Vol. 98, No. 6 Archives – Southern California Law Review

Litigation Finance in the Market Square

October 2025October 2025Suneal Bedi* & William C. Marra†

Litigation finance is the subject of a contentious scholarly and policy debate. Litigation funders provide capital to litigants or law firms in exchange for a share of case proceeds. The current debate centers on how litigation finance impacts the civil justice system. Proponents of funding argue it helps litigants get their day in court, while opponents argue funders pervert the judicial process. Policymakers are torn between these two competing viewpoints, without a clear path forward.

This Article reframes the debate about litigation finance. Scholars and policymakers have focused too narrowly on the “litigation” part of litigation finance, that is, on how funding impacts the legal system. We shift the focus to the “finance” implications of litigation finance. We explore for the first time how litigation finance affects competition not only in the courtroom but also in the marketplace—how companies use funding to access not just the courts but also the capital markets. To do this, we offer a novel interdisciplinary approach drawing on the classic business concept of “nonmarket strategies.” This scholarship, which has been all but ignored by legal scholars, studies how companies leverage “nonmarket” institutions like courts to increase their competitive advantage in the market. While we introduce this scholarship with reference to litigation finance, it holds promise to reframe the debate around legal issues far beyond the realm of litigation funding.

Our central claim is that any regulation of litigation finance is a regulation not only of the courts but also of the capital markets, with significant but unexplored implications for contemporary debates about funding. We show that the regulation of funding affects competition in the marketplace and is especially likely to harm small and medium-sized enterprises, which are more likely to rely upon litigation funding to pursue nonmarket strategies. Our approach also offers new insights into the ongoing debate about funding’s impact on the civil justice system. We conclude by inviting scholars and policymakers to further study these new questions about litigation finance’s impact outside the courthouse gates and in the market square.

Introduction

This Article reframes the contentious scholarly and policy debate about litigation finance. Third-party litigation funders provide capital to litigants or law firms in exchange for an interest in the potential recovery from a legal claim.¹ The standard approach to litigation funding focuses exclusively on how litigation finance affects litigation: that is, how it impacts the civil justice system and access to the courts.² Scholars have explored whether funding improves or impairs the legal system, benefits or harms litigants, prolongs or expedites cases, impairs or supports the attorney-client relationship, and so on.³ In the political arena, a fight over how funding should be regulated pits those who argue funding levels the litigation playing field against those who contend it spurs frivolous suits and encourages speculation on lawsuits.⁴

These are important themes but not the full story. Litigation finance is not just “likely the most important development in civil justice of our time,”⁵ it is also a highly important development for the capital markets and business arena. To fully appreciate the welfare effects of third-party funding, scholars and policymakers must study not only how litigation finance impacts litigation but also how it impacts finance; how it affects not only access to the courts but also access to the capital markets. This Article starts that process.

This Article is the first to shift the debate about litigation finance to a host of vital questions that are not currently being considered: How does litigation finance affect business competition? What impact does the rise of this new corner of the capital markets have on corporate strategy, including the use of litigation to gain a strategic advantage in the marketplace? Why do some companies finance litigations and other business activities with third-party litigation funding, rather than with more traditional third-party debt and equity financing? Who wins—and who loses—in the business arena when we impose regulations designed to restrict access to litigation finance? How do the answers to these questions bear upon the existing debate about funding?

One reason these questions about litigation finance have not yet been explored is that legal scholars do not have an accepted framework for analyzing how companies engage with litigation for strategic business purposes. We provide that framework by drawing on foundational business scholarship about “nonmarket strategies,” which provides an account of how companies leverage the courts, legislatures, and other “nonmarket” institutions to jockey for position in the market.⁶ The nonmarket strategy literature speaks directly to how companies interact with the judicial process to gain an advantage in the market, yet it has been almost entirely ignored by legal scholars.⁷ Although we introduce a nonmarket strategy approach in the context of how companies engage with litigation finance, this framework holds the promise of influencing legal scholarship across the waterfront of issues pertaining to business litigation.⁸

Analyzing litigation finance through the lens of nonmarket strategies, we highlight three ways the use of litigation finance affects competition in the market square. First, companies use litigation finance not only to finance litigation but also to raise working capital to support business growth, leveraging the courts (a nonmarket institution) to strengthen their capital position in the market. In this way, litigation finance is simply a new dimension of the financial markets and one that is especially likely to provide a lifeline to small and medium-sized enterprises (“SMEs”) that have relatively thin access to traditional equity and debt capital markets.⁹ Second, companies use litigation finance to pursue litigation as a nonmarket strategy—that is, they use litigation to obtain a strategic advantage relative to other marketplace actors, the same way well-resourced companies have done since long before the advent of the modern litigation finance industry.¹⁰ Third, we recast lobbying efforts to regulate litigation finance and the actions of related trade associations to support or attack litigation finance as, themselves, nonmarket strategies used by companies that stand to lose or gain from the growth of litigation finance.¹¹

These insights provide a fresh perspective on debates about litigation funding. First, we identify an entire set of funding’s policy implications that scholars and policymakers have overlooked. Existing discussions of litigation finance present only one view of the cathedral.¹² Litigation finance’s impact on litigation is explored at length but its impact on finance and business strategy is ignored. Scholars and policymakers cannot fully understand or effectively address litigation finance unless they explore its implications for both litigation and finance. Indeed, one could set aside entirely the debate about whether litigation finance is good for the legal system and still be left with a host of questions about whether litigation finance is good for business and finance.

Our study of the business and finance implications of litigation finance reveals that almost all companies use some form of third-party financing—“other people’s money”—to pay for litigation and other legitimate business pursuits.¹³ Some companies use traditional debt and equity financing. But for many companies—primarily SMEs—structuring a capital raise as a litigation finance investment is the most efficient, or even the only, way to raise new third-party capital. Litigation finance is thus used disproportionately by SMEs to pursue nonmarket strategies that might allow those firms to better compete against larger incumbent players. Regulation of modern commercial litigation finance may undermine SMEs’ ability to compete in the marketplace, likely diminishing welfare.

Second, our study of the finance implications of litigation finance also brings fresh insights to the existing debate about how litigation finance impacts the civil justice system.¹⁴ The traditional debate first defines third-party litigation funding and then zooms in on its impact on the legal system. We instead zoom out and place the modern litigation finance industry in the broader context of the many ways companies use third-party capital to finance litigation and other legitimate business pursuits. When we do this, we show that many arguments that third-party litigation finance adversely affects the civil justice system—that it might promote frivolous litigation, invite foreign control of litigation, and impair the principle of party control—apply equally or even more forcefully to the many other ways claimholders raise third-party capital to support litigation (for example, via traditional debt and equity capital). These insights both expose existing efforts to regulate litigation funding as vastly underinclusive relative to their stated goals and help us see the (mostly negative) welfare effects of targeting only one specific form of third-party funding—that is, the kind of third-party funding supplied by the modern litigation finance industry and especially demanded by SMEs.

This Article proceeds in five parts. Part I describes litigation finance and how it has been framed in the scholarly and policy debate, demonstrating that the narrow focus on litigation finance as a purely “litigation” phenomenon has led to ad hoc regulations and confusion by legislatures on how to manage litigation finance. Part II introduces the concept of nonmarket strategies and describes the various “nonmarket” strategic behaviors that companies pursue. Part III identifies three ways companies use litigation finance (and the regulation of funding) as a nonmarket strategy to jockey for position in the financial and commercial markets. Part IV offers policy implications of this new framework. Part V draws out implications of our framework for legal and business scholars.

I. Today’s Debate About Litigation Finance

We first provide a background on litigation finance, defining what it is and reviewing its scholarly and public policy debate.

A. What is Litigation Finance?

Imagine you are the CEO of a small, family-owned technology company. You invented high-flying weather balloons that operate as airborne communication systems. A much larger company suggests a joint venture, signs a nondisclosure agreement, and learns your trade secrets. In the end, no deal happens—but the larger company soon copies your tech anyway and recreates its own version of your weather balloons.¹⁵

Assume that to rebuild you need $15 million, including $5 million to bring a $150 million trade secret misappropriation case against your one-time joint venture partner and another $10 million to research and develop a next-generation weather balloon transceiver. You have a strong, and therefore valuable, legal claim.¹⁶ But you do not have $15 million. You approach the traditional debt or equity markets, but you experience the same problems many SMEs face: a thin capital market, high lending rates, and reluctant equity investors.¹⁷ What can you do?

An emerging solution is litigation finance, the practice where a third party provides capital to a litigant or law firm in exchange for an interest in the potential recovery of a legal claim.¹⁸ “Litigation funding agreement[s],” one court recently acknowledged, “are a fact of contemporary complex litigation.”¹⁹ Instead of trading away equity in the company or pledging assets to a traditional lender, you can pledge expected proceeds from your legal claim as collateral for the $15 million you need.

Litigation finance investments are typically “non-recourse,” which means the litigation funder receives its return only if the case succeeds.²⁰ If the case loses, the funder receives nothing.²¹ The non-recourse nature of litigation finance can make it attractive even to companies that can access the traditional equity and debt capital markets, because (unlike new equity investment) litigation finance does not dilute existing shareholders,²² and (unlike debt finance) funders do not have the right to regular payments of interest and principal or the power to put the company into bankruptcy or sue for recovery if those payments are not made.²³

The key insight, then, of the modern litigation finance industry is an insight not so much about the civil justice system but about corporate finance: legal claims are assets against which companies can secure financing, no different than inventory, real estate, and accounts receivable. In short, litigation funders are asset-based investors, and the asset is law.²⁴

Asset-based investing typically requires specialized expertise,²⁵ and litigation finance is no different. Instead of valuing a company’s real property or inventory, litigation finance companies expend great time and effort studying the merits of legal claims before advancing capital against those claims.²⁶ The need for subject-matter expertise has led to specialization among litigation funders.²⁷ Some litigation finance companies invest primarily in business-to-business disputes. These “commercial litigation funders” include publicly-traded companies like Burford Capital and Omni Bridgeway, multi-strategy hedge funds like the D.E. Shaw Group, and privately-held groups like Parabellum Capital and Certum Group.²⁸ Other financiers focus instead on financing mass tort claims, where they typically help law firms advertise for clients who have been injured in a particular mass tort.²⁹ Still other entities are consumer litigation funders, primarily providing small-dollar advances to individuals with personal injury and medical malpractice claims.³⁰

Commercial litigation finance companies typically undertake months-long due diligence processes before they invest in a case.³¹ Funders are staffed with highly experienced lawyers who develop specialized expertise in evaluating whether a case is a winner or loser.³² Funders frequently consult subject matter experts to assist with their evaluation, including outside diligence counsel and third-party damages experts.³³ The net effect is that commercial funders invest in only a tiny fraction of cases they see—typically less than 10% of opportunities.³⁴ In the end, it is likely that a funder’s evaluation process is even more rigorous than the evaluation provided by contingent fee law firms or by companies deciding whether to pursue a case with their own retained earnings.³⁵

In this Article, we focus on the commercial litigation finance space, which is by all accounts the largest and most prominent segment of the litigation finance industry and is also the emerging target of regulation by policymakers.³⁶ In 2023, there were an estimated thirty-nine active commercial litigation finance companies, with a total of $15.2 billion in assets under management.³⁷ These companies made $2.7 billion in new litigation finance commitments that year, with funding distributed across 353 new deals.³⁸ Commercial litigation finance companies invest in a range of business-to-business disputes, including contract, business tort, antitrust, patent infringement, trademark, copyright, and trade secret misappropriation cases.³⁹ Commercial litigation funders can finance either claimants or law firms,⁴⁰ and they can invest at any stage of the case, from pre-suit through appeal and post-judgment proceedings.⁴¹

Litigants and law firms can use litigation finance in two different ways: to pursue their legal claims and to raise general-purpose working capital. To begin with the first point, litigation is very expensive.⁴² Many litigants are liquidity-constrained: they lack access to the thousands or even millions of dollars it takes to pursue litigation.⁴³ Even if prospective litigants have the money to pursue the case, they may be risk-constrained: that is, they may not want to risk their capital in an uncertain litigation.⁴⁴ Law firms can litigate cases in exchange for a contingent fee—effectively operating as a third-party funder—but law firms are usually uniquely ill-suited to invest in litigation, for reasons that scholars have explored at length.⁴⁵ Litigation finance provides an alternative path for litigants and law firms to finance their cases.

The second way litigants can use litigation finance is by using the funding as working capital to finance general corporate endeavors, including to hire new workers, build new products, or invest in research and development.⁴⁶ In this sense, litigation funders operate similarly to traditional equity and debt providers, advancing capital in return for an interest in potentially valuable assets.⁴⁷ Although the focus of this Article is the use of litigation funding directly by claimholders, law firms may also use litigation finance as working capital—drawing down funding against

existing contingent fee matters to hire new employees and expand client services.⁴⁸

While commentators typically distinguish between funders’ supply of fees and costs funding on the one hand and working capital on the other hand, it is important to remember that money is fungible.⁴⁹ A dollar of third-party financing allocated for one purpose frees capital for other purposes.⁵⁰ Thus, even if a claimholder obtains third-party litigation funding that may be used only to pay its lawyers in a case, this financing frees up the company’s remaining capital to pursue other legitimate corporate purposes like paying employee wages, delivering goods and services, and so on.⁵¹ Similarly, when funders support law firms, this funding typically enables lawyers to enter into a “full contingency” relationship with their clients (with the firm’s fees partially funded by the litigation funder), enabling the claimholder to pursue a case without having to devote its finite resources to paying lawyers.⁵² Thus, even funding directed to law firms helps corporate claimholders free up capital for general corporate purposes.

B. The Scholarly Debate

Legal scholars are paying attention to what Maya Steinitz calls “likely the most important development in civil justice of our time.”⁵³ The scholarship about litigation finance is vibrant and growing. Yet virtually the entire collection treats litigation finance as fundamentally a litigation phenomenon. That is, scholars study litigation finance almost solely as a development in “civil justice,” examining how funding impacts the legal system.⁵⁴ The unit of analysis is the legal system, with proponents of litigation finance arguing that funding creates a better legal system and opponents arguing that funding hurts civil justice.⁵⁵ Indeed, even articles that apply an economic lens to litigation finance apply that lens to study how funding impacts litigation, not how funding impacts the financial markets or the broader business world.⁵⁶

Existing scholarship studies the litigation effects of litigation finance from many different and important angles. Scholars have debated whether litigation funding increases the amount of litigation and whether it results in the filing of frivolous lawsuits.⁵⁷ They have studied how litigation funding affects litigants’ access to the courts⁵⁸ and the price at which claims settle.⁵⁹ Scholars have studied how funding impacts the price of legal services and how it injects competition into the market for legal services.⁶⁰ They have explored whether litigation funding violates background legal rules about champerty and maintenance.⁶¹ They have studied whether litigation funding runs afoul of the legal ethics rules⁶² and whether funders interfere with (or strengthen) the attorney-client relationship.⁶³

An especially large body of scholarship studies whether litigation funding agreements and communications should be disclosed to the court and defendants during litigation, both as a policy matter and under the attorney work product doctrine and attorney-client privilege.⁶⁴ Control is another hot topic, with scholars debating whether funders should be allowed to control litigation strategy decisions.⁶⁵

This scholarship is important, but it studies litigation finance through a narrow lens: the effect that litigation finance has on the legal system. A few scholars have discussed the causes of litigation finance—that is, why companies use third-party litigation funding to finance their cases. But that scholarship (which includes our own) is mostly limited to explaining that companies typically use litigation funding because they are either liquidity-constrained—that is, they do not have the capital to pursue the case—or they are risk-constrained—that is, they do not want to risk their capital on litigation.⁶⁶ This explanation is true as far as it goes, but it goes only far enough to explain why companies would use third-party capital rather than retained earnings to finance litigation or working capital needs. While commentators have recognized the valuable non-recourse nature of litigation finance, no one has studied at depth why companies might use third-party litigation finance rather than the host of other ways they can raise third-party capital like traditional debt or equity finance to support their litigation and business endeavors.⁶⁷

Moreover, the emphasis on the litigation effects of litigation finance has also led to the near-exclusive study of litigation finance as a tool to finance the fees and costs of litigation. But, as explained above, that is only half the story: companies also use litigation finance to raise working capital that can be used to support non-litigation business needs like hiring employees.⁶⁸ And because money is fungible, “fees and costs” funding also frees up other capital for managers to reinvest in a company’s core market pursuits.⁶⁹ Scholars sometimes mention in passing that funding can be used to raise working capital, but the market impact of funding’s role as a source of general business capital has not been analyzed.⁷⁰

The existing scholarship about litigation finance is insightful and important—but it tells only half the story. To fully understand litigation finance, we must study its implications not just for litigation but also for finance—its implications for competition not only in the courtroom but also in the market square.

C. The Policy Debate

Alongside this scholarship stands a four-front policy debate about litigation finance. This policy debate tracks the scholarship by focusing on

funding’s impact on the civil justice system while ignoring its impact on the marketplace.

First, opponents of litigation finance are asking federal and state legislative bodies to enact regulations of litigation finance.⁷¹ While there are not yet any federal regulations that specifically target litigation funding, several states have acted. The first round of state statutes were essentially consumer protection statutes that targeted consumer litigation finance agreements, that is, agreements that typically concerned smaller-dollar advances to personal injury tort plaintiffs. State regulations in this mold were enacted in Arkansas, Indiana, Nebraska, and Vermont, among other states.⁷² These consumer-rights statutes require consumer litigation funders to register with the state,⁷³ provide funded parties with certain disclosures in the litigation finance contract,⁷⁴ and sometimes limit the interest rates funders can charge customers.⁷⁵ With respect to disclosure during litigation, those older regulations state that litigation funding documents are protected by the attorney-client privilege, thus making it harder for defendants to obtain information on a plaintiff’s funding agreements.⁷⁶

More recent “second wave” regulations focus on the commercial rather than consumer sector, and they demand more rather than less disclosure of litigation funding agreements. Emblematic second wave regulations include newly-enacted laws in Indiana⁷⁷ and Louisiana⁷⁸ and a failed bill in Florida.⁷⁹ The United States Chamber of Commerce, a business advocacy group, was a chief proponent of these bills.⁸⁰ While earlier consumer litigation funding statutes confirmed enhanced protection for litigation funding documents, the Indiana and Louisiana statutes, and the failed Florida bill, all provide that commercial litigation funding agreements are subject to discovery and disclosure to opposing parties.⁸¹ The statutes also contain other regulations designed to restrict litigation finance. For example, Indiana’s statute prohibits funders from exercising any control or even “influence” over litigation decisions,⁸² while the Louisiana statute requires litigation funders to be responsible for costs imposed on funded litigants⁸³ and provides that any violation of the statute renders a litigation finance contract unenforceable by the funder.⁸⁴

Advocacy groups, like the Chamber of Commerce, have recently argued that litigation funding may present a national security risk. They argue that foreign adversaries may use funding to harm American companies and obtain access to U.S. corporate trade secrets.⁸⁵ Supporters of litigation funding have pushed back against this narrative, claiming it is a scare tactic without basis in fact.⁸⁶ However, in response to these concerns, some states have enacted new laws. Indiana’s new law bans litigation funding from foreign adversaries of the United States, including China, Russia, and North Korea,⁸⁷ and Louisiana’s statute requires disclosure of anyone entitled to receive, pursuant to a funding agreement, any information affecting national defense or security disclosed during a litigation.⁸⁸

Second, in addition to the policy fight among legislators, there is a push to have judges themselves enact disclosure rules that target litigation funding.⁸⁹ In 2021, the U.S. District Court for the District of New Jersey became the first federal district court to adopt a disclosure rule targeting litigation finance companies’ involvement across all cases.⁹⁰ Chief Judge Colm Connolly of the U.S. District Court for the District of Delaware has also adopted the rule.⁹¹ This rule requires parties to disclose to the court if any non-party is funding the matter on a non-recourse basis.⁹² If such a funder exists, the litigant must disclose the identity of the funder, “[w]hether the funder’s approval is necessary for litigation decisions or settlement decisions in the action and if the answer is in the affirmative, the nature of the terms and conditions relating to that approval,” and “[a] brief description of the nature of the financial interest.”⁹³ The rule also states:

The parties may seek additional discovery of the terms of any such agreement upon a showing of good cause that the non-party has authority to make material litigation decisions or settlement decisions, the interests of parties or the class (if applicable) are not being promoted or protected, or conflicts of interest exist, or such other disclosure is necessary to any issue in the case.⁹⁴

Lawmakers opposed to litigation funding have also asked the Judicial Conference—the judicial branch’s national policymaking body for the federal courts—to investigate whether mandatory disclosure of litigation finance agreements should be required.⁹⁵ In response, the Judicial Conference has formed a working group to study whether the Federal Rules of Civil Procedure should address litigation funding.⁹⁶

Third, alongside efforts to persuade lawmakers and judges to enact regulations, the practice of litigation funding continues to be tested during litigation. Defendants routinely seek disclosure of litigation funding agreements and communications from plaintiffs.⁹⁷ Most courts reject these attempts, concluding that the communications are either not relevant to the case or protected by the work-product doctrine or attorney-client privilege.⁹⁸ But some courts have allowed some disclosure of litigation funding information, concluding that funding agreements may be relevant to issues including the adequacy of class counsel or the value of the plaintiff’s claim.⁹⁹ Courts have also addressed related legal questions including whether litigation finance violates prohibitions against champerty¹⁰⁰ and whether funders can exercise control over settlement decisions.¹⁰¹

Fourth, bar associations and legal ethics committees are increasingly being asked to decide whether litigation funding agreements violate applicable ethics rules. In 2020, the American Bar Association released a set of “Best Practices” for third-party litigation funding, which addressed topics including the handling of confidential information, the rule against fee sharing, and funding contracts.¹⁰² In addition, bar association ethics committees have weighed in on topics including whether agreements between funders and law firms violate the rule against lawyers sharing fees with non-lawyers,¹⁰³ whether litigation counsel should advise clients in the negotiation of litigation funding agreements,¹⁰⁴ how lawyers should approach the sharing of confidential information with litigation funders,¹⁰⁵ and whether lawyers may refer their clients to litigation funders.¹⁰⁶

On all four fronts, the policy debate has tracked the scholarly debate and suffers the same limitations. That is, the policy debate studies litigation finance solely as a litigation phenomenon, with one side arguing that litigation funding promotes a more level litigation playing field and the other side arguing that funding perverts the civil justice system. A simple illustration: litigation finance is discussed by congressional judiciary committees but wholly ignored by financial services committees.¹⁰⁷ One congressional committee debate in June 2024 exemplifies the narrow scope of the debate about funding, with the supporters of funding emphasizing its positive impact on the legal system and the detractors of funding alleging its detrimental effects on civil litigation.¹⁰⁸

The lobbying groups on either side of the debate similarly focus on the litigation effects of funding. As noted, the Chamber of Commerce is probably the most vocal critic of litigation funding and a driving force behind much of the recent state regulation of funding.¹⁰⁹ The Chamber has issued a number of attacks against litigation funding, and they all focus on funding’s impact on the courtroom, not the marketplace or the capital markets.¹¹⁰ Indeed, although the Chamber usually supports deregulating the capital markets and expanding small businesses’ access to capital,¹¹¹ the Chamber has not addressed how litigation finance might impact those goals. Meanwhile, the International Legal Finance Association—the trade association for the litigation finance industry—has likewise articulated the case for litigation funding as fundamentally about access to the courtroom, not access to the capital markets or the business marketplace.¹¹²

* * * * *

Existing scholarship and policy debates discuss funding’s impact on litigation but largely ignore its effect on finance and business strategy. When we reframe the debate about litigation finance around business strategy, we pave new paths to study litigation finance, its use cases, and its impact on society. These are questions that have not simply gone unanswered—they have gone unasked.

II. Nonmarket Strategies: A Primer

We explained in Part I that scholars and policymakers have largely overlooked litigation finance’s implications for corporate finance and business strategy. We believe this has happened in part because legal scholars lack a widely adopted framework for analyzing how companies strategically engage with litigation. In Part II, we provide that framework by drawing on a robust body of literature in business academia concerning “nonmarket strategies.” While business scholars pay great attention to nonmarket strategies, legal scholarship has almost entirely ignored the topic, despite its intimate connection to not only litigation finance specifically but also litigation more generally.¹¹³ In this section, we define and describe nonmarket strategies, identify different forms of nonmarket strategies, and discuss why companies use these nonmarket strategies.¹¹⁴

A. What Are Nonmarket Strategies?

Companies seek to maximize value for their shareholders and other stakeholders. This theme resonates in legal, ethics, and business scholarship¹¹⁵ The actions a company takes to maximize value are called strategies.¹¹⁶

Business research has long focused on how companies use the marketplace in which they operate to extract and maximize value. These behaviors are considered market strategies.¹¹⁷ Market strategies are “a concerted pattern of actions taken in the market environment to create value by improving economic performance.”¹¹⁸ The key element here is the use of the private market environment, which “includes those interactions between the firm and other parties that are intermediated by markets or private agreements. These interactions typically are voluntary and involve economic transactions and the exchange of property.”¹¹⁹ When companies operate with market strategies, they perform business activities like producing goods, hiring workers, contracting with counterparties, and engaging in mergers and acquisitions.

