Standardmaking

PAUL J. STANCIL*

ABSTRACT

Every law student can rehearse the debate over rules and standards in her sleep. The cost-benefit analysis inherent in deciding whether to give law its content ex ante or ex post is ideal fodder for the law school classroom; moreover, the rules/standards debate often provides the perfect introduction to a corollary debate about legal institutions and institutional competence. And the rules/standards debate is more than just a classroom construct. Academic commentators have also devoted substantial attention to the tradeoffs associated with the choice of rules or standards in connection with specific regulatory challenges. But few have systematically addressed a more foundational question: how does the ideal character of regulation affect the costs associated with the promulgation and enforcement of the preferences that regulation ostensibly represents?

This is an important question. Regulation typically implies agency; thus, given the agency cost and transaction cost tradeoffs inherent in the choice of a standard over a rule or vice-versa, it is critical that we understand whether and to what extent the ideal character of a regulation may interact with the institutional context to create opportunities for regulatory mischief.

This Article explores the process of “standardmaking” from an economic perspective, and the game theoretical framework I adopt applies generally, with minimal modification, to all regulatory contexts. Depending upon both the institutional context and the ideal character of the regulation in question, agents to whom interpretive/executive authority has been delegated may enjoy substantial ability to privilege their own preferences over those of their regulatory principals.

The analysis suggests that at least three factors dictate the extent of the arbitrage opportunities available to agents whose preferences diverge from those of their principals. First, traditional institutional impediments to regulatory action may provide enforcing agents with more or less wiggle room; the impedimenta associated with affirmative Congressional action raise transaction costs considerably vis-à-vis the impediments in a * Assistant Professor of Law, University of Illinois College of Law. Thanks to Amitai Aviram, Dhammika Dharmapala, Bob Lawless, Jennifer Robbennolt, Suja Thomas, and Tom Ulen for their insightful comments at various stages in the writing process. Thanks also to participants in the 2010 Midwestern Law & Economics Conference and Notre Dame Law School faculty for workshop comments, and special thanks to Kimberly Watson for her able research assistance. Errors are all mine.

hypothetical pure autocracy, for example. Second, the ideal character (“rule” or “standard”) of the regulation matters. If a particular problem is better-suited for standard-regulation, the costs of promulgating an equivalent fully-determined rule will be proportionally higher. Third, the institutional relationship between agent and principal matters, both because it may impact the principal’s ability to express its preferences strategically to counter the agent’s preferences, and because it may affect the principal’s ability to discipline the agent. Taken together, these factors define a policy space in which enforcing agents will be able to enact their divergent preferences into law without drawing fire from their regulatory principals.

The Article concludes by applying this analysis of the current debate over civil pleading standards occasioned by the Supreme Court’s decisions in Twombly and Iqbal; the analysis suggests that Congress’s apparent inability to respond to these decisions may in part be attributable to the standardmaking problem.

TABLE OF CONTENTS

Standardmaking 1

INTRODUCTION

Few law professors can resist the opportunity to introduce the classic debate over rules and standards.1 In the traditional formulation of the rules/standards tradeoff discussion, rules provide greater predictability and consistency, and more effectively constrain the actions of agents tasked with executing the law. Standards, by contrast, are somewhat less expensive to promulgate, and offer greater flexibility and thus a better chance that justice will be done in any individual case, albeit at the risk of increased uncertainty and higher agency costs.2

But the relatively deep literature discussing the advantages and disadvantages of rules and standards pays remarkably little attention to how standards and rules are promulgated.3 This is an important question, because the choice between rules and standards necessarily involves consideration of the institutional contexts and relative transaction costs associated with each. When the preferences of the regulatory principal diverge from those of the enforcing agent, transaction cost concerns may ultimately dominate the analysis; a regulator-principal who lacks faith in its executor-agent may sometimes find it difficult to fix actual policy at the principal’s ideal point.

A principal’s lack of faith, however deep and however justified, does not always dictate the adoption of a zero-discretion rule over a high-1 See, e.g., Pierre J. Schlag, Rules and Standards, 33 U.C.L.A. L. REV. 379 (1985); LOUIS Kaplow, Rules Versus Standards: An Economic Analysis, 42 DUKE L.J. 557 (1992); Colin S. Diver, The Optimal Precision of Administrative Rules, 93 YALE L. J. 65 (1983). See also FREDERICK SCHAUER, PLAYING BY THE RULES: A PHILOSOPHICAL EXAMINATION OF RULE-BASED DECISION-MAKING IN LAW AND IN LIFE (1991); KENNETH CULP DAVIS, DISCRETIONARY JUSTICE: A PRELIMINARY INQUIRY (1969); Isaac Ehrlich & Richard A. Posner, An Economic Analysis of Legal Rulemaking, 3 J. LEGAL STUD. 257 (1974); Legal Theory Lexicon 026: Rules, Standards, and Principles, http://lsolum.typepad.com/legal_theory_lexicon/2004/03/legal_theory_le_3.html (March 7, 2004).2 For a comprehensive discussion of the tradeoffs inherent in the selection of standards over rules and vice-versa, see generally id. Following Kaplow, I here adopt the admittedly loose but still useful definition of rules as laws given their content by lawmakers ex ante, and standards as laws given their content ex post. See id.at 560. I also adopt Kaplow’s “common practice of referring to rules and standards as if one were comparing pure types, even though legal commands mix the two in varying degrees.” See id. at 561. I do, however, take issue with certain of Professor Kaplow’s conclusions, in particular his conclusions regarding the relative promulgation costs of rules versus standards under certain circumstances. See infra notes __-__ and accompanying text; compare, e.g., Kaplow at 569. 3 See, e.g., Kaplow, supra note 1 at 569 (offering a two-paragraph discussion of law promulgation). Despite its title, the seminal Isaac & Posner article concerns itself primarily with “the conditions under which greater specificity or greater generality is the efficient choice . . .,” without particular regard for promulgation costs. See Isaac & Posner, supra note 1 at 257.

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discretion standard. It is not necessarily or perhaps even typically the case that agents will be called upon only to enforce their principals’ regulatory will in contexts amenable to rule regulation. Sometimes the principal will be working in an environment characterized by both a strong objective preference for a standard and a high risk of agent unfaithfulness. When this happens, the regulator may be in trouble.

This article explores the dynamics of the rules/standards promulgation process from a game theoretical perspective. The article builds on a recent article by the present writer,4 but it is far more than an extension of the previous work. That work examined the transaction costs of policymaking, but assumed that the expressed form of the policy preferences of various actors in the regulatory process was irrelevant; it modeled a specific regulatory process without regard for whether the relevant preferences were best expressed as rules or standards.5

This article has a broader reach. Here I expressly explore the institutional transaction costs associated with the promulgation of standards or rules, and in so doing, focuses intently upon (1) the ideal character of regulation; and (2) the institutional context in which regulation takes place. I then incorporate character, context, and the resultant costs into a game theoretical model that predicts additional opportunities for agents to arbitrage in favor of their own preferences under certain character/context combinations. The article uses the ongoing regulatory tussle over federal civil pleading standards as its primary real-world example, but the analysis here applies to virtually all regulatory decisions involving a rule/standard election.6

Part I of the article briefly introduces the rules/standards debate.7 This Part also analyzes the ideal character of regulation, concluding that certain regulatory problems can realistically be addressed best by more rule-like regulation, while others are best remedied through the adoption of a more standard-like approach in which interpretive authority is delegated to an agent for case-by-case determination.

4? See Paul J. Stancil, Close Enough for Government Work: The Committee Rulemaking Game, 96 VA. L. REV. 69 (2010).5 The earlier article expressly left the rules/standards question largely unaddressed. See id. at 86, note 58.6 Or at least all such situations where the regulator delegates enforcement authority to an agent. The dynamics I identify would not be present in those relatively rare cases in which the regulator itself bears the responsibility of enforcing the laws it adopts. In those cases, traditional rules/standards analysis would apply.7 Pure-type rules and pure-type standards of course exist as endpoints on a continuum containing myriad mixed-type regulations. For convenience, I generally ignore intermediate approaches in favor of pure-type analysis, but the fundamental analysis for mixed-type approaches is no different.

Standardmaking 3

Part II presents a simple game-theoretical model of the rules/standards problem. This model demonstrates that arbitrage opportunities for enforcing agents are a function of three distinct but related features of the regulatory landscape: (1) the institutional structure in which the regulation is to be situated; (2) the optimal or ideal character of the regulation in question; and (3) the relationship between the regulatory principal and its enforcing agent. Each of these factors affects the regulator-principal’s transaction costs in connection with regulation, and thus impacts regulatory agents’ ability to arbitrage those transaction costs in favor of the agents’ preferences. Depending on the dynamics associated with a particular regulatory problem, the cumulative effect of these transaction costs may be to give enforcing agents substantial leeway to establish a policy equilibrium far distant from the ostensible principal’s ideal point.

Because rules are more difficult and expensive to promulgate than their functionally equivalent standards, the model predicts that agents tasked with overseeing enforcement of regulators’ desires in contexts better-suited to standard regulation will have the ability to arbitrage the increased costs of promulgating an equivalent rule into an equilibrium position some additional distance away from the principal’s ideal point. This is particularly true when institutional factors suggest that the principal will find it difficult either to discipline the agent or to set policy strategically at a location different from its own ideal point in an attempt to account for potential agent unfaithfulness ab initio.

Part III analyzes the challenges presented by federal civil pleading standards through the lens of the model. Rule 8(a)(2) requires that the pleader provide only a “short and plain statement of the claim showing that the pleader is entitled to relief.” But the proper interpretation of this requirement is difficult, because the cost- and information asymmetries inherent in certain forms of litigation put regulators in a no-win situation. The more liberal the pleading standard, the easier it is for certain plaintiffs to take advantage of cost asymmetries to extract settlements from defendants without regard to the underlying merits of the claim. The more restrictive the pleading standard, the more difficult it is for certain genuinely injured plaintiffs’ claims to survive long enough to counteract the defendant’s informational advantage. Regardless of how one solves the asymmetry problem, the only practical approach to pleading law is to adopt a standard that courts must in turn interpret.

Though Rule 8 was interpreted liberally for over fifty years,8 the Supreme Court recently issued two opinions that arguably significantly limited plaintiffs’ ability to survive a motion to dismiss on thin factual allegations.9 These decisions spawned voluminous academic and political commentary, and the great majority of that commentary has roundly

8 See, e.g., Conley v. Gibson, 355 U.S. 41 (1957).

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criticized both decisions.10 The decisions also drew Congressional fire. By November 2009, both Houses of Congress were considering remedial legislation intended to legislatively overrule Twombly and Iqbal.11 In December 2009 the Senate Judiciary Committee held a hearing asking “Has the Supreme Court Limited Americans’ Access to Courts?”12

But to date, Congress has not turned activity into action; at this writing, Congress has enacted no statutory response to the Supreme Court’s pleading cases. [In light of the results of the 2010 midterm elections, no Congressional response is likely for the foreseeable future]. This congressional inaction is curious for a variety of reasons.

For over 18 months after Iqbal was decided (and for over 40 months after Twombly), the Democratic Party enjoyed substantial majorities in both Houses of Congress, and a Democrat occupied the White House. Moreover, pleading standards carry with them a relatively stable and predictable political valence—Democrats have predictably opposed Twombly and Iqbal in their public statements, while Republicans have generally supported the Court’s pleading decisions.13 And these decisions are genuinely important;14 both Twombly and Iqbal have been cited 9 See Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007); Ashcroft v. Iqbal, 556 U.S. ___ (2009). 10 See, e.g., Robert G. Bone, Plausibility Pleading Revisited and Revised: A Comment on Ashcroft v. Iqbal, 85 NOTRE DAME L. REV. (forthcoming 2010) available at http://ssrn.com/abstract=1467799; Editorial, Throwing Out Mr. Iqbal’s Case, N.Y. TIMES, May 20, 2009, at A28. A. Benjamin Spencer, Iqbal and the Slide Toward Restrictive Procedure, 14 LEWIS & CLARK L. REV. 185 (2009); Ettie Ward, The After-Shocks of Twombly: Will We “Notice” Pleading Changes? 82 ST. JOHN’S L. REV. 893 (2008); David G. Savage, Narrowing the Courthouse Door: High Court Makes it Tougher to Get Past the Pleading Stage, A.B.A. J., July 2009; Christopher M. Fairman, A Requiem for Notice Pleading, ASS’N AM. L. SCH., 37-42 (2010), http://www.aals.org/midyear2010/CivproWorkbooklet.pdf. But see Douglas G. Smith, The Twombly Revolution?, 36 PEPP. L. REV. 1063 (2009); Michael R. Huston, Note, Pleading with Congress to Resist the Urge to Overrule Twombly and Iqbal, 109 Mich. L. Rev. (forthcoming 2010) available at http://ssrn.com/abstract=1627704. 11 See Open Access to Courts Act of 2009, H.R. 4115, 111th Cong. (2009); Notice Pleading Restoration Act of 2009, S. 1504, 111th Cong. (2009).The Senate proposal purports to fix pleading standards legislatively by explicit reference to Conley v. Gibson, 355 U.S. 41 (1957). By contrast, the House proposal would (a) explicitly reject any “plausibility” requirement, and (b) codify the more liberal half of Conley (the so-called “no set of facts” requirement) without any modifying language.12 See Has the Supreme Court Limited Americans’ Access to Courts?: Hearing on S. 1504 Before the S. Jud. Comm., 111th Cong. (2009). 13 See id. (Only Democrats to speak, Leahy, Feingold, and Whitehouse, all spoke in favor of legislative repeal; Republicans Kyl and Cornyn opposed). But see April 20, 2010 Letter from Rep. Rick Boucher (D-Va.) to Rep. John Conyers (Conservative Democrat urges no action on H.R. 4115 because risk of frivolous suits is real and substantial).14 See, e.g., Letter from Michael Dorf, Professor, Cornell Law School, to Senate Jud. Comm. (Nov. 24, 2009) available at http://www.dorflaw.org/2009/11/my-letter-to-senate-judiciary-committee.html (stating Twombly and Iqbal are “nothing short of revolutionary”); see also Michael C. Dorf, The Supreme Court Wreaks Havoc in Federal

Standardmaking 5

thousands of times by lower courts;15 though the jury is still out on the overall impact of these decisions, there is at least some evidence that they are resulting in higher dismissal rates for certain categories of cases.16

Though it is always potentially risky to apply theoretical constructs to real-world phenomena, the model developed in this article is generally consistent with observed data in the pleading context. Given the instutional relationships in question and the extraordinarily high costs associated with any attempt to circumscribe judicial discretion by adoption of a rule, it is at least plausible that the Supreme Court’s Twombly and Iqbal decisions represent a thus-far successful attempt by the Court to arbitrage the transaction costs associated with effective expression of congressional preferences.

