The history of the modern democratic state can be understood as a story of shifting authority and lawmaking, first from private potentates to sovereign monarchs, and then to publicly accountable democracies. Today, this centuries-long democratizing trend is rapidly being reversed. Western democracies are not simply embracing neoliberalism in the sense of deregulating the economy. Elites are pursuing something aptly described as a new form of feudalism, in which entire realms of public law, public property, due process, and citizen rights revert to unaccountable control by private business.
The system of finance, once supervised by bank regulatory agencies and the Securities and Exchange Commission, has been delegated to private realms of law. The financial collapse of 2008 is best understood as the seizure, corruption, and abuse of entire domains of regulation and jurisprudence. Laws to protect workers and consumers, reflecting 70 years of struggle to expand rights, are now erased by compulsory arbitration regimes. Trade law permits similar private tribunals to overturn or sidestep public regulation. Tech platform monopolies have created a proprietary regime where they can crush competitors and invade consumer privacy by means of onerous terms, often buried in online “terms of service” provisions. The unity of common scientific inquiry has been balkanized by confidentiality agreements and abuses of patents, as scientific knowledge comes to be “owned” by private entities. Companies like Monsanto, manipulating intellectual property and trade law, prevent farmers from following the ancient practice of keeping seeds for the next planting season. This is not deregulation or neoliberalism. It is legally sanctioned private jurisprudence—neo-feudalism.
The Brief Era of the Democratic Commons
For part of the 20th century, the democratic state served as a counterweight to the concentrated power that flowed to concentrated wealth in a capitalist economy. Laws helped workers offset the power of employers, protected small investors from the schemes of bankers and brokers, gave some countervailing power to tenants against landlords, and added consumer safeguards to constrain abuses of manufacturers and retailers. All of this has been thrown into reverse—not just by the more visible forms of deregulation, but by the creation of entirely private realms of property and law.
It is easy to miss what has been occurring, because the age-old elements of private law, such as contracts and torts, have long coexisted with public law and regulation. Contention between public law and private power is a very old story. What is new and alarming is the displacement of entire areas of public law by private commercial interests and the resurrection of abusive forms of private law.
Not only did the 20th-century state expand democratic public law. Acting through the courts, the state intervened to police private contracts and protect weaker parties from abuse by the powerful. Twentieth-century courts moved away from the formalist contract law of the late 19th century, which was characterized by rigid contract interpretation and deference to the principle of caveat emptor. In its place, 20th-century judicial interpretation and enforcement of contracts emphasized fairness between the parties. Using such doctrines as unconscionability, duress, and impracticability, courts in the 20th century refused to enforce contracts between parties with vastly unequal resources, knowledge, or bargaining power when they found agreements to be oppressive, coercive, grossly one-sided, misleading, or blatantly unfair.
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For example, courts refused to enforce loans to consumers with excessive interest rates; consumer contracts that disclaimed standard warranties; employment contracts with broad covenants not to compete; contracts between mining companies and farmers to sell family homesteads for a pittance; and leases with draconian liquidated-damage clauses for minor tenant infractions. Moreover, the courts scrutinized the process of contract formation for real, as opposed to fictitious, consent. In a similar vein, the Uniform Commercial Code, drafted by legal-realist scholar Karl Llewellyn in 1952 and subsequently adopted in all 50 states, expanded the doctrine of good faith in commercial contracting and adopted “commercial reasonableness” as the standard for interpreting contractual ambiguities.
The trend in contract law took a U-turn in the 1980s, as the law and economics movement began to permeate the judiciary. The new “efficiency” theory of contract law held that all contracts should be enforced, notwithstanding either deception or vast power inequalities between the parties. Thus the capture of public law and the reversion to one-sided private law reinforced each other, creating vast pools of proprietary power.
The extreme privatization of jurisprudence overlaps the privatization of public services, but it is more sinister. When a public service such as a voucher school, a park, a highway, or an entire town (such as Disney’s town of Celebration) is privatized, it alters the cost, quality, and distribution of the service, and also reduces public accountability. Voucher schools are able to manipulate admissions, avoid costly special-needs kids, and have their own legal and disciplinary procedures, which are supervised only very loosely by the state, if at all. Public prisons, already replete with abhorrent conditions, have become much worse as private, for-profit entities, with even less opportunity for redress.
