CoA Institute Files Amicus Brief in FTC v. AMG Capital Management

On March 14, 2019, Cause of Action Institute (CoA Institute) filed an amicus brief in the Ninth Circuit in support of an en banc petition to rehear a three-judge panel ruling for the Federal Trade Commission (FTC) in FTC v. AMG Capital Management, LLC, et al., No. 16-17197.

This case addresses the important issue of the power of the FTC to take businesses’ property without the due process protections Congress has placed around such confiscation. Here, for example, the FTC used Section 13(b) of the FTC Act to obtain a judgement of over one billion dollars against AMG Capital Management, LLC (AMG) for practices that the FTC (which began its investigation in 2002) never notified AMG were, in the FTC’s view, unlawful until it sued a decade later in 2012. Congress, however, only provided the FTC with power to obtain such relief under Section 19 of the FTC Act, which established a number of procedural safeguards that ensure companies’ ability to defend themselves, including a requirement that the FTC must prove that the defendant knew or should have known its actions were wrongful and a three-year statute of limitations. Section 13, on the other hand, was enacted so that the FTC could quickly get preliminary injunctive relief to stop a company from doing harm to consumers if it could show an ongoing, current violation.

The FTC, in keeping with the tropism of agencies to aggrandize their power beyond Congressional limitations, set out to persuade the judiciary that Section 13(b) allowed the agency, through “ancillary” relief under equity, to get the same confiscations Congress allowed under Section 19. The Ninth Circuit long ago accepted this argument. In this case, however, two Judges ruling for the FTC stated that they had to rule that way as precedent demanded it, but that the larger Ninth Circuit (by an en banc panel) should review the case and change that Circuit’s precedent in light of subsequent Supreme Court rulings, notably, Kokesh v. Securities and Exchange Commission, 137 S. Ct. 1637 (2017).

The amicus brief focuses on the long-term strategy of the FTC to lead the Courts astray on what Congress had allowed and not allowed by enacting specific sections of the FTC Act to do different things. The Washington Legal Foundation and the Chamber of Commerce also urged in amicus briefs that the Ninth Circuit take up this case to right a legal error of the past.

Our full amicus brief can be view here.

John J. Vecchione is President and CEO at Cause of Action Institute.

CoA Institute Presents Winning Research Paper at 2019 National Freedom of Information Coalition Summit

On Friday, April 12, Cause of Action Institute (CoA Institute) Counsel Ryan Mulvey joined a panel at the National Freedom of Information Coalition’s (NFOIC) 2019 Annual Freedom of Information (FOI) Summit in Dallas, Texas to present a winning research paper co-authored by Mulvey and CoA Counsel and Senior Policy Advisor James Valvo. The paper presents a comprehensive survey of open records laws and identifies useful trends in how public access to legislative records is regulated at the state and federal levels. Ryan and James’ paper was one of three to be presented on a panel from 18 total submissions for the contest. Their underlying research evolved out of work originally undertaken for an amicus brief filed in the Georgia Court of Appeals.

The paper, ‘Opening the State House Doors’: Examining Trends in Public Access to Legislative Records examines how all 50 states’ FOI laws address the question of access to legislative records. That survey reveals that 38 states provide some form of access to various legislative materials. Only 11 exclude the legislative branch from their public-disclosure laws, whether expressly, by implication, or according to judicial interpretation. The clear trend, in any case, is to construe state FOI laws in favor of public access.

Of the 38 states that provide requesters with at least some basic level of access to legislative records, 14 do so implicitly while the other 24 explicitly allow access to legislative records.

Of the states that explicitly cover the legislature in their FOI laws, there is some diversity in how the branch is included. For example, in two states the law focuses on the nature of the record subject to disclosure. North Carolina defines a “public record” to include materials “made or received” by a “public office,” including that of an elected official. Another 20 states focus on the kinds of government entities that must disclose their records upon request, including nine states that define an “agency” to include the legislature or legislative offices. Finally, in Missouri and Florida, access to legislative records is guaranteed by the state constitution.

Ryan and James identified 14 states that impliedly grant access to legislative records. Ten states do so based on the interpretation of terms defining the governmental entities subject to disclosure. For example, six states use the term “branch,” which is understood to include the legislature. Four states define the sort of record subject to disclosure in such a way to include legislative materials. And in six states, the presence of statutory exemptions—or protections that allow a record custodian to withhold information—only applicable to certain legislative records suggest that the legislature, as a whole, is subject to the FOI statute.