I. RULES AND STANDARDS

Rules versus standards. Determinism versus discretion. Categorical versus individualized justice. Virtually every legal policy debate invokes some form of the debate over the preferred underlying character of regulation. And this debate is well-rehearsed; this article thus will not fully recapitulate the arguments and analyses offered by other able scholars.17 Instead, the following paragraphs sketch the general nature of the debate, and argue that there are specific categories of regulatory problems for which either more standard-like or more rule-like regulations are best.

A. Rules and Standards: Definition and Debate

For purposes of my analysis, I define “rules” and “standards” as pure-type endpoints on a continuum of regulatory options available to

Courts—Again, FINDLAW (Aug. 13, 2007), http://writ.news.findlaw.com/dorf/20070813.html.15 See An October 19, 2010 Westlaw Keycite search yields 37215 cases citing Iqbal and 94880 citing Twombly.16 See Patricia W. Hatamyar, The Tao of Pleading: Do Twombly and Iqbal Matter Empirically? 59 AM. U. L. REV. 553 (2010); Statistics Division, Administrative Office of the U.S. Courts, Motions to Dismiss: Information on Collection of Data, UNITED STATES COURTS, http://www.uscourts.gov/uscourts/RulesAndPolicies/rules/Motions_to_Dismiss_081210.pdf (last visited Sept. 1, 2010); Joseph A. Seiner, The Trouble with Twombly: A Proposed Pleading Standard for Employment Discrimination Cases, 2009 U. ILL. L. REV. 1011, 1014-16 (2009). Even if accurate, reports of higher dismissal rates do not necessarily imply excessive dismissal of claims. See infra notes __-__ and accompanying text.17 See sources listed in note 1, supra. As Professor Schlag notes somewhat acerbically, the rules/standards debate can often be reduced to what he describes as a “dialectic,” in which the argument is little more than Kabuki theater. See Schlag, supra note 1 at 383-90.

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policymakers.18 It is traditional when discussing rules and standards to more fully define the terms by reference to the time at which they are given their substantive content.19 In the typical formulation, which I adopt both for consistency with my predecessors and for ease of analysis, rules are loosely defined as regulations given their content before the actors subject to the regulations act, while standards are given their content after such action has taken place.20

Thus, in the federal civil procedure context, a pure-type rule might dictate that “[a] motion for a new trial must be filed no later than 28 days after the entry of judgment.”21 By contrast, Federal Rule of Civil Procedure 56(c)(2), which governs the issuance of summary judgment is, despite some imprecise and semantically unfortunate nomenclature, far more “standard” than “rule”:

The judgment sought should be rendered if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.22

The Rule’s direction that courts should grant summary judgment when “there is no genuine issue as to any material fact” leaves substantial discretion in the hands of courts; even as precedent accumulates over time, the summary judgment determination is still far more standard than rule.23

18 See Kaplow, supra note 1 at 561. A purist might argue that the continuum should be extended beyond “standards” to include the even looser term “principles.” For the purposes of this article, the distinction is one of degree only, and is irrelevant to the analysis. In the unlikely event that a particular regulatory problem can be addressed only by the articulation of general “principles” as opposed to a relatively more restrictive “standard,” the agency cost risks detailed in Part II below increase even further, but the analysis does not change.19 See Kaplow, supra note 1 at 559.20 Here, too, I follow Professor Kaplow’s wise course by avoiding discussions regarding the extent to which binding rules are possible, whether they can be interpreted independently of their underlying justifications (which may themselves be standards), and other matters of deep legal theory. See Kaplow, supra note 1 at 560-61, note 5. I agree with Professor Kaplow’s general contention that there is substantial value in analyzing rules and standards as I define them without reference to those deeper issues. See id.21 See FED. R. CIV. P. 59(b). See also FED. R. CIV. P. 6 (providing deterministic rules for computation of time periods referenced in the Federal Rules of Civil Procedure, including the 28-day time period referenced in Rule 59(b)).22 See FED. R. CIV. P. 56(c)(2).23 Others have argued that standards subject to common law adjudication take on more a rule-like mien as precedent accumulates. This may be so in certain contexts, and the phenomenon lends further support to the assertion that in the real world, any given law typically exists somewhere on a continuum between pure-type rule and pure-type standard. But in the summary judgment context (as in the pleading context discussed in Parts III and IV, infra), the fact that virtually every summary judgment motion is hotly

Standardmaking 7

But the summary judgment standard24 is not a pure-type standard; Rule 56 gives some ex ante content to the law by establishing rules governing, for example, the timing of summary judgment motions25 and the evidence to be considered in deciding such motions.26

And many of the Federal Rules of Civil Procedure are in fact even more explicit hybrids of rule and standard, lying somewhere in between the pure-type extremes with which this article is primarily concerned. For example, Rule 15 governing the amendment of pleadings is either pure rule or near-pure standard, depending on the timing of the motion to amend.27 If a party seeks to amend early enough after the initial filing, the court must accept one such amendment; the “matter of course” provision in Rule 15(a)(1) is essentially a pure-type rule.28 But once the “matter of course” time period has expired, a standard comes into play; then the party “may amend its pleading only with the opposing party’s written consent or the court’s leave,” which the court “should freely give . . . when justice so requires.”29

For ease of modeling, this article focuses only on the extreme pure-type endpoints of the rules/standards continuum.30 But the model holds for all points in between as well; as a general matter, the more susceptible a regulatory problem is to rule regulation, the lower the transaction costs associated with confining the discretion of an untrustworthy agent. The less susceptible, the higher those transaction costs, and thus the greater the opportunity for agent arbitrage.31

B. The Ideal Character of Regulation

Many regulatory problems are more amenable to regulation of a particular character. There are numerous regulatory challenges for which highly-deterministic rule regulation is objectively preferable. At the same time, there are other regulatory challenges that, for a variety of reasons,

contested by both the moving and the opposing party suggests that the admittedly significant volume of summary judgment precedent has done little to change the essential character of the determination. Summary judgment is still a standard.24 It is typically so described in judicial opinions. See, e.g., [R.A. Supreme Court or (less preferred) significant Circuit Court of Appeals opinions using the word “standard” or better, the phrase “summary judgment standard” to describe summary judgment law].25 See FED R. CIV. P. 56(c)(1).26 See FED. R. CIV. P. 56(c)(2), (e).27 See FED. R. CIV. P. 15.28 See FED. R. CIV. P. 15(a)(1) (allowing filing party to amend pleading once as a matter of course “within 21 days after serving it” or “ if the pleading is one to which a responsive pleading is required, 21 days after service of a responsive pleading or 21 days after service of a motion under Rule 12(b), (e), or (f), whichever is earlier.”).29 See FED. R. CIV. P. 15 (a)(2).30 For further discussion of the mixed-type character of most law, see, e.g., Kaplow, supra note 1, at 561-62; Russell B. Korobkin, Behavioral Analysis and Legal Form: Rules and Standards Revisited, 79 OR. L. REV. 23, 30 (2000).31 See Part II, infra.

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cannot effectively be governed by rule regulation; for these problems, a standard is best. At root, selection of the ideal character of regulation is a problem of complexity and cost. For certain types of regulatory challenges, especially those in which the law seeks to balance two or more competing ends, it would be virtually impossible to craft a deterministic system of rules that would give the law sufficient ex ante content to answer each and every question likely to be presented. For other regulatory concerns, the costs associated with fact-intensive case-by-case determination may counsel instead in favor of a rule.

It is relatively simple for a regulator to devise rule regulations governing maximum highway speeds, for example. Because speed can be measured numerically, and because there is a strong positive correlation between increasing speed and increasing public safety risk, the problem of excessive speed is inherently amenable to rule regulation. This is not to say that the speed limit problem must necessarily be addressed by rule. Speed limits are the classic academic hypothetical for the rules/standards discussion in part because it is reasonable to prefer a standard (“it shall be illegal to drive at an excessive speed”) in place of a rule (“it shall be illegal to drive in excess of X miles per hour”) in certain circumstances.

Speed limits are a paradigm example of the traditional debate. Numerical speed limits (rules) are predictable and relatively easy to enforce, but they can be both under- and over- inclusive.32 Any given speed limit can be either too fast or too slow for a societally optimal level of auto safety, depending on conditions. By contrast, a prohibition against “excessive speed” (standard) would allow for greater case-by-case accuracy, but at potentially staggering expense in the form of increased compliance uncertainty and massively higher enforcement costs. As a result, different jurisdictions have reached different conclusions on speed limits, depending primarily upon unique local factors. 33

But the specific decision one reaches with respect to whether maximum highway speeds should be governed by a rule or by a standard is largely beside the point. Rather, the important observation is that many

32 As Professor Kaplow notes, rules are not inherently under- or over-inclusive. See Kaplow, supra note 1 at 588-93. One could envision deterministic rule regulation of vehicle speeds that is neither; the point is that the resulting rules would be complex and relatively costly to promulgate. For example, one might enact discrete subcategories of rules for multiple combinations of time-of-day, weather, traffic, and road conditions. The resulting regime might be equivalent to a standard in terms of adjudicatory fidelity to underlying norms, but it would be enormously costly to design.33 See MONT. CODE ANN. § 61-8-303 (1994); see also Danny Hakim, Study Links Higher Speed Limits to Deaths, N.Y. TIMES, Nov. 24, 2003, www.nytimes.com/2003/11/24/national/24SPEE.html (explaining that “[M]ontana had no daytime speed limits on some highways, requiring one to drive in a ‘reasonable and prudent manner.’”). But see MONT. CODE ANN. § 61-8-303 (2009) (shifting from a standard to a numerical speed limit).

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jurisdictions have concluded that maximum highway speeds are in fact amenable to rule regulation at reasonable regulatory cost. This is not always the case.

Indeed, certain regulatory problems are simply not good candidates for deterministic rule regulation. There are at least two possible contexts in which this is often true: (1) when the error costs of rule promulgation and enforcement are likely to be excessively high;34 and (2) when competing conceptions of the public good intersect or overlap.35 The classic example comes directly from the first-year law school curriculum: the “reasonable person” standard governing the tort of negligence.

Torts are, by definition, difficult to define.36 And even for specific torts like negligence, the near-infinite combination of interactions that could give rise to liability make design of a deterministic set of liability rules a fool’s errand at best. A set of true rules dictating the circumstances under which liability for negligence should attach would either be hopelessly detailed and costly37 or overwhelmingly under- or over-inclusive. In addition, the law governing the tort of negligence serves at least two masters: the desire to protect persons from injury, and a potentially competing desire to obtain only an optimal amount of care from potential tortfeasors and no more.

Thus, although it is possible to conceive of a rule-regime governing negligence law, and although it is even possible to conceive of a negligence rule regime that offers the functional equivalent of the reasonable person standard, it is difficult in the extreme to imagine regulators expending the resources necessary to generate such a regime.38

34 I take no position on precisely when error costs rise to the level of “excessive.” I am not actually making a normative contention, and one can easily imagine different rules/standards error cost “break points” arising out of differing underlying social values. The point is that, whatever the specific normative threshold we adopt, there is likely to be some level of rule-induced error costs that prompts us to prefer a standard. 35 See, e.g., Lon L. Fuller, The Forms and Limits of Adjudication, 92 HARV. L. REV. 353, 393-405 (1978) (suggesting that “polycentric” problems are less suited to traditional adjudication and may be better resolved by top-down “managerial direction,” a rough analogue of a standard-based approach.); but see Schlag, supra note 1 at 399, 422-24 (challenging the notion that neither polycentricity nor any other theory offers independent justification for adoption of standards over rules or vice-versa).36 See BRYAN A. GARNER, A DICTIONARY OF MODERN LEGAL USAGE 885 (2d ed. 1995) (in definition of “tort,” describing traditional definitions as “barely adequate, because ‘it is perhaps impossible to give an exact definition of ‘a tort’’ . . .Why? Because there is no common set of traits that every tort possesses.”)37 Imagine the level of detail necessary in a set of rules capturing the societally-optimal level of “reasonable care” relevant to only railroad-crossing accidents. Now multiply that by the number of interactions potentially giving rise to negligence liability. It’s a pretty big matrix.38 There is also a related epistemological problem, though that problem can be characterized in cost terms equally as well as in “nature of knowledge” terms: it is foolish to assume regulators have the capacity to anticipate every possible interaction that might

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Over time, of course, the common law tends to sharpen amorphous standards like “reasonable care” into slightly more concrete, more rule-like shapes. But this observation is hardly fatal to the contention that standards are sometimes objectively preferable to their rule equivalents. First, the continued existence of negligence litigation and trials—notwithstanding high pretrial settlement rates—suggests that even over a century’s worth of common law has not converted negligence law from standard to rule. As important, the rule/standard question with which we are concerned is primarily an ex ante question: which approach should one adopt in response to a new regulatory problem? Regulators may well take into account the eventual accretion of precedent in their calculus. But when they discount the accumulated law of negligence one hundred, fifty, or even five years hence to present value, they’re left with something close to a pure “rule or standard?” decision to make.39

Whenever the costs of rule regulation are too high relative to some societal baseline, regulators will inevitably look to standards to address regulatory problems.40 As discussed below, the introduction of agency costs into the analysis can disrupt regulators’ calculus substantially, but with or without agency costs, standards are inevitable.

