Home Slideshow

Harmonizing Federal Immunities

When a federal employee is charged with a state crime based on conduct that was within their official responsibilities, the United States Constitution protects them from prosecution through Supremacy Clause immunity. This immunity was developed by the Supreme Court in a small set of cases from around the turn of the twentieth century, but no Supreme Court cases have mentioned it since. Generally, as lower courts have construed it, it is a highly protective standard. This Note questions that standard by attempting to re-align Supremacy Clause immunity with another federal immunity that also derives from the Supremacy Clause: federal tax immunity. Until the mid-twentieth century, federal tax immunity cases protected the federal government from almost any state-tax-related burdens, even indirect ones. But in 1937, the Supreme Court abruptly changed course and overruled a century of its previous precedents. As a result, federal tax immunity today has only a shadow of its previous force. In relating these two immunities to each other, this Note aims to shine light on Supremacy Clause immunity as a doctrine based on an outdated conception of the role of federal courts in our federalist system. It ties the Court’s shift in federal tax immunity to a broader philosophical transformation that also appeared in other doctrines, like those governing the application of the Tenth Amendment and preemption. And it shows that Supremacy Clause immunity as it currently stands is the sour note in an otherwise consistent harmony of federalist relationships.

Introduction

In two disconnected and hypothetical1 1.Only partially hypothetical, one is in Idaho. SeeIdaho v. Horiuchi, 253 F.3d 359, 363–64 (9th Cir. 2001).Show More locations, two government officers in performance of their duties run afoul of a state criminal law. One is an FBI sniper who takes an arguably unjustified shot at a fleeing man and kills an innocent bystander. The other is a state police officer who, facing the same situation, makes the same tragic error. Both officers are charged with a crime: involuntary manslaughter. Assuming all relevant facts are parallel between the two scenarios, does the law dictate that the state police officer should stand trial while the federal officer is held to be immune from prosecution? More generally, given the structure of our federalist system and the text, purpose, and history of the United States Constitution, how often should it be the case that a federal officer is immune from state criminal prosecution despite the fact that a state officer would be held to be culpable for doing the very same thing?

Courts tell us that this question is answered by the Constitution’s Supremacy Clause.2 2.U.S. Const. art. VI, cl. 2 (“This Constitution, and the Laws of the United States . . . shall be the supreme Law of the Land . . . any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.”).Show More But the Supreme Court has not been generous with its guidance. The concept of federal officer immunity from state criminal prosecution was first explored in In re Neagle,3 3.135 U.S. 1, 62 (1890).Show More but although that case is memorable for its remarkably dramatic set of facts,4 4.See id.at 45 (“As [the former Chief Justice] was about leaving the room, . . . he succeeded in drawing a bowie-knife, when his arms were seized by a deputy marshal and others present to prevent him from using it, and they were able to wrench it from him only after a severe struggle.”).Show More it is well over a century old and offers little in the way of specifics. After an initially rapid development, Supremacy Clause immunity has remained entirely untouched by the Supreme Court since 1920, and it has arisen in lower federal courts only sporadically during that intervening century. Though no clear legal standard has emerged, the doctrine has generally been construed to offer sweeping immunity to federal employees who commit state crimes, as long as their actions bore some relationship to their federal duties.5 5.The standard that has developed in lower courts is discussed in Subsection I.B, infra.Show More

Despite its infrequent appearance in federal courts, Supremacy Clause immunity may have unexpected contemporary significance. Scholars have pointed out that the historical periods when it is most likely to arise are times when there are strong political tensions between state and federal governments.6 6.See Seth P. Waxman & Trevor W. Morrison, What Kind of Immunity? Federal Officers, State Criminal Law, and the Supremacy Clause, 112 Yale L.J. 2195, 2232 (2003) (stating that Supremacy Clause immunity tends to arise “around historical moments of significant friction between the federal government and the States”).Show More In areas as disparate as electoral policy,7 7.Nick Corasaniti & Reid J. Epstein, A Voting Rights Push, as States Make Voting Harder, N.Y. Times (Jan. 11, 2022), https://www.nytimes.com/2022/01/11/us/politics/biden-voting-rights-state-laws.html [https://perma.cc/39MC-2PR7] (describing that eighteen states are passing laws containing “a host of new voting restrictions” while Democrats in Congress try to pass a bill prohibiting state laws with those very types of restrictions).Show More public health,8 8.See Nancy J. Knauer, The COVID-19 Pandemic and Federalism: Who Decides?, 23 N.Y.U. J. Legis. & Pub. Pol’y 1, 8 (2020) (arguing that the current federal-state collaborative approach to pandemic response “left the federal government ill-prepared to respond to the COVID-19 pandemic because of conflicting priorities”); James G. Hodge, Jr., Federal vs. State Powers in Rush to Reopen Amid Coronavirus Pandemic, Just Sec. (Apr. 27, 2020), https://www.justsecurity.org/69880/federal-vs-state-powers-in-rush-to-reopen-amid-corona‌virus-pandemic/ [https://perma.cc/62LX-4B2G] (“[T]he novel coronavirus is exposing a deep rift in American federalism as federal and state governments vie for primacy in remedying the nation’s ills.”).Show More immigration,9 9.SeeArizona v. United States, 567 U.S. 387, 416 (2012) (holding, in a suit filed by the United States seeking an injunction against the enforcement of Arizona law, that the law providing for state enforcement of federal immigration policy was preempted).Show More and law enforcement,10 10.Compare H.R. 1280, 117th Cong. § 102 (2021) (limiting defense of qualified immunity in suits against law enforcement officers), with Iowa Code § 670.4A (2023) (reinforcing defense of qualified immunity as a matter of Iowa state law).Show More now is such a time. It is thus unsurprising that a federal circuit court was recently presented with a Supremacy Clause immunity claim in a case that evokes the broader public debate about immunity from suit for law enforcement officers.11 11.See Virginia v. Amaya, No. 1:21-cr-91, 2021 WL 4942808 (E.D. Va. Oct. 22, 2021), appeal dismissed, 2022 WL 1259877 (4th Cir. Apr. 25, 2022). The Fourth Circuit dismissed the case after a newly elected attorney general ceased pursuing the appeal. Tom Jackman, Va. Attorney General Miyares Ends Prosecution of U.S. Park Police Officers in Ghaisar Case, Wash. Post (Apr. 22, 2022, 7:51 PM), https://www.washingtonpost.com/dc-md-va/2022/04/‌22/ghaisar-case-dismissed/ [https://perma.cc/89CT-6YD2].Show More And any abstract conjecture about the doctrine’s relevance is cemented by ongoing conversations about Georgia’s potential prosecution of former President Trump for attempting to illegally influence vote counts in the aftermath of the 2020 election, and the possibility that he will invoke Supremacy Clause immunity.12 12.SeeNorman Eisen et al., Fulton County, Georgia’s Trump Investigation: An Analysis of the Reported Facts and Applicable Law 216–52 (2022).Show More That prosecution, were it to occur, would also provide the most likely avenue for Supremacy Clause immunity to finally reappear in the Supreme Court.

This Note approaches Supremacy Clause immunity from a novel perspective. Others have compared it to qualified immunity and preemption,13 13.Waxman & Morrison, supra note 6, at 2241.Show More but no one has attempted to untangle the relationship between Supremacy Clause immunity and federal tax immunity, a doctrine based on the same clause of the Constitution and which serves the same purpose: protecting the functioning of the federal government from state obstruction. Since the seminal case McCulloch v. Maryland,14 14.17 U.S. (4 Wheat.) 316, 395 (1819).Show More the Court has spoken relatively frequently about federal tax immunity,15 15.See, e.g., Graves v. New Yorkex rel. O’Keefe, 306 U.S. 466, 477 (1939) (stating that federal immunity from state taxation extends to corporations owned and controlled by the government).Show More and the doctrine it has expounded provides helpful illumination for contemporary attempts to understand the scope of Supremacy Clause immunity. The comparison yields a surprising conclusion: viewed in light of federal tax immunity, the approach that lower courts have been taking to Supremacy Clause immunity appears decidedly anachronistic. In fact, Supremacy Clause immunity as it currently exists is entirely inconsistent with the understanding of the Supremacy Clause that underlies every related constitutional doctrine. Neagle arose at a time when the Court’s perception of its own power to override state laws was at its zenith.16 16.SeeStephen A. Gardbaum, The Nature of Preemption, 79 Cornell L. Rev. 767, 801 (1994) (characterizing the turn of the century as a “double shift in the direction of enhanced federal power” based on the Court’s overturning state laws as either preempted or unconstitutional under the Dormant Commerce Clause).Show More But in the last century, that has changed. As a result, the Court’s analysis of federal tax immunity has shifted dramatically, as has the doctrine of preemption.

