Standardmaking
Paul J. Stancil[*]
Abstract
Every law student can rehearse the debate over rules and standards in her sleep. The cost-benefit analysis inherent in deciding whether to give law its content ex ante or ex post is ideal fodder for the law school classroom; moreover, the rules/standards debate often provides the perfect introduction to a corollary debate about legal institutions and institutional competence. And the rules/standards debate is more than just a classroom construct. Academic commentators have also devoted substantial attention to the tradeoffs associated with the choice of rules or standards in connection with specific regulatory challenges. But few have systematically addressed a more foundational question: how does the ideal character of regulation affect the costs associated with the promulgation and enforcement of the preferences that regulation ostensibly represents?
This is an important question. Regulation typically implies agency; thus, given the agency cost and transaction cost tradeoffs inherent in the choice of a standard over a rule or vice-versa, it is critical that we understand whether and to what extent the ideal character of a regulation may interact with the institutional context to create opportunities for regulatory mischief.
This Article explores the process of “standardmaking” from an economic perspective, and the game theoretical framework I adopt applies generally, with minimal modification, to all regulatory contexts. Depending upon both the institutional context and the ideal character of the regulation in question, agents to whom interpretive/executive authority has been delegated may enjoy substantial ability to privilege their own preferences over those of their regulatory principals.
The analysis suggests that at least three factors dictate the extent of the arbitrage opportunities available to agents whose preferences diverge from those of their principals. First, traditional institutional impediments to regulatory action may provide enforcing agents with more or less wiggle room; the impedimenta associated with affirmative Congressional action raise transaction costs considerably vis-à-vis the impediments in a hypothetical pure autocracy, for example. Second, the ideal character (“rule” or “standard”) of the regulation matters. If a particular problem is better-suited for standard-regulation, the costs of promulgating an equivalent fully-determined rule will be proportionally higher. Third, the institutional relationship between agent and principal matters, both because it may impact the principal’s ability to express its preferences strategically to counter the agent’s preferences, and because it may affect the principal’s ability to discipline the agent. Taken together, these factors define a policy space in which enforcing agents will be able to enact their divergent preferences into law without drawing fire from their regulatory principals.
The Article concludes by applying this analysis of the current debate over civil pleading standards occasioned by the Supreme Court’s decisions in Twombly and Iqbal; the analysis suggests that Congress’s apparent inability to respond to these decisions may in part be attributable to the standardmaking problem.
Table of Contents
Standardmaking / 47Introduction
Few law professors can resist the opportunity to introduce the classic debate over rules and standards.[1] In the traditional formulation of the rules/standards tradeoff discussion, rules provide greater predictability and consistency, and more effectively constrain the actions of agents tasked with executing the law. Standards, by contrast, are somewhat less expensive to promulgate, and offer greater flexibility and thus a better chance that justice will be done in any individual case, albeit at the risk of increased uncertainty and higher agency costs.[2]
But the relatively deep literature discussing the advantages and disadvantages of rules and standards pays remarkably little attention to how standards and rules are promulgated.[3] This is an important question, because the choice between rules and standards necessarily involves consideration of the institutional contexts and relative transaction costs associated with each. When the preferences of the regulatory principal diverge from those of the enforcing agent, transaction cost concerns may ultimately dominate the analysis; a regulator-principal who lacks faith in its executor-agent may sometimes find it difficult to fix actual policy at the principal’s ideal point.
A principal’s lack of faith, however deep and however justified, does not always dictate the adoption of a zero-discretion rule over a high-discretion standard. It is not necessarily or perhaps even typically the case that agents will be called upon only to enforce their principals’ regulatory will in contexts amenable to rule regulation. Sometimes the principal will be working in an environment characterized by both a strong objective preference for a standard and a high risk of agent unfaithfulness. When this happens, the regulator may be in trouble.