C. The Agency Problem

For both better and worse, we live in a regulatory world dominated by disconnects between the authority to regulate and the authority to enforce regulation. The concept of agency is enshrined in the Constitution’s deliberate separation of powers, and the promulgation/enforcement divide is mirrored in nearly every common regulatory context. Congress enjoys legislative primacy, but it delegates authority to the President, executive branch agencies, or the judiciary to carry out its legislative wishes. State legislatures operate in much the same way. City councils delegate enforcement authority to their police forces, inspection departments, and

give rise to negligence liability. Put in cost terms, regulators will be sitting there thinking for a very long time, at very great expense, if they’re trying to come up with a fully determined system for negligence liability based upon an underlying normative preference for any “optimal” level of care between “perfect care” and “no care.”39 If the regulator can reasonably anticipate the relatively quick development of ex ante content by way of precedent of some sort, she must still consider the agency risks associated with delegation of standard enforcement authority.40 Standards are also inevitable in the context of the law governing court procedures, for precisely the same reasons. The staggering variation in the types of claims and disputes submitted for adjudication, coupled with the competing goals of the judicial system (accuracy, fairness, participation, etc.) and the realities of a resource-constrained world together suggest that courts needs must make countless decisions on a case-by-case basis. The pleading problem discussed in Parts III and IV is but one example of this phenomenon.

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other agents. Although there are a few exceptions, “regulatory principal/enforcing agent” is the dominant structure for U.S. law.

The costs and benefits of both public and private principal/agent relationships are remarkably well-studied.41 And yet there is remarkably little discussion of the ways in which regulatory principal/agent relationships interact with the ideal character of regulations to drive regulatory outcomes. This is a significant hole in the literature, because any serious discussion about “rules and standards” must necessarily engage the agency cost question, and any serious attempt to understand agency costs must factor in the ideal character of regulation, given the institutional context in which the regulatory problem is situated.

It is against this backdrop that we now consider the game theory of standardmaking.

II. THE GAME THEORY OF STANDARDMAKING

Most regulatory regimes in the U.S. rely heavily upon regulatory agents to enforce the will of the regulatory principals in whom policymaking power resides. The division of labor made possible by the principal/agent structure offers significant efficiency and expertise advantages over structures in which the regulatory principal also bears direct enforcement responsibility.

At the same time, every principal/agent relationship carries with it the opportunity for mischief, because the agent’s incentives do not always align with the principal’s. This is to some degree a feature rather than a bug in the regulatory context, at least insofar as agency costs can be used as a deliberate, premeditated check on regulatory power.42 But not every regulatory relationship was designed with The Federalist Papers in mind.43 For many regulatory relationships, agency costs are a regrettable fact of life. But regardless of the normative implications of agency theory, the game played between regulatory principals and their agents is worthy of study, as are the ways in which both the institutional structure of the relationship and the ideal character of regulation can interact to change the outcome of the game.

41 See Michael C. Jensen & William H. Mecling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. FIN. ECON. 305 (1976); Kathleen M. Eisenhardt, Agency Theory: An Assessment and Review, 14 ACAD. MGMT. REV. 57 (1985).42 See, e.g., U.S. CONST. ART. I, SECTION 7.43 See, e.g., THE FEDERALIST NO. 51 (Alexander Hamilton or James Madison) (arguing for federal structure on the grounds that “ambition should be made to counteract ambition”).

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A. The Regulatory Agent/Principal Game

Many regulatory regimes can be modeled as sequential games mapping the preferences and incentives of the regulatory principal and its enforcing agent. The structure of the game introduced below is adapted from a similar analysis of legislative incentives developed by William Eskridge and John Ferejohn.44 In their model, Eskridge and Ferejohn map the preferences of various constitutional actors (including members of the House and Senate, the Executive Branch, and the Judiciary) along a single axis to predict statutory equilibria.45

Though this article focuses on only two players, it is nonetheless broader in at least two important ways than the Eskridge/Ferejohn analysis. First, it develops a framework for the analysis of all regulatory principal/agent relationships, rather than focusing exclusively on the federal legislative process. Thus, it offers a framework for comparative institutional analysis that may illuminate a variety of apparent regulatory curiosities. Second, the article specifically takes the ideal character of regulation into account. Earlier models accounted for policy preferences without examination of the ways in which the ideal type of regulation—rule or standard—might affect the equilibrium. This is an important addition to the analysis, because the transaction costs associated with ideal character are sometimes game-changers in terms of the policy equilibrium.

Positive political theory suggests a formal model for this game. As is traditional, I assume that information is both perfect and complete, such that the preferences of the players, the structure of the game, and the rationality of the actors are all common knowledge. It thus follows that the players can, by backward induction, perfectly anticipate the future course of play. Finally, the game assumes that no one can commit to future courses of action, and that each decision is reached on its own “merits” without logrolling. I employ the following notation:

For any given question of policy:

P = the ideal point preference of the regulatory principal.46

A = the ideal point preference of the regulatory agent

To keep things simple, each of the hypothetical scenarios that follow will use the same basic absolute ideal point mapping set forth in Figure 1:

44 See William N. Eskridge, Jr. & John Ferejohn, The Article I, Section 7 Game, 80 GEO. L. J. 523 (1992). 45 See, e.g., id. at 529-32.46 The character of the ideal point will depend upon the institutional context. For many common democratically organized U.S. regulatory institutions, the ideal points will actually represent the preferences of the median member of the institution in question.

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Of course, the players absolute ideal point preferences tell us little or nothing about the final equilibrium in this case, unless there are no transaction costs associated with regulatory action. In that case, the equilibrium point would exist at point P, because the principal would be able to enact its preferences successfully without regard for the agent’s divergent preferences. But as with Coase, the interesting things begin to happen when transaction costs enter the mix.47 I thus introduce the following notation to account for the various transaction costs regulatory principals may face in connection with their attempts to enforce their will through potentially unreliable agents:

PI* = Indifference point before which regulatory principal’s institutional characteristics alone will prevent regulatory response.

PR* = Indifference point beyond which regulatory principal will respond by adopting a fully-determined rule that eliminates agent discretion.

PS* = Indifference point beyond which regulatory principal will respond by strategically shifting range to anticipate and neutralize agency costs.

PD* = Indifference point beyond which regulatory principal will respond by disciplining or replacing agent.

P** = Indifference point representing maximum aggregated transaction cost arbitrage available to agent.

xmax = Maximum arbitrage equilibrium resulting from game when principal cannot combine responses.

x = Policy equilibrium resulting from the game

In determining where the policy equilibrium will lie in this game, one must first determine the various transaction costs affecting the principal’s ability to respond to its agent’s attempt to set policy in accordance with the agent’s divergent preferences. Second, one must determine whether and how those transaction costs interact to create a maximum arbitrage 47 See Ronald H. Coase, The Problem of Social Cost, 3 J. L. & ECON. 1 (1960).

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point beyond which the agent cannot set policy without provoking a response.

B. Modeling Transaction Costs

All regulatory actions are costly, but some are more costly than others. The following section offers an introductory analysis of the various transaction costs facing a regulatory principal who is ultimately reliant upon an agent for enforcement of the regulator’s preferences. As we will see, both the principal’s ideal point and the associated transaction-cost-adjusted indifference points are relevant to the game; different institutional and other characteristics have very different implications as to the final equilibrium.

1. Ideal Points and Indifference Points

Points P and A in the model denote the ideal points for the regulatory principal and agent, respectively. The method by which these ideal points are determined is highly contingent upon the institutional context. For example, in a pure autocracy, the point P simply represents the autocrat’s actual preferences. By comparison, in the U.S. federal system, the point P may in fact be a function of a complex game involving, at minimum, both houses of Congress and the President.48 But regardless of the manner in which we arrive at these ideal points, they are just that—ideal. In a perfect Coasean world, the principal-agent relationship would be frictionless and thus irrelevant; the ideal point and the policy equilibrium would necessarily be congruent.

Each of the points in the model denoted with an asterisk is an indifference point that accounts for one or more categories of transaction costs associated with regulatory action in the principal/agent context. The distance between P and one of the P* variants is effectively the transaction costs associated with a particular regulatory response, translated into policy space terms. In general, the model addresses four separate categories of transaction costs: (1) baseline institutional costs; (2) ideal-character-related costs; (3) range-shifting costs; and (4) agent discipline costs.

These costs influence the extent to which an agent whose preferences diverge from the principal’s can privilege her own preferences over the principal’s. Depending on the institutional context and the ideal character of the regulation in question, different categories of cost may be more or less relevant. I take each category of costs in turn, and conclude the model with a discussion of the ways in which these costs interact to create an

48 See Eskridge & Ferejohn, supra, note __ .

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absolute indifference point for any given regulatory character/context combination.

2. The Categories of Cost

a. Institutional Baselines

Every regulatory institution brings with is a set of baseline transaction costs, both variable and fixed. The background noise of regulation includes at least three categories of unavoidable costs: (1) collective action costs; (2) information or search costs; and (3) opportunity costs. In order for any regulatory body to take any action at all, it must overcome all three categories.

Of course, the institutional context drives these baseline costs. Consider again a hypothetical pure autocracy. In a government of one, institutional baseline costs are likely to be quite low, but they will not be zero. Even the dictator faces some baseline costs: she must summon the minions and sycophants to whom she will express her will; she will likely engage in at least some self-education before making even her most arbitrary pronouncements; and she will undoubtedly find her attention divided by all of the pressing problems that the modern despot faces.49

By contrast, the U.S. congressional model carries with it substantially higher costs. The traditional static impediments to congressional action—bicameralism, presentment/veto, legislative committees, calendaring rules, etc.—all combine to make affirmative congressional action substantially more difficult than its autocratic counterpart. Similarly, Congress must routinely self-educate sufficient to make its decisions in a world where voters will punish bad decisions at the ballot box.50 In addition, Congress is at various times more or less busy; there is thus a dynamic component to the baseline as well—all else equal, Congressional action is somewhat more costly and thus less likely if it is preoccupied with other things.

It is important to keep in mind that though relative institutional baseline costs may differ, they are all likely to be quite small relative to some of the other costs considered below. Thus, Figures 2A and 2B illustrate plausible relative institutional baseline costs for an autocracy and Congress, respectively; note that neither figure’s arbitrage gap is particularly large relative to the overall policy space51:

49 See THE PRINCESS BRIDE (MGM 1987) (aspiring autocrat Prince Humperdinck: “Try ruling the world sometime.”)50 The general search/information costs discussed here are similar to but distinct from the ideal-character-related costs discussed in Part II.B.2.b below. Those costs are a distinct subset of information/search costs that need only be incurred if it becomes necessary to divest the regulatory agent of all discretion.51 For each of the preference maps in this article, there would generally exist indifference points to either side of the principal’s ideal point. Because this is a two-player game, we

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In both cases, the agent tasked with enforcing the regulatory principal’s desires may be able to arbitrage the equilibrium in her own preferred direction; any point between P and PI* would be closer to A but would not prompt a response from the principal. And the equilibrium would likely be closer to the agent’s ideal point A in the congressional context than in an autocracy. But not that much closer; in neither case do the traditional impediments to action establish significant transaction cost barriers to overcome in the face of agent unfaithfulness.

The costs represented by the line segment PPI* are present regardless of the relationship between agent and principal, and regardless of the ideal character of the response to the regulatory problem in question. The character- and context-driven costs discussed in the following paragraphs are additional to these baseline costs.

b. Ideal-Character-Related Costs

Many regulatory problems are best addressed by rules. Others are best addressed by standards.52 In a game characterized by agency risk, the

focus only on the side to which the agent’s divergent preferences lie.52 As discussed elsewhere, this article is addressed primarily to pure-type rules and standards, and the problems pure-type responses are best-suited to solve. There are, of course, myriad regulatory problems for which mixed-type solutions may be appropriate; that middle range may also be characterized by problems for which several different mixed-type responses would be optimal. Though I ignore mixed-type ideal responses here for simplicity’s sake, the existence of such problems and responses does not undermine the basic argument: moving from an approach that delegates interpretive discretion to the agent to an approach that eliminates that discretion can be costly, especially when the problem in question is best addressed by more standard-like responses.

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transaction costs associated with the need to circumscribe or eliminate an agent’s discretion may provide opportunities for arbitrage.