These concurrent shifts demonstrate the Supreme Court’s adoption of a theory of government called “process federalism,”17 17.SeeWilliam Marshall, American Political Culture and the Failures of Process Federalism, 22 Harv. J.L. & Pub. Pol’y 139, 147–48 (1998); Ernest A. Young, Two Cheers for Process Federalism, 46 Vill. L. Rev. 1349, 1350 (2001).Show More which was proposed by Professor Herbert Wechsler in a highly influential mid-century Article.18 18.Herbert Wechsler, The Political Safeguards of Federalism: The Role of the States in the Composition and Selection of the National Government, 54 Colum. L. Rev. 543, 546 (1954).Show More Wechsler’s analysis focused on the judiciary’s role in protecting states from the federal government, for example by invalidating federal actions as infringing on the powers of the states.19 19.Id.at 558–60.Show More He argued that the judiciary’s role in this area was limited.20 20.Id. at 560.Show More In his view, if the matter were left to Congress, states’ interests would naturally be accommodated based on their role in Congress’s structure and composition.21 21.Id.at 547.Show More Other scholars later related Wechsler’s theory to doctrines that pointed in the other direction, and concluded that courts should also decline to invalidate state action as obstructing the federal government without explicit congressional direction.22 22.Laurence H. Tribe, Intergovernmental Immunities in Litigation, Taxation, and Regulation: Separation of Powers Issues in Controversies About Federalism, 89 Harv. L. Rev. 682, 695, 712–13 (1976).Show More Otherwise the judiciary is inclined to be overprotective of the federal government and deaf to states’ concerns.

Jurisprudential shifts in both federal tax immunity and preemption reveal the Supreme Court’s wholesale embrace of this state-protective spin on process federalism. In each of these areas the Court previously nullified state action on a constitutional basis whenever it perceived a conflict between federal and state interests. But it now only invalidates the state law if it perceives congressional intent to do so.23 23.See discussion infra Section III.B.Show More Supremacy Clause immunity has escaped this treatment, and as it currently stands, it remains irreconcilable with the theoretical underpinnings of other Supremacy Clause-derived doctrines. In cases where federal officers claim Supremacy Clause immunity, federal judges still routinely refuse to enforce state criminal law based only on their own perceptions of conflict between federal and state interests, and without any reference to congressional intent. The legal standard these cases apply is no longer consistent with the Supreme Court’s understanding of the Supremacy Clause generally, even if it is reasonably derived from the scarce text of the Court’s century-old Supremacy Clause immunity cases.

This Note proceeds in four parts to propose a new approach to evaluating claims of Supremacy Clause immunity. Part I charts the origin of Supremacy Clause immunity in a string of turn-of-the-century Supreme Court cases and its subsequent development in circuit courts. Part II rejects an approach to Supremacy Clause immunity that has grown in influence in more recent cases and which has engendered some scholarly support: defining Supremacy Clause immunity through analogy to qualified immunity. Part III argues that a more appropriate comparison can be made to a closely analogous doctrine, federal tax immunity, and it describes the development of that doctrine and establishes its relationship to process federalism. Finally, Part IV applies the analysis to Supremacy Clause immunity and explores some of its implications.

  1. Only partially hypothetical, one is in Idaho. See Idaho v. Horiuchi, 253 F.3d 359, 363–64 (9th Cir. 2001). ↑
  2. U.S. Const. art. VI, cl. 2 (“This Constitution, and the Laws of the United States . . . shall be the supreme Law of the Land . . . any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.”). ↑
  3. 135 U.S. 1, 62 (1890). ↑
  4. See id. at 45 (“As [the former Chief Justice] was about leaving the room, . . . he succeeded in drawing a bowie-knife, when his arms were seized by a deputy marshal and others present to prevent him from using it, and they were able to wrench it from him only after a severe struggle.”). ↑
  5. The standard that has developed in lower courts is discussed in Subsection I.B, infra. ↑
  6. See Seth P. Waxman & Trevor W. Morrison, What Kind of Immunity? Federal Officers, State Criminal Law, and the Supremacy Clause, 112 Yale L.J. 2195, 2232 (2003) (stating that Supremacy Clause immunity tends to arise “around historical moments of significant friction between the federal government and the States”). ↑
  7. Nick Corasaniti & Reid J. Epstein, A Voting Rights Push, as States Make Voting Harder, N.Y. Times (Jan. 11, 2022), https://www.nytimes.com/2022/01/11/us/politics/biden-voting-rights-state-laws.html [https://perma.cc/39MC-2PR7] (describing that eighteen states are passing laws containing “a host of new voting restrictions” while Democrats in Congress try to pass a bill prohibiting state laws with those very types of restrictions). ↑
  8.  See Nancy J. Knauer, The COVID-19 Pandemic and Federalism: Who Decides?, 23 N.Y.U. J. Legis. & Pub. Pol’y 1, 8 (2020) (arguing that the current federal-state collaborative approach to pandemic response “left the federal government ill-prepared to respond to the COVID-19 pandemic because of conflicting priorities”); James G. Hodge, Jr., Federal vs. State Powers in Rush to Reopen Amid Coronavirus Pandemic, Just Sec. (Apr. 27, 2020), https://www.justsecurity.org/69880/federal-vs-state-powers-in-rush-to-reopen-amid-corona‌virus-pandemic/ [https://perma.cc/62LX-4B2G] (“[T]he novel coronavirus is exposing a deep rift in American federalism as federal and state governments vie for primacy in remedying the nation’s ills.”). ↑
  9.  See Arizona v. United States, 567 U.S. 387, 416 (2012) (holding, in a suit filed by the United States seeking an injunction against the enforcement of Arizona law, that the law providing for state enforcement of federal immigration policy was preempted). ↑
  10.  Compare H.R. 1280, 117th Cong. § 102 (2021) (limiting defense of qualified immunity in suits against law enforcement officers), with Iowa Code § 670.4A (2023) (reinforcing defense of qualified immunity as a matter of Iowa state law). ↑
  11.  See Virginia v. Amaya, No. 1:21-cr-91, 2021 WL 4942808 (E.D. Va. Oct. 22, 2021), appeal dismissed, 2022 WL 1259877 (4th Cir. Apr. 25, 2022). The Fourth Circuit dismissed the case after a newly elected attorney general ceased pursuing the appeal. Tom Jackman, Va. Attorney General Miyares Ends Prosecution of U.S. Park Police Officers in Ghaisar Case, Wash. Post (Apr. 22, 2022, 7:51 PM), https://www.washingtonpost.com/dc-md-va/2022/04/‌22/ghaisar-case-dismissed/ [https://perma.cc/89CT-6YD2]. ↑
  12. See Norman Eisen et al., Fulton County, Georgia’s Trump Investigation: An Analysis of the Reported Facts and Applicable Law 216–52 (2022). ↑
  13. Waxman & Morrison, supra note 6, at 2241. ↑
  14. 17 U.S. (4 Wheat.) 316, 395 (1819). ↑
  15. See, e.g., Graves v. New York ex rel. O’Keefe, 306 U.S. 466, 477 (1939) (stating that federal immunity from state taxation extends to corporations owned and controlled by the government). ↑
  16. See Stephen A. Gardbaum, The Nature of Preemption, 79 Cornell L. Rev. 767, 801 (1994) (characterizing the turn of the century as a “double shift in the direction of enhanced federal power” based on the Court’s overturning state laws as either preempted or unconstitutional under the Dormant Commerce Clause). ↑
  17. See William Marshall, American Political Culture and the Failures of Process Federalism, 22 Harv. J.L. & Pub. Pol’y
    139

    , 147–48 (1998); Ernest A. Young, Two Cheers for Process Federalism, 46 Vill. L. Rev. 1349, 1350 (2001). ↑

  18. Herbert Wechsler, The Political Safeguards of Federalism: The Role of the States in the Composition and Selection of the National Government, 54 Colum. L. Rev. 543, 546 (1954). ↑
  19. Id. at 558–60. ↑
  20. Id. at 560. ↑
  21. Id. at 547. ↑
  22.  Laurence H. Tribe, Intergovernmental Immunities in Litigation, Taxation, and Regulation: Separation of Powers Issues in Controversies About Federalism, 89 Harv. L. Rev. 682, 695, 712–13 (1976). ↑

  23. See discussion infra Section III.B. ↑

Qualitative Market Definition

Modern antitrust law has come under intense criticism in recent years, with a bipartisan chorus of complaints about the power of technology and internet platforms such as Google, Amazon, Facebook, and Apple. A fundamental issue in these debates is how to define the “market” for the purposes of antitrust law. In the Supreme Court’s first antitrust case on platforms (2018’s Ohio v. American Express), the definition of the relevant market was the central issue. The Justices’ 5-4 split on the issue was particularly stark, with the dissent describing the majority’s approach as not only “wrong” but “economic nonsense.” Partially in response to the controversy in American Express, recent judicial, legislative, and regulatory proposals have even suggested doing away with market definition in some antitrust cases.

