Thanks to Joel Trachtman, Professor of International Law, and formerly the Academic Dean and Interim Dean, at The Fletcher School at Tufts University, for his review:

I.  Introduction

Profs. O’Hara and Ribstein, two leading experts on conflicts of law and regulatory competition, have made a formidable proposal for reformulation of the “market” for law.  The challenge to which they respond “is to foster the beneficial aspects of the law market with enforcement of choice-of-law clauses while simultaneously protecting states’ ability to impose reasonable regulation.” (p. 16)  This is certainly a worthy quest:  to reconcile the benefits of the market with the necessary role of the state.    

Preliminarily, note that The Law Market’s primary, but not sole, focus is on U.S.interstate choice-of-law in a contractual context, and that its proposal takes the form of a U.S. federal choice-of-law statute.  The Law Market states that “it is not clear how far the contract approach” that it espouses should be carried.  (P. 218)  My main focus in this review, in contrast, is on regulatory jurisdiction in the international setting.  The Law Market suggests that its approach, and its prescription of greater regulatory choice, can be extended to regulatory jurisdiction in the international setting (e.g., p. 224); my review suggests that it cannot. 

First, a thought experiment.  Imagine a world, World One, of two states each with exactly one law.  In State C, the law says you may eat only chocolate ice cream.  In State V, the law says you may eat only vanilla ice cream.  Under these circumstances, no one would object to a liberal choice-of-law rule, allowing individuals to choose freely between the law of State C and the law of State V.  This is because no conceivable public interest is affected by the choice.  And overall welfare would be improved by allowing choice:  each individual would be able to eat the flavor he prefers.  But it would be equally easy for State C and State V simply to change their laws to allow choice. The effects of either liberal law or liberal choice-of-law rules are identical in this case. 

Now consider a different world, World Two.  In this world, vanilla ice cream causes State C residents the most exquisite and irresistible pleasure, but causes them to exhale a gas that is deadly to thousands (but not to the person who ate the ice cream). Chocolate ice cream has a converse effect on State V residents.    (The point of this science fiction is that there may be significant external effects of the regulated conduct.)  Under these circumstances, it would be unacceptable to allow individuals to choose freely between the law of State C and the law of State V.  And, again, the effects of either liberal law or liberal choice-of-law rules are identical. 

One’s view of “the law market” depends on which world you are in.  It depends on the purpose of the law.  To be sure, the effects of liberal law or liberal choice-of-law are not necessarily identical in all cases:  there are worlds in between.  It may be that certain types of connections with foreign jurisdictions would ameliorate the policy decision to make law mandatory.  The foreign connections may argue for non-application of law, either because adverse effects on the regulating state are no longer sufficiently significant due to the foreign connection, or because the foreign connection provides a reason to defer reciprocally to another state’s regulation.  Legislators may specify these circumstances for non-application, or may explicitly or implicitly delegate to courts the job of determining the respective scopes of application and non-application.[1] 

The Law Market attempts to capture this idea, when it concludes that “what really matters to whether regulations are binding is not whether a rule is mandatory, but whether it is super-mandatory, in the sense of withstanding parties’ ability to contract for more permissive laws.”  (P. 217)  The way that I suggest we understand this statement is by accepting the term “super-mandatory” as meaning that it still makes sense for this type of law to be mandatory, after taking into account the foreign state connections that may be involved, and despite the parties’ choice.  The application of “ordinary” mandatory law would not survive private choice.  But legislatures would want to distinguish among different types of foreign state connections, or to delegate to courts the job of doing so—not all foreign connections will be sufficient to dis-apply otherwise applicable law.  The term “super-mandatory” as a substitute for “still mandatory taking into account foreign connections” loses important discriminating nuance.  In effect, The Law Market is suggesting that we broadly re-examine the category of mandatory law, and this may indeed be a useful project, but it would seem to go too far to say, with a wave of a scholar’s hand, that legislative choices to make law mandatory are henceforward to be rendered null unless they were made with sufficient specificity.    