The ideal character of a response to a regulatory problem dictates the scope of this opportunity. In general terms, a problem that is relatively more amenable to rule-regulation will offer fewer opportunities for agent arbitrage, because the problems for which rule-regulation is well-suited are typically problems susceptible of relatively low-cost rule promulgation. By contrast, a problem relatively better-suited for standard-regulation will often offer greater arbitrage opportunities because these tend to be problems for which the design and implementation of deterministic rules is prohibitively expensive.

It is a commonplace that a rule is more expensive to promulgate than its equivalent standard.53 Independent of agency costs, this is of course true: if we are not concerned about the risk of agent subversion, then it is often if not always going to be easier and cheaper to agree on an amorphous, ambiguously-worded standard than upon a fully-determined rule that accomplishes the same thing.

When a rule is preferable, the higher initial promulgation costs associated with fleshing out the rule regime may be counterbalanced by the relatively lower costs of circumscribing agent authority through the drafting of deterministic rules. But when a standard is a more attractive solution on promulgation cost grounds, it is also necessarily true that arbitrage risks are higher. Consider two hypothetical examples, one involving a regulation governing the safety of hot drinks sold at retail, and another addressing problems of railroad negligence liability at railroad crossings.

i. Hot Drinks

Imagine that, after a series of unfortunate accidents, a regulator wishes to improve the safety of hot drinks sold by restaurants, convenience stores, and other retail outlets. And imagine that this regulator wants to reduce hot-drink-related injuries by some particular amount.54 The regulator has available a full panoply of options, from a pure-type standard (“drinks shall be served at a reasonable temperature,” etc.) to a pure-type rule (“drinks shall be served at a temperature of no more than x degrees Fahrenheit”). Now imagine that the enforcing agent—perhaps someone who likes her McDonald’s coffee hot enough to sear meat—prefers instead an ideal point involving higher temperatures and accordingly more injuries than the regulator would prefer.

53 Kaplow, supra note 1, at 562-63.54 The actual amount is irrelevant.

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In some sense, this world is vaguely Coasean, in that it matters relatively little whether the regulator initially chooses to regulate by standard or by rule. The important fact is that the regulatory problem is relatively easily addressed by a rule. Thus, even if the regulator initially opted for a “reasonable temperature” standard, the transaction costs associated with fully determining a discretion-eliminating rule are relatively low, and thus the opportunity for arbitrage is small. If the agent were to set policy at an injury level above the principal’s preferences, it would be a relatively simple thing for the regulator to impose a deterministic rule in place of the standard.55

ii. Railroad Crossings

Now imagine that, after a series of unfortunate accidents, a regulator wishes to improve the safety of railroad crossings for motorists and pedestrians. Assuming that the regulator’s ideal point does not lie all the way at the “no accidents” end of the spectrum, the regulator again would technically be able to employ a wide variety of regulatory responses to address this problem. Now imagine that the enforcing agent—perhaps a judge with an unethical (and undisclosed) cache of railroad stock certificates in his desk drawer—does not wish to lower the accident rate as much as the regulator does.

All else equal, the agent here may have substantial additional breathing room to privilege her own preferences over those of the principal. Though the story is a bit different at the policy extremes,56 it is generally true that any attempt to circumscribe or eliminate agent discretion in the railroad crossing context by promulgating a fully-determined rule will be proportionately more expensive—perhaps prohibitively so. Imagine, for example, that the regulator wishes to codify in fully-determined form a rule approximating the “due care” standard with which first-year Torts students become so well-acquainted. A matrix dictating liability in relation to all of the relevant factors might run to the thousands of pages or more.

Thus, when a standard is objectively preferable, the costs associated with translating that standard into a nondiscretionary rule are likely to be quite high. Holding all else constant, the agent will be able to move policy

55 I leave for another time any discussion of the extent to which hard-and-fast rules themselves create opportunities for unfaithfulness by giving agents greater opportunity to distinguish a given rule as inapplicable. For my purposes, a rule is defined as a regulatory construct that effectively constrains/eliminates agent discretion.56 As the principal’s ideal point approaches either policy extreme, rule regulation becomes increasingly viable, regardless of the underlying character of the regulatory problem; however, for the great majority of regulatory problems, the principal’s preferences are likely to be well away from the extremes. For ideal points somewhere in the middle, the ideal character of regulation matters a great deal.

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some distance from the principal’s ideal point, so long as she does not move it so far that the principal finds it preferable to develop a fully-determined rule. Figures 3A and 3B illustrate plausible rule-regulation transaction costs associated with the “hot drinks” and “railroad crossing” problems.

In many cases, it is possible that the transaction costs associated with fully-determined rule-regulation will effectively be infinite, or at least well beyond the agent’s own ideal point. This will be the case any time the regulatory problem in question is one that calls for case-by-case determination to effectuate the principal’s preferences.57 Figure 3C might sometimes be more plausible than figure 3B, allowing the agent to set her preference precisely at her own ideal point:

And yet, we do not typically see agents running roughshod over their regulatory principals’ wishes in this way. This is because sometimes other things constrain agents’ behavior—fully-determined rule regulation may not be the only way to prevent an agent from deviating from the principal’s preferences.

c. Agent Discipline Costs

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The regulatory principal need not promulgate a fully-determined rule if it can scare the agent into submission. Thus, an agent’s ability to arbitrage his own preferences will extend only as far as the costs associated with disciplining the agent. Those costs will in turn vary wildly depending on the institutional context; for some regulatory agent/principal relationships, the prospect of relatively low-cost agent discipline may serve as the primary deterrent to agent arbitrage. For others, the principal will have no effective means by which to discipline the agent.

The form of agent discipline may also vary substantially depending upon institutional context. In some circumstances, it may involve suspension, termination, and/or replacement of the agent. In others, it may take a somewhat softer, subtler form. The very concept of agency generally implies some level of control by the principal over the agent; the lower the cost of exerting this control, the more constrained the potentially unfaithful agent will find herself.

i. The Police Chief

Consider, for example, the case of a small town in which the city council passes a noise ordinance barring “excessive noise in residential neighborhoods.” The ordinance is effectively a standard, delegating substantial authority to the town’s police chief to decide whether and under what circumstances noise is “excessive.” And though the advantages of a standard over a rule are apparent in this case, the adoption of a standard does provide the police chief with some leeway to privilege her own preferences over those of the city council.

In the event that the chief’s interpretation diverges substantially from the city council’s, the council has at least two obvious options. First, it could draft a more-or-less fully-determined rule, specifying the decibel level, duration, and time-of-day combinations that constitute a violation.58 But if the council is writing from a blank slate, full rule-regulation is a relatively costly endeavor. Its other obvious option might be better in this case: discipline the chief of police, either informally or formally.

Because police chiefs generally serve at the pleasure of city government (subject to the terms of any relevant employment agreement), agent discipline is generally a relatively low-cost proposition. The mechanisms for discipline may range from the informal—for example, a quick telephone call—to a formalized reprimand, suspension, or termination proceeding. The costs associated with disciplining a police chief will not be zero. She may be enormously popular with city residents, such that it would be politically costly to discipline her formally. She may be so good at her job on balance that the increased friction and 58 See, e.g., http://www.nonoise.org/lawlib/cities/losangel.htm (reprinting Los Angeles, CA noise ordinance).

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risk of departure occasioned by disciplinary proceedings would not be worth the benefit of a more-accurately enforced ordinance. But in the grand scheme, disciplining a police chief is likely to be relatively low-cost by comparison to certain other regulatory principal/agent relationships.

Thus, a police chief whose preferences diverge from her principal’s will be able to arbitrage those preferences only as far as the transaction costs associated with disciplining her allow. She may be able to get away with the occasional borderline noise citation, but a pattern of deviation may well lead the city council to take action against her.

ii. Congress and the Supreme Court Sometimes agent discipline is much more expensive. Consider the

example of Congress and the Supreme Court. When the Supreme Court is tasked with interpreting a federal statute, it generally occupies the role of agent.59 The principal in these cases is Congress, in whom the Constitution reposes primary legislative authority.60 And yet Congress’s ability to discipline the Supreme Court is remarkably limited, even where the matter is one of pure statutory interpretation.61

This is, of course, part of the deliberate constitutional design. Article

III judges (including members of the Supreme Court) receive life tenure on good behavior in large part to insulate them from the vicissitudes of politics and the pressures of politicians.62 At the end of the day, Congress has some ability to attempt discipline-by-shaming,63 but its only real power comes either by way of a jurisdiction-stripping statute or at the end of an impeachment trial. Neither is attractive. Jurisdiction-stripping statutes are rarely successful, perhaps in part because they run counter to the popular conception of the Supreme Court’s role. Moreover, attempts to strip the Court of its appellate jurisdiction are often counterproductive, insofar as Congress relies upon the Court to fill in interstitial details and take the heat for unpopular implementations.

59 This actually goes in both directions, to the extent that the Supreme Court also sometimes acts as Congress’s principal in connection with matters of constitutional interpretation. Here, however, I focus on matters of statutory interpretation, where the Court is generally seen as Congress’s agent (subject, of course, to a potential constitutional backstop in certain cases).60 The Executive Branch also plays a role here, insofar as the President enjoys nomination authority. 61 U.S. CONST. art. III § 1 (explaining Supreme Court Justices have life tenure).62 See, e.g., THE FEDERALIST NO. 79 (Alexander Hamilton arguing that other methods for removing judges beside impeachment are “more liable to abuse than calculated to any good purpose”).63 One recent Executive Branch example may be found in President Obama’s decision to criticize the Supreme Court’s Citizens United holding in his 2010 State of the Union Address. It is unclear whether that criticism had any effect on the Court.

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Similarly, any attempt to impeach members of the Supreme Court over matters of statutory interpretation would be high-cost, to say the least. Congress might conceivably be willing to bear these costs if all of the political stars are aligned and the stakes are sufficiently high, much as President Franklin Roosevelt was willing to push his court-packing plan in 1937.64 But for many regulatory problems, Congress will find it exceedingly costly to discipline the Supreme Court if the Court’s interpretation diverges from Congressional intent.65

Agent discipline costs are thus an independent source of arbitrage risk; the less it costs a regulatory principal to discipline an agent for unfaithful behavior, the less leeway that agent has to diverge from the principal’s preferences in the agent’s interpretation. Thus, figures 4A and 4B represent plausible accounts of the agent discipline costs associated with the police chief and Congress-Supreme Court examples discussed above:

In either case, the agent would be able to establish an equilibrium point at or just inside PD*, assuming that the principal was limited to agent discipline in its response to agent infidelity. But greater control over the agent by the principal necessarily implies less opportunity for arbitrage.

d. Range-Shifting CostsFinally, a regulatory principal may also be able to respond to an

agent’s unfaithful conduct by shifting the range; that is, by expressing a strategic ideal point that deviates from the principal’s true ideal point such that the enforcing agent’s arbitrage yields an equilibrium at, near, or at least closer to that true ideal point. .

64 The plan was ultimately unsuccessful, in large part due to public opposition. Cite. [but see standard account of “switch in time,” revisionist account]65 See e.g., Saikrishna B. Prakash, America’s Aristocracy, 109 YALE L. J. 541, 571 n. 141 (1999) (stating the “hurdles are far too high” for Congress to impeach members of the Supreme Court).

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Imagine a regulatory problem for which standard-regulation would generally be preferred, because the costs associated with promulgation of a fully-determined rule are exorbitant. Further assume that agent discipline costs are similarly high. Taken together, these high rule-regulation costs and high agent discipline costs suggest that the agent will enjoy substantial ability to privilege its own preferences at the expense of the regulatory principal’s.

It will be difficult if not impossible for the principal to overcome the transaction cost problem by traditional means. But he does have one final option: he can shift his observed ideal point even farther away from the agent’s preference. The resulting standard will preserve the agent’s range of freedom in absolute terms; the agent will still be able to deviate substantially from the principal’s expressed preference without drawing discipline or a discretion-stripping rule. But because the range has been shifted away from the agent’s ideal point, the actual final arbitrage-influenced equilibrium will exist closer to the principal’s ideal point. In Figure 5, below, the principal shifts his expressed preference from P to P′, thus shifting the aggregate indifference point from P** to P**′. This in turn allows the agent to arbitrage the principal’s transaction costs only to P**′, a point substantially closer to the principal’s true ideal point than P**:

Range-shifting of this sort is possible even under the knowledge assumptions of the model, but it is not costless. It is possible because expressions of even a standard have at least some tethering effect over agents. Consider, for example, a congressional ideal point preference for a policy under which the liability standards for certain federal tort actions would be low (for example, liability for any conduct that is traditionally “negligent” or worse). If the Supreme Court’s preference is for a more conservative liability standard and transaction costs present a real risk of significant arbitrage, it may be possible for Congress to enact an even lower nominal standard—“a scintilla of negligence,” perhaps—such that the Court’s arbitrage nonetheless lands closer to Congress’s true ideal point. This is possible despite the Supreme Court’s ex ante knowledge of the true congressional ideal point, because the more liberal enacted standard will shift the entire game to the left.

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But range-shifting is also potentially expensive, and its costs are in part dependent upon institutional context. For example, it may be difficult for the regulatory principal to enact a standard that nominally diverges from the principal’s ideal point. If, for example, the regulatory principal is an elected body, any attempt to enact a nominal preference out-of-keeping with the electorate’s nominal preference may be met with public opposition. The more salient the issue, the higher the potential costs.

Similarly, intertemporal effects may raise the costs of range-shifting substantially. Range-shifting only works to the extent that the shift responds to the actual current preferences of the agent. Because regulation is generally rather durable and difficult to repeal once enacted, the same policy that made strategic sense when the Supreme Court had a 5-4 conservative majority makes much less sense two years later when the balance is now 5-4 in favor of the liberals.