Finally, the survey found that of the 12 states that completely exclude the legislature from their FOI statutes, eight do so explicitly, two implicitly, and two based on judicial interpretation.

In addition to surveying state law, Ryan and James examined the treatment of legislative records under the federal FOIA. Specifically, they discussed the possibility that courts could look more seriously at the availability of records under the control of legislative branch agencies, and they pointed to the positive development in the case law governing the extension of congressional control over records that reflect the interaction of the federal legislature and the Executive Branch.

The full paper can be viewed here. The findings discussed above, and the graphics excerpted from the panel presentation, reflect developments in three states (Missouri, South Carolina, and Michigan) that are not discussed in the paper.

Ryan Mulvey is counsel at Cause of Action Institute. Mallory Koch is a communications associate at Cause of Action Institute. 

McDonough v. Smith: Why SCOTUS Should Revisit the Statute of Limitations for Fabrication of Evidence

By the time Annie Dookhan was finally caught in 2012, she had been falsifying drug test results at a state crime laboratory in Massachusetts for several years. The rogue chemist had managed a productivity rate 500% higher than her peers by not actually running tests at all, and her misconduct would ultimately impact over 36,000 criminal cases.

Dookhan is not alone – fabricated evidence is far more common than it may seem, and it can impact thousands of people falsely accused of crimes. The legal remedy for this misconduct is known as a Section 1983 lawsuit, but a significant decision by the Second Circuit in McDonough v. Smith would sharply limit when those lawsuits could be filed. This case was appealed to the Supreme Court, which recently agreed to hear the case. On March 4, 2019, Cause of Action Institute filed an amicus curiae brief urging the court to overturn the Second Circuit.

The question in front of the Supreme Court is when the countdown begins on the limited amount of time available for filing a claim that fabricated evidence was used (i.e. when the statute of limitations begins to run, also known as when the claims “accrue”). In this case, petitioner Edward McDonough endured two criminal trials for election-related crimes that he was ultimately acquitted of. McDonough now argues that Youel Smith, the prosecutor in his criminal case, fabricated evidence in an attempt to falsely convict him. In response, Smith filed a motion arguing claims related to fabricating evidence accrue when the defendant first becomes aware of the tainted evidence and its improper use.

Several other appellate courts had previously decided that the claim accrued when the criminal proceeding ended in the defendant’s favor. That could mean an acquittal, winning on appeal and having the charges dropped, or other, less-common means of victory. Only after the possibility of criminal charges was gone were courts ready to hear a claim that evidence used to support those charges had been fabricated.

In McDonough’s case, however, the Second Circuit took a different view. Instead of waiting for criminal proceedings to end, they decided that defendants were ready to file lawsuits the moment they became aware that fabricated evidence was being used against them.  The Second Circuit thus granted Smith’s motion to dismiss, leaving McDonough with no legal redress. It was the first appellate court in the country to use this rule, and the decision will result in unfair treatment of defendants and unnecessary complications for prosecutors and judges as well. This is especially true given the level of factual support needed to successfully file a lawsuit under the current Supreme Court precedent.

For someone sitting in an interrogation room, it is impossible to know exactly what is happening when fabricated evidence is first used. Imagine the police just said you were seen leaving the house after a robbery occurred. You know you weren’t there, so why is someone saying that? Are they mistaken? Lying for their own benefit? Or did the police induce them to lie so the case would be closed? Only the last explanation justifies a Section 1983 lawsuit, and asking a defendant in this position to walk directly from the police station to the courthouse (if they are even free to do so) is both unrealistic and against the “complete and present” standard the Second Circuit used to determine if a claim had accrued.

Even if a defendant immediately knew a police officer had fabricated evidence, as recently happened in nearly 2,000 cases in Baltimore, it is almost impossible for a defendant to have enough evidence to successfully file a lawsuit. In two cases decided approximately ten years ago, the Supreme Court raised the bar for what must be included in the initial filing of lawsuits. Mere “conclusions” were not enough; factual support was needed. This is understandable in theory, but someone accused of having drugs in their pocket when they know that pocket was empty has almost nothing to offer but the conclusion that police or prosecutors must be responsible.