Recall the weather balloon company we discussed earlier. That company surely engaged in a host of market strategies to grow. These market strategies might include offering competitive wages to attract talented employees, conducting research and development into new technologies, entering into joint ventures and other strategic partnerships with other companies, contracting with suppliers, and marketing products. Each of these behaviors relies on private commercial markets, including the markets for labor, supplies, and customers.

The rise of institutional economics has drawn attention to strategic behavior beyond the market environment.¹²⁰ Business scholars have increasingly recognized that, in addition to traditional “market strategies,” companies also engage in strategies that use the “nonmarket.”¹²¹ The nonmarket environment “includes those interactions that are intermediated by the public, stakeholders, government, the media, and public institutions. These institutions differ from those of the market environment because of characteristics such as majority rule, due process, broad enfranchisement, collective action, and publicness.”¹²² The nonmarket environment includes the courts, the lawmaking process, interest group activities, and social and cultural institutions.¹²³

A nonmarket strategy, then, is a set of actions that utilizes the nonmarket environment to drive economic value.¹²⁴ These institutions create the “rules of the game” for competition in the marketplace.¹²⁵ Companies engage in nonmarket strategies when they leverage nonmarket institutions (for example, courts) to compete more effectively in the marketplace.¹²⁶

Our weather balloon company is likely to pursue a host of nonmarket strategies alongside more traditional market strategies. For example, it might lobby lawmakers for subsidies, sue companies engaging in anticompetitive behavior, or challenge government regulations adverse to its business interests.

B. The Types of Nonmarket Strategies

Business scholars have identified three types of nonmarket strategies that firms might pursue: adaptive strategies, transformative strategies, and additive strategies.¹²⁷ We discuss each in turn.

Adaptive Strategies

Adaptive strategies are nonmarket strategies that take the state of existing institutional nonmarkets as a given and attempt to either leverage or circumvent those nonmarket institutions to the actor’s advantage.¹²⁸ One common example is the use of litigation by a company to attack the market position of a direct or indirect competitor.

The Lanham Act is a common locus of adaptive nonmarket strategies, as it provides companies with a cause of action to sue a direct or indirect competitor for false advertising.¹²⁹ One leading Lanham Act case involved Johnson & Johnson’s false advertising suit against Procter & Gamble concerning over-the-counter (“OTC”) heartburn medication.¹³⁰ In 2003, Procter & Gamble launched the OTC heartburn drug Prilosec OTC, which was poised to compete with Johnson & Johnson’s incumbent Pepcid offering.¹³¹ Procter & Gamble’s marketing campaign suggested that one pill of Prilosec OTC would provide twenty-four hours of heartburn relief.¹³² Johnson & Johnson challenged this statement as false advertising, because the pill took up to five hours to start working.¹³³ A federal district court agreed with Johnson & Johnson and granted a preliminary injunction against the advertising campaign, ruling that Procter & Gamble’s advertisements were “literally false and certainly convey[ed] a false message.”¹³⁴

Johnson & Johnson’s litigation may be described as an adaptive nonmarket strategy because, rather than competing through the market system (for example, by using comparative advertising, a well-studied and researched marketing strategy¹³⁵), the company used existing legal institutions—specifically, the court system and liability rules—to gain market share from Procter & Gamble. Lawsuits like these help the plaintiff firm extract economic value from the marketplace, regardless of whether the competitor suit is welfare-enhancing for consumers.¹³⁶

Transformative Strategies

Companies may also engage in transformative nonmarket strategies, which are strategies that seek to alter a nonmarket institution that impacts the company.¹³⁷ In these cases, companies seek to lobby politicians, regulators, and courts to transform the rules of the game.¹³⁸

Lobbying is a classic example of a transformative nonmarket strategy. Ample work has examined the nature of lobbying as it relates to political processes and the law.¹³⁹ When companies lobby, their goal is frequently to have lawmakers (re)write the rules of the game in their favor.¹⁴⁰ For example, when the federal government responds to lobbying efforts by granting tax subsidies that offset the cost of installing electric vehicle chargers, the government effectively reduces the purchase price of electric vehicles. This gives electric vehicle manufacturers, like Tesla, a competitive leg up over manufactures of more traditional gas-powered vehicles.¹⁴¹

Transformative nonmarket strategies may also be directed toward the civil justice system. A company sometimes lobbies lawmakers to change court rules to favor itself. One recent example is illustrative: after Apple lost two prominent patent cases before the U.S. International Trade Commission (“ITC”), the company asked Congress to change the rules governing how the ITC adjudicates complaints and enforces penalties.¹⁴² These rules, if adopted, would make it more difficult for parties to prevail in ITC suits against Apple, giving the company a competitive advantage in the marketplace.¹⁴³

Litigation can also be a form of transformative nonmarket strategy. We discussed above how litigation functions as an adaptive nonmarket strategy when a company uses it to enforce existing rules against competitors. By contrast, litigation is used as a transformative nonmarket strategy when companies bring court challenges to government regulations that impair their business efforts. From one perspective, these litigations simply ask courts to affirm that an inferior law must give way to a supreme law.¹⁴⁴ From another perspective, however, these litigations are nonmarket strategies that ask courts to transform the legal “nonmarket” environment in which firms operate.

For a recent example of litigation as a transformative nonmarket strategy, consider the Chamber of Commerce’s lawsuit challenging the Federal Trade Commission’s rule banning non-compete agreements between employers and employees.¹⁴⁵ Although the Chamber does not disclose its individual donors, the Chamber is financed by corporations and engages in strategic litigation on their behalf.¹⁴⁶ To satisfy standing requirements, the Chamber invokes the associational standing doctrine, which allows the Chamber to vindicate its members’ interests.¹⁴⁷ The Chamber’s challenge to the rule against non-competes is a transformative nonmarket strategy because it seeks to use the nonmarket environment of courts to create a market environment in which companies have greater leverage over their employees, giving them a potential competitive advantage in the marketplace.

Thus, litigation can be used as part of both adaptive and transformative nonmarket strategies. The distinction between the two generally tracks the distinction between the enforcement of “private law” and “public law.”¹⁴⁸ “Private law” refers to litigation that ordinarily occurs between private individuals or companies.¹⁴⁹ As Abram Chayes has explained, private law litigation is typically retrospective—that is, it involves a controversy over an “identified set of completed events” and in which the right and remedy are interdependent. The typical remedy is “that the plaintiff will get compensation”—money damages—“measured by the harm caused by the defendant’s breach of duty.”¹⁵⁰ Adaptive nonmarket strategies typically take this form, with one company litigating a private law claim against another company.

Transformative nonmarket strategies typically involve litigation over the validity of laws and regulations themselves. In such cases, the defendant is usually a governmental body and the primary relief sought is almost always declaratory or injunctive, not retrospective damages. Companies usually engage in public law litigation as part of a transformative strategy to require or prevent the enforcement of laws on issues of public concern—such as civil rights, environmental law, or administrative law.¹⁵¹

Additive Strategies

Additive nonmarket strategies work “by supplementing [existing institutional] structures with new, decentralized ones to which participants commit voluntarily rather than in response to a mandate from the state, thus creating a polycentric institutional structure.”¹⁵² Rather than simply take the institutions as a given, companies seek to augment institutional structures to give themselves a competitive advantage.¹⁵³

In one common additive strategy, companies engage in self-regulation, either acting alone or in concert with competitors. For example, companies may band together into an industry trade association and sign on to certain “standards of conduct,”¹⁵⁴ or they may all agree to certain voluntary business practices.¹⁵⁵ When acting alone, companies may act solely to reduce a perceived negative externality with the hope of setting an industry norm, resulting in benefits to the firm.¹⁵⁶ Traditional corporate social responsibility (“CSR”) behaviors also fall into this nonmarket strategy.¹⁵⁷ CSR strategies include, for example, voluntary environmental and socially-sustainable practices.¹⁵⁸ Companies frequently undertake these behaviors with the hope that stakeholders will reward the company and hence further enhance the firm’s economic value. But additive strategies also seek to anticipate or influence institutional changes. Companies may voluntarily take costly behaviors in anticipation that regulators will eventually enact rules of conduct that the firm has already adopted, leaving the firm better positioned to succeed in the market.¹⁵⁹

C. The Choice Among Nonmarket Strategies

Not all strategies are created equal. Companies consider a range of internal and external factors when deciding whether and how to use nonmarket strategies.

External factors include the nature of both market and nonmarket institutions.¹⁶⁰ Some jurisdictions, including the United States, have clear laws and regulations that allow for relative predictability in outcome.¹⁶¹ Other jurisdictions, including many developing countries, may have no laws, or either unclear or incomplete laws, governing business conduct.¹⁶² Whether an institution is relatively “complete” or “captured” (as in the United States) or relatively “incomplete” (as in many developing countries)¹⁶³ influences which type of nonmarket behavior a company may engage in.

Internal factors also affect which strategies a company may use. For example, some companies may develop a comparative advantage in implementing certain nonmarket strategies over others.¹⁶⁴ These so-called firm-specific capabilities drive which nonmarket strategies firms pursue.¹⁶⁵ Research on firm-specific capabilities analyzes a company’s unique strengths and asks what strategies the company may use to leverage these unique strengths.¹⁶⁶ The goal is to create sustained, long-term competitive advantages in the marketplace.

Consider, for example, a company that can recruit former politicians into its ranks.¹⁶⁷ Relative to its competitors, that company has a comparative advantage in transforming the institutional rules in which it operates. The firm’s political connections provide it with superior insight into how certain regulations will be interpreted and implemented. These capabilities may also

give the firm a comparative advantage in influencing which regulations are made or unmade. Such a firm is more likely to use transformative strategies, as it has unique capabilities to influence regulations.¹⁶⁸

A firm’s capabilities will also help predict whether a company will use a market or a nonmarket strategy in the first place.¹⁶⁹ Certain companies, as we describe using examples below, can more cheaply and efficiently engage in nonmarket strategies in comparison to more traditional market ones. As we argue, SMEs may find it cheaper to engage in capital funding using nonmarket strategies than market ones.

III. Litigation Finance as a Nonmarket Strategy

Litigation finance is an important development not only for the civil justice system but also for the capital markets and marketplace at large. Companies use litigation finance to compete not only in the courthouse but also in the market square. Drawing upon the nonmarket strategy literature discussed above, we illustrate three ways companies engage with litigation finance to help themselves better compete in the marketplace.

The chart below provides a roadmap for our discussion. This chart indicates the types of strategies, the result each strategy seeks to achieve, an example of the strategy, and the business benefit the strategy creates. We also note that some of these strategies involve the use of litigation finance while others involve the regulation of funding.

A. Litigation Finance as Corporate Finance: An Adaptive Strategy

The best things in life may be free, but everything else costs money. Corporate finance is the discipline that studies how companies finance their business pursuits.¹⁷⁰ We first provide a brief overview of the traditional ways companies finance their activities. We then demonstrate how litigation finance operates as an alternative “nonmarket” way to access investment capital and finance business pursuits, including but not limited to the financing of litigation. Using litigation finance in the way we describe below is a type of adaptative nonmarket strategy.

“Market” Methods of Corporate Finance

Companies need money to pursue the waterfront of legitimate corporate activities, including hiring employees, manufacturing products, marketing their goods, investing in research and development, and yes, sometimes pursuing litigation. Firms use one of three broad categories of finance: retained earnings, equity, and debt.¹⁷¹ All three involve the company appealing to traditional market institutions: the marketplace for goods and services to obtain revenue that can then be used to finance future business activities, or the capital markets, in which third parties provide debt or equity capital in exchange for an anticipated return on their investment.¹⁷²

Recall the weather balloon company that needs $15 million in financing, including $5 million to pursue litigation and $10 million for research and development. To come up with the cash, first, the company could use its retained earnings, that is, profits or revenue in excess of expenses.¹⁷³ Second, the company might raise debt from third parties. These loans can be either unsecured or secured.¹⁷⁴ Unsecured loans rely on the borrower’s creditworthiness and future cash flows.¹⁷⁵ Secured loans are backed by company assets.¹⁷⁶ Secured loans may be further categorized: some are secured by all company assets, while others are “asset-based” loans secured by only a specific subset of the company’s assets.¹⁷⁷ Third, the company might raise equity financing, selling ownership interests in the firm in exchange for capital.¹⁷⁸

Several points bear emphasis. First, both debt and equity financing usually involve companies raising capital from third party investors.¹⁷⁹ Creditors remain third parties after the transaction is consummated; that is, they do not become first-party owners of the company.¹⁸⁰ Equity investors, by contrast, are third parties relative to the company before making their investment and come inside the company as first-party owners after the transaction is consummated. Thus, if a firm like our weather balloon company needs capital to fund litigation and research, there is a good chance it would approach the capital markets and raise capital from third-party investors, with those investors expecting their return to come from some or all of the firm’s assets.¹⁸¹

Second, a firm’s choice between using retained earnings, debt, and equity to finance business endeavors is typically driven by questions of corporate finance and business strategy. Classical corporate finance theory teaches that, in perfect markets without transaction costs, firms should be indifferent between using retained earnings, debt, and equity.¹⁸² In reality, markets are not perfect and firms are not indifferent.¹⁸³ There is an entire discipline—corporate finance—devoted to studying firms’ decisions about how to finance their business activities.

A corporate finance literature review is beyond the scope of this Article. It is sufficient for present purposes to identify a few tradeoffs that companies face when deciding whether to finance their business activities through retained earnings, debt, or equity.¹⁸⁴

For example, companies may prefer to use retained earnings because they can act quickly when they see an investment opportunity, avoiding the time-consuming and scrutiny-inducing process of raising money in the capital markets.¹⁸⁵ On the other hand, existing shareholders may prefer to receive those earnings as dividends today and shift the risk of tomorrow’s success onto third-party debt or equity capital.¹⁸⁶ Debt finance frequently has tax advantages,¹⁸⁷ and it usually caps creditors’ upside, ensuring shareholders receive any surplus profits generated when the company invests the loan.¹⁸⁸ On the other hand, debt instruments usually saddle the debtor with relatively inflexible payment obligations, requiring the company to regularly generate cash to pay interest on the debt.¹⁸⁹ An advantage of equity financing is that equity investors have fewer downside protections than lenders, which means equity is usually “riskier capital” than debt.¹⁹⁰ Thus, early-stage companies and other businesses without a proven track record can raise third-party capital in the equity markets even when the debt markets are closed to them.¹⁹¹ On the other hand, raising new equity dilutes existing shareholders, who may prefer not to have their ownership interest and decision-making power reduced.¹⁹²

The upshot for our purposes is that firms select their method of corporate finance for reasons very specific to that firm and the firm’s regulatory environment. Preferences and market access will vary according to a host of factors, including the firm’s size and strength, its industry, its geography, and the regulatory landscape.

Third, while all companies in principle can use retained earnings or obtain third-party debt or equity, in practice, SMEs usually do not have access to substantial retained earnings or to liquid debt and equity markets.¹⁹³ There is a robust literature explaining how and why SMEs face challenges accessing traditional capital markets.¹⁹⁴

Again, a comprehensive literature review is beyond the scope of this Article. It is sufficient to repeat the oft-made insight that information asymmetries, transaction costs, and other market inefficiencies result in SMEs either being totally cut off from the debt and equity markets or facing much higher costs of capital relative to more established incumbent players.¹⁹⁵ Prospective investors in smaller companies face much larger information asymmetries compared to when they invest in larger companies that are publicly traded and have armies of analysts studying their every move.¹⁹⁶ Increased information asymmetry means increased risk, and increased risk means higher borrowing costs.¹⁹⁷ In short, it is generally much harder for SMEs to find willing investors or lenders, and when they do, they typically face a much higher cost of capital compared to larger companies.¹⁹⁸ Similarly, SMEs almost by definition do not have significant retained earnings to invest in business-critical projects, including research and development, launching new products, or paying lawyers for bet-the-company litigation.

When SMEs can access third-party capital, they tend to gravitate towards bank loans with personal guarantees or towards higher-cost secured credit, in which a third-party investor lends against discrete collateral and has the right to foreclose on that collateral if the debtor fails to repay the loan.¹⁹⁹ With asset-backed transactions, the financier treats the collateral as the primary or, indeed, sole source of repayment and thus does not need to rely on the counterparty’s general creditworthiness, enabling loans to go to companies that cannot qualify for unsecured debt or equity investments.²⁰⁰

We thus have a rough hierarchy of firms’ ability to access the capital markets. Larger, more established firms generally have the best access to equity and debt markets. SMEs often have thin or no access to the capital markets. But SMEs with high-quality assets can frequently obtain secured loans even when unsecured lending or equity investment is not an option.

Litigation Finance as a “Nonmarket” Method of Corporate Finance

Enter litigation finance. We explained earlier that the central insight of the modern litigation finance industry is an insight about corporate finance—namely, that a strong legal claim is a valuable asset that can be used to secure third-party financing. Litigation finance may be characterized as asset-based finance in which the asset is a legal claim, and the financing can be used either to secure financing to pursue the legal claim itself or to secure working capital that can be used for general corporate purposes. Put differently, if a company needs money to invest in litigation, research, or any other legitimate business pursuit, it can use retained earnings, it can raise equity investment, it can raise traditional types of secured or unsecured debt—or it can raise litigation finance.

But we just explained that (a) companies face tradeoffs when deciding whether to use retained earnings, debt, or equity finance, and (b) not all companies have equal access to all of these forms of capital. The same holds true for litigation funding. The latter point is easier to make: litigation finance is only available to companies with strong legal claims that typically involve plaintiff-side litigations with sizable damages potential.²⁰¹ If you do not have a litigation claim, you cannot obtain litigation finance.

As for tradeoffs, there are pros and cons to the use of litigation finance. Many of the drawbacks concern the high transaction costs inherent in litigation funding deals. Because commercial litigation funders perform comprehensive diligence into funded matters, funded deals often take months to close. Companies that need financing quickly—whether because their case has a statute of limitations issue, they urgently need capital to hire new employees, or they have some other reason—may prefer to use readily available retained earnings, or existing access to equity or debt investors, rather than wait months for litigation funders to complete their work.²⁰²

As we explained, litigation funders typically perform more comprehensive diligence on a company’s legal claim compared to other forms of financing.²⁰³ Companies that use retained earnings do not have to subject their decision to pursue a legal claim to the discipline of the market.²⁰⁴ Meanwhile, traditional equity or debt financiers do not usually invest based on the value of legal claims and thus are unlikely to scrutinize the legal claim before providing financing.

The regulatory landscape concerning litigation funding also imposes transaction costs. Litigation funders typically request to see case confidential information before investing in a lawsuit. And defendants typically seek disclosure of litigation finance agreements and communications, in part to gain a strategic advantage in the litigation.²⁰⁵ The early statutes regulating consumer litigation finance deals recognized this fact and reacted by ensuring that communications with funders do not impair the protections of the work product doctrine or attorney-client privilege.²⁰⁶ Ironically, the more recent statutes recognize this fact, too, except that they mandate rather than prohibit litigation finance disclosure.²⁰⁷ Regulations that impede funders’ access to full and transparent communication from prospective funded parties, present lurking regulatory challenges, and limit funders’ ability to control litigation all effectively increase the funder’s risk and thus increase the price funded parties must pay for litigation funding.

Against these drawbacks stand the benefits of using litigation finance. Such funding is typically non-recourse, which means the company can secure financing backed only by a discrete legal asset.²⁰⁸ Litigation finance is thus frequently preferable to debt, since the funder does not have an absolute right to be repaid and the attendant enforcement rights that creditors have. And funding is frequently preferable to equity, as litigation funding does not dilute existing shareholders.²⁰⁹ Funders, like other asset-backed lenders, also have specialized expertise, which can help the company maximize the value of its legal assets. Moreover, because traditional debt and equity financiers are not trained in valuing legal claims, they are likely to undervalue legal claims relative to litigation funders.

But perhaps the most important reason many companies—especially SMEs—use litigation finance is simply that these businesses have no other choice. Most companies do not have millions of dollars in retained earnings to invest in litigation or research and development. Most companies are not publicly traded and do not have investment bankers who help them access liquid pools of debt and equity capital. Traditional equity and debt financing is either prohibitively expensive or effectively unavailable to these many enterprises. And most companies do not have substantial assets like inventory, machinery, or real property that can serve as the basis for asset-backed loans.²¹⁰

For these reasons, SMEs are leading consumers of litigation finance.²¹¹ They use litigation finance not only to finance their cases but also to obtain lower-cost capital than they could access in the traditional capital markets.²¹² Simply put, companies most likely to use litigation finance are SMEs that have difficulty accessing capital in the more traditional capital markets.

The implications for the scholarly and political debate about funding are significant. Companies use litigation finance not simply because it gives them better access to the courts. They use litigation finance because it gives them better access to the capital markets. Companies use litigation finance as an adaptive nonmarket strategy, leveraging their legal claims to secure financing that allows them to grow their businesses and better compete in the marketplace. This is especially true when a company secures litigation finance to obtain general working capital, for in that sense, litigation finance companies serve an identical function to financiers in other corners of the capital markets: they are third parties who provide investments secured by company assets. This insight holds true when they secure funding to pay the fees and costs of litigation: money is fungible, and by obtaining financing for their litigation, they free up other cash to invest in their core business.

B. Litigation Finance to Pursue Litigation: Adaptive and Transformative Strategies

We explained earlier that businesses frequently seek a competitive market advantage by engaging in litigation, including by bringing suit against competitors, customers, suppliers, or regulators. Companies use the court system to gain a strategic advantage in the marketplace and drive economic value to themselves.²¹³ Winning the litigation is a secondary consideration, or more precisely, a necessary antecedent to the ultimate goal of winning in the marketplace. Companies use litigation as an additive nonmarket strategy when they use litigation to enforce existing rules and regulations against other market participants in the hope of achieving an advantage in the marketplace.²¹⁴ These litigations are typically “private law” disputes seeking money damages. By contrast, companies use litigation as a transformative nonmarket strategy when they use the court system to transform the rules and regulations that affect their business, typically by challenging the legality of laws and regulations.²¹⁵ These litigations are typically “public law” disputes seeking declaratory and injunctive relief.

If a company wants to use litigation as a nonmarket strategy, it needs money to pursue that claim. Litigation is expensive, and some firms (generally, SMEs) are at a comparative disadvantage in terms of their ability to use retained earnings to file suit or to access traditional capital markets to raise debt or equity capital that can be used to finance litigation.

A firm’s relative inability to use litigation as a nonmarket strategy puts the firm at a comparative disadvantage in its ability to compete in the marketplace. Compared to larger players, the firm is relatively unable to pursue private law claims against other market participants to bolster its position in the market, and it is also comparatively less able to pursue public law claims that attack unfavorable government regulations. Thus, litigation finance helps level the playing field in the marketplace by enabling SMEs to have greater ability to use litigation as a nonmarket strategy. The battle over litigation finance must then be understood at least in part as a battle over which companies have access to litigation as a nonmarket strategy.

Our argument here does not presume that any and every nonmarket strategy is necessarily welfare-enhancing. Indeed, scholars have questioned the value of litigation through a host of normative lenses. For example, some have argued that private law litigation between two parties does not maximize welfare for either the parties to the litigation or society as a whole.²¹⁶ Likewise, the use of lobbying—a transformative strategy—has been challenged as inefficient rent-seeking.²¹⁷ While resolution of these underlying questions is beyond the scope of this Article, we offer three relevant comments.

First, the question for purposes of this Article is not whether litigation (or lobbying for that matter) should be used as a nonmarket strategy. Litigation has been used for strategic business reasons since long before the rise of the modern litigation finance industry, and well-resourced companies will continue to use litigation as a nonmarket strategy even if third-party litigation finance is stamped out of existence. The question instead is whether the ability to use litigation for strategic purposes should primarily be the domain of companies more likely to rely on retained earnings or traditional capital markets to pursue litigation or whether it should also be the domain of smaller firms more likely to use third-party litigation finance.²¹⁸ Put differently, even if one believes the “first-best” policy would be for no one to use litigation as a nonmarket strategy, the second-best solution is not necessarily to allow well-resourced incumbents to use nonmarket strategies while stripping smaller competitors of the means to do so too.²¹⁹

Second, there are good reasons to believe that cases funded by litigation funders are less likely to exacerbate broader concerns about the use of litigation as a nonmarket strategy. We previously discussed funders’ rigorous due diligence process, which tests a case’s merits in the courtroom, not its impact on the plaintiff’s market position.²²⁰ Because funders need their return to come from a court settlement, they generally do not benefit if a funded case results in a small monetary settlement but a significant market advantage for the funded party. Put differently, litigation funders are less likely to back cases that help companies win in the marketplace unless the company is also likely to win in the courtroom. Thus, although some critics of litigation finance argue that funders may promote frivolous litigation, the opposite is more likely to be true: cases funded by litigation funders are probably less likely to be weak, competitor-bullying cases than are most other cases, because funded cases are subject to more pre-filing scrutiny than other cases.