As with the other costs discussed above, different institutional contexts may imply different range-shifting costs. Consider the example of an internal delegation of authority within an Executive Branch agency. The leadership of the agency is political, having been appointed by the President, while the rank-and-file staffers are typically career public servants. Thus there likely will be occasional differences of opinion between political appointees and the professional staffers that serve them.

Moreover, civil service rules make it extremely difficult to terminate lower-level staff, and political principals may be reluctant to invoke the disciplinary procedures that do exist because they may worry about anything from losing a knowledgeable staffer to outright low-level rebellion among the career employees. Similarly, in many cases it may be difficult and expensive for the political appointees to promulgate fully-determined rules that effectively divest lower-level civil servants of discretionary authority.66

But it may not be excessively costly to cabin these agents’ arbitrage opportunities by shifting the range, at least not relative to other institutional principal/agent relationships. The political principals are usually short-timers, with an average tenure measured in months rather than years. Turnover alone (both intra-Administration and inter-Administration) mitigates much of the risk that the relationships will cycle out of control.67 In addition, the ideological valence of agencies at the career-civil-servant level is likely considerably more stable than the

66 This would sometimes be a meta-rulemaking problem, in that the challenge would often lie in creating a set of deterministic rules that the lower-level career employees would be forced to follow in their own rulemaking processes.67 See Part II.____, infra for further discussion of the feedback loop problem.

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ideological valence of the Supreme Court, Congress, or the political upper echelons of the Executive Branch. Thus, there would be relatively less intertemporal risk.

Finally, neither intra-agency principal/agent relationships nor intra-agency policy disputes are generally as salient as their congressional or Judicial Branch cousins.68 Taken together, these factors imply that, for example, a Republican-appointed Administrator of the Environmental Protection Agency might face relatively low range-shifting costs when attempting to rein in purportedly overzealous staff-level enforcement of greenhouse gas emissions.

By comparison, the Congress-Supreme Court example introduced above is likely an example of relatively high range-shifting costs. Disputes between Congress and the Court are generally highly salient, and intertemporal risks are high. Moreover, as discussed below, repeat-player concerns add a whole new dimension to the cost picture, because Congress and the Court cannot simply avoid one another in the halls if their relationship sours.

Figures 5A and 5B illustrate plausible range-shifting costs for the intra-agency context and for the Congress-Supreme Court relationship; the points PS* in each figure represent the indifference point beyond which it would be economically rational for the principal to shift the range in response to agent infidelity. If range-shifting were the only tool available to a regulatory principal, we would thus expect to see equilibria at or near PS* in each case.

68 The recent quite public dispute between certain career Department of Justice Civil Rights Division staff attorneys and their political-appointee superiors regarding Voting Rights Act enforcement priorities may be an exception that helps prove the rule. Though low-level grumbling is a relative constant in this context, these sorts of disputes rarely capture national attention unless the specific issue in question is highly salient to the public. (E.g., disputes regarding the intelligence upon which Bush Administration based its decision to invade Iraq in 2003).

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e. Net Present Value, Feedback Loops, and a Dangerous Game of Chicken

Agent discipline costs and range shifting costs share a common additional component that I discuss in one place for convenience: they are both influenced to varying degrees by repeat player considerations. As before, the extent of the repeat player effect varies with institutional context; the city council/police chief relationship is unlikely to present much in the way of repeat player concerns, because the chief generally serves at the pleasure of the council, and a relationship that might otherwise spiral out of control is bounded by the council’s power to terminate.69 By contrast, a number of regulatory principal/agent relationships are characterized by relative permanence; in these relationships, the principal must contemplate a more daunting array of repeat player risks.

At its worst, the repeat player phenomenon can devolve into a high-stakes game of regulatory chicken; depending on the institutional context, the agent may be able to continue its defiance on the issue in question, or it may spread the conflict to other issues. In the Congress-Supreme Court context, for example, the dynamics are potentially dangerous.70 Congressional attention is horribly divided; by contrast, the Court takes ever-fewer cases annually,71 and certainly does not have an overwhelming workload. The Court must depend on others to provide justiciable controversy grist for the certiorari mill. But the sheer volume of certiorari petitions and the skill with which the highly specialized Supreme Court bar can locate and exploit the Justices’ preferences together suggest that the Court can effectively signal the pool of litigants that it would like to go another round.

69 For a more interesting relationship, consider instead the relationship between an elected county board of supervisors and the elected sheriff. 70 Again, I am limiting my analysis here to situations in which the Court is acting as Congress’s agent (e.g., non-constitutional statutory interpretation). It is worth noting, however, that the Court is also likely to fare well when the roles are reversed (e.g., constitutional interpretation questions). Compared to the act of passing a statute, it is a relatively low-cost proposition for the Court to strike one down. 71 See e.g., Joan Biskupic, The Shrinking Docket; Attorneys Try to Make an Issue Out of the Dramatic Decline in High Court Rulings, WASH. POST, Mar. 18, 1996, at A15.

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Thus, a regulatory principal contemplating either range-shifting or agent discipline must factor in not only the immediate costs of action, but must also account for the present value of the future costs of that action. If a regulatory principal/agent relationship is effectively permanent, future costs could be high, and the discount rate relatively low; the risk of entering into a feedback loop may add still additional space in which the agent can arbitrage transaction costs.

3. Locating the Relevant Indifference Point Threshold

At the end of the day, the regulatory agent with dreams of infidelity cares about just one thing: how far he can go without drawing his principal’s fire. Up to this point, however, we have treated each category of transaction costs separately. In this section we will attempt to stitch them together into a coherent whole.

a. The Least Common Denominator

The maximum possible arbitrage opportunity available to a regulatory agent is the shortest of the three distances PPR*, PPD*, and PPS*. In other words, the agent can go no farther than the principal’s least-cost alternative to prevent agent infidelity. Depending upon the institutions and the ideal character of the regulation, any of the three points PR*, PD*, or PS* might supply the maximum arbitrage range. For example, arbitrage opportunities for a problem for which standard-regulation is clearly preferred, involving an at-will employee-agent, might be bounded on the upper end by PD*; in Figure 6A, rule-regulation and range-shifting will not come into play at all because agent discipline is relatively low cost:

Here, the agent can arbitrage the principal’s transaction costs no farther than xmax. Even though the principal cannot effectively shift the range or rule-regulate at that point, it can discipline the agent. Thus, the least-common-denominator/maximum possible arbitrage for this particular problem is at or just inside PD*.

By contrast, imagine a scenario in which the costs associated with disciplining the agent effectively are actually higher than the costs of

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range-shifting. In Figure 6B, the point PS* supplies the arbitrage maximum:

Finally, posit a scenario in which agent discipline costs and range-shifting costs are high, but in which cost dynamics make rule regulation attractive or at least feasible. For example, imagine a difference of opinion between Congress and the Supreme Court over the ideal amount of time given to plaintiffs in responding to a motion for summary judgment; in our hypothetical, assume that Congress prefers a longer response time and the Court a shorter response time. In Figure 6C, the point PR* supplies the arbitrage maximum:

In this case, the Supreme Court might be able to nudge policy slightly away from the congressional ideal point and toward the Court’s own ideal point, but the relatively low cost of rule regulation in this case (it would not be all that difficult for Congress to express its summary judgment response time ideal point as a specific number of days) substantially limits the Court’s ability to privilege its own preferences.

b. Subtraction By Addition?

The shortest of the line segments PPR*, PPD*, and PPS* establishes an upper bound on the agent’s arbitrage prospects. Defining the lower bound (i.e., the “safety zone” in which the agent is free to set policy without fear of a response from the principal) is somewhat more difficult. In many cases, the maximum may also be the minimum. If there is little or no way for the principal to combine her responses into a hybrid lower-cost alternative, then the least common denominator indifference point will be both ceiling and floor for the unfaithful agent.

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This may also be functionally true if a single indifference point dominates the analysis. For example, if a problem is highly susceptible to rule regulation such that the distance between P and PR* is very small, and it would be relatively costly to discipline the agent or shift the range, then PR* likely supplies the effective minimum as well. The intuition is that, when rule regulation costs are low and other transaction costs are high, it will rarely be worth it for the principal to bring the high-cost options into play.72

If, on the other hand, the problem is one for which the principal can combine her responses, then subtraction by addition becomes possible: by adding a dash of agent discipline and a hint of rule regulation to her range shifting, the principal may be able to reduce the potential arbitrage range to a distance less than the least common denominator would suggest.

Consider the relationship between Congress and an Executive

Branch agency. As primary legislative authority, Congress retains the right to set national policy on a variety of issues (subject to the veto/override calculus contained in Article I, Section 7 of the Constitution). But primary executive authority has been delegated to the President, and in the modern administrative state, to Executive Branch agencies the President oversees.

Imagine a regulatory problem in which Congress’s preferences diverge substantially from those of the agency. Further imagine that it is a problem that fairly cries out for standard regulation, but that direct agent discipline costs and range-shifting costs are also quite high. The maximum arbitrage range will be defined by the lowest-cost response among the three.

But it may be the case that Congress can combine its efforts into a lower-cost hybrid. For example, the problem may have one or two facets susceptible of rule regulation, and adding that to a bit of range shifting or agent discipline (holding up a Presidential nomination, for example) may cost less than relying solely on one response. In those cases, the effective arbitrage range would be somewhat less than the distance between P and the closest of the three “pure” indifference points. Compare Figure 6D, in which the responses cannot be combined, with Figure 6E, in which they can:

72 This is, of course, a matter of degree. In such situations, the shrewd agent would be wise to set policy far enough inside the least common denominator to account for the possibility of subtraction by addition.

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Under the assumptions of our model, the agent’s perfect and complete information will allow him to fix the location of P** with precision; he knows all of the inputs and also knows the function the principal will use to determine her own course of action. In the real world, things will not be so simple. Within limits, it is plausible to assume that a regulatory agent can quantify rule-regulation, agent discipline, and range-shifting transaction costs and identify the least cost, least common denominator constraint on the agent’s actions. It may be substantially more difficult for the agent to analyze the principal’s combinatory approach. Nonetheless, even in the real world, agents should have a reasonable intuitive sense of how far they can push their principals without provoking a response. This is likely true even if the principal can pursue a lower-cost hybrid response.

C. Modeling the Regulatory Response

The model introduced above delineates the boundaries within which an unfaithful regulatory agent can privilege his own preferences over his regulatory principal’s without drawing an affirmative response. It says nothing, however, about the precise response the agent will draw if it mistakenly crosses the line. And even if we assume the principal will engage in its lowest-cost response in reaction to the agent’s miscalculation, one would have to construct a wholly separate model to predict the character and extent of the response.

For example, assume that the principal’s independent, least-cost response is to rule-regulate, and that the agent has set policy outside the indifference point for a fully-determined rule. This effectively guarantees that the principal will act, likely with some form of rule-regulation (especially if agent discipline and range-shifting costs are high). But the principal will engage in its own cost-benefit analysis in determining the

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scope of its response. It may be that the principal goes all the way, promulgating a fully-determined rule. It may be that the principal opts for an intermediate response, cabining the agent’s discretion with some rule-regulation, but without eliminating that discretion entirely. This decision will be the function of a separate, multiple-iteration game played by the principal, in which signaling and Bayesian updating become relevant. That analysis is well beyond the scope of this article.

But our inability to predict the specific response is not really a problem, at least within the confines of the model. In our model, the players will never get to that point, because the agent both the necessary knowledge and every incentive to stay within the safety zone. Thus, while we are certainly interested in any situation in which the regulatory principal acts to restrain the agent, we are interested primarily because it provides an example in which our knowledge assumptions proved faulty. More often, the dog simply won’t bark.73

III. THE PLEADING PROBLEM

The model introduced above may prove particularly helpful in evaluating the curious case of Twombly, Iqbal, Congress, and federal civil pleading law. Pleading law establishes the quantum and character of formal allegations the law requires before allowing any given civil claim for relief to advance past pre-discovery demurrer or dismissal. Despite—or perhaps because of—its critical gatekeeper function, pleading law is notoriously difficult to define. Moreover, virtually any conceivable pleading law will involve competing social costs and benefits. This section briefly summarizes three separate challenges I define collectively as the “pleading problem.”

Civil pleading standards have long been the subject of debate and commentary. Since the medieval “forms of action” first came under attack for their complexity in 19th-century74 Britain, scholars, judges and regulators have tried repeatedly to fix the pleading problem. Nineteenth-century “fact pleading”—today almost universally reviled as a barrier to court access—was itself an attempt to simplify and demystify common law pleading requirements. In turn, the notice pleading revolution—previewed in Charles Clark’s early law review articles,75 then given substance in the Federal Rules of Civil Procedure—was a deliberate

73 See ARTHUR CONAN DOYLE, Silver Blaze, in THE MEMOIRS OF SHERLOCK HOLMES (1892).74 Richard L. Marcus, The Revival of Fact Pleading Under the Federal Rules of Civil Procedure, 86 COLUM. L. REV. 433, 437-38 (1986).75 Charles E. Clark, History, Systems and Function of Pleading, 11 VA. L. REV. 517 (1925); Charles E. Clark, The Complaint in Code Pleading, 35 YALE L. J. 259 (1926); CHARLES E. CLARK, HANDBOOK OF THE LAW OF CODE PLEADING 150-79 (1928).

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response to the perceived excesses of the fact pleading regimes then predominant throughout the U.S. litigation landscape.