This article explores the dynamics of the rules/standards promulgation process from a game theoretical perspective. The article builds on a recent article by the present writer,[4] but it is far more than an extension of the previous work. That work examined the transaction costs of policymaking, but assumed that the expressed form of the policy preferences of various actors in the regulatory process was irrelevant; it modeled a specific regulatory process without regard for whether the relevant preferences were best expressed as rules or standards.[5]
This article has a broader reach. Here I expressly explore the institutional transaction costs associated with the promulgation of standards or rules, and in so doing, focuses intently upon (1) the ideal character of regulation; and (2) the institutional context in which regulation takes place. I then incorporate character, context, and the resultant costs into a game theoretical model that predicts additional opportunities for agents to arbitrage in favor of their own preferences under certain character/context combinations. The article uses the ongoing regulatory tussle over federal civil pleading standards as its primary real-world example, but the analysis here applies to virtually all regulatory decisions involving a rule/standard election.[6]
Part I of the article briefly introduces the rules/standards debate.[7] This Part also analyzes the ideal character of regulation, concluding that certain regulatory problems can realistically be addressed best by more rule-like regulation, while others are best remedied through the adoption of a more standard-like approach in which interpretive authority is delegated to an agent for case-by-case determination.
Part II presents a simple game-theoretical model of the rules/standards problem. This model demonstrates that arbitrage opportunities for enforcing agents are a function of three distinct but related features of the regulatory landscape: (1) the institutional structure in which the regulation is to be situated; (2) the optimal or ideal character of the regulation in question; and (3) the relationship between the regulatory principal and its enforcing agent. Each of these factors affects the regulator-principal’s transaction costs in connection with regulation, and thus impacts regulatory agents’ ability to arbitrage those transaction costs in favor of the agents’ preferences. Depending on the dynamics associated with a particular regulatory problem, the cumulative effect of these transaction costs may be to give enforcing agents substantial leeway to establish a policy equilibrium far distant from the ostensible principal’s ideal point.
Because rules are more difficult and expensive to promulgate than their functionally equivalent standards, the model predicts that agents tasked with overseeing enforcement of regulators’ desires in contexts better-suited to standard regulation will have the ability to arbitrage the increased costs of promulgating an equivalent rule into an equilibrium position some additional distance away from the principal’s ideal point. This is particularly true when institutional factors suggest that the principal will find it difficult either to discipline the agent or to set policy strategically at a location different from its own ideal point in an attempt to account for potential agent unfaithfulness ab initio.
Part III analyzes the challenges presented by federal civil pleading standards through the lens of the model. Rule 8(a)(2) requires that the pleader provide only a “short and plain statement of the claim showing that the pleader is entitled to relief.” But the proper interpretation of this requirement is difficult, because the cost- and information asymmetries inherent in certain forms of litigation put regulators in a no-win situation. The more liberal the pleading standard, the easier it is for certain plaintiffs to take advantage of cost asymmetries to extract settlements from defendants without regard to the underlying merits of the claim. The more restrictive the pleading standard, the more difficult it is for certain genuinely injured plaintiffs’ claims to survive long enough to counteract the defendant’s informational advantage. Regardless of how one solves the asymmetry problem, the only practical approach to pleading law is to adopt a standard that courts must in turn interpret.
Though Rule 8 was interpreted liberally for over fifty years,[8] the Supreme Court recently issued two opinions that arguably significantly limited plaintiffs’ ability to survive a motion to dismiss on thin factual allegations.[9] These decisions spawned voluminous academic and political commentary, and the great majority of that commentary has roundly criticized both decisions.[10] The decisions also drew Congressional fire. By November 2009, both Houses of Congress were considering remedial legislation intended to legislatively overrule Twombly and Iqbal.[11] In December 2009 the Senate Judiciary Committee held a hearing asking “Has the Supreme Court Limited Americans’ Access to Courts?”[12]
But to date, Congress has not turned activity into action; at this writing, Congress has enacted no statutory response to the Supreme Court’s pleading cases. [In light of the results of the 2010 midterm elections, no Congressional response is likely for the foreseeable future]. This congressional inaction is curious for a variety of reasons.
