.051 (Vernon)).

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95. Carroll et al. (2005, vii). 96. Carroll et al. (2005, 76) describe the literature on this problem. The most compelling evidence is from the Manville Trust’s analysis of claims. Using only doctors selected in consultation with the plaintiffs’ bar and a process designed to favor claimants, the study nonetheless found that approximately half the claims failed the independent review of their radiographs. Carroll et al. (2005, 76). 97. Carroll et al. (2005, vii). 98. Priest (2003, 268). 99. McGovern (2001, 617). 100. Brickman (2005, 997). M. White (2006, 368–369) offers a clear account of the process. 101. Carroll et al. (2005, 41). 102. Carroll et al. (2005, 49). 103. Carroll et al. (2005, 94). 104. Carroll et al. (2005, 23–24). 105. McGovern (2002, 1721). 106. McGovern (2001, 617). 107. Priest (2003, 265). 108. See Brickman (1992, 1882–1883). 109. To avoid bankruptcy, ‘‘asbestos defendants entered into arrangements with plaintiff lawyers . . . to settle [claims] en masse or not contest them in court and accept default judgments and then tender these liabilities to the insurance companies for payment. In some cases, this appears to have encouraged plaintiff lawyers to put forward meritless claims secure in the knowledge that defendants would not give them close scrutiny.’’ Brickman (2003, 55–56). 110. Hayek (1973, 100). 111. Carroll et al. (2005, xx). 112. Carroll et al. (2005, 56). 113. McGovern (2001, 618). 114. In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293, 1034 (7th Cir. 1995). Field and Frank (1983, 127) note that ‘‘[t]he pressure of immensely overcrowded dockets has encouraged legislatures to adopt a posture towards settling multi-defendant cases that appears to deprive defendants of the fair exercise of their right to a trial.’’ See also Justice Ruth Bader Ginsburg’s comment in Norfolk & Western Railway Co. v. Ayers, 538 U.S. 135, 166 (2003) (quoting Ortiz v. Fibreboard Corp., 527 U.S. 815, 821 (1999)), that ‘‘[t]he ‘elephantine mass of asbestos cases’ lodged in state and federal courts, we again recognize, ‘defies customary judicial administration and calls for national legislation.’ ’’ 115. Coffee (1995, 1356). The grouping of claims of people with quite different symptoms plays an important role here. ‘‘Through this grouping of claims, the defendants are essentially held hostage. The defendants do not want to risk going to trial on a mesothelioma claim. They do not want the dying person on the stand, with a sympathetic jury and possible liability for punitive damages. So you get the bouquet approach: one rose, a few carnations, and all of the baby’s breath settled at once.’’ Biggs (2003, 1053). 116. Axelrod (1984) examines the role of repeat play in depth.

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117. Carroll et al. (2005, 30). 118. Biederman et al. (1998). Transaction costs have consumed more than half of the spending on asbestos claims, with the majority going to plaintiffs’ attorneys. Carroll et al. (2005, vii). In a sign of plaintiffs’ attorneys power, the share of spending going to plaintiffs’ firms held steady, while defense firms’ share fell over time (with the savings going to the plaintiffs). Carroll et al. (2005, 60–61). 119. The plaintiffs’ bar generally is an organized lobbying group. The Association of Trial Lawyers of America (ATLA) (since renamed the American Association for Justice), the major national plaintiffs’ bar organization, contributed almost $11 million to political campaigns (over 90 percent to Democratic candidates) over the 2000–2004 election cycles. See the Web site of the Center for Responsive Politics (entry on the American Association for Justice), http://www.opensecrets.org/orgs/summary.asp?ID=D0000000 65 (accessed April 22, 2007). ATLA ‘‘routinely ranks among the top five PACs in federal campaign contributions.’’ Manhattan Institute for Policy Research (2003). Two major asbestos law firms, Baron & Budd and the Law Offices of Peter Angelos, themselves gave more than $3 million. Manhattan Institute for Policy Research (2003). ‘‘Over the years, Angelos has used his amassed power to change laws that have benefited his law practice and helped ensure that his cases come out on top. At his request, more judges have been named to hear asbestos cases in Baltimore, and significant alterations in state law have made it easier to sue asbestos makers and tobacco companies.’’ LeDuc and Ruane (1999, C1). 120. With respect to the bankruptcy process, ‘‘a small subset of the plaintiffs’ bar has come to dominate trust operations. These lawyers handle a huge percentage of pending claims; this is critical in light of the § 524(g) requirement that a 75% supermajority of claimants must approve any plan. This provides key members of the asbestos plaintiffs’ bar with huge leverage in the bankruptcy process, which, in turn, allows them to insist on trust procedures that will ensure their dominance over trust operations.’’ Stengel (2006, 264–265). 121. Coffee (1995, 1360); Edley and Weiler (1993, 384); Carroll et al. (2005, 47–48); Field and Frank (1983, 91). 122. Carroll et al. (2005, 45, 49); Brickman (2003, 59–103); Coffee (1995, 1359); Biederman et al. (1998). 123. On evidence, a classic example is the investment by the asbestos plaintiffs’ bar in locating 1930s Johns Manville general counsel Vandiver Brown, who had retired to Scotland. Manville had resisted the ‘‘introduction of damaging correspondence between Brown and Sumner Simpson, president of Raybestos Manhattan, as trial evidence by arguing that Brown was dead and therefore his signature could not be authenticated. However, this tactic proved futile after plaintiff’s lawyers found Brown alive and well in Scotland.’’ Billauer (1987, 691 n. †). On the legal theories, see Coffee (1995, 1360). Advice for potential defendants echoes this point, noting that liability theories ‘‘continue to grow in the hands of creative plaintiffs’ lawyers.’’ See Billauer (1987, 687). 124. Coffee (1995, 1350). 125. Schwartz, Behrens, and Tedesco (2003, 867); Carroll et al. (2005, 26); Jasanoff and Perese (2004, 632–633). 126. Brickman (2005). Professor McGovern (2001, 616) commented that

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Notes to Pages 112–114 over the last twenty-five years what we’ve seen is plaintiff’s lawyers [who] . . . used to get $15 thousand for a wrongful death case. Now what is it? Twenty-five million dollars for a minimal asbestos case. You’ve got a big pot of money that lawyers have put together, and those lawyers, what are they going to do with it? I used to look at the Silicon Valley folks and I said well, what’s the difference between the gazillionaires in Silicon Valley and the tobacco lawyers? And it’s pretty much the same. People tend to invest their money in what they know. And so we’ve seen a lot of lawyers who made a lot of money through tobacco and through asbestos reinvesting that money in HMO cases, in handgun cases, in genetically-modified plants, holocaust, you name it. So we saw an evolution in the plaintiff’s bar of slowly but surely putting together the resources where the plaintiff’s bar can go toe-to-toe on a financial basis with the biggest corporations.

127. Coffee (1995, 1346). 128. Coffee (1995, 1365). Biederman et al. (1998) quote a defense attorney for a ‘‘very small player,’’ who asked that his name not be used because ‘‘when you irritate [Baron & Budd], they have a tendency to retaliate.’’ 129. Carroll et al. (2005, 23); Coffee (1995, 1373–1376). 130. Biggs (2003, 1060); Jasanoff and Perese (2004, 628). The first bankruptcy attributed to asbestos was in 1976; there were nineteen more in the 1980s and another seventeen in the 1990s; and from 2000 through the middle of 2004, an additional thirtysix filings. Carroll et al. (2005, xxvii). 131. Professor McGovern, who has direct experience as special master in asbestos suits, describes the bankruptcy process: ‘‘The other participants in the bankruptcy negotiations—the debtor, the financial creditors, the U.S. Trustee, and others—tend to defer to the committee of asbestos personal injury plaintiffs appointed by the U.S. Trustee in the bankruptcy. The members of this committee—either claimants themselves or their lawyers, but for all practical purposes, the lawyers—reflect the interests of the personal injury plaintiffs who are making claims against the bankrupt company. These lawyers are the legislators, judges, and juries in deciding the appropriate mechanism for paying current and future asbestos personal injury plaintiffs. Their negotiations constitute a marketplace for determining criteria and values, just as the tort system and proposed legislative approaches set criteria and values.’’ McGovern (2006, 166). 132. McGovern (2006, 167–168). 133. ACandS, Inc. v. Abate, 121 Md. App. 590 (Md. Ct. Spec. App. 1998). See Carroll et al. (2005, 28–45) for a survey of case-management issues. 134. Brickman (2005, 1002). 135. Stengel (2006, 241); Carroll et al. (2005, 130). 136. Priest (2003, 265). Regulatory agencies have had a lot to say about cleaning up asbestos in existing structures, however. 137. The EPA did attempt to ban asbestos, but its rule was overturned in Corrosion Proof Fittings v. EPA, 947 F.2d 1201 (5th Cir. 1991). 138. Carroll et al. (2005, 129). 139. Both Professor McGovern and the RAND study found that the proportion of compensation going to the most severely ill plaintiffs had risen during the 1990s. McGov-

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ern (2006, 175–176); Carroll et al. (2005, 102). This does not mean, however, that cancer cases are not still being undercompensated relative to asymptomatic cases, just that the problem is becoming less severe. The increasing volume of asymptomatic cases also means that they are exhausting the pool of assets available, even if the average recovery is smaller. 140. McGovern (2002, 1726) terms the transaction costs ‘‘outrageous,’’ noting that ‘‘[l]awyers receive a grossly disproportionate share of the total amount of monies spent in the litigation process.’’ 141. Carroll et al. (2005, 87–106) survey costs. 142. Carroll et al. (2005, 88). 143. Carroll et al. (2005, xxix). 144. Hall (1983, 1984) describes the rise of the elected judiciary. 145. NIOSH (2002, v). 146. Morriss and Dudley (2006, 314–322) survey this period. 147. NIOSH (1974). Morriss and Dudley (2006) discuss the interactions between NIOSH and OSHA. 148. See, e.g., Black (2002, 35), in which a plaintiffs’ lawyer cites the NIOSH document as proof of problem. 149. The National Conference to Eliminate Silicosis was held in 1997. Markowitz and Rosner (1998, 309). 150. Markowitz and Rosner (1998, 308). 151. Markowitz and Rosner (1998, 309). 152. Goodwin et al. (2003, 310). 153. Humble Sand & Gravel, Inc. v. Gomez, 146 S.W.2d 170 (Tex. 2004), is the most recent definitive statement by the Texas Supreme Court and traces the duty back to a 1974 case. Shapiro (2005, 995) notes the role of Texas law on this point. Schwartz, Behrens, and Crouse (2006) give a critical assessment of the duty to warn in silica cases. 154. Markowitz and Rosner (1998, 309). 155. Shapiro (2005, 988). 156. The quote is from Brickman (2005). 157. National Institute for Occupational Safety and Health, ‘‘B Reader Information for Medical Professionals,’’ http://www.cdc.gov/niosh/topics/chestradiography/breaderinfo.html (accessed Jan. 13, 2007). See In re Silica Products Litigation, 398 F. Supp. 2d 563, 596–603 (S.D. Tex. 2005), for a thorough description of the screening process. 158. Hechler (2005, 18). 159. Shapiro (2005, 985). 160. Judge Jack is also a nurse. Hechler (2005, 18). 161. Creswell (2006) (quoting Daniel Mulholland, lawyer for a lead defense firm in silica litigation). As Congressman Whitfield noted, ‘‘[e]ven after Judge Jack’s opinion and the committee’s investigation, silicosis cases continued to proliferate, many even involving the same doctors and screening companies whose conduct had been so thoroughly discredited.’’ U.S. House (2006, 364) (opening remarks of Mr. Whitfield). 162. In re Silica Products Litigation, 398 F. Supp. 2d at 574. 163. In re Silica Products Liability Litigation, 280 F. Supp. 2d 1381, 1382 (Jud. Panel on MDL, 2003).

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164. In re Silica Products Litigation, 398 F. Supp. 2d at 573, 666. 165. A Daubert hearing, so called after the Supreme Court’s decision in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), is held to evaluate the admissibility of scientific evidence. See Vickers (2005) for a review of the decision and empirical work evaluating its impact. 166. U.S. House (2006, 36). 167. In re Silica Products Litigation, 398 F. Supp. 2d at 580. 168. Most discovery of the testimony of consulting experts, as opposed to experts who would testify at trial, is prohibited by Federal Rule of Civil Procedure 26(b)(4)(B). However, as the court explained, ‘‘[t]he Plaintiffs refused to affirmatively state that any particular doctor was, in fact, a non-testifying expert for any Plaintiff. Moreover, the Court ruled that ‘so long as Plaintiffs are proffering the doctors and their diagnoses to fulfill this Court’s requirement under Order No. 6 that Plaintiffs produce diagnoses of silica-related disease, Plaintiffs cannot claim the doctors are non-testifying.’ ’’ In re Silica Products Litigation, 398 F. Supp. 2d at 584 (notes omitted). 169. The district court’s opinion describes the situation with Dr. Martindale in detail. In re Silica Products Litigation, 398 F. Supp. 2d at 581–586. 170. In re Silica Products Litigation, 398 F. Supp. 2d at 587–588. 171. In re Silica Products Litigation, 398 F. Supp. 2d at 605–610. The court noted that the rate of reversal of diagnosis of one of the plaintiff’s screening doctors ‘‘can only be explained as a product of bias—that is, of Dr. Harron finding evidence of the disease he was currently being paid to find.’’ 398 F. Supp. 2d at 638. The two diseases produce different patterns on radiographs. As the court noted, citing testimony from Senate hearings, ‘‘[b]ecause asbestosis and silicosis have such different appearances on an x-ray, in a clinical setting, ‘confusion between silicosis and asbestosis does not occur.’ ’’ 398 F. Supp. 2d at 595. In her congressional testimony, Dr. Welch said that it is ‘‘uncommon’’ for people to have both silicosis and asbestosis, that she has never seen one in her career, and that she has seen ‘‘mixed dust disease’’ where people had heavy exposures to both. U.S. House (2006, 107). 172. In re Silica Products Litigation, 398 F. Supp. 2d at 612. The court noted that Dr. Levy spent less than four minutes per case on average. A more objective expert estimated that ‘‘the entire process of determining whether an individual has silicosis takes between 60–90 minutes.’’ 398 F. Supp. 2d at 594. One doctor defended his rapid readings in the hearings as follows: ‘‘There has been a suggestion that my review of the x-rays was ‘cursory.’ To some extent (time-wise), that is correct because reviewing the film and the examining physician’s assessment is all I did. When a B-reader reviews x-rays, it does not take a great deal of time. In taking the federal exam to become a certified B-reader, we read 125 x-rays in a 6-hour period, or 21 per hour. Experienced B-readers may be more proficient.’’ U.S. House (2006, 483) (letter from Dr. George H. Martindale to Billy H. Davis, Jr., March 25, 2005). 173. In re Silica Products Litigation, 398 F. Supp. 2d at 615. Another physician testified that Dr. Levy’s procedures ‘‘came nowhere near meeting what his own methodology was that he spelled out. And I have both the Third and Fourth Edition of his textbooks. And in no way does it relate to that methodology.’’ 398 F. Supp. 2d at 639. 174. In re Silica Products Litigation, 398 F. Supp. 2d at 601. In particular, the court

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noted that ‘‘[b]ecause of this fee structure, Mr. Mason [owner of the screening company] testified that the emphasis was on attracting as many people as possible to the screenings and creating as many positive diagnoses as possible; as he stated, ‘[F]rom a business standpoint of mine, you had to do large numbers.’ ’’ 175. In re Silica Products Litigation, 398 F. Supp. 2d at 570–573. The court pointed out that ‘‘[t]his explosion in the number of silicosis claims in Mississippi suggests a silicosis epidemic 20 times worse than the Hawk’s Nest incident. Indeed, these claims suggest perhaps the worst industrial disaster in recorded world history.’’ 398 F. Supp. 2d at 575. 176. In re Silica Products Litigation, 398 F. Supp. 2d at 570–573. 177. In re Silica Products Litigation, 398 F. Supp. 2d at 676. 178. In re Silica Products Litigation, 398 F. Supp. 2d at 620. 179. In re Silica Products Litigation, 398 F. Supp. 2d at 640. 180. U.S. House (2006, 115–116). 181. U.S. House (2006, 189). 182. Mississippi had held its disciplinary proceedings in abeyance during the congressional investigation, under the mistaken assumption that a federal criminal investigation was proceeding. Once the state agency learned that the congressional proceedings were noncriminal (something it surely should have been able to find out by calling the committee earlier), it decided to proceed. U.S. House (2006, 220). 183. U.S. House (2006, 422–423). The O’Quinn Law Firm, for example, financed the creation of the Laminack, Pirtle, and Martinez law firm. The former handled silicosis claims and the latter handled asbestosis claims. 184. U.S. House (2006, 363). 185. U.S. House (2006, 218–219, 231) (statements of Robert W. Goff, director, Division of Radiological Health, Mississippi Department of Health, and Richard Ratliff, Department of State Health Services, Texas); see, e.g., 25 Tex. Admin. Code § 289.226. Texas defines ‘‘healing arts screening’’ as ‘‘[t]he testing of asymptomatic human beings using radiation machines for the detection or evaluation of health indications when such tests are not specifically and individually ordered by a licensed practitioner of the healing arts legally authorized to prescribe such x-ray tests for the purpose of diagnosis or treatment.’’ 25 Tex. Admin. Code § 289.227(e)(34). Texas has authorized healing-arts screening only for mammography, bone densitometry, and heart computed tomography. In 1999 the state began investigations into complaints regarding unauthorized screenings for asbestosis and silicosis. It discovered seven entities had done so, only one of which had a licensed physician providing the individual prescriptions, and five of the six others were not authorized to do X-ray screening. One company ultimately paid a $10,000 fine; three others were issued notice of violations. U.S. House (2006, 232) (statement of Richard Ratliff). 186. U.S. House (2006, 218–219; 231–232). 187. U.S. House (2006, 223–224) (statement of Dr. Mallen G. Morgan, executive director of Mississippi State Board of Medical Licensure). 188. U.S. House (2006, 64). The leading organization of occupational medicine clinics, the Association of Occupational and Environmental Clinics, has a policy statement on asbestos screening, which sets out principles that apply to silicosis screenings as well. It