For part of the 20th century, the democratic state served as a counterweight to the concentrated power that owed to concentrated wealth in a capitalist economy. That role has been reversed as private potentates have captured the state.
The carving up of public law and property into proprietary domains is the new tragedy of the commons. The environmental tragedy, at least in principle, is amenable to public regulation that applies to all players. In the new tragedy, public regulation is precluded because law has been sundered from the democratic commons, in a manner that evokes the original tragedy of the commons—the English enclosure movement of the 17th and 18th centuries—in which lands that had been cultivated by the peasantry since time immemorial were carved up into commercial properties by local lords, with the blessing and legal protection of the Crown.
In some respects, the new feudalism is even more lopsided than the original, in that historic feudalism had some forms of reciprocal obligation between lord, vassal, and serf; between king and aristocrat; Church and Crown; and between apprentice, tradesman, and master. For all of its absolutism, feudalism had aspects of what J.K. Galbraith, describing capitalism at the apex of the mixed economy, was to call “countervailing power.” Neo-feudalism is a one-way seizure of private power and law by elites.
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From Feudalism to Democracy—and Back
The historic movement from feudalism to the modern state and then to political democracy began in the late Middle Ages and the early modern era. Feudal lords had massive landholdings wherein their word was law. They maintained their own military forces, and operated feudal courts to resolve disputes. These quasi-states had understandings (and sometimes clashes) with monarchies and with the Church. Feudal lords had plenary authority over their domains, although they themselves were subject to the higher authority of the monarch and the Church. During the heyday of feudalism, most contract questions, property disputes, criminal matters, domestic relations, inheritance, and other matters affecting ordinary folks were handled in the local courts. In principle, serfs had some customary rights, but masters ruled.
The feudal system arose in response to the anarchy and vacuum of sovereignty left in Europe after the collapse of the Roman Empire and the ebb and flow of invaders from the east, north, and south—Huns, Goths, Arabs, Norsemen, and others. Some monarchies were potent, others weak; but as long as a feudal lord was a faithful vassal of the king, he was sovereign in his own realm. For nearly a thousand years, there was a four-way contention for power among kings, feudal lords, the Church, and the rising imperatives of commerce, with the monarchy gradually gaining sovereignty.
In the late Middle Ages, commerce among different principalities was governed by a transnational body of customary commercial law known as the lex mercatoria. Commercial disputes were resolved by private tribunals created by the commercial community according to the norms of the merchant community itself. The results were recognized by monarchies. This system made it possible for a product to pass from country to country with the property rights of the owner recognized by other merchants and sovereigns. The slave trade was part of this commercial system, and it could only function thanks to this symbiosis between traders and kings, in which ownership rights to a chattel were recognized by monarchies.
By the end of the 18th century, these struggles for primacy had been largely resolved in favor of the state. This came to be known by scholars as the Westphalian system, after the 1648 Treaty of Westphalia, which ended the Thirty Years’ War by giving the king the right to dictate the religion of his subjects. Nation-states gained more and more authority over realms previously governed by feudal lords, including the power to define and protect property rights, maintain a military and judicial system, and regulate commerce, labor, the professions, finance, trade, and domestic relations. The state gained a monopoly on the legal use of force. A post-feudal aristocracy still existed, but the monarch became increasingly sovereign. Yet the bias in favor of economic elites persisted.
There followed another century of struggle to make the state democratic. Despite the democratizing trends, some feudal remnants remained well into the modern era. For example, until the early 20th century, under the English doctrine of primogeniture and the device of the entail, property owners were required to keep their estates intact and leave them to a single heir. In the U.S., supposedly “born free” of feudal heritage, many feudal doctrines from the common law of England were nonetheless incorporated into Britain’s North American colonies. In the U.S. as well as Britain, the doctrine of coverture effectively made wives the property of husbands. In much of the West, there were still property requirements for the franchise, left over from the aristocratic era.