The root problem, this Article shows, is that modern market definition has been treated in antitrust as a matter of quantitative economics, with markets defined by economic formulas lacking a connection to widely held social understandings of competition. Antitrust law needs to augment these quantitative approaches by explicitly acknowledging qualitative aspects of markets, including the normative visions of competition they represent. Such an approach is hardly radical. Such qualitative factors have been part of market definition since its origin, and federal antitrust regulators have recently solicited public comment on whether to include qualitative factors in market definition. This Article argues that market definition is necessarily normative and describes an approach for including qualitative criteria in market definition so that market definition accurately reflects the types of competition antitrust law seeks to protect.

Introduction

Few aspects of antitrust are more central, and more controversial, than the role of market definition. Market definition plays a role in almost every antitrust case.1 1.Jonathan B. Baker, Market Definition: An Analytical Overview, 74 Antitrust L.J. 129, 129 (2007) (“Throughout the history of U.S. antitrust litigation, the outcome of more cases has surely turned on market definition than on any other substantive issue.”).Show More Market definition featured prominently in 2018’s Ohio v. American Express,2 2.Ohio v. Am. Express Co., 138 S. Ct. 2274, 2285–87 (2018).Show More the first case in which the Supreme Court addressed the question of how U.S. antitrust law should regulate “platforms.”3 3.In the economics literature, a “platform” or “two-sided” market is one in which “1) two sets of agents interact through an intermediary or platform, and 2) the decisions of each set of agents affects the outcomes of the other set of agents, typically through an externality.” Marc Rysman, The Economics of Two-Sided Markets, 23 J. Econ. Persps. 125, 125 (2009). Facebook offers a typical example. Facebook produces two products (social media services and advertising services) that are consumed by two distinct groups (social media “friends” and advertisers) and the value of at least one product (the advertising) increases with consumption of the other product (social media) by a different group (“friends”). See Thomas B. Nachbar, Platform Effects, 62 Jurimetrics 1, 8 (2021). These indirect network effects and the externalities they generate separate platforms from other businesses, which also bring together distinct groups of users. Mark Armstrong, Competition in Two-Sided Markets, 37 RAND J. Econ. 668, 673 (2006); David S. Evans, The Antitrust Economics of Multi-Sided Platform Markets, 20 Yale J. on Reg. 325, 332–33 (2003); Geoffrey G. Parker & Marshall W. Van Alstyne, Two-Sided Network Effects: A Theory of Information Product Design, 51 Mgmt. Sci. 1494, 1496, 1502 (2005). Platforms have been canonically described by Jean-Charles Rochet and Jean Tirole. See Jean-Charles Rochet & Jean Tirole, Platform Competition in Two-Sided Markets, 1 J. Eur. Econ. Ass’n 990, 990 (2003). The terms “platform,” “two-sided,” and “multi-sided” are used interchangeably in the literature. See, e.g., Evans, supra, at 325; David S. Evans & Richard Schmalensee, The Industrial Organization of Markets with Two-Sided Platforms, 3 Competition Pol’y Int’l 150, 151 (2007); Lapo Filistrucchi, Damien Geradin, Eric van Damme & Pauline Affeldt, Market Definition in Two-Sided Markets: Theory and Practice, 10 J. Competition L. & Econ. 293, 299 (2014); Rochet & Tirole, supra, at 990. Following conventional usage, I will also use the terms interchangeably.Show More But correctly defining relevant markets is the subject of much controversy.4 4.For a comprehensive treatment of the problem, see William M. Landes & Richard A. Posner, Market Power in Antitrust Cases, 94 Harv. L. Rev. 937 (1981).Show More The case that introduced modern market definition to antitrust, United States v. E.I. du Pont de Nemours & Co. (Cellophane),5 5.351 U.S. 377 (1956).Show More is widely known in antitrust circles for giving birth to its own brand of error: the “Cellophane fallacy.”6 6.E.g., Baker, supra note 1, at 164; Thomas G. Krattenmaker & Steven C. Salop, Appendix A—Analyzing Anticompetitive Exclusion, 56 Antitrust L.J. 71, 80 n.32 (1987) (“This error, now termed the Cellophane fallacy . . . .”); Gene C. Schaerr, The Cellophane Fallacy and the Justice Department’s Guidelines for Horizontal Mergers, 94 Yale L.J. 670, 677 (1985); see Donald F. Turner, Antitrust Policy and the Cellophane Case, 70 Harv. L. Rev. 281, 309 (1956); Landes & Posner, supra note 4, at 960–61 (describing the error in the Cellophane case).Show More American Express itself resulted in a 5‑4 split on the market definition, with the dissent describing the majority’s approach as not only “wrong” but “economic nonsense.”7 7.138 S. Ct. at 2295, 2297 (Breyer, J., dissenting).Show More Even proponents of market definition are dubious about its accuracy,8 8.See Landes & Posner, supra note 4, at 960–61.Show More and at least one prominent antitrust scholar, Louis Kaplow, believes that the problems inherent in market definition are so central as to warrant its abandonment in antitrust.9 9.Louis Kaplow, Why (Ever) Define Markets?, 124 Harv. L. Rev. 437, 440 (2010).Show More

The current debate over market definition is universal, with scholars like Kaplow being joined by jurists, legislators, and regulators arguing not only over how to conduct market definition but whether it needs to be conducted at all. In American Express, Justice Breyer wrote a strong dissent, arguing not only that the majority wrongly defined the relevant market10 10.138 S. Ct. at 2297 (Breyer, J., dissenting).Show More but also that market definition was unnecessary because the district court had found evidence of anticompetitive effects, which obviated the need to define the market in the first place.11 11.Id. at 2296.Show More Legislation proposed in the last Congress by Senator Amy Klobuchar would have removed market definition as a requirement in many antitrust cases12 12.See Competition and Antitrust Law Enforcement Reform Act of 2021, S. 225, 117th Cong. § 13(a) (2021).Show More and would prohibit antitrust courts from requiring market definition in most cases if direct evidence of “actual or likely harm to competition” is present.13 13.Id. § 13(b).Show More The Department of Justice (“DOJ”) and the Federal Trade Commission (“FTC”), as part of their revision of the Horizontal Merger Guidelines, have recently solicited public comment on whether it is “necessary to precisely define [a relevant] market in every case,”14 14.U.S. Dep’t of Just. & U.S. Fed. Trade Comm’n, Request for Information on Merger Enforcement 5 (Jan. 18, 2022) [hereinafter DOJ/FTC Request for Information], https://www.‌regulations.gov/document/FTC-2022-0003-0001 [https://perma.cc/3TSX-GM3D].Show More how to change market definition to include qualitative criteria, or whether to eliminate it if likely anticompetitive effects can be shown.15 15.Id.Show More The FTC doubled down on the expendability of market definition in its recent policy statement on the application of Section 5 of the Federal Trade Commission Act to competition cases.16 16.U.S. Fed. Trade Comm’n, Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act 10, 15 (Nov. 10, 2022) [hereinafter FTC Policy Statement], https://www.ftc.gov/system/files/ftc_gov/pdf/p221202sec5enforcementpolicystatement_002.pdf [https://perma.cc/8YP4-EU8Q].Show More Such proposals (like Justice Breyer’s) could shift the emphasis in antitrust away from market definition, and the DOJ/FTC proposed changes to the merger guidelines suggest changing how market definition should be conducted—changes with the potential to revolutionize how antitrust cases are litigated. These conversations have placed the meaning and necessity of market definition at the forefront of antitrust law.