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provides that ‘‘[s]creening on the basis of chest X-ray and work history alone identifies possible cases but does not by itself provide sufficient information to make a firm diagnosis, to assess impairment or to guide patient management.’’ ‘‘Principles and Guidance: Asbestos Screening,’’ http://www.aoec.org/principles.htm. 189. U.S. House (2006, 215) (prepared statement of the Honorable Joe Barton, chairman, Committee on Energy and Commerce). 190. One doctor testified in the congressional hearings that he performed approximately five days of physical examinations for N&M, Inc. (a screening firm) for $5,000 per day, and provided them with a summary on forms provided by N&M. Approximately one month later he was asked to ‘‘re-sign’’ forms. He testified that he later found out that N&M had added additional language diagnosing silicosis, which he had not seen because he had asked his office manager to stamp the forms with his signature. U.S. House (2006, 258) (statement of Dr. Glyn Hilbun). Dr. George Martindale, in response to a letter from a lawyer at Campbell Cherry, wrote the firm concerning his ‘‘withdrawal’’ of his diagnosis, asserting that he had been asked by the firm to ‘‘review the x-rays of workers who I was told had been clinically diagnosed as having either asbestosis or silicosis’’ and to ‘‘state whether my ‘read’ was consistent with the diagnosis made by the examining physician’’ and that he had been told that the examining doctor was an expert who had conducted a medical, occupational, and physical examination and pulmonary function test. ‘‘It was explained to me that a B-reader was needed to validate the findings of the examining physician.’’ U.S. House (2006, 482) (letter from Dr. George H. Martindale to Billy H. Davis Jr., March 25, 2005). 191. U.S. House (2006, 214). 192. U.S. House (2006, 215). 193. U.S. House (2006, 522–526) (letter from Joseph Gibson to defense counsel in MDL cases, April 16, 2004; memo from Joe Gibson to Steve Bryant, April 12, 2004, with detailed expense calculation for defendants). The memo provides some examples, including ‘‘Medical records—on average most people will have seen three (3) doctors and/or confined to a hospital. The average costs for medical records will be $500 per plaintiff. Thus, the costs of medical records on 9,000 plaintiffs can be estimated to be $4,500,000.00. If only twenty of defendants order copies of the records the costs will be $90,000,000.’’ ‘‘The totals above equal $1,102,600,000. Yes, that’s over $1 billion.’’ 194. The system of B-reads was summarized by Judge Jack as follows: The ILO system standardizes the interpretation of chest x-rays using descriptions of the size, shape, and profusion (i.e., degree or severity) of radiographic abnormalities (i.e., visible lung markings or scarring). The system is used to describe shape (either regular/rounded or irregular/linear) and size (regular/rounded: ‘‘P,’’ ‘‘Q,’’ ‘‘R’’; irregular/linear: ‘‘S,’’ ‘‘T,’’ ‘‘U’’) characteristics of radiographic abnormalities. . . . The extent of radiographic abnormalities (i.e., ‘‘profusion’’ . . .) is characterized by a number between 0 and 3, and a second number, separated from the first by ‘‘/.’’ The first number, preceding the ‘‘/,’’ is the final score assigned to that film by the reader. The second number, following the ‘‘/,’’ is a qualifier. The numbers 0, 1, 2, and 3 are the main categories, ranging from normal (or 0) to increasingly abnormal (1, 2, and 3). An x-ray read as a category 1 film might be

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described as 1/0, 1/1, or 1/2. When the reader uses the descriptor ‘‘1/1,’’ she is rating the film as a ‘‘1,’’ and only considered it as a ‘‘1’’ film. If she uses ‘‘1/0,’’ she is saying she rated the film as a ‘‘1,’’ but considered calling it a ‘‘0’’ (or normal) film before deciding it was category 1. Finally, when the reader uses ‘‘1/2,’’ she is saying she is rating the film as a ‘‘1,’’ but considered calling it a ‘‘2’’ film. In re Silica Products Litigation, 398 F. Supp. 2d 563, 591 (S.D. Tex. 2005) (notes omitted). 195. Representative Whitfield brought this up in the hearings, asking Tulane law professor Ed Sherman, ‘‘[W]hy couldn’t someone look at the Judge Jack opinion and call it an example as some people have today that the system is working, bad claims being tossed out[?]’’ Professor Sherman responded: ‘‘Well, what Judge Jack’s opinion pointed out is the lack of standards over screening and diagnosis in this area, and without standards, we could anticipate that these kinds of situations might arise in other places and at other times. It points up quickly it seems to me that systemic changes need to be made in establishing ground rules and standards for screening and diagnosis.’’ U.S. House (2006, 99). 196. Carroll et al. (2005, 122–123). 197. Carroll et al. (2005, xix). 198. U.S. House (2006, 116).

Chapter Six: Tobacco Litigation 1. Four states—Florida, Minnesota, Mississippi, and Texas—had previously settled suits with the tobacco industry. There is a vast literature on the MSA and tobacco regulation generally. Books by Derthick (2005) and Viscusi (2002a) are noteworthy treatments that focus on and analyze regulation-by-litigation as a new form of rulemaking. 2. In re Fordice, 691 So. 2d 429 (Miss. 1997). 3. W. Olson (2000). 4. Estimates vary, but a ‘‘consensus’’ estimate of price elasticity for adults by the National Cancer Institute is –0.40, which would produce a 4 percent decline in demand for a 10 percent increase in price. National Cancer Institute (1993). An internal Philip Morris review concluded that price elasticity was declining over time and had reached –0.20 by 1982. M. E. Johnston, memorandum to H. G. Daniel, ‘‘Still More on the Price Elasticity of Cigarettes,’’ March 25, 1982, at 5, http://tobaccodocuments.org/pm/20435 65313-5328.html. 5. According to the U.S. Department of Agriculture’s (USDA’s) Economic Research Service, ‘‘cigarette prices surged 45 cents per pack’’ on the day the MSA was signed. The wholesale price for cigarettes moved from $1.00 to $1.50 per pack in 1998 and then moved to $2.25 three years later. Meanwhile the export price fell slightly from $0.50 to $0.40 per pack. Cigarette-producer profits surged. See Capehart (2000; 1999, 8); Rachlinski (1999, 813). 6. Derthick (2005, 1). 7. Mollenkamp et al. (1998, 137). 8. Fowler and Ford (2004, 28).

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9. M. Little (2001, 1143). 10. We elaborate on the bootleggers-and-Baptists analysis by Yandle et al. (forthcoming), dividing the players into bootleggers (the tobacco interests), Baptists (the health interest groups), and televangelists (the plaintiffs’ attorneys and state attorneys general), with the last group distinguished by a lack of principle. 11. On the number of smokers, see U.S. Bureau of the Census (1999, 153). One might argue that the smokers benefited from increased state expenditures on smoking reduction. However, as we discuss later, the states did not dedicate much of the revenue windfall to programs intended to benefit smokers. 12. Tan (2006, 233). 13. Chamberlin (1933). Cartel theory is summarized by Tirole (1988, 239–262). We know a great deal about the cigarette’s demand curve from the many investigations of and experience with cigarette taxation. 14. Jacquemin and Slade (1989, 420–421) summarize the literature on the incentive to cheat. 15. Jacquemin and Slade (1989, 417–418). 16. Agriculture marketing orders are issued for specific products (e.g., iceberg lettuce) from specific regions or states (e.g., Arizona) for specific destination markets (e.g., Phoenix). All lettuce producers agree to the marketing orders through association meetings. Violators of the order can be penalized by having a portion of a future crop withheld from the market. See U.S. Department of Agriculture, ‘‘Fruit and Vegetable Programs: Marketing Orders,’’ http://www.ams.usda.gov/fv/sm-bus-c.htm (accessed Jan. 12, 2007). 17. Kreps (1990, 524–536) discusses the economics of implicit collusion. 18. As O’Brien (2000, 2) explains, ‘‘[b]ecause the states are receiving billions of dollars in ‘damages’ pursuant to the MSA, the state attorneys general can hardly be expected to enforce the antitrust laws with respect to the agreement.’’ 19. Master Settlement Agreement [hereinafter MSA], section IX(d), available at http:// www.naag.org/backpages/naag/tobacco/msa//msa, or http://ag.ca.gov/tobacco/msa.php. As we will discuss later, the effort to block entry was, as might be expected, less than perfect. 20. Appendix T of the MSA provided a model statute for states to pass. The ostensible purpose for these contributions was ‘‘to pay judgment[s] or settlement[s] on any released claim brought against such tobacco product manufacturer[s] by the State or any releasing party located or residing in the State.’’ MSA, supra note 19, appendix T. As we noted, the amounts are proportional to the payments of the original MSA participating companies. For information on this requirement, as well as an example of its implementation, see the page on nonparticipating tobacco manufacturers on the California attorney general’s Web site, http://ag.ca.gov/tobacco/manufacturers.php (accessed Jan. 28, 2007). 21. This claim is false, as Professor Michael Krauss noted. ‘‘In truth the payments scheduled by the Multistate Agreement are in no way based on any calculation of losses suffered by the states. Rather, they are amounts that the parties calculated could be added to the price of cigarettes without significantly reducing the consumption that both governments and the tobacco companies desire.’’ Krauss (2001, 658). 22. An account sympathetic to Mississippi attorney general Michael Moore described his announcement in a Washington press conference of the proposed settlement of the

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state lawsuits: ‘‘As Moore warmed to the topic and the TV audience, he sounded more comfortable by the second. There would be more than 15 minutes of fame attached to this moment, he was certain. Now, he was a household name and finally a player in something more than a small southern pond; this was a huge rushing river, 10 blocks from the White House.’’ Mollenkamp et al. (1998, 33). 23. Orey (1999, 317–318) discusses the stock-price issues. 24. Orey (1999, 153) notes that though they are ‘‘[r]uthless rivals in the marketplace, tobacco companies closed ranks and cooperated extensively in a number of areas deemed beneficial to the industry as a whole. This included lobbying, public relations, some forms of scientific research, and legal strategy.’’ 25. Zegart (2000, 197). Turriciano (1998, 633–634) reports that ‘‘according to a Common Cause study, the tobacco industry contributed $2.4 million in soft money to the Republican Party in 1995 [the year that federal regulation was being pushed by the FDA] compared to $546,000 in 1993. . . . In 1996, Philip Morris donated $1.76 million to Republican political campaigns and almost $500 million to the Democratic party.’’ 26. Brown and Snell (2003, 1); Fisher (2000). The number of farms, which were typically small-acreage operations, had been declining for years and would reach a postMSA count of 57,000 in 2002. Womach (2005). 27. The agricultural subsidies were built around a system of tobacco quotas, whose size was set annually by the U.S. Department of Agriculture. A tobacco quota, essentially the right to produce tobacco, has value when tobacco prices rise above production costs. Brown and Snell (2003). 28. Fritschler (1969, 9, 127). 29. Kagan and Nelson (2001, 16) argue that ‘‘[f ]rom the start, governmental action to discourage smoking has been sharply constrained by the long-standing ubiquity of tobacco products and the large number of smokers.’’ 30. Kagan and Nelson (2001, 11). 31. Kagan and Nelson (2001, 13–14) note that antitobacco policy entrepreneurs have come from the ‘‘public health establishment’’ and ‘‘private, non-profit public health organizations’’ and term them ‘‘the functional equivalent of a traditional industry-based interest group.’’ We refer to the antitobacco groups as ‘‘health interest groups’’ rather than as ‘‘public-health advocates’’ or ‘‘public-health groups’’ because we take a neutral view of interest groups’ activities. Health interest groups like Action on Smoking and Health, and the American Cancer Society may have the most laudable of motives in seeking the regulations they advocate, and we do not doubt that smokers would likely be healthier if tobacco were banned entirely. Nonetheless, these interest groups seek to use the power of government to impose their choices on others, whereas we view the decision to smoke or not as one properly left to the private sphere. 32. Fritschler (1969, 16–17). Doll (2004, 6–7) terms the medical evidence that came out in 1950 the ‘‘watershed’’ in health research, although he notes that ‘‘[t]he results were given wide publicity, but the conclusion was not widely believed. Medical scientists had as yet to appreciate the power of epidemiology in unraveling the aetiology of non-infectious disease.’’ 33. Zegart (2000, 53), who focuses on the role of the plaintiffs’ bar, notes rather dismissively that ‘‘the money the voluntaries [the American Cancer Society, the American

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Heart Association, and the American Lung Association] were willing to spend was pitiful: about $150,000 a year’’ in the 1980s and that the Coalition on Smoking or Health, a joint endeavor of the three, did not ‘‘notch any important victories in Washington’’ during the 1980s. Kluger (1996, 465) terms the opposition to tobacco ‘‘weak and scattered voices of protest’’ and notes that the three voluntaries spent little on tobacco issues in the 1970s. 34. Kluger (1996, 506). 35. Kluger (1996, 508–510). 36. Kluger (1996, 284). Kluger also notes (1996, 285) that the Johnson administration did not make tobacco a priority, because it was focused on desegregation and civil rights and did not want to further antagonize southern interests. 37. Not all regulators supported regulatory action on tobacco. The USDA and the U.S. Department of Health, Education, and Welfare (HEW) both opposed cigarette regulation in the 1960s. Fritschler (1969, 31). 38. Each of these state actions has its own story. See Ausness (2004, 829). Attorneys general have significant freedom to act independently. The power of attorneys general and their freedom to act on behalf of the executive is well established. Their incentive to take on high-profile suits is also well established, since attorneys general are seen frequently making the passage to governor. On the first point, the Fifth Circuit Court of Appeals ruled in 1976 that in the absence of statutory authority denying an attorney general ‘‘specific powers . . . he typically may exercise all such authority as the public interest requires.’’ Florida v. Exxon Corp., 526 F.2d 266, 268 (5th Cir. 1976). Derthick (2001, 49) also examines the issue of attorney-general authority. Their powers do not include the powers to levy taxes, of course. The evidence that this implicit taxation can be attractive to states that have the power to directly tax tobacco is found in the widely varying state excise taxes imposed on cigarettes. As suggested by Professor Derthick, with cigarette taxes in 2000 that varied from Virginia’s $0.025 per pack to New York’s $1.11 per pack, it is clear that there are different political forces at work in different states. 39. Mollenkamp et al. (1998, 27). 40. There are a variety of accounts of just how the idea of suing on behalf of the state took hold. See Jensen (2001, 1344–1346); Zegart (2000, 92–93); Orey (1999, 260, 265); Mollenkamp et al. (1998, 26–30); Pringle (1998, 25); W. Olson (2003, 30–31). Although details vary, there is general agreement that Moore, Scruggs, and two other Mississippi lawyers—Ron Motley and Mike Lewis—all played important roles. They also consulted several law professors, including Professor David Owens at the University of South Carolina and Professor Laurence Tribe at Harvard Law School. Pringle (1998, 31). 41. W. Olson (2003, 30–33). 42. MSA, supra note 19, exhibit S. Most states contracted with one or more of these national firms and hired local counsel as well. The states with the most outside counsel were Louisiana (17), Montana (11), and Indiana (10). Some states like California and Georgia did not designate outside counsel. Olson (2003, 40). 43. M. Little (2001, 1147). The MSA ultimately identified 185 individual attorneys and firms as ‘‘outside counsel’’ for the participating states. MSA, supra note 19, exhibit S. 44. M. Little (2001, 1184–1185). 45. Zegart (2000, 331).