Throughout the 19th century, employers in the U.S. retained quasi-feudal rights over their workers through the operation of two common-law doctrines—the “entire contract” doctrine, which provided that workers who left an employer mid-contract had no right to be paid for any work they had performed, and the tort of enticement, which enabled employers to prevent their workers from departing their establishment to work for someone else. However, with the rise of commercial principles in the late 19th century, some individualistic approaches emerged. For example, the at-will rule that emerged in the 1880s gave individual laborers the right to quit their employment with impunity—and gave employers the right to fire workers for any reason, or for no reason. And, in the area of industrial accidents, no matter how egregious an employer’s negligence, courts reasoned that the worker had freely contracted to accept the risk and therefore had no recourse. Thus, in the case of labor law as well as other areas of commercial law, both the feudal remnants and the evolving modern market system favored the property owner.
IN THE UNITED STATES, the democratization of the modern state was realized in the economic realm only in the 20th century, as new citizen and worker protections were enacted by Congress and upheld by courts. In the 20th century, government acted to balance the commercial interests of emerging companies and industries against a broader public interest. Railroads, radio, television, electric utilities, civil aviation, telephones—all sectors with actual or potential monopoly abuses—were subject to public law after many had attempted to install regimes of private law relying on coercive market power. Railroads, which had operated like feudal baronies, dictating terms of commerce for shippers and destroying rivals, became subjected to public rate-making. In the telephone industry, the dominant Bell System had sought to make and enforce rules to crush or capture potential competitors, but it came to be regulated by the Federal Communications Commission. So did the emerging radio industry, dominated by one company, RCA, which had sought to rule the airwaves. In all of these cases, the democratic state intervened both to supplant areas of private law with public regulation and to assure that systems of private law had some balance and accountability that would protect the economically weak from the economically strong.
The law became more procedurally transparent as well as more substantively egalitarian. The Administrative Procedure Act of 1946 (APA) created an orderly and transparent process for regulatory agencies to make rules and to ensure greater citizen participation in the rule-making process. The APA also imposed restrictions on ex parte contracts between the regulated entities and the regulators, and prohibited conflicts of interest in many other respects. Thus, the gains for democracy were both procedural and substantive.
The high watermark of the democratized legal and policy regime was the 1960s and 1970s, when numerous consumer and environmental laws were enacted, unions represented almost one worker in three, and courts defended citizen rights.
Beginning in the 1980s, power shifted again. Entire domains were handed back to private entities that were empowered to exercise quasi-state functions and create their own proprietary systems of law.
These developments have been described in mainstream policy discourse as “deregulation” and “privatization,” but those terms are misleading. The term “deregulation” suggests a reversion to a pre-existing system of nonregulation, a realm in which state authority is absent. But this is a fantasy. There is no pre-legal, law-free realm. There is always regulation, albeit sometimes invisible and private, and hence unaccountable.
Similarly, the term “privatization” is misleading. The term suggests a neutral transfer of governmental functions to the private domain for the sake of efficiency. But privatization invariably has distributional as well as civic consequences, since it changes the structure of costs and benefits and obscures public accountability. Privatized water and highway systems raise costs to users. Public parks are generally free; privatized ones charge. The privatized entity can avoid public obligations such as due process, transparency, and nondiscrimination requirements.
Outsourcing of public functions, which gained ground beginning in the 1980s, brought with it outsourcing of jurisprudence. Private prisons turn a quintessentially public function—incarceration for criminal actions—into a profit-making venture with minimal public accountability. In private “voucher schools” (financed by public funds), a private entity makes the rules. Gated residential communities, such as Disney’s Celebration, are privately controlled municipalities that make and enforce their own laws. Private mercenary armies, such as Blackwater (now rebranded as Academi), are hired by the Pentagon so that their “soldiers” will be less accountable for what might otherwise be war crimes. Eminent domain, the inherent public prerogative to claim private property for a public purpose, has been commandeered by private developers. And courts—the ultimate embodiment of law in a democracy—have been privatized by the vast expansion of compulsory arbitration.
Neo-Feudalism and the Financial Collapse of 2008
Under the system of financial regulation created in the New Deal, commercial banks were strictly supervised under one regulatory regime, while the issuance and sale of securities were tightly governed under another. In exchange for federal deposit insurance and/or membership in the Federal Reserve System, commercial banks had to abide by reserve requirements, conflict-of-interest strictures, and regular supervisory examinations. Their ability to merge or open branches was limited. The interest they could pay on deposits was regulated. They were not permitted to turn loans into securities. This regulatory regime was designed to ensure both safety and soundness of the system as a whole, as well as protection of investors, savers, and borrowers.