Third, litigation finance is more likely to be used in contexts where litigation is used as an adaptive rather than a transformative strategy. Because litigation funders invest on a non-recourse basis, receiving their recovery only from case proceeds, they typically only invest in cases where the plaintiff seeks money damages, not injunctive relief.²²¹ Thus, litigation funders frequently finance competitor suits like patent suits, false advertising cases, unfair competition suits, and so on, all of which are within the domain of adaptive nonmarket strategies. But litigation funders are highly unlikely to finance cases that pursue transformative strategies, as those suits are more likely to be cases brought against governmental entities seeking declaratory and injunctive relief, usually in the form of a court order finding a particular regulation unenforceable.

Larger firms that do not need litigation finance (for example, the Apples and Intels of the world) are more likely to pursue litigation as a transformative strategy rather than an adaptive strategy. In a related context, scholars have studied the different litigation preferences of repeat players compared to “one shotters.”²²² Larger corporations tend to be repeat players, whereas smaller firms and individuals tend to be one-shotters.²²³ And larger companies are more likely to be sued than to sue for violations of patent, antitrust, unfair competition, trademark, and copyright laws. For this reason, they are less likely to pursue meritorious plaintiff-side cases involving those underlying legal theories because they do not want to establish precedent that expands liability in those domains. For example, a victory in a specific patent case for Apple may be Pyrrhic if it expanded Apple’s liability for patent infringement in dozens of other cases.

Litigation used as a transformative strategy—that is, as a strategy to invalidate rules and regulations—presents a different story. In general, larger firms will be more comfortable with plaintiff-side litigation that develops precedent in ways that restrict the power of regulatory bodies, such as precedent overruling the Chevron doctrine or invalidating agency regulations. This insight helps explain why the Chamber of Commerce strongly opposes modern commercial litigation finance even as it actively pursues public law litigation to benefit its own financiers.²²⁴

In sum, (a) large and small companies can use litigation as a nonmarket strategy, (b) litigation finance is primarily used by smaller companies to implement adaptive nonmarket strategies, and (c) larger companies that have less of a need for litigation finance are more likely to pursue transformative strategies and disfavor litigation involving adaptive strategies. From these points emerges an important implication for the policy debate about litigation finance: regulations of litigation finance, with their focus on third-party funders’ receipt of money damages rather than injunctive relief, target the use of litigation as an adaptive strategy, primarily as employed by SMEs. If the battle over litigation finance is partly a battle over which companies can use litigation as a strategy to better compete in the marketplace, then the regulation of litigation finance will generally tend to give larger companies a comparative advantage over smaller companies.

C. Lobbying and Trade Associations: Transformative and Additive Strategies

Litigation finance has become a contentious policy issue, with regulations being considered by state and federal lawmakers and judges alike. The opponents of litigation finance are lobbying lawmakers and judges, asking them to impose regulations that range from mandatory disclosure rules and registration requirements to rate caps and even bans on funding.²²⁵ These efforts are led by the United States Chamber of Commerce, a business lobby, and by major corporations that have found themselves as defendants in funded cases.²²⁶ The supporters of funding have launched their own counter-offensive, trying to stave off the regulations they believe will hinder the industry’s growth.²²⁷ The funding community’s efforts are led by the International Legal Finance Association (“ILFA”), a nonprofit organization whose mission is to promote litigation finance and represent funders’ interests before lawmaking bodies like the United States Congress.²²⁸

As we have demonstrated, participants in the policy debate focus on funding’s impact on the civil justice system.²²⁹ Our analysis suggests a different interpretation: the policy fight itself must be understood at least in part as a nonmarket strategy where the stakes are success in the market. Many companies stand to either win or lose in the marketplace when litigation finance becomes widely available. Efforts by groups like the Chamber of Commerce and businesses to impose burdensome regulations on the litigation finance industry represent a classic example of that common transformative nonmarket strategy: lobbying.²³⁰ These enterprises are trying to transform the laws and regulations governing funding to essentially increase the transaction costs associated with third-party litigation finance, with the goal of ultimately giving larger firms a comparative advantage in the marketplace.

Litigation funders have also responded by forming ILFA, a trade association. ILFA engages in lobbying as its own transformative strategy in response to efforts to regulate litigation funding. ILFA has also promulgated a set of best practices for funders, which includes an emphasis on clarity, avoidance of conflicts of interest, confidentiality, respect for court rules, and capital adequacy.²³¹ ILFA’s members voluntarily commit to these standards.²³² Trade associations that set standards for an industry present prime examples of additive nonmarket strategies.²³³ Companies voluntarily sign onto these trade associations, they fund them, and ultimately, they follow the advice of these trade associations.²³⁴ The goal is frequently to insulate an industry from further external regulation through self-regulation.²³⁵

By voluntarily committing to the standards set by ILFA, financiers can accomplish several strategic goals. By self-regulating, they may avoid “being subject to government rules which may be more onerous or less efficient than the rules defined locally by the actors themselves.”²³⁶ The legal profession itself is largely self-regulating through the code of legal ethics, allowing lawyers primarily to regulate themselves rather than being subject to external government regulation.²³⁷ Moreover, by organizing behind a group like ILFA, funders can signal to stakeholders that they take seriously their obligations to justice and the legal system. The goal here is to create a system where financiers are “rewarded for establishing a norm of better behavior, either by those who benefit from their actions directly, or from those who value responsible behavior more generally.”²³⁸

IV. Policy Implications of Litigation Finance as Nonmarket Strategy

We have demonstrated that litigation finance has powerful implications not only for the legal system, but also for finance and business competition. The primary contribution of this Article is thus to identify a new dimension of study for scholars and policymakers who wish to understand the welfare effects of litigation finance. We provide a nonmarket strategy framework for understanding how litigation funding impacts finance and business.

We now provide some initial observations for how our insights affect debates about funding. First, we identify implications related to funding’s impact on the marketplace. Second, we draw implications for the existing debate about funding’s impact on the civil justice system.

A. A New Dimension to the Policy Debate

Companies use litigation finance to compete not only in the courtroom but also in the marketplace. Scholars and policymakers cannot fully understand and effectively regulate litigation finance unless they account for these overlooked welfare impacts.

A Regulation of the Capital Markets

Recent efforts to regulate “third party litigation finance” cannot be understood as efforts to broadly regulate the practice of third parties funding lawsuits in the civil justice system. Rather, the proposed regulations are targeted at a particular corner of the capital markets—and a corner more likely to be used by SMEs.

Consider two enacted regulations: a federal court’s local rule requiring disclosure of certain third-party financing agreements, and an exemplary state law regulating certain third-party financing arrangements. These regulations do not target third-party funding writ large. Rather, they target very specific types of corporate transactions.

We begin with the District of New Jersey’s Local Rule requiring mandatory disclosure of certain litigation funding arrangements, which has been copied verbatim by Judge Colm Connolly in the District of Delaware. The rule requires disclosure of any

person or entity that is not a party and is providing funding for some or all of the attorneys’ fees and expenses for the litigation on a non-recourse basis in exchange for (1) a contingent financial interest based upon the results of the litigation or (2) a non-monetary result that is not in the nature of a personal or bank loan, or insurance.²³⁹

Subtle nuances in the Rule’s language work to require disclosure only of certain forms of third-party finance. The rule covers entities that are “not a party” to the litigation and provide finance “on a non-recourse basis.” These limitations carve out traditional equity and debt financing. If a company raises equity financing from third parties with the goal of using that money to pursue litigation, disclosure is not required because the third-party investor essentially becomes a first-party owner. This new equity holder could very well hold voting rights to control the company’s activities, including its litigation. Meanwhile, the reference to “non-recourse” financing carves out traditional forms of unsecured or secured credit, which typically rely on the firm’s general creditworthiness (unsecured loans) or discrete assets like receivables or machinery (secured loans).

The Rule also excludes from disclosure instances where a company finances a third party seeking injunctive relief, as when companies provide financing to entities like the Chamber of Commerce so that the Chamber can seek declaratory and injunctive relief in public law cases. Companies that finance third parties seeking injunctive relief do not retain “a contingent financial interest” in the litigation, nor do they finance in exchange for “a non-monetary result that is not in the nature of a personal or bank loan, or insurance.” They simply finance the pursuit of injunctive relief that will necessarily benefit their business.

A similar analysis may be applied to a recent law enacted in Louisiana, SB355, which requires disclosure of litigation financing agreements and prohibits funders from controlling litigation.²⁴⁰ The statute has a lengthy definition of “third-party litigation funder” that excludes from its coverage many entities that are in fact third-party litigation funders. The statute’s 300-plus word definition of “litigation financing” provides:

“Third-party litigation funder” means any person or entity that provides funding intended to defray litigation expenses or the financial impact of a negative judgment related to a civil action and has the contractual right to receive or make any payment that is contingent on the outcome of an identified civil action by settlement, judgment, or otherwise or on the outcome of any matter within a portfolio that includes the action and involves the same counsel or affiliated counsel. This term does not apply to:

(a) The named parties, counsel of record, or law firm of record providing funding intended to defray litigation expenses related to the civil action.

(b) A person or entity providing funding solely intended to pay costs of living or other personal or familial expenses during the pendency of such civil action where such funds are not used to defray litigation expenses.

(c) Counsel of record, or law firm of record, or any referring counsel providing legal services on a contingency fee basis or to advance his or her client’s legal costs where the services or costs are provided by counsel of record or law firm of record in accordance with the Rules of Professional Conduct.

(d) A health insurer, medical provider, or assignee that has paid, is obligated to pay, or is owed any sums for health care for an injured person under the terms of a health insurance plan or other agreement.

(e) A financial institution providing loans made directly to a party, counsel of record, or a law firm of record when repayment of the loan is not contingent upon the outcome of such civil action or on the outcome of any matter within a portfolio that includes such civil action and involves the same counsel or affiliated counsel.

(f) A nonprofit legal organization exempt from federal income tax under 28 Section 501(c)(3) of the Internal Revenue Code, or any person providing funding to a nonprofit legal organization that represents clients on a pro bono basis. This Subparagraph does not affect the award of costs or attorney fees to a nonprofit legal organization or related attorney.²⁴¹

Each of the exclusions in subsections (a) through (f) is in fact an instance of third parties to the litigation that provide financing to support the litigation. Subsection (b) exempts third-party funding provided for a particular use of funds. Ignoring that money is fungible, the statute permits funders to provide capital that is specifically used for “costs of living or other personal or familial expenses,” so long as that money is not diverted “to defray litigation expenses.” Subsection (b) does not permit funders to provide capital used for corporate working capital, thus ensuring that the statute regulates discretionary financing to companies but not to individuals.

The remainder of the exclusions carve out various entities that provide third-party funding. Subsections (a) and (c) exempt lawyers (third parties to the litigation) who finance the litigation on a contingent fee basis, while subsection (a) also allows one party to the litigation to finance the litigation of their co-plaintiffs. Subsection (d) exempts insurers. Subsection (e) carves out all third-party investments that are non-recourse and limited only to the legal claim. In other words, subsection (e) recognizes that many companies use general-recourse third-party debt and equity financing to back their litigation, but it excludes those entities from having to disclose their funding. Meanwhile, subsection (f) excludes nonprofit entities organized under section 501(c)(3).

The definition of “third-party litigation funder” also only covers entities with a “contractual right to receive or make any payment” from the funded case.²⁴² This definition therefore excludes all funders that seek declaratory or injunctive relief in public law matters (as opposed to money damages relief in private law matters). This exclusion applies, for example, to organizations like the Chamber of Commerce’s Litigation Center, a 501(c)(6) organization that raises money from donors to pursue injunctive relief against government entities (pursuing transformative nonmarket strategies on behalf of its backers). The Chamber’s proposed regulations of third-party funding carve out the form of third-party funding that the Chamber uses.

In sum, the New Jersey disclosure rule and Louisiana statute, which are emblematic of other proposed and enacted regulations,²⁴³ do not broadly regulate the practice of third parties financing the pursuit of legal claims. Rather, they target specific forms of third-party funding, with a definition based on the corporate form of the transaction and the parties thereto. The regulations turn primarily on the financier’s corporate status (e.g., whether it is a law firm, nonprofit, or profit-seeking funder), the collateral for the financier’s investment (e.g., whether it is broad-recourse equity or debt, or recourse only to the litigation), and whether the financier’s expected return is tied directly to a monetary result in a case. Certain types of companies are more likely to prefer the narrow category of third-party funding regulated by these rules and statutes. Specifically, SMEs are more likely to structure their third-party capital raises using modern commercial litigation finance, regardless of whether they use the litigation funder’s investment to pursue litigation or as general corporate working capital.

Implications for Business Competition

Efforts to regulate or deregulate litigation finance must be viewed as a battle for an edge not just in the courthouse but also in the marketplace. When companies lobby for regulations of litigation funding, they are pursuing transformative nonmarket strategies to give themselves a market edge by discouraging litigation funding. And when the funding industry forms its own lobbying and standard-setting body, it is pursuing transformative and additive nonmarket strategies to combat the anti-funding transformative strategy.

This Article has also shown that companies use litigation finance to pursue nonmarket strategies in both adaptive and transformative ways. Regulations that promote or discourage litigation finance will impact firms’ ability to avail themselves of these nonmarket strategies. This insight raises important but overlooked welfare concerns that scholars and policymakers must consider when evaluating litigation finance.

First, consider the use of litigation finance to pursue litigation as an adaptive strategy (e.g., to pursue an antitrust suit against a competitor) or as a transformative strategy (e.g., to challenge a regulation that targets the company’s business model). If policymakers curtail access to funding, then companies that rely on litigation funding to pursue litigations with adaptive or transformative purposes will be less likely to pursue those litigations, or they will have fewer resources to effectively prosecute those litigations.²⁴⁴

In the first instance, the normative impact of litigation finance regulations will likely depend on whether one views the pursuit of these nonmarket strategies as a good or bad thing. For example, if one thinks the patent laws are under-enforced and the antitrust laws promote a healthier market, then diminished access to litigation finance may be a bad thing because it means fewer firms will be able to pursue patent and antitrust suits as an adaptive nonmarket strategy. If one takes a different view—that litigation involving the existing patent and antitrust laws diminishes welfare—then one might view the regulation of litigation finance as a good thing.

But the analysis is more complicated than this. Many companies do not need modern litigation finance to pursue litigation as an adaptive or transformative nonmarket strategy. Ban litigation funding, and they still have access to retained earnings and traditional debt or equity capital to pursue litigation designed to give them an edge in the courthouse. Regulating litigation finance thus only prohibits some players from deploying these nonmarket strategies. Put differently, if one prohibits some (mostly smaller) firms from accessing litigation finance, other (mostly larger) firms that do not need litigation finance can still pursue litigation for adaptive and transformative purposes, putting them at a comparative advantage in the marketplace. Policymakers must consider the welfare implications that flow from firms’ unequal ability to pursue litigation as a nonmarket strategy.²⁴⁵

Second, in addition to the use of litigation for adaptive and transformative purposes, this Article also demonstrated that companies can use litigation finance as an adaptive strategy by leveraging their legal claims to raise capital. Many companies use third-party financing writ large not simply to pay their lawyers on legal cases, but also to raise general working capital to fund their business activities.²⁴⁶ Larger companies often structure these transactions as third-party equity investments, or third-party debt investments that are either unsecured or secured by assets other than litigation claims. Smaller companies have more difficulty accessing these traditional markets, so they often turn to litigation finance instead.²⁴⁷

Put differently, large companies are more likely to finance their litigation and other business activities through third-party capital that falls within the safe harbors provided by the nascent regulations of litigation funding such as the New Jersey disclosure rule and Louisiana statute discussed above. They are more likely to raise general recourse debt or equity capital, and they are more likely to have the financial wherewithal to finance transformative litigation through a third party like the Chamber of Commerce.

To see the patchwork results, recall the weather balloon company that needs $15 million to finance litigation and develop new products. If the company has retained earnings or is able to raise traditional third-party debt or equity financing, it need not disclose its financing in litigation. Yet if the most efficient fundraise for the company is a commercial litigation finance fundraise, then the litigation finance regulatory structure kicks in. Meanwhile, if the company’s interests lie not in enforcing a claim against a competitor for money damages, but rather in invalidating a government regulation via declaratory and injunctive relief, then the company is not subject to the litigation finance disclosure regime either. This is so regardless of whether the company sues in its own name or if it finances a third party like the Chamber of Commerce to pursue the litigation.

One’s perspective on these insights may depend on the normative lens applied. As an example, consider the impact of limiting companies’ ability to raise capital via litigation funding. Assuming one values marketplace efficiency, current calls for regulation of litigation finance likely move the marketplace away from efficiency.²⁴⁸ This is because current litigation finance regulations hamper small businesses’ ability to access the litigation finance capital markets to fund various strategic business endeavors. These regimes thus favor larger companies, who have ample access to other capital markets and have less need for litigation funding.

And assuming one believes that it is better when most industries have many firms competing against each other, then the use of litigation finance as an adaptive strategy to raise capital likely improves societal outcomes. Litigation finance allows more companies to raise capital to produce, market, and sell their goods. Increased competition usually reduces prices for consumers and moves the market towards a more competitive equilibrium.²⁴⁹

B. Implications for the Civil Justice System

In addition to identifying a new dimension in the debate about litigation funding—how funding affects parties’ ability to compete in the marketplace—our study also brings a fresh perspective to the existing debate about how funding affects the civil justice system.

First, one significant question in the existing policy debate is whether litigation funders spur frivolous litigation. Opponents of litigation funding argue that funders will seek high-value claims even if they are frivolous, with the hopes of forcing settlements. Proponents of funding respond that financiers who invest in bad cases will soon be out of business.²⁵⁰

Our analysis sheds new light on that question by inviting a comparison of the scrutiny applied to cases that are funded via third-party litigation finance, as compared to funding via retained earnings or traditional third-party debt and equity financing. Before commercial litigation finance companies invest in cases, they apply extensive, months-long due diligence that is characteristic of asset-based lenders in general.²⁵¹ By contrast, funding litigation with retained earnings does not result in rigorous third-party scrutiny of the value of the litigation. Indeed, corporate finance scholarship has identified the agency problem inherent when managers use retained earnings to pursue new investments. Retained earnings avoid investor accountability because, by not raising external funds, “managers avoid a capital markets inspection of their past performance and the need to persuade the capital markets of the soundness of their proposed projects.”²⁵² By contrast, the use of project finance—and litigation finance is project finance for law—can “discipline management” because it “allows the investors, not the managers, to decide where the free cash flow will be invested. If the managers want to make new investments, they must raise the capital from outside investor.”²⁵³ Meanwhile, while raising more traditional equity or debt capital does invite investor scrutiny, it is not usually scrutiny specifically focused on the value of the legal claim. It follows that if companies want to pursue frivolous litigation, third-party litigation funding is probably least likely to result in approval to pursue the case.

Second, another important question in the existing debate about funding is whether third-party funders should be able to control litigation strategy and settlement decisions. Third-party funders state that they generally do not exercise control rights over litigation decisions, and many publicly-disclosed financing agreements bear this out, but there is one notable exception: after Burford Capital provided $140 million in working capital to Sysco, secured against several antitrust suits the food company had brought against suppliers, Burford attempted to veto Sysco’s decision to settle those cases for an amount below Burford’s liking.²⁵⁴ Meanwhile, litigation finance regulations have targeted control, with recent regulatory efforts trying to prohibit funders from controlling litigation, and court rules promulgated by the District of New Jersey and the Chief Judge of the District of Delaware requiring parties to disclose if they have provided a third-party funder with litigation control rights.²⁵⁵

If policymakers are concerned about control, there are many ways that financiers can accomplish control, and indeed standing as a third-party funder may be a uniquely inferior way to obtain control. For example, a third-party financier could become a controlling equity investor in the company and thus take over control of all the company’s operations, including the litigation.²⁵⁶ This approach might be particularly feasible for smaller claimholders in financial distress whose value is tied primarily or entirely to the value of litigation. Similarly, traditional creditors usually have powerful levers of control, including the power to force the company into bankruptcy or sue for payment on a loan.²⁵⁷ Creditors may use these rights to influence litigation. Yet the proposed regulations of litigation funding capture none of these instances of control via equity or traditional debt investment.

Third, a more recent issue in the litigation finance debate is whether litigation finance might present a national security risk. Opponents of litigation finance argue that funding can provide a conduit for foreign adversaries like China and Russia to impair the competitiveness of American companies by forcing them to defend against costly litigation and by gaining access to sensitive trade secrets during discovery.²⁵⁸ Supporters of litigation finance argue that there is little evidence of such foreign interference, and that China and Russia have much more effective ways of hurting America than corrupting the judicial system from the position of a third-party funder.²⁵⁹

Our analysis offers a different perspective. If foreign adversaries want to gain a competitive edge by accessing secrets through litigation, they can do so much more effectively by simply taking control of the plaintiff company, or by pursuing any of the other third-party financial methods that are not captured by the proposed regulations. In those circumstances, none of the onerous proposed regulations of litigation finance would capture their participation. The enacted and proposed regulations are highly underinclusive relative to the stated goal of ferreting out foreign influence.

Fourth, the disclosure of litigation finance agreements has emerged as a leading regulatory proposal in the existing debate. Proposed regulations of funding almost universally include a requirement that plaintiffs disclose the presence of litigation funding to the court and defendants.²⁶⁰ Proponents of disclosure argue that it is necessary to unearth whether the funder is violating any applicable ethical or legal rules, and to avoid judicial conflicts of interest.²⁶¹ Opponents of disclosure argue that it invites discovery side-shows and gives defendants a strategic advantage by disclosing whether the plaintiff has funding (and potentially disclosing much more, too).²⁶²

But again, there are myriad ways in which third parties finance another company’s litigation, and these financing methods are not commonly disclosed to courts or litigation opponents. Indeed, the federal rules provide very thin corporate disclosure, mandating that private companies need only disclose the identity of a parent corporation and of any publicly held corporation that owns ten percent or more of its stock.²⁶³ These limited disclosures were no mere oversight but a deliberate choice. The Rules Committee acknowledged that “[f]raming a rule that calls for more detailed disclosure will be difficult” and could create “[u]nnecessary disclosure requirements” that “place a burden on the parties and on courts.”²⁶⁴ The new regulations of litigation finance thus impose burdensome disclosure requirements on only one form of corporate finance, with the inquiry turning not on the type of litigation or the intent of the financier, but rather simply on the type of corporate form that makes most sense for the regulated party.²⁶⁵

In sum, almost all companies raise third-party capital to finance litigation and other business pursuits. Sometimes they raise equity from third-party investors. Sometimes they raise traditional third-party debt on a secured or unsecured basis. And sometimes—if it makes sense for the company given its size, strength, and regulatory environment, among other factors—they raise modern “litigation finance.” Efforts to regulate only a subset of the many ways claimholders raise third-party capital to finance litigation suggest that many proposed regulations of funding are underinclusive relative to their stated goal. Our nonmarket strategy framework suggests strategic business motivations for these proposed regulations.

V. Scholarly Benefits of the Nonmarket Strategy Framework

In addition to reframing how scholars and policymakers should approach litigation finance, our framework also holds value for both the law and business academies. First, our analysis answers recent calls by legal scholars for work that combines the scholarly disciplines of law and strategy. Second, our framework creates new insights for business scholars, especially concerning the types of strategic endeavors that firms engage in.

