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Elena Kagan's War on Small Business

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Elena Kagan's War on Small Business

Solicitor General Kagan urged against letting a small firm challenge a regulatory agency in court. Would a Justice Kagan do the same?

Now that Congress has passed — thanks to the peeling off of a bare minimum of Senate Republicans — and President Obama has signed a financial regulatory bill with a massive scope and untold costs, and a bill extending unemployment benefits without paying for them, he and the Democratic leadership have two more big items to rush through before Congress’s August recess. They are a bill that will ostensibly help small business and the Supreme Court nomination of Elena Kagan.
While Congress is claiming it wants to help small business, confirming Kagan could mean great harm to business owners crippled by costly regulation. Based on her writings and her arguments as Obama’s solicitor general (which is all we have to go on, since she has never served on the bench), not only is Kagan likely to rule against constitutional challenges to Obamacare, Dodd-Frank, and other onerous laws, but she is also likely to do what she can to make it nearly impossible for smaller “regulated firms,” as she calls them, to have their day in court in the first place.

In blasting Republicans for delaying passage of the small-business bill, Obama proclaimed, “Small businesses are the engine of job growth, and measures to cut their taxes and make lending available should not be held hostage to partisan tactics.” Yet in preparing legal briefs for the Obama administration, Kagan effectively argued that small businesses that object to a particular law or regulation as unconstitutional should be held hostage to the administrative-review process of the agency responsible for enforcing that law or regulation. According to Kagan, “regulated firms” should have no standing to bring a constitutional claim to federal courts until they “exhaust” every remedy at the regulatory agency.

Kagan’s prescription would be an unaffordable option for the vast majority of small businesses, as they could spend years in the exhausting “exhaustion” process before they could seek relief in court. This radically restrictive view of legal standing to challenge agency authority has been rejected by Democratic-appointed judges in federal courts and was given a stinging rebuke late last month by the U.S. Supreme Court in the landmark case Free Enterprise Fund v. Public Company Accounting Oversight Board.

In this case (in which attorneys with my Competitive Enterprise Institute served as co-counsel), the two-person Nevada accounting firm Beckstead & Watts challenged the constitutionality of the board that issues the costly accounting mandates under the Sarbanes-Oxley Act of 2002. In her October 2009 brief for the Supreme Court, Kagan argued that the court should throw the case out before even considering the constitutional merits.

The brief, which lists Kagan as “counsel of record,” argued that the U.S. District Court for the District of Columbia “lacked jurisdiction because petitioners failed to exhaust the exclusive statutory review procedures” at the agency. Directly attacking the reasoning of Judge James Robertson, appointed to the D.C. District Court by President Clinton, Kagan maintained that Robertson’s decision to even let the case proceed was “contrary to bedrock principles of judicial review of administrative action.”
Standing is indeed one of the bedrock elements of judicial review under our Constitution. Article III requires that there actually be a “case” or “controversy” before federal courts can rule on the legal merits of a law or regulation, and the plaintiff has to show a sufficient injury or the likelihood of one from the policy at hand to give him standing to sue. This edict keeps the courts from being a pure policymaking body.

Yet, from the perspective of natural rights — or indeed common sense — some modern court rulings have turned the element of standing upside down. Activists such as environmentalists can get standing to challenge a policy with the most trivial of injuries. On the other hand, small-business owners who suffer very definite injuries from laws and regulations that harm their livelihoods typically face an uphill battle in getting their day in court.

The Natural Resources Defense Council, for instance, was able to get an injunction on the U.S. Navy’s use of ship-tracking sonar technology in training exercises because the noise allegedly disturbed whales and dolphins, and this adversely affected NRDC members’ “scientific, recreational, and ecological interests.” (The injunction would be later be overturned by the U.S. Supreme Court in Winter v. NRDC.) And in Massachusetts v. EPA, the Bay State was able to get standing for its suit to require the Environmental Protection Agency to limit carbon-dioxide emissions because of alleged injuries to the state in terms of land that would be lost because of global warming in approximately 100 years.