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46. McGrew (1972). 47. Thornton (1997). 48. Troyer and Markle (1983, 33–34). 49. Chaloupka, Wakefield, and Czart (2001, 42); Robert (1967, 256, 276). 50. Pure Food and Drug Act of 1906, Pub. L. No. 59-384, 34 Stat. 768, 768–772 (repealed 1938). 51. The removal of tobacco from the Pharmacopoeia has suggested to some that there was a connection between passage of the 1906 statute and the removal. Fritschler (1969, 32) attributes the removal to tobacco-company pressure, basing his conclusion on Neuberger’s work (1963). Pringle (1998, 102), who generally does not hesitate to conclude that the tobacco companies misbehave, finds that ‘‘[t]here is no hint, however, of such a deal in the Congressional Record, nor in the papers of Dr. Harvey Washington Wiley, a physician and pharmacist who had been in charge of the precursor to the FDA, the Agriculture Department’s Division of Chemistry. Tabacum was dropped, it seems, because its properties as a cure had been superseded by other substances.’’ 52. Food, Drug, and Cosmetic Act, 21 U.S.C. §§ 301–397. The quoted language is at 21 U.S.C. § 321(g)(1)(C). 53. See FDA v. Brown and Williamson Tobacco Corp., 529 U.S. 120, 156 (2000); Pringle (1998, 97–98). 54. Brown and Williamson, 529 U.S. at 160; McGowan (2002, 493). 55. Costello (1997). 56. A quarter of the Senate committees and a third of the House committees in the early 1960s were chaired by politicians from tobacco states. Fritschler (1969, 24). Senator Maureen Neuberger’s antitobacco book also made this point in 1963, noting that the industry benefited from the seniority of southern senators and congressmen. Neuberger (1963, 71–72). The most prominent example of this power was the 1957 issuance of a report critical of tobacco by a House subcommittee chaired by a congressman from Minnesota. The subcommittee was soon dissolved, and the Minnesota congressman lost his chairmanship. When the subcommittee was reconstituted, the former chair was no longer a member. Fritschler (1969, 24–25); Kluger (1996, 189). Senator Neuberger identified these events as an example of the industry’s political power. Neuberger (1963, 54–55). Tobacco interests also benefited in the 1960s from the hiring of a former U.S. senator and congressman, Earle C. Clements, as their chief lobbyist in 1964. Clements had been minority and majority whip in the Senate in the 1950s; had served as the head of the Senate Democratic Campaign Fund in the late 1950s, putting many senators in his debt; had floor privileges as a former senator; was personally close to the Johnson administration, including to Abe Fortas; and had a daughter serving as Lady Bird Johnson’s social secretary. Fritschler (1969, 20–22); Kluger (1996, 270–271). Fritschler (1969, 116–120) describes Clements’s role in the industry’s victory in the passage of the Federal Cigarette Labeling and Advertising Act in 1965. Finally, Senator Neuberger noted the ‘‘liberality in lobbying’’ of the tobacco companies, observing that ‘‘one occasionally hears of unscrupulous state legislators introducing a cigarette labeling bill with the not unreasonable expectation of ‘shaking down’ tobacco lobbyists for substantial ‘contributions’ in exchange for prompt burial of the bill.’’ Neuberger (1963, 72).

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57. Pringle (1998, 122). 58. Calfee (1986). Parker-Pope (2001, 82–86) discusses in some detail the marketing of cigarettes as a means of weight control. The FTC put a stop to the explicit marketing of cigarettes as a weight-control method, although the manufacturer of Lucky cigarettes continued a series showing ‘‘double-chinned and heavy-belted silhouettes behind normal figures,’’ with the slogan ‘‘Reach for a Lucky instead.’’ Robert (1967, 238). Such claims were particularly difficult for the FTC to handle on an individual basis, however, which ultimately led to the warning-label requirement. Fritschler (1969, 70–71). 59. Pringle (1998, 125). 60. Section 5 of the Federal Trade Commission Act broadly prohibits deceptive and unfair acts or practices in or affecting commerce, including deceptive advertising. 15 U.S.C. § 45. In addition, supplement advertising falls under sections 12 and 15 of the act, which prohibit false advertisements, defined as advertisements that are misleading in a material respect. 15 U.S.C. §§ 52, 55. The FTC ‘‘invoked its adjudicatory powers in cases involving cigarette producers approximately 25 times between 1938 and 1968.’’ Fritschler (1969, 70). The FTC guidelines ended the ‘‘tar derby’’ in 1955. Fritschler (1969, 72). Kozlowski and O’Connor (2004, 39–41) describe the tar derby in detail. 61. See supra note 56. 62. Cigarette Advertising Agreement (1988, 7,853.51) (quoting a statement by Earl W. Kintner, FTC chairman, on Feb. 5, 1960). Calfee (1986) details the problems caused by the FTC’s actions. The FDA played a role in stopping claims by cigarette manufacturers that particular brands prevented colds, flu, and other diseases. Pringle (1998, 97). 63. Kluger (1996, 190). 64. The FTC’s ban on health claims had an unintended effect on the introduction of filter cigarettes. By banning health claims, the FTC kept the companies from discussing what the filters did, but the companies were allowed to tell consumers that their cigarettes had filters, which presumably removed something from the smoke. However, ‘‘[t]o compensate for the taste robbed from them by filters, the new brands used stronger tobaccos that yielded about as much tar and nicotine as the old, unfiltered brands.’’ Kluger (1996, 188). 65. Fritschler (1969, 2). 66. Kluger (1996, 203–204). The American Medical Association did not play a major role in the debates over policy in the 1960s, in part because it was focused on fighting against socialized medicine programs and wanted to avoid offending tobacco-state congressmen and senators. Kluger (1996, 203, 286–287). 67. Senator Neuberger also wrote to the FTC in April 1962 asking it to require a warning label. Fritschler (1969, 73). 68. Fritschler (1969, 37–38); McGrew (1972). Neuberger (1963, 62–63) describes the ‘‘sequence of events in detail. Five days after the President ‘warily’ answered the reporter’s question by promising a later response, the Wall Street Journal predicted a panel of scientists would be convened by the Surgeon General to take pressure off the government. Three days later the panel was created. That same day, Kennedy was asked by the same reporter who asked the initial question to comment on the Surgeon General’s announcement of the panel and ‘[t]he President, fully armed, responded readily’ that the panel’s

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appointment ‘gives the position of the Surgeon General, which I have supported, and in response to the question you asked two weeks ago . . . I think that the announcement is in response to your question. You have been answered.’ ’’ 69. Fritschler (1969, 40–41) describes the selection process. 70. Thun & Henley (2004, 25); Jones (1997, 12). 71. HEW (1964, 8–9, 31–32). 72. McGrew (1972). The agency claimed that failure to warn consumers that smoking was dangerous was an unfair and deceptive trade practice under the Federal Trade Commission Act. Unfair or Deceptive Advertising or Labeling of Cigarettes in Relation to the Health Hazards of Smoking, 29 Fed. Reg. 8324, 8325 (July 2, 1964). Fritschler (1969, 83–84) reports that FTC chair Rand Dixon was concerned about whether the agency had the political clout to successfully challenge the cigarette industry. Four congressmen from North Carolina testified before the FTC in opposition to the requirement, an unusual occurrence at that time. Fritschler (1969, 86). The industry’s challenge at the hearings centered on disputing the FTC’s authority rather than a challenge on the merits. Fritschler (1969, 86–88). On the timing, see Fritschler (1969, 48) and Notice of Rulemaking Proceeding, 29 Fed. Reg. 530 (Jan. 22, 1964). Future law-and-economics scholar and Seventh Circuit judge Richard Posner helped draft the rule. Kluger (1996, 268). 73. Unfair or Deceptive Advertising or Labeling of Cigarettes in Relation to the Health Hazards of Smoking, 29 Fed. Reg. 8324. 74. Fritschler (1969, 99); Kluger (1996, 280). 75. Extension of Effective Date for Labeling Requirements, 29 Fed. Reg. 12,626 (Sept. 5, 1964); Kluger (1996, 272). 76. U.S. House (1964); Kluger (1996, 286–287). 77. Kluger (1996, 289–291). 78. Federal Cigarette Labeling and Advertising Act, Pub. L. No. 89-22, 79 Stat. 282 (1965); Fritschler (1969, 11). Fritschler (1969, 110) terms the ‘‘congressional reprimand’’ of the FTC ‘‘unexpectedly severe in its intensity.’’ After the statute’s passage, the FTC withdrew its rule. Vacation of Warning Requirements in Trade Regulation Rule concerning Advertising and Labeling of Cigarettes, 30 Fed. Reg. 9484 (July 29, 1965); Fritschler (1969, 128). 79. Fritschler (1969, 112). The circumstances of passage testified to the tobacco lobby’s influence. The bill passed the Senate 72 to 5, with support from most of the tobaccostate senators, and by a voice vote in the House. ‘‘Even those who often raise[d] objections to bills which grant the national government regulatory powers instead of allowing the states to have them were quiet on [the] labeling bill.’’ Fritschler (1969, 113–114). The House passage occurred while the bill’s chief opponent was out of town, allegedly having been told that it would be brought up later. Fritschler (1969, 114–115). 80. Federal Cigarette Labeling and Advertising Act, Pub. L. No. 89-22, § 4, 79 Stat. 282, 283 (1965). 81. Local regulations were beginning to appear at the time the federal statute was passed. Fritschler (1969, 112). The House had favored a permanent ban on federal warning labels but accepted a three-year ban instead during conference-committee negotiations with the Senate. Fritschler (1969, 115). 82. Pub. L. No. 89-22, § 5, 79 Stat. at 283. The annual-reporting provision was

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terminated effective May 15, 2000, pursuant to Pub. L. No. 104-66, § 3003, 109 Stat. 707, 734 (1995). 83. Fritschler (1969, 131). 84. The machine likely underestimated the tar and nicotine actually inhaled by smokers. Gilhooley (2002, 1204–1205) discusses problems with the measurements from the ‘‘smoking machine’’ caused by differences in how people and the machine smoke. 85. Viscusi (1998, 1118). 86. Kluger (1996, 371–372). Jones (1997, 46–47) points out that the government figures created the ‘‘low tar’’ market segment. ‘‘Capitalizing on the built-in publicity surrounding government-approved tar content figures, the cigarette industry rushed into the new field.’’ By 1995, low-tar cigarettes made up 59.7 percent of the U.S. market, up from 3.6 percent in 1970. 87. Kluger (1996, 371). 88. The constitutionality of the fairness doctrine was upheld in Red Lion Broadcasting Co. v. FCC, 395 U.S. 367 (1969). 89. The FCC action came in response to a letter from a New York lawyer and over the opposition of advertisers, the National Association of Broadcasters, and even some of the health groups. Fritschler (1969, 135–136); Kluger (1996, 304–307); Tobacco Institute, confidential memorandum, ‘‘Federal Communications Commission and Cigarettes,’’ Sept. 1974, http://tobaccodocuments.org/ness/7613.html. In Banzhaf v. FCC, 405 F.2d 1082, 1097 (D.C. Cir. 1968), a federal appeals court upheld the fairness doctrine’s application to tobacco as a valid exercise of the FCC’s mandate to assure public interest use of the public airways, saying, ‘‘[t]he danger cigarettes may pose to health, is among others, a danger to life itself.’’ The case was in the D.C. Circuit because Banzhaf, worried that the broadcasting and tobacco industries would appeal the FCC’s Friday ruling, filed a notice of appeal in person on Saturday morning with a D.C. Circuit judge, thus preempting the industry’s Monday-morning filing in the Fourth Circuit in Richmond, Virginia. Kluger (1996, 307). Banzhaf eventually became a law professor and ran his own antitobacco group, Action on Smoking and Health. Kluger (1996, 506). 90. Jacobson, Wasserman, and Anderson (1997, 80); Kluger (1996, 309). 91. Jones (1997, 13). 92. Another reason for the newly aggressive agency actions was the 1965 statute’s requirement of an annual report on smoking by HEW and the FTC. Kluger (1996, 326). These reports provided a weaker version of the political pressure for regulation than the original surgeon general’s report had created. 93. Notice of Proposed Rulemaking, 34 Fed. Reg. 1959 (Feb. 11, 1969). 94. Notice of Proposed Rulemaking, 34 Fed. Reg. 7917 (May 20, 1969); Kelder et al. (1997); Kelder and Daynard (1997, 67). 95. Kluger (1996, 331). 96. Fritschler (1969, 139). 97. Public Health Cigarette Smoking Act of 1969, Pub. L. No. 91-222, 84 Stat. 87 (1970). 98. Chaloupka, Hahn, and Emery (2001-2002, 1035–1036) summarize the literature supporting this as an important impact of the broadcast ad ban. 99. Jones (1997, 13). 100. Jones (1997, 13).

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101. Mollenkamp et al. (1998, 137) report that this was behind the tobacco companies’ willingness to give up cartoon and human figures in advertising as well. Kluger (1996, 333) suggests that at least some in the industry recognized this benefit. 102. U.S. Department of Agriculture (2005); Fritschler (1969, 1). 103. EH.Net Encyclopedia, s.v. ‘‘Advertising bans in the United States,’’ http://eh.net/ encyclopedia/article/Nelson.AdBans (accessed Jan. 9, 2007). 104. In 1992, Congress passed the ADAMHA Reorganization Act, Pub. L. No. 102-321, 106 Stat. 323 (1992), which included smoking-control programs (the Synar Amendment, Pub. L. No. 102-321, § 1926, 106 Stat 394 (codified at 42 U.S.C. § 300x-26)). The Synar Amendment used the carrot of financial incentives to encourage states to enforce their own prohibitions on underage tobacco use. 42 U.S.C. § 300x-26(a)(1). States that participated were required to enact laws prohibiting manufacturers, retailers, and distributors of tobacco products from selling or distributing them to minors. 42 U.S.C. § 300x-26(a)(1). In return, the federal government provided block grants to those states to use for prevention and treatment of substance abuse. 42 U.S.C. § 300x-26(a). If a state failed to enforce its underagesmoking laws, it could lose 10 percent of its block grant in its first year of noncompliance and up to 40 percent by its fourth year. 42 U.S.C. § 300x-26(c)(1)–(4). Congress also enacted the Pro-Children Act of 1994, which prohibited smoking in federally funded indoor facilities that are routinely used for the delivery of services to children—including schools, daycare, libraries, health care, and early childhood development centers. Pro-Children Act of 1994, 20 U.S.C. §§ 6081–6084. The other federal regulations modified the warning labels, added the warnings to advertising, extended the system to smokeless tobacco products, and banned smoking on domestic commercial airline flights. The secondhand-smoke efforts were led by Ralph Nader. Kluger (1996, 373). In 1972, the FTC and the tobacco companies agreed to consent orders requiring all cigarette advertising to display the same warning as that required on the packaging. Jacobson, Wasserman, and Anderson (1997, 80). Congress enacted the Comprehensive Smoking Education Act, which replaced the single warning label with a rotating system that required four rotating health warnings on all cigarette packages and advertisements. Pub. L. No. 98-474, § 4, 98 Stat. 2200, 2201–2202 (1984). In 1986, Congress passed the Comprehensive Smokeless Tobacco Health Education Act of 1986, 15 U.S.C. §§ 4401– 4408. The 1986 statute mirrors many provisions in legislation affecting tobacco products that are smoked. Further, it mandated that the FTC issue regulations on the placement of rotating health warnings on packaging and advertising, gave the FTC enforcement responsibility for the warnings, and ordered the agency to publish a biennial report to Congress on smokeless tobacco advertising and promotion. Harbour (2006). 105. Kluger (1996, 376–377). 106. Kluger (1996, 435–441, 447–448, 461–465). 107. Kluger (1996, 537). 108. Kluger (1996, 374–375) describes how the initial smoking bans were the work of a few activists, largely in western states. Once the industry realized the threat, ‘‘[i]ts lobbyists flocked to state capitals and argued that smoking restrictions were unfair, unjustified by scientific findings, and unenforceable.’’ 109. The third-wave lawsuits uncovered documents supporting this claim. Pringle (1998, 171–172). 110. National Cancer Institute (2003, 7).

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111. Professor Robert Rabin (2001b, 351) notes that such measures may help attenuate the habit for smokers. Professor Dorothea Kübler (2001, 468–469) argues that bans are more effective than antismoking campaigns at changing attitudes toward smoking under some circumstances. Chaloupka, Hahn, and Emery (2001-2002, 1029–1030) summarize the literature on the impact of workplace smoking restrictions. 112. Danella (2006) and Lambert (2005) survey these restrictions and some of the problems they pose for property owners. Jones (1997, 14–16) discusses the adoption of these laws and attributes the boom in them in the late 1970s to the second surgeon general’s report, which emphasized the dangers of secondhand smoke. 113. See, e.g., Colo. Rev. Stat. § 24-34-402.5. 114. For example, the Tobacco-Free Kids Action Fund Web site listed eight referenda and initiative campaigns in seven states in 2006. http://tobaccofreeaction.org/election/ ballot.php. 115. U.S. Bureau of the Census (2006, 272, table 425). 116. The Book of the States (1990-1991, 316; 1980-1981, 327). Hawaii applied a 40 percent tax on the wholesale price consistently. Tax increases in the other states ranged from $0.02 to $0.25 per pack. The Book of the States (1990-1991, 316; 1980-1981, 327). 117. Chaloupka, Wakefield, and Czart (2001, 53–54) note that estimates of the longrun price elasticity of demand for cigarettes is about twice the short-run elasticity. 118. Sirois (2003) discusses the problem of sales from low-tax jurisdictions into hightax jurisdictions and gives the history of the Jenkins Act, designed to solve the problem, and the current controversy over sales on Indian reservations. The general propensity to tax at the state level is seen in data on state excise taxes per package of cigarettes. In 2002, for example, state tobacco taxes averaged $0.315, with a range that went from $0.03 in Kentucky to $0.75 in Michigan. See Viscusi (2002a, 96– 97); see also Rastgoufard (2004, 411 n. 1) (‘‘[O]n January 1, 2002, the average state cigarette tax was 45 cents. By July 1, 2002, the average state tax was 54 cents.’’). Further, ‘‘[t]he 2002 state tax increases ranged from seven cents in Tennessee, to seventy cents in New Jersey; also, ‘[s]mokers in New York City were hit twice: not only did the state raise its per-pack tax by 39 cents, but packs sold within city limits faced an additional city tax increase of $1.42 [up from 8 cents a pack].’ All told, these 2002 state tax increases will bring in an estimated $2.5 billion per year.’’ (Rastgoufard 2004, 411). As these numbers indicate, states differ substantially in their willingness to tax tobacco, reflecting the relative strengths of tobacco interests, health interest groups, and various claimants on the revenue the taxes could yield. 119. Alabama attorney general William H. Pryor Jr. made this point part of his criticism of the MSA. Pryor (2001, 605). Once long-run changes in demand due to taxinduced price increases are taken into account, however, tobacco taxes are less regressive, as low-income smokers are more responsive to price increases and reduce their consumption. Chaloupka, Wakefield, and Czart (2001, 63–64). 120. This is supported by Trogdon and Sloan’s regression results (2006, table 2, 734). They found that the difference between cigarette and beer taxes increased (i.e., that cigarette taxes were higher relative to beer taxes) in states with lower smoking rates, with greater Democratic Party control of state government, and after the MSA, among other factors.