From the New Deal to the 1980s, investment bankers, retail stockbrokers, and issuers of stock were governed by the Securities and Exchange Commission. Publicly traded stocks were subject to extensive disclosures and prohibitions against insider trading and other abuses such as over-leveraging, self-dealing, and deceptive marketing and pricing, which had led to the Great Crash of 1929. There were no derivatives, no private equity, no complex securitization, no pyramid schemes, no off–balance sheet assets, and above all no opaque system of private law. The system was simple enough for supervisors to comprehend and thus to regulate.
In a parallel process of public invention and regulation, the New Deal created and governed a new system of mortgage finance. A new home loan bank system backstopped the (mostly nonprofit) savings and loan sector. The government invented the long-term, self-amortizing mortgage. A new agency, the FHA, insured these mortgages so that ordinary people could acquire homes with low down payments. Yet another public agency, FNMA, used Treasury bond financing to purchase mortgages and replenish the capacity of banks and thrift institutions to make more loans. Still another new agency, the Home Owners Loan Corporation, helped refinance mortgages for borrowers at risk of foreclosure. The entire system was closely supervised and scandal-free.
Franklin Roosevelt’s original alphabet soup of new public agencies has mutated into a toxic stew of self-regulatory and self-interested organizations run by and for regulated industries. It is one giant conflict of interest.
The important point is that this entire post-Depression architecture of financial structure and regulation was publicly created and subject to public scrutiny. It existed for the benefit of the broad citizenry, not for the profit of industry insiders. Even transactions and contracts that were ostensibly private, such as the sale of stocks and bonds, were subject to public rules. This system worked well. Not only did it protect ordinary investors, savers, mortgagors, and the economy as a whole; the financial part of the economy supplied plenty of capital to the real economy during the long postwar boom.
As the distribution of political power shifted in the 1970s and 1980s, the financial industry began reprivatizing systems of law and finance. They invented new strategies of financial speculation to which regulators gave their blessing. Leverage buyout artists began acquiring entire companies using almost none of their own money, with the target company’s stock as collateral. In the new, pro-market environment, regulators concluded that this was legal.
The LBO business mutated into private equity, in which trillions of dollars of transactions were outside the system of securities regulation on the premise that these were not public offerings of shares. What had been a very small loophole in the structure of New Deal securities law metastasized into a largely unregulated multitrillion-dollar industry. Complex layers of derivatives securities were invented, in which immense and largely hidden multiples of leverage were possible. When some regulators expressed an interest in taking a closer look, a Congress newly beholden to the financial industry acted in 2000 to expressly prohibit regulation of derivatives, either as insurance, securities, or as gambling.
In the same period, public agencies delegated regulation to regulated industries via more than a dozen industry-controlled entities known as self-regulatory organizations (SROS). The original self-regulatory organization was the New York Stock Exchange, created in 1792. Prior to the New Deal, the Stock Exchange functioned as a private club, and its failure to enforce transparent and fair dealing had vast consequences for the public well-being when markets periodically crashed.
From the inception of securities regulation in 1933, there was bitter contention over how much enforcement would be the direct province of the new sec and how much would be delegated to the privately operated stock exchange. It is a testament to the residual power of capital that even at the nadir of its disgrace, the New York Stock Exchange won many of these initial skirmishes, setting an unfortunate pattern to be exploited once FDR was gone. Against the wishes of the sec’s original architects, the stock exchange was permitted to supervise many of its own activities with the sec relegated to watchdog, supervising at one remove. In 1939, the sec allowed the first explicitly recognized SRO, the National Association of Securities Dealers, to govern the system of over-the-counter (off-exchange) stock trades. This was just the beginning of a vast reversion.
After Wall Street invented financial derivatives in the 1980s, the whole field of derivatives creation and trading came to be governed by rules established by the industry trade association, the International Swaps and Derivatives Association (ISDA). At its simplest level, a financial derivative is analogous to an insurance policy against a bond or other security failing to pay back interest or principal. But ISDA, not a government agency, gets to decide how derivatives work and under what circumstances that obligation must be paid. This is neo-feudalism, par excellence. The democratic state plays no role whatever, except to bless the privatized realm of law.