A. Legal Scholars

Legal scholarship does not usually focus on strategic business decision-making.²⁶⁶ “The notion that law may be a source of competitive advantage remains largely unexplored.”²⁶⁷ This is so even though law has a tremendous impact on business strategy, and even though many of the most contentious contemporary legal questions have high stakes for business interests.²⁶⁸

Scholars have recently called for a change. “If scholars can better understand the characteristics of firms and the attitudes of managers that promote legal strategy,” Robert Bird has argued, “both scholars and managers can devise ways to capture value from the legal environment that have never been previously considered.”²⁶⁹ He concludes that “law and strategy research can contribute much to both disciplines and can produce beneficial insights for scholars, practitioners, and managers alike.”²⁷⁰ For example, a full picture of the interaction between corporate counsel and regulators must account for business strategy decisions.²⁷¹ Fortunately, a law-and-strategy line of legal scholarship is emerging.²⁷² Other scholars (including one of us) similarly contend that laws and legal principles are important for marketing and product developers to understand so that they may better drive consumer demand to their products.²⁷³ Still others have argued that litigation can be a type of bullying to capture market power.²⁷⁴

This Article responds to the call of various legal scholars to engage with strategic decision-making in addition to legal decision-making.²⁷⁵ We provide a new lens for legal scholars to study how laws impact business strategy. This framework can help scholars address business litigation writ large, including private law disputes (such as the antitrust, patent, and Lanham Act disputes we have discussed) as well as high-profile public law disputes that grab headlines at the Supreme Court.²⁷⁶

B. Business Scholars and Businesses

Just as legal scholars have mostly ignored business scholars’ insights about law and strategy, the business and finance academy has mostly overlooked litigation finance.²⁷⁷ This Article contends that litigation finance is ripe for business scholarship, too.

A few avenues of research are likely to be fruitful. First, litigation finance is relatively unique in the nonmarket strategy context as it implicates adaptive, transformative, and additive strategies. Most business scholarship focuses on corporate strategies that are one-dimensional. Litigation finance is also unique because it is the subject of a push-and-pull of nonmarket strategies: some companies are using litigation finance as a nonmarket strategy to improve their market position, while others are pushing back against funding to preserve their own position.

Second, there is a dearth of empirical scholarship on litigation finance.²⁷⁸ The literature that has explored the instrument empirically has, unsurprisingly, focused on dependent variables relevant to the legal system, including the number, type, and outcome of funded cases.²⁷⁹ The framework presented in this Article suggests business scholars should also explore various business-focused dependent variables, including investment returns, weighted cost of capital, market power, and so on. Our framework can be a foundation on which scholars can evaluate the efficacy of these nonmarket strategies.

In addition to business scholarship, our framework here should provide businesses themselves with new strategies to create economic value. We have identified for firms the types of nonmarket strategies they can leverage. While we have identified several ways companies leverage litigation finance to drive economic value, we suspect that there are many unexplored strategies. By retooling litigation finance as a strategic endeavor and not just a legal one, companies may improve their ability to compete not only in the courtroom but in the market too.

Conclusion

This Article shifts the vantage point for analyzing litigation finance from the courthouse to the market square. The extensive scholarship on litigation finance has focused only on funding’s impact on the civil justice system. We argue that scholars and policymakers must also grapple with funding’s impact on capital markets and the business marketplace. To make this point, we use an interdisciplinary approach, drawing on business strategy literature about nonmarket strategies that has been largely ignored by legal scholars. Our framework identifies an entire set of funding’s policy implications in the market. It also offers new insights for the existing debate about how litigation finance affects the civil justice system. This approach provides a new lens for scholars and regulators struggling with how to study and regulate funding.

98 S. Cal. L. Rev. 1379

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Suneal Bedi* & William C. Marra†

*Associate Professor of Business Law & Ethics, Jerome Bess Faculty Fellow, Indiana University Kelley School of Business.

†Lecturer in Law, University of Pennsylvania Carey Law School. For helpful comments, we are grateful to Tom Baker, Mathew Caulfield, Brian Fitzpatrick, Todd Haugh, Donald Kochan, Samir Parikh, Tony Sebok, Maya Steinitz, and Maria Glover. The authors would also like to thank the law review editors for their helpful edits and comments.

A New Look at Old Money

October 2025October 2025Miranda Perry Fleischer*

Taxing wealth—including inherited wealth—is a hot topic, making headlines and generating heated debate. Should millionaires and billionaires face an annual wealth tax, as championed by Senators and former presidential candidates Elizabeth Warren and Bernie Sanders? Should we strengthen the existing estate tax, as former presidential candidate Kamala Harris urged? Or, as opponents argue, are both annual wealth and once-a-generation wealth transfer taxes unfair and impractical? What makes this debate so intractable is not only that the public as a whole is divided on these issues, but that also many individual Americans hold simultaneous beliefs about wealth, opportunity, fairness, desert, and family that seemingly contradict each other. This Article cuts through that debate by proposing a novel solution for inheritance taxation that reconciles these deeply held beliefs with the benefits of wealth transfer taxation.

Our current estate tax treats the self-made millionaire the same as an heiress who has not earned a cent when they pass their fortunes on to their heirs. But this is misguided. Drawing on recent work on the psychology of taxation, this Article makes the case for an innovative inheritance tax system that taxes old money more heavily than new. This approach would allow individuals to bequeath wealth that they have earned—but not wealth that they have inherited—free of tax. Known as a Rignano tax, this proposal harnesses the finding that many Americans “silo” beliefs about wealth, holding seemingly contradictory beliefs that differ in part based on whether wealth is earned or inherited. By leveraging these findings and building on experience with the existing transfer tax system, this Article elaborates and advances a set of specific and concrete design recommendations for a Rignano tax.

This comprehensive analysis of a Rignano tax—the first in the law review literature—complements philosophical work that advocates for such a tax but does not address key design and policy questions. Further, it contributes to tax scholarship by advancing our understanding of the relationship between a tax’s normative goals and structural design choices. And for both advocates and opponents of the estate tax, it offers a nuanced and fair exploration of the debate surrounding inheritance taxation as well as a potential resolution of the enduring stalemate over taxing wealth.

Her voice is full of money.

—F. Scott Fitzgerald, The Great Gatsby¹

They were new money, without a doubt: so new it shrieked. Their clothes looked as if they’d covered themselves in glue, then rolled around in hundred-dollar bills.

—Margaret Atwood, The Blind Assassin²

Introduction

Compare Tom, who builds a multi-million-dollar business from the ground up, with Mary, an heiress who inherits millions and never earns a cent. Both want to leave their fortunes to their children. Although our current estate tax treats Tom and Mary the same, this approach is misguided. It ignores that not only is the public as a whole divided on the issue of taxing wealth transfers,³ but many individual Americans hold simultaneous beliefs about wealth, opportunity, desert, fairness, and family that seemingly contradict each other. Many believe, for example, both that working hard and saving in order to help one’s children is as American as apple pie and that it is unfair for some children to begin life with a substantial head start.⁴

As a result, the debate over taxing wealth—including inherited wealth—is at a longstanding impasse.⁵ Influential legislators including Senators and former presidential candidates Elizabeth Warren and Bernie Sanders champion annual wealth taxes on ultra-millionaires, while opponents passionately contend that even once-a-generation taxes on wealth transfers are unfair and impractical, calling them “expropriation” and “an especially cruel injury.”⁶ This Article cuts through that debate and reconciles those competing beliefs by proposing a novel inheritance tax system that taxes old money more heavily than new. This innovative approach—known as a Rignano tax⁷—would allow Tom to bequeath wealth that he has created free of tax, while taxing Mary, who simply inherited her wealth.

Drawing on recent work on the psychology of taxation, this innovation harnesses the finding that many Americans “silo” beliefs about wealth, holding seemingly contradictory beliefs that differ in part based on whether wealth is earned or inherited. A Rignano tax thus reconciles the benefits of wealth transfer taxation with deeply held beliefs about fairness, desert, private property, and family. Because these beliefs—which legal philosophers Liam Murphy and Thomas Nagel call “everyday libertarianism”⁸ and which economist Steven Sheffrin terms “folk justice”⁹—generally differ from those of policymakers and academics, they are often ignored. Recent work on the psychology of taxation suggests that this is a mistake.¹⁰ Policymakers who ignore these beliefs do so at their own peril, often undermining their own normative aims.

But taking these beliefs into account does not mean abandoning wealth transfer taxation altogether. People frequently hold views about fairness and morality in different domains that appear to contradict each other, a concept that Zachary Liscow terms “policy silos.”¹¹ A pro-life advocate, for example, may also support the death penalty; someone who opposes redistributive taxation may favor transportation policy that helps the poor. Crucially, evidence indicates that many Americans “silo” beliefs about wealth, holding seemingly contradictory beliefs that depend in part on whether wealth is earned or inherited.

These insights suggest a way out of the morass bogging down the debate over inherited wealth. Supporters of inheritance taxes should not dismiss out-of-hand public attitudes about hard work, thrift, and family, but instead harness the concept of policy silos. By allowing individuals to make tax-free transfers of wealth that they themselves have earned—but not wealth that they have merely inherited—a Rignano tax acknowledges the very real, deeply held value that the public places on hard work, entrepreneurship, and notions of desert while also addressing concerns about inherited wealth.¹²

Although the idea of taxing old money more heavily than new has long fascinated philosophers of all stripes,¹³ philosophical literature leaves key design and policy questions unanswered. This Article answers those questions, offering the only comprehensive analysis in the law review literature of a Rignao tax. It first justifies a Rignano tax as a normative matter, delving more deeply into both expert and lay arguments for and against taxing wealth and recent work on the psychology of taxation. Its key normative insight is that a Rignano tax balances the goals of wealth transfer advocates (such as enhancing equality of opportunity and minimizing dynastic transfers of unearned power) with those of opponents of such taxes (such as rewarding desert, hard work, and family). By acknowledging both the pros and cons of taxing wealth transfers, a Rignano tax can succeed politically where other proposals fail.

What remains to be resolved are important questions of design and administration. Charting new ground in the literature on Rignano taxes, this Article builds on experience with the existing transfer tax system to elaborate and advance a set of specific and concrete design recommendations for a Rignano tax. These are:

Base: Imposing a tax on gifts and bequests received by an individual when that wealth is the subject of a second transfer;

Rate: Levying a rate of 0% on first-generation transfers and 40% on other transfers;

Valuation: Using the risk-free rate of return to determine what portion of a gift or bequest is second-generation wealth;

Frequency: Taxing generation-skipping transfers;

Tracing: Using a first-in-time approach to allocate second-generation wealth;

Trusts: Treating distribution as the relevant date for both imposing the tax and “starting the clock” for determining future growth; and

Transition Rules: Treating one-sixth to one-third of existing wealth as inherited.

Together, these recommendations build upon the insights of the psychology literature to craft an inheritance tax system that balances how the public actually thinks about taxation with the goals of inheritance tax supporters. Taxing heirs instead of transferors harnesses the insight that people silo beliefs about wealth, distinguishing between inherited and earned wealth. It also lessens the pull of moral mandates about double taxation and hard work. At the same time, it reflects the moral intuitions shared by most supporters of inheritance taxation. For example, many of the concerns raised by inherited wealth—such as equality of opportunity—are best measured by how much wealth a given person inherits, not how much total wealth an individual bequeaths without regard to how that wealth is divided among beneficiaries.

Imposing a zero rate on initial transfers of earned wealth likewise diminishes the attraction of the double taxation and hard work arguments. It also minimizes the threat that people often feel when systems of which they are a part—such as the family or an economy that rewards hard work and entrepreneurship—are undermined. By suggesting a rate of forty percent for later transfers, it acknowledges that repeated wealth transfers raise normative

concerns without breaching the fifty percent threshold that is especially salient in tax debates.

Other recommendations address valuation and liquidity concerns to increase administrability and decrease opposition triggered by those difficulties. For example, even though most normative considerations suggest taxing trust beneficiaries when their interests vest, this Article proposes taxing them at distribution. At that point, accurate valuations—and not just estimates—can be made, and liquidity concerns disappear. This acknowledges the instinct many people have that taxing “paper gains” is unfair. And using the risk-free rate of return to determine what portion of an inheritance’s growth is earned versus unearned provides a simple, easy to administer method for distinguishing what portion of a second transfer is old money versus new.

A Rignano tax thus charts a course through the competing beliefs held by both supporters and opponents of inheritance taxation. Although implementing one will require some additional complexity and recordkeeping, these burdens are not insurmountable. Several European countries tax some bequests more heavily than others depending on the relationship between the transferor and transferee.¹⁴ And for the last decade or so, our current system has successfully allowed one spouse’s estate tax consequences to turn on the value of the other spouse’s property as well as actions taken by the predeceased spouse’s executor at his or her prior death. This suggests that tying a recipient’s tax burden to the actions of the transferor is feasible. Administrative concerns therefore do not derail a Rignano tax’s carefully charted course. What remains is a workable inheritance tax system that can gain traction with the public where other proposals fail.

This Article proceeds as follows. Section I offers an overview of the current estate and gift tax system and common alternatives. Section II explores the arguments for and against taxing wealth transfers. Section III describes the justifications for a Rignano tax, and Section IV details what implementing a Rignano tax would entail. Section V concludes by assessing how well a Rignano tax balances competing intuitions concerning inherited wealth and concludes that the Rignano tax is worth pursuing notwithstanding the potential complexities that attach to its design and implementation.

I. An Overview of Wealth Transfer Taxation

Taxing wealth transfers is a longstanding feature of our federal tax system. Our current estate tax dates from 1916, when Congress imposed a tax ranging from one percent on estates over $50,000 to ten percent on estates over $5,000,000.¹⁵ To prevent individuals from avoiding the tax by making lifetime gifts instead of bequests, Congress permanently added a gift tax a few years later.¹⁶ This system is “unified,” meaning that it taxes an individual’s gratuitous transfers once they cumulatively exceed a per-transferor exemption amount, whether those transfers are gifts or bequests.¹⁷ For simplicity, this Article refers to this unified structure as the “estate tax.”

Due to changes in the exemption and rates, the tax’s bite has fluctuated dramatically over the past two decades.¹⁸ As recently as the year 2000, the top rate was 55 percent; by 2013, it had dropped to 40 percent, where it remains.¹⁹ As rates were dropping, the exemption was increasing. Between 2000 and 2017, it grew from a comparatively small $675,000 to over $5,000,000,²⁰ and in 2017, the Tax Cuts and Jobs Act temporarily doubled the exemption to $10,000,000²¹ (adjusted for inflation to $13,990,000 in 2025²²). Although the exemption was scheduled to return to a benchmark of $5,000,000 in 2026, legislation in the summer of 2025 permanently increased it to $15,000,000, adjusted for inflation, starting in 2026.²³ Given the exemption’s size, the estate tax affects only a tiny sliver of the population. In 2020, roughly 4,100 estates were required to file an estate tax return,²⁴ and of those, only about 1,900 actually owed any estate tax—less than 0.1 percent of the estimated 2,800,000 decedents that year.²⁵ Despite the small number of taxable returns, the tax raises a non-trivial amount of revenue—roughly $16 billion in 2020.²⁶ Interestingly, the amount of revenue has not decreased as fast as the number of taxable estates has decreased, which suggests that exempting additional transfers from tax (as a Rignano tax would) would not necessarily eviscerate the tax’s revenue-raising capacity.²⁷

A few features of the estate tax merit mention. First, it focuses on the transferor. This contrasts with recipient-focused taxes, such as the inheritance or accessions tax schemes that are more common abroad.²⁸ Other than the marital and charitable deductions, the estate tax does not distinguish among recipients. Consider Anna, whose wealth totals $15,000,000. She is taxed the same whether she transfers her fortune to one child or splits it among ten cousins.

Second, individuals may make a number of tax-free transfers. Most importantly, each individual has a single lifetime exemption amount—currently $13.99 million—which applies to her cumulative wealth transfers.²⁹ Assume that Anna gifts her daughter $10 million during life and later dies with an estate of $5 million. The lifetime gift uses up most of her exemption amount, leaving only $3.99 million of it left for later transfers. At her death, $3.99 million of her estate will be shielded from tax by the rest of her exemption amount, and the remaining $1.1 million of her estate will be taxed. She does not get a new exemption for her bequests. In addition, the annual exclusion allows each individual to exclude the first $19,000 transferred to each recipient each year from the above calculations.³⁰ Anna can give as many people as she likes—her whole Tax I class, perhaps—$19,000, and the gifts are simply ignored. Anna can do this year after year, and the gifts do not use up any of her exemption amount. Further, there are unlimited deductions for marital³¹ and charitable transfers.³² If Anna bequeaths her entire estate to her spouse, her taxable estate is zero. She does not need to use her exemption amount, and it rolls over to her spouse for later use. Likewise, if Anna bequeaths her $15,000,000 to charity, her taxable estate is zero. In this case, however, her unused exemption simply disappears.

Third, the generation-skipping transfer tax precludes families from minimizing their total tax burden by “skipping” generations. If Anna bequeaths her estate to her daughter Bonnie, who in turn bequeaths the wealth to Anna’s granddaughter Chloe, the estate tax is imposed twice. But if Anna skips Bonnie and bequeaths her wealth directly to Chloe, the estate tax is imposed only once. To equalize the tax burden in these situations, the generation-skipping tax imposes a tax on transfers that “skip” generations.

Finally, this system is separate from the income tax. Gifts and bequests received are not included in a recipient’s income, regardless of size.³³ Later income tax consequences to the transferee depend on whether the transfer is a gift or bequest.³⁴ Assume that Anna buys stock for $100 and transfers it to Bonnie when it is worth $1,000. If the transfer is a gift, Bonnie takes Anna’s basis for income tax purposes and will pay tax on the $900 unrealized gain upon disposition.³⁵ If Anna bequeaths the stock to Bonnie, Bonnie takes a fair market value basis of $1,000.³⁶ The $900 gain that accrued in Anna’s hands disappears.

A transferor-focused estate tax is just one possible way of taxing wealth transfers. Numerous OECD countries, including Belgium, France, Germany, Japan, Spain, and Switzerland, impose either accessions or inheritance taxes that focus on beneficiaries.³⁷ Although the two terms are often used interchangeably, they are technically distinct.³⁸ The former taxes the recipient based on the total amount of gifts and bequests received during her lifetime, while the latter taxes the beneficiary on such receipts annually.³⁹ Inheritance tax rates often vary based on the relationship between the donor and beneficiary, with transfers between close relatives taxed more lightly than transfers between more distant relatives and unrelated individuals. Finally, both accessions and inheritance tax systems generally exempt transfers between spouses.

An alternative to taxing gifts and bequests through a separate estate, inheritance, or accessions tax system is to change their income tax treatment. Most obviously, gifts and bequests could be included in income, just like salary or lottery winnings.⁴⁰Although this is fairly rare, Latvia and Lithuania do this, and Lily Batchelder’s “comprehensive inheritance tax” is essentially an income inclusion scheme.⁴¹

Another option is to use carry-over basis for bequests as well as gifts so that when transferees sell, they will pay tax on any gain that accrued to the donor regardless of whether the transfer is a gift or bequest (returning to Anna and Bonnie, Bonnie would pay tax on the $900 gain that accrued in Anna’s hands in both circumstances). The U.S. has briefly experimented with carry-over basis twice before—once in 1976 (although it was repealed before going into effect) and again in 2010 (that year, estates could choose between the regular estate tax or a system without an estate tax but with carry-over basis).⁴²And finally, gifts and bequests could be treated as realization events to the donor that trigger tax on unrealized appreciation at the time of transfer.⁴³ The United Kingdom⁴⁴ and Australia⁴⁵ treat gifts as realization events. Canada takes this approach at death, and former President Biden and numerous Senators have proposed that the U.S. follow suit.⁴⁶ In theory, one could both change the income tax treatment of gifts and bequests and impose a separate wealth transfer tax, but in the real world, they tend to be treated as either/or propositions due to political concerns.

II. The State of The Debate over Estate Taxes

Taxing wealth transfers is extremely controversial. As the foregoing history demonstrates, opponents have successfully pursued legislation that has drastically weakened the estate tax over the past two decades. In spite (or perhaps because) of this political history, taxing wealth transfers (as well as wealth itself) remains popular with a substantial portion of the public.⁴⁷ Supporters of wealth transfer taxation focus on egalitarian and welfarist justifications, while opponents generally rely on libertarian arguments. This Article’s goal is not to evaluate the strengths and weaknesses of those arguments in depth, which an extensive body of work does elsewhere. Instead, it is to provide an overview of this debate so that readers can better understand how people think about the estate tax so that they can evaluate the attractions of a Rignano tax.

A. Arguments in Favor of Wealth Transfer Taxation

Equality of Opportunity

Perhaps the most popular argument for taxing wealth transfers stems from the principle of equality of opportunity.⁴⁸ This ideal holds that each individual—regardless of arbitrary characteristics such as race or gender—should have an equal shot at pursuing her vision of the good life, while still bearing responsibility for her decisions.⁴⁹ In tax and legal scholarship, the most common instantiations require “redistribution from those with greater means and opportunities to those with less.”⁵⁰

These “liberal egalitarian” theories⁵¹ rest on two arguments. First, the financial circumstances of birth impact one’s ability to develop one’s talents. An intelligent child born to poor parents generally does not have the same educational opportunities as one born to wealthy parents.⁵² Well-off parents can afford private school tuition or a house in a high-quality school district,⁵³ tutors, and challenging after-school programs. Parents of athletes pay for private coaches, travel teams, and expensive summer camps. Well-off children do not have to work to help pay the rent but can instead spend time on their studies and resume-building activities like internships. And once a child is grown, wealthy parents can provide seed money for a business, pay for graduate school, or cover the down payment on a house. Second, these circumstances are arbitrary. A child does not choose to be born into a rich or poor family, just as she does not choose her race.

Equal opportunity therefore requires some ex ante equalization of resources so that a poor child with an IQ of 150, Mozart’s musical genius, or a keen business sense has the same shot at success as a richer child. In theory, taxing wealth transfers both reduces their size (in turn diminishing the advantages of being born into a rich family) and creates revenue to fund redistribution to those with fewer opportunities.⁵⁴

Dynastic Power

A related justification is to minimize the intergenerational transmission of power.⁵⁵ As our founders recognized, rejecting hereditable power is one of our fundamental values.⁵⁶ Yet great wealth often brings economic and political power over others.⁵⁷ Those favoring wealth transfer taxes on these grounds point to the following.

First, money enables one to make substantial political donations. Donors become de facto gatekeepers and agenda setters, influencing who more easily stays in the race and which issues gain prominence.⁵⁸ Substantial contributions plausibly increase access to elected officials⁵⁹ as well as influencing legislative behavior.⁶⁰ Large contributors often obtain influential positions such as ambassadorships or bureaucratic posts.⁶¹ Having a lot of money also makes it easier to run for office. Consider recent presidential candidates Tom Steyer⁶² and Michael Bloomberg⁶³ as well as President Donald Trump.⁶⁴ Closer to home, numerous candidates in U.S. Senate and House races⁶⁵ and state and local elections⁶⁶ have also spent plentiful sums of their own.

Money also allows one to influence public opinion,⁶⁷ most directly through unlimited, anonymous contributions to Section 501(c)(4) social welfare organizations that can advocate for and against candidates, lobby, and conduct issue advocacy. The wealthy can shape the media’s news and editorial coverage through advertising purchases⁶⁸ or from owning media companies directly.⁶⁹ And finally, the ability to influence policy (both directly and indirectly) also accompanies wealth.⁷⁰ Threats to relocate businesses, cancel events, or abandon planned openings or expansions can influence elected officials eager to protect local economies, even when the policies in question are not directly business-related.⁷¹ Business leaders are often consulted for advice by policymakers,⁷² be it through informal conversations or official advisory councils.⁷³ And more directly, such leaders are often named to policy-making positions that require special knowledge precisely because of the skills and expertise that made them successful. Lastly, the traits that bring business success often enable business leaders to naturally become civic leaders.⁷⁴

Wealth can also mean having economic power over others, especially in areas where a few families dominate economic life. Although the days of official company towns are long-gone, some influential families still control much of the employment opportunities in certain communities—for example, the Kohler family in Wisconsin.⁷⁵Elsewhere, residents might depend on a small set of firms for groceries, housing or other needs, such as cars. Decisions about what food to stock and at what prices, whether to raise rents or wages, expand or close a firm, and the like directly impact residents’ lives.⁷⁶ Handing the family business (or controlling chunks of publicly traded companies) down to one’s heirs is therefore tantamount to handing them economic power over others.

Inheritances and Ability to Pay

A third justification for taxing wealth transfers proceeds from the principle that political institutions should maximize welfare.⁷⁷ This argument equates welfare with utility and assumes that individuals have identical utility functions that decline as wealth and income increase.⁷⁸ Redistribution from an individual with more income or wealth to an individual with less thus increases overall utility. The catch is that taxing higher-income (or higher-wealth) individuals may lead to reduced labor and investment, decreasing overall welfare. The optimal tax literature thus argues that the ideal solution would be to tax ability, which cannot be minimized the way one can choose to work less.⁷⁹ But since ability cannot be directly observed, the next best is to tax income as a proxy.⁸⁰

Starting from this premise, some theorists argue that gifts and bequests received also reflect well-being and ability and should be taxed as proxies therefore.⁸¹ The reasoning is two-fold. If you are comparing two individuals with identical labor income, ignoring the fact that one receives a large inheritance is nonsensical—just as ignoring any other inflow, such as winning the lottery, would be. Second, the receipt of gifts and bequests is linked to a variety of “nonfinancial inherited assets and traits that powerfully affect earning ability.”⁸² These theorists generally reject the standard optimal tax account that taxing capital (which an estate tax does) creates too many economic distortions on three grounds.⁸³ First, they argue that this account overestimates the share of bequests made for reasons that are responsive to tax versus those that are not responsive. For example, someone who is saving to fund a comfortable retirement or for medical and long-term care as they age, and who “accidentally” leaves whatever is left to their heirs, will not really be influenced by taxation. Second, they contend that observed declines in wealth accumulation that correlate to transfer taxes are plausibly attributable to tax avoidance or increased lifetime gifting rather than reduced savings.⁸⁴ Lastly, these theorists note that most studies ignore recipients, who often work less after receiving an inheritance.