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121. As the state attorney-general suits charged, of course, the net revenue benefit to states must take into account additional health-care and other costs. However, this implies that the calculation will also consider the savings from the early deaths of tobacco users. See Viscusi (2002a). Not surprisingly, Viscusi’s point has proved controversial. These costs are unlikely to enter into the immediate political calculation because the additional costs of tobacco sales today will not materialize for many years, well beyond the political time horizon of anyone in office today. The revenues from taxes on tobacco sales today, however, accrue to the benefit of today’s officeholders. 122. Kluger (1996, 510). 123. Rabin (1992, 857). One early suit, Green v. American Tobacco Co., came close to a plaintiff’s verdict, with the jury finding that the plaintiff died of cancer and that the cancer was caused by his smoking. Zegart (2000, 39–40). The jury also found that the connection between cancer and smoking was not sufficiently well established in 1956, when the plaintiff’s illness was diagnosed, to allow a verdict for the plaintiff. Zegart (2000, 40). After an appeal, the case was retried and tobacco companies won. Green v. American Tobacco Co., 409 F.2d 1166 (5th Cir. 1969). Green was soon followed by convincing victories for the tobacco companies, ending the first wave. Zegart (2000, 46–47). 124. Rabin (1992, 859). 125. Rabin (1992, 858–860). More dramatically, Pringle (1998, 5) quotes an unnamed tobacco defense lawyer as ‘‘boasting, paraphrasing General Patton, that he won cases not by spending his company’s money, but by ‘making the other son-of-a-bitch spend all of his.’ ’’ The quote is attributed to a memorandum by R. J. Reynolds counsel J. Michael Jordan in Haines v. Liggett Group, Inc., 814 F. Supp. 414, 421 (D.N.J. 1993). 126. Rabin (1992, 854). 127. Rabin (1992, 863). Professor Rabin (1992, 863–864) offers an intriguing analysis of the connection between the formulation of strict liability in the Restatement (Second) of Torts § 402A and tobacco suits. 128. Barr (2001); Sirabionian (2005); Rabin (1992, 865–866, 870–871). 129. Rabin (1992, 868). The closest the plaintiffs came to winning was the Cippollone case. See infra note 130. 130. In the first plaintiffs’ verdict in a tobacco case, the trial court found for smoker Rose Cipollone’s husband and awarded him, but not Rose, $400,000, although the verdict was reversed on appeal. Zegart (2000, 85). The plaintiffs’ firm ‘‘pulled out’’ after the appeal, having spent ‘‘nearly $3 million.’’ Pringle (1998, 41). The appellate opinion, Cipollone v. Liggett Group, Inc., 789 F.2d 181 (3d Cir. 1986), cert. denied, 479 U.S. 1043 (1987), offered what Professor Rabin said could ‘‘most charitably be regarded as an unconventional way of identifying tort compensation awards’’ in conducting its preemption analysis. Rabin (1992, 869). Not only were the risks of smoking well established and known, tobacco’s defenders argued, but the tobacco companies even placed a warning label to that effect on their product. Ellender (2006, 184–186). Generally speaking, juries were sympathetic to the argument that smoking health effects were widely known and that any risk associated with cigarette smoking was self-imposed. Gallup surveys across 1997, 1999, 2000, and 2001 asking whether manufacturers should be held liable continually reported agreement that consumers should be liable by some 60 percent of the respondents. Calfee (2002, 58).

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131. Zegart (2000, 86); Orey (1999, 58); Roemer (2004, 688–689); Kluger (1996, 559–560). Pringle (1998, 42–43) describes how useful the third-wave firms found the Cipollone documents. Daynard played a critical role in coordinating attacks on tobacco, serving as ‘‘the plantiff lawyers’ tactician, cheerleader, publicist, and cross-pollinator, trying to get the attorneys, inevitably working on a contingency fee basis . . . to share costs, intelligence, and documents.’’ Kluger (1996, 560–561). 132. Rabin (2001a, 189–190). 133. Not only were there efforts at large-scale aggregated claims, but individual suits were also becoming more common. Rabin (2001b, 344–346). 134. Zegart (2000, 333). 135. Pringle (1998, 9). 136. In 1994, an anonymous source known at the time only as ‘‘Mr. Butts’’ provided approximately four thousand pages of information to Professor Stanton A. Glantz at the University of California at San Francisco. Field (1997, 120); Pringle (1998, 73–76). In reality, Merrell Williams, a paralegal, had stolen these documents from Brown and Williamson and given them to Scruggs. Scruggs then sent the documents to Glantz, who posted them on the Internet. Bulow and Klemperer (1998, 333). The documents revealed that Brown and Williamson and other tobacco companies had known for more than thirty years (i.e., before the surgeon general’s 1964 report) that cigarettes were both addictive and could cause cancer. See Field (1997, 121). Pringle (1998, 68–69) and Orey (1999, 208–216) describe the dramatic efforts to make the documents public. They also recovered additional material, particularly in Minnesota’s attorney-general suit. Ciresi, Walburn, and Sutton (1999, 489–492) describe the additional approximately thirty-five million pages of documents Minnesota procured through an aggressive discovery strategy. In particular, Minnesota managed to procure a number of crucial indexes to documents, facilitating further discovery. The documents gave hope to the plaintiffs’ bar that jurors might reject the assumption of risk defense. Rabin (2001a, 184). 137. Tobacco companies were not particularly successful in concealing the health risks. As Professor Michael Krauss (2001, 659) notes, ‘‘Although cigarette manufacturers have indeed been loath to admit the health risks of their products, every study done shows that smokers as a class have not been bamboozled by tobacco companies. Indeed, a carefully done study shows that people actually appear to overestimate the one very established risk of habitual smoking: contracting pulmonary diseases like lung cancer, bronchitis and emphysema.’’ 138. Research into the media coverage of the third-wave suits documented a proplaintiff shift in news stories. Haltom and McCann (2004, 242–243) describe this literature. 139. Pringle (1998, 54). Rabin (2001a, 179) points to the impact of the documents on public opinion as a key factor in creating the third wave. 140. Rabin (2001b, 345). 141. 160 F.R.D. 544 (E.D. La. 1995), rev’d, 84 F.3d 734 (5th Cir. 1996). Castano is usefully summarized by Rabin (2001b, 333–335). 142. Zegart (2000, 137, 149, 253). Pringle (1998, 42–48) describes the assembling of the coalition. Rodham was certainly added for his White House connections, as he ‘‘had never tried any major cases in his career—he had only been an assistant public defender in Florida.’’ Mollenkamp et al. (1998, 74).

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143. Rabin (2001a, 181). 144. Zegart (2000, 151). 145. Zegart (2000, 151). 146. Zegart (2000, 201); Orey (1999, 316–317, 342). Liggett’s settlement was part of Liggett CEO Bennett LeBow’s strategy to increase Liggett’s value and sell the company. Mollenkamp et al. (1998, 60–61). 147. Castano v. American Tobacco Co., 84 F.3d 734 (5th Cir. 1996); Zegart (2000, 201, 205–207); Rabin (2001b, 334–335). The Liggett documents provoked a battle over Liggett’s ability to release them, described in characteristically dramatic fashion by Zegart (2000, 218–219). 148. Zegart (2000, 225). 149. Rabin (2001b, 336). 150. Pringle (1998, 9). The plaintiffs’ bar got more organized, with the Tobacco Trial Lawyers’ Association formed in 1999 to help coordinate suits. Rabin (2001b, 346); Tobacco Trial Lawyers’ Association, http://ttlaonline.com/index.htm. Erichson (2000, 390–391) gives examples of the cooperation this allows. 151. EPA (1992). 152. Pringle (1998, 32–33). 153. Forman (1997, 125–127); President (1995); Regulations Restricting the Sale and Distribution of Cigarettes and Smokeless Tobacco to Protect Children and Adolescents, 60 Fed. Reg. 41,314 (proposed Aug. 11, 1995). The proposed regulations limited the sale of tobacco products to the under-eighteen population, required proof of age to purchase tobacco products, made illegal the free distribution of sample cigarettes, restricted billboard advertising in close proximity to schools, and outlawed other advertising activities that appealed particularly to young people. Although the FDA initially targeted only teen smoking, its rationale would have supported broader regulation of tobacco, and the agency considered further steps to regulate adult smoking. Gilhooley (2002, 1189– 1191); Kessler (2000, 268). 154. Regulations Restricting the Sale and Distribution of Cigarettes and Smokeless Tobacco to Protect Children and Adolescents, 61 Fed. Reg. 44,396 (Aug. 28, 1996). The FDCA grants the FDA the authority to regulate ‘‘drugs’’ and ‘‘devices.’’ 21 U.S.C. § 321(g)–(h). By asserting jurisdiction, the FDA concluded that nicotine was a ‘‘drug’’ and that both cigarettes and smokeless tobacco were ‘‘devices’’ that delivered nicotine to the smoker’s body. 61 Fed. Reg. at 44,397; Costello (1997, 678–679); Kessler (1999, 1603); Rienzo (1998, 276–276); Schlick (1999, 744); Turriciano (1998, 617). 155. David Kessler, then the commissioner of the FDA, says he first approached Clinton about a youth-smoking-based strategy shortly after the 1994 elections at a reception. Kessler (2000, 300). Morriss, Meiners, and Dorchak (2003) address the administration’s post-1994 strategy more broadly. 156. Zegart (2000, 177). Kessler (2000, 304–305, 322–323) discusses Morris’s role at length and credits Morris with playing a key role in getting Clinton to think of an attack on tobacco as politically smart. Although it was ‘‘politically risky’’ for the head of a regulatory agency to talk directly with a political operative like Morris, Kessler did so as part of his plan to ‘‘circle the White House’’ on the issue. Kessler (2000, 307). Pringle (1998, 163–164) discusses the politics within the Clinton White House and notes that tobacco states like Tennessee, Kentucky, and North Carolina were important to Clinton’s

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1996 reelection strategy. House minority leader Richard Gephardt (D-Mo.) was a ‘‘big recipient of tobacco industry campaign funds’’ and lobbied the White House, calling the FDA’s proposals ‘‘a critical economic factor’’ in many southern states. Pringle (1998, 164). Ultimately Clinton concluded that the gains from an antitobacco stand in California, New York, and New Jersey outweighed the costs in the tobacco states. Pringle (1998, 164). Kessler says that he invested considerable effort in persuading the Clinton White House to move on tobacco. Kessler (2000, 76–77, 302). 157. Pringle (1998, 104). 158. Kluger (1996, 544). 159. Derthick (2005, 54–56); Kessler (2000, 107); see also Zegart (2000, 108) (labeling Kessler ‘‘a brilliant, egocentric pediatrician who also had degrees in law and public health’’ who ‘‘wanted badly to get a foot in tobacco’s door’’). Kessler may also have been influenced by Jeff Nesbitt, who became chief of staff at the FDA and whose father had been a heavy smoker and was dying of lung cancer in the early 1990s. Pringle (1998, 103). Kessler himself points to the opinion by key staff at the FDA that tobacco’s political clout had waned. Kessler (2000, 32). 160. Pringle (1998, 104); Kessler (2000, 50–51). 161. Zegart (2000, 100–119) details the ABC News story. Philip Morris sued ABC for libel, and the network ultimately apologized and paid the company $15 million for its legal fees. Derthick (2005, 112). 162. Zegart (2000, 121). The hearings helped provide the plaintiffs’ bar with witnesses by pressuring the companies to release some former employees from confidentiality agreements. Zegart (2000, 128–129) notes that ‘‘the day after he testified,’’ one former tobacco company scientist, who had been under a confidentiality agreement until Representative Michael Synar (D-Okla.) used an appearance by the heads of the tobacco companies to pressure them to release him from the agreement, ‘‘was talking with plaintiff’s attorneys eager to recruit him for a potent new generation of cigarette lawsuits.’’ Representative Waxman also read hundreds of pages of previously confidential tobacco company records into the Congressional Record, making them available to lawyers in the attorney-general and private lawsuits. Zegart (2000, 176). Professor Gilhooley (2002, 1183) suggests that Waxman forced the FDA to act before it was fully prepared to do so, ultimately weakening the regulatory effort. Waxman’s years of efforts against tobacco are described in detail by Kluger (1996, 542–549). Synar was also an important early ally for the FDA’s Kessler. Kessler (2000, 52–53). The Subcommittee on Health and the Environment held seven days of hearings on the regulation of tobacco products in 1994. U.S. House (1994). 163. For example, Pringle (1998, 11) takes a heroic view of the role of the plaintiffs’ lawyers and paints government as weak: ‘‘Tobacco had become so rich and powerful, no part of government at any level would take it on. Only the lawyers of the plaintiffs’ bar had the wit, the strength, and the prospect of big rewards to make it worth their while.’’ 164. Kessler (2000, 168). The zeal can be seen in Kessler’s proposal, after he left office, that cigarettes be sold only by a government-owned nonprofit corporation in a plain wrapper with just a brand and warning label. As he notes, ‘‘It would be the end of the industry as we know it.’’ Kessler (2000, 392). 165. Coyne Beahm, Inc. v. FDA, 966 F. Supp. 1374, 1388 (M.D.N.C. 1997), rev’d sub

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nom. Brown and Williamson Tobacco Corp. v. FDA, 153 F.3d 155 (4th Cir. 1998), aff’d, 529 U.S. 120 (2000). 166. Brown and Williamson v. FDA, 153 F.3d 155 (4th Cir. 1998). 167. FDA v. Brown and Williamson, 529 U.S. 120, 160–161 (2000). 168. The theories eventually included ‘‘deceptive advertising, antitrust violations, federal Racketeer Influenced Corrupt Organizations (RICO) claims, unfair competition, a variety of fraud allegations, and in at least two states, Florida and Massachusetts, statutory claims based on the enactment of specific health care cost recovery legislation.’’ Rabin (2001b, 338). 169. See Jensen (2001); Derthick (2005, 169); Orey (1999, 282–283). Persuading the state to participate was not easy. Orey (1999, 277–278) discusses Moore’s political calculations. 170. Orey (1999, 272). 171. Zegart (2000, 140); Pringle (1998, 32). Orey (1999, 268–272) describes the public opinion polling and research that led the plaintiffs’ counsel in Mississippi to seek a trial in chancery court. 172. Orey (1999, 280). 173. DeBow (2001, 566) gives the chronology of the suits. 174. Derthick (2005, 167–170). W. Olson (2003, 40–44) describes the relationships between the attorneys general and the private attorneys in some detail, noting the links to politically prominent firms in each state as well as to entrepreneurs like Scruggs across states. 175. Zegart (2000, 222); Orey (1999, 299). 176. Zegart (2000, 4). Similarly, Pringle (1998, 4–5) explains how the ‘‘fiercely competitive’’ plaintiffs’ lawyers are able to cooperate on the third-wave suits: ‘‘[T]he greatest tort prize of all time—the treasures of Big Tobacco—suddenly seemed to be within the grasp of these risk capitalists of adversity.’’ Zegart’s rather melodramatic account of the tobacco litigation (2000, 152) has one lawyer telling an idealistic scientist that ‘‘[t]hey’ll [the lawyers] tell you this is a cause and they’re fighting the good fight. Bullshit. It’s all about money. Never forget that.’’ Orey (1999, 265) quotes Scruggs as attributing the plaintiffs’ attorneys’ zeal to ‘‘a need for professional fulfillment and achievement . . . a constant, insatiable desire of most successful men . . . [and] the professional and intellectual challenge of doing this for the first time.’’ Mellencamp and others’ largely sympathetic account (1989, 29) notes that the lawyers involved early knew that success ‘‘would catapult them into the ranks of the nation’s boldest and brightest attorneys.’’ 177. Roundtable (2001, 623). As an example of the resources the plaintiffs’ attorneys brought to the cases, Zegart (2000, 2) recounts how Ness, Motley, Loadholt, Richardson & Poole had invested $30 million in tobacco suits by 1998 without winning a single suit. By 1996, the firm was spending $1 million a month on tobacco suits. Zegart (2000, 202). Similarly, Scruggs brought fresh financial resources to the battle, joining Mississippi lawyer John Barrett at a point when Barrett had lost two trials and ‘‘his legal allies were quitting on him.’’ Zegart (2000, 88). As Zegart notes, the plaintiffs’ firms involved had substantial resources available. Ness Motley for example, settled $10 billion worth of asbestos claims in a single year in the early 1990s. Zegart (2000, 94). Ness Motley and Scruggs’s firm also ‘‘sold’’ an interest in their Florida attorney-general case to the lawyers

