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Federalism

Privatization’s Preemptive Effects

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Many states offer their citizens protections, benefits, and services that go well beyond those of federal law, ranging from consumer protection to education, environmental preservation, and healthcare. The Trump Administration and an increasingly conservative Supreme Court disapprove of many of these measures. However, rather than forthrightly use its power to pass statutes that preempt state law, the federal government, especially recently, has enabled, incentivized, and delegated power to private corporations to flout and displace state laws that the corporation might consider undesirable. Such privatized displacement of law, which functionally shades into outright preemption, is all the more problematic given private firms’ lack of accountability, transparency, and democratic responsiveness. This allows federal instigation of displacement — which looks functionally like preemption — to stay out of the public eye.

Private firms displace state law with federal assistance in four ways, each of which gives escalating levels of discretion to private entities as to whether to displace state law. Under sovereign-shield displacement, contractors argue that they are essentially an arm of the federal government, and therefore are immune from suits under state law. Next, under contractual preemption, the federal government preempts state law, and leaves private entities to regulate the area. State regulation is displaced by private contract. Under incentivized displacement, the federal government provides incentives to undermine state policies and programs. For example, the Trump Administration sought to provide subsidies to private religious schools and health entities, which undercut state policies and programs with which the private entities compete. Finally, under delegated preemption, the federal government has sought to devolve the power to preempt certain state industry regulation to a firm in the industry. Each approach presents escalating dangers to the structure of federalism, of government, and of individual-protecting laws.

In adopting a solution, I place the vast literatures on privatization and state law displacement in full conversation for the first time. Federalism can be used to check and balance privatization. Just as the constitutional structure contemplates a bilateral system in which states check and balance the federal government, I propose a trilateral system, in which states have greater authority with the federal government over private entities, but the latter continue to have a voice. The federal government should give states the option of carrying out the functions of federal contractors ex ante, create forums for ongoing interaction between the entities, and give states enforcement authority ex post to address the harms of these preemptive effects in a structural manner.

Introduction

In the last few decades, many states have become the progressive protectors of citizens’ rights, seeking to curb environmental pollution,1×1. Sam Ricketts et al., States Are Laying a Road Map for Climate Leadership, CTR. FOR AM. PROGRESS (Apr. 30, 2020, 8:00 AM), https://www.americanprogress.org/issues/green/reports/2020/04/30/484163/states-laying-road-map-climate-leadership [https://perma.cc/XDQ7-NCGT]. bolster public education,2×2. See, e.g., Howard Blume, California Moves Toward New Limits on Charter Schools, L.A. Times (June 10, 2019, 5:00 AM), https://www.latimes.com/local/lanow/la-me-edu-charter-school-task-force-report-20190610-story.html [https://perma.cc/3AH9-N5SR]. preserve the health privacy of their citizens,3×3. See Craig Konnoth, Health Data Federalism, B.U. L. Rev. (forthcoming) (manuscript at 26–27) (on file with the Harvard Law School Library). and improve consumer protections against financial institutions and student loan corporations.4×4. See Kate Sablosky Elengold & Jonathan D. Glater, The Sovereign Shield, 73 Stan. L. Rev. (forthcoming 2021) (manuscript at 43), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3539622 [https://perma.cc/R9RP-26SR]. The federal government, especially under the Trump Administration, has opposed these efforts,5×5. See, e.g., id. preferring to leave matters to the vicissitudes of the markets.

Yet, rather than openly preempting and prohibiting these — often popular — state initiatives, and bearing the political heat that such actions would bring, the federal government has taken a shrewder tack. It has turned to private corporations, and incentivized, assisted, and delegated to them the power to contravene and displace state laws — including laws that are often supposed to regulate those very corporations’ interactions with the state’s citizens. It is the corporation, rather than the federal government, that determines when this displacement of state law takes place. Further, because these firms, in the current legal landscape, are generally more well insulated from transparency mechanisms and meaningful legal review than are federal entities, their decision to unseat state law is not subject to democratic accountability.6×6. See infra note 80. Since private entities are displacing state law, these actions have largely fallen through the cracks of the large literatures both on privatization and preemption (and preemption-related fields).