This Article reframes the ongoing debate over market definition by taking a step back to consider the problem of market definition more generally. The platform markets at issue in American Express (and subject to recent proposals) present particular challenges to market definition, but in confronting those challenges, the case provides valuable insight into how evidence of anticompetitive effects should (and should not) inform antitrust analysis more generally. There are few clear answers, although what is clear is that Justice Breyer’s (and Senator Klobuchar’s) claim that market definition is unnecessary is not only wrong but illogical.

Reliance on anticompetitive effects is frequently unreliable, and Justice Breyer’s invocation of anticompetitive effects in lieu of market definition demonstrates a deeper misunderstanding about the relationship between observed effects and anticompetitive harm. For instance, the evidence of anticompetitive effects that Justice Breyer would have relied on in American Express—higher prices—are singularly ill-suited to identifying the market power that is the target of the antitrust laws. Indeed, seriously considering Justice Breyer’s reliance on price emphasizes other problems with the economic definition of market power—captured by the Lerner Index17 17.See infra text accompanying notes 26–27.Show More—that has been accepted by antitrust theorists for decades.18 18.See, e.g., IIB Phillip E. Areeda, Herbert Hovenkamp & John L. Solow, Antitrust Law ¶ 503b (5th ed. 2021) (explaining the Lerner Index); Baker, supra note 1, at 142 n.49; Kaplow, supra note 9, at 445 (“This concept of market power is usually expressed using the Lerner Index.”); Landes & Posner, supra note 4, at 938–39.Show More

By reconsidering market definition and the anticompetitive effects that Justice Breyer would have relied on in its stead, we can gain new insight into the way market definition and conceptions of market power have been used and misused in American antitrust law over the last half century. Attacked by Donald Turner as economically inaccurate since its inception,19 19.See Turner, supra note 6, at 309–10.Show More the Cellophane approach to market definition has nevertheless survived. What those like Kaplow have made clear, though, is that the established practice of defining relevant markets is problematic at best. But the problems with current understandings of market definition and market power go far beyond criticisms identified by Kaplow and others. Theories of market definition and market power go to the very core of what is “anticompetitive,” a concept dependent on normative understandings of antitrust law. Indeed, it was just such a criticism over the Court’s understanding of antitrust law, not its understanding of economics, that led Turner to criticize the Court’s market definition in the Cellophane case in the first place.20 20.Id.Show More When the normative basis of Turner’s criticism is understood, it becomes an argument for, not against, antitrust market definition.

This Article proceeds in four Parts. Part I describes the general debate over market definition, whose merits are usually debated with regard to a specific use of market definition: the inference of market power from market shares, a singular emphasis that ignores other ways in which market definition can be useful in antitrust. Part II considers the problem of market definition in American Express and highlights problems with how the district court and Justice Breyer used pricing information as the basis for finding anticompetitive effects, a problem that goes beyond American Express. Part III expands on Part II’s consideration of American Express, explaining how the problem of focusing on price information in American Express is not limited to platform markets but applies generally to analysis of observed market effects in antitrust. Although price increases might reflect anticompetitive market power, they are equally indicative of competition through product differentiation. For the purposes of antitrust, the price effects are secondary to effects on output. That recognition puts in question antitrust scholars’ long-standing reliance on comparisons between price and marginal cost, as expressed in the Lerner Index, to define market power in antitrust cases. In the end, the Lerner Index does not just represent an incomplete understanding of market power; it embodies a normative understanding of competition that does not track the content of the antitrust laws. As explained in Part IV, antitrust actually protects a conception of competition that is far more complex, and quite distinct, from that embodied by the Lerner Index. So understood, market definition is a necessary element to describing the competition that antitrust seeks to protect. For the purposes of applying the antitrust law, relevant markets must be defined not only through economic tools like the Lerner Index; it is also necessary to use other legal and socially relevant features of markets, and Part IV considers what those factors might be. The Article ends with a brief Conclusion.

  1. Jonathan B. Baker, Market Definition: An Analytical Overview, 74 Antitrust L.J. 129, 129 (2007) (“Throughout the history of U.S. antitrust litigation, the outcome of more cases has surely turned on market definition than on any other substantive issue.”). ↑
  2. Ohio v. Am. Express Co., 138 S. Ct. 2274, 2285–87 (2018). ↑
  3. In the economics literature, a “platform” or “two-sided” market is one in which “1) two sets of agents interact through an intermediary or platform, and 2) the decisions of each set of agents affects the outcomes of the other set of agents, typically through an externality.” Marc Rysman, The Economics of Two-Sided Markets, 23 J. Econ. Persps. 125, 125 (2009). Facebook offers a typical example. Facebook produces two products (social media services and advertising services) that are consumed by two distinct groups (social media “friends” and advertisers) and the value of at least one product (the advertising) increases with consumption of the other product (social media) by a different group (“friends”). See Thomas B. Nachbar, Platform Effects, 62 Jurimetrics 1, 8 (2021). These indirect network effects and the externalities they generate separate platforms from other businesses, which also bring together distinct groups of users. Mark Armstrong, Competition in Two-Sided Markets, 37 RAND J. Econ. 668, 673 (2006); David S. Evans, The Antitrust Economics of Multi-Sided Platform Markets, 20 Yale J. on Reg. 325, 332–33 (2003); Geoffrey G. Parker & Marshall W. Van Alstyne, Two-Sided Network Effects: A Theory of Information Product Design, 51 Mgmt. Sci. 1494, 1496, 1502 (2005). Platforms have been canonically described by Jean-Charles Rochet and Jean Tirole. See Jean-Charles Rochet & Jean Tirole, Platform Competition in Two-Sided Markets, 1 J. Eur. Econ. Ass’n 990, 990 (2003). The terms “platform,” “two-sided,” and “multi-sided” are used interchangeably in the literature. See, e.g., Evans, supra, at 325; David S. Evans & Richard Schmalensee, The Industrial Organization of Markets with Two-Sided Platforms, 3 Competition Pol’y Int’l 150, 151 (2007); Lapo Filistrucchi, Damien Geradin, Eric van Damme & Pauline Affeldt, Market Definition in Two-Sided Markets: Theory and Practice, 10 J. Competition L. & Econ. 293, 299 (2014); Rochet & Tirole, supra, at 990. Following conventional usage, I will also use the terms interchangeably. ↑
  4. For a comprehensive treatment of the problem, see William M. Landes & Richard A. Posner, Market Power in Antitrust Cases, 94 Harv. L. Rev. 937 (1981). ↑
  5. 351 U.S. 377 (1956). ↑
  6. E.g., Baker, supra note 1, at 164; Thomas G. Krattenmaker & Steven C. Salop, Appendix A—Analyzing Anticompetitive Exclusion, 56 Antitrust L.J. 71, 80 n.32 (1987) (“This error, now termed the Cellophane fallacy . . . .”); Gene C. Schaerr, The Cellophane Fallacy and the Justice Department’s Guidelines for Horizontal Mergers, 94 Yale L.J. 670, 677 (1985); see Donald F. Turner, Antitrust Policy and the Cellophane Case, 70 Harv. L. Rev. 281, 309 (1956); Landes & Posner, supra note 4, at 960–61 (describing the error in the Cellophane case). ↑
  7. 138 S. Ct. at 2295, 2297 (Breyer, J., dissenting). ↑
  8. See Landes & Posner, supra note 4, at 960–61. ↑
  9. Louis Kaplow, Why (Ever) Define Markets?, 124 Harv. L. Rev. 437, 440 (2010). ↑
  10. 138 S. Ct. at 2297 (Breyer, J., dissenting). ↑
  11. Id. at 2296. ↑
  12.  See Competition and Antitrust Law Enforcement Reform Act of 2021, S. 225, 117th Cong. § 13(a) (2021). ↑
  13. Id. § 13(b). ↑
  14.  U.S. Dep’t of Just. & U.S. Fed. Trade Comm’n, Request for Information on Merger Enforcement 5 (Jan. 18, 2022) [hereinafter DOJ/FTC Request for Information], https://www.‌regulations.gov/document/FTC-2022-0003-0001 [https://perma.cc/3TSX-GM3D]. ↑
  15. Id. ↑
  16.  U.S. Fed. Trade Comm’n, Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act 10, 15 (Nov. 10, 2022) [hereinafter FTC Policy Statement], https://www.ftc.gov/system/files/ftc_gov/pdf/p221202sec5enforcementpolicystatement_002.pdf [https://perma.cc/8YP4-EU8Q]. ↑
  17. See infra text accompanying notes 26–27. ↑
  18. See, e.g., IIB Phillip E. Areeda, Herbert Hovenkamp & John L. Solow, Antitrust Law ¶ 503b (5th ed. 2021) (explaining the Lerner Index); Baker, supra note 1, at 142 n.49; Kaplow, supra note 9, at 445 (“This concept of market power is usually expressed using the Lerner Index.”); Landes & Posner, supra note 4, at 938–39. ↑
  19. See Turner, supra note 6, at 309–10. ↑

  20. Id. ↑

Disclosing Corporate Diversity

This Article’s central claim is that disclosures can be used instrumentally to increase diversity in corporate America in terms of race, gender, sexual orientation, and disability. Until recently, scholars and policymakers have underappreciated this possibility because diversity was often omitted from the larger Environmental, Social, and Governance (“ESG”) disclosures context, even though, as this Article empirically shows, public companies make diversity disclosures in that context.