A Wealth Transfer Tax as a Periodic Wealth Tax

The foregoing arguments focus on the significance of transferring wealth. In contrast, a second set of justifications focuses on its very existence. But because political and administrative hurdles render taxing wealth itself difficult (if not impossible), taxing wealth transfers is an indirect solution.⁸⁵

Wealth Inequality and Democratic Concerns. A first justification for taxing wealth is to protect our democratic institutions.⁸⁶ There is a strong link between money and political influence, and people have different amounts of money.⁸⁷ As a result, many argue that money muddles the ideal that “the political system should . . . treat[] all citizens as free and equal participants.”⁸⁸ One concern is that the preferences of constituents with money will be prioritized over those without.⁸⁹ A growing body of evidence suggests that policymakers are more responsive to the views of the former;⁹⁰ this phenomenon has been observed at both the state⁹¹ and federal level,⁹² across a range of policies,⁹³ and especially when the two sets of views diverge.⁹⁴ This is both fundamentally at odds with a core tenet of democracy,⁹⁵ and creates a second harm by distorting the deliberative process.⁹⁶ If the system ignores information about the preferences of a large chunk of society, policymakers may lack all the information necessary to make fully-informed decisions. This vacuum also prevents the deliberative system from benefiting from a diversity of viewpoints.⁹⁷ A similar yet distinct harm from overweighting the preferences of the affluent is inefficiency. Here, the concern is that neither the harms to the non-affluent from policies favored by the wealthy nor the benefits from policies favoring the non-affluent will be taken into account. As a result, the true costs of a

variety of policies are obscured, potentially resulting in indirect redistribution to the affluent.⁹⁸

Economic Externalities from Wealth Concentrations. A similar justification for taxing wealth is that large wealth concentrations harm the economy.⁹⁹ Although short-run studies are mixed, several long-run studies suggest that highly unequal concentrations of wealth are negatively correlated with economic growth.¹⁰⁰ Several plausible explanations exist, but two appear most likely.

First, high levels of inequality might lead to underinvestment in education and health. Poorer families often face borrowing constraints that encourage young adults to enter the workforce rather than continue with schooling that increases skills and later income. In turn, fewer resources will be available to pass on to the next generation, compounding the cycle.¹⁰¹ A complex link between wealth, fertility, and education may also exist. Wealthier families tend to have fewer children, leading to greater investment in each one; the opposite is generally true for less-wealthy families.¹⁰² At the societal level, societies with higher levels of inequality may invest less in educational opportunities for the less well-off.¹⁰³

Somewhat similarly, high levels of inequality might decrease societal investment in health care.¹⁰⁴ And on the micro-level, having a relatively low income or social status might negatively impact an individual’s health, which imposes costs in terms of lost human capital and diverted financial resources.¹⁰⁵ Second, unequal concentrations of wealth are linked to social unrest and diminishing social cohesion, both of which can also contribute to slower economic growth in a number of ways.¹⁰⁶ It is plausible that in highly unequal societies, individuals engage in more rent-seeking, which misallocates resources. Inequality also contributes to sociopolitical instability, which both disrupts normal market and economic activities (think

of labor strikes) and creates an environment of political and legal uncertainty.¹⁰⁷

Owning Wealth and Ability to Pay. A final justification for taxing wealth is that simply holding it reflects ability to pay. Consider two people who each have $75,000 of labor income. If one also has several million dollars in the bank, shouldn’t that change our assessment of whether the two have an equal ability to pay tax?¹⁰⁸ After all, the mere existence of wealth enhances one’s financial capacity.¹⁰⁹ It also brings comfort, security, and status, all of which are intrinsically valuable and plausibly make it easier to generate even more wealth.¹¹⁰ Second, recall the welfarist ideal that tax burdens should track ability or endowment, and that income is the best proxy. Due to the realization requirement, our income tax system does not tax all economic income as it accrues. Some therefore propose taxing wealth periodically to capture the same measure more fully.

B. Arguments Against Wealth Transfer Taxation

While advocates of wealth transfer taxes tend to rely on arguments that reflect egalitarian and welfarist ideals, opponents generally ground their criticisms in libertarian and libertarian-adjacent arguments about efficiency, property rights, and the appropriate role of government. These can be a bit hard to categorize because scholarly opposition to wealth transfer taxes is scant in comparison to scholarly support. Most of the arguments made by everyday estate tax supporters are also fleshed out with care by academics. This is less true, however, for many of the opinions held by everyday estate tax opponents. Nonetheless, we can sort these critiques into roughly two groups.¹¹¹ The first set opposes wealth transfer taxes because they have differing normative visions of the role of government, a just distribution of resources, and fairness. The last set focuses on the efficiency of wealth transfer taxes to argue that they are themselves harmful.

Equality of Opportunity Revisited

The argument that equality of opportunity requires redistributing resources from rich to poor is contested.¹¹² Another interpretation of equal opportunity, known as “careers open to talents” or “the merit principle,” instead focuses on open competition.¹¹³ On this view, resources are irrelevant to one’s ability to compete for jobs, school admissions and scholarships, and the like; what counts is whether all individuals have a chance as a formal matter to compete.¹¹⁴ This ensures that positions are awarded based on merit to the most talented, instead of to the less talented due to arbitrary and unrelated characteristics like race or sex. Advocates of the merit principle often point to rags-to-riches stories such as media personality Oprah Winfrey, clothing designer Ralph Lauren, and Starbucks CEO Howard Schultz as proof that formal nondiscrimination sufficiently ensures a level playing field. If one interprets equal opportunity in this manner—as many Americans do—then one would naturally oppose any tax designed to redistribute wealth or income on equality of opportunity grounds, including a wealth transfer tax.

Rejecting Declining Marginal Utility and Progressivity

Many similarly contest the various arguments relating to the declining marginal utility of wealth and income. Some oppose the estate tax because they believe that redistribution to maximize welfare is beyond the proper scope of government, even if they accept the premise of declining marginal utility.¹¹⁵ Others question the assumption itself.¹¹⁶ Richard Epstein emphasizes, for example, that dollars are not ends unto themselves, but rather means. As he writes, “The decline in the marginal utility of an additional steak after you have already eaten one may be very high. But wealth is convertible into any number of different goods, so in each case the decline in utility has to be measured by referring to the utility of the most desired good as yet unpurchased.”¹¹⁷ And there’s some evidence supporting this view,¹¹⁸ including work suggesting that although utility likely declines as income rises in the lower range, it then increases with income in the middle range before declining again, creating an S-shaped curve.¹¹⁹

A related set of critiques reflects the normative dispute over whether the overall tax system should impose progressive or proportionate tax burdens.¹²⁰ Supporters of progressivity favor taxes that target the wealthy—such as estate taxes—as a way to increase the progressivity of the overall tax system.¹²¹ Opponents of progressivity naturally oppose such taxes, favoring proportionate taxes for several reasons.¹²² Some accept the ideal that tax burdens should track one’s ability to pay but reject the assumption that declining marginal utility requires imposing higher tax rates on the wealthy—the “equal sacrifice” argument. If utility does not decline, then taxing everyone at the same rate imposes an equal sacrifice, negating the need for progressive rates.¹²³

Others reject the ability-to-pay principle, instead arguing that taxes should reflect how much one benefits from the societal infrastructure (the “benefit” theory). As Friedrich Hayek explains, “since almost all economic activity benefits from the basic services of government, these services form a more or less constant ingredient of all we consume and enjoy and that, therefore, a person who commands more of the resources of society will also gain proportionately more from what the government has contributed.”¹²⁴ Richard Epstein analogizes the state to a partnership, highlighting that partnerships default to the “pro rata division of gains and losses derived from any common venture,” which ensures that “every individual [is] made better off to the same degree, that is, receive the same rate of return on his proportionate investment in social infrastructure.”¹²⁵

Private Property Rights

A third normative objection is that estate and inheritance taxes unjustly interfere with private property rights.¹²⁶ Supporters of strong private property rights, ranging from John Locke¹²⁷ and John Stuart Mill¹²⁸ to Robert Nozick¹²⁹ and Richard Epstein, overwhelmingly argue that if someone justly acquires property, she has the right to transfer that property however she likes, including by making gifts and bequests.¹³⁰ Because estate and inheritance taxes interfere with this right, they are not simply unjust, but uniquely unjust. As philosopher Loren Lomasky argues, they are “an especially cruel injury because [they] deprive[] the dead of one of their last opportunities for securing the goods that they value.”¹³¹ On this account, choosing to make a gift or bequest expresses the identity of the donor in a way that selling property does not. It is a sign of her affection for the recipient, as well as her values.¹³² Just as other intimate family matters relating to the expression of values—such as which holidays to celebrate and whether to go to church—should be immune from state interference, so too should gratuitous transfers. Moreover, gifts and bequests take place in the private realm of the home and neither avail themselves of the market infrastructure nor represent a voluntary entrance into the public sphere. In contrast, most taxable activity—like selling labor or property—represents a voluntary entry into the public sphere whereby one willingly consents to the burdens of taxation in exchange for using the market infrastructure. Perhaps, then, the intrusive burden of taxing gifts and bequests (e.g., tracking, valuing, and reporting) in the private sphere should be given more weight than the burden from taxing transactions in the public marketplace.

Double Taxation

Many also view the estate tax as double taxation.¹³³ Although this critique is extremely common among members of the public, policymakers and scholars tend to be dismissive of it as betraying a misunderstanding of the broader tax system. They first note that because of the realization requirement,¹³⁴ many wealthy individuals have never paid income tax on the increase in value of their investments.¹³⁵Studies suggest that untaxed appreciation comprises an average of 32% of smaller estates (a few million dollars) to 55% of large estates (those in the $100 million range).¹³⁶ To some extent, then, estate tax supporters are correct that opponents wielding the double taxation argument either misunderstand this point or overstate their case.

But what about wealth that has already been taxed, such as labor income invested in assets such as taxable savings accounts? Estate tax opponents are correct that an estate tax taxes this twice.¹³⁷ And to many, that just seems unfair on a gut level, despite various counterarguments. One counter is that the same income is often taxed multiple times to the same person; think of income, payroll, and sales taxes. Another counter is that recipients of gifts and bequests do not include them in income. Therefore, taxing gifts and bequests simply matches up the number of people that benefit from the property with the number of times it is taxed. If Hannah gives Iris a gift of $1,000, many argue that taxing both of them makes sense since each benefits from the funds. Hannah could have spent that $1,000 on fancy cheese, but instead chose to give the money to Iris, and she enjoys the warm glow that comes with making a gift. And Iris has $1,000 to spend as she sees fit.¹³⁸

But many transfer tax opponents contest that Hannah benefits when she makes a gift to Iris the same way that she benefits when, for example, she pays Iris to paint her house. In their view, Hannah has transferred the ability to benefit from the funds to Iris. Since only one person—Iris—ends up benefitting, only one person should be taxed. Since Hannah was already taxed via the income tax, it makes no sense either to impose a separate transfer tax or require Iris to include the transfer in income.¹³⁹ Setting aside the issue of appreciated property, we can see that the double taxation argument comes down to a normative view about the definition of income. If Hannah benefits from making a gift just as she benefits from having her house painted, there is no double taxation. But if one believes that Hannah gives up her ability to benefit and passes it to Iris, then taxing gifts and bequests is double taxation. As with arguments about equality of opportunity and progressivity, this simply comes down to reasonable disagreements about normative priors.

Efficiency and Administrative Concerns

A final set of arguments highlight efficiency and administrative concerns. For some, these concerns alone are sufficient to oppose the estate tax, even if they otherwise sympathize with its goals; for others, these concerns buttress normative critiques.

Economic Incentives. At heart, transfer taxes are taxes on savings by donors.¹⁴⁰ As such, opponents contend that they punish savers and reward spenders by raising the price of saving relative to spending.¹⁴¹ This reaction seems intuitive to many laypeople, and is arguably backed up by two recent economic analyses finding a correlation between higher estate taxes and lower wealth accumulations at death—a reduction in wealth at death of roughly 10% for the very wealthiest taxpayers.¹⁴² Some theorists–such as economists who deploy optimal tax analysis—thus argue that transfer taxes decrease overall welfare by shrinking the size of the pie available for redistribution.¹⁴³ Professor Ed McCaffery offers a twist on this argument, arguing that the estate tax exacerbates inequalities of opportunity by encouraging lifetime consumption and early spending.¹⁴⁴ And many everyday people simply recoil at the idea of a tax that seems to single out behavior (working hard, saving, and frugality) that our society deems virtuous.

Harm to Small Businesses and Family Farms. A related critique—one that strongly resonates with the public—is that the estate tax harms small businesses and family farms. To that end, estate tax opponents frequently recount stories of families who allegedly have been or will be forced to sell farms and small businesses to pay the tax.¹⁴⁵ (The story of Lester Thigpen, an African-American tree farmer from Mississippi who was the grandson of slaves, is a prime example.)¹⁴⁶ Opponents also emphasize the costs that families must incur to plan for the tax, such as purchasing insurance to provide liquidity and paying advisors to help minimize potential taxes.

To the ire of estate tax supporters, however, many (if not all) of these stories are unproven. Namely, many of the individuals profiled by estate tax opponents would not have been subject to the tax, even at its pre-EGTRRA levels. And according to Michael Graetz, neither the American Farm Bureau nor New York Times reporter David Cay Johnston could find any farms that had actually been sold to the pay tax after a search in the late 90s.¹⁴⁷ Nevertheless, the possibility (however remote) that a family farm or small business could be harmed troubles many Americans. Moreover, many estate tax opponents overlook that this possibility becomes more likely were exemption levels to drop, and rates to increase, as they advocate.

Avoidance Costs. Another efficiency-related concern is that the tax raises little revenue while encouraging wasteful tax planning that renders the tax essentially voluntary.¹⁴⁸ In 2020, for example, the estate and gift taxes together raised only $17.6 billion—roughly 0.1% of gross domestic product.¹⁴⁹ Meanwhile, millions—possibly billions—of dollars¹⁵⁰ are spent each year on avoidance activities that involve complicated legal structures.¹⁵¹ Because of the availability of these structures to well-advised families, many view the estate tax as a “voluntary” tax that only the less-sophisticated, semi-wealthy pay, while the truly wealthy avoid it.¹⁵² Here, opponents of the estate tax see another reason to reject it, while supporters see a reason to strengthen it.

Administrative Costs. A related critique is the cost and difficulty involved in administering the estate tax. Some opponents estimate that taxpayers spend almost $20 billion annually complying with the tax,¹⁵³ although supporters of the tax dispute this figure. One contributor to high compliance costs is valuation difficulties.¹⁵⁴ While the assets of many middle- and upper-middle class individuals such as lawyers and doctors are fairly easy to value–cash, brokerage and retirement accounts, publicly-traded stock, and straightforward real estate like suburban houses—the same is not true for the wealthy. One estimate suggests that roughly half the assets owned by the wealthiest 1% of American families are hard to value, including unique real estate, closely held stock, noncorporate business assets, farm assets, private equity and hedge funds, art, limited partnership interests, and other miscellaneous assets.¹⁵⁵ Moreover, taxpayers can engage in a number of complicated transactions to artificially minimize the value of normally easy-to-value assets like stock.¹⁵⁶ To opponents, the fact that valuation is costly, time consuming, and imprecise is another reason its limited revenue is not worth the cost.

III. Settling the Debate with a Rignano Tax

As Section II shows, the debate over estate taxation is complex, implicating both normative values and empirical questions. The recent weakening of the tax suggests that opponents are winning this debate, to the great frustration of estate tax supporters who repeat the following laments: If only the public understood that the tax affects a mere sliver of the population and how few family farms and small businesses are impacted by it. If only the public knew that the tax’s burden likely falls on heirs, who have not in fact done anything to earn the wealth in question. If only opponents could see that the estate tax is not double taxation, due to the realization requirement and the step-up in basis. If only the public appreciated the harms of inequality.¹⁵⁷

Estate tax advocates thus keep recycling the same tactics. One approach is to try to correct the public’s factual misperceptions about double taxation, the impact on family farms and small businesses, and how many estates are hit by the tax.¹⁵⁸ Another is to argue that taxing the recipient instead of the transferor (via an accessions tax or income inclusion) would better display the tax’s goals and burdens to the public, thereby convincing them of the value of taxing wealth transfers.¹⁵⁹

But these approaches miss the mark by failing to adequately account for deeply held beliefs shared by a large portion of the population about fairness, desert, private property, and family. This Section first explores these beliefs, as well as seemingly contradictory views on equal opportunity and democratic participation that are also widely held. It then argues that a Rignano tax is the best way to reconcile the competing moral intuitions held by many Americans.

A. Attitudes Toward Taxation, Fairness, Redistribution, and Equality

Crucially, these beliefs about fairness, desert, and property rights—which Liam Murphy and Thomas Nagel call “everyday libertarianism” and which economist Steven Sheffrin terms “folk justice”¹⁶⁰—often do not overlap with the philosophical and economic frameworks favored by policymakers and academics. Sheffrin explains:

Ordinary individuals hold a set of psychological principles about fairness in taxation that are considerably broader and that differ in systematic and fundamental ways from the ideas of fairness that dominate our public debate today. . . . [T]he emphasis on tax fairness as redistribution comes from academic work in philosophy and economics that, in many ways, stands apart from the concerns that motivate everyday people. . . . [T]ax fairness is important, but it is not synonymous with redistribution. To the average person, tax fairness means something else, primarily receiving benefits commensurate with the taxes one pays, being treated with basic respect by the law and the tax authorities, and respecting legitimate efforts to earn income. The average person is not totally indifferent to inequality, but concerns for redistribution are moderated by the extent to which income and wealth have been perceived to be earned through honest effort.¹⁶¹

Because the public takes these views so seriously, policymakers who simply try to convince the public to change its views face an uphill battle. For example, Murphy and Nagel acknowledge that their argument that pre-tax income is meaningless is “counterintuitive” and that “[c]hanging this [belief] would require a kind of gestalt shift, and it may be unrealistic to hope that such a shift in perception could easily become widespread.”¹⁶² Sheffrin terms this “resonance,” arguing that “[a]ny ethical or social theory that does not resonate with folk ideas will be doomed to eventual failure as a vehicle for social change. Understanding folk ideas of justice is then essential to building effective social structures.”¹⁶³

Going further, many theorists argue that when policymakers fail to take these views seriously, they end up undermining their own normative aims.¹⁶⁴ Zachary Liscow illustrates with the common law and economics wisdom that redistribution should take place solely in the tax and transfer system. He argues that this approach makes sense in theory but fails in the real world because it “ignores how ordinary Americans think about [taxes] and thus ends up exacerbating inequality rather than mitigating it.” As a result, “tax policy runs up against political constraints—driven by ordinary people’s

attitudes about taxation” that prevent tax policy from accomplishing policymakers’ goals.¹⁶⁵

Taxation and Folk Justice

What are these attitudes? One key belief relates to what moral philosophers call “desert” and what Steven Sheffrin terms “equity theory.” To everyday people, there should be a roughly proportional relationship between effort and results.¹⁶⁶ People believe that the money they earn belongs to them,¹⁶⁷ and that if they “earn more money, they deserve to keep a decent share of it.”¹⁶⁸ Even those who critique this belief acknowledge that the “idea that people deserve to be rewarded for thrift and industry” is natural to many and that “it can seem preposterous” that hard-working individuals who are willing to take risks do not deserve more than the lazy and unadventurous.¹⁶⁹ Although scholars debate the merits of these views,¹⁷⁰ numerous studies suggest that substantial portions of the public subscribe to them.¹⁷¹ As Murphy and Nagel recognize, to many, these views are “instinctive[],”¹⁷² “ingrained,”¹⁷³ and “hard to banish from [] everyday thinking.”¹⁷⁴

These beliefs lead to a distaste for redistributive taxation generally, and to some extent, opposition to the estate tax simply reflects these general principles of folk justice. But Sheffrin identifies two further aspects of folk justice that supercharge these attitudes as applied to the estate tax. In his view, the fact that estate tax opponents have successfully capitalized on these folk justice beliefs—while estate tax supporters have ignored them—explains a large part of the tax’s deep unpopularity.¹⁷⁵ (Polls consistently suggest that roughly fifty percent of the population supports repealing it entirely).¹⁷⁶

Moral Mandates. One concept is that of moral mandates, which are deeply held, non-negotiable subjective beliefs about right and wrong. These beliefs are resistant to logical argument, and can be seemingly inconsistent, such as when a pro-life advocate also favors the death penalty.¹⁷⁷ When something contravenes a moral mandate, it generates a level of outrage that might seem excessive. An act becomes “wrong” and not merely “disagreeable.”

According to Sheffrin, several of the arguments discussed in Section II.B. rise to the level of moral mandates. One is that imposing a tax when someone dies is simply immoral. On this account, the estate tax “comes at the worst possible time for families – the death of their family’s breadwinner.”¹⁷⁸ People are simultaneously grieving their loved ones and worried about providing for the family that’s left behind. Telling people that it’s not death per se that triggers the tax but instead the transfer of wealth; or that grieving families have to deal with all kinds of logistical and business arrangements, such as funerals and the probate process; or that the families affected by the tax are wealthy and well-provided for, will not make any headway. The tax is associated with death, and that simply seems immoral to many.

Another moral mandate—one which polling data suggests has been extremely influential—is that double taxation is unfair.¹⁷⁹ People have deeply-held beliefs that if someone works hard and saves their whole life, paying taxes as she goes along, she should be able to leave her wealth to her family at her death without the government swooping in a second time.¹⁸⁰ And again, telling people that double taxation is not unique to the estate tax, or that much wealth subject to the estate tax has not already been taxed, is pointless.

And finally, people value entrepreneurship.¹⁸¹ They view the tax as disincentivizing hard work and wealth accumulation, thus undermining another deeply held value. Demonstrating that very few small businesses or family farms owe the tax, let alone need be liquidated to pay the tax, is largely fruitless.

System Justification. In addition to touching on moral mandates, Sheffrin argues that the tax also implicates “system justification theory.” This theory—somewhat like cognitive dissonance—posits that individuals adapt their beliefs to defend existing systems and the status quo, even when they do not appear to benefit from those systems. They thus react strongly to threats to that system, even when people other than themselves—such as the wealthy—will be the ones harmed by those threats.¹⁸²

Specifically, the estate tax appears to threaten two key systems: the family and our meritocratic system that rewards talent and effort. Even if the estate tax will not affect the majority of Americans, many view wealthy businesspeople as “valuable members of society who deserve their wealth and support the American economy.”¹⁸³ As such, a tax that affects them undermines an entire system of which they are a part. Likewise, even if the families affected by the tax are rich families, taxing them when they engage in a familial act of generosity threatens the family system that we are all a part of.¹⁸⁴

Policy Silos

At the same time that the public opposes estate taxes, however, it also shares many of the values highlighted by its supporters. Economist Stefanie Stantcheva’s recent empirical work on how people reason about income and estate taxes illustrates this seeming contradiction. In a large-scale representative survey, Stantcheva finds that 58% of respondents believe that parents should be able to pass along whatever they wish to their children, even if that creates unequal opportunities at a societal level, and that 61% of respondents believe that it is unfair to tax the estates of hard workers. Yet in this same group,

68% say that it is unfair that children from wealthy families have access to better amenities such as schools;

64% believe that the wealth distribution is unfair; and

46% view inequality as a serious issue.¹⁸⁵

Stantcheva is not the first to note that many people hold a variety of conflicting beliefs simultaneously. In fact, her findings illustrate another aspect of moral mandates—people form them on an issue-by-issue basis. They do not represent an overarching world view, and they may contradict each other, as when a pro-life advocate also favors the death penalty.¹⁸⁶

Zachary Liscow calls this phenomenon “policy silos,” meaning that “ordinary people hold category-by-category views about what is just for a given policy and apply those views partly in isolation.”¹⁸⁷ For example, people view taxation and transportation separately, such that they may oppose redistributive taxation but favor redistributive transportation policy. The former is “giving” money to the poor, while the latter is helping them get to work.¹⁸⁸ Stantcheva’s findings echoed this observation, as respondents’ views differed based on whether the questions focused on parents/transferors or children/transferees. To put it in Liscow’s terms, people appear to view estate taxes in a different silo than equal opportunity concerns.