But the pleading problem persists despite these noble reform efforts. In fact, parallel developments in the civil litigation system, largely unforeseen by Judge Clark and his contemporaries, have now rendered notice pleading more controversial than it was at the time of its adoption into federal practice in 1938. At the same time, few would take issue with the generally liberal ethos embodied in the move from fact pleading to notice pleading. And therein is the conundrum.

The crux of the problem is this: litigation is expensive, but so is information. When a claim passes the pleading gate successfully, its passage may have practical economic significance independent of the merits of the claim. At the same time, a civil litigation system founded on adversarial principles is particularly vulnerable to early-stage stonewalling by defendants with little independent incentive to share information with plaintiffs. And information and litigation costs are strongly correlated – information costs tend to be highest for plaintiffs precisely when relative litigation costs are highest for defendants. This correlation creates a tale of two asymmetries.

A. A Tale of Two Asymmetries76

The standard move in academic commentary about pleading standards is to focus on the deleterious effect stricter pleading standards have upon plaintiffs unable to obtain the information they need without full discovery.77 This is an understandable approach. Informational asymmetries of that sort are often real, and they are of substantial concern, especially in an adversary system. But defendant-favoring informational asymmetries are only half the picture. Modern U.S. civil litigation practice has engendered a second set of competing asymmetries favoring plaintiffs: in certain types of cases, pretrial litigation cost disparities can create perverse incentives for defendants to settle even wholly frivolous claims to avoid pretrial costs inherent in obtaining summary judgment.

76 For a more detailed treatment of the asymmetry problem and its economic implications, see Stancil, Balancing, supra, note___. My analysis in that article used Twombly as a springboard; it predated the Supreme Court’s decision in Iqbal. But the economic analysis in that article stands independent of either opinion, and in fact suggests that the Court made several significant mistakes in each case. 77 Whether the Supreme Court has Limited Americans’ Access to Court: Hearing Before the Sen. Comm. On the Judiciary, 111th Cong. 18 (2009) (statement of Stephen B. Burbank, David Berger Professor for the Administration of Justice, University of Pennsylvania), available at http://judiciary.senate.gov.pdf/12-02-09%20Burbank%Testimony.pdf; A. Benjamin Spencer, Understanding Pleading Doctrine, 108 MICH. L. REV. 1, 28 (2009); Bone, supra note 10 (manuscript at 33); Ettie Ward, The After-Shocks of Twombly: Will We “Notice” Pleading Changes? 82 ST. JOHN’S L. REV. 893, 911 (2008).

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1. Information Asymmetry

In many types of standard claims, the plaintiff knows as much or more about the relevant facts as the defendant. For example, in a standard automobile accident tort claim, the plaintiff knows better than the defendant what the plaintiff herself was doing in the moments leading up to the accident. She also has better knowledge regarding her own injuries and the other damages she suffered as a result of the defendant’s alleged wrongdoing. In many cases, she may also have her own observations about the defendant’s conduct – whether she saw him weaving drunkenly from lane to lane/sending a text message/playing a Nintendo DS in the seconds before the collision.

The plaintiff may not know precisely how much the defendant had had to drink, what precisely the defendant was typing with his thumbs at 45 m.p.h., or whether he was on the verge of defeating the Gormulans in an epic space battle in the seconds before the accident, but the defendant’s superior knowledge of these facts is counterbalanced to some degree by his ignorance of much relevant information uniquely in the plaintiff’s custody or control before litigation.

But plaintiffs operate at a substantial informational disadvantage in other types of cases. The viability of many modern causes of action—for example, antitrust claims, securities fraud, racial discrimination, and civil rights violations—depends upon the plaintiff’s ability to prove facts uniquely within defendants’ knowledge.78 In a typical antitrust conspiracy case, the plaintiff must prove that defendants entered into an agreement that unreasonably restrained trade; these agreements often take the form of traditional conspiracies, complete with smoke-filled hotel rooms, secret codes, and clandestine breakfast meetings at Denny’s.79 Similarly, securities fraud plaintiffs must prove that the defendant knowingly and intentionally misrepresented material facts to investors. And racial discrimination plaintiffs must demonstrate the defendant’s state of mind – that the negative result of which the plaintiff is complaining is the result of

78 See e.g., Park v. El Paso Bd. of Realtors, 764 F.2d 1053, 1064 (5th Cir. 1985) (setting forth the elements of an antitrust claim including requirement of conspiracy); In re Constar Int’l Inc. Sec. Litig., 585 F.3d 774, 782-83 (3d Cir. 2009) (explaining the prima facie case for securities fraud including the requirement for a misrepresentation or omission); McDonnell Douglas Corp. v. Green, 411 U.S. 792, 792-93 (1973) (explaining the prima facie case for racial discrimination including an animus requirement); 15 AM. JUR. 2D Civil Rights § 163 (2010) (setting forth the prima facie case for civil rights violations that “varies with respect to differing factual situations”).79 The information asymmetry problem is compounded in the typical antitrust conspiracy case because only plaintiffs who have suffered “antitrust injury” are authorized to sue. Competitors—those most likely to have access to relevant information regarding the existence and scope of an antitrust conspiracy—do not typically suffer “antitrust injury” as that term has been defined by the courts. See Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977).

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racial animus rather than benign factors. Plaintiffs in civil rights cases face similar hurdles.

In these types of cases, plaintiffs often cannot know enough about their interactions with defendants to state a plausible claim of legal injury. Moreover, defendants engaged in this type of conduct have remarkably strong incentives to keep their activities secret. These are not run-of-the-mill contract disputes or garden-variety personal injury tort claims. These are cases involving deliberate and premeditated wrongful conduct that can sometimes lead to criminal liability. To the extent we ascribe broad remedial purposes to our private civil litigation system, a pleading standard that closes the courthouse doors to plaintiffs in these sorts of cases is arguably inconsistent with that end. 80

2. Cost Asymmetry and Its Determinants

Modern civil litigation presents another problem, however. Certain types of claims often involve pretrial cost disparities so favoring plaintiffs that a defendant has a strong economic incentive to settle even claims wholly without substantive merit. I have elsewhere discussed the cost dynamics presenting the greatest risk of such perverse outcomes.81 In general terms, some litigated claims make even completely innocent defendants an offer they can’t refuse.

A defendant faced with (1) extremely high pretrial costs; (2) an inability to impose proportional reciprocal costs upon the plaintiff; and (3) relatively low settlement externalities82 may find it worthwhile to settle a claim when the net economic cost (including externalities) of a successful summary judgment—the next stop on the train after the claim survives a pleading challenge—is higher than the amount for which the plaintiff will settle.

Though this type of cost disparity has been around about as long as adversarial litigation itself, it has become increasingly important as other features of the adversarial litigation process have evolved over time. Three factors in particular have dramatically increased the risk of opportunistic, settlement-extorting claim filing: (1) liberal discovery rules 80 See, e.g., Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 484 (2006) (explaining a private right of action is available to a person “‘injured in his business or property by reason of a violation’ of RICO’s substantive restrictions”); Buckhannon Bd. and Care Home, Inc. v. W. Va. Dep’t of Health and Human Res., 532 U.S. 598, 635-36 (2001) (“Persons who bring meritorious civil rights claims, in this light serve as ‘private attorneys general.’”); Nike, Inc. v. Kasky, 539 U.S. 654, 665 (2003) (explaining private individuals as private attorney generals can “‘prosecute a business for unfair competition or false advertising’”); Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 129 (1986) (“effective enforcement of the antitrust laws has always depended largely on the work of private attorney generals”).81 See Stancil, Balancing, supra note __ at ____.82 That is, relatively low reputational costs from settlement, for example. See id. at ___.

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generally; (2) the proliferation of electronic media and thus electronic discovery; and (3) the expansion of civil statutory liability to include additional causes of action involving intentional behavior.83

a. The Adversary System, the American Rule, and Discovery

Civil litigation in the United States is remarkable for its dependence on the litigating parties to develop the facts necessary for trial. In fact, the default assumption of the civil litigation process is that the court will be involved infrequently, if at all, until dispositive motions are filed or the case is essentially ready for trial. Because the system relies on adversaries to conduct factual investigation, it provides the parties with a number of powerful tools in the form of liberal discovery provisions. Like any powerful tool, the discovery process can be used for good or for evil.

The Federal Rules of Civil Procedure contemplate a remarkably liberal discovery process in which parties to civil litigation may discover “any matter, not privileged, that is relevant to the claim or defense of any party. . .”84 The Rules expressly contemplate a liberal definition of “relevant” as well: “Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.”85 And the court can authorize discovery “of any matter relevant to the subject matter involved in the action” upon demonstration of good cause.86

But liberal discovery is expensive.87 Because the U.S. civil litigation system is unabashedly adversarial, parties have strong incentives to seek the broadest possible discovery from their adversaries; they can hardly

83 The adversary system itself and the continued commitment to the “American Rule” governing attorneys fees also play a part. See id. at __. As for how “dramatically” the risk has increased, see infra. It is enormously difficult to quantify costs and benefits in the pleading context, and this difficulty has significant implications for the likely outcome of any reform effort. 84 See FED. R. CIV. P. 26(b)(1).85 See id.86 See id.87 See LAWYERS FOR CIVIL JUSTICE ET AL., LITIGATION COST SURVEY OF MAJOR COMPANIES 3 (2010)(“The average company paid average discovery costs per case of $621,880 to $2,993,567.”); EMERY G. LEE & THOMAS E. WILLGING, FEDERAL JUDICIAL CENTER, NATIONAL, CASE-BASED CIVIL RULES SURVEY: PRELIMINARY REPORT TO THE JUDICIAL CONFERENCE ADVISORY COMMITTEE ON CIVIL RULES 37-39 (2009), available at http://www.fjc.gov/public/pdf.nsf/lookup/dissurv1.pdf/$file/dissurv1.pdf (explaining discovery-related expenses comprise twenty-seven percent of total litigation costs for defendants and twenty percent for plaintiffs); see also ABA SECTION OF LITIGATION MEMBER SURVEY ON CIVIL PRACTICE: DETAILED REPORT 2 (2009) (“82% agree that discovery is too expensive, but within that group only 61% of plaintiffs’ lawyers think it so.”); THOMAS E. WILLGING & EMERY G. LEE, IN THEIR WORDS: ATTORNEY VIEWS ABOUT COSTS AND PROCEDURES IN FEDERAL CIVIL LITIGATION 16 (2010) available at http://ssrn.com/abstract=1606866 (“‘The volume of discovery is the main factor affecting costs in our cases.’”).

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rely on their opponents to do their work for them.88 Even when a party is litigating in good faith, she still faces a strong incentive to ask for more rather than less. And when judges actually take an interest in discovery matters, they face similar incentives.

Moreover, parties in U.S. civil litigation generally pay their own attorneys’ fees, regardless of the outcome of the suit. This “American Rule” forces parties to bear their own costs. As important, a litigating party knows that its opponent will typically bear her own costs as well, including any costs the that party can impose on the opponent, without regard for the merits of any claim or defense. The American Rule can thus encourage litigating parties to engage in cost-imposition games unrelated to the merits of the case.89

Liberal discovery has been with us over 70 years, and there are numerous early accounts of the special difficulties presented by “complex litigation.”90 But civil litigation in the modern era is made substantially more complex by the presence and retention of electronically stored information. To some degree, the proliferation of electronic data is an evidentiary bonanza – matters that were once discussed only in person or by telephone are now routinely discussed by electronic mail or text message. Draft documents that would have been discarded or destroyed as a matter of course now live on forever on hard drives and remote servers. To some degree, at least, the electronic data explosion has made proving a complex case substantially easier; if nothing else, an electronic “paper trail” is far more difficult to erase than its hard-copy counterpart.

At the same time, the sheer volume of electronically stored information, coupled with the unique (read: expensive) challenges inherent in reviewing it, have together made an earlier generation’s “complex case” a Byzantine nightmare, and have even made more pedestrian matters (contract disputes, for example) discovery-intensive in ways they would not have been thirty years ago.91

88 And the adversary system is deeply ingrained in the American legal psyche, as is the notion that parties should not be required to do their adversaries’ work for them. See Stancil, Close Enough, supra, note __ at 103-110 (recounting controversy surrounding adoption of the “initial disclosures” requirement of FED. R. CIV. P. 26(a)(1).89 See Stancil, Balancing at 102-03.90 Silas A. Harris, Proposed Changes in Pleading and Practice, 1 L. J. STUDENT B. ASS’N OHIO ST. 70 (1935); Joseph M. F. Ryan, A Judicial Solution to the Procedural Problems of the So-Called Big Case, 41 GEO L. J. 182 (1953); John P. Sullivan, Twombly and Iqbal: The Latest Retreat From Notice Pleading, 43 SUFFOLK U. L. REV. 1, (2009).91 EMPIRICAL RESEARCH PANEL PART II: REVIEW OF SATISFACTION OR DISSATISFACTION WITH THE CURRENT SYSTEM AND SUGGESTIONS FOR CHANGE RAISED BY THE DATA 2 (2010) [hereinafter EMPIRICAL RESEARCH PANEL] (“The preliminary findings suggest that the major expense is the review for privilege and relevancy, which consumes more than half of all expenditure”); INSTITUTE FOR THE ADVANCEMENT OF THE AMERICAN LEGAL SYSTEM, CIVIL LITIGATION SURVEY OF CHIEF LEGAL OFFICERS AND GENERAL

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When liberal discovery standards wed electronic media, they beget a litigation environment potentially many times more expensive than in the pre-electronic age.

b. Expansion of Civil Liability

Finally, Congress and state legislatures have dramatically expanded the scope of civil liability over the past century or so. At the turn of the 20th Century, there existed very few statutory rights of action. Most civil litigation was either traditional tort or traditional contract litigation. But beginning [with Congress’s enactment of the Clayton Act in 1914]92 and continuing through the post-Civil Rights Act of 1964 period, Congress and its state-level counterparts embarked on an ambitious project of civil-liability-expansion.93

And many of these new claims inherently involve discovery-intensive inquiries. Antitrust cases. Securities fraud cases. Civil rights cases. Racial discrimination cases.94 Each of these categories of claims is likely to involve a more sweeping inquiry into the defendant’s conduct and attitudes than traditional tort or contract litigation. In simple terms, we have more expensive types of litigation now than we did a hundred years ago. Moreover, many of these new causes of action require deep and searching inquiry into a defendants private actions and/or intentions, without requiring similar inquiry of plaintiffs. However noble and good these laws may be, they set the stage for the type of cost asymmetry that contributes to the pleading problem.