Diversity disclosures are important not only for shareholders’ interests in transparency, but also for the benefit of other stakeholders, including employees, customers, and the communities in which companies operate, who want to know whether companies are diverse to determine where to work, what brands to buy, and what companies value. The literature has yet to explore the significance of diversity disclosures for the benefit of all these stakeholders.

This Article argues that legal reform is needed to use disclosures to improve corporate diversity for the benefit of all stakeholders. Policy-makers must go beyond the confines of the securities laws to translate disclosure into societal change. This Article examines contemporary law and policy approaches that fall short of having forward-looking provisions that would have an impact on improving diversity. It proposes disclosure rules with statistical and forward-looking provisions and mechanisms that shareholder and employee activists, and others, can use to pressure companies to improve diversity incrementally.

Introduction

Since 2020, diversity has become a central concern for companies and their leaders, prompting more companies to voluntarily incorporate diversity into their Environmental, Social, and Governance (“ESG”) disclosures.1 1.ESG, which has its origins in the United Nations’ environmental movement, is about integrating environmental, social, and governance issues into business. For an excellent discussion about the origins and ambiguity around the term ESG, see Elizabeth Pollman, The Making and Meaning of ESG 20–29 (Inst. L. & Econ., Working Paper No. 659, 2022).Show More A 2021 survey showed that diversity, equity, and inclusion was the top focus—95% for public companies and 63% for private companies—in ESG reports that companies are currently disclosing or plan to disclose in the future.2 2.Thompson Hine, An ESG Snapshot: Survey Confirms Companies Are Responding to Increasing Expectations 5 (2021), https://admin.thompsonhine.com/wp-content/uploads/202‌2/04/An_ESG_Snapshot.pdf [https://perma.cc/VHV7-9SE8]. Public companies are more likely to disclose ESG matters than private companies. L. Emily Hickman, Information Asymmetry in CSR Reporting: Publicly-Traded Versus Privately-Held Firms, 11 Sustainability Acct., Mgmt. & Pol’y J. 207, 219 (2020).Show More Indeed, as the empirical research in this Article shows, there has been a significant increase in diversity disclosures in companies’ ESG reports in the last five years. This Article defines corporate diversity as the representation and inclusion of employees, management, and board members in a company, by gender, race, ethnicity, LGBTQ+ status, and disability, and the provision of equal employment opportunity.

This Article makes three claims. The first is that disclosures can be used instrumentally to diversify corporate boardrooms and workplaces. The second is that while diversity disclosures are important for shareholders who want to know about diversity in the companies in which they invest, other stakeholders, including employees, suppliers, customers, community members, advocacy groups of various types, activists, reformers, and the public as a whole,3 3.Survey after survey reveals that employees, customers, and the public all want companies to encourage or prioritize workplace diversity and inclusion. See, e.g., Susan Caminiti, Majority of Employees Want to Work for a Company that Values Diversity, Equity and Inclusion, Survey Shows, CNBC: Workforce Wire (Apr. 30, 2021, 3:12 PM), https://www.cnbc.com/2021/04/30/diversity-equity-and-inclusion-are-important-to-workers-survey-shows.html# [https://perma.cc/8NPJ-HZH8]; Shelby Jordan, 64% of Consumers Consider Making an Immediate Purchase After Seeing Diverse Advertisements, New Data Shows, PR Newswire (Nov. 11, 2020), https://www.prnewswire.com/news-releases/64-of-consumers-consider-making-an-immediate-purchase-after-seeing-diverse-advertisements-ne‌w-data-shows-301170981.html [https://perma.cc/5XHT-KECK]; Victoria Petrock, Consumers Expect Brands to Be Inclusive, Insider Intel. (Nov. 25, 2020), https://www.emarketer.com/content/consumers-expect-brands-inclusive [https://perma.cc/D‌M29-8H9G]; Juliana Menasce Horowitz, Americans See Advantages and Challenges in Country’s Growing Racial and Ethnic Diversity, Pew Rsch. Ctr. (May 8, 2019), https://www.pewresearch.org/social-trends/2019/05/08/americans-see-advantages-and-challe‌nges-in-countrys-growing-racial-and-ethnic-diversity/ [https://perma.cc/X568-XDGJ] (reporting that 75% of Americans say it is very or somewhat important for companies to promote racial and ethnic diversity in their workplace).Show More are also interested in diversity disclosures. The literature has yet to explore the importance of corporate diversity disclosures to these other stakeholders. The third is that legislative reform is needed for disclosures to be used as an instrument to increase corporate diversity.

The Article makes theoretical, empirical, and policy contributions in relation to these claims. Theoretically, it brings the ESG and corporate diversity literatures together for the first time. ESG is about the role of business in society, particularly whether and how companies consider the public interest in their practices and policies.4 4.Sean O’Neill, What is the Difference Between CSR and ESG?, Corp. Governance Inst. (July 6, 2022), https://www.thecorporategovernanceinstitute.com/insights/lexicon/what-is-the-difference-between-csr-and-esg [https://perma.cc/R7QY-D8VL].Show More

Scholars have long written about Corporate Social Responsibility (“CSR”) and ESG, and corporate diversity as two separate subjects.5 5.See infra notes 31–36 and accompanying text.Show More CSR and ESG scholarship can be traced to the 1930s debate between Columbia Law School’s Adolph Berle and Harvard Law School’s Merrick Dodd.6 6.Ronald Chen & Jon Hanson, The Illusion of Law: The Legitimating Schemas of Modern Policy and Corporate Law, 103 Mich. L. Rev. 1, 35 (2004).Show More Berle described the protection of shareholders as the critical challenge facing corporate law.7 7.A.A. Berle, Jr., Corporate Powers as Powers in Trust, 44 Harv. L. Rev. 1049, 1049 (1931).Show More Dodd focused on the power dynamics between corporations and society and argued that corporate managers should be attentive not just to shareholders, but to other stakeholders.8 8.E. Merrick Dodd, Jr., For Whom Are Corporate Managers Trustees?, 45 Harv. L. Rev. 1145, 1158–61 (1932).Show More This debate crystallized in the 1970s—at a similar moment as the environmental movement sought to mitigate ecological harm caused by certain corporate practices—with Milton Friedman’s proclamation that managers should act primarily in the interest of shareholders rather than other stakeholders.9 9.Milton Friedman, A Friedman Doctrine—The Social Responsibility of Business is to Increase Its Profits, N.Y. Times (Sept. 13, 1970), https://www.nytimes.com/‌1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html/ [https://perma.cc/6VKK-MWZV].Show More This academic debate is still very much alive today.10 10.See Jill E. Fisch & Steven Davidoff Solomon, Should Corporations Have a Purpose?, 99 Tex. L. Rev. 1309, 1309 (2021); Mark J. Roe, Corporate Purpose and Corporate Competition, 99 Wash. U. L. Rev. 223, 223–25 (2021); Tom C.W. Lin, Incorporating Social Activism, 98 B.U. L. Rev. 1535, 1537–38 (2018); Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law, 85 Va. L. Rev. 247, 249–51 (1999); David Millon, Essay, New Game Plan or Business As Usual? A Critique of the Team Production Model of Corporate Law, 86 Va. L. Rev. 1001, 1001–03 (2000); Ronald M. Green, Shareholders as Stakeholders: Changing Metaphors of Corporate Governance, 50 Wash. & Lee L. Rev. 1409, 1409–14 (1993); Oliver Williamson, Corporate Governance, 93 Yale L.J. 1197, 1197–1200 (1984).Show More The Business Roundtable’s declaration in 2019 that companies have a “fundamental commitment to all . . . stakeholders”11 11.Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy that Serves All Americans’, Bus. Roundtable (Aug. 19, 2019), https://www.business‌roundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans [https://perma.cc/4UTS-ABFF].Show More further complicated the debate since some scholars have argued that the declaration does not drastically shift companies’ purpose beyond shareholder wealth maximization.12 12.See, e.g., Dorothy S. Lund, Corporate Finance for Social Good, 121 Colum. L. Rev. 1617, 1619–20 (2021). CEOs from 181 companies representing some of America’s largest companies signed the declaration. Bus. Roundtable, supra note 11.Show More