As a result of siloing, public support for two economically identical but superficially different programs can vary based on framing.¹⁸⁹ This has two implications. First, Liscow argues that lawmakers should not rely on the tax system as the sole means of redistribution but should also implement redistributive policies elsewhere. A second implication is that when policymakers do use the tax system for redistributive or similar reasons, they should take advantage of siloing, as the public’s dislike of one tax might not necessarily translate into a dislike of a different tax. Joseph Thorndike has observed, for example, that even though the public hates the estate tax, it favors wealth taxes.¹⁹⁰

A Rignano Tax Reconciles These Competing Intuitions

What does all this mean for wealth transfer taxes? One common suggestion is to replace the estate tax with a recipient-focused accessions or inheritance tax.¹⁹¹ The hope is that focusing attention on recipients will shift the debate more firmly into the equal opportunity silo instead of the tax silo, as well as lessening the intensity of some of the moral mandates around double taxation, entrepreneurship, hard work, and thrift.

This Article takes that suggestion one step further. A Rignano-style accessions tax that exempts first-generation transfers does an even better job of incorporating folk justice and people’s everyday psychological intuitions about the estate tax. Imagine the following structure (which Section IV fleshes out in more detail): Grandfather builds a business from the ground up and bequeaths $10,000,000 to Mother. No tax is imposed, but if Mother does not create any wealth of her own and simply retransfers $10,000,000 to Daughter, all of Mother’s estate is taxed. In contrast, if Mother creates new wealth, different portions of her estate are treated differently. The inherited $10,000,000 that Mother re-transfers is taxed, while any newly earned wealth is not.

By allowing individuals to make tax-free transfers of wealth that they themselves have earned—but not wealth that they have merely inherited—a Rignano tax acknowledges the very real, deeply-held value that the public places on hard work, entrepreneurship, and notions of desert while also addressing the concerns people hold about the prevalence of inherited wealth.¹⁹²

IV. A Rignano Tax

The idea of taxing second- or third-generation wealth more heavily than newly earned wealth has a long history. Roughly 100 years ago, Eugenio Rignano offered the first sustained treatment of it, arguing that such a tax is the best way to move gradually toward socialism.¹⁹³ Rignano believed that the means of production should eventually be owned by the government, but that individuals, not the government, are better wealth-creators. He thus proposed a tax that would exempt transfers by wealth-creators, tax second transfers at 50%, and tax third transfers at 100%. This, he believed, would be the most efficient way to implement socialism.¹⁹⁴

Libertarian Robert Nozick later picked up this idea, albeit for decidedly non-socialist reasons. In The Examined Life, Nozick suggests that a Rignano-type structure is the best means of balancing competing intuitions about family ties, wealth and inheritance, and fairness. He first defends the right of individuals to bequeath what they have created themselves as an act of love: “Bequeathing something to others is an expression of caring about them, and it intensifies those bonds. . . . [T]he donor . . . has earned the right to mark and serve her relational bonds by bequeathal.”¹⁹⁵ But he does not view second-generation inheritances as a similar act of love, due to the lack

of connection between the person who created the wealth and the second recipient.

He also acknowledges, moreover, that when wealth is “passed on for generations to persons unknown to the original earner and donor, [it] produc[es] continuing inequalities of wealth and position” and that the “[t]he resulting inequalities seem unfair.”¹⁹⁶ Unfortunately, Nozick’s discussion of this tension is rather sparse. He does not explain, for example, why he believes the resulting inequalities are unfair. Nor do we know whether first-generation bequests are inherently fair, or whether they are unfair, but whose unfairness is outweighed by the value of the donor’s ability to express affection and love.¹⁹⁷

And most recently, philosopher Daniel Halliday argues that a Rignano tax furthers equality of opportunity ideals better than traditional estate and inheritance taxes. In his view, context matters—that is, whether someone is born into a family that has not just wealth, but long-standing wealth and the social and cultural capital that accompanies it (let’s call these “wealth norms”). Imagine that Grandfather starts with nothing, builds a successful business, and leaves all his wealth to Mother at his death. Halliday believes that this bequest does not give Mother a head start in life. Her life prospects were largely shaped long before receiving her inheritance, when she was young and Grandfather was still building his business. He had not yet amassed enough wealth to pay for private school and expensive tutors for Mother, to give her seed money to start her own business or to launch her own career. Moreover, Grandfather’s self-made status suggests that the family did not have wealth norms when Mother was growing up. Instead of golfing at a country club, Grandfather likely bowled in the neighborhood bowling league and did not have the same cultural norms and social and professional networks as families with older wealth.

But now consider Mother and Daughter. Halliday argues that “parental conferral of advantage compounds over successive generations. . . . Families that have been wealthy for longer possess a greater range of powers that keep their children privileged.”¹⁹⁸ Grandfather’s bequest allows Mother to provide advantages to Daughter that she herself did not have, such as high-quality schools, tutors and after-school lessons, and expensive camps. It also means that Daughter—unlike Mother—grows up in a family with wealth norms. The family belongs to a country club, not a bowling league. Mother’s contacts can give Daughter internships, and Daughter knows which fork to use during the interview lunch and how to dress for it. For these reasons, Halliday views the transmission of wealth across three generations as a contributor to and a tag for economic segregation, which he argues undergirds unequal opportunities. As such, these inheritances should be taxed.

In contrast, Halliday contends that first-generation inheritances should not be taxed. Not only are they not problematic, but they might even reduce economic segregation by serving as a safety net keeping middle-class families afloat in a stagnating or contracting economy. Halliday observes that in many areas, the costs of housing and other necessities have skyrocketed while middle-class wages have stayed flat, rendering home-ownership unaffordable to many such families. But if Grandfather leaves the family home to Mother, or enough money for a down payment, this helps minimize economic segregation in such areas. First-generation inheritances thus counteract inequality of opportunity and therefore should not be taxed.

Implementing a tax that exempts the first transfer but taxes the second might sound simple to those unfamiliar with tax policy. Yet the devil is in the details. Implementing a Rignano tax requires resolving seven design decisions, explored below: the (1) base; (2) rates; (3) valuation; (4) frequency; (5) tracing; (6) transfers in trust; and (7) transition rules. Although a Rignano tax is complex, crafting one is possible.¹⁹⁹ As we shall see, in many instances one solution is superior regardless of why one wants to tax old money more heavily than new. With other decisions, however, differing justifications for taxing repeated wealth transfers point in different directions.

A. The Base

This section addresses three base-related decisions: Should the tax focus on transfers or receipts? Should it treat gifts and bequests equally? And should it contain any exclusions or exemptions?

Transfers or Receipts?

The first base-related question is whether to tax receipts or transfers. If Grandfather earns a fortune, leaves it to Mother, and Mother in turn passes it along to Daughter, who does the tax focus on? Does it look at Grandfather and Mother in turn, and tax Mother because she’s the one who re-transfers wealth while exempting Grandfather because he’s the one who earned the wealth? This model is akin to a traditional estate tax, which focuses on the total amount of wealth transferred by an individual over the course of her lifetime.²⁰⁰ Or does it look at each and ask who among them received re-transferred wealth (here, Daughter)? This is similar to traditional accessions or inheritance taxes, which apply to transferees based on gifts and bequests received.²⁰¹

In either case, the tax is imposed once, at transfer.²⁰² But the distinction matters, both psychologically and normatively. At first glance, one might think an estate tax model makes the most sense. If Grandfather creates the wealth, and the goal is to allow him to transfer it tax-free, then the focus should be on him. Yet this ignores many of the normative aims of those who wish to tax wealth transfers in the first instance.²⁰³

Start with dynastic wealth and equality of opportunity concerns. Looking at the sum of gratuitous transfers received by a given individual tracks ex ante differences in opportunity better than looking at aggregate transfers made by an individual. Imagine a decedent with an estate of $5,000,000. An estate tax treats her the same whether she leaves it all to one child or splits it up among ten recipients. Yet receiving $5,000,000 impacts life opportunities much more dramatically than receiving $500,000. The same is true for dynastic wealth: what matters is how much wealth someone receives. An inheritance of $50,000,000 bestows political and economic power in a way that an inheritance of $500,000 does not. As numerous commentators have acknowledged, a recipient-focused accessions or inheritance tax better reflects these concerns.²⁰⁴

Next consider the welfarist argument that gratuitous transfers received should count toward an individual’s ability to pay, just like salary, business profits, and gains from property sales. This concern also suggests a recipient-focused tax. How much wealth a transferor has does not necessarily correspond to the ability to pay of the transferee. For example, Lily Batchelder and Surachai Khitatrakun estimate that “22% of heirs burdened by the estate tax have inherited less than $500,000, while about 21% inheriting more than $2,500,000 bear no estate tax burden.”²⁰⁵

An accessions-tax framework also better addresses the concern that wealth concentrations are in and of themselves harmful by encouraging donors to split their fortunes up. An estate tax would treat Warren the same whether he leaves his fortune in one big bundle to one lucky heir, or whether he splits it up among multiple recipients. But an accessions tax treats these two situations differently, since it focuses on cumulative gifts and bequests received in excess of an exemption amount. Since each recipient has their own exemption amount, splitting a large fortune up generates a lower overall tax bill.

Finally, the psychological insights discussed in Section III.B. also point to the superiority of an accessions tax. Recall, for example, Stantcheva’s findings that support for transfer taxes rises when people focus on recipients instead of transferors.²⁰⁶ This is likely due in part to framing and siloing, but perhaps also to the fact that focusing on recipients weakens the pull of moral mandates about double taxation and hard work.²⁰⁷

Gifts

A second decision is whether the tax should apply not only to bequests but also to gifts. Although Rignano clearly suggests taxing both, Halliday is more equivocal. Halliday’s equivocation is misplaced; the tax should apply to both equally.

a. Gifts in General

Consider the various reasons for taxing wealth transfers, starting with equality of opportunity. As Halliday notes, gifts are usually received earlier in life than bequests. This creates advantages sooner rather than later for the donee and her family, thus magnifying those advantages.²⁰⁸ For this reason, Anne Alstott has suggested varying inheritance tax burdens based on the recipient’s age.²⁰⁹ Further, the act of making a gift suggests that the donor feels financially secure enough to dispose of some of her wealth while alive, which makes it more likely that her heirs grew up in a family with wealth norms.

The ability-to-pay and dynastic wealth concerns also suggest taxing both gifts and bequests. Both gifts and bequests enable recipients to spend money for political purposes as well as influence the economic lives of others. Both gifts and bequests provide utility to recipients. In fact, declining marginal utility suggests that gifts might even provide more utility than bequests of comparable size, as individuals tend to have less money earlier in their lives. And both serve as a tag for one’s nonfinancial endowment. Again, gifts may signal greater nonfinancial advantages than comparably sized bequests, as families that engage in lifetime gifting are often wealthier than families who do not.

Moreover, Halliday’s arguments for excluding gifts from a Rignano tax do not withstand scrutiny. One argument is that transferors have such a strong preference for bequests that excluding gifts would not encourage them to make gifts instead.²¹⁰ Halliday correctly observes that many transferors do not maximize opportunities to make tax-free gifts under current law and that many people save more than enough to cover the expenses of old age. He also acknowledges, however, that these statistics reflect decisions made during periods with relatively low rates and that they likely underestimate the extent to which wealthier families will change their behavior. A key part of estate planning for such families is maximizing the tax advantages of lifetime gifts, and minimizing the ability of transferors to characterize bequests as gifts creates a great deal of complexity in the current estate tax system.

Halliday also argues that taxing gifts is essentially pointless.²¹¹ He believes that most gifts can be easily concealed—unlike bequests, which are documented during probate and hard to hide. But many large gifts are similarly hard to conceal. Stock transfers are recorded; large cash transfers are tracked. And even gifts of jewelry and other family heirlooms generate records when donees insure them. Of course, under-the-table gifts will always occur, but not at a level that makes attempting to tax gifts pointless. Because this Article advocates for treating gifts similarly to bequests, later references to “bequests” or “inheritances” refer to gifts and vice versa.

b. Gifts and Timing Complications

Taxing gifts does raise a complication related to timing. Return to Grandfather, Mother, and Daughter. We do not know exactly how much Mother will inherit—which affects the accessions tax imposed on Daughter—until Grandfather is dead. If the tax only applied to bequests, this would not be a problem. But what if the tax also applies to gifts and Mother makes a gift to Daughter while Grandfather is still alive, before he bequeaths any wealth to Mother?

To illustrate, imagine that Mother gives Daughter $1,000,000 and five years later, receives $10,000,000 from Grandfather. If we look just at the first gift of $1,000,000, it initially appears to be newly created wealth that should not be taxed. But money is fungible; if Mother knows she’s about to receive an inheritance, this frees her up to make a lifetime gift to Daughter, whether from her own or borrowed funds. The tax would be easy to avoid if we simply cast any transfer from Mother’s generation to Daughter’s generation as a first transfer of wealth if it comes before Grandfather transfers anything to Mother. Yet whether Mother inherits before or after the gift to Daughter seems irrelevant if the point is to tax the second generation in a family that inherits wealth. This is especially true if one views second-generation wealth transfers as more of a welfarist or equal opportunity concern than first-generation transfers.

A “catch-up tax” that applies to transferees who have themselves made prior transfers can account for this scenario. When Daughter receives $1,000,000 from Mother, the tax—as applied to Daughter—would treat it as a first-generation transfer because at that point, Mother has not yet inherited anything. When Mother later inherits $10,000,000 from Grandfather, the tax—as applied to Mother—would treat different parts of that bequest differently. It would treat $9,000,000 as first-generation wealth and any amounts previously transferred by Mother to Daughter—here $1,000,000—as second-generation wealth.

Now consider what might happen later. One possibility is that Mother consumes the $10,000,000 she inherits from Grandfather, making no more gifts to Daughter. Because Daughter receives nothing more, no more tax is imposed upon the family. In total, $11,000,000 has been transferred within the family ($10,000,000 to Mother, and $1,000,000 to Daughter.) Overall, the tax will have treated $10,000,000 as first-generation wealth (Daughter is taxed as receiving $1,000,000 of first-generation wealth and Mother is taxed as receiving $9,000,000) and $1,000,000 as second-generation wealth (imposed on Mother via the catch-up tax at Grandfather’s death).²¹² In essence, the price Mother pays for making a lifetime gift before receiving her own inheritance is that she, not Daughter, is treated as having received a second-generation transfer.

Another possibility is that Mother later passes her $10,000,000 inheritance down to Daughter. In that case, a total of $21,000,000 has been transferred within the family ($10,000,000 to Mother, and $11,000,000 to Daughter). Of this, $10,000,000 represents a second transfer, and $11,000,000 represents newly created wealth (Grandfather created $10,000,000 and Mother created $1,000,000). When Daughter receives Mother’s $10,000,000 inheritance, the tax should therefore treat only $9,000,000 as second-generation wealth. This accurately taxes $10,000,000 of the family’s total transfers as second-generation wealth (recall that when Mother received her inheritance, $1,000,000 was treated as second-generation due to the catch-up tax), and $11,000,000 as first-generation wealth ($1,000,000 when Daughter received Mother’s lifetime gift, $9,000,000 of Mother’s receipt from Grandfather, and another $1,000,000 when Mother dies).

Exclusions and Exemptions

The last set of base-related decisions concerns exclusions and exemptions. As both Rignano and Halliday suggest, each individual should have a relatively small lifetime exclusion amount.²¹³ Assume that after Grandfather bequeaths his $10,000,000 to Mother, she has several runs of bad luck and passes along only $1,000,000 to Daughter. Even though that $1,000,000 is second-generation wealth, it seems plausible to allow Daughter to inherit something free of tax for the same reasons that most (if not all) systems have such exemptions. In addition to administrative concerns, allowing small inheritances tax-free recognizes that bequests are a natural part of most families’ lives, and that they can provide a needed cushion for many less-wealthy individuals. Any amount chosen would be arbitrary, but something like $500,000 or $1,000,000 seems reasonable.

For similar reasons, the tax should have something similar to the annual exclusion described in Section I, but on a smaller scale. The annual exclusion’s purpose is to simplify record-keeping and to recognize that intra-family gift giving for birthdays, weddings, and holidays is a normal, everyday occurrence in almost all families that does not trigger any normative concerns. These same concerns are relevant in a Rignano tax. That said, the current $19,000 per recipient exclusion is far larger than necessary to cover regular birthday and holiday gifts, and in fact, allows for much tax-free giving that exacerbates unequal opportunities.²¹⁴ As with the lifetime exemption amount, any chosen number would be arbitrary, but something like $5,000 seems reasonable.

Most transfer tax systems also exempt marital and charitable transfers. Intra-spousal transfers should not be taxed, as they do not transmit wealth down to a lower generation.²¹⁵ Charitable transfers are a bit trickier from a normative perspective. In theory, their treatment should depend on what kind of charity receives the gift or bequest. If one’s concern is equality of opportunity, for example, a gift to an inner-city tutoring program furthers equality of opportunity while other gifts may undermine it (imagine gifts to private foundations that employ family members or to a private school that provides few scholarships).²¹⁶ But if one goal of a Rignano tax is to gain public traction where other transfer taxes flounder, charitable transfers should be exempted. Charities benefit from a “halo effect,” and the point that some charities exacerbate social ills is nuanced and hard for the public to understand. Further, giving to charity is seen as virtuous, and may invoke reactions similar to the moral mandates and systems justification theories discussed earlier.

A final question is whether the relationship between the wealth creator and the second recipient should matter in determining whether a gift or bequest received is second-generation. Specifically, should second-time-around transfers that originate in a different family be exempted if the recipient is the first in her family to inherit? Halliday, for example, suggests the tax should apply to anyone whose parents or grandparents have inherited, but not to individuals who are the first in their families to inherit. That makes sense if one’s concern is equal opportunity and if one agrees with Halliday that repeated wealth transfers are the real culprit in that context due to the creation of wealth norms and economic segregation.²¹⁷

Imagine two scenarios in which Grandfather starts with nothing, earns a fortune, and leaves it to Mother. In Childless, Mother has no children and leaves her wealth to Friend’s child. Mother’s Friend neither inherits from Friend’s parents nor bequeaths any wealth to Friend’s child. In Helping Hand Family, Mother has a daughter, to whom she leaves her wealth. In both cases, Mother inherited wealth and then passed it along a second time. In that sense, both Daughter and Friend’s child have received second-generation wealth. But if the concern is that repeated wealth transfers create or signal economic segregation and wealth norms, then Daughter and Friend’s child are not similarly situated. Friend’s child is the first in Friend’s family to inherit, and in that sense, what she receives is not second-generation wealth.²¹⁸ Daughter, by contrast, belongs to the second generation of Mother’s family to inherit. This suggests looking not only at the recipient, but also at the pattern of prior transfers in the recipient’s family—if one shares Halliday’s concerns.²¹⁹

However, other normative justifications for taxing wealth transfers point in other directions. If one’s focus is dynastic wealth and traditional equality of opportunity concerns, or welfarist concerns, then the source of the gratuitous transfer should be irrelevant. Receiving unearned advantage, power, or welfare is the main concern, more than whether that receipt followed an intra-familial chain of transmission. The same is true if one’s concern is the mere existence of wealth.

Likewise, the psychological insights of folk justice suggest that treating intra-family transfers worse than other transfers would not fare well. First, system justification theory indicates that a large factor in hostility to the existing estate tax is its perceived threat to the family.²²⁰Second, it is plausible that people hold moral mandates about family businesses and family farms that would be triggered if intra-family transfers were treated worse. Thus, any softening of the public’s opposition to inheritance taxes that comes from exempting first transfers would likely be undone if familial transfers were treated worse than other second transfers.

B. The Rate

After choosing a base, one must also choose a rate. Halliday and Rignano both use examples in which first-generation transfers are not taxed, second-generation transfers are taxed at 50%, and third-generation transfers are taxed at 100%.²²¹ This Article proposes completely exempting first-generation inheritances and taxing subsequent ones at a rate of 40%, although it acknowledges that any rate will be somewhat arbitrary. Although this Article’s normative arguments point to taxing later transfers more heavily than initial transfers, they do not point to specific rates the way they signal, for example, that gifts and bequests should both be taxed. Nor does past experience illuminate the perfect rate as a technical matter. Perhaps

more than any other design question, choosing a rate reflects balancing numerous political considerations.

Initial Transfers

The rate on initial transfers should be a simple, easy to understand zero. Work on cognitive psychology and tax suggests that individuals focus on “highly visible” and “easily recallable” aspects of a tax; this is known as “prominence” or “saliency.” When thinking about income taxes, for example, the public tends to focus on the highest marginal rate.²²² Completely exempting initial transfers of wealth provides a sharp and clear distinction between initial and successive transfers in a way that merely using a lower rate does not. “You are not taxed at all when you pass along wealth that you have earned” has a salience that “you are taxed less” lacks.

The former also harnesses the power of folk justice better than the latter. Start with systems justification theory and the notion that taxing wealth transfers threatens a system that people are a part of and value. Here, it is the act of taxation in and of itself which is harmful. Taxing transfers of earned wealth at a low rate is still taxing them. Telling people that a system they care about is damaged only “a little bit” will do little to assuage the concerns of those who value the family. Damaging something valuable a little bit still damages it.

Completely exempting initial transfers also better counters the double taxation argument. Once again, it is the act of taxation—not the level of taxation—that gives this argument weight with the public. The public believes (rightly or wrongly) that the wealth-earner has already been taxed on the wealth. Educating the public about untaxed appreciation and the step-up in basis has not countered that. Nor has emphasizing that what should matter is the total tax burden, not the number of times something is taxed. Telling the public that you are taxing earned wealth less than inherited wealth will be similarly fruitless. From a folk justice perspective, the best way to address concerns that earned wealth is being double taxed is to be crystal clear that transferring it does not trigger tax. Only completing exempting such transfers does this.

Subsequent Transfers

If first-generation transfers are completely exempted, how should later transfers be treated? Rignano suggested taxing second-generation transfers at 50% and third-generation transfers at 100%; although Halliday rejects the latter suggestion, he does not address whether second- and third-generation transfers should be taxed differently.²²³ This Article proposes treating them alike by taxing all later transfers at a flat rate of forty percent.

As an initial matter, second- and later-generation transfers should be treated similarly to each other. While the insights of folk justice strongly point to distinguishing first-generation wealth, they do not justify treating later transfers differently from each other. Nor do most of the justifications for taxing wealth transfers. Gifts and bequests received increase well-being and enhance ability to pay, regardless of whether the transferor earned or inherited the wealth in question. Money is money when it comes to political spending. Similarly, under traditional equality of opportunity concerns, money is money when it comes to paying for private school tuition or houses in top school districts, tutors, or fancy camps.

That said, other justifications are plausibly consistent with distinguishing among second-generation and later transfers, even if they do not necessarily mandate such an approach. Take Halliday’s linkage of wealth norms and equality of opportunity; it is likely that the older the family’s money, the stronger the wealth norms. Likewise, it is plausible that the longer a family has been politically or economically powerful in a given town, the more powerful they are. Knowing that another family has had power over yours for decades is probably more demoralizing the longer that has been the case.

In these cases, however, any difference in power or opportunity between second- and later-generation wealth diminishes over time. Let’s illustrate with wealth norms and equal opportunity: Grandfather creates wealth, which he passes along to Mother, who in turn passes her inheritance along to Daughter. Under Halliday’s reasoning, Mother enjoys substantially fewer advantages than Daughter, since Mother grows up in a family with first-generation wealth and Daughter grows up in a family with second-generation wealth. Yet it is unlikely that Daughter has substantially fewer advantages than Daughter’s children. The marginal advantage of growing up with third-generation wealth as opposed to second is likely much smaller than the marginal advantage of growing up with second- versus first-generation wealth. The case for distinguishing between second- and later-generation inheritances is therefore much weaker than for distinguishing first transfers.

And on a practical level, treating second and third inheritances alike minimizes the valuation, tracing, and record-keeping concerns addressed below. All that need be determined is how much an individual’s parents inherited. Given the weak theoretical case for distinguishing among later transfers, and the strong practical case against doing so, treating second and later transfers similarly to each other is preferable.

This Article thus proposes a rate of 40% on subsequent transfers, which is the current estate tax rate in the U.S. This number is admittedly arbitrary, and none of the theoretical considerations discussed above mandate any given rate. That said, something about tax rates that exceed 50% seem to hit a nerve with people. And given the prominence bias discussed above, it is likely that a Rignano tax that is seen as “raising rates” above current levels would face more opposition than one that does not raise rates.