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handling the Texas attorney-general suit to get ‘‘more financial horsepower’’ in exchange for cash and a share of the Texas fees. Gibeaut (1998, 50). 178. In the Mississippi suit, for example, the lawyers deliberately chose not to sign contingency-fee agreements ‘‘to fend off attacks from the state legislators that the plaintiffs’ firms were getting too much money.’’ Pringle (1998, 32); Orey (1999, 265–267). The lawyers had an elaborate fee and cost-sharing arrangement among themselves. Orey (1999, 265). Some of the fee deals, such as Florida’s, later descended into a welter of suits and countersuits. Gibeaut (1998) describes the contentious Florida fee dispute. 179. W. Olson (2003, 28). 180. M. Little (2001, 1150). 181. M. Little (2001, 1150); W. Olson (2003, 42). 182. Coyle (2000, A2). One of the most notorious was the Texas fee arrangement, where ‘‘after a $17.5 billion settlement with the tobacco industry, former Attorney General Dan Morales was involved in a scheme to award his friend, private attorney Mark Murr, up to three percent of the settlement award.’’ Murr ultimately accepted an arbitration award of $1 million. Roundtable (2001, 621–622). 183. W. Olson (2003, 44). 184. Zegart (2000, 226). 185. Rabin (2001b, 338). 186. Orey (1999, 344). 187. Rabin (2001a, 190). 188. The industry began by reaching out to the White House for assistance in getting the state attorneys general to talk to them. Mollenkamp et al. (1998, 70–88). 189. Kessler (2000, 388) (quoting Steven Parrish, a Philip Morris vice president). 190. Orey (1999, 354–355). 191. Rabin (2001a, 191). 192. Proposed Tobacco Industry Settlement, http://www.stic.neu.edu/settlement/6-20settle.htm; O’Brien (2000, 3). Orey (1999, 320–323) describes the initial, secretive settlement process. 193. Zegart (2000, 254). Orey (1999, 339) discusses the ‘‘son of Castano’’ lawyers’ involvement briefly. 194. Zegart (2000, 252–270) and Mollenkamp et al. (1998, 167–191) describe the negotiations in detail. The talks broke down at least once over differences among the attorneys general. Scruggs and Moore had a strategy of negotiating a deal first among the lawyers, attorneys general, and Congress and then proposing it, hoping to force the tobacco companies and the White House to accept it. Mollenkamp et al. (1998, 98–105, 126–127). 195. Zegart (2000, 265–266). ‘‘Humphrey was the most passionate antitobacco attorney general,’’ partly because his father had been a heavy smoker and partly because he thought he could win at trial given the massive document discovery he had conducted and the favorable consumer protection and fraud laws in Minnesota. Mollenkamp et al. (1998, 190). 196. Pryor (2001). 197. Pryor (2001, 608–609). Nagareda (2007, 203–204) discusses how the structure of the MSA encouraged participation.

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198. Zegart (2000, 261). 199. Proposed Tobacco Industry Settlement, supra note 192. The Resolution would have legislatively settled all present actions by attorneys general, all pending class actions, and all ‘‘addiction/dependence claims.’’ Section A1 prohibited punitive damages for industry conduct prior to Congress’s enactment of the legislation. Section B1 banned future suits involving all but individual plaintiff’s actions—that is, ‘‘no class actions, joinder, aggregations, consolidations, extrapolations or other devices to resolve cases other than on the basis of individual trials, without defendant’s consent.’’ Sections B and C imposed other drastic restrictions on suits challenging both past and future conduct. Pinto (1998). 200. Zegart (2000, 335). 201. Rabin (2001b, 338). 202. Mollenkamp et al. (1998, 98). 203. Mollenkamp et al. (1998, 144). 204. This is a critical point that at least some of the attorneys general seem not to have grasped. For example, Minnesota attorney general Humphrey suggested in remarks in 2001 that all damages awards lead to price increases, ignoring the crucial role of price elasticity. Humphrey (2001, 599). Economist W. Kip Viscusi estimated that 90 percent of the cost of the MSA would be paid by smokers. DeBow (2001, 569). 205. Proposed Tobacco Industry Settlement, supra note 192, title VI provided that the payments would be tax deductible. For a related perspective on the MSA, see Parloff (2005, 129). 206. Fowler and Ford (2004) estimate and discuss the financial impact of the MSA on the major cigarette firms relative to the overall stock market, showing that it was positive and significant. 207. The key restrictions included a ban on all nontobacco merchandise bearing the name, logo, or selling message of a tobacco brand, which would have ended Marlborobranded shirts and other consumer items; a ban on the offer of nontobacco items or gifts based on proof of purchase of tobacco products; a ban on the use of human images and cartoon characters in all tobacco advertising and on tobacco product packages, which would have ended the popular Joe Camel image; a ban on all outdoor tobacco product advertising; a prohibition of tobacco product advertising on the Internet unless designed to be inaccessible in the United States; and a ban on direct and indirect industry payments for tobacco product placements or glamorization in movies, television programs, video games, and other media appealing to minors. See Kelder et al. (1997). Other elements of the Resolution addressed warning labels. Cigarette packages and cartons would be required to include nine different rotating warning labels, and smokeless tobacco products would be required to include four rotating warning labels. Following the FDA’s regulatory lead, the Resolution set a minimum age of eighteen for the purchase of tobacco products, banned the sale of tobacco products from open containers, set the minimum package size at twenty cigarettes, and banned the use of product samples and the distribution of tobacco products through the mail. The Resolution set targets and provided tobacco-industry incentives to reduce underage tobacco use. Within five years after the Resolution’s enactment into law, underage smoking had to decrease at least 30 percent. By the tenth year, there needed to be 60 percent fewer teen smokers. The Resolution set similar teen-use goals for smokeless tobacco products. If a target was not met, the FDA

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would impose a mandatory surcharge on the relevant industry (cigarette or smokeless tobacco). Proposed Tobacco Industry Settlement, supra note 192. 208. Proposed Tobacco Industry Settlement, supra note 192, title III. The Resolution provided that ‘‘[n]on-participating manufacturers would be subject to the access restrictions and regulatory oversight. . . . They would receive none of the civil liability protections. . . . [E]ach nonparticipating manufacturer [would have to] place into an escrowed reserve fund each year an amount equal to 150 percent of its share of the annual payment required of participating manufacturers. . . . These escrowed funds would be earmarked for potential liability payments, and the manufacturers would reclaim them with interest 35 years later to the extent they had not been paid out in liability. . . . [T]he resolution provides that the exemption from civil liability applicable to distributors and retailers of the products of participating manufacturers will not apply to distributors and retailers who handle tobacco products of non-participating manufacturers.’’ 209. Orey (1999, 356). 210. Zegart (2000, 265–274) describes the negotiations with the White House and notes the opposition by Vice President Al Gore and Senator Tom Harkin (D-Iowa) because they wanted to use tobacco as a campaign issue. 211. Parloff (2005, 126); Derthick (2005, 179). In particular, Kessler, now out of office, and former surgeon general C. Everett Koop proved troublesome, attacking the Resolution as too weak. Kessler says that he was invited to participate but declined because he thought that talks without the White House or Congress involved were ‘‘not the right strategy.’’ Kessler (2000, 360). He opposed the Resolution because he thought it ‘‘conferred legitimacy on tobacco and stability for the companies that sold it.’’ Kessler (2000, 361). Kluger quotes a Philip Morris official that Koop ‘‘was singlehandedly responsible for reinvigorating the antismoking movement’’ in the 1980s. Kluger (1996, 540). Mollenkamp et al. (1998, 34) note that Kessler and Koop were ‘‘[r]emoved from the action’’ by their departure from office. 212. Professor Rabin (2001a, 192) suggests that the parties to the Resolution ‘‘failed to recognize’’ that the deal would ‘‘take on a life of its own’’ once it reached Congress. 213. Levy (1998, 45) notes that the year prior to the deliberations saw the industry endure ‘‘embarrassing disclosures that tobacco companies had targeted underage smokers, manipulated nicotine content, and lied about its addictive qualities.’’ 214. M. Cooper (1998). For example, Clinton and some senators on both sides of the aisle came out against the Gregg-Leahy Amendment to the bill introduced by Senator John McCain (R-Ariz.), which increased yearly tobacco-industry payouts from the initial $6.5 billion cap. Kelder (1998, 7). The cap was seen as a form of de facto immunity for the industry, but Clinton was willing to accept the cap because he ‘‘had factored the settlement into his budget’’ and wanted to get the deal done. Kelder (1998, 7); Bierbauer (1998). 215. Gibbs et al. (1998). Gibbs notes that Clinton had pegged $65.5 billion worth of education and health programs in his budget to new revenues from tobacco legislation. 216. Kelder (1998, 12). The expansion reduced Republican support. Senate majority leader Trent Lott (R-Miss.) had worked with Clinton on several issues in the recent past. Gibbs et al. (1998). But as the fight wore on, he backed away, saying that the bill had gone ‘‘far, far afield’’ from the original aim of reducing teen smoking. King and Randall (1998).

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Other Senate Republicans, such as Mitch McConnell (R-Ky.)—from tobacco country— and Phil Gramm (R-Tex.), who disliked the idea not only of increased cigarette taxes but of increased taxes in general, shared influence over the bill’s demise. Gibbs et al. (1998). The bill had become a ‘‘cookie jar’’ for senators’ pet spending programs. Drinkard (1998, A1). 217. Kelder (1998, 8). 218. Universal Tobacco Settlement Act, S. 1415, 105th Cong. (1998); Levy (1998, 46); Kelder (1998, 5–6). Senate majority leader Trent Lott, brother-in-law of attorney Richard Scruggs, had asked McCain in early 1998 to craft in the Commerce Committee a bill that embodied the tobacco settlement. ‘‘The committee consulted Wall Street analysts who calculated Congress could extract that much without any of the tobacco companies going bankrupt.’’ Bierbauer (1998); see also O’Brien (2000); Rabin (2001b, 340). 219. Kelder (1998, 6). 220. Bianchini (1999, 713–714); Kelder (1998, 6). The cigarette companies spent $40 million in an attempt to convince the public that the bill was just another example of a tax-and-spend policy. Daynard and Kelder (1998). 221. Kelder (1998, 14); Gibbs et al. (1998); King and Randall (1998); Bulow and Klemperer (1998); Zegart (2000, 321). 222. Rabin (2001b, 340–341) details the reduced scope of the MSA compared with the earlier proposed settlement. 223. Paying money over time offered the tobacco firms a substantial advantage over making a lump-sum payment, which would have been immediately added to the firms’ balance sheets. Dagan and White (2000, 378–379). 224. MSA, supra note 19, exhibit T; see also O’Brien (2000, 11). 225. W. Olson (2003, 66). For example, the parties did not provide an executive summary, table of contents, index, or outline with the MSA; nor was it widely circulated before becoming final. Olson (2003, 66). 226. Warner, Schelling, and Entin (1998, 3). 227. Warner, Schelling, and Entin (1998, 3). 228. As the Wall Street Journal put it in 1999, ‘‘The White House argued that the fight was more political than legal; just sue and industry will settle.’’ Cloud (1999). 229. President (1999); see also Calnews.com (1999). 230. United States v. Philip Morris USA, Inc., 449 F. Supp. 2d 1, 27 (D.D.C. 2006). 231. Sebok (2004). 232. United States v. Philip Morris, Inc., 116 F. Supp. 2d 131 (D.D.C. 2000). 233. Lichtblau (2003). This number represented all profits gotten between 1971 and the present by ‘‘defrauding the youth addicted population,’’ which was basically those who began smoking before age twenty-one. Lichtblau (2003). A comprehensive roundup of explanations for why the new administration reduced the damages claim is available in Jonathan Adler’s comment ‘‘Was There ‘Political Interference’ in Tobacco Litigation?’’ posted to the Volokh Conspiracy blog on March 23, 2007, http://www.volokh.com/ archives/archive—2007—03—18-2007—03—24.shtml#1174663473. 234. Philip Morris USA, 449 F. Supp. 2d 1. The court enjoined the companies from further use of brand descriptors such as ‘‘low tar,’’ ‘‘light,’’ ‘‘ultra light,’’ and ‘‘natural.’’ The order also required the firms to make corrective statements in major media and to refrain from cigarette design practices that ensure maximum nicotine delivery.

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235. U.S. House (1998a, 1–2). 236. Womach (2005). 237. Tan (2006, 233); Derthick (2005, 185). 238. See Xcaliber Int’l Ltd. v. Kline, No. 05-2261, 2006 WL 288705 (D. Kan. Feb. 7, 2006), appeal docketed, No. 06-3061 (10th Cir. Feb. 16, 2006) (antitrust and procedural due process challenges to Kansas’s allocable-share repeal law, which amended Kansas’s escrow statute implementing the MSA); Xcaliber Int’l Ltd. v. Edmondson, 2005-2 Trade Cas. (CCH) 75,052 (N.D. Okla. Aug. 31, 2005), appeal docketed, No. 05-5178 (10th Cir. Oct. 3, 2005) (antitrust challenge to Oklahoma’s allocable-share amendment; previous First Amendment, equal protection, due process, and commerce clause claims were dismissed); Xcaliber International Ltd. v. Foti, 442 F.3d 233 (5th Cir. 2006) (denying motion to dismiss and remanding to district court) (First Amendment, equal protection, and procedural due process challenges to Louisiana’s allocable-share amendment); A. B. Coker, Inc. v. Foti, No. CIVA 05-1372, 2006 WL 3307445 (W.D. La. Nov. 9, 2006) (Tenth Amendment, FCLAA, commerce clause, compact clause, due process, and First Amendment challenges to the MSA itself; Tenth Amendment claim dismissed; motion to dismiss other claims denied); Freedom Holdings, Inc. v. Spitzer, 408 F.3d 112, 114 (2d Cir. 2005) (denying preliminary injunction in an antitrust challenge to a New York MSA-implementing statute); Grand River Enterprises Six Nations, Ltd. v. Pryor, 2006-1 Trade Cas. (CCH) 75,284 (S.D.N.Y. May 31, 2006) (denying preliminary injunction), aff’d, 481 F.3d 60 (2d Cir. 2007) (antitrust and commerce clause challenge to allocable-share repeal law); S&M Brands v. Summers, 393 F. Supp. 2d 604 (M.D. Tenn. 2005), aff’d, 228 Fed. App’x 560 (6th Cir. 2007) (antitrust, due process, and equal protection challenges to MSA and Tennessee qualifying statutes; district court dismissed claims); Sanders v. Lockyer, 365 F. Supp. 2d 1093 (N.D. Cal. 2005), aff’d, 504 F.3d 903 (9th Cir. 2007) (smoker class-action antitrust challenge to the MSA itself and California MSA-implementing statutes; district court dismissed); Grand River Enterprises Six Nations, Ltd. v. Beebe, 418 F. Supp. 2d 1082 (W.D. Ark. 2006), aff’d, 467 F.3d 698 (8th Cir. 2006) (antitrust, First Amendment, equal protection, and due process challenges to Arkansas MSA-implementation legislation; district court dismissed all but alleged retroactive procedural due process violation). 239. O’Brien (2000). Nagareda (2007, 204–207) summarizes the cartel-like features of the MSA. 240. O’Brien (2000). 241. In addition, if the settling companies as a group lose market share, individual companies can reduce damages payments by three times the amount of their marketshare loss in excess of two percentage points. O’Brien (2000, 3–4). 242. Derthick (2005, 185). 243. They could (1) sign the MSA (i.e., become subsequent participating manufacturers) and pay damages if they increased their sales above a certain amount; (2) not sign the MSA and deposit 150 percent of what they would have paid if they had become SPMs into escrow as security against possible liability in the future; or (3) leave the business. Failure to do one of these things could make a nonparticipating manufacturer liable for fines and ban the company from the tobacco business for two years. See O’Brien (2000). As of April 2004, forty-two additional cigarette companies had joined the MSA. Derthick (2005, 184).

