Regulation by Litigation

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Editorial Reviews

Jonathan Macey
"A valuable, spirited book about how bureaucrats use litigation to avoid the constraints they face when they regulate the old-fashioned way, by formulating rules, that enriches our understanding of bureaucracy."—Jonathan Macey, Yale University
Terry L. A
"This book invites lawyers to apply economics to the law and urges economists to analyze litigation's impact on the economy. The authors reveal the pernicious results of substituting litigation for sound public policy, providing a first step toward correcting a regulatory process gone awry."—Terry L. Anderson, Executive Director, The Property and Environment Research Center
Richard A. Epstein
"The authors’ winning combination of clear theory and illustrative case studies makes this book a necessary read for anyone who wishes to grapple with the negative synergies of two systems of social control, which can easily swamp any gains that either system alone could provide.”—Richard A. Epstein, James Parker Hall Distinguished Service Professor of Law, University of Chicago
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Product Details

  • ISBN-13: 9780300120028
  • Publisher: Yale University Press
  • Publication date: 12/9/2008
  • Edition description: New Edition
  • Pages: 296
  • Product dimensions: 6.40 (w) x 9.30 (h) x 1.10 (d)

Read an Excerpt

Regulation by Litigation


Yale University Press

Copyright © 2009 Andrew P. Morriss, Bruce Yandle, and Andrew Dorchak
All right reserved.

ISBN: 978-0-300-12002-8

Chapter One


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 bringingsuits 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.

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, regulation by 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 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 emissions 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. 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 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 public-interest 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 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.


Excerpted from Regulation by Litigation by ANDREW P. MORRISS BRUCE YANDLE ANDREW DORCHAK Copyright © 2009 by Andrew P. Morriss, Bruce Yandle, and Andrew Dorchak. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents


1 Introduction....................1
2 The Regulator's Dilemma....................16
3 Modes of Regulation....................36
4 Heavy-Duty Diesel-Engine Litigation....................55
5 Dust Litigation....................93
6 Tobacco Litigation....................126
7 What Have We Learned?....................160
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