Adjusting for Age

A final rate-related issue is whether gifts and bequests received earlier in life should be taxed more heavily than those received later in life. Here, practical and theoretical considerations are in tension. Several justifications for taxing wealth transfers point in the direction of adjusting for age, such as equal opportunity theory.²²⁴As theorists recognize, receiving an inheritance early in life alters one’s life prospects more than receiving one later in life. A $1,000,000 bequest at age twenty-five provides seed money for a start-up, while such a bequest at age sixty-five likely does no more than enable one to enjoy a more comfortable retirement. Other justifications, however, do not support adjusting for age. A large bequest increases one’s ability to pay regardless of one’s age, for example. And although such adjustments could be made,²²⁵ doing so adds another layer of complexity and is probably not worth that additional complexity.

C. Frequency: Determining the Number of Transfers

A further issue is determining how many times wealth has been transferred. Revisit Grandfather, Mother, and Daughter. Two questions arise. First, if Grandfather leaves his wealth directly to Daughter in a “generation-skipping transfer” that skips over Mother, is that a first- or second-generation transfer? Put another way, should that be treated the same or differently than if he leaves it to Mother, who in turn re-bequeaths it to Daughter? Second, what if Grandfather leaves his wealth to Mother, who

dies soon thereafter? Should adjustments be made for deaths in rapid succession?

Generation-Skipping Transfers

Let’s start with generation-skipping transfers. Current law imposes an additional tax on such transfers to ensure that families face an equivalent level of tax whether their wealth proceeds directly from one generation to the next or skips over one generation. This prevents ultra-wealthy families in which Mother’s generation may not need Grandfather’s wealth from minimizing their tax burden by having Grandfather pass his wealth directly to Daughter.

Although counterarguments exist, a Rignano tax should contain similar rules that treat a transfer by Grandfather directly to Daughter as a second transfer instead of a first. This would prevent families from avoiding one level of tax by skipping generations. As under current law, however, exceptions should apply if Mother pre-deceases Grandfather, such that Grandfather’s transfer to Daughter does not skip over a living person.²²⁶

To be sure, this design decision runs counter to folk justice principles. It renders transfers directly to grandchildren vulnerable to the double taxation argument and to system justification concerns about harming families. But the Rignano tax is not a tax designed to further folk justice principles; rather, it is a tax designed to take such principles into account when designing a wealth transfer tax that achieves other goals. Here, treating such transfers as first transfers would allow for too much game-playing, thus undermining the goals of taxing second-generation wealth. Moreover, it is plausible that the treatment of such transfers will be less salient to the public than the fact that the default for first transfers is complete exemption.²²⁷ For these reasons, the better approach is to treat generation-skipping transfers as two transfers, not one.

Transfers in Rapid Succession

A related issue is how to treat transfers in rapid succession. Imagine that Grandfather bequeaths his fortune to Mother, who dies unexpectedly a few months later, re-transferring his wealth to Daughter. Should this be considered a second transfer? Halliday argues that it should not be: “A short interval between bequests may mean that a donor has had less opportunity to save and accumulate due to an early death. It is harder to say, in that case, that this person’s bequests should still be taxed as if he or she had remained idle.”²²⁸

Halliday’s approach is misguided; transfers in rapid succession are still transfers. Halliday is correct that Mother has had less time to build upon Grandfather’s inheritance after receiving it. Yet he ignores that she had time before either her or Grandfather’s death to earn her own wealth, and that wealth will be taxed as first-generation wealth. Counting each transfer treats Mother and Daughter the same as other families.

D. Valuation

Perhaps the most difficult issue is how to value re-transferred wealth. Revisit Grandfather, who starts with nothing and builds a $10,000,000 fortune. He bequeaths his wealth to Mother, who later dies with a $50,000,000 fortune which she leaves to Daughter. How much of Mother’s $50,000,000 should be considered a second transfer of Grandfather’s wealth? Rignano and Halliday, without discussion, use a simple but flawed approach in their examples: they would treat $10,000,000 as a second transfer and $40,000,000 as newly created wealth.

The Problem

This approach erroneously overlooks the fact that asset values fluctuate over time due to a variety of causes—inflation, the time value of money, changing market conditions, and the owner’s efforts. Take inflation. Imagine that Mother invests her inheritance in an asset that keeps exact pace with inflation. $10,000,000 inherited in 1993 has an inflation-adjusted value of roughly $22,700,000 in 2025.²²⁹ The Rignano/Halliday default wrongly treats the $12,700,000 increase that is due to inflation as instead stemming from Mother’s efforts. But Mother has added no value. The asset has simply kept up with inflation.

Risk-Free Rate of Return as the Default Solution

A more accurate approach would impute the risk-free rate of return to Grandfather’s fortune. This better distinguishes between earned and inherited wealth by recognizing the dual roles of risk and choice. To illustrate, imagine that Grandfather leaves Mother a building worth $10,000,000 that is worth $30,000,000 when she re-bequeaths it to Daughter. As explained above, attributing only $10,000,000 of the building’s value to Grandfather overstates Mother’s contribution and understates Grandfather’s. Yet attributing all $30,000,000 to Grandfather does exactly the opposite. It overstates Grandfather’s contribution and understates Mother’s.

What is key is that when Mother inherited the building, she had a choice. At that point, she held $10,000,000 of wealth that she could invest however she liked. She could continue to hold that particular building, swap it for other real estate, or cash out and invest in stocks, bonds, or a risky start-up. If she keeps the building itself, some—but only some—of any later increase in value is due to her choice to do so.

More specifically, a later increase in value has three possible components: the risk-free rate of return, a return to risk, and (occasionally) inframarginal returns.²³⁰ The risk-free rate of return is the return one would receive by investing in a zero-risk project with a guaranteed return, such as a U.S. Treasury bond. This return is simply compensation for using the invested funds—a pure time-value-of-money return sometimes referred to as the “return to waiting.”²³¹

To illustrate, imagine a stock investor. Unlike a bond investor, the stock investor does not know ex ante whether she will recoup her investment. Because the company’s value could either increase or decrease, she will insist on a higher return to compensate her for taking on that risk. Most investment returns are comprised solely of these two elements, which means that the return to risk is the excess over the risk-free return.

Occasionally, an investment also yields an inframarginal return, which is a return above and beyond the market rate for risky investments. These arise from “special opportunit[ies] not generally available in the market” and are usually associated with “rents to ideas, managerial skill, or market power.” They can include unique returns to capital due to information asymmetries or imperfect markets, as well as returns to some combination of a person’s labor, ingenuity, and/or luck.²³²

Although distinguishing between inframarginal and market-rate returns is difficult, we need not do so. Mother—not Grandfather—should be credited for both whenever Mother has a choice about investing her inherited wealth. Any investment of Grandfather’s $10,000,000 would have triggered, at minimum, the risk-free rate of return and should be traced back to Grandfather’s bequest. Returns above and beyond the risk-free-rate of return, however, should be attributed to Mother.

The default rule should therefore be to attribute the risk-free rate of return—as measured by the average U.S. Treasury bond yield—to Grandfather’s investment. The best measure of this is the average yield on a U.S. Treasury Bond of comparable length. Imagine that Mother outlives Grandfather by 30 years. If so, the average rate of return for a 30-year bond should be imputed to Mother’s inheritance from Grandfather. Any “extra” wealth should be credited to Mother and treated as new, first-generation wealth.

Complications

The foregoing analysis assumes both that Mother has a choice about what to invest in, and that her investments are successful. But what if those assumptions are incorrect? Start with choice. Imagine that Grandfather bequeaths stock that skyrockets in value to a trust with an independent trustee over whom Mother has no control. Given that Mother has no say in how to invest the asset and assumes no risk herself, none of the stock’s value is attributable to her choices. The stock’s full value at her death should be credited to Grandfather. Moreover, we already have rules that identify when one has control over a trust; the Rignano tax could simply import the grantor trust rules.

Next let’s upend the assumption that Mother’s investments are uniformly successful. Imagine that Mother quickly squanders Grandfather’s fortune by investing his $10,000,000 in Blockbuster Video stock. She later, however, invests in a relatively unknown start-up called “Google,” parlaying a few thousand dollars into $10,000,000. How should Mother’s fortune be treated at her death?

Mother’s fortune should still be treated as inherited and traced back to Grandfather for three reasons (an approach favored by Rignano).²³³ First, Mother is able to leave Daughter $10,000,000 more than without Grandfather’s wealth. His bequest enables Mother to start at $10,000,000; lose $10,000,000; and nevertheless end at $10,000,000. Without the bequest, if Mother loses and re-earns $10,000,000, she ends at zero. Second, if we assume that Mother would have earned the risk-free rate of return when successfully investing Grandfather’s bequest, parity requires us to make the

same assumption even when the outcome is different. Either we assume that return or we do not.

Finally, ignoring Grandfather’s bequest ignores that money is fungible and creates incentives that undermine the goals of wealth taxation by essentially encouraging Mother to squander Grandfather’s bequest. Let’s say that Mother has an idea for a successful business that will earn her $15,000,000, and Mother also wants to spend $10,000,000 on a year-long first-class trip around the world. Compare two scenarios, Early Trip and Late Trip. In Late Trip, Mother saves Grandfather’s money and starts a business that earns $15,000,000 before taking the trip. The trip reduces her bank account from $25,000,000 to $15,000,000. Under the default rule established above, we’d use the risk-free rate of return to see what Grandfather’s wealth would have grown to. For the sake of illustration, let’s assume it would have grown to $14,000,000. If so, only $1,000,000 of Mother’s bequest to Daughter is treated as earned by Mother.

In contrast, imagine what happens if we use a rule that ignores Grandfather’s bequest if she spends it or invests it poorly. Mother can reduce her tax burden by travelling before earning her own money. In Early Trip, Mother spends Grandfather’s money on the trip and zeroes out her account. She then starts a business and earns $15,000,000, which she passes along to Daughter. If we ignore Grandfather’s bequest on the grounds that she spent it or wasted it, all her $15,000,000 wealth is treated as self-made.

Mother should not be treated differently depending on what she does with Grandfather’s money. Whether she spends it, invests it poorly, or invests it wisely, she had power over $10,000,000, and at her death, $10,000,000 (plus the risk-free-rate-of-return) should be credited back to Grandfather.

E. Tracing

A fifth issue—flagged by neither Rignano nor Halliday—is determining who receives inherited wealth as it moves downstream. This has two components, one normative and one administrative.

The Normative Question

Let’s start with the normative question. We’ve been using an example with one member in each generation for simplicity. Again, assume that Grandfather leaves Mother $10,000,000, but now imagine that Mother has not one but two children, Daughter and Son.

In applying the tax to Daughter and Son, how should we decide as a normative matter who receives Grandfather’s wealth, and who receives the wealth created by Mother? Ideally, we’d somehow allocate Grandfather’s wealth to each of them in proportion to how much wealth they actually receive from Mother. This would be possible if Mother does not make any lifetime gifts, instead re-transferring all of Grandfather’s wealth at her death. Lifetime gifts, however, render this impossible.

One option is to allocate Grandfather’s bequest pro rata among Daughter and Son by giving them each a $5,000,000 “taxable amount” that is essentially a mirror-image of existing exemptions (this represents the total amount of Grandfather’s wealth that should be taxed as a second transfer when Mother passes it along, divided by two since Mother has two children). Under this approach, transfers to each of them would be taxed until they reached $5,000,000; later transfers would be untaxed. This solution, however, has two problems. First, it undertaxes the family if Mother favors one child. Imagine that Mother does not earn her own wealth, and transfers all of Grandfather’s $10,000,000 to Daughter and none to Son. Under the pro rata apportionment approach, only $5,000,000 would be treated as second-generation. Second, assigning a per-capita amount at Grandfather’s death requires knowing who Grandfather’s bequest should be apportioned among—that is, who Mother is going to leave her wealth too—which may be unknowable at his death.

A better solution is a first-in-time approach that treats the first $10,000,000 received by either Daughter or Son as second-generation, regardless of how Mother splits $10,000,000 between them. This is essentially how the current system treats a donor’s lifetime exemption amount and allows Mother to allocate the tax burden via the timing of her transfers.

Administration

The next question is how one determines as an administrative matter, that a recipient of a gift or bequest has received wealth that has been inherited by the transferor. This requires more record-keeping than a traditional estate or inheritance tax, but not an insurmountable amount. And in fact, certain elements of this Article’s proposal exist in current estate and inheritance taxes in the U.S. and internationally.

Revisit Grandfather, Mother, and Daughter. As under current law, Grandfather’s executor will file a tax return at his death that shows the total amount of gratuitous transfers that Grandfather has made. To implement a Rignano tax, his executor would also make an election on that return to treat some or all of Grandfather’s wealth as first-generation, as well as recording to whom Grandfather left his wealth. Any wealth not elected by the executor will be treated entirely as a second-generation transfer. Absent malpractice, Grandfather’s executor will make the election. Mother, who receives Grandfather’s bequest, will also file a tax return upon receipt showing the bequest’s source and value, as well as indicating whether any assets are not under her investment control. Assuming Grandfather’s executor make the proper election, however, Mother will pay no tax.

These records enable us later to determine how much of any wealth that Mother later passes along should ultimately be traced back to Grandfather. When Mother makes a gift or bequest later, we need to know three things to calculate Daughter’s tax liability: the imputed value of Grandfather’s bequest to Mother at the time of Mother’s later transfer, the amount of that later transfer, and the value of any assets transferred from Grandfather to Mother over which Mother had no control.

We know the imputed value of Grandfather’s bequest by applying the risk-free rate of return to its value, as recorded on his and Mother’s tax return. This, of course, assumes Mother had investment control over the assets. If Grandfather also bequeathed assets to Mother over which she had no control, we’d determine both the imputed value of assets over which she control, and the current value of any assets over which she lacked control. This determines what dollar value of any transfers from Mother should be taxed to the recipients. Any excess will be treated as wealth created by Mother and not taxed.

This approach requires more record-keeping than under current law—namely, it requires both transferors and recipients to file returns, instead of just the transferor (in an estate tax) or just the recipient (in an inheritance tax). But the valuations required present no more difficulties than under current law. Transferors must already value assets at the time of a gift or bequest, and at times, formulas are used to impute such values based on current interest rates.

Two additional aspects of this approach are similarly used both in the U.S. and abroad. First, many inheritance tax systems tax recipients differently depending on from whom they inherit. (Generally, heirs who inherit from close relatives such as parents are treated more leniently than those who inherit from more distant relatives like cousins.). There is thus precedent for looking at the source of a gift or bequest when taxing the recipient.

Second, current law in the U.S. provides that in some circumstances, the tax consequences to a decedent turn on actions taken at the prior death of a spouse.²³⁴More specifically, the second spouse to die can use any of the first spouse’s unused exemption amount, so long as the first spouse’s executor made the proper election. The success of portability, as these rules are known, suggest that tying one person’s tax consequences to the actions of prior transferors is workable.

F. Transfers in Trust

The foregoing illustrations have used outright gifts and bequests. But many wealthy families transfer most of their wealth in trusts that last for several generations. For example, Grandfather may choose to create a trust that pays the income to Mother for her life, and at her death, distributes the corpus to Daughter. Applying a Rignano tax to transfers in trust raises additional questions. The first, which arises in any accessions tax proposal, is to determine when the taxable events occur. Note that for each trust beneficiary, there are potentially two important events—the date the tax is actually imposed, and the date the clock starts for valuation purposes for later transfers.

Remainder Interests

Let’s start with Daughter and her remainder interest. Should she be taxed at vesting, or at distribution?²³⁵ Most accessions tax proposals suggest distribution for administrative and valuation reasons.²³⁶ First, we do not know until distribution exactly how much Daughter receives. While we can often estimate the value of her remainder interest when Grandfather creates the trust based on current interest rates and Mother’s life expectancy, any figure is just that—an estimate. And for some trusts, additional valuation difficulties appear. Imagine that Grandfather’s trust was to Mother for life, and then to her children equally. Perhaps Daughter is the only living child at Grandfather’s death. But whether Mother has more children affects the share of the remainder Daughter will receive. Finally, many interests are subject to trustee discretion, as would be the case if the remainder interest in Grandfather’s trust passed to “Mother’s children in such proportions as the trustee determines to be in their best interests.” Second, until distribution, Daughter may not have liquid funds with which to pay the tax. Although some trust interests can be sold or borrowed against, many cannot.

These concerns apply with equal force to a Rignano tax. But where do normative considerations point, vesting or distribution? With a traditional accessions tax, one could argue that most (but not all) normative justifications suggest treating vesting as the taxable event. For example, if an accessions tax is designed to further welfarist principles, then vesting seems logical, as one’s welfare (from security, reputation, and the fungibility of money) increases upon vesting. Political influence likely starts accumulating at vesting, when politicians and PACs start courting the remainder beneficiary. And since money is fungible, a vested interest frees up other funds that can provide a head start when it comes to educational and economic opportunities. That said, Anne Alstott has argued that the choice/chance distinction counsels in favor of distribution if an accessions tax is designed to reflect equal opportunity concerns.

But a Rignano tax is not designed to further any single normative goal such as equality of opportunity or welfarism in isolation. Instead, it is designed to find a compromise among competing intuitions about wealth transfer taxation—even when those intuitions may seem “wrong” to tax theorists. To that end, some of the administrative considerations discussed above take on normative weight. Consider valuation. In theory, one could tax at vesting based on estimated values and then adjust at distribution to account for divergences from the estimate. But it is quite likely the public would react negatively to the taxation of undistributed yet vested interests, for the same reason the public reacts negatively to the possible taxation of unrealized gains. To many, it simply seems unfair to impose a tax when there has not yet been an event that provides liquidity, or when valuation is unclear. Given that one purpose of a Rignano tax is to make political headway where other inheritance taxes fail, the better course is to wait until distribution of remainder interests to impose the tax—that is, until we know exactly who gets exactly how much.

The same rule, with two exceptions, should apply when determining when Daughter’s clock starts ticking for purposes of valuing later growth for subsequent transfers. Daughter generally does not have control of the funds until distribution, and therefore none of their prior growth (or lack thereof) should be attributed to her to determine what part of subsequent transfers by Daughter stems from her own initiative or Grandfather’s wealth. The first exception would be if Daughter somehow had discretionary investment control of the assets during Mother’s income interest, in which case investment decisions could plausibly be attributed to her. The second is if Daughter could sell her remainder interest at vesting, in which case the decision to leave it invested in the trust should be attributed to her and any later distribution of wealth beyond the risk-free-rate of return should be deemed self-made.

Income Interests

What about income interests? Assume that Mother’s income interest has an estimated FMV of $1,000,000 at vesting based on the present value of its payment stream and is predicted to pay out $100,000 a year for the rest of Mother’s life. Or imagine that Daughter receives a secondary life estate instead of the corpus outright at Mother’s death. Should she be treated as receiving the inheritance all at once at vesting, or over time when she receives her annual income distribution? In theory, these are economically equivalent, assuming perfect information about interest rates and lifespans (just as the difference between taxing a remainder interest at vesting and distribution is).

The same considerations that apply to remainder interests should apply here as well. The normative considerations that justify a traditional accessions tax do not point clearly in one direction, while weighty valuation and liquidity concerns remain. The default should be that the taxable event, be it imposing tax or starting the clock for later valuation purposes, happens at distribution. Exceptions would be made where the beneficiary has control over investment assets or the ability to sell her income interest.

G. Transition Rules

A Rignano tax contains a unique transition issue. In the illustrations used throughout this Article, we have assumed that Grandfather was self-made. And in the example above, we know how much of Mother’s wealth to tax because Grandfather’s estate would have filed an election to treat his estate as first-generation wealth.

But what if Grandfather himself inherited some money, and was not completely self-made? How do we treat the first generation after a transition to a Rignano tax? Treating all existing wealth at the time of the tax’s imposition as self-made is unsatisfactory, for it essentially delays implementation of the tax for a generation and does not reflect reality. Instead, some existing wealth should be treated as self-made, and some should be considered second-generation wealth. Halliday and Rignano both acknowledge the need for a transition rule to determine that portion, with Rignano suggesting that one-third to one-half of current wealth should be treated as inherited.²³⁷ Fairly recent studies suggest that anywhere from 15% to 46% of current wealth is inherited. Although any number will be admittedly arbitrary, treating one-sixth to one-third of existing wealth as second-generation wealth seems reasonable.²³⁸

CONCLUSION

This Article has made the case for an inheritance tax system that—unlike our own—taxes old money more heavily than new. Specifically, it proposes completely exempting gifts and bequests of self-made wealth, but taxing heirs who receive re-transferred wealth. Although such a tax is more complex than our current system, the challenges are manageable and are well worth it.

Crucially, this proposal provides a way out of the enduring stalemate over taxing wealth. The estate tax has been the subject of passionate debate for decades, resulting in an ongoing state of political uncertainty. Rates and exemption levels have ping ponged back and forth for two decades, including a single year—2010—that had no estate tax at all. And although recent legislation ostensibly made the exemption’s expansion “permanent,” there is no reason a future Congress could not “permanently” shrink it again. Given the current political polarization, there is no doubt that questions about whether and how to tax wealth will continue to generate heated debate.

What makes this debate so intractable is not only that the public as a whole is divided on the issue of inheritance taxation, but that many individual Americans hold simultaneous beliefs about wealth, opportunity, desert, fairness, and family that seemingly contradict each other. Many of us, for example, have at least a sliver of sympathy for some of the claims of both supporters and opponents of the tax.

Yet our current system treats taxing wealth transfers as an all or nothing proposition, without acknowledging a key source of our seemingly contradictory beliefs: the finding that many of us silo beliefs about wealth, distinguishing among earned and inherited wealth. By harnessing this finding, as well as the insights of other recent psychological work on taxation, a Rignano tax thus reconciles the benefits of wealth transfer taxation with deeply held beliefs about fairness, desert, private property, and family. And by so doing, it offers an opportunity for a stable and lasting resolution to the debate over taxing inherited wealth.

98 S. Cal. L. Rev. 1439

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Miranda Perry Fleischer*

*Richard and Kaye Woltman Professor in Finance, The University of San Diego School of Law. For helpful feedback and suggestions, the author thanks Anne Alstott, Jordan Barry, Lily Batchelder, Heather Field, Dov Fox, David Gamage, Ari Glogower, Daniel Halliday, Shelly Layser, Ray Madoff, Shu-Yi Oie, Caley Petrucci, Jim Repetti, Diane Ring, Darien Shanske, and Mila Sohoni, as well as participants at the University of Virginia Tax Policy Workshop, the Boston College Law School/Tulane Law School Tax Roundtable, the Association of Mid-Level Tax Scholars Conference, the University of San Diego Colloquium Series, and the staff of the Southern California Law Review. Thanks to the University of San Diego Law Library and Carlisle Olson for invaluable research assistance.

Major Questions Avoidance and Anti-Avoidance

October 2025October 2025Daniel J. Hemel*

In recent years, the Supreme Court has articulated a new “major questions” doctrine that prescribes a heightened standard of judicial scrutiny for regulations that address questions of vast economic and political significance. This jurisprudential innovation incentivizes—indeed, practically invites—strategically minded agencies to engage in “major questions avoidance”: to modify their regulatory approaches in order to skirt the major questions doctrine’s consequences. This Article is the first to name the phenomenon of major questions avoidance and to develop a taxonomy of avoidance tactics. It identifies four broad categories of major questions avoidance: “slicing” a single rule into a series of smaller rules; “lumping” together regulations under different statutory authorities to achieve a common, far-reaching objective; “glossing” over a major rule in technocratic language that downplays its economic and political significance; and “bypassing” the rulemaking process via guidance documents, administrative adjudications, and enforcement actions. Agencies appear to be deploying various major questions avoidance tactics already—openly in some cases and subtly in others. Although each of these avoidance tactics is costly to pursue, agencies are likely to engage in major questions avoidance—at least some of the time—as long as the major questions doctrine remains a salient feature of the administrative law landscape.

The nascent phenomenon of major questions avoidance presents both normative and jurisprudential puzzles. Different normative theories of administrative state legitimacy lead to contrasting conclusions regarding the desirability of major questions avoidance. If major questions avoidance is a problem, courts could—in theory—try to solve it by developing new doctrines of “major questions anti-avoidance.” Yet these anti-avoidance doctrines will face their own set of logical and logistical challenges—challenges that underscore the limits of judicial power in the cat-and-mouse game between courts and strategically minded agencies. Ultimately, a clear conceptual mapping of major questions avoidance and anti-avoidance can shed new light not only on the major questions doctrine itself but also on the justifications for, constraints on, and adaptability of the modern administrative state.

