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Volume 66, Issue 1
The Illusion of Fiscal Illusion in Regulatory Takings

By Bethany R. Berger66 Am. U. L. Rev. 1 (2016)

The main economic justification for compensating owners for losses from land use restrictions is based on a surprising mistake.  Compensation is said to make governments internalize the costs of their actions and therefore enact more efficient regulations.  Without compensation, the argument goes, governments operate under a fiscal illusion because, from their perspective, their actions are costless.  The problem is that this argument makes no sense as a description of the actual costs to governments.

Taxation is the main way governments get revenue, and most taxes depend on the value of property and its permissible uses.  If a government restricts land use so as to reduce the value of a parcel or the income produced by it, its residents, or its patrons, tax revenues should go down.  If, however, the restriction creates benefits, tax revenues should go up.  While there are limitations to the accuracy and efficacy of the tax revenue signal, efficient regulations should have a net positive effect on governmental revenues, while inefficient ones should have a net negative effect.  Fully compensating owners, in contrast, does not lead the government to accurately internalize societal costs—it rather adds a new and much larger cost.  Because this cost usually far exceeds revenue gains, governments may rationally forgo even efficient regulations.  Owner compensation, in other words, does not correct fiscal illusion, it creates it.

Revealing the illusion of fiscal illusion leaves standing much older arguments that compensation is required as a matter of fairness.  But clearing away the main efficiency justification for one-to-one compensation permits clearer-eyed assessment of whether and to what extent fairness may require compensation and reveals that compensation measures in the name of efficiency may, in fact, undermine it. 

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Insider Trading Flaw: Toward a Fraud-on-the-Market Theory and Beyond

By Kenneth R. Davis66 Am. U. L. Rev. 51 (2016)

No federal law specifically makes insider trading unlawful. Current law is based on section 10(b) of the Securities Exchange Act, the general antifraud provision. The deception giving rise to a trading violation under section 10(b) is a breach of fiduciary duty to the source of the information. This approach is misguided because the source of the information is not injured by the trade. Rather, the counterparty to the trade is injured, and, in a more general sense, confidence in the securities markets suffers as a result of trading on material, nonpublic information. Even worse, current law does not clearly prohibit the use of inside information in circumstances that no sensible law would condone. For example, suppose a thief steals corporate inside information and trades on that information. It is unclear whether the thief has violated section 10(b). Similarly, if a corporate insider provides material, nonpublic information to a friend and the friend trades on the information, it is unclear whether either party has violated the law. This Article proposes replacing the current regime with fraud-on-the-market theory based on the well-recognized duty to publicly disclose inside information or abstain from trading. A breach of that duty would be a fraud on the public and the counterparty, and would therefore violate section 10(b). The Article goes on to analyze and critique congressional bills that propose new insider trading legislation.

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The Circular Logic of Actavis

By Joshua B. Fischman66 Am. U. L. Rev. 91 (2016)

Assessing the fairness of settlements is an inherently difficult task.  Because settlements foreclose the judicial determination of litigants’ entitlements, courts can only compare settlements to speculative predictions about what would have occurred in litigation.  Courts can conduct full-blown inquiries into the merits after the fact, but doing so undermines the cost-saving rationale of settlement.  In FTC v. Actavis, Inc., a case involving an antitrust challenge to a pharmaceutical patent settlement, the United States Supreme Court adopted a novel solution to this problem.  The Court held that the terms of a patent settlement do not need to be compared to a judicial assessment of the parties’ underlying rights as determined by patent law.  Rather, the fairness of a settlement could be inferred using economic analysis of the settlement terms themselves; the magnitude of a payment from the patentee to the challenger could serve as a surrogate for the weakness of the patent.  In this Article, I argue that this inference is problematic on both jurisprudential and economic grounds.  The jurisprudential critique is that Actavis implicitly relies on the prediction theory of law—the widely disparaged conception of law as consisting merely of predictions about what courts will do.  To the extent that the settlement terms are probative of the merits of the patent infringement case, they reflect the parties’ expectations about the outcome of the litigation.  In using the settlement terms as a surrogate for a legal conclusion, Actavis displaces legal reasons with predictions about court decisions.  The economic critique is that the Actavis inference fails to account for “feedback effects” between the court and litigants.  In settling the initial patent dispute, rational litigants will anticipate the inference that a subsequent court may draw from their settlement, which will distort the terms of their bargain.  In drawing an inference from the settlement, a court must therefore account for the distorting effect of its own inference.