In the area of accounting standards, the sec expressly delegated monitoring and enforcement to the industry trade association, the American Institute of Certified Public Accountants (AICPA). When self-regulation failed and accounting frauds led to the Enron scandal and kindred abuses, Congress restored some direct regulatory standards via the Sarbanes-Oxley Act of 2002. However, that same legislation created a new body, the Public Company Accounting Oversight Board (PCAOB), that enabled industry self-regulation to persist in a different form. PCAOB was created as a dot-org, not a government entity. Its president is paid over $670,000 a year. It is dominated by the Big Four accounting firms. The sec delegated a great deal of regulatory enforcement to it, as well as to another industry private association, FINRA, the Financial Industry Regulatory Authority (which used to go under its original and more accurate name, the National Association of Securities Dealers). By definition, the self-interest of securities dealers is not identical to that of the investing public.
SIFMA, the Securities Industry and Financial Markets Association, is a lobbying and trade association. But with the approval of the government, SIFMA also sets the regulatory standards for repos (overnight loans) and money-market and securities lending transactions through its “master templates.” There are similar industry groups that “regulate” the terms of municipal bond underwriting and sales (the Municipal Securities Rulemaking Board); the terms for creation and trading of futures (the National Futures Association); as well as the Financial Accounting Standards Board (FASB).
All of these industry self-regulatory bodies have their own systems of jurisprudence, far less transparent or committed to the public interest than the direct public regulation of the New Deal schema. Roosevelt’s original alphabet soup of new public agencies has mutated into a toxic stew of self-regulatory and self-interested organizations. It is one giant conflict of interest.
Private Jurisprudence and the Mortgage Collapse
The subprime collapse of the early 2000s was the direct result of the invention of new toxic financial products and private systems of law. Loan originators created new categories of mortgages in which the borrowers’ rates would explode after a few years, and marketed them aggressively to unsuspecting homebuyers who could not afford them. Deceptive mortgage products such as “pick-a-pay” had low nominal interest rates, while the true interest costs were added to the principal. Others had low teaser rates that rose dramatically after a few years. The mortgages in turn were sold to investment bankers who packaged them into securities that, through the alchemy of private credit rating agencies, were given triple-A ratings.
When investment bankers devised pyramids of asset-backed securities and collateralized debt obligations, they needed complex private legal and financing systems. The government basically got out of the way and let the bankers run the show and write the rules as private contracts, even though a variety of existing laws and principles of sound banking were violated. The credit rating agencies that rewarded the securities based on exploding mortgages with triple-A ratings were essentially unregulated.
Compulsory arbitration moves consumer and employment disputes from the courts to a rigged process of private systems of adjudication, depriving workers and consumers of statutory rights that they achieved in the 1960s and ’70s.
In order to make the system of high-volume mortgage securitization work, the financiers had to devise an end run around a property-recording system that has been in place in America since before the Revolution. The banks invented a private database that tracked transfers of title to the property, called Mortgage Electronic Registration Systems (MERS). MERS was basically a shell company, wholly owned by major banks, designed to enable the securitization industry to evade recording fees incurred when banks transferred mortgages multiple times.
Rather than using the traditional system of transferring and recording property and mortgage liens with the local recorders of deeds, the MERS system listed itself as the mortgagee of record. Banks could make unlimited transactions inside MERS; the recorder of deeds would only know about the original sale.
At the height of the housing bubble, most of the existing mortgages in the United States listed MERS as the mortgagee. But this mass tax evasion scheme was susceptible to widespread database errors that proved disastrous when the whole subprime system blew up. MERS would either try to claim standing over mortgages it had no financial interest in, or would make an after-the-fact assignment to a trustee, which violated the rules governing securitization. MERS designated thousands of low-level mortgage industry workers “vice presidents” of the company, and they would sign the unlawful transfers of mortgage in MERS’s name.
This phony paper was used as evidence in several million foreclosure cases. Many families lost their homes based on fraudulent documents from a shell company that was at best a legal fiction. A handful of judges threw out foreclosure proceedings on the premise that the deed had been fraudulently recorded by a shell system or there was no record of the loan in the first place, but most foreclosures stood. The industry’s creation of a proprietary fiefdom of law—a private property records system created with no public debate or legislative approval—was richly rewarded. MERS still exists.