There are other problems with the Second Circuit decision, including the possibility that prosecutors being sued will be tempted to punish those filing the lawsuits. At the very least, those prosecutors will have to defend themselves while simultaneously trying to perform their official duties. There are many reasons why having the statute of limitations begin to run earlier is an unwise decision that will prevent government agents from being held accountable for these abuses of power, and we hope the Supreme Court chooses to endorse the rule used by other appellate courts instead of the new approach used by the Second Circuit.

John McGlothlin is Counsel at Cause of Action Institute. Libby Rudolf is a litigation support analyst at Cause of Action Institute.

Recap: Cause of Action Institute at Seafood Expo North America 2019

Earlier this month, Cause of Action Institute joined more than 20,000 members of the fishing industry from across the globe at the 2019 Seafood Expo North America in Boston. For years, Cause of Action has monitored and brought legal challenges against the overregulation of our nation’s fisheries and its negative economic impact on fishing communities – especially small business and family owned operations. However, after three days of speaking with industry insiders last week, the breadth of the harm caused by administrative state overreach continues to appall us.

We spoke with people from nearly every corner of the seafood industry who are severely impacted by the government regulations that plague this field: trade restrictions such as tariffs or quotas, the cost of complying with regulations such as the Jones Act, one size fits all or outdated regulations that benefit certain companies at the expense of others, and offshore development that has the potential to bring many companies’ business to a standstill. Many of the visitors we engaged with were small business owners who fear regulations like industry-funded monitoring will run them out of business entirely.

Cause of Action was fortunate to be able to reconnect with former clients David Goethel and John Haran. For David, John, and many members of their respective communities, fishing is not only their livelihood, but also a large part of the culture of their respective communities. When faced with economic devastation from regulations like the Omnibus Amendment, the way of life that communities have spent years building is also threatened with destruction.

Cause of Action Staff with former client David Goethel

Stories like those we encountered last week serve as an important reminder of the direct consequences posed by arbitrary and excessive executive power. American’s should be free to live prosperous lives and reach their highest potential without the interference of an overbearing administrative state, and Cause of Action looks forward to continuing to strive towards this goal in the commercial fishing industry, among many other affected fields.

Mallory Koch is a communications associate at Cause of Action Institute.

Wisconsin’s Foxconn Deal Illustrates the Dangers of Corporate Welfare

Corporate welfare undermines the economic liberties of individuals, entrepreneurs and innovators by creating a two-tiered society where the government creates a special set of rules and benefits for favored companies. Recently released documents obtained from a Wisconsin Public Records Request reveal that while many of Foxconn’s tax incentives are tied to employment numbers, the Wisconsin Economic Development Council (WEDC) has no formal process for checking construction employment numbers and has to rely on reports compiled by Foxconn’s construction company. The Foxconn deal in Wisconsin illustrates the dangers of corporate welfare and perfectly sums up why Cause of Action Institute is dedicated to exposing these deals and informing citizens of the risks associated with tax incentives and subsidies designed to benefit a single exclusive company.

How did this all begin? Then Wisconsin Governor Scott Walker promised to bring thousands of blue-collar manufacturing jobs back to state, and in July 2017, Walker signed a deal with Foxconn, one of the largest technology providers in the world. Foxconn promised to invest over $10 billion in Wisconsin and create up to 13,000 jobs by 2022, three-fourths of which would be in manufacturing. As a short-term goal, Foxconn promised to create 5,200 jobs by 2020. In exchange, Walker promised $4.5 billion in subsidies and other benefits. At the time, President Trump touted this extravagant corporate welfare deal as “the eighth wonder of the world,” and supportive Wisconsin legislators declared that it would bring economic prosperity to Wisconsin.

Almost two years later, however, the rosy picture painted by Wisconsin lawmakers has yet to materialize. In late 2018, Nikkei Asian Review wrote that Foxconn was planning on cutting 100,000 jobs worldwide due to global economic uncertainty. Then, Louis Woo, one of Foxconn’s lead negotiators on the deal, announced that they were scrapping plans to build a factory, saying “We can’t compete.” Instead of building a manufacturing facility in Wisconsin, as promised, Foxconn shifted to building research and development facilities expected to employ substantially fewer people from a categorically different labor pool.