Consider the following scenarios:

Displacing state law enforcement: In July, the Federal Protective Service (FPS) of the Department of Homeland Security (DHS) rolled into Portland to suppress Black Lives Matter protestors, over the objection of Portland’s mayor. Indeed, federal law enforcement tear gassed a protest that included the mayor.7×7. Portland Mayor Tear-Gassed by Federal Agents at Protest, CBS News (July 23, 2020, 2:45 PM), https://www.cbsnews.com/news/portland-protest-mayor-ted-wheeler-tear-gas-federal-agents [https://perma.cc/JR2E-EWEE]. FPS consists of approximately 1,300 officers, along with 13,000 contractors;8×8. Garrett M. Graff, The Federal Crackdown in Portland Is “Legal.” That’s the Problem with It, Wash. Post (July 22, 2020, 11:50 AM), https://www.washingtonpost.com/outlook/2020/07/22/portland-constitution-dhs-crackdown-legality [https://perma.cc/XD2D-8VHM]. some sources suggest that private contractors numbered among those deployed in Portland, thus displacing state and local policy regarding the protests.9×9. Bill Conroy, Private Contractor Assisting Feds in Quelling Portland Protests Is Revealed, Medium (Aug. 20, 2020), https://wkc6428.medium.com/private-contractor-assisting-feds-in-quelling-portland-protests-is-revealed-d866eb6db1c5 [https://perma.cc/YY82-K44F].

Displacing consumer rights: Large corporations like AT&T routinely require consumers to sign contracts that waive their litigation remedies.10×10. See David Horton, Arbitration as Delegation, 86 N.Y.U. L. Rev. 437, 464–65 (2011). State law has limited this practice. The Supreme Court, led by its conservative wing, has read statutes like the Federal Arbitration Act (FAA) to preempt these consumer protections.11×11. See id. at 453–55. But the Act does not replace state protections with federal protections. Rather, after state law is preempted, there is a vacuum. The relationship between firms and individuals is set by private contracts, not state law. If these contracts contradict consumer-protective state law, the contracts prevail. And instead of state courts, consumers move to private arbitral forums.12×12. See id. at 453, 455.

Displacing environmental efforts13×13. See Ricketts et al., supra note 1. : Many state programs subsidize renewable energy over coal.14×14. See David Roberts, The Trump Administration Just Snuck Through Its Most Devious Coal Subsidy Yet, Vox (Dec. 23, 2019, 9:40 AM), https://www.vox.com/energy-and-environment/2019/12/23/21031112/trump-coal-ferc-energy-subsidy-mopr [https://perma.cc/CQ3Y-6LPA]. The Trump Administration explicitly took aim at these programs.15×15. See id. The Administration could have potentially sought the authority from Congress simply to preempt state policy. However, as the Supreme Court has noted, preemption is a highly visible act;16×16. The visibility involves accountability to voters, and other political and institutional actors. See infra section II.E, pp. 1981–90 (explaining how privatized preemption helps escape this accountability). the federal government might want to avoid close scrutiny of its hostility to renewables. Rather, the government has introduced price controls that prevent renewables from offering their products at cheaper prices that undercut coal and gaining market share.17×17. See Roberts, supra note 14. Fewer private firms will therefore enter the renewables market: the federal government need not formally preempt state law.

Displacing public education programs18×18. See Sherry Posnick-Goodwin, Let’s Be Clear About Charter Schools, Cal. Tchrs. Ass’n (Aug. 3, 2018), https://www.cta.org/educator/posts/lets-be-clear-about-charter-schools [https://perma.cc/W6DJ-UQ4P]. : States provide public education, which reaches a broad, racially, religiously, and socioeconomically diverse base of students. The Trump Administration, however, prioritized aiding charter schools over public schools.19×19. See Off. of Mgmt. & Budget, Budget of the U.S. Government 40 (2018) https://trumpwhitehouse.archives.gov/wp-content/uploads/2018/02/budget-fy2019.pdf [https://perma.cc/4YFN-AHNF]; see also James Forman, Jr., Do Charter Schools Threaten Public Education? Emerging Evidence from Fifteen Years of a Quasi-Market for Schooling, 2007 U. Ill. L. Rev. 839, 840. Again, no preemptive legislation is involved. Rather, the Administration sought to shift funding from public to private schools, through voucher programs,20×20. See Michael Stratford, Trump Opens Up Federal Dollars for Private School Vouchers amid Pandemic, Politico (Dec. 28, 2020, 8:18 PM), https://www.politico.com/news/2020/12/28/trump-private-schools-pandemic-451757 [https://perma.cc/2WKD-Y79N]. and most recently, through manipulating COVID-19 school funding.21×21. Complaint for Declaratory and Injunctive Relief at 17, Michigan v. DeVos, No. 20-cv-04478 (N.D. Cal. July 7, 2020), https://oag.ca.gov/system/files/attachments/press-docs/CARES%20Act%20K-12%20Funds%20Complaint.pdf [https://perma.cc/E78V-LFUS]. This would undermine public schools, and bolster competing private schools, according to some advocates,22×22. Forman, supra note 19, at 840. again with no formal act of preemption.