The corporate diversity literature has its roots in the passage of Title VII of the Civil Rights Act of 1964 and the Equal Employment Opportunity Act of 1972, which, among other things, address the role of corporations in gender and racial discrimination in the workplace and the economy.13 13.Civil Rights Act of 1964, Pub. L. No. 88-352, §§ 703–704, 78 Stat. 241, 253–59; Equal Employment Opportunity Act of 1972, Pub. L. No. 92-261, 86 Stat. 103.Show More The U.S. Supreme Court’s diversity discourse has been integrated into corporate policies since the 1990s, which accelerated in 2020.14 14.See, e.g., Regents of Univ. of Cal. v. Bakke, 438 U.S. 265, 313 (1978) (concluding that universities might use race as one factor among others to promote the “robust exchange of ideas” that might flow from a racially diverse academic community); see also Ellen Berrey, The Enigma of Diversity: The Language of Race and the Limits of Racial Justice 27, 196–97 (2015) (discussing the development of diversity management in the late twentieth century).Show More

Traditionally, CSR and ESG disclosures—which are typically not covered by financial metrics—were internal and external facing documents companies used to communicate their philanthropic efforts and their impact on the environment and the communities in which they operate.15 15.Catherine Cote, What is a CSR Report and Why is it Important?, Harv. Bus. Sch. Online (Apr. 20, 2021), https://online.hbs.edu/blog/post/what-is-a-csr-report [https://perma.cc/6XK9‌-SL6M].Show More The CSR and ESG disclosure literature mirrored this traditional form of disclosures by mostly focusing on climate, environmental, and sustainability matters, and to some extent philanthropy, with little to no engagement with diversity.16 16.See, e.g., Cynthia A. Williams, The Securities and Exchange Commission and Corporate Social Transparency, 112 Harv. L. Rev. 1197, 1199–1201 (1999); Russell B. Stevenson, Jr., The SEC and the New Disclosure, 62 Cornell L. Rev. 50, 50–59 (1976); Douglas M. Branson, Progress in the Art of Social Accounting and Other Arguments for Disclosure on Corporate Social Responsibility, 29 Vand. L. Rev. 539, 575–76, 581 (1976); Theodore Sonde & Harvey L. Pitt, Utilizing the Federal Securities Laws to “Clear the Air! Clean the Sky! Wash the Wind!”, 16 How. L.J. 831, 834–35 (1971); David Hess, Social Reporting: A Reflexive Law Approach to Corporate Social Responsiveness, 25 J. Corp. L. 41, 42–46 (1999); Janet E. Kerr, The Creative Capitalism Spectrum: Evaluating Corporate Social Responsibility Through a Legal Lens, 81 Temp. L. Rev. 831, 846 (2008); Thomas Lee Hazen, Social Issues in the Spotlight: The Increasing Need to Improve Publicly-Held Companies’ CSR and ESG Disclosures, 23 U. Pa. J. Bus. L. 740, 741–47 (2021); Daniel C. Esty & Quentin Karpilow, Harnessing Investor Interest in Sustainability: The Next Frontier in Environmental Information Regulation, 36 Yale J. on Regul. 625, 625–28 (2019).Show More Corporate diversity scholarship, on the other hand, has mostly focused on the business case for diversity, largely omitting the CSR and ESG disclosure framework.17 17.See, e.g., Jeffrey Meli & James C. Spindler, The Promise of Diversity, Inclusion, and Punishment in Corporate Governance, 99 Tex. L. Rev. 1387, 1387–93 (2021); Lisa M. Fairfax, Board Diversity Revisited: New Rationale, Same Old Story?, 89 N.C. L. Rev. 855, 855–59 (2011) [hereinafter Fairfax, Revisited] (criticizing the overreliance on business justifications for diversifying corporate boards); Lisa M. Fairfax, The Bottom Line on Board Diversity: A Cost-Benefit Analysis of the Business Rationales for Diversity on Corporate Boards, 2005 Wis. L. Rev. 795, 796–99 [hereinafter Fairfax, Bottom Line]. The exception is Veronica Martinez & Gina-Gail S. Fletcher, Equality Metrics, 130 Yale L.J.F. 869, 869, 875 (2021), which addresses the role of diversity disclosures but in the context of shareholder transparency and decision making.Show More In fact, expanding the ESG literature to include corporate diversity is important for developing new theories of ESG and informing diversity policy as the field changes.

Empirically, this Article shows that, at least in the last five years, public companies have firmly integrated diversity disclosures in their ESG reports. This Article uses machine-learning techniques to analyze 3,461 ESG reports for 1,288 Russell 3000 index companies listed on the Nasdaq Stock Market LLC (“Nasdaq”) and the New York Stock Exchange (“NYSE”) for the five-year period from 2017 to 2021. For example, 95% of corporations mentioned racial or gender diversity in their 2021 ESG disclosures.

In terms of policy, this Article makes the case for using disclosures instrumentally to bring about change that would benefit all stakeholders through new legislation. This Article addresses the limitations of emerging attempts to mandate diversity disclosures, particularly by the Securities and Exchange Commission (“SEC”). Since the 1960s and 1970s, companies have grappled with whether and how to disclose their CSR and ESG policies and practices that impact shareholders, other stakeholders, and society.18 18.See infra Section I.C and accompanying text.Show More Scholars and other commentators have since debated whether the SEC has the authority to require the disclosure of ESG practices.19 19.See generally Williams, supra note 16, at 1205–07 (arguing that the SEC has the authority to require expanded disclosure and should use this authority to ensure “corporate social transparency”); Stevenson, supra note 16, at 58–62 (explaining and rebutting the SEC’s reluctancy to use its authority to require the disclosure of policies related to social goods); Branson, supra note 16, at 631–34 (discussing Judge Charles Richey’s perspective on the SEC’s authority to require social responsibility disclosure); Sonde & Pitt, supra note 16, at 835–36 (discussing the SEC’s opportunity to “help promote the nation’s environmental policy” through disclosure requirements related to the National Environmental Policy Act); Paul G. Mahoney & Julia D. Mahoney, The New Separation of Ownership and Control: Institutional Investors and ESG, 2021 Colum. Bus. L. Rev. 839, 843–45 (cautioning the SEC against adopting ESG disclosure mandates).Show More Even as academic debates have continued, however, corporations began to voluntarily disclose their CSR and ESG reports as early as the 1990s, largely because of shareholder pressure for transparency and information.20 20.See Cathy Hwang & Yaron Nili, Shareholder-Driven Stakeholderism, U. Chi. L. Rev. Online (Apr. 15, 2020), https://lawreviewblog.uchicago.edu/2020/04/15/shareholder-driven-stakeholderism-hwang-nili/ [https://perma.cc/7FTT-RYGP]; Andrew J. Hoffman, A Strategic Response to Investor Activism, 37 Sloan Mgmt. Rev. 51, 51 (1996); Michal Barzuza, Quinn Curtis & David H. Webber, Shareholder Value(s): Index Fund ESG Activism and the New Millennial Corporate Governance, 93 S. Cal. L. Rev. 1243, 1265 (2020); Stavros Gadinis & Amelia Miazad, Corporate Law and Social Risk, 73 Vand. L. Rev. 1401, 1464 (2020).Show More