The Invasion of Arbitration
Another emblematic case of neo-feudalism is the use of compulsory arbitration to move consumer and employment disputes from the public courts to a rigged process of private systems of adjudication. This privatization of justice deprives workers and consumers of the benefits of many of the statutory rights that they achieved in the 1960s and ’70s. It is the result of new, radical judicial interpretations of the Federal Arbitration Act (FAA).
The FAA was enacted in 1925 at the behest of the business community, which wanted to bolster trade associations by giving them the ability to compel their members to submit disputes to arbitration rather than to the courts. But since the 1980s, the Supreme Court has ruled that the statute could be used by corporations to require arbitration in virtually all settings. Companies began inserting arbitration clauses in their employment and consumer contracts. By the 2000s, large corporations made arbitration mandatory for most employment discrimination disputes, federal and state wage and hour disputes, disputes over alleged violations of state employment protective laws, consumer breach of warranty claims, allegations of consumer fraud, and most other cases involving workers and consumers.
With the approval of the courts, corporations now require arbitration for allegations of lethal negligence by nursing homes, allegations of identity theft, instances of sexual assault of students by teachers in private schools, claims of antitrust conspiracies by large corporations against small businesses, and efforts by on-demand workers to obtain fair working conditions. The corporation picks the arbitrator and defines the rules of the proceedings. It can insist on limited discovery and impose confidentiality gags so that plaintiffs with similar cases cannot share evidence or information about the outcome of their cases. It can also exclude certain types of evidence in advance, and limit the types of remedies a successful claimant can recover. It is common to also impose fee-sharing so that an employee or a consumer has to pay a significant sum just to have their case heard.
In a recent trend, some employers require the losing party to pay all of the cost of an arbitration—typically several thousands or tens of thousands of dollars—as well as the winning party’s attorney fees. These clauses are designed to discourage workers and consumers from asserting claims altogether. When disputes go to arbitration and an award is issued, the losing party has virtually no right to appeal.
Moreover, arbitration proceedings lack the due process protections we expect of courts. An arbitration hearing has no transparency—there is almost never a transcript of the proceeding; there is often no written opinion; and there is seldom a public record that reveals the names of the parties, the nature of the dispute, or the outcome. Hence large corporations, who as repeat players have amassed experience with many different arbitrators and seen many similar cases, have a substantial advantage.
Arbitration has seriously undermined workers’ and consumers’ rights to use class actions. With class action suits, individuals with common claims—such as Walmart workers who were denied legally mandated overtime payments—are able to consolidate their claims, obtain a lawyer, and get into court. In the 1990s and early 2000s, employment-related class actions proliferated; some corporations were forced to pay multimillion-dollar awards.
But in 2011, the Supreme Court gave its blessing to arbitration provisions that ban the use of class actions, either in court or in an arbitration proceeding. The case involved tens of thousands of consumers, each of whom had been cheated out of approximately $30 by AT&T. Without the vehicle of the class action, such a large number of small-value claims would never be pursued in any tribunal, giving corporations a license to cheat customers with impunity. Today, the vast majority of arbitration clauses written by corporations include a class action ban.
Private Arbitration Regimes in Trade Law
Since the 1980s, major trade agreements have included a device known as Investor-State Dispute Settlement. This first came about in the case of trade deals between European multinational corporations and former colonies with weak or corrupt systems of law. The U.S. government copied this formula in bilateral trade deals to protect U.S. investors from expropriation. Before they risked their money, American investors wanted some assurance that in the event of disputes, a relatively impartial tribunal would be the judge. Thus were born investor-state panels that could supersede local law. This made a certain amount of sense in the case of trading partners with underdeveloped systems of law. But beginning with the North American Free Trade Agreement of 1993 (NAFTA), investor-state panels were empowered to override federal and state courts in cases of disputes between private corporations and government regulations in advanced democracies, in this case the U.S. and Canada, as well as Mexico.
Under NAFTA, a U.S. corporation with operations in Canada or Mexico can bring suit before a special NAFTA panel alleging that a labor or environmental or financial regulation violates the trade agreement because it operates as an indirect barrier to trade. Not only does the investor-state provision of NAFTA allow for end runs around national and state courts; the review panels have none of the strictures against conflicts of interest or the discovery provisions of regular courts. Under NAFTA, arbitration panels have required governments to pay corporations about $500 billion in damages because national or state health, safety, labor, financial, or environmental laws supposedly infringed on trade freedoms.