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244. Derthick (2005, 185–186). Reynolds, and Brown and Williamson merged in 2004 to create Reynolds American, Inc. New companies arose in both foreign and domestic locales to capitalize on the opportunity to underprice the MSA signatories. Because they are often small and mobile, the upstarts have proved difficult to catch. Further, through a loophole in the ‘‘allocable share’’ portion of the model statutes that states were to enact, nonparticipating manufacturers that sell to only a few states have legally avoided most of the payments they otherwise would have been forced to make. As Derthick notes, ‘‘NPMs [nonparticipating manufacturers] . . . made payments only to states in which they had sales, and they were entitled to a refund of the difference between what they owed such a state and what it would have received had they signed the MSA. Thus an NPM that sold cigarettes only in a state whose share of settlement funds was 2 percent would qualify for a refund of 98 percent of its escrow payment.’’ As of April 2004, twenty-seven states had passed revisions to close this loophole, and the states have fought the nonparticipating manufacturers to protect their revenue stream in other ways since. Derthick (2005, 187–189). In short, the states are allied with the big tobacco companies to enforce their agreement against small upstarts and consumers. 245. Reynolds American, Inc., ‘‘Frequently Asked Questions,’’ http://www.reynoldsa merican.com/Investors/RAIFaq.aspx?mp=common&q=2 (accessed Apr. 6, 2007). 246. O’Brien (2000). 247. 317 U.S. 341 (1943). 248. Parker, 317 U.S. at 352. 249. The Supreme Court in Lafayette v. Louisiana Power & Light Co., 435 U.S. 389 (1978), modified the state-action exemption. ‘‘[F]or purposes of the Parker doctrine, not every act of a state or a state agency is that of the state as sovereign.’’ Lafayette, 435 U.S. at 410. ‘‘[T]he Parker doctrine exempts only anticompetitive conduct engaged in as an act of government by the state as sovereign, or, by its subdivision, pursuant to state policy to displace competition with regulation or monopoly public service.’’ Lafayette, 435 U.S. at 412. 250. A. D. Bedell Wholesale Co. v. Philip Morris, Inc., 104 F. Supp. 2d 501 (W.D. Pa. 2000); Mariana v. Fisher, 338 F.3d 189 (3d Cir. 2003). 251. The idea of finding a way to get peace seems to have appeared first in 1994, when Representative Thomas Bliley (R-Va.), the ‘‘representative from Philip Morris,’’ approached the FDA’s Kessler about a possible deal. Kessler (2000, 288). The idea fizzled, however. Representative Charles Rose (D-N.C.) also approached White House counsel Abner Mikva in 1995 to suggest that the industry might be interested in a deal. Kessler (2000 302). 252. For example, Mississippi attorney general Michael Moore stepped down as attorney general in 2004 to become chairman of the board of the Partnership for a Healthy Mississippi, a group funded with MSA money, and an attorney in a Mississippi law firm. Moore’s Wikipedia entry notes that ‘‘[i]t is expected that Moore will run for elected office again, and there has been speculation that he will run for governor in 2007, or for U.S. Senate in 2008 if Thad Cochran retires.’’ Wikipedia, s.v. ‘‘Mike Moore (Mississippi politician),’’ http://en.wikipedia.org/wiki/Mike—Moore—%28Mississippi—politician %29 (accessed April 22, 2007). 253. The fact that states do not smoke and therefore could not claim that they are

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damaged from smoking applies traditional common-law logic to the question of state action, but there is more to consider. The doctrine of parens patriae holds that a state has responsibility for the welfare of its citizens and that this includes deflecting or reducing costs that might be imposed on the citizenry. Even here, however, there exists a question as to the appropriate forum for seeking a remedy. On parens patriae, see Ieyoub and Eisenberg (2000, 1859). On the appropriate forum, see DeBow (2001, 563). 254. Nagareda (2007, 200) discusses the disconnect between payments and measures of harm. 255. LaFrance (2000, 187–203). The concern expressed by LaFrance is indeed the basis for policy in the United Kingdom. As reported by Andrei Sirabionian (2005, 501), ‘‘[m]ost nations outside of the United States have determined that tort litigation is not an effective or efficient method to achieve social or personal justice.’’ 256. LaFrance (2000, 188). 257. Kluger (1996, 288, 424). Neuberger acknowledged Pertschuk as the ‘‘mainstay’’ of the group of her staff who assisted her in her antitobacco book. Neuberger (1963, viiii). 258. Walter Olson (2003, 68) argues that the attorneys general were able to ‘‘dictate terms to their supposed masters and employers, the governments of the fifty states.’’ 259. Derthick (2005) describes both the enthusiasm expressed by New York legislators at the prospect of receiving ‘‘free money’’ and the opposition that came before the court when the MSA was being reviewed and ultimately approved. In every case, state courts approved the settlements, despite those who argued that they did not have a voice in the negotiations. Derthick (2005, 174, 179). 260. Rabin (2001a, 193). 261. The Farm Security and Rural Investment Act of 2002, Pub. L. No. 107-171, 116 Stat. 134, requires the GAO to report annually on the amount of MSA payments received by states and the allocation of the funds by the states. It is recognized that some states capitalized the expected payments by issuing bonds backed by the expected MSA revenues and spending the revenues up front. According to the GAO, in fiscal years 2004 and 2005, the forty-six MSA states received approximately $15.1 billion. See GAO (2005). Sloan et al. (2005) give an interest-group-based empirical analysis of spending patterns. 262. Tobacco-Free Kids (2006, i). Twenty-eight states and the District of Columbia provided modest or minimal funding for tobacco prevention programs (50 percent or less of the CDC minimum), and five states provided no such funding. Tobacco-Free Kids (2006, vi). 263. Tobacco-Free Kids (2006, i). It may be argued that states have deliberately reduced their cessation programs in order to maintain smoker-generated cash flow. 264. GAO (2006, 4). This report is still the most comprehensive analysis of state spending under the MSA. 265. GAO (2006, 10).

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Index

ABC News, 146 ADAMHA Reorganization Act, 229n104 A.D. Bedell Wholesale Co. v. Philip Morris, Inc., 155 Adler, Jonathan, 198n71 administrations. See presidential administrations Administrative Dispute Resolution Act (1996), 43 Administrative Procedure Act (APA), 2, 23, 25 Advanced Combustion Emissions Reduction Technology (ACERT), 82, 206n160 adversarial relationship, undermining of, 105, 110, 111, 166 advertising, tobacco, 135–39, 226n58, 226n60, 227n72, 227n78, 229n101, 237n207 agency staff, 26, 41 air quality: computer modeling of, 70–

72, 85–86, 200n98, 201nn100–101, 202nn105–106; diesel emissions litigation and, 84–88; diesel engines and, 61–64; national standards for, 67–68, 70–71, 78–79, 199n72; regulatory approach to, 90. See also Clean Air Act; Clean Air Act Amendments American Association for Justice, 215n119 American Association for Labor Legislation (AALL), 98 American Cancer Society, 132, 136, 157, 158, 223n33 American Federation of Labor (AFL), 210n40 American Heart Association, 136, 158, 223n33 American Lung Association, 68, 132, 158, 224n33 American Medical Association, 226n66 Angelos, Peter, 215n119 antitrust legislation, 128–29, 154–55, 173

267

268

Index

APA. See Administrative Procedure Act Apanovitch, Derek, 50 appropriations riders, 39 Army Corps of Engineers, 25, 185n17 asbestos litigation, 1, 14, 93–94, 104– 15; and bankruptcy, 112, 214n109, 215n120, 216n130, 216n131; changes in, over time, 108; characteristics of, 111; client-identification process in, 107, 109; costs of, 108, 113, 114, 213n89, 213n90, 215n118, 217n140; defendants in, 109; elasticity of, 109– 11; and forum shopping, 108; geographical locations of, 108, 213n94; impact of, 113–15; incentives in, 112; interest groups and, 107, 111–13, 115, 215n119; knowledge as factor in, 104, 106, 107, 111–12; legal changes related to, 109–11, 212n73; mass consolidations in, 112–13, 214n114, 214n115; plaintiffs’ bar in, 105, 107– 15, 123–24, 165–67, 215n118, 215n119, 216n126; plaintiffs in, 108– 9, 112, 214n96, 216n139; proliferation of, 104, 107–9; regulatory impact of, 105–15; scope of, 113; settlements in, 105, 111; summary of, 163–68. See also dust litigation Asleep at the Wheel (House Commerce Committee report), 77, 173 Association of Occupational and Environmental Clinics, 219n188 Association of Trial Lawyers of America (ATLA), 215n119 assumption-of-risk defense, 143, 231n130 attorneys general. See state attorneys general automobile exhaust emissions: federal vs. state regulation of, 10, 69; rent-seeking and, 6; Supreme Court ruling on, 24; technology for, 32. See also mobile source emissions control auxiliary emission control devices (AECDs), 83–84, 195n30

bankruptcy, asbestos litigation and, 112, 214n109, 215n120, 216n130, 216n131 Banzhaf, John, III, 138, 157, 228n89 Baron & Budd, 111, 215n119, 216n128 Barrett, John, 235n177 Barth, Peter S., 183n43 Barton, Joe, 121–22 Bell, Griffin, 105 benchmarks: establishing, 17–18; private ordering, 18–23 Bernstein, Marver, 5 Biggs, Jennifer L., 214n115 Bliley, Thomas, Jr., 131, 241n251 blue laws, 10 bootleggers-and-Baptists theory, 10–11, 157–58; and finances, 175; ideological pressure groups and, 26; and tobacco products, 127, 130, 133, 139, 146–47, 156, 222n10 Borel v. Fibreboard Paper Products Corp., 93, 106–7 BorgWarner, 89 B-readers, 116–17, 119, 218n172, 220n190, 220n194 Brickman, Lester, 109, 212n73, 215n126 Brown, Vandiver, 215n123 Brown and Williamson Tobacco Corp., 126, 131, 154, 232n136, 241n244 Browner, Carol, 59 Bryner, Gary, 185n18 Buchanan, James M., 179n2 Bureau of Mines, 96 Bush, George W., 153, 208n186 business: and enlightened self-interest, 183n37; regulatory interests of, 26 buyback programs, 203n123 Cadillac electronic engine controllers, 76 California: and fuel emissions, 57, 60, 69; and occupational diseases, 101 California Air Resources Board (CARB), 55, 59–61, 77, 88–89 Campaign for Tobacco-Free Kids, 158 Campbell Cherry Harrison Davis Dove, 120, 121

Index Cannon, Jonathan, 181n17 canons of public choice. See publicchoice theory capture theory, 5–7 CARB. See California Air Resources Board carbon monoxide (CO), 56, 57, 63, 67 Carmody & Torrance, 148 Carrington, Paul, 50 Carroll, 2005, 214n96 cartels: cigarette companies, 15, 127–31, 153–55; illegality of, 128–29; prevention of, through oversight, 173; theory of, 128–31 Carter, Jimmy, 140 cash transfers, restrictions on, 175–76 Castano v. American Tobacco Co., 144– 45 catalytic converters, 6, 32 Caterpillar, 64, 82–85, 194n30, 206n158, 206n160, 207n170 Centers for Disease Control and Prevention (CDC), 159 chip reflashing, 60 cigarette companies: benefits of MSA for, 127, 129, 156; as cartel, 15, 127, 153– 55; importing of tobacco by, 146; industry for, 128; nonparticipating, in MSA, 154, 240n243, 241n244; Philip Morris and regulation of, 12; prices charged by, 127, 128, 158, 221n5. See also Master Settlement Agreement; tobacco industry; tobacco litigation Cipollone v. Liggett Group, Inc., 231n130 Clean Air Act: and automobile emissions, 24; and diesel emissions, 66–76, 89; EPA provisions in, 23, 42; and PSD program, 24, 182n23; and public process, 90; stationary- vs. mobile-source regimes, 69; strange alliances among interest groups involving, 27; and technology of emissions control, 72 Clean Air Act Amendments (1970): and air quality standards, 67–68; and die-

269

sel emissions, 57; and federal vs. state regulation, 69 Clean Air Act Amendments (1977): and coal-manufacturing regulation, 7, 8; and diesel emissions, 39, 55, 57 Clean Air Act Amendments (1990), 58–59 Clean Water Act, 24–25 Clements, Earle C., 225n56 Clinton, Bill, 145–46, 151, 153, 233n155, 233n156, 238n214 Clinton, Hillary, 144 Coalition on Smoking or Health, 132, 146, 224n33 Coase, Ronald, 18 Coglianese, Cary, 44, 46, 185n18, 187n32 collateral-estoppel theories, 175 collective good, 22, 181n15. See also public interest Colorado, 159 command-and-control regulation, 42, 70, 72, 174–75 comment process, 38–39 commerce clause, 154 Committee of Counsel, 131 common resource, atmosphere as, 90 compact clause, 150, 154 competition, imperfect, 17–18 competitive bidding, 176 Comprehensive Smokeless Tobacco Health Education Act, 229n104 Comprehensive Smoking Education Act, 229n104 computer modeling, of mobile source emissions, 70–72 Congress: and asbestos, 113; as beneficiary of regulation-by-litigation, 205n134; EPA oversight by, 181n17; oversight activities of, 173; regulatory action forced by, 181n20; and silica, 102, 120–22, 124; and tobacco, 135– 37, 139, 150–53, 225n56, 227n79, 229n104, 234n162 Connecticut, 148 consent decrees. See settlements

270

Index

Consumer Product Safety Act, 140 Consumer Product Safety Commission, 139–40 consumption patterns, regulation’s influence on, 75, 84 corruption, 53 cost-benefit analysis: methodological issues of, 17; optimization of, 19– 20; public-choice theory and, 3–4; of regulation-by-litigation, 50–54; of regulation-by-negotiation, 44–47; of regulation-by-rulemaking, 38–43; regulation decisions and, 16–17, 180n4; for regulators, 34, 36; for regulatory entrepreneurs, 34 Coughlin, Charles, 212n64 Council on Tobacco Research, 131 courts: accountability of, 114–15; asbestos litigation and, 105, 112–13; deference of, to regulatory agencies, 85–86, 189n44; procedures of, 174 Crete Carrier Corp. v. EPA, 194n30 criteria pollutants, 67–68 Cummins, 64, 82, 195n30, 206n160 Currie, David, 39 DaimlerChrysler, 64 Dana, David, 191n64 Daubert hearings, 118–20, 218n165 Daynard, Richard, 143, 232n131 defeat devices, 56, 59, 76, 83–84 Delaware, 159 Department of Agriculture, 224n37 Department of Health, Education, and Welfare, 224n37 Department of Justice, 128, 153, 173 Department of Labor, 102 Department of Transportation, 12 Depression. See Great Depression De Re Metallica, 95 Derthick, Martha, 146 Detroit Diesel, 64–65, 82–83, 194n30, 206n160 Diesel Emissions Reduction Act, 89, 208n191

diesel-engine manufacturers: collaborative efforts of, 88–89; customers of, 62, 65–66, 73–75, 84–88, 197n51, 207n164; design process of, 65; and electronic engine controllers, 62–64, 76–77, 83, 193n25, 202n114; and emissions, 6–7; EPA lawsuits against, 1, 14, 56, 59–60, 66, 76–88, 161–63, 193n26; and EPA settlement compliance, 81–84; foreign, 82; industry for, 64–66; product demand influenced by EPA settlement, 84–85; and regulations negotiation, 55, 58–59; regulators’ vs. customers’ demands on, 63, 73–74; retrofitting by, 59, 88–89; testing by, 65 diesel engines: and air pollution, 61–64; characteristics of, 61; life cycle of, 65– 66, 75, 202n120; prevalence of, 62, 196n41, 196n42; rebuilt, 193n25, 193n26; retrofitted, 59, 88–89; technology of, 64, 81–84, 87; truck design and, 65, 198n57 diesel fuel emissions control, 55–92; additional legal disputes concerning, 194n30; Clean Air Act and, 39, 55, 57, 66–75; electronic engine controllers and, 62–64; engines as focus of, 65; exhaust components, 56; factors in, 61–62; fuel economy and, 56, 62–63, 193n25; future of, 60–61; history of, 56–60; incentives and, 87; issues in, 6– 7, 21–22; lead-time requirements for, 53, 57, 68–69, 78, 86–87, 91; legislative controls evaded by, 52–53, 91; methods of, 62, 64; and nitrogen oxide emissions, 6–7, 68; political influence in, 39; regulation-by-litigation and, 56, 59–60, 66, 76–88; regulation-bynegotiation and, 55, 58; regulation-byrulemaking and, 55, 57–60; settlement regarding, 59–60, 77, 79–80, 193n26; Statement of Principles and, 55, 59; summary of, 161–63; technology for, 64, 78, 81–84; testing for, 57–60, 65,

Index 76–79, 88, 195n31, 196n38, 197n51; trade-offs in, 63; voluntary programs for, 88–89. See also mobile source emissions control Dingell, John, 39–40, 42, 185n11, 185n14 discovery of testimony of experts, 118, 218n168 doctors, in silica litigation, 116–22, 217n161, 218n168, 218nn171–173, 220n190 doctrine, in tort litigation, 110 documents, tobacco industry, 143–46, 232n136, 232n139, 234n162 due process, 2, 154 dust litigation, 93–125; asbestos litigation, 104–15; history of, 93–94; silica litigation, 95–104, 115–23; summary of, 163–68 eastern coal producers, 7, 8 Eastman, Crystal, 209n18 economic logic: public-choice theory and, 3; theories of regulation and, 12–13 economic theory of regulation. See special-interest theory EGR systems. See exhaust-gas recirculation (EGR) systems electronic engine controllers, 62–64, 74, 76–77, 83, 193n25, 202n114 EMA. See Engine Manufacturers Association emissions. See automobile exhaust emissions; diesel fuel emissions control; mobile source emissions control Emmett & Glander, 148 Energy Policy Act (2005), 89 enforcement actions, 48, 191n60 engine design: based on standards, 73– 74, 77, 197n51; emissions control and, 196n38; trade-offs in, 63, 73–74, 197n51; truck design and, 65, 198n57 Engine Manufacturers Association (EMA), 60, 88, 195n31