For over 18 months after Iqbal was decided (and for over 40 months after Twombly), the Democratic Party enjoyed substantial majorities in both Houses of Congress, and a Democrat occupied the White House. Moreover, pleading standards carry with them a relatively stable and predictable political valence—Democrats have predictably opposed Twombly and Iqbal in their public statements, while Republicans have generally supported the Court’s pleading decisions.[13] And these decisions are genuinely important;[14] both Twombly and Iqbal have been cited thousands of times by lower courts;[15] though the jury is still out on the overall impact of these decisions, there is at least some evidence that they are resulting in higher dismissal rates for certain categories of cases.[16]
Though it is always potentially risky to apply theoretical constructs to real-world phenomena, the model developed in this article is generally consistent with observed data in the pleading context. Given the instutional relationships in question and the extraordinarily high costs associated with any attempt to circumscribe judicial discretion by adoption of a rule, it is at least plausible that the Supreme Court’s Twombly and Iqbal decisions represent a thus-far successful attempt by the Court to arbitrage the transaction costs associated with effective expression of congressional preferences.
I. Rules And Standards
Rules versus standards. Determinism versus discretion. Categorical versus individualized justice. Virtually every legal policy debate invokes some form of the debate over the preferred underlying character of regulation. And this debate is well-rehearsed; this article thus will not fully recapitulate the arguments and analyses offered by other able scholars.[17] Instead, the following paragraphs sketch the general nature of the debate, and argue that there are specific categories of regulatory problems for which either more standard-like or more rule-like regulations are best.
A. Rules and Standards: Definition and Debate
For purposes of my analysis, I define “rules” and “standards” as pure-type endpoints on a continuum of regulatory options available to policymakers.[18] It is traditional when discussing rules and standards to more fully define the terms by reference to the time at which they are given their substantive content.[19] In the typical formulation, which I adopt both for consistency with my predecessors and for ease of analysis, rules are loosely defined as regulations given their content before the actors subject to the regulations act, while standards are given their content after such action has taken place.[20]
Thus, in the federal civil procedure context, a pure-type rule might dictate that “[a] motion for a new trial must be filed no later than 28 days after the entry of judgment.”[21] By contrast, Federal Rule of Civil Procedure 56(c)(2), which governs the issuance of summary judgment is, despite some imprecise and semantically unfortunate nomenclature, far more “standard” than “rule”:
The judgment sought should be rendered if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.[22]
The Rule’s direction that courts should grant summary judgment when “there is no genuine issue as to any material fact” leaves substantial discretion in the hands of courts; even as precedent accumulates over time, the summary judgment determination is still far more standard than rule.[23] But the summary judgment standard[24] is not a pure-type standard; Rule 56 gives some ex ante content to the law by establishing rules governing, for example, the timing of summary judgment motions[25] and the evidence to be considered in deciding such motions.[26]
And many of the Federal Rules of Civil Procedure are in fact even more explicit hybrids of rule and standard, lying somewhere in between the pure-type extremes with which this article is primarily concerned. For example, Rule 15 governing the amendment of pleadings is either pure rule or near-pure standard, depending on the timing of the motion to amend.[27] If a party seeks to amend early enough after the initial filing, the court must accept one such amendment; the “matter of course” provision in Rule 15(a)(1) is essentially a pure-type rule.[28] But once the “matter of course” time period has expired, a standard comes into play; then the party “may amend its pleading only with the opposing party’s written consent or the court’s leave,” which the court “should freely give . . . when justice so requires.”[29]
For ease of modeling, this article focuses only on the extreme pure-type endpoints of the rules/standards continuum.[30] But the model holds for all points in between as well; as a general matter, the more susceptible a regulatory problem is to rule regulation, the lower the transaction costs associated with confining the discretion of an untrustworthy agent. The less susceptible, the higher those transaction costs, and thus the greater the opportunity for agent arbitrage.[31]
B. The Ideal Character of Regulation
Many regulatory problems are more amenable to regulation of a particular character. There are numerous regulatory challenges for which highly-deterministic rule regulation is objectively preferable. At the same time, there are other regulatory challenges that, for a variety of reasons, cannot effectively be governed by rule regulation; for these problems, a standard is best. At root, selection of the ideal character of regulation is a problem of complexity and cost. For certain types of regulatory challenges, especially those in which the law seeks to balance two or more competing ends, it would be virtually impossible to craft a deterministic system of rules that would give the law sufficient ex ante content to answer each and every question likely to be presented. For other regulatory concerns, the costs associated with fact-intensive case-by-case determination may counsel instead in favor of a rule.