Some critics of NAFTA were surprised and heartened when the investor-state dispute resolution provision of NAFTA was revised in the renegotiated U.S.-Mexico-Canada (USMCA) agreement of 2020. But industry did not resist all that strenuously because the investor-state provision lives on in the 2019 EU-Canada Comprehensive Economic and Trade Agreement (CETA), which expressly permits corporate end runs around law to special investor-state panels. So a U.S. corporation with operations in Canada or Europe can use ceta to bring a complaint before such a panel. Investor-state options also survive in dozens of other bilateral trade deals to which the U.S. is a party. A variation of the process of corporate end run around national law is possible under the World Trade Organization’s rules.
Silicon Valley as a Giant Fiefdom
One of the startling trends of recent decades has been the success of the giant tech monopolies at creating their own proprietary systems of law and insulating themselves from public regulation. While citizens are protected from unreasonable searches and seizures by constitutional constraints on government surveillance, the tech giants know far more about us, often with our “consent,” than the government does. The giant tech industry has fought off efforts to regulate its use of personal data. Instead, companies such as Google, Apple, and Amazon have invented their own jurisprudence, hidden in obscure terms of service, to govern the consent of users to the commercial use of personal data.
The tech monopolies have also succeeded in creating a proprietary legal regime to govern their relationship with their actual or potential commercial competitors, and they have stacked the deck in favor of the house. Amazon, for example, has agreements with 2.5 million third-party sellers, who use its site to market their products. These agreements are devised by Amazon for its own advantage, often at cost to outside vendors who are both users of Amazon’s platform and rivals who compete with Amazon’s own offerings. By playing the role of both platform provider and competitor, Amazon is able to engage in strategic pricing and marketing, courtesy of its superior access to consumer buying data. Sellers must also pay a basic subscription fee, referral charges, and additional fees if Amazon provides fulfillment and delivery. And of course, Amazon requires all of its independent sellers to sign the now-familiar arbitration clause, requiring submission of disputes to an arbitrator selected by Amazon. Most of this ought to be illegal, but it isn’t.
Instead of being the creation of Amazon’s private law, fair ground rules should be set by some neutral regulatory agency. Critics have suggested a variety of reforms to limit the market power of giant tech monopolies and the resulting abuses. These include the application of common carrier principles, privacy rules, and the enforcement of antitrust laws. Under common carrier principles, Amazon would either be a platform or a vendor, but not both. But so far, the large platform companies have succeeded in fending off these reforms by means of a combination of raw political power and a sly appeal to libertarian values.
Private Law in the Drug Industry
Like Big Tech, the pharmaceutical industry is a fortress of privatized law—despite the fact that most drug breakthroughs are ultimately financed by you, the American taxpayer, either through NIH grants or through elevated health insurance premiums. The big drug companies have succeeded in manipulating patent law to their advantage, to the point where independent innovators who have new ideas that would lower consumer prices are often silenced by industry lawsuits and confidentiality agreements. The industry has also succeeded in jacking up prices of drugs long in the public domain by devising “new” variants that add little value, obtaining monopoly protection for these “improvements” from the patent office, and then strong-arming medical systems into using the more expensive substitute. The industry also keeps well-established and cheap drugs artificially scarce and expensive by driving out generic producers or merging and carving up markets so that even many drugs that are off-patent have only one producer.
How is all this possible? In the absence of countervailing public regulation, the industry simply makes up its own private law, using its market power to increase profits and insulate itself from either competition or government supervision. It is a law unto itself. The more powerful the industry is, the more allies it has in Congress to make sure that the FDA stays narcotized under Democrats and Republicans alike.
AMERICAN DEMOCRACY today is under assault on multiple fronts. The autocratic incursions of the Trump administration are only the most urgent and immediate. But the private capture of public regulatory law is more long-term and more insidious. If we are to get our democracy back, once we oust Trump we need to begin to reclaim public law from neo-feudalism.
The ultra-libertarian Friedrich Hayek warned that too much state intervention would deprive the citizenry of cherished rights and liberties. With unintended irony, he titled his treatise The Road to Serfdom. Hayek had it backwards. Today’s road to serfdom is corporate.
