Band 6, Heft 1 - The Role and Limits of Legal Regulation of Conflicts of Interest (Part I)

Lawmakers regularly delegate authority to agents. Such delegation is accompanied by mechanisms that attempt to ensure that the agents adhere to the will of the lawmakers. But these mechanisms are often ineffective or inefficient. Moreover, at times the very imposition of constraints distorts the agents’ incentives and impels them to adopt skewed policies. We suggest that it is possible to reduce such wasteful enforcement costs by delegating authority to certain types of agents who will pursue the lawmaker’s policies without constraints imposed by the lawmaker. In this Article we focus on agents who are impartial — but not indifferent! — and skillful enough to identify the proper course of action. The Article encompasses two main arguments. The normative argument is that when skillful and impartial agents can be identified, it makes sense to delegate to them decision-making powers with only limited constraints. Moreover, in such instances it may be more cost-effective to provide agents with incentives (or design agents, like administrative agencies) to act impartially rather than develop enforcement mechanisms to impose impartiality. The positive argument is that the law — sometimes explicitly and sometimes implicitly — is compatible with our normative argument in various fields. Although our argument is general in scope and applies to many areas of law, in this Article we begin by focusing on tort law and on international law. We distinguish five categories of cases where the law relies on agents and detect in some of them impartial and skillful agents. This analysis demonstrates that, in some of these categories, the law in fact relies on agents with only minimal constraints and that, in other situations, the constraints imposed by the law are counterproductive. Our normative argument thus serves an explanatory role in understanding many legal doctrines and principles, but, at the same time, offers a critical view on other doctrines and principles, which are not compatible with that argument.

Property concerns conflicts — both conflicts between individuals and conflicts of interest. Conflicts between individuals have long been the paradigmatic property focus. According to this view, property debates circle around issues of autonomy and productive competition. But this is an impoverished view. In this Article, we shift attention to conflicts of interest. By helping people manage conflicts of interest, a well-governed property system balances interdependence with autonomy and productive cooperation with productive competition. We identify three mechanisms woven throughout property law that help manage conflicts of interest: (1) internalization of externalities; (2) democratization of management; and (3) de-escalation of transactions. We show that property law predictably selects among these mechanisms depending on the ratio of economic to social benefits that people seek from a group resource. When economic concerns predominate, property law typically uses contribution-based allocations of rights and responsibilities mediated by formal, foreground procedures, while at the social end of the spectrum we tend to see more egalitarian substantive rules operating as an informal, background safety net.

Private law and regulation are constantly involved in the evaluation of conflicts of interest, judging some of them salutary, with others requiring adjustment. Focusing on the question of conflicts of interest allows us to clarify our vision of when such adjustment is appropriate and, more specifically, when the law should supply an infrastructure for cooperative behavior. Thus, the prism of conflicts of interest provides a lens through which to view basic legal problems that turn on whether individual actors will be deemed responsible to some joint interest or whether they will be at liberty to pursue their individual interests despite the adverse effects of such activity on others. This article proposes a conflicts of interest perspective for examining contract law and its immediate surroundings. It suggests a map of conflicts of interest along three axes: the remedial axis; the axis of positive duties to avoid conflicts; and the axis of the transition from independence to loyalty. Applying the map to contract doctrine, the article examines a number of contract doctrines including: remedies for breach of contract; modification; conditions; good faith in performance; and formation. The article goes on to apply the map of conflicts to two complex fact situations: corporate acquisitions and corporate bankruptcies. The analysis underscores the fact that conflicts of interest rules do not simply protect existing interests, but also contribute to the very constitution of those interests. Recognizing the constitutive role of legal rules raises questions about our ability to determine interests ex ante and thus calls for a more nuanced approach to gauging the incentive effects of a legal regime.