Crucially, much of the subsidies promised to Foxconn are tied to the company meeting agreed-upon employment numbers. However, documents also reveal that WEDC does not have any formal process for verifying Foxconn’s construction job numbers, despite the fact that WEDC’s website claims credit for the project supporting “10,000 construction jobs in each of the next four years.”  Instead, it must rely on Foxconn’s construction management company, Gilbane, to report the job numbers to them. WEDC CEO Mark Hogan said in emails that the WEDC “would only have to verify job creation by a sample of job creation data and signed statements from the company.” As if this weren’t bad enough, Wisconsin’s legislature also has no way to determine what jobs Foxconn employees are doing. In a letter to the state legislature’s leadership, several members of Wisconsin’s state senate and house of delegates said “The company has never explained what the 178 employees in Wisconsin are doing now.” For such a huge deal, there is a staggeringly low amount of oversight.

Unless Foxconn hits its hiring targets, it won’t see much of the $4.5 billion subsidy package, but the state and local governments, as well as the nearby communities, have already paid significant costs. In order to secure the necessary land for the Foxconn campus, the village of Mount Pleasant exercised eminent domain to force village residents out of their homes. Mount Pleasant and Racine County have spent over $130 million to prepare for Foxconn construction, and the state of Wisconsin has spent an estimated $120 million on road construction in the nearby area.

When the deal was originally signed, the non-partisan Wisconsin Legislative Fiscal Bureau (WFLB) reported that even in the absolute best-case scenario, where all the workers employed by Foxconn live in Wisconsin and all the money spent by Foxconn stays in Wisconsin, the state government would not see any return on its investment until the year 2042. In the same study, WFLB estimates that around 10 percent of people employed by Foxconn in Wisconsin will be filled by Illinois residents, pushing the break-even point back to 2045. In February 2018, Tim Bartik, a senior economist at the W.E. Upjohn Institute, told Bloomberg that Wisconsin will never see a return.

Drawing a big company to invest in a particular region can be an exciting proposition for state and local politicians enticed by the prospect of increased employment and economic activity in their state or town. However, when these deals are made final, they often cost more in tax money than they generate. In Wisconsin, the state and local governments proved willing to use every means at their disposal, including the seizure of private property, to try to convince Foxconn to build a multibillion-dollar facility in the state. As the Foxconn deal (and those like it) highlight, state and local governments should not create a separate standard for well-connected companies by granting them billions of dollars in special benefits or using eminent domain to seize private property to advance the needs of a single corporation.

Zeke Rogers is a Research Associate at Cause of Action Institute



IRS Gives Nod to Its Regulatory Noncompliance, Doesn’t Address Real Issues

The Internal Revenue Service (“IRS”) is notorious for flouting regulatory procedures that are designed both to legitimize the administrative state’s exercise of lawmaking power and to constrain the worst abuses of that authority through information gathering tools and judicial review.  One reason the IRS is able to avoid the traditional regulatory process is because the Anti-Injunction Act prevents most lawsuits that would invalidate rules that the IRS promulgates outside that process.

Last week, the IRS acknowledged some of those shortcomings in a policy statement announcing changes to the way it rolls out new rules.  These changes are on top of last year’s revocation of a decades-old exemption from White House pre-publication review and approval.

The Administrative Procedure Act (“APA”) has different processes for legislative and interpretative rules, i.e., rules that create new legal obligations on private parties and those that purportedly don’t.  The IRS has long maintained that nearly all its rules are interpretative and thus exempt from the APA and notice-and-comment regime.  This is a dubious claim, at best.  Notwithstanding this self-bestowed exemption, the IRS magnanimously still puts its supposedly interpretative rules out for notice and comment.  But it does so without following all of the required procedures, which it justifies by claiming that any process it is following is voluntary anyway, so it can follow which procedures it wants to.  In its policy statement, the IRS confirmed that it “will continue to adhere to [its] longstanding practice of using the notice-and-comment process for interpretive tax rules.”

IRS Won’t Seek Deference

An issue that has plagued the IRS is the use of subregulatory guidance to explain the IRS’s view on how it will apply statutes and regulations; these guidance documents often come in the form of revenue rulings, revenue procedures, notices, and announcements.  Although these documents are supposed to be interpretative and explanatory, in many cases they create new legal obligations and are thus actually legislative in nature.