The authors of The Law Market do not argue that free choice should be the rule, but they argue (a) that it should be the rule more often (implicitly asserting that under current conditions it is not the rule enough), and (b) that a specific change in the method of deciding the scope of mandatory law—the limits on choice—would provide for better decisions than the current methods. 

O’Hara and Ribstein see the application of local regulation as potentially inefficient.  They argue that legislatures are subject to interest group influence, that legislators have limited knowledge, that judges are unable effectively to constrain “bad” laws, and that the application of local law can have adverse spillover effects on foreign persons. 

The Law Market adopts the belief that regulatory competition results in superior law:  “The exit option motivates antiregulatory interest groups that ‘stand in’ for the people and businesses that are directly hurt by a proposed law but are too weak by themselves to prevent its adoption.”  Thus, The Law Market posits that the same interest group mechanism that it blames for suboptimal laws would be stimulated by “the exit option” to produce better laws.  In order to make this claim, we would need an account of a systematic bias in pre-“exit option” interest group politics that is remedied by the stimulation of these antiregulatory “exit-affected” interest groups.  It is notable that The Law Market sees the thrust of these interest groups as “anti-regulatory.”  So the bias that it sees must be pro-regulatory.  But there is no plausible reason for this bias. 

It is not hard to see that local governments may have an anti-foreigner bias:  they may be motivated to systematically legislate in ways that harm foreigners.  But this bias is not the same as a pro-regulatory bias.  In fact, where foreigners would otherwise be benefited by regulation at the expense of locals, it would be expected to be anti-regulatory. 

The “Law Market” solution:  allow greater choice of applicable law through enforcement of contractual choice-of-law clauses.  The recommendation of greater regulatory competition is based, of course, on the Tiebout model of competition in the provision of government goods and services, first published in 1956.  The Tiebout model shows that if a number of strong assumptions are made, the provision of these goods and services will be efficient.  O’Hara and Ribstein emphasize that the assumption of costless mobility is patently unmet in the real world, and so argue for the enforcement of choice-of-law clauses in order to provide what we might call virtual mobility.  Indeed, the enforcement of choice-of-law clauses also presumably allows a kind of infinite choice of combinations of government-provided goods, along the lines that Tiebout assumed.  However, O’Hara and Ribstein seem to reject using choice-of-law clauses to allow this condition to be  satisfied. 

It is doubtless correct that enforcement of choice-of-law clauses would enhance mobility.  But, of course, the theory of the second best might raise some question as to whether bringing any parameter closer to the required assumption would enhance efficiency overall. 

Moreover, enhanced mobility through choice-of-law clauses may affect a second parameter.  This is the assumption that there are no spillovers from one regulatory system to another.  At the same time that choice-of-law clauses would bring us closer to costless mobility, they might well bring us farther from a world without spillovers.  The Law Market emphasizes one type of spillover as a concern that its proposal may address:  the possibility that an unconstrained state might regulate foreign persons inefficiently because the unconstrained state does not bear the costs of the inefficiency.  The Law Market emphasizes spillovers that hurt the subjects of regulation.  But The Law Market does not emphasize spillovers that hurt the beneficiaries of regulation.  O’Hara and Ribstein argue (p. 33) that “third parties need protection only when they lack information or other means to adjust their activities as a consequence of the contract [between two primary parties].”  However, this is not particularly comforting, because the authors have merely restated the economic theory of regulation:  third parties need protection from choice-of-law clauses where third parties need protection by regulation.  Once we see this, the set of cases in which choice-of-law clauses can be used instead of regulation that is otherwise appropriately made mandatory is empty. 