Are federal prosecutions of non-federal officials for corruption likely to improve non-federal government? This essay suggests that such prosecutions can undermine the distinctive style of democracy at the state and local level, an effect that can be harmful to democracy in America overall. This conclusion rests on a larger argument about the different nature of federal and non-federal democracy in the United States. To insure that each official maintains impartial loyalty to values defined by a single, popularly accountable policymaker, the federal system of bureaucratic populism strictly separates the officials’ public and private interests, through various devices such as civil service protection for executive officials, Article III life tenure, and fixed salary for federal judges, specialized training for federal officers, and conflict-of-interest rules that bar federal officers from acting when their judgment could be compromised by private interests. By contrast, participatory populism rejects this separation of the public and private spheres, instead mixing professional and lay decision-making by using thousands of part-time, under-paid executive and legislative officers who are expected to have substantial private interests in the communities that they represent. The essay argues that each style of democracy has mutually exclusive advantages and disadvantages. However, enforcement of federal anticorruption law against non-federal democracies can undermine their system of mingled private and public interests, reducing the degree to which such governments can provide laypersons with opportunities for political activity. As an illustration of the overextension of federal criminal law, I examine the First Circuit’s interpretation of 18 U.S.C. §§ 1341 and 1346, the federal mail fraud statute in United States v. Sawyer. Sawyer comes dangerously close to declaring that any undisclosed state or local officer’s conflict of interest constitutes a violation of § 1346 when it involves the U.S. mails. I argue that this view of § 1346 is an error. Participatory populism requires that private and public tasks be closely mingled in ways that bureaucratic populism forbids. Undoubtedly, this mixture of public and private creates a risk that public office will be used for private gain. However, it also avoids some of the bureaucratic sclerosis and lack of lay participation that can be endemic to the more centralized federal tradition. In conclusion, I suggest that federal prosecutors ought to content themselves with using § 1346 to enforce already-existing state criminal conflict-of-interest rules, for the sake of preserving a place in our federal regime for participatory populism.

The article presents the argument that administrative decision-making should be understood as devoted to balancing between conflicting interests of individuals or groups, usually when none of the affected parties has predefined legal rights that are relevant to the substantial content of the administrative decision. Administrative decisions often have a direct effect not only on human and civil rights issues, but also on matters bearing on the quality of life, living conditions, prices of regulated products, and the allocation of government funds. Since the decision as to which interest should prevail in the conflict is a distributive one and has many possible answers, the role of administrative law is primarily to ensure that these decisions are made fairly, with due weight given to the conflicting interests of the various groups and individuals involved. With this as background, the article shows how the doctrines of positive administrative law are designed to meet the challenge of coping with conflicting interests in the administrative decision-making process, using such examples as the prohibitions against decision-makers’ conflicts of interest and the rules regarding interest representation and judicial review. In the second part, the article applies the interest perspective to the administrative decision-making process in order to analyze the highly extensive regulation of land resources in Israel. The analysis concentrates on the Israeli Supreme Court decision in one of the most controversial petitions brought before it: against administrative decisions on the development (toward urbanization) of formerly agricultural lands (the Mizrahi Democratic Rainbow case).

Under the WTO’s dispute settlement procedures, a party that has been injured by a scofflaw state’s failure to comply with its trade obligations may retaliate against the scofflaw state by withdrawing equivalent trade concessions. Legal and economic commentators generally view retaliation as an economically perverse strategy for enforcing freetrade norms. This Article explores an alternative explanation, arguing that retaliation may provide the optimal enforcement mechanism for trade liberalization given the prevalence of low compliance incentives and high enforcement costs in international cooperation agreements. The Article argues that retaliation is superior to other remedial options because it enables an injured state to inflict maximum political costs on the scofflaw state by mobilizing powerful export groups in the scofflaw state against protectionist policies. Furthermore, this Article shows how the presence of significant protectionist groups in the injured state, which stand to benefit from retaliatory measures, also improves the injured state’s ability to commit to retaliation. Even if states have asymmetric preferences about protectionist policies, retaliation threats can still be credible since there is uncertainty about each state’s retaliation costs. Finally, the Article concludes that contrary to the conventional wisdom, the substantial role of uncertainty in this model indicates that specific performance, and not compensation, ought to be the goal of the WTO’s enforcement mechanism.

American universities are increasingly proactive in dealing with conflict of interest problems of their faculty. Changing social norms, publicized scandals, and more have made both university administrators and faculty extra alert to the dangers of faculty infidelity to their roles as teachers and scholars. Personal interests — both financial and non-financial — appear increasingly to pressure faculty to behave inappropriately. Most faculty members resist those pressures. Yet, enough conduct that either is, or appears to be, improper has occurred to prompt the adoption by universities of an ever-more complex regulatory regime. This regime no longer relies primarily upon threats of after-the-fact punishment for gross deviations from professorial norms. Instead, universities have also enacted a wide array of in-advance restrictions. These include required disclosures by faculty members of certain private interests, prohibitions of specific faculty behavior, and specified instances in which faculty members must temporarily withdraw from their professorial roles in light of their private interests. This article draws especially upon the author’s experience at the University of California to illustrate the new system of regulation.