Thursday, February 02, 2006

Why Sovereign Immunity?

We lack a convincing justification for excusing political entities and actors from compensating the victims of their wrongs. Larry Rosenthal, one of my colleagues at Chapman Law School, has drafted an interesting new approach to the problem: The Theory and Practice of Government Damages Liability: Torts, Constitutional Torts, and Takings. Although Larry rejects the extant justifications for sovereign immunity, he ends up defending some form of it. Although I don't agree with his justifications, I tentatively think sovereign immunity might sometimes make sense, too.

Larry starts by describing the rather complicated legal rules that control when state entities and state agents must pay compensation for their wrongs to private parties. To grossly oversimplify, the doctrine of sovereign immunity ensures that public actors suffer less exposure to tort liability than do private ones. Most academics and courts excuse that disparity by arguing that economic sanctions cannot incentivize politicians and bureaucrats. Larry convincingly rebuts that claim, however, explaining that because elected officials win career benefits from retaining discretion over the expenditure of public funds, they try to avoid making compelled payments to the victims of government wrongs. Larry concludes that "government liability creates a political incentive to invest in loss prevention in order to maximize political control over public resources."

Intriguingly, though, Larry does not conclude that we should abandon or even deeply curtail sovereign immunity. To the contrary, he argues that public entities and agents should continue to enjoy protection from many sorts of torts. He offers these three reasons:

1) Because government wrongs lead citizens to withhold votes or even move away from badly managed communities, political agents already face sufficient incentives to avoid committing torts;

2) Judges and juries would compensate the victims of government wrongs without taking due account of how such awards would affect the availability of government funds for unrelated projects, and without suffering any political accountability for the consequent upheaval; and

3) Innocent third parties—most notably the poor who rely on government services—would suffer unfairly if government funds were diverted to victims of government wrongs.

I don't think that those three reasons suffice to justify sovereign immunity however. Why? Because they also argue for giving large private entities immunity from many sorts of torts. Consider, for instance, an auto manufacturer. It already faces market pressure to design safe cars, judges and juries are neither likely to understand all the budgetary and design issues involved nor likely to suffer any penalty for their ignorance, and innocent investors and creditors will ultimately have to pay for any tort judgment against the auto manufacturer. I conclude that, based on Larry's three reasons, public and private entities should face the same degree of tort liability.

I might yet join Larry in defending sovereign immunity. I would do so, however, on grounds that public entities have an extraordinary power to shift the costs of their torts onto their subjects. To illustrate that power, it helps to recap why private entities find it relatively difficult to shift the costs of their torts onto others.

Suppose that Ford Motor Company loses a huge tort lawsuit. It stocks lose value, costing its shareholders. Perhaps Ford even has to file for bankruptcy, leaving some of its creditors in the lurch. But the losses of those innocent shareholders or creditors will run no farther than their investments or loans. By no means can Ford tax an investor or creditor for excess funds. It is, after all, a limited liability company.

In contrast, public entities can socialize their losses, forcing the full amount of their tort liability onto innocent citizens. A state facing a huge tort claim thus might, for instance, raise taxes so much as to effectively confiscate property to which the state formerly had no claim. Granted, heavily taxed citizens might withhold votes or exit the jurisdiction. But those remedies might come too late to avoid the tax, and some assets would prove unreasonably costly or impossible to remove.

Furthermore, and in contrast to private entities, some public entities cannot shield their citizens from such losses via bankruptcy. Although municipalities and counties can file for bankruptcy, I don't think that states or the federal government can. Smaller political entities also pose lower risks of pass-through liability because they impose lower exit costs. You can more easily escape a tax-mad city or county than you can a state or country.

Add it all up, and I think you can make a qualified case for sovereign immunity. Due to bankruptcy laws and the costs of exit, the argument works best at the federal and state level. Even at its best, though, we should probably regard sovereign immunity as a kludge. Although it arguably corrects the problems that follow from unduly limiting bankruptcy law and from socializing costs over large areas, we would probably do better to amend the laws and institutions that make sovereign immunity justifiable.


Glen Whitman said...

"Larry convincingly rebuts that claim, however, explaining that because elected officials win career benefits from retaining discretion over the expenditure of public funds, they try to avoid making compelled payments to the victims of government wrongs."

I don't find this rebuttal convincing, because there is a kind of free-rider problem. The elected official who takes effort to conserve state funds (by avoiding lawsuits) creates benefits that are spread among all officials who draw from the public treasury, while bearing the whole cost of effort himself.

Tom W. Bell said...

Although Larry doesn't address that particular objection, I imagine that he might say something like this: That may be true of large groups of legislators, but it is not likely true of politicians in the executive branch or who are in small groups exercising legislative power. A mayor, for instance, has an incentive to protect the city budget from raids by torts attorneys. Granted, though, that a U.S. Congressional rep might not care about how much the FDA would have to pay were it susceptible to tort claims by the people it has wronged.

David Friedman said...

There is an argument I think you are missing for why making political actors liable is more important, not less important, than making private actors liable. One of the weaknesses in a democratic system is rational ignorance: Since my vote has a negligable effect on the outcome, I am unlikely to spend much time and effort finding out what politicians have done and should have done, in order to decide which ones to vote for.

A successful tort suit against the government reduces this problem by generating free information for the voters--if the state not only did something wrong, but did something so wrong that they owe a million dollars in damages, that's pretty strong evidence against those in control. The damage award is an incentive to the injured party to generate that information, and so benefit the rest of us.

Tom W. Bell said...

Thanks for the good argument, David: A tort plaintiff who wins judgement against state entities or agents generates a positive externality: Information about bad governance. We worry that the elective process does not do too well at revealing consumer preferences. Giving voters more information about government wrongs might remedy that failing.

Problem is, government payments to its victims also generates, or at least encourages, a negative externality: Government appropriation of innocents' wealth. Query whether the good effects of making governments pay tort victims outweighs the bad effects of stimulating governments to tax citizens.

Rosenthal said...

As the author, I thought I'd make an effort to defend myself, not on Tom's concerns (I'm too smart to go after the author of a blog) but with respect to the other comments. Glen Whitman's comment, in my view, perhaps unintentionally identifies the anomalies at work in government liability. An official who invests in liability reduction does not bear any "cost" himself; he's not using his own money. Instead, everyone involved in the appropriation process "pays" the political opportunity cost of an appropriation for the purpose of reducing future liabilities. David Friedman's comment also identifies an anomaly: if politicians will experience a serious political cost from an adjudication of liability (and I agree that they sometimes will), that gives them an incentive to pay a premium (with taxpayer funds) to settle a case in order to avoid adverse publicity. Very problematic.

Larry Rosenthal