In her confirmation hearings this summer, Kagan appeared sympathetic to a broad definition of injury when it comes to standing for activists filing environmental lawsuits. In response to a question from Sen. Dianne Feinstein, she told the Judiciary Committee on June 29 that an injury sufficient for standing “can be of many different kinds. It can be economic injury, but it can also be a kind of injury that you get when the environment is degraded and you can’t use the parks in the way you would have wanted to use the parks.”

But for Americans who spend their time building businesses as well as going to parks, Kagan would apparently try to shut the courthouse door. Mark W. Smith, founding partner of the New York law firm Smith Valliere and Martinez PLLC and author of Disrobed: The New Battle Plan to Break the Left’s Stranglehold on the Courts, notes that Kagan appears to be selective in her principles on standing and in her empathy for plaintiffs. “It is ironic how liberal jurists like Elena Kagan seem willing to allow all sorts of liberal plaintiffs to get redress in the courts,” Smith says. “But if you are a small business caught in the web of the government’s bureaucracy, forget about it.”

State and federal courts already make it difficult to challenge specific regulatory actions, citing the “exhaustion doctrine” that plaintiffs must seek every possible administrative remedy at the agency before they can get judicial review. But this typically hasn’t applied to constitutional challenges to provisions of the statutes that created or gave power to the agency in question. As the California Supreme Court has remarked, “It would be heroic indeed to compel a party to appear before an administrative body to challenge its very existence and to expect a dispassionate hearing before its preponderantly lay membership on the constitutionality of the statute establishing its status and functions.”

But in her Supreme Court brief, Kagan maintained that Beckstead &Watts, the small firm challenging the PCAOB, was required to perform just such a heroic task. The firm had not challenged as unconstitutional any specific rule or action of the PCAOB. It maintained that the PCAOB’s structure under Sarbanes-Oxley violated the separation-of-powers principles of the Constitution because of the limits the law places on the president and his direct lieutenants in appointment and removal of the board’s members.

While the D.C. federal appeals court ruled against the firm on the merits of its challenge, it found that the plaintiffs had more than satisfied requirements for standing. Judge Judith Rogers — appointed to the court by President Clinton — wrote in the majority opinion that because the “constitutional challenges to the Act are collateral to the Act’s administrative review scheme, the exhaustion doctrine does not apply, and we hold that the district court had subject matter jurisdiction over the complaint.”

Kagan emphatically disagreed. She wrote in the brief that “petitioners were not free to forgo that route in favor of a direct facial challenge.” For “even when an agency cannot itself rule on the merits of a constitutional challenge, a regulated firm cannot bypass exclusive administrative review procedures established by Congress if the constitutional claims can be meaningfully addressed in the Court of Appeals after the administrative review.” What Kagan essentially was saying was that a small business cannot challenge a regulation in court, no matter the reason and no matter the impact on its bottom line, until the government agency has taken its own sweet time — whether that is months or years — reviewing the challenge.

There’s one other slight problem with Kagan’s call for exhausting agency procedures. The administrative-review scheme in this case and others grants judicial review to appeal a sanction or punishment imposed by the agency. Beckstead & Watts faced onerous compliance costs from regulation but was never actually sanctioned. Hence, it had no penalty to appeal in order to seek judicial review.

No problem, says Kagan’s brief: All a business has to do is simply break the law. “Beckstead and Watts (or any other firm) could challenge the Board’s authority to conduct an inspection or investigation by refusing to comply and raising its constitutional challenges . . . in a disciplinary action brought by the Board,” the brief declares.

Fortunately, the Supreme Court wasn’t comfortable with Kagan’s proposition that a firm needs to break laws in order to get access to justice. Noting that Beckstead & Watts would face “severe punishment should its challenge fail,” Chief Justice John Roberts wrote dryly in the June 28 opinion, “We normally do not require plaintiffs to bet the farm by taking the violative action before testing the validity of the law, . . . and we do not consider this a meaningful avenue of relief.”

The court then gave Beckstead & Watts “declaratory relief” on the merits, though it did not go so far as to invalidate the PCAOB’s appointments, as critics of Sarbanes-Oxley would have liked. The decision to grant this firm even a small amount of relief, however, was 5 to 4. This suggests that the outcome of the Kagan nomination could be the action of the greatest consequence for small business that the Senate faces before the August recess.