For example, the IRS used a subregulatory mechanism to announce new “transactions of interest” that captive insurance companies must report to the IRS or face a penalty and enforcement.  This is a classic case of a new law that affects private parties that was slipped through in a policy document, without notice and comment, and which should be invalidated on those grounds.

The IRS now seems to be conceding the issue broadly, although not with regard to the example above, and announced in its policy statement that:

When proper limits are observed, subregulatory guidance can provide taxpayers the certainty required to make informed decisions about their tax obligations.  Such guidance cannot and should not, however, be used to modify existing legislative rules or create new legislative rules.  The Treasury Department and the IRS will adhere to these limits and will not argue that subregulatory guidance has the force and effect of law.  In litigation before the U.S. Tax Court, as a matter of policy, the IRS will not seek judicial deference under Auer v. Robbins, 519 U.S. 452 (1997) or Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), to interpretations set forth only in subregulatory guidance.

This is a positive development, but it remains to be seen whether IRS attorneys really will abide by the constraint when faced with a rule that they’re trying to save in court.  Further, the policy only applies in “litigation before the U.S. Tax Court,” and so will not apply when challenges are brought to federal district court, as many procedural challenges to rulemaking are.  Another limitation of the statement appears to be that the IRS is only forswearing seeking deference to interpretations of subregulatory tax guidance and not other rules that litigants might dispute the IRS has violated, such as the APA or the Regulatory Flexibility Act, which the IRS claims does not apply to nearly all of its rules.

“Good Cause”

One of the APA procedures the IRS sidesteps is providing “good cause” for when interim final rules become immediately effective upon publication.  Treasury and the IRS have decided to now “commit to include a statement of good cause when issuing any future temporary regulations under the Internal Revenue Code.”  This is a good, if minor, change and adherence to general practice used elsewhere in the government.

The biggest issue plaguing the IRS’s compliance with procedural rules that constrain the agency is the Anti-Injunction Act, which prevents many challenges that would clean up the IRS’s lack of compliance.  Unless and until there is a shift in judicial interpretation of that provision or Congress exempts Title 5 challenges to IRS rules, we will continue to see the IRS operate outside the bounds of standard administrative practice.  The IRS’s recent policy statement does nothing to change that.

James Valvo is counsel and senior policy advisor at Cause of Action Institute.

Shining a Light on Agency FOIA Policies that Contradict the Law

Some agencies have regulations that conflict with the Freedom of Information Act (FOIA), which can lead to confusion for officials and the public, as well as the improper withholding of public information.  For instance, a few agencies still base their definition of a “representative of the news media” on language that is outdated and contradicted by both the FOIA statute and judicial authorities.  The old “organized and operated” standard that certain agencies have left in their regulations can be used to deny preferential fee treatment to nascent or non-traditional news media groups, as well as government watchdog organizations like Cause of Action Institute (CoA Institute).  The current statutory definition, by contrast, is meant to broaden the universe of requesters qualifying for the news media fee category.

In Cause of Action v. Federal Trade Commission,  a monumental decision in 2015 that resulted with an appellate court victory for Cause of Action Institute, the U.S Court of Appeals for the D.C. Circuit struck down the Federal Trade Commission’s outdated and narrow definition of a “representative of the news media” and confirmed the current statutory standard.  The FTC had tried to deny CoA Institute its proper fee categorization and a public interest fee waiver.

In March 2018, CoA Institute submitted a comment to the Millennium Challenge Corporation (MCC), a small agency tasked with delivering foreign aid to combat global poverty, on the agency’s proposed rule revising its FOIA regulations.  Among other things, CoA Institute suggested that the MCC correct its definition of a “representative of the news media.” In July of that year, MCC finalized a rule implementing the recommended revisions and taking a step towards effective and transparent oversight.  CoA Institute has had similar success with FOIA reform at other agencies, including the Consumer Product Safety Commission, Office of the Special Counsel, U.S. Department of Defense, U.S. Agency for International Development, and the U.S. Department of Homeland Security.

This is but one example of the work CoA Institute performs to advance government transparency and protect the rights of the American public, taxpayers and our collective ability to hold our government accountable for its actions.

Matt Frendewey is Director of Communications at Cause of Action Institute.