3. It’s the Asymmetry, Stupid!

Standing alone, liberal discovery in an electronic world is not a sufficient condition for problematic opportunistic conduct. The key here is finding claims or claim types in which disparity of costs as to defendants vis-à-vis plaintiffs creates unilateral incentives to misbehave. Thus, modern statutory causes of action that inherently involve searching inquiry into a defendant’s state of mind and conduct, but do not bring with them a concomitantly searching inquiry into the plaintiff’s behavior, are particularly suspect. The real worries about frivolous litigation are not

COUNSEL 28-37 (2010) (exploring “the workings of e-discovery at respondent companies”).92 See Clayton Act of 1914, Pub. L. No. 63-212, 38 Stat. 730 (codified as amended in scattered sections of 15 U.S.C. and 29 U.S.C.); Civil Rights Act of 1871, 17 Stat. 13 (1871) (codified as amended at 42 U.S.C. §1983 (2006)); see also Securities Exchange Act of 1934 Pub. L. No. 111-229, 48 Stat. 881 (1934) (codified as amended at 15 U.S.C. §78 (2006))(creating a private right of action).93 Robert C. Ellickson, Taming Leviathan: Will the Centralizing Tide of the Twentieth Century Continue into the Twenty-First? 74 S. CAL. L. REV. 101, 105-07 (200).94 In addition, expansion of private rights of action.

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merely cost-related. Rather they appear in claim types for which cost disparity exists such that the defendant cannot discover unto the plaintiff as the plaintiff is discovering unto her.

A nonexhaustive list of such claims would include “fraud-on-the-market” claims like consumer antitrust actions, certain forms of securities fraud claims, and the like. In those cases, the pretrial litigation costs for plaintiffs are likely to be disproportionately low relative to defendants’ pretrial costs, because the plaintiffs have little relevant information in their possession, custody, or control. Moreover, they can decide whether and when to devote resources to reviewing the discovery material produced by defendants, and defendants typically have no such choice—they must review all material for relevance and privilege before production. When this cost dynamic obtains, we have half of the pleading problem, because standing alone, the cost disparity counsels in favor of a stricter pleading standard.95

4. An Unfortunate Correlation

Unfortunately, there is a strong, inevitable, and positive correlation between “cases in which plaintiffs act at a substantial informational disadvantage” and “cases in defendants act at a substantial pretrial cost disadvantage.” Because discovery drives litigation costs, troubling pretrial cost disparity is likely to be highest in precisely those cases in which defendants have possession, custody, or control over substantially more relevant information than plaintiffs.96 Thus, apparently somewhat paradoxically, the defendant is often in a better economic position when a significant corpus of relevant factual knowledge lies with the plaintiff. Though the defendant will be required to expend resources to obtain that information, the plaintiff typically will spend substantially more to produce the information to the defendant.97 The defendant’s ability to impose discovery costs on plaintiffs thus provides some protection from frivolous claims.

95 The full cost calculus is actually somewhat more complex, in that the parties must also take into account the externalities associated with their litigation activities. See generally Stancil, Balancing, supra, note __ at 128-32.96 EMPIRICAL RESEARCH PANEL, supra note 76, at 2-3.97 See James N. Derouzos, et al., The Legal and Economic Implications of Electronic Discovery; Options for Future Research, RAND Institute for Civil Justice, at 3 (2008), available at http://www.rand.org/pubs/occasional_papers/2008/RAND_OP183.pdf (explaining electronic documents have to be examined for relevance and privilege adding “as much as 75 to 90 percent of additional costs attributable to e-discovery”); see also EMERY G. LEE & THOMAS E. WILLGING, LITIGATION COSTS IN CIVIL CASES: MULTIVARIATE ANALYSIS, REPORT TO THE JUDICIAL CONFERENCE ADVISORY COMMITTEE ON CIVIL RULES 5,7 (2010) available at http://ssrn.com/abstract=1606846 (explaining plaintiffs “who both requested and produced ESI reported approximately 48% higher costs” and defendants who requested and produced ESI had 17% higher costs).

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But when plaintiffs are most in the dark about defendants’ conduct, they are also less likely to face the disciplining effects of extensive discovery counterfire. When the vast majority of the relevant and discoverable information rests with the defendant, that defendant has little ability to use discovery defensively to fend off a plaintiff’s fishing expedition or naked attempt to extract a settlement. In a typical antitrust consumer class action, for example, the defendants face remarkably limited options in response to plaintiffs’ typical “everything and the kitchen sink” discovery requests. Plaintiffs will be required to produce some summary information regarding their purchases of the relevant product, the prices paid, etc. But as the purported victims of a “fraud on the market,” there is little else they can add to the discussion. Individual plaintiffs, including class representatives, are little more than economic placeholders – all of the real action, and the associated costs, takes place on the defendants’ side of the aisle.

Of course, this correlation is far from perfect. Though one might expect to see plaintiffs’ information asymmetry and defendants’ cost asymmetry together in antitrust, securities fraud, and prison litigation,98 it is far less clear that an individual race discrimination plaintiff’s informational deficit carries with it a concomitant pretrial cost advantage. In that type of case, the defendant alone knows whether her allegedly discriminatory actions were in fact the product of racial animus. But the plaintiff’s own actions are likely to be a significant issue in the case—in an employment case for example, the defense will almost certainly focus on the plaintiff’s unsatisfactory job performance. Thus, though the inverse correlation between information asymmetry and cost asymmetry exists, it is not necessarily universal.

B. The Pleading Problem and the Court

1. The Current State of Play: From Clark to Conley to Twiqbal

Judge Charles Clark, primary architect of the Federal Rules of Civil Procedure, considered the Rules’ embrace of simplified pleading standards

98 Prison litigation presents a rather special case in which the concept of “costs” is turned on its ear. The individual prisoner does not incur “costs” in the same way a non-incarcerated plaintiff would, especially if he is proceeding pro se. (See Stancil, Balancing, supra note __ at __ for a discussion regarding the ways in which attorney representation affects the cost calculus). For prisoners, a day spent giving a deposition, or answering discovery requests in the prison law library is probably, on balance, a good day. The existing literature on prison lawsuits suggests that the incentive structure for prison litigants is in many ways the opposite of the incentive structure facing traditional civil litigants. See, e.g., [Prison suit literature in which the prisoners talk about getting out, etc.]

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the centerpiece of the reforms he hoped to accomplish.99 Judge Clark’s vision of simplified, general pleading requirements was codified in Rule 8(a) of the Federal Rules, which required only that the plaintiff provide “a short and plain statement of the claim showing that the pleader is entitled to relief.”100

Judge Clark’s desire for constructive ambiguity in pleading law may have been laudable, but the amorphous standard set forth in Rule 8(a)(2) ultimately faced judicial interpretation and refinement. Although early lower court cases under the Rules rarely mentioned the concept of “notice pleading” (and though at least some of the cases using the term did so in a negative sense),101 the Supreme Court’s opinions in Hickman v. Taylor102

and Conley v. Gibson103 cemented “notice pleading” as the standard under which complaints were to be judged for their legal sufficiency. In the classic Conley formulation, the function of the complaint is to “give the defendant fair notice of what the plaintiff’s claim is and the grounds upon which it rests.”104 Under the literal terms of Conley, a complaint “should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.”105

After Conley, the Supreme Court’s pleading jurisprudence continued in much the same vein for the next fifty years. In several subsequent cases, the Court expressly rejected lower court opinions allowing stricter pleading standards for certain categories of cases.106 Congress

99 See Bone, supra, note __ at __. See also Charles E. Clark, The Federal Rules of Civil Procedure : 1938-1958—Two Decades of the Federal Civil Rules, 58 COLUM. L. REV. 435, 449 (1958) ( “With the need for clarity without technicality in mind, the Advisory Committee by precept and illustration established a system of general pleading not at all a departure from the best common-law precedents, and not the "notice" pleading often advocated by many whose aims are high, but whose ideas are unclear.”) (emphasis added). In a footnote to that quote, Judge Clark noted that he did not disagree with the “statement of aim” contained in Conley v. Gibson and Hickman v. Taylor, but took issue with the rules they announced. See id., at note 66 ; see also Peter Julian, Note, Charles E. Clark and Simple Pleading: Against a “Formalism of Generality,” 103 NW. U. L. REV. __ (forthcoming 2010), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1392546. (arguing that Clark’s vision was for simplified pleading, not necessarily “notice pleading” as that term came to be understood post-Conley).100 See FED. R. CIV. P. 8(a)(2) (1938) (original version).101 See Julian, supra note __ at 13, note 84 (collecting pre-Conley cases rejecting proposition that Federal Rules adopted notice pleading).102 329 U.S. 495 (1947).103 355 U.S. 41 (1957).104 See id., at 47.105 See id., at 45-46.106 See, e.g., Leatherman v. Tarrant County Narcotics Intelligence & Coordination Unit, 507 U.S. 163 (1993); Swierkiewica v. Sorema N.A., 534 U.S. 506 (2002).

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occasionally tightened the pleading standard of its own accord,107 but the general standard remained liberal “notice pleading” from 1957 until 2007.

In 2007, the Supreme Court tightened the screws somewhat, holding for the first time since the adoption of the Federal Rules that Rule 8(a)(2) required something more than mere “notice” of the plaintiff’s claim. In Twombly v. Bell Atlantic Corp.,108 the Court held by a 7-2 majority that plaintiffs must plead facts that, if proved at trial, make the existence of legally cognizable wrongdoing by the defendant “plausible.”109 In Twombly itself, consumer class action antitrust plaintiffs pled that large incumbent telecommunications companies (the “Baby Bells”) were engaged in a number of allegedly anticompetitive practices, including discrimination against new competitors and declining to compete with one another in their historic territories.110 Assuming the truth of those contentions, the Supreme Court nonetheless rejected plaintiffs’ complaint as legally insufficient. The Court noted that the plaintiffs’ antitrust claim required proof of a conspiracy among the defendants for the conduct in question to be illegal.111 Because the plaintiffs alleged no facts that made the existence of a conspiracy plausible, their generalized allegations of what might equally likely be unilateral (and thus completely legal) behavior did not state a claim.112

Perhaps in response to some commentators’ contention that the Twombly applied only to antitrust cases, a more deeply divided court in 2009 held that the “plausibility” requirement was universal. In Ashcroft v. Iqbal113 a Muslim man formerly detained as part of a federal terrorism investigation sued a variety of federal officials, from individual employees of the Bureau of Prisons up through then-FBI Director Robert Mueller and then-Attorney General John Ashcroft, alleging that they had been part of a wide-ranging conspiracy to discriminate against Muslims on the basis of their religion.114

Though the Supreme Court allowed Iqbal’s complaint to proceed against lower-level federal employees, it rejected Iqbal’s claims against Mueller and Ashcroft, again on “plausibility” grounds. According to the majority, Iqbal had offered nothing more than conclusory allegations of Mueller’s and Ashcroft’s involvement in the alleged conspiracy. That

107 See Private Securities Litigation Reform Act of 1995, Pub. L. 104-67, 109 Stat. 737 (requiring that fraud be pleaded with “particularity”). See id., codified at 15 U.S.C. § 78u-4(b)(1).108 550 U.S. 544 (2007).109 [Kim: pinpoint cite]110 [Kim: pinpoint].111 [Kim: pinpoint].112 {Kim: pinpoint].113 __ U.S. __ (2009).114 [Kim: pinpoint]

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wasn’t enough. Instead, the Court clarified that the plausibility requirement applies universally to all claims.

2. Response to Twiqbal

The response to Twombly and Iqbal was fast and largely furious. They spawned voluminous academic and political commentary, and the great majority of that commentary roundly criticized both decisions.115 The decisions also drew Congressional fire. By November 2009, both Houses of Congress were considering remedial legislation intended to legislatively overrule Twombly and Iqbal.116 In December 2009 the Senate Judiciary Committee held a hearing asking “Has the Supreme Court Limited Americans’ Access to Courts?”117

But to date, Congress has not turned activity into action; at this writing, Congress has enacted no statutory response to the Supreme Court’s pleading cases. [Moreover, in light of the results of the 2010 midterm elections, no Congressional response is likely for the foreseeable future]. This congressional inaction is curious for a variety of reasons.