271

Environmental Defense, 89 Environmental Protection Agency (EPA): and air quality models, 70–72, 85–86, 200n98, 201nn100–101, 202nn105– 106; and asbestos, 216n137; and automobile emissions, 24; congressional oversight of, 181n17; constraints on, 23; and diesel emissions, 1, 14, 52–53, 55–92, 161–63; incentives facing, 78; legal challenges to, 41, 187n32; mobile-source models (MOBILE) of, 71–72, 85–86, 200n98, 201nn100– 101; New Source Review litigation of, 49; and nonattainment status, 67; and PSD program, 24–25; reauthorizations of laws involving, 181n18; and regulation-by-litigation, 76–88, 90– 92; regulation-by-negotiation in, 43, 45, 185n18, 188n39, 188n40; and scientific rationale, 185n17; and secondhand smoke, 145; and small gasoline-engine emissions, 12; and water pollution, 19–21 European emissions standards (Euro III), 60 exclusive-remedy provision, 100 executive branch. See presidential administrations executive-branch reviews, 39 exhaust-gas recirculation (EGR) systems, 81–83, 205n154, 206n158, 206n160 externalities, 16–17, 36. See also regulatory externalities factions, 20–21 fairness doctrine, 138–40, 228n89 Farm Security and Rural Investment Act, 242n261 FCC. See Federal Communications Commission FDA. See Food and Drug Administration Federal Cigarette Labeling and Advertising Act (FCLAA), 137 Federal Communications Commission (FCC), 133, 138, 228n89

272

Index

Federalist No. 10, 20 Federal Radio Commission, 138 Federal Register, 172–73 federal regulation, 2 Federal Test Procedure (FTP), 57–58, 204n133 Federal Trade Commission (FTC), 128, 133, 135–38, 173, 226n58, 226n60, 227n72, 227n78, 229n104 FedEx, 89 fellow-servant doctrine, 96 Field, Richard C., 214n114 Fifth Amendment, 122 Fifth Circuit Court of Appeals, 106, 144 First Amendment, 154 Fiss, Owen, 189n46 Fleet Owner (magazine), 84 Florida, 151, 221n1 Food and Drug Administration (FDA), 12, 133–35, 138–39, 145–47, 150, 152, 170 Food, Drug, and Cosmetic Act (FDCA) (1938), 135 Ford, 12 Ford, Wendell, 140 Fortas, Abe, 137, 225n56 forum shopping, 108 Fourth Circuit Court of Appeals, 147 Frank, Ronald F., 214n114 Frankfurter, Felix, 39 Fritschler, A. Lee, 225n51 FTC. See Federal Trade Commission fuel economy: diesel emissions control and, 56, 62–63, 193n25; truck/SUV standards for, 12, 180n17 Funk, William, 23, 190n54 Future of Diesel Engines, The, 56 gasoline-engine emissions control, John Deere and, 12 Gauley Bridge disaster, 102, 211n59 Gauthier, Wendell, 144 General Motors (GM), 6, 12, 76, 180n17, 204n133 Gephardt, Richard, 234n156

Ginsburg, Ruth Bader, 214n114 Glantz, Stanton A., 232n136 Golub, David, 148 Gompers, Samuel, 211n40 Gore, Al, 77, 238n210 Government Accountability Office (GAO), 19, 87–88, 159, 242n261 government intervention: constraints on, 20–21, 40; imperfection of, 18; private ordering vs., 18–23 Gramm, Phil, 239n216 Great Depression, 11, 99, 100 Green v. American Tobacco Co., 231n123 Gregg-Leahy Amendment, 238n214 Harkin, Tom, 238n210 Harrington, Joseph E., Jr., 183n46 Harris, Oren, 137 Harter, Philip, 43, 186n23, 186n28, 187n32 Hayek, Friedrich A. von, 21, 32 healing arts screening, 121, 219n185 health effects of smoking, 135–39, 143– 44, 223n32, 232n137 health interest groups, 130–32, 134, 138–40, 145, 146, 149–52, 223n31, 223n33 heavy-duty diesel engines. See diesel fuel emissions control high-sulfur coal, 7, 8, 21–22 Hilburn, Glyn, 220n190 Hopkins v. General Motors, 110 Horsehead Resources Development Co. v. Browner, 185n17 House Commerce Committee, 77, 173 House subcommittee on silica litigation, 120–22, 124 Humphrey, Hubert H., III, 149, 236n195 hydrocarbons, 56, 57, 59, 60, 67 Iacocca, Lee, 74 ideological pressure groups, 26. See also lobbyists Ieyoub, Richard, 148

Index imperfect competition, 17–18 imperfect information, 17–18, 31–34 inaction, regulatory, 23–24, 40, 181n19, 181n20 incentives: in asbestos litigation, 112; for knowledge production, 31–34; in regulation-by-negotiation, 44–45; of regulatory agencies, altering through litigation, 23–25; for technological advances, 72–74, 202n112 income tax, 11 incumbent firms, 26 information. See mobile source emissions control: comment process and, 39; imperfect, 17–18, 31–34; incorporation of, into regulatory process, 31–34; regulation and, 31–34; regulationby-litigation and, 94, 124, 167; regulation-by-negotiation and, 43; solicitation of, concerning regulation, 172–73; technology related to, 97; workplace health and safety and, 96– 97, 183n45 innovation: regulation and prediction of, 73; time frame for, 74–75 insurance industry: and asbestos litigation, 110; medical knowledge sought by, 97–98; and occupational diseases, 102; and silicosis litigation, 100–101; and workplace health and safety legislation, 97. See also workers’ compensation insurance interest groups: and asbestos litigation, 107, 111–13, 115, 215n119; as beneficiaries of regulation-by-litigation, 53; businesses, 26; capture theory and, 6– 7; and diesel emissions, 80; disadvantaged, 132; identification of relevant, 25–26; ideological pressure groups, 26; incumbent firms, 26; litigators, 133; and occupational diseases, 98– 99; and regulation, 25–27, 34–35; and regulation-by-litigation, 4–5, 26; and regulation-by-negotiation, 44; and regulation-by-rulemaking, 38–39, 41,

273

186n21; regulatory agency staff, 26; regulatory entrepreneurs, 27; regulatory inaction addressed by, 23–24; smokers, 132; special-interest theory for analyzing, 7–9; strange alliances among, 27; theories of regulation and, 12–13; tobacco industry, 131, 134–41, 146–47, 149–52, 223n25, 227n79; and tobacco litigation, 130– 31, 149–52, 223n33; and tobacco regulation, 131–34. See also lobbyists interests, 19. See also interest groups; public interest International Labour Office (ILO) Classification System, 116 Interstate Commerce Commission (ICC), 7 Jack, Janis Graham, 117–20, 122–23, 172–74, 217n160, 220n194, 221n195 J. B. Hunt, 88 Jefferson, Thomas, 177 John Deere, 12 Johns Manville Co., 213n89, 215n123 Johnson, Lady Bird, 225n56 Johnson, Lyndon, 224n36 judicial review, 40–41, 186n20 Kaplow, Louis, 180n4 Kennedy, David M., 212n64 Kennedy, James, 193n25 Kennedy, John F., 136, 226n68 Kessler, David, 146, 149, 171, 233n155, 233n156, 234n159, 234n164, 238n211, 241n251 Kirtz, Chris, 185n18 Kluger, Richard, 132, 229n108 knowledge: asbestos litigation and, 104, 106, 107, 111–12; about dust-related diseases, 97–98, 101, 104, 209n8; incentives for producing, 31–34; markets vs. centralized institutions concerning, 21, 32; regulation-bynegotiation and, 46; specialized, 3–4. See also information

274

Index

Kolko, Gabriel, 6 Koop, C. Everett, 238n211 Krauss, Michael, 222n21, 232n137 Kübler, Dorothea, 230n111 Kyoto Protocol, 26 Lafayette v. Louisiana Power and Light Co., 241n249 Landes, William M., 186n20 law, elasticity of, 110, 165, 212n73 lawsuits. See asbestos litigation; litigation; mass tort litigation; regulationby-litigation; silica litigation; tobacco litigation; tort litigation lawyers. See litigators Lazarus, Richard, 181n18 lead, 67 lead-time requirements, 53, 57, 68–69, 78, 86–87, 91 LeBow, Bennett, 233n146 legislation: asbestos-related, 113; litigation as spur to, 103–4, 165–66; silicarelated, 101–2; on workplace health and safety, 96–97, 99–100 legislatures: oversight activities of, 173; regulation-by-litigation and, 52–53. See also Congress legitimacy, 171 Lewis, Mike, 224n40 Liggett Tobacco Company, 144, 233n146 litigation: effects of, 2; financial aspects of, 124; regulation-by-litigation vs., 48, 171–76; regulations challenged by, 40–41; regulatory inaction addressed by, 23–24, 181n19; transparency in, 172–74. See also asbestos litigation; mass tort litigation; private parties; regulation-by-litigation; silica litigation; tobacco litigation; tort litigation litigators: bootleggers-and-Baptists theory and, 11; compensation of, for regulation-by-litigation, 53, 111, 114, 134, 148, 156, 175–76, 215n118, 216n126, 217n140; as interest group,

133; as regulatory entrepreneurs, 27; special-interest theory and, 9; stakes of, in regulation-by-litigation, 9; in tobacco lawsuits, 142–45; transparency in fee arrangements for, 175– 76. See also plaintiffs’ bar Little, Margaret, 127 lobbyists, 6. See also ideological pressure groups; interest groups local knowledge, 21 Long, Huey, 212n64 Lorillard Tobacco Company, 126, 131 Lott, Trent, 238n216, 239n218 Louisiana, 148 low-sulfur diesel fuel, 60 lung disease. See dust litigation; occupational diseases Mack, 64, 81 Madison, James, 20–21 Magnuson, Warren, 137–39, 157 Maine, 159 Mandel, Jeff, 89 Manville Trust, 213n89 Marcantonio, Vito, 211n59 Mariana v. Fisher, 155 market failures, 18 markets, and knowledge acquisition/use, 21, 32 Martindale, George, 119, 220n190 Maryland Court of Appeals, 113 mass consolidations of claims: in asbestos litigation, 112–13; constraints on, 167–68, 174; in silica litigation, 120; strategy of, 124–25, 214n114, 214n115; in tobacco litigation, 143– 44 mass tort litigation: asbestos litigation as, 104–15; client-identification process in, 107, 109, 116–22, 218nn171–174; conditions for, 94; individualized information in, 124; regulatory effects of, 3, 4, 14–15, 93, 166; as repeat-player game, 112; silica litigation as, 115–17; workplace accidents and, 96

Index Master Settlement Agreement (MSA): advantages of, to several parties, 130, 155, 156; cigarette companies benefited by, 127, 129, 156; consumers disadvantaged by, 53, 54, 127, 132, 156; financial aspects of, 127; impact of, 15, 126–27, 155–56, 168; legal challenges to, 154–55; origins of, as Resolution, 150–52; payments mandated by, 126, 129–30, 152, 156–57, 222n21, 242n261; politics and, 129–30; publicinterest rationale for, 130, 158–59; public participation precluded from, 54, 152, 156; regulatory nature of, 126–27, 155–58; states benefited by, 126, 129–31, 157, 159, 242n261; state spending of revenues from, 158– 59. See also tobacco litigation McCain, John, 152, 238n214, 239n218 McChesney, Fred S., 9 McConnell, Mitch, 239n216 McGarity, Thomas O., 183n43, 209n18 McGovern, Francis, 109–11, 216n131, 216n139, 217n140 Medicaid, 126, 133, 146, 147, 149–52, 156, 158 medical knowledge, about dust-related diseases, 97–98, 101, 104, 209n8 Medicare, 153 Mercedes Benz, 64, 82 mesothelioma, 104, 106 Meyner, Robert, 137 midnight regulations, 52 Mine Safety and Health Administration, 183n43 Minnesota, 151, 221n1, 232n136 Mississippi: asbestos litigation in, 108; silica litigation in, 115, 117, 120–21, 124, 219n182; tobacco litigation in, 126, 147, 151, 221n1 mobile source emissions control: computer modeling of, 70–72; design decisions based on, 73–74; effectiveness of, 74; EPA role in, 70–72; regulatory environment for, 58, 69–70; state reg-

275

ulators and, 200n94; technology and, 72–75; testing for, 57–58, 63–64, 73– 74; vehicle life cycle and, 74–75. See also automobile exhaust emissions; diesel fuel emissions control mobile-source models (MOBILE), 71– 72, 85–86 Moore, Michael (Mike), 133, 147, 191n64, 224n40, 241n251 Morales, Dan, 191n64, 236n182 Morris, Dick, 145, 233n156 Moss, Frank, 139–40 Motley, Ron, 134, 145, 224n40 motor carriers, 7, 8 MSA. See Master Settlement Agreement multidistrict litigation (MDL) proceeding, 117–22 Murr, Mark, 236n182 N&M, 220n190 NAAQS. See national ambient air quality standards Nader, Ralph, 139, 229n104 Nagareda, Richard, 93 national ambient air quality standards (NAAQS), 67–68, 70–71, 78–79, 199n72 National Association of Attorneys General, 158 National Conference to Eliminate Silicosis, 116, 217n149 National Institute for Occupational Safety and Health (NIOSH), 116 National Petrochemicals & Refiners Ass’n v. EPA, 194n30 National Recovery Administration, 129 National Research Council, 200n98 National Tuberculosis and Respiratory Disease Association, 136 NCPs. See noncompliance penalties negotiated rulemaking. See regulationby-negotiation Negotiated Rulemaking Act (1990), 43 Nesbitt, Jeff, 234n159

276

Index

Ness, Motley, Loadholt, Richardson & Poole, 235n177 Neuberger, Maureen, 136, 157, 225n56 New Deal, 25, 102, 129 new entrants: regulation-by-litigation and, 177; regulation-by-negotiation not applicable to, 51; regulations disadvantaging, 26, 129; tobacco industry and, 129, 139, 151, 153–54, 241n244 New Masses (newspaper), 211n59 New York Times (newspaper), 135, 144 nitrogen oxides (NOx), 6–7, 56, 57, 59, 60, 62, 63, 67–68, 71–72, 75, 78–79, 84, 87, 200n84 Nixon, Richard, 191n65 Noerr-Pennington doctrine, 154–55 nonattainment status, 67–68, 72, 199n76, 200n95 noncompliance penalties (NCPs), 55, 58, 82, 206n154 nonparticipating manufacturers, in MSA, 154, 240n243, 241n244 notice-and-comment rulemaking. See regulation-by-rulemaking NRDC v. Callaway, 24 occupational diseases: growing interest in, 98–102; legislation on, 97, 102; multiple sources of, 106; unions and, 98; workers’ compensation and, 101– 4. See also asbestos litigation; silica litigation Occupational Safety and Health Act (OSHAct): and cost-benefit analysis, 17; dust-level standards of, 96; effectiveness of, 38, 184n6; Nixon administration and, 191n65; and silica, 115– 16 Office of Information and Regulatory Affairs (OIRA), 173 Office of Management and Budget, 39, 173 Olson, Walter, 127, 148 onboard diagnostic systems, 195n33 organic statutes, 23, 49

organized labor, 7 overregulation: computer modeling and, 71; emissions tests and, 58; explanation of, 28–29 oversight hearings, 39 Owens, David, 224n40 ozone, 67–68, 71, 79, 199n76 parens patriae doctrine, 242n253 Parker v. Brown, 155, 241n249 particulates, 56, 59, 60, 62, 67–68, 75, 78–79 Partnership for a Healthy Mississippi, 241n251 People’s Press (newspaper), 211n59 perfect-world analysis, 17–18 performance-based regulation, 32, 175 Pertschuk, Michael, 157 Pharmacopoeia, 135, 225n51 Philadelphia, 53 Philip Morris, 12, 126, 128, 131, 143, 150, 154, 223n25 plaintiffs’ bar: in asbestos litigation, 105, 107–13, 115, 123–24, 165–67; dangers of, 96, 167; influence of, 101; interests of, 123–24; resources of, 216n126; in silica litigation, 115–17, 123; in tobacco litigation, 133–34, 143–45, 147–50, 156, 233n150, 234n163, 235n176, 235n177 policy. See public policy political wealth extraction theory, 9–10 politicians: as beneficiaries of MSA, 156; as beneficiaries of regulation-by-litigation, 53, 191n64; public-choice theory and, 3–4; public-interest theory and, 5; and silicosis crisis, 104. See also politics politics: legitimacy of, 171; and MSA, 129–30; principles of U.S., 40; regulation-by-litigation and, 4, 51, 53, 157–58, 171, 191n65; regulation-bynegotiation and, 46–47; regulatory constraint through, 39–40; rentseeking behavior in, 6; and silicosis crisis, 103–4; small groups’ effectiveness