The Law Market does recognize the problem that enforcement of choice-of-law clauses may allow evasion of “good” laws.  However, it speciously argues (p. 29) that this problem is ameliorated by the fact that an enforceable choice-of-law clause constitutes a choice of some “law” rather than a choice not to be regulated at all.  However, if the choice makes a difference, as it always must in O’Hara and Ribstein’s model, then it is a choice not to be regulated in the way that the otherwise applicable law would have regulated. 

In the end, in recognition of some of the concerns that I emphasize here, The Law Market makes a fairly modest prescription for change.  Its main proposal is for a presumption in favor of enforcing choice-of-law rules in contracts, unless a state statute explicitly provides otherwise.  (Chapter 10)  So there are two components to this proposal:  (i) shifting power away from courts, and (ii) establishing a presumption in favor of enforcement of choice-of-law rules in the absence of explicit legislative action.  Something along these lines may indeed by attractive for use in the U.S.interstate context, and The Law Market should be commended for this proposal. 

It is interesting that in a number of areas of international regulatory jurisdiction, the U.S.federal legislature has only partially addressed the issue of the scope of regulatory jurisdiction.  For example, Congress has addressed this issue to a limited extent in connection with antitrust, securities regulation, and bankruptcy law.  To the extent that Congress has spoken to this issue to a limited extent, it has implicitly or explicitly delegated to courts the task of deciding, under limited guidance, the scope of application of law.  In the international context, The Law Market’s proposal may be viewed as consistent with a Charming Betsy presumption of intent to comply with international law, assuming that international law supplies a restrictive rule limiting the exercise of prescriptive jurisdiction. 

I would like to propose a different method of structuring the law market in the international context.  In order to ensure that efficient choice prevails, and has beneficial effects, it will sometimes be necessary for states to negotiate specific rules of regulatory jurisdiction in order to provide the optimal level of choice and spillover.  O’Hara and Ribstein argue that there is a need to induce antiregulatory interest groups to stand in for those hurt by regulation.  If, as I suggest, there is no evidence of a systematic pro-regulatory bias, then the concern will be with protecting foreign persons who are not a part of the domestic political process.  Here, the possibility for international legal negotiation and rule-making allows foreign governments, representing their citizens, to seek welfare-enhancing agreements that cause regulating states to take the interests of those foreign citizens into account.  This is the Coasean regulatory externality internalizing function of international law. 

Furthermore, for states without market power—states that foreign persons can avoid without loss—it may be that there are adequate incentives for these states not to apply excessive laws.  An important exception to my response is the possibility that states with regulatory market power might have incentives to abuse their market power by imposing costs on outsiders—just the way that states with market power in a trade context may impose tariffs on outsiders in order to capture part of the producer surplus.  Where this is so, one response may be an international law response:  negotiation of treaties or other international legal rules whereby states make reciprocal agreements to refrain from this type of behavior.    An alternative response would be one of comity:  reciprocal informal deference.  Under either of these responses, states may formally or informally agree not to apply their law in cases where their law imposes excessive burdens on foreign persons. 

Conclusion

One’s view of “the law market” depends on which world you are in.  In the world of private law, where there is by definition little public interest in restricting choice, the prescriptions of The Law Market are valid.  However, in the world of mandatory law we must assume that the mandatory aspect of this law has public policy reasons.  Furthermore, simply noting that legislatures are imperfect does not tell us in which direction their imperfection consistently runs, or why.  So, there is little reason to argue generally (as opposed to specifically in particular contexts) that more choice would be better. 

The Law Market recognizes that different areas of law will be different, but tends to discount these differences, and to assume that greater choice will be broadly beneficial.  Yet, The Law Market presents no evidence that the present system for deciding the degree to which a particular type of law is mandatory, and the degree to which party choice will be respected, is inadequate.  Legislatures make laws and decide whether they should be mandatory or not.  Sometimes they decide to relax the application of laws under circumstances of foreign connections.  Sometimes they explicitly or implicitly delegate to courts the job of deciding these issues.  There are no plausible reasons to change the general operation of this system. 

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