In August 2021, the SEC approved Nasdaq’s rule requiring companies listed on its exchange to disclose the diversity of their boards pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 , and Rule 19b-4,21 21.15 U.S.C. § 78s(b)(1); 17 C.F.R. § 240.19b-4 (2006).Show More making it the first-ever ESG disclosure mandate. While the rule is an important start to mandating diversity disclosures, the SEC is limited in its authority to use disclosures for social change. This limitation is evidenced by three features of the Nasdaq/SEC rule. First, the rule requires Nasdaq-listed companies to have two diverse board members—at least one director who self‑identifies as female and at least one director who self-identifies as an underrepresented minority or as LGBTQ+—or explain why they lack diversity on their boards.22 22.Underrepresented minority is defined as identifying as Black (or African American), Latinx, Asian, Native American, Alaska Native, Native Hawaiian, Pacific Islander, or a combination of multiple of these ethnicities; LGBTQ+ is defined as an individual who “self-identifies as any of the following: lesbian, gay, bisexual, transgender, or as a member of the queer community.” Order Approving Changes to Listing Rules Related to Board Diversity, 86 Fed. Reg. 44424, 44424–25, 44425 n.18 (Aug. 6, 2021). The SEC itself is looking to propose its own board diversity disclosure regulations for companies and may include disability status in its rules. See Lydia Beyoud & Andrew Ramonas, Disability Advocates Seek Inclusion in SEC Board Diversity Rules, Bloomberg L. (Sept. 30, 2021), https://news.bloomberglaw.com/‌esg/disability-advocates-seek-inclusion-in-sec-board-diversity-rules [https://perma.cc/3Z7W-H2KD].Show More The “explain” portion of this “disclose or explain” approach means that companies do not have to disclose two diverse board members if they can explain why they lack board diversity. The SEC states that, “[w]hile the proposal may have the effect of encouraging some Nasdaq-listed companies to increase diversity on their boards, the proposed rules do not mandate any particular board composition.”23 23.Order Approving Changes to Listing Rules Related to Board Diversity, 86 Fed. Reg. at 44428.Show More Therefore, the rule advances shareholder transparency but stops short of using disclosures to increase board diversity. Second, the rule applies only to boards and would not require the disclosure of employee or executive diversity, which significantly limits its reach. Third, it only applies to public companies listed on the Nasdaq stock exchange; it does not apply to companies listed on other exchanges or private companies with large valuations that are like public companies, thereby omitting a large subset of the economy.

This Article argues that Congress should step in to establish a diversity disclosure obligation that can increase diversity in both public and private companies. The United States House of Representatives recently passed the ESG Disclosure Simplification Act of 2021 (“ESG Disclosure Act”),24 24.The ESG Disclosure Simplification Act was passed as part of the Corporate Governance Improvement and Investor Protection Act, H.R. 1187, 117th Cong. (as passed by House, June 16, 2021). The Bill was originally introduced in the House as the ESG Disclosure Simplification Act (“EDSA”) on February 18, 2021. 167 Cong. Rec. H535 (daily ed. Feb. 18, 2021).Show More which would require companies to disclose their ESG matters, including employee and board diversity.25 25.H.R. 1187 § 603. The Act would also require companies to disclose their environmental and climate risk mitigation measures. Id. § 403.Show More While the proposed ESG Disclosure Act is a significant step toward mandating diversity disclosures for transparency, it lacks a forward-looking component to increase diversity over time.26 26.See Atinuke O. Adediran, Disclosures for Equity, 122 Colum. L. Rev. 865, 873–74 (2022) (explaining how to use disclosures to reach racial equity ends).Show More This Article proposes a comprehensive disclosure regime with statistical and forward-looking components and explains how shareholder and employee activists can use disclosures to push companies to actually increase diversity incrementally over time.

This Article proceeds in four parts. Part I discusses the scholarship on CSR and ESG, the history of movements to make CSR and ESG disclosures mandatory, and the history of voluntary ESG disclosures. Part II discusses contemporary law, policy, and private ordering around diversity disclosures, including the recent Nasdaq/SEC rule mandating diversity disclosures and Congress’s attempt to mandate diversity disclosures in the ESG Disclosure Act. Part III describes the data and methods used for analysis and empirically shows that diversity disclosures are already firmly included in ESG reports. Part IV analyzes the shortcomings of the Nasdaq/SEC and legislative approaches, arguing that because the purpose of securities laws is limited to ensuring transparency for shareholders to make investment decisions, it is imperative to have a comprehensive disclosure regime that can be used to improve board and workplace diversity rather than to merely provide transparency or serve other shareholder interests. Part IV then proposes a comprehensive disclosure legislation that includes statistical information and forward-looking provisions that aim to gradually increase corporate diversity to benefit a broader range of stakeholders. It also discusses the role of shareholder and employee activists as mechanisms to pressure companies to improve diversity under both the proposed regime and the current Nasdaq/SEC “disclose or explain” rule.