Index in, 4; and technological innovation, 73; and tobacco litigation, 148, 157, 233n156, 238n210; and tobacco regulation, 140, 142, 145–46. See also politicians Posner, Richard A., 111, 186n20 prebuys, 85–88, 207n164, 207n170 presidential administrations: regulationby-litigation and, 52, 91; regulatory agencies’ relation to, 26, 52 Prevention of Significant Deterioration (PSD) program, 24–25, 182n23, 199n72 Priest, George, 108–10, 113 principal-agent model, 25 Pringle, Peter, 225n51, 235n176 private ordering, regulation vs., 18–23 private parties: regulation-by-litigation and, 93–94, 123–25; tobacco litigation by, 142–45, 147–49 Pro-Children Act, 229n104 products-liability theory, 93, 106, 116 Progressive Era, 99 Prohibition, 10–11 Pryor, William H., Jr., 149 PSD program. See Prevention of Significant Deterioration (PSD) program public: cost-benefit analysis of regulation-by-litigation for, 50–52, 54, 91, 123–24, 162–63, 170–71; costbenefit analysis of regulation-bynegotiation for, 44–45, 170–71; costbenefit analysis of regulation-byrulemaking for, 38–41, 90, 170–71; MSA and, 54, 152 public-choice theory, 3–5, 170–71, 179n2, 210n18 Public Health Service, 138 public interest: maximization of, 5; MSA and, 130, 158–59; private-party regulation-by-litigation and, 123–24; problems of defining, 6–7. See also collective good public interest groups, 26. See also interest groups

277

public-interest theory, 5, 209n18 public opinion: about regulatory agencies’ moral status, 13; on tobacco industry, 146, 152, 232n139 public participation: precluded by regulation-by-litigation, 51–52, 54, 172; in regulation-by-rulemaking, 38– 39; transparency measures and, 172– 74 public policy: asbestos litigation and, 110; cash transfer restrictions, 175– 76; constraints on regulatory agency power, 174–75; proposals for, 171– 76; transparency measures, 172–74 Pure Food and Drug Act (1906), 134 Rabin, Robert, 143, 144, 149, 150, 230n111, 232n139 Racketeer Influenced and Corrupt Organizations Act (RICO), 153 radiography, 97, 100, 108, 116, 119, 121, 214n96, 218n171, 218n172 railroads, 7, 8 RAND Corporation, 107–8, 113, 123– 24, 216n139 rational ignorance: interest groups’ benefits from, 4–5; and price increases, 13; public-choice theory and, 3–4; and regulatory agencies’ moral status, 13; and spreading of costs, 4, 13 Raybestos Manhattan, 215n123 Reagan, Ronald, 140 regulation: and behaviors required of the regulated, 30–31; and benchmarks, 17–22; beneficiaries of, 19; collusion through, 129; command-and-control, 42, 70, 72, 174–75; constraints on, 22–25, 171; consumption patterns affected by, 75, 84; deadline establishment in, 72–73; decisions involved in, 16–17, 24–25, 27–35, 160; enforcement actions vs., 48, 191n60; federal, 2; gains and losses from, 11–12; and inaction, 23–24, 40, 181n19, 181n20; information as factor in, 31–34;

278

Index

regulation (continued) interest groups and, 25–27, 34–35; intermediate, 33–34; interpretation of rules, 190n49; interpretation of statutes, 23–25; midnight regulations, 52; modes of, 14, 36, 54, 91–92; nonregulation vs., 18–23, 181n19; object of, 27–30; over- vs. under-, 28–29; performance-based, 32, 175; principalagent model in, 25; process of, 2; specific vs. general, 32; state, 2; technology-forcing, 72–74, 81; theories of, 5–11; trade-offs in (see tradeoffs). See also government intervention; regulation-by-litigation regulation-by-litigation, 47–54; agency power and, 48–49, 174–75; appeal of, vs. other methods, 171; asbestos litigation as, 104–15; characteristics of, 48– 49; conditions for, 176–77; constraints on power of, 174–75; defined, 1, 14, 47–48; and diesel emissions, 56, 59– 60, 66, 76–88; disadvantages of, 2, 50–52, 167, 170; effects of, 2–3; EPA and, 76–88, 90–92; financial aspects of, 53–54, 79, 175–76, 191n64; forward-looking nature of, 48; future of, 176–77; ideological pressure groups and, 26; information as factor in, 94, 124, 167; interest groups and, 4–5; litigation vs., 48, 171–76; mass torts and, 3, 4, 14–15, 93; and newentrants problem, 177; politics and, 4, 51, 53, 157–58, 171, 191n64, 191n65; presidential administrations and, 52, 91; price increases and, 13; private parties and, 93–94, 123–25; problems with settlements in, 49–50, 189n46– 190n52, 190n54; public-interest theory and, 5; public participation precluded from, 51–52, 54, 172; public’s cost-benefit perspective on, 50–52, 54, 91, 123–24, 162–63, 170–71; reforms aimed at, 167–68, 171–76; regulators’ cost-benefit perspective on, 52–54,

77–80, 92; regulatory agency use of, 1–3; scope of, 48, 51; as second bite from the apple, 2; tobacco litigation as, 126, 155–58; trend of, 1–3 regulation-by-negotiation, 43–47; advantages of, 186n28; characteristics of, 43–44; decision to use, 45, 188n36; defects of, 187n32, 190n54; defined, 14, 43; and diesel emissions, 55, 58; EPA and, 43, 45, 185n18, 188n39, 188n40; information gained in, 46; interest groups and, 44; origins of, 186n23, 186n24; politics and, 46–47; process of, 43, 186n26; public’s costbenefit perspective on, 44–45, 170–71; regulators’ cost-benefit perspective on, 45–47; scholarship on, 37, 45; time frame for, 45, 187n32 regulation-by-rulemaking, 14, 37–43; benefits of, 41; characteristics of, 37; and diesel emissions, 55, 57–60; and due process, 2; interest groups and, 38–39, 41, 186n21; legal constraints on, 40–41; political constraints in, 39– 40; process of, 37, 184n3; public participation in, 38–39; public’s costbenefit perspective on, 38–41, 90, 170–71; regulation-by-negotiation as modification of, 43–47; regulators’ cost-benefit perspective on, 41–43; time frame for, 7, 38 regulators, individual: cost-benefit analysis for, 34, 36; cost-benefit analysis of regulation-by-rulemaking for, 41–43; operations of, 13. See also regulatory agencies regulatory agencies: administrative aims of, 42; constraints on power of, 174– 75; cost-benefit analysis of regulationby-litigation for, 52–54, 77–80, 92; cost-benefit analysis of regulation-bynegotiation for, 45–47; cost-benefit analysis of regulation-by-rulemaking for, 41–43; court deference to, 85–86, 189n44; discretion of, 181n19; as

Index interest group, 133; litigation used by, 1–3; and moral high ground, 13; office relations within, 80–81; settlement tactics of, 49–50; staff of, 26, 41; threats from, 174–75. See also regulators, individual regulatory entrepreneurs, 27 regulatory externalities, 36, 42–43, 47 Reitze, Arnold, Jr., 199n76 Reno, Janet, 153 rent-seeking behavior: defined, 6; factions and, 21; public-comment process and exposure of, 38; public interest served by, 39–40 repeat-player games, 111–12 Republican party, 52 Resolution, on tobacco industry Medicaid reimbursement, 150–51, 237n199, 237n207, 238n208, 238n211, 238n216 Restatement (Second) of Torts, 110 retrofitting, of diesel engines, 59, 88–89 revealed preferences, 38 Reynolds American, 241n244 R. J. Reynolds Tobacco Company, 126, 128, 131, 154, 241n244 Rodham, Hugh, 144, 232n142 Roosevelt, Franklin D., 102, 212n64 Rose, Charles, 241n251 Rowland, John, 148 Ruhl, J. B., 39, 190n49 rules. See regulation-by-rulemaking Russell Sage Foundation, 209n18 safe cigarettes, 12 Salzman, James, 39, 190n49 Schneider, 84 Schumer, Charles, 12 screening, of occupational disease clients, 107, 109, 116–22, 217n161, 218n172, 218n174, 219n185, 219n188, 220n190 scrubbers, for coal-manufacturing equipment, 7, 8, 179n6 Scruggs, Millette, Bozeman & Dent, 133

279

Scruggs, Richard ‘‘Dickie,’’ 133, 145, 147, 149, 191n64, 224n40, 232n136, 235n176, 235n177, 239n218 secondhand smoke, 144, 145, 147, 229n104, 230n12 Sellers, Christopher, 183n39, 183n41 settlements: in asbestos litigation, 105, 111; court deference shown in, 189n44; in diesel emissions case, 59– 60, 77, 79–80, 193n26, 203n133; Medicaid-reimbursement, 149–52; problems with, 49–50, 84, 189n46– 190n52, 190n54; reason for, 49; regulators’ tactics in, 49–50; in silica litigation, 122; transparency in, 172–74 Shapiro, Sidney A., 183n43, 209n18 Shavell, Steven, 180n4 Sherman, Edward, 118, 120, 124, 221n195 Sherman Act, 128 Sierra Club v. Ruckelshaus, 24, 182n23 silica, 95–96 silica litigation, 93–104, 115–23; asbestos litigation methods and, 115– 17, 121; client-identification process in, 116–22, 218nn171–174; defendants’ actions in, 117–19; economics of, 121–23; legislation in response to, 102–4; origins of, 95; plaintiffs’ bar in, 115–17, 123; precursors to, 95–99; problems with, 119; proliferation of, 100–101, 115–16, 217n161, 219n175; settlements in, 122; summary of, 163–68; Texas MDL proceedings in, 117–23. See also dust litigation silicosis, 95, 98, 100–102, 116 Silver Golub & Teitell, 148 Simpson, Sumner, 215n123 sin taxes, 141 ‘‘small is beautiful,’’ 13 SmartWay Transport Partnership, 89, 208n190 Smith, Gerald L. K., 212n64 smog, 68

280

Index

smokers: costs of tobacco litigation borne by, 53, 127, 132, 150, 156, 158; as interest group, 132; left out of tobacco litigation, 54; as plaintiffs, 143, 147, 231n123, 231n130; taxes’ effect on, 141 smoking: health effects of, 135–39, 143– 44, 223n32, 232n137; restrictions on, 141, 229n108, 230n12, 230n111. See also tobacco society. See public Solid Waste Agency of Northern Cook County v. U.S. Army Corps of Engineers, 185n17 special interest groups, 26. See also interest groups special-interest theory, 7–9 specialized knowledge, 3–4 state-action exemption, 155, 241n249 state attorneys general: and antitrust legislation, 128–29; authority of, 133, 150, 224n38; incentives of, 133, 147– 48, 224n38; and private attorneys, 148; and regulation-by-litigation, 2–3, 9; and tobacco litigation, 1, 15, 130, 133, 147–53, 157 state implementation plans (SIPs), for air quality standards, 67–69, 71, 198n71 Statement of Principles, on diesel emissions, 55, 59 states: and mobile source emissions control, 200n94; MSA benefits for, 126, 129–31, 157, 159, 242n261; regulation by, 2; regulatory power of, 2; and sin taxes, 141, 230n18; tobacco litigation on behalf of, 130–31, 147–53, 224n40, 241n253; tobacco regulation by, 140–42 steady-state emissions tests, 57 Stigler, George, 7 Stroup, Richard, 18, 177 sugar import quotas and price supports, 19 sulfur dioxide (SO2), 67 Supreme Court: and automobile emis-

sions, 24; cost-benefit analysis cases before, 17; and tobacco regulation, 147 surgeon general, 136, 137, 226n68, 230n12 Synar, Michael, 234n162 Synar Amendment, 229n104 technology: for diesel fuel emissions control, 64, 78, 81–84, 87; effect of regulation on, 32; incentives for, 72–74, 202n112; innovation in, 73; for mobile source emissions control, 72–75; politics and, 73; regulatory forcing of, 72– 74, 81; time frame for, 74–75 Tenth Amendment, 154 Terry, Luther, 136 tests, emission-control: design based on, 73–74, 77, 197n51; effectiveness of, 58, 76–77, 203n126, 203n127; electronic engine controllers and, 59, 63– 64, 76–79; engines as focus of, 65; EPA, 57–58, 76–79, 86–88, 195n31; steady-state, 57; supplemental, imposed by settlement, 203n133; transient-engine, 57–58, 203n126; variation in, 196n38 Texas: asbestos litigation in, 213n94; healing arts screening in, 121, 219n185; silica litigation in, 116–23; tobacco litigation in, 151, 221n1 theories of regulation, 5–11, 170–71; bootleggers-and-Baptists theory, 10– 11; capture theory, 5–7; political wealth extraction theory, 9–10; publicchoice theory, 210n18; public-interest theory, 5, 209n18; special-interest theory, 7–9 Thompson, Kirk, 88 tobacco: age and sales restrictions on, 140, 145, 233n153, 237n207; health effects of, 135–39; social and political importance of, 134; taxes on, 141, 230n18. See also smoking tobacco farmers, 131–32, 146, 153

Index tobacco industry: advertising by, 135– 39, 226n58, 226n60, 227n72, 227n78, 229n101, 237n207; benefited by regulation, 137–39, 142; as interest group, 131, 134–41, 146–47, 223n25, 227n79; and Medicaid-reimbursement settlement, 149–52, 237n199, 237n207, 238n208, 238n211; new entrants to, 129, 139, 151, 153–54, 241n244; and private litigation, 142– 45; publication of documents of, 143– 46, 232n136, 232n139, 234n162; shrinking of, 146. See also cigarette companies tobacco litigation, 126–59; bootleggersand-Baptists theory applied to, 127, 130, 133, 156, 222n10; controversial nature of, 126; factors in, 130; federal, 153; impact of, 1; interest groups and, 130–31, 149–52, 223n33; lawyers’ compensation from, 53, 134, 148, 235n176, 236n178, 236n182; Medicaid-reimbursement settlement, 149–52, 237n199, 237n207, 238n208, 238n211; motives for, 147– 48; plaintiffs’ bar in, 133–34, 143–45, 147–50, 156, 233n150, 234n163, 235n176, 235n177; politics and, 148, 157, 233n156, 238n210; private, 142– 45; as regulation-by-litigation, 126, 155–58; regulatory background for, 131–42; risks involved in, 149; states benefited by, 150; summary of, 168– 70. See also cigarette companies; Master Settlement Agreement tobacco quotas, 223n27 tobacco regulation, 131–42, 145–47; bootleggers-and-Baptists theory applied to, 139, 146–47; early years of, 134; fairness doctrine and, 138–40; federal opposition to, 224n37; interest groups and, 131–34; pattern of, 137– 38; politics and, 140, 142, 145–46; state, 140–42; after surgeon general’s report, 136–38; before surgeon gen-

281

eral’s report, 134; tobacco industry aided by, 137–39, 142 tobacco settlement. See Master Settlement Agreement Tobacco Trial Lawyers’ Association, 233n150 tort litigation: changes in, 110; economic incentives for, 100–101; for silicosis, 100–101, 103. See also mass tort litigation tort reforms, 167 Toyota, 12 trade-offs: air quality modeling and, 71– 72; fuel-economy/emissions, 63; role of, in regulation, 21–22 Trade Regulation Rule on Cigarette Labeling and Advertising, 137 tragedy of the commons, 90 transaction costs, 17–18 transient-engine tests, 57–58, 203n126 transparency in litigation, 172–76 Transport Topics (magazine), 84 Tribe, Laurence, 224n40 truck buyers, 62, 65–66, 73–75, 84–88, 197n51, 207n164 truck idling, 89, 208n191 trucking firms, 7, 8 type I errors, 40, 171 type II errors, 40, 171 underregulation: computer modeling and, 71, 201nn100–101; emissions tests and, 58; explanation of, 28–29 unions, 98, 210n32, 210n40 United Mine Workers, 8 United States v. Cummins Engine Company, Inc., 195n30 United States v. Detroit Diesel Corporation, 195n30 U.S. Constitution, tobacco litigation and, 150, 154 U.S. Silica, 117 vehicle use, controls on, 69–70 Vernon, John M., 183n46

282

Index

Viscusi, W. Kip, 53, 183n46 Volvo, 64, 76 Wald, Patricia, 46–47 Wall Street Journal, 150 Wal-Mart, 208n191 water pollution, 19–21, 42 Waxman, Henry, 146, 234n162 weekend effect, 71, 79 western coal producers, 7, 8 wetlands, 24–25 White, Lawrence J., 202n112 Wiley, Harvey Washington, 225n51 Williams, Merrell, 232n136 Witt, John Fabian, 183n43 women workers, 210n32 workers’ compensation insurance: as incentive, 33–34, 183n46; judicial handling of asbestos claims and, 106–

7; litigation vs., 93; and occupationaldisease claims, 101–4; origins of, 96, 209n18 workplace health and safety: incentives for improving, 32–34, 97, 183n37, 183n39, 183n41, 183n46; industrial changes and, 98–99; information availability and, 96–97, 183n45; injuries and deaths, 96; interest groups and, 98–99; legislative approach to, 96–97; workers and, 183n43, 183n44. See also dust litigation X-ray technology, 97. See also radiography Young, Robert, 54 Zegart, Dan, 223n33, 234n162