For over 18 months after Iqbal was decided (and for over 40 months after Twombly), the Democratic Party enjoyed substantial majorities in both Houses of Congress, and a Democrat occupied the White House. Moreover, pleading law carries with it a relatively stable and predictable political valence—Democrats have predictably opposed Twombly and Iqbal in their public statements, while Republicans have generally supported the Court’s pleading decisions.118 And these decisions are

115 See, e.g., Robert G. Bone, Plausibility Pleading Revisited and Revised: A Comment on Ashcroft v. Iqbal, 85 NOTRE DAME L. REV. (forthcoming 2010) available at http://ssrn.com/abstract=1467799; Editorial, Throwing Out Mr. Iqbal’s Case, N.Y. TIMES, May 20, 2009, at A28. A. Benjamin Spencer, Iqbal and the Slide Toward Restrictive Procedure, 14 LEWIS & CLARK L. REV. 185 (2009); Ettie Ward, The After-Shocks of Twombly: Will We “Notice” Pleading Changes? 82 ST. JOHN’S L. REV. 893 (2008); David G. Savage, Narrowing the Courthouse Door: High Court Makes it Tougher to Get Past the Pleading Stage, A.B.A. J., July 2009; Christopher M. Fairman, A Requiem for Notice Pleading, ASS’N AM. L. SCH., 37-42 (2010), http://www.aals.org/midyear2010/CivproWorkbooklet.pdf. But see Douglas G. Smith, The Twombly Revolution?, 36 PEPP. L. REV. 1063 (2009); Michael R. Huston, Note, Pleading with Congress to Resist the Urge to Overrule Twombly and Iqbal, 109 Mich. L. Rev. (forthcoming 2010) available at http://ssrn.com/abstract=1627704. 116 See Open Access to Courts Act of 2009, H.R. 4115, 111th Cong. (2009); Notice Pleading Restoration Act of 2009, S. 1504, 111th Cong. (2009).The Senate proposal purports to fix pleading standards legislatively by explicit reference to Conley v. Gibson, 355 U.S. 41 (1957). By contrast, the House proposal would (a) explicitly reject any “plausibility” requirement, and (b) codify the more liberal half of Conley (the so-called “no set of facts” requirement) without any modifying language.117 See Has the Supreme Court Limited Americans’ Access to Courts?: Hearing on S. 1504 Before the S. Jud. Comm., 111th Cong. (2009). 118 See id. (Only Democrats to speak, Leahy, Feingold, and Whitehouse, all spoke in favor of legislative repeal; Republicans Kyl and Cornyn opposed). But see April 20,

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genuinely important;119 both Twombly and Iqbal have been cited thousands of times by lower courts;120 though the jury is still out on the overall impact of these decisions, there is at least some evidence that they are resulting in higher dismissal rates for certain categories of cases.121

There are several plausible explanations for Congress’s failure to act. First, it could be opportunity costs. Congress has been remarkably busy over the last year or so, and it is possible that their genuine anger over Twombly and Iqbal, while real, is nonetheless insufficiently intense to prompt them to action in a Congress overcome by a lingering recession, healthcare reform, financial regulation reform, and a host of other issues.

Second, it may be that the rumors of notice pleading’s death were greatly exaggerated. Academic fury and political grandstanding occasioned by Twombly and Iqbal notwithstanding, it may simply be that the decisions have not proved as bad in practice as first feared. Thus, the passage of time may both reduce the salience of the controversy and demonstrate that there is in fact less controversy than we originally thought. Perhaps we have reached a satisfactory new equilibrium without congressional intervention.

Finally, it may be that Congress is for some reason unable to act. The “opportunity cost” and “new equilibrium” narratives are plausible, of course; it is likely that each has played a role in preventing a congressional response. But I will focus on this third explanation. The model developed above provides a plausible partial account of Congressional inaction. Taken together, the institutional context and the ideal character of pleading law may have permitted the Supreme Court to arbitrage congressional transaction costs in favor of its own median preferences.

2010 Letter from Rep. Rick Boucher (D-Va.) to Rep. John Conyers (Conservative Democrat urges no action on H.R. 4115 because risk of frivolous suits is real and substantial).119 See, e.g., Letter from Michael Dorf, Professor, Cornell Law School, to Senate Jud. Comm. (Nov. 24, 2009) available at http://www.dorflaw.org/2009/11/my-letter-to-senate-judiciary-committee.html (stating Twombly and Iqbal are “nothing short of revolutionary”); see also Michael C. Dorf, The Supreme Court Wreaks Havoc in Federal Courts—Again, FINDLAW (Aug. 13, 2007), http://writ.news.findlaw.com/dorf/20070813.html.120 See An October 19, 2010 Westlaw Keycite search yields 37215 cases citing Iqbal and 94880 citing Twombly.121 See Patricia W. Hatamyar, The Tao of Pleading: Do Twombly and Iqbal Matter Empirically? 59 AM. U. L. REV. 553 (2010); Statistics Division, Administrative Office of the U.S. Courts, Motions to Dismiss: Information on Collection of Data, UNITED STATES COURTS, http://www.uscourts.gov/uscourts/RulesAndPolicies/rules/Motions_to_Dismiss_081210.pdf (last visited Sept. 1, 2010); Joseph A. Seiner, The Trouble with Twombly: A Proposed Pleading Standard for Employment Discrimination Cases, 2009 U. ILL. L. REV. 1011, 1014-16 (2009). Even if accurate, reports of higher dismissal rates do not necessarily imply excessive dismissal of claims. See infra notes __-__ and accompanying text.

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IV. MODELING THE RESPONSE TO TWIQBAL

A. THE IDEAL CHARACTER OF PLEADING LAW

Pleading must be governed by a standard. So long as congressional preferences lie somewhere between the two politically untenable extremes of “all cases go to discovery” and “no cases go to discovery,” the only realistic way for congress to express those preferences is in the form of a standard delegating substantial authority to the Supreme Court and inferior courts to decide on a case-by-case basis.

In fact, pleading law is necessarily something of a meta-standard. Courts are generally called upon to exercise mandatory jurisdiction over myriad forms of civil dispute, including disputes in which liability is governed by rules, by standards, and everything in between. Given the functionally infinite variation in fact patterns and governing substantive law, it would be breathtakingly expensive (and likely functionally impossible) to craft a fully-determined rule codifying any ideal point in the great middle between “all cases” and “no cases.” Assuming that the congressional ideal point is in fact in that great middle, courts will necessarily have to exercise discretion on a case-by-case basis to determine whether a given claim passes muster.

To model the dynamics of the response to Twiqbal, I use essentially the same nomenclature, but I replace the generic principal designation “P” with “C” for Congress, and the generic agent designation “A” with “SCt” for “Supreme Court.” Thus, using those labels, the preference for a standard in the pleading context is modeled in Figure 7 by showing a significant distance between point C and point CR*, the point at which full rule-regulation would be justified on transaction costs grounds:

Note that the rule-regulation indifference point actually exists well to the right of the Supreme Court’s own ideal point; given the extraordinary costs associated with creating a truly deterministic pleading regime, it is plausible that the Court would be able to set policy more or less wherever it liked if the only possible congressional response was rule-regulation.

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B. The Institutional Context of Pleading Law

1. Agent Discipline Costs

The analysis in Part II demonstrates that institutional dynamics may also play a significant role in the current pleading standard paralysis. In short, Congress in this case does not have any significant ability to discipline the Supreme Court; even its weaker but less provocative and thus less costly “jurisdiction-stripping” power is effectively unavailable where, as here, the issue in question involves the function of the courts themselves.122 Thus, if Congress wanted to threaten the Court into submission over pleading law, it likely would have to brandish the impeachment club.

But impeachment is almost certainly a political nonstarter in this context. Neither the Supreme Court nor its subsidiary Article III courts can be threatened with replacement; nor can Congress threaten to divest authority from the courts in favor of another agent. The significant distance between C and CD* in Figure 7B illustrates the relatively high costs of agent discipline in this context:

Here again, the extraordinarily high costs associated with disciplining the Supreme Court would allow the Court to set policy at its own ideal point, if agent discipline were the only possible response to infidelity.123

2. Range-Shifting Costs

The location of the congressional indifference point in relation to a range shifting response is admittedly something of a puzzle. In general terms, range shifting costs are quite high in the pleading law context. Intertemporal concerns, issue salience, and repeat player risks all combine

122 Compare to example of jurisdiction stripping; e.g., 1996 Immigration Reform Act, stripping courts of authority to review certain INS decisions.123 When a statute arguably involves a constitutional issue, this further increases agent discipline costs in the Congress-Supreme Court context. For example, if the Supreme Court were to up the ante in the pleading cases by claiming that the Due Process Clauses required a “plausibility” requirement to protect innocent defendants from being deprived of property, it would increase the costs of disciplining the Court, given its well-known primary in matters of constitutional interpretation.

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to suggest that Congress would think long and hard before shifting the observed ideal point away from its true ideal point in an attempt to coopt the Supreme Court’s preferences. In many ways, the proposed legislation introduced in both the House and Senate Judiciary Committees is inherently range-shifting; the bills’ sponsors know well that the court will continue to enjoy substantial discretion in deciding which cases live or die, and thus it is possible that the proposed statutory language in either bill does not represent true median Congressional preference, but rather a point somewhat to the left of the congressional ideal such that the Supreme Court’s arbitrage will result in an acceptable equilibrium closer to the true C.

And Congress’s inaction may in part be explained by the costs associated with adopting a range-shifting approach. In addition to the risk of a low-grade war between Congress and the Court, there is also a substantial possibility that a Democratic President will soon move the balance of the Supreme Court to the left; if this happens, a range-shifting approach may move the standard too far too the left. The intertemporal risk is substantial.

Still, it seems likely that, all in all, range-shifting costs would be lower than the other relevant transaction costs in the pleading context. Thus, Figure 7C offers one plausible preference mapping:

But is also plausible that the range-shifting indifference point lies to the right of the Supreme Court’s ideal point, as in Figure 7D:

In our model, the location of the range-shifting indifference point has significant implications for the meaning of the potential equilibrium represented by Twombly and Iqbal.

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B. Aggregated Model and Implications

Putting everything together, at least two plausible pictures of the Twiqbal story emerge. In one version of the story, x represents a “Twiqbal equilibrium” somewhat to the left of the Supreme Court’s own ideal point, but well to the right of the Congressional ideal point. In Figure 8A, the Court is constrained by Congress’s ability to shift the range at a policy point short of the Court’s own preferences:

In this version of the story, the Supreme Court’s real preference is for an equilibrium even farther to the right than Twombly and Iqbal; nonetheless, the Court strategically places policy some distance away from its own ideal point and closer to the congressional ideal point, just inside the least common denominator indifference point.

If, on the other hand, each of the relevant congressional indifference points lies to the right of the Supreme Court’s ideal point, then the policy preference expressed in Twombly and Iqbal may represent the Supreme Court’s ideal point.124

124 The equilibria in Figures 8A and 8B assume that Congress would find it impossible to combine its responses to produce a lower-cost aggregate indifference point. This is a reasonable assumption given the extraordinary difficulty attendant with rule-regulation in the pleading context, and with attempting to discipline the Supreme Court. On a different note, if we relax the “perfect and complete knowledge” assumption a bit, one might tell a slightly more sophisticated story in which Twombly represents the Court’s first tentative foray to the right. In this narrative, Iqbal represents the Court’s second shift; having learned that Twombly wasn’t particularly close to the edge, the Court decided to raise the stakes in the second case.

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This is not to say that either of the above scenarios is a perfectly accurate representation of the paralysis gripping Congress in the wake of Twiqbal. There are too many variables in play to be certain that the dynamics of standardmaking and the institutional context created space for agent arbitrage; similarly, it is difficult to conclude with certainty that the Court has acted strategically to privilege its preferences over those of Congress by arbitraging congressional transaction costs.

At the same time, the model offers a plausible explanation for congressional inaction; it may well be that the Court’s Twombly and Iqbal decisions are the product of skillful gameplay as much as heartfelt preferences.

CONCLUSION

Agency relationships are a fact of life in the modern regulatory state. Virtually every regulator relies upon others to enforce their preferences, and that reliance carries with it the seeds of rebellion. The game-theoretical model presented above demonstrates several interesting and underappreciated features of the agency relationship common if not necessarily unique in the regulatory context. In particular, a focus on regulatory transaction costs is illuminating, because it demonstrates the extent to which agents may be able to pursue infidelity without being called to account by their principals.

From this focus on transaction costs, we learn several things. First, character matters. The ideal character of a regulation, rule or standard, can directly and significantly affect the transaction costs associated with limiting or eliminating agent discretion. The more a standard is preferred, the more difficult a regulatory principal will find it to reduce discretion by promulgating more rule-like regulations.

Second, context matters. Other mechanisms for preventing agent subversion of principal preferences, including agent discipline and range-shifting, are highly context-dependent. Congress has little ability to discipline the Supreme Court, for example, especially compared with some other regulator’s ability to discipline an at-will employee. And the more salient the issue and the more permanent the relationship between agent and principal, the more difficult it becomes to range-shift strategically. The Supreme Court’s recent pleading standard decisions may present an example of a situation where both character and context combine to give the Court enormous power to set policy, despite its nominal status as Congress’s agent in statutory interpretation.

Ultimately, the model suggests that it may be profitable to embark on a programmatic study of regulatory problems, regulatory institutions, and

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the attendant risks of transaction cost arbitrage. To be clear, there is no immediately obvious normative approach to solving the problem. In fact, there is a reasonable argument that the “problem” identified in the model is in fact a feature rather than a bug, and a feature designed into certain institutional relationships by the Framers at that. At the same time, opportunities for genuine mischief abound as well. The largely-ignored standardmaking problem is worthy of substantial future attention.