  1.  ESG, which has its origins in the United Nations’ environmental movement, is about integrating environmental, social, and governance issues into business. For an excellent discussion about the origins and ambiguity around the term ESG, see Elizabeth Pollman, The Making and Meaning of ESG 20–29 (Inst. L. & Econ., Working Paper No. 659, 2022). ↑
  2.  Thompson Hine, An ESG Snapshot: Survey Confirms Companies Are Responding to Increasing Expectations 5 (2021), https://admin.thompsonhine.com/wp-content/uploads/202‌2/04/An_ESG_Snapshot.pdf [https://perma.cc/VHV7-9SE8]. Public companies are more likely to disclose ESG matters than private companies. L. Emily Hickman, Information Asymmetry in CSR Reporting: Publicly-Traded Versus Privately-Held Firms, 11 Sustainability Acct., Mgmt. & Pol’y J. 207, 219 (2020). ↑
  3. Survey after survey reveals that employees, customers, and the public all want companies to encourage or prioritize workplace diversity and inclusion. See, e.g., Susan Caminiti, Majority of Employees Want to Work for a Company that Values Diversity, Equity and Inclusion, Survey Shows, CNBC: Workforce Wire (Apr. 30, 2021, 3:12 PM), https://www.cnbc.com/2021/04/30/diversity-equity-and-inclusion-are-important-to-workers-survey-shows.html# [https://perma.cc/8NPJ-HZH8]; Shelby Jordan, 64% of Consumers Consider Making an Immediate Purchase After Seeing Diverse Advertisements, New Data Shows, PR Newswire (Nov. 11, 2020), https://www.prnewswire.com/news-releases/64-of-consumers-consider-making-an-immediate-purchase-after-seeing-diverse-advertisements-ne‌w-data-shows-301170981.html [https://perma.cc/5XHT-KECK]; Victoria Petrock, Consumers Expect Brands to Be Inclusive, Insider Intel. (Nov. 25, 2020), https://www.emarketer.com/content/consumers-expect-brands-inclusive [https://perma.cc/D‌M29-8H9G]; Juliana Menasce Horowitz, Americans See Advantages and Challenges in Country’s Growing Racial and Ethnic Diversity, Pew Rsch. Ctr. (May 8, 2019), https://www.pewresearch.org/social-trends/2019/05/08/americans-see-advantages-and-challe‌nges-in-countrys-growing-racial-and-ethnic-diversity/ [https://perma.cc/X568-XDGJ] (reporting that 75% of Americans say it is very or somewhat important for companies to promote racial and ethnic diversity in their workplace). ↑
  4. Sean O’Neill, What is the Difference Between CSR and ESG?, Corp. Governance Inst. (July 6, 2022), https://www.thecorporategovernanceinstitute.com/insights/lexicon/what-is-the-difference-between-csr-and-esg [https://perma.cc/R7QY-D8VL]. ↑
  5. See infra notes 31–36 and accompanying text. ↑
  6. Ronald Chen & Jon Hanson, The Illusion of Law: The Legitimating Schemas of Modern Policy and Corporate Law, 103 Mich. L. Rev. 1, 35 (2004). ↑
  7. A.A. Berle, Jr., Corporate Powers as Powers in Trust, 44 Harv. L. Rev. 1049, 1049 (1931). ↑
  8. E. Merrick Dodd, Jr., For Whom Are Corporate Managers Trustees?, 45 Harv. L. Rev. 1145, 1158–61 (1932). ↑
  9.  Milton Friedman, A Friedman Doctrine—The Social Responsibility of Business is to Increase Its Profits, N.Y. Times (Sept. 13, 1970), https://www.nytimes.com/‌1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html/ [https://perma.cc/6VKK-MWZV]. ↑
  10. See Jill E. Fisch & Steven Davidoff Solomon, Should Corporations Have a Purpose?, 99 Tex. L. Rev. 1309, 1309 (2021); Mark J. Roe, Corporate Purpose and Corporate Competition, 99 Wash. U. L. Rev. 223, 223–25 (2021); Tom C.W. Lin, Incorporating Social Activism, 98 B.U. L. Rev. 1535, 1537–38 (2018); Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law, 85 Va. L. Rev. 247, 249–51 (1999); David Millon, Essay, New Game Plan or Business As Usual? A Critique of the Team Production Model of Corporate Law, 86 Va. L. Rev. 1001, 1001–03 (2000); Ronald M. Green, Shareholders as Stakeholders: Changing Metaphors of Corporate Governance, 50 Wash. & Lee L. Rev. 1409, 1409–14 (1993); Oliver Williamson, Corporate Governance, 93 Yale L.J. 1197, 1197–1200 (1984). ↑
  11. Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy that Serves All Americans’, Bus. Roundtable (Aug. 19, 2019), https://www.business‌roundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans [https://perma.cc/4UTS-ABFF]. ↑
  12. See, e.g., Dorothy S. Lund, Corporate Finance for Social Good, 121 Colum. L. Rev. 1617, 1619–20 (2021). CEOs from 181 companies representing some of America’s largest companies signed the declaration. Bus. Roundtable, supra note 11. ↑
  13. Civil Rights Act of 1964, Pub. L. No. 88-352, §§ 703–704, 78 Stat. 241, 253–59; Equal Employment Opportunity Act of 1972, Pub. L. No. 92-261, 86 Stat. 103. ↑
  14. See, e.g., Regents of Univ. of Cal. v. Bakke, 438 U.S. 265, 313 (1978) (concluding that universities might use race as one factor among others to promote the “robust exchange of ideas” that might flow from a racially diverse academic community); see also Ellen Berrey, The Enigma of Diversity: The Language of Race and the Limits of Racial Justice 27, 196–97 (2015) (discussing the development of diversity management in the late twentieth century). ↑
  15. Catherine Cote, What is a CSR Report and Why is it Important?, Harv. Bus. Sch. Online (Apr. 20, 2021), https://online.hbs.edu/blog/post/what-is-a-csr-report [https://perma.cc/6XK9‌-SL6M]. ↑
  16. See, e.g., Cynthia A. Williams, The Securities and Exchange Commission and Corporate Social Transparency, 112 Harv. L. Rev. 1197, 1199–1201 (1999); Russell B. Stevenson, Jr., The SEC and the New Disclosure, 62 Cornell L. Rev. 50, 50–59 (1976); Douglas M. Branson, Progress in the Art of Social Accounting and Other Arguments for Disclosure on Corporate Social Responsibility, 29 Vand. L. Rev. 539, 575–76, 581 (1976); Theodore Sonde & Harvey L. Pitt, Utilizing the Federal Securities Laws to “Clear the Air! Clean the Sky! Wash the Wind!”, 16 How. L.J. 831, 834–35 (1971); David Hess, Social Reporting: A Reflexive Law Approach to Corporate Social Responsiveness, 25 J. Corp. L. 41, 42–46 (1999); Janet E. Kerr, The Creative Capitalism Spectrum: Evaluating Corporate Social Responsibility Through a Legal Lens, 81 Temp. L. Rev. 831, 846 (2008); Thomas Lee Hazen, Social Issues in the Spotlight: The Increasing Need to Improve Publicly-Held Companies’ CSR and ESG Disclosures, 23 U. Pa. J. Bus. L. 740, 741–47 (2021); Daniel C. Esty & Quentin Karpilow, Harnessing Investor Interest in Sustainability: The Next Frontier in Environmental Information Regulation, 36 Yale J. on Regul. 625, 625–28 (2019). ↑
  17. See, e.g., Jeffrey Meli & James C. Spindler, The Promise of Diversity, Inclusion, and Punishment in Corporate Governance, 99 Tex. L. Rev. 1387, 1387–93 (2021); Lisa M. Fairfax, Board Diversity Revisited: New Rationale, Same Old Story?, 89 N.C. L. Rev. 855, 855–59 (2011) [hereinafter Fairfax, Revisited] (criticizing the overreliance on business justifications for diversifying corporate boards); Lisa M. Fairfax, The Bottom Line on Board Diversity: A Cost-Benefit Analysis of the Business Rationales for Diversity on Corporate Boards, 2005 Wis. L. Rev. 795, 796–99 [hereinafter Fairfax, Bottom Line]. The exception is Veronica Martinez & Gina-Gail S. Fletcher, Equality Metrics, 130 Yale L.J.F. 869, 869, 875 (2021), which addresses the role of diversity disclosures but in the context of shareholder transparency and decision making. ↑
  18. See infra Section I.C and accompanying text. ↑
  19. See generally Williams, supra note 16, at 1205–07 (arguing that the SEC has the authority to require expanded disclosure and should use this authority to ensure “corporate social transparency”); Stevenson, supra note 16, at 58–62 (explaining and rebutting the SEC’s reluctancy to use its authority to require the disclosure of policies related to social goods); Branson, supra note 16, at 631–34 (discussing Judge Charles Richey’s perspective on the SEC’s authority to require social responsibility disclosure); Sonde & Pitt, supra note 16, at 835–36 (discussing the SEC’s opportunity to “help promote the nation’s environmental policy” through disclosure requirements related to the National Environmental Policy Act); Paul G. Mahoney & Julia D. Mahoney, The New Separation of Ownership and Control: Institutional Investors and ESG, 2021 Colum. Bus. L. Rev. 839, 843–45 (cautioning the SEC against adopting ESG disclosure mandates). ↑
  20. See Cathy Hwang & Yaron Nili, Shareholder-Driven Stakeholderism, U. Chi. L. Rev. Online (Apr. 15, 2020), https://lawreviewblog.uchicago.edu/2020/04/15/shareholder-driven-stakeholderism-hwang-nili/ [https://perma.cc/7FTT-RYGP]; Andrew J. Hoffman, A Strategic Response to Investor Activism, 37 Sloan Mgmt. Rev. 51, 51 (1996); Michal Barzuza, Quinn Curtis & David H. Webber, Shareholder Value(s): Index Fund ESG Activism and the New Millennial Corporate Governance, 93 S. Cal. L. Rev. 1243, 1265 (2020); Stavros Gadinis & Amelia Miazad, Corporate Law and Social Risk, 73 Vand. L. Rev. 1401, 1464 (2020). ↑
  21. 15 U.S.C. § 78s(b)(1); 17 C.F.R. § 240.19b-4 (2006). ↑
  22. Underrepresented minority is defined as identifying as Black (or African American), Latinx, Asian, Native American, Alaska Native, Native Hawaiian, Pacific Islander, or a combination of multiple of these ethnicities; LGBTQ+ is defined as an individual who “self-identifies as any of the following: lesbian, gay, bisexual, transgender, or as a member of the queer community.” Order Approving Changes to Listing Rules Related to Board Diversity, 86 Fed. Reg. 44424, 44424–25, 44425 n.18 (Aug. 6, 2021). The SEC itself is looking to propose its own board diversity disclosure regulations for companies and may include disability status in its rules. See Lydia Beyoud & Andrew Ramonas, Disability Advocates Seek Inclusion in SEC Board Diversity Rules, Bloomberg L. (Sept. 30, 2021), https://news.bloomberglaw.com/‌esg/disability-advocates-seek-inclusion-in-sec-board-diversity-rules [https://perma.cc/3Z7W-H2KD]. ↑
  23. Order Approving Changes to Listing Rules Related to Board Diversity, 86 Fed. Reg. at 44428. ↑
  24. The ESG Disclosure Simplification Act was passed as part of the Corporate Governance Improvement and Investor Protection Act, H.R. 1187, 117th Cong. (as passed by House, June 16, 2021). The Bill was originally introduced in the House as the ESG Disclosure Simplification Act (“EDSA”) on February 18, 2021. 167 Cong. Rec. H535 (daily ed. Feb. 18, 2021). ↑
  25. H.R. 1187 § 603. The Act would also require companies to disclose their environmental and climate risk mitigation measures. Id. § 403. ↑

  26. See Atinuke O. Adediran, Disclosures for Equity, 122 Colum. L. Rev. 865, 873–74 (2022) (explaining how to use disclosures to reach racial equity ends). ↑

©Virginia Law Review Association. All rights reserved.