Article

Market Segmentation: The Rise of Nevada as a Liability-Free Jurisdiction

This paper exposes and analyzes the rise of Nevada as an almost liability-free jurisdiction. Contrary to conventional wisdom – that Nevada imitates Delaware law but does not make any profits from competing with it – Nevada has embarked on a lucrative strategy of market segmentation with a differentiated product – a shockingly lax corporate law.

Market segmentation with lax law has allowed Nevada to overcome significant barriers to entry. By tailoring its product to a particular subset of the market, Nevada gained market power in a segment that is not served by Delaware. Nevada’s clear, no-liability law makes Delaware’s competitive advantages less significant and leaves it unable to effectively respond.

Firms may incorporate in Nevada for a variety of reasons that include extracting private benefits, saving on incorporation taxes, and minimizing litigation costs. The data, however, suggest that at least some firms choose Nevada for the first, less benign reason.

Normatively, policy makers should find it worrisome that high agency costs firms, which would benefit the most from regulation, disproportionally choose Nevada’s lax law. Another reason for concern is that Nevada, by creating a competitive pressure towards the bottom, may be dragging Delaware down.

The Constitutionality of Federal Jurisdiction-Stripping Legislation and the History of State Judicial Selection and Tenure

Few questions in the field of Federal Courts have captivated scholars like the question of whether Congress can simultaneously divest both lower federal courts and the U.S. Supreme Court of jurisdiction to hear federal constitutional claims and thereby leave those claims to be litigated in state courts alone. Such a divestiture is known today as “jurisdiction stripping,” and, despite literally decades of scholarship on the subject, scholars have largely been unable to reconcile two widely held views: jurisdiction stripping should be unconstitutional because it deprives constitutional rights of adjudication by independent judges and jurisdiction stripping is nonetheless perfectly consistent with the text and original understanding of the Constitution. In this article, I show how the scholarly impasse that has pitted constitutionalism and judicial independence on the one hand versus text and history on the other can be overcome. In particular, I show that something important has changed in the years since the Constitution was ratified: the gap between the independence of state and federal judges. At the time of the founding, much like their federal counterparts, no state judges were elected and the vast majority of them enjoyed life tenure. Precisely the opposite is true today. As such, the consequences of depriving federal courts of jurisdiction to hear constitutional claims were much different then than they are today. Because state courts were the background against which Article III of the Constitution was written and ratified, these changes enable the answer to the question of whether jurisdiction stripping is constitutional to change as well. In other words, just because jurisdiction stripping was constitutional in 1789 does not mean it must be constitutional today, and it does not mean we must ignore the original understanding of the Constitution to reach that conclusion. The history I have uncovered in this Article has the potential to reshape many other jurisdictional doctrines of the federal courts.

The Law of Nations as Constitutional Law

Courts and scholars continue to debate the status of customary international law in U.S. courts. The modern position argues that courts should treat customary international law as federal common law. The revisionist position contends that customary international law applies only to the extent that positive federal or state law has adopted it. Neither approach, however, adequately takes account of the Constitution’s allocation of powers to the federal political branches or the judiciary’s treatment of the law of nations throughout U.S. history. The Constitution’s allocation of specific powers to the federal political branches—such as the powers to recognize foreign nations, declare war, issue letters of marque and reprisal, and make rules governing captures—can only be understood by reference to certain background principles of the law of nations. Many of the Supreme Court’s decisions applying traditional principles derived from the law of nations may plausibly be understood as upholding the Constitution’s allocation of war and foreign relations powers to the political branches of the federal government. In numerous cases, the Court has upheld the rights of foreign sovereigns in ways that respect the political branches’ possession or exercise of these specific constitutional powers. This understanding has potential implications for the ongoing debate over the status of customary international law in U.S. courts. Specifically, it suggests that the modern position is over-inclusive and the revisionist position is under-inclusive of the role of customary international law. The allocation of powers approach—grounded in specific constitutional provisions and supported by numerous Supreme Court cases—suggests that courts should apply the law of nations when necessary to uphold the Constitution’s exclusive allocation of war and foreign relations powers to the federal political branches.

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