Taking state land: Federal agencies have recently held that statute has delegated power to certain private entities to decide whether to take state land to build pipelines, even if, in some cases, state law promotes conservation efforts on that land.23×23. See infra p. 1977. Agencies have claimed that they lack the power to oversee such decisions.24×24. See Jennifer Danis & Michael Bloom, Taking from States: Sovereign Immunity’s Preclusive Effect on Private Takings of State Land, 32 Stan. L. & Pol’y Rev. (forthcoming) (manuscript at 32), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3631160 [https://perma.cc/A2DM-FT7C].

My key focus here is on private firms displacing state law at the instigation or assistance of the federal government, and I seek to engage with the problem conceptually and normatively. The kind of state law displacement that concerns me involves both entities — the federal government brings private partners in, and those partners do its bidding. Without the federal government, the state law displacement that occurs here would not involve preemptive effects; without private entities, the displacement would be similar to standard preemption and its cognates.

The first task is conceptual. We lack the vocabulary and the conceptual lexicon to reckon fully with this phenomenon. Preemption and displacement of state law have historically been a federal government function. Thus, scholarship on preemption and related doctrines has, with few exceptions, focused on government entities, not private entities,25×25. See, e.g., Thomas W. Merrill, Preemption and Institutional Choice, 102 Nw. U. L. Rev. 727, 739 (2008) (“[There are] multiple categories of implied preemption, the exact number depending on who is doing the counting.”); Viet D. Dinh, Reassessing the Law of Preemption, 88 Geo. L.J. 2085, 2100–01 (2000) (offering several approaches). and privatization scholarship has rarely engaged with federalism.26×26. For an exhaustive listing of privatization scholarship, see sources cited infra notes 61–86, which I do not reproduce here for aesthetic reasons. Frequently cited works, among others, include Jody Freeman, The Private Role in Public Governance, 75 N.Y.U. L. Rev. 543, 556–58 (2000); Gillian E. Metzger, Privatization as Delegation, 103 Colum. L. Rev. 1367, 1369 (2003); and Jon D. Michaels, Constitutional Coup 57–58 (2017).

To be sure, existing doctrinal concepts capture some of what firms are doing under the umbrella of preemption or claims of immunity from suit. But other approaches — such as in situations where private schools are given a leg up over and displace the reach of public schools — lack doctrinal conceptualization. And yet others, such as in situations where private entities take state land, are liminal concepts that resemble, but do not quite count as, preemption.

Collectively, I refer to all these forms of displacement of state law as involving “preemptive effects.” This terminology seeks to emphasize that the effects of combined federal and private action in many cases are the same as if the federal government had engaged in preemption, even if the behavior does not quite count as preemption as a formal matter. In the scenarios I present, private entities have escalating levels of discretion as to whether to displace state law. My categories are thus organized around the functional extent of privatized discretion with respect to state law displacement, rather than formal doctrinal categories, which are, as I note above, too slippery in this context to do much work. Indeed, because preemption and related doctrines are focused on federal government prerogative, these doctrinal categories prove conceptually challenging as private entities gain greater power over displacement decisions. On this account, it does not matter whether the state law displacement is achieved through formal preemption — choosing federal law over state law — or through some other means.