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COMMENT: The Battle over U.S. Water: Why the Clean Water Rule “Flows” Within the Bounds of Supreme Court Precedent

By Ashleigh Allione66 Am. U. L. Rev. 145 (2016)

For close to thirty years, the U.S. government and courts have struggled to determine the scope of the Clean Water Act (“CWA”).  The CWA is the primary federal statute that regulates pollution of our nation’s waters, vaguely defined by Congress as the “waters of the United States.”  A body of water defined as a “water of the United States” is subject to the Act’s jurisdiction and permit requirements.  On June 29, 2015, the Environmental Protection Agency and U.S. Army Corps of Engineers issued a long-awaited rule—the Clean Water Rule—redefining the “waters of the United States.”  This Rule has led to widespread controversy among landowners, state governments, and environmental groups who are challenging its validity and scope.  At one extreme, landowners are concerned about increased federal regulation over private property and the need for costly permits prior to development or use; at the other, environmental groups contend that the Rule is not strong enough to protect our nation’s crucial waterways from pollution.  This Comment analyzes the Clean Water Rule and argues that it falls within the permissible scope of CWA jurisdiction and comports with Supreme Court precedent.  This Comment further contends that the Rule was a good faith attempt to streamline the permit process and provide the public with increased clarity on the scope of the “waters of the United States.”

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COMMENT: Make-Whole or Make-Short? How Courts Have Misread Title VII’s Limitations Period to Truncate Relief in EEOC Pattern-Or-Practice Cases

By Sara A. Fairchild | 66 Am. U. L. Rev. 195 (2016)

Section 707 of Title VII of the Civil Rights Act of 1964 authorizes the federal government to sue employers engaged in a pattern or practice of discrimination.  Congress designed these so-called “pattern-or-practice” suits to be a formidable weapon against the most entrenched and reprehensible Title VII violations and to provide the public with swift and effective relief.  Unlike section 706 of the statute, which furnishes a right of action for individual complainants, section 707 empowers the government to redress systemic discrimination.  The only procedural requirement that Congress originally prescribed for section 707 cases was that the government have reasonable cause to believe that an employer was engaged in a pattern or practice of discrimination.

In 1972, Congress transferred the government’s pattern-or-practice power from the U.S. Attorney General to the Equal Employment Opportunity Commission in an attempt to strengthen Title VII’s enforcement.  In doing so, it added a provision to section 707, stating that the Commission shall investigate and act upon allegations of a pattern or practice of discrimination “in accordance with the procedures set forth in [section 706].”  Like many private rights of action, section 706 includes a limitations period.  Although the Supreme Court has recognized that Congress intended the EEOC to have the same authority under section 707 as the Attorney General, numerous district courts have begun using this provision to apply section 706’s statutory limitations period to restrict relief in EEOC pattern-or-practice cases.  This Comment argues that such an application conflicts with Congress’s intent, both in enacting section 707 and in granting the EEOC authority to litigate section 707 cases.  But, even if Congress had intended section 706’s limitations period to apply to section 707 cases, a pattern or practice of discrimination is a single, continuing violation for purposes of timely filing.

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COMMENT: Big Pharma Monopoly: Why Consumers Keep Landing on “Park Place” and How the Game Is Rigged

By Mark S. Levy | 66 Am. U. L. Rev. 247 (2016) 

Now, more than ever before, pharmacologists are contributing medical advances to confront ravaging disease.  They are developing drugs to mitigate the effects of Alzheimer’s, HIV, multiple sclerosis, and various forms of cancer.  To capitalize on the opportunity, brand-name pharmaceutical firms are patenting these drugs, consequently guarding formulas and, with it, profits.  Patents grant brand-name firms market exclusivity, which essentially allows them to set their own prices.

Even though brand-name firms are investing some of their capital to cultivate new drugs, they also are enjoying gigantic revenue streams, absurd profit margins, and seemingly unfettered control of their respective markets.  Consequently, sick patients are unable to afford their medication; high prices are bankrupting consumers in the absence of reasonably-priced generic alternatives.  Despite the fact that generic drugs contain identical ingredients, cure the same symptoms, and cost 70% less, brand-name drugs persistently dominate their generic counterparts.