I next turn to the normative effects of this private displacement. Whatever one’s views about the correct balance of power of state versus federal governments — a debate with which I do not engage — using private firms, rather than federal law, to displace protective state programs undermines the Constitution’s separation of powers between the national and state governments.27×27. Indeed, as I argue in my work on health data regulation, there is a good argument to defer to the federal government in the field — but not to private firms. See Konnoth, supra note 3 (manuscript at 45). It is a structural problem that demands a structural solution. While one might speak about the balance (or imbalance) between the government and private entities in the privatization context,28×28. See supra notes 1–5 and accompanying text. or between federal and state governments in that of federalism,29×29. See Victoria Nourse, The Vertical Separation of Powers, 49 Duke L.J. 749, 777 (1999); Akhil Reed Amar, Of Sovereignty and Federalism, 96 Yale L.J. 1425, 1450 (1987) (“As with separation of powers, federalism enabled the American People to conquer government power by dividing it.”). each of these bilateral balancing acts has grown somewhat lopsided. I therefore propose a potentially more stable trilateral system of checks and balances, where the federal government, states, and private entities can supervise and check each other. The federal government should bring states in as partners to oversee how private entities carry out their tasks. This would allow progressive states whose interests do not align with those of the national government to push back against private firms that undermine their interests.

At the same time, as scholars argue, private engagement may offer some benefits in terms of expertise and efficiency, and in any case, private entities are inevitably enmeshed within government.30×30. See Jon D. Michaels, Essay, We the Shareholders: Government Market Participation in the Postliberal U.S. Political Economy, 120 Colum. L. Rev. 465, 469 (2020). Trilateral balancing means that they too will have a voice.

Part I first offers some background on the literatures of privatization and of preemption and its cognates, and defines both concepts. In short, privatization occurs when the federal government formally or informally delegates a function previously carried out by the government to a private entity. Preemption occurs when federal law displaces state law, though I also describe related doctrines that similarly result in the failure of state law to take effect.

Part II carries the conceptual weight of the paper. It gives us the conceptual tools to break down the kinds of preemptive effects we see, by offering four categories. In each subsequent category, the firm has greater discretion whether to displace state law. Under sovereign-shield displacement, federal contractors argue that they enjoy immunity from state suit under immunity doctrines. Thus, the FPS contract forces may claim immunity on this ground. This doctrine is usually premised on heightened government control and limited privatized discretion, and some of its constituent elements may have been “scaled back” to some extent at least in the twentieth century.31×31. David S. Rubenstein, Supremacy, Inc., 67 UCLA L. Rev. 1130, 119697 (2020). That, and the fact that existing scholarship does engage the area uniquely, limits my detailed engagement with it.

Under the contractual preemption approach, the federal government preempts state regulation in an area of law, and, instead of regulating in itself, formally or informally allows the rules of interaction in the space to be determined by private contract. Thus, rather than looking to state law — on consumer services, airline services, or financial regulations, for example — we must look to arbitration agreements, airline contracts, and private regulators.

Next, under the incentivized displacement approach, which appears to have been a trademark of the Trump Administration, the federal government incentivizes private entities in ways that nullify state regulations and programs. To take the example discussed above: the federal government has set minimum price-bid requirements in energy markets for renewable energy sources. Such requirements counteract subsidies that states have offered renewables and support the survival of coal energy.32×32. See Roberts, supra note 14. Similarly, as noted above, the Administration has sought to assist private entities that compete with state programs: for example, providing parents vouchers for private schools, and monopolies to private healthcare information exchange entities, can harm state schools and state healthcare information exchanges.33×33. See sources cited supra notes 2–3.

Finally, under the delegated preemption approach, I describe how the government has delegated control to private entities in various spaces to develop rules and regulations that displace state law. Sometimes, the agency retains nominal authority to veto the rules that the private entities develop, as in the case of financial regulation. But Congress has purported to delegate full authority to private entities to engage in state land takings.

Part II concludes by suggesting that privatized preemptive effects are normatively problematic. They undermine federalism in problematic ways. They also tend to align against the public interest by enhancing corporate power. While corporate power is not always aligned against public interests — and I present some cases where the public and corporate interests are aligned — it often is. Enhancing corporate power to flout the state laws that bind them, then, presents normative concerns.

Where Part II lays the conceptual scene, Part III concludes with a normative prescription. Scholars have long sounded the alarm bells on both privatization and preemption (and related doctrines) — but rarely on both issues taken together. Many scholars suggest changes to privatization and preemption doctrine, respectively. Part III argues that the problem is not doctrinal — following in the footsteps of various other scholars, I argue that the issue is structural. The solution must be structural as well. Just as the Constitution creates a bilateral system of checks and balances between the states and federal government, I propose a trilateral system of structural checks and balances between the states, the federal government, and private entities. I argue that states should have greater supervisory authority, with the federal government, over private entities. However, given what I, with many other scholars, see as the inevitable enmeshment of private entities in government, these entities, too, will have a voice. Such a trilateral system is especially useful at times — like in recent years — when the federal government has relaxed oversight over private entities, and also allows us to leverage the expertise of both private and state entities. I offer three analytically separate approaches.34×34. While analytically separate, I note that each of these methods can be deployed simultaneously. States may play the role of contractors in certain federal schemes while also acting as advisors and engaging in litigation proceedings. And the power of the state in each context is determined by its powers in other contexts — for example, whether it can successfully negotiate with private entities in ongoing oversight depends on whether it carries the stick of enforcement and litigation ex post.

First, as an ex ante matter, if the federal government seeks to devolve functions, it should devolve functions to states rather than private entities. In the Affordable Care Act35×35. Pub. L. No. 111-148, 124 Stat. 119 (2010) (codified as amended in scattered sections of 26 and 42 U.S.C.). (ACA), for example, the federal government has deputized both states and private contractors to develop health insurance exchanges — and according to some, states have done a better job.36×36. See infra p. 2007. Second, as an ongoing matter, the federal government should create forums where states and private entities both have a voice. This can involve informal advisory committees, or more formal multi-ownership corporations in which state, federal, and industry players all hold a stake. Finally, as an ex post matter, states can play a role in litigating and enforcing private malfeasance. Protective state law should, of course, be preempted to the lowest degree possible, so that it can be used to combat private misbehavior. However, states should also be given the authority to pick up federal slack, and to enforce federal law — especially when there is no private cause of action. Even when a private cause of action exists, I argue that state enforcement presents certain benefits.

I conclude by recognizing some of the limitations of my approach. First, some may argue that the structural solutions I offer are impractical — states might be bought out just as easily as the federal government. Second, much of the structure I offer is left to the policy discretion of the federal government — an unfriendly federal government may displace states or private entities. Yet I argue that my approach may often be the result of legislative compromise. And third, some may raise concerns about administrative ossification. I offer various pragmatic solutions to these questions.

Finally, an important caveat to this Article is that for the purposes of analysis, I elide the divisions among federal and state governments, and indeed, within branches of government. I also do not address the role of local government, and recognize that deeper questions about the nature of lawmaking, statehood, and governmentality itself must await another day.


* Associate Professor of Law, University of Colorado School of Law, Faculty Director, Health Data & Technology Initiative, Silicon Flatirons Center. My thanks to Bruce Ackerman, Fred Bloom, Jessica Bulman-Pozen, Guy-Uriel Charles, Jessica Clarke, Nathan Cortez, David Fagundes, Jennifer Hendricks, Lonny Hoffman, Aziz Huq, Derek Kiernan-Johnson, Ben Levin, Leah Litman, David Rubenstein, Audrey McFarlane, Lev Menand, Jon Michaels, Aziz Rana, Mark Rosen, Liz Sepper, Michaeljit Sandhu, Gavriel Schreiber, Miriam Seifter, Fred Smith, Ahmed White, the Houston External Workshop Series, and the University of Baltimore Faculty Colloquium for comments on this draft of this Article. For comments on earlier drafts, thanks to Sharon Jacobs, Dayna Matthew, Neil Siegel, Rabea Benhalim, Abbe Gluck, Aya Gruber, Sarah Krakoff, Ben Levin, Margot Kaminski, Kristin Madison, Helen Norton, Jenn Oliva, Nadav Orian Peer, Lucia Savage, Mark Squillace, the Colorado Law Work in Progress Colloquium, the Duke Culp Colloquium, and the Northeast Health Scholars Workshop, and to Seth Davis, Denise Grab, and Rory Van Loo for helpful conversations. Also, thanks are owed to Kelly Ilseng and Erin Vanek for Bluebooking assistance.