Introduction

One of the first lessons that students learn in law school is the concept of “question size elasticity.” Law school instructors rarely (if ever) use the term “question size elasticity,” but they almost inevitably illustrate the concept starting on Day One. For example, when teaching Vosburg v. Putney,¹ the first case in many torts casebooks,² professors often divide the central question—whether intent to harm should be a required element of the tort of battery—into a series of sub-questions (for example, whether intent to harm should be a required element when the alleged battery occurs in a touch football game, or on a crowded subway, or—as in Vosburg—in a seventh-grade classroom).³ Going in the opposite direction, professors often show how a seemingly self-contained doctrinal question such as the question presented in Vosburg implicates much larger questions about the structure of society (for example, how to mediate between conflicting interests in economic efficiency and bodily autonomy). By the end of their 3L year, students may not remember the particulars of the cases that they read as 1Ls, but if they were paying even a modicum of attention, they will have learned how to slice a big question into lots of littler ones and how to transform a superficially small question into a much more expansive inquiry.

The concept of question size elasticity, applicable in many legal contexts,⁴ takes on particular relevance in the context of the “major questions” doctrine, possibly the most consequential new doctrine to emerge in U.S. administrative law so far this century.⁵ The doctrine—which prescribes a heightened standard of judicial scrutiny for agency rules that implicate questions of particular economic and political significance—played a central role in four blockbuster Supreme Court cases during the Biden presidency. These four decisions—in which the Court overturned a nearly nationwide eviction moratorium,⁶ struck down a COVID-19 vaccine mandate for more than 80 million U.S. workers,⁷ stripped the Environmental Protection Agency of authority to carry out its Clean Power Plan,⁸ and blocked the Department of Education from forgiving $430 billion in federal student debt⁹—affect broad swaths of the American population and American life.¹⁰ The doctrine continues to rear its head in dozens of lower court cases and is almost certain to return to the Supreme Court soon, likely leading to the invalidation of additional agency actions.¹¹

When applied to the major questions doctrine, the concept of question size elasticity generates a number of, well, major questions. First, as a predictive matter: if a major question can be split into a series of minor questions, will agencies seek to avoid the doctrine’s consequences by slicing what would otherwise be “major” rules into smaller bits and pieces? We might call this slicing method—along with other tactics to evade the major question doctrine’s reach—“major questions avoidance.” Second, as a normative matter: if some agencies do engage in major questions avoidance at least some of the time, should we, as citizens, applaud those agencies’ avoidance tactics? Put another way, is major questions avoidance a salutary phenomenon—either as a desirable “workaround”¹² to circumvent an otherwise undesirable doctrine or as exactly the sort of agency behavior that the major questions doctrine is supposed to incentivize? Or, to the contrary, is major questions avoidance a pernicious administrative tactic that agencies ought to eschew for the public good? And third, as a jurisprudential matter: to the extent that major questions avoidance is undesirable, how—if at all—should courts police the practice? Should courts construct a doctrine of major questions anti-avoidance in administrative law, just as courts have—for example—developed anti-avoidance doctrines to defend the integrity of federal tax law? And if so, what shape might a doctrine of major questions anti-avoidance take?

Rigorously thinking through the relationship between major questions avoidance and anti-avoidance can provide fresh perspectives on the major questions doctrine itself—and, more broadly, about the relationship between the judiciary and the administrative state. According to one view, well expressed by the legal scholar Blake Emerson, the Supreme Court’s invocation of the major questions doctrine “is not legal interpretation at all, but rather an exercise of raw political power.”¹³ In a similar vein, Josh Chafetz characterizes the major questions doctrine as a central element of what he calls “the new judicial power grab.”¹⁴ This Article—though agnostic about the desirability of the doctrine¹⁵—suggests another possible slant on the doctrine’s power implications. When we consider potential agency responses to the major questions doctrine—along with the enormous difficulties that courts will face in policing those workarounds—our takeaway may be that the doctrine, if a judicial power grab, is one with surprisingly infirm grip. In other words, the major questions doctrine—though cited by critics as a signal example of creeping “juristocracy”¹⁶—may, at the end of the day, reveal as much about judicial power’s limits as about its reach.

Part I of this Article provides a brief overview of the major questions doctrine and defines the concept of major questions avoidance. Part II considers whether, when, and why agencies may (or may not) choose to engage in major questions avoidance. Part III evaluates major questions avoidance from a normative perspective, showing how four different theories of the administrative state’s legitimacy lead to very different conclusions regarding major questions avoidance. Part IV looks forward to the next move in the chess game between agencies and courts, asking whether and how courts can construct a doctrine of major questions anti-avoidance. Along the way, the analysis highlights the difficulties that even an ideologically motivated judiciary will face if it seeks to prevent administrative agencies from resolving questions of vast economic and political significance.

I. The Major Questions Doctrine and Major Questions Avoidance

A. The Major Questions Doctrine(s)

For years, a popular parlor game among administrative law scholars involved counting the number of Chevron steps. As formulated by Justice Stevens in the 1984 case that gave the Chevron doctrine its name, judicial review of agency statutory interpretation is a two-step process: is the statute ambiguous (Step One) and, if so, has the agency adopted a “permissible construction of the statute” (Step Two)?¹⁷ Thomas Merrill and Kristin Hickman later argued that in practice, an additional step precedes Steps One and Two—Chevron “Step Zero”—at which courts determine whether an agency’s statutory interpretation is even eligible for Chevron deference.¹⁸ William Jordan interpreted the Supreme Court’s decision in United States v. Mead Corp.¹⁹ as “erect[ing] a new four step test to replace what we once knew as the Chevron two step.”²⁰ Matthew Stephenson and Adrian Vermeule responded with an article provocatively titled: “Chevron Has Only One Step.”²¹ Aaron Nielson and I argued that courts have created a half-step between Steps One and Two—what we called “Chevron Step One-and-a-Half.”²² Judges got in on the Chevron step-counting exercise, too.²³ Much fun was had by all.

With the Chevron doctrine now dead²⁴—or at least, “mostly dead”²⁵—counting the versions of the major questions doctrine is the newest administrative law numbers game. Cass Sunstein has argued that there are actually two major questions doctrines.²⁶ Jody Freeman and Matthew Stephenson count three different iterations.²⁷ Louis Capozzi writes that after West Virginia v. EPA, the 2022 Clean Power Plan case, “[t]here is one version of the major questions doctrine” still standing.²⁸

In all of its iterations, the major questions doctrine applies more searching judicial review to “agency decisions of vast ‘economic and political significance.’ ”²⁹ The various versions of the major questions doctrine differ in what that more searching review entails. In one version, the “majorness” of an agency’s assertion of statutory authority is a factor weighing against that reading.³⁰ This version of the major questions doctrine evokes Justice Scalia’s statement that Congress “does not . . . hide elephants in mouseholes”³¹—that an interpretation of a statute is less plausible if it ascribes extraordinary consequences to “vague terms or ancillary provisions.”³² In a second version, the majorness of an agency decision was a reason for courts to deny Chevron deference and interpret the relevant statute de novo. This version³³—which was on clearest display in the Supreme Court’s 2015 King v. Burwell decision³⁴—faces an uncertain future in a post-Chevron world.³⁵ In a third version, majorness is a reason to reject an agency’s interpretation of a statute unless Congress has issued a “clear statement” authorizing the agency’s assertion of power.³⁶ Freeman and Stephenson describe this third, “most aggressive” version of the major questions doctrine as a “novel judicial innovation” that had not been embraced by the Supreme Court until West Virginia v. EPA in 2022.³⁷

All of these versions require courts to somehow distinguish major questions from minor ones. None of the Supreme Court’s cases give concrete guidance on the ingredients of majorness, though they do provide potentially instructive examples. In cases where it has found a question to be major, the Court has cited—among other factors—the population of people affected,³⁸ the amount of money at stake,³⁹ the rule’s geographic reach,⁴⁰ and the number of sectors that could be affected by the agency’s interpretation.⁴¹ Other factors cited by the Court in major questions cases include whether the

rule finds precedent in past agency practice⁴² and whether the rule lies within the agency’s “sphere of expertise.”⁴³

The emphasis in major questions cases on the scope of the challenged regulation raises a possibility that scholarship has only begun to probe: if the majorness of an agency interpretation depends, in part, on the number of people, industries, or regions affected by the relevant rule or by the rule’s dollar-denominated costs, can an agency duck the major questions doctrine by slicing a larger rule into smaller bits and pieces?⁴⁴ Although the Court has never stipulated a specific population threshold, dollar threshold, or other numerical criterion for majorness, its major questions cases so far indicate—and common sense would suggest as well—that smaller-in-scope rules are less major than larger rules. And in the major questions doctrine era, rules that do not implicate the major questions doctrine would seem to have a better chance of surviving judicial scrutiny than rules that do.

B. Major Questions Avoidance

Just as the major questions doctrine comes in multiple flavors, major questions avoidance does too. Broadly, “major questions avoidance” refers to any tactic by which an agency changes the form or substance of its regulations in order to avoid the application of the major questions doctrine while achieving similar—though not necessarily identical—results. We can divide the broad category of major questions avoidance into at least four subcategories: “slicing,” “lumping,”⁴⁵ “glossing,” and “bypassing.” This Section considers each in turn.

“Slicing”

“Slicing” refers to a type of major questions avoidance in which an agency divides a larger rule into several smaller ones. For example, when the Centers for Disease Control and Prevention (“CDC”) restricted evictions during the COVID-19 crisis, the agency engaged in a form of temporal slicing: it issued a series of time-limited eviction prohibitions with durations of one,⁴⁶ two,⁴⁷ three,⁴⁸ and four⁴⁹ months. It was only after the fifth iteration of the CDC’s moratorium that the Supreme Court struck down the agency’s action, stating that “the sheer scope of the CDC’s claimed authority” required a clear authorization from Congress.⁵⁰

Time is not the only dimension along which agencies might “slice.” Agencies also might slice geographically. For example, instead of issuing a single rule for the entire country, the CDC could have promulgated a series of geographically limited, temporally overlapping moratoria with a combined effect approaching—if not equaling—a nationwide rule.⁵¹ Alternatively, agencies might slice by industry. For example, the Occupational Safety and Health Administration—instead of issuing a vaccination and testing rule for nearly all private employers with at least one hundred employees⁵²—could have issued a series of industry-specific rules that, in the aggregate, reach most or all sectors of the economy. The Environmental Protection Agency (“EPA”) arguably engaged in a form of industry slicing in early 2024 when it split its greenhouse gas emissions limits for existing coal-fired and natural gas-fired power plants into two rules—proceeding immediately with the rule for existing coal plants while stating that it would delay the rule for existing gas plants for at least several more months.⁵³

Slicing can theoretically result in total or partial avoidance of the major questions doctrine. Imagine, for example, that an agency wishes to apply a single rule, R, to twenty-six industries labeled A through Z. Total avoidance would occur if the agency issues twenty-six identical versions of rule R, each for a single industry, and all pursuant to the same statutory authority. Partial avoidance could occur if the agency modifies the rule for each industry such that rule R_a applies to industry A, R_b applies to industry B, and so on, all the way through R_z for industry Z, where all of these industry-specific rules are substantively similar but none are carbon copies of each other. Partial avoidance also might occur if the agency applies rule R to some subset of industries—perhaps to A, C, and E but not B, D, and F—with the upshot that a large slice but not all of the economy is covered by R. Thus, partial avoidance allows an agency to achieve much of—though not all of—what it would have sought to achieve in the absence of the major questions doctrine.

Concededly, the slicing subcategory is blurry around the edges. At what point does an agency’s response to the major questions doctrine cease to be “avoidance via slicing” and simply become a downsizing of the relevant rule? For example, if an agency wishes to impose rule R on industries A through Z but—fearing the major questions doctrine—settles on applying rule R to industry A alone, then the agency has not “avoided” the major questions doctrine at all; the agency has been thwarted. There is no clear line between A and Z at which frustration turns into partial avoidance. In this respect, major questions avoidance is as fuzzy as the majorness element of the major questions doctrine itself.

Even though slicing—at least when it results in partial avoidance—may be difficult to distinguish from frustration, slicing still can be a useful concept. For our purposes, “slicing” occurs when an agency issues a series of narrower rules pursuant to the same statutory authority. As we shall see, this feature—multiple rules pursuant to the same authority—serves to distinguish slicing from its closest cousin: “lumping.” The import of the distinction between slicing and lumping—though it may seem pedantic at this juncture—will become clearer when we consider potential judicial countertactics in Part IV.

“Lumping”

“Lumping” refers to a type of major questions avoidance in which an agency promulgates multiple rules pursuant to different statutory authorities to reproduce the effect of a single rule that, if it had been issued on its own, would or could have implicated the major questions doctrine. In other words, the agency “lumps” together several different regulations under different statutory delegations to achieve a common policy goal that—if pursued in a single rule under a single statutory authority—would have risen to the level of majorness. Lumping, as we will see, is a strategy that agencies undoubtedly pursued to circumvent the major questions doctrine under the Biden administration. Whether it will continue under the second Trump administration is—as of this writing in early 2025—not yet clear, as all except the most obvious cases of lumping will be very difficult to detect.

The clearest example of lumping from the Biden years is the Department of Education’s response to the Supreme Court decision to block the cancellation of $430 billion in student loan debt.⁵⁴ In its first stab at large-scale debt cancellation—the effort thwarted by the Court’s 2023 decision—the department relied on language in the Higher Education Relief Opportunities for Students Act of 2003 (“HEROES Act”) authorizing the Secretary of Education to “waive or modify” the provisions of several federal student loan programs in order to protect recipients from the financial consequences of a “national emergency.”⁵⁵ The Department of Education argued that the COVID-19 pandemic—undoubtedly a national emergency—justified the invocation of its HEROES Act authority. Invoking the major questions doctrine, the Court held that “[h]owever broad the meaning of ‘waive or modify,’ that language cannot authorize the kind of exhaustive rewriting of the statute that has taken place here.”⁵⁶

Thwarted in its effort to use the Department of Education’s “waive or modify” authority under the HEROES Act, the Biden administration vowed to find other statutory means of relieving student debt.⁵⁷ Just eleven months after the Supreme Court’s ruling, the administration announced that without relying on the HEROES Act, it had successfully canceled $167 billion in student debt for 4.75 million borrowers through a series of smaller rules under different statutory authorities.⁵⁸ Furthermore, the administration averred, there were still additional loan forgiveness measures to come. “President Biden will not stop fighting to cancel more student debt for as many Americans as possible,” the White House declared.⁵⁹ (Some of those measures were subsequently blocked by the Eighth Circuit.)⁶⁰

The Biden administration’s response to the Court’s Clean Power Plan decision offers a somewhat less overt example of major questions avoidance. Promulgated under President Obama and then rescinded during President Trump’s first term, the Clean Power Plan leveraged the EPA’s authority under section 111 of the Clean Air Act to set emissions standards at the level achievable through the “best system of emission reduction” that has been satisfactorily demonstrated.⁶¹ The EPA interpreted that language to authorize it to prescribe “generation shifting”: the nation’s electricity grids would be required to replace high-emitting coal plants with increased electricity generation from natural gas plants and renewable sources such as wind and solar.⁶² The “best system,” in other words, involved taking coal plants out of commission and substituting cleaner energy. The Court in West Virginia v. EPA rejected that reading of the statute: “As a matter of ‘definitional possibilities,’ generation shifting can be described as a ‘system,’ ” Chief Justice Roberts wrote for the Court, but “a vague statutory grant is not close to the sort of clear authorization required by our precedents” for a rule as “major” as the EPA’s.⁶³

In the wake of the West Virginia decision, the Biden administration—which had never actually tried to reinstate the Obama administration’s Clean Power Plan—pursued a series of coal-related rulemakings that did not rely on its predecessor’s contentious reading of section 111 as allowing “generation shifting.” These efforts culminated in April 2024 when the EPA Administrator announced a “suite of final rules” to reduce coal power plant emissions.⁶⁴ One of these rules, mentioned above in the context of slicing,⁶⁵ requires existing coal power plants to install carbon capture and storage systems—a more traditional interpretation of the “best system” language in section 111 than the Clean Power Plan.⁶⁶ A second rule, promulgated under section 112 of the Clean Air Act rather than section 111, sets new limits on emissions of mercury and other air toxics from coal facilities.⁶⁷ A third rule relies on the EPA’s authority under an entirely different statute—the Clean Water Act—to impose more stringent restrictions on water discharges from coal plants.⁶⁸ “Taken together,” observed a New York Times news analysis, “the regulations could deliver a death blow in the United States to coal.”⁶⁹ Put another way, the suite of regulations seeks to accomplish the same ultimate goal that the Clean Power Plan pursued: to force a shift away from coal and toward cleaner energy sources across the U.S. electric grid.⁷⁰

One factor that distinguishes the coal case from the student loan case is that in the student loan case, we know that the Department of Education adopted its lumping strategy in response to the major questions doctrine. We know that because the Department of Education tried to implement its student debt cancellation plan pursuant to the HEROES Act and then shifted to other statutory authorities only after the Supreme Court blocked the HEROES Act effort on major questions grounds. In the coal case, by contrast, we do not know whether, in the absence of the West Virginia decision, the Biden administration EPA would have updated its predecessor’s Clean Power Plan—adopting the same reading of section 111 as authorizing generation shifting—or whether in the first instance the Biden EPA would have promulgated a potpourri of rules under both the Clean Air Act and the Clean Water Act. What we can say is that when the major questions doctrine foreclosed one possible regulatory approach to coal, the Biden administration chose another.

As examples of lumping, the series of student debt cancellations and coal-focused EPA rules are arguably more alike than different. What makes them alike—and different from many other potential cases of lumping—is that they came after, not in anticipation of, a court ruling that blocked an alternate regulatory route on major questions grounds. In other cases, major questions avoidance via lumping may occur more subtly. One or more agencies may issue a series of rules in service of a common goal without first trying and failing to achieve the same objective through a larger rule pursuant to a single statutory authority. We might never know whether this series of rules reflects major questions avoidance because we cannot observe the counterfactual world without the major questions doctrine hanging overhead. Even the administration officials involved in the decision to pursue the series of rules might not be able to say definitively that the strategy reflects major questions avoidance: fear of the major questions doctrine may have been one among several factors favoring the more incremental approach, and no single policymaker may know for sure whether the major questions doctrine was outcome-determinative.

This last point regarding the difficulty of detecting lumping will become particularly significant to the analysis in Part IV, when we consider whether the courts can combat avoidance through a doctrine of major questions anti-avoidance. If major questions avoidance is difficult to detect, it also may be difficult to deter. Thus, while lumping may be a less obvious example of avoidance than slicing, the non-obviousness of lumping may turn out to be exactly what makes it such an effective avoidance strategy.

“Glossing”

Whereas slicing and lumping entail changes to the scope and substance of agency regulations, “glossing” affects rules only on the surface. Glossing occurs when agency officials or others within the administration describe a rule in terms tailored to downplay its majorness. Even before the Court’s quartet of major questions decisions starting in 2021, Blake Emerson observed that the major questions doctrine alters agencies’ rhetorical incentives. “Because the doctrine generally forbids agencies from making decisions of great economic and political significance,” Emerson wrote, “it encourages agencies to explain themselves in technocratic terms, even if significant questions of value are at issue.” Emerson added: “If agencies know that courts will decline to defer to them if they detect agency consideration of important questions of political value, they will invariably explain their interpretations of statutory ambiguities in a way that makes them appear purely technical.”⁷¹ They will, to use this Article’s terminology, “gloss.”

Although glossing is a potential response to the major questions doctrine, it may not be—as Emerson suggests—an “invariabl[e]” response. Jody Freeman and Matthew Stephenson agree with Emerson that “executive branch lawyers might well start advising agencies to make their rules seem smaller in scope, more incremental, and more technocratic, and suggesting that the President, agency ofﬁcials, and other supporters avoid talking about how these rules contribute to some larger policy agenda or help address some big national problem.”⁷² But Freeman and Stephenson add that “this advice goes against the grain, since most political appointees are eager to tout their regulatory accomplishments, and presidents want to demonstrate strong leadership by publicizing and claiming credit for what their agencies are doing.”⁷³ Whether the litigation-driven incentive to gloss will outweigh the political incentive to trumpet the majorness of a regulatory initiative may depend on—among other factors—the distance to the next election, the relative influence of an agency’s general counsel vis-à-vis other officials, and the career ambitions of the agency head who promulgates the relevant rule.

So far, we have seen some examples of glossing and some examples of administration officials issuing statements that defy the rhetorical incentives generated by the major questions doctrine. As a possible example of glossing, then-CDC Director Rochelle Walensky said on National Public Radio in August 2021—when announcing an additional two-month extension of the agency’s eviction moratorium—that the “new, tailored order” was focused specifically on “areas of highest transmission” that faced the “most public health challenges.”⁷⁴ In fact, the August 2021 moratorium—though slightly narrower in geographic scope than the previous nationwide eviction prohibition—still covered ninety percent of the U.S. population.⁷⁵ President Biden’s unbridled celebration of his administration’s student debt forgiveness efforts offers a contrary example of “anti-glossing”: an administration official—here, the highest-ranking administration official—explicitly emphasizing that an agency initiative represents an end–run around the major questions doctrine. “[T]he Supreme Court blocked us,” President Biden told an audience at a college in Wisconsin in May 2024, but “that didn’t stop us. . . . We continue to find alternative paths to reduce student debt payments . . . that are not challengeable.”⁷⁶ Republican Attorneys General from seven states did, indeed, seek to block those “alternative paths,” alleging that the Biden administration’s approach still violated the major questions doctrine.⁷⁷ And as noted, that challenge succeeded in delaying some—though not all—of the Biden administration’s student debt relief measures.⁷⁸

“Bypassing”

A fourth form of major questions anti-avoidance is “bypassing,” whereby an agency sidesteps the rulemaking process altogether by pursuing its objectives through guidance documents, administrative adjudications, or enforcement actions. I borrow the “bypass” label from Jennifer Nou, who applies it in a different context to refer to similar tactics—including guidance, adjudication, and enforcement—that agencies use to insulate themselves from review by the Office of Information and Regulatory Affairs within the White House Office of Management and Budget.⁷⁹ Here, the impetus to use guidance documents, adjudications, and enforcement actions is not to escape White House review but to reduce the probability that judicial review will result in invalidation under the major questions doctrine.

A possible example of bypassing is the Department of Health and Human Services’ response to the Supreme Court’s 2022 ruling in Dobbs v. Jackson Women’s Health Organization, which overturned fifty years of precedent and withdrew constitutional protections for induced abortion.⁸⁰ Following that ruling, the Department of Health and Human Services issued a guidance document stating that the federal Emergency Medical Treatment and Labor Act (“EMTALA”), which applies to virtually all hospitals in the United States, requires physicians at covered hospitals to perform abortions in cases where abortion is necessary to resolve an emergency medical condition.⁸¹ The guidance added that “[w]hen a state law prohibits abortion and does not include an exception for the life of the pregnant person—or draws the exception more narrowly than EMTALA’s emergency medical condition definition—that state law is preempted.”⁸² Unlike other interpretations of EMTALA that have taken the form of regulations,⁸³ the Department declined to initiate a rulemaking process with respect to its abortion interpretation.

Undeterred by the fact that the Department’s interpretation came in the form of a guidance document rather than a rule, the Texas Attorney General—along with two groups of pro-life physicians—challenged the interpretation in federal district court, arguing among other points that the Department’s guidance ran headlong into the major questions doctrine because it resolved an “issue of vast policy and political significance” without clear authorization from Congress.⁸⁴ The Department responded that unlike the rules struck down by courts in earlier major questions cases, the EMTALA guidance was “not final agency action subject to judicial review” because it merely interpreted the statute and did not determine the rights or obligations of any party.⁸⁵ Both the federal district court and the Fifth Circuit rejected the Department’s finality argument, concluding that the guidance document reflected a new policy with concrete legal consequences that had all the indicia of final agency action.⁸⁶ In compliance with the district court injunction, the Department is not enforcing its EMTALA guidance in the state of Texas or against members of the two pro-life physicians’ groups while it seeks Supreme Court review, though it is continuing to enforce the guidance throughout the rest of the country.⁸⁷

Time will tell whether bypass via guidance document can succeed in other circumstances. As Ronald Levin observes, case law regarding the rule/guidance distinction is in a state of “general disarray.”⁸⁸ We will return in Section II.C to the questions of when and whether bypass via guidance may be a viable legal strategy. Importantly, though, guidance is not the only means of effectuating bypass: agencies also can seek to skirt the major questions doctrine by pursuing their policy goals through enforcement actions.⁸⁹

One arguable example of bypass via enforcement is the Securities and Exchange Commission’s ongoing effort to police the cryptocurrency industry. The Commission has argued in a series of enforcement actions that certain cryptocurrency offerings are “securities” subject to the registration requirements of the Securities Act of 1933. Some commentators have argued that the Commission’s assertion of jurisdiction over the cryptocurrency industry violates the major questions doctrine because “the cryptocurrency market has vast economic and political significance” and the Commission “has not clearly been empowered by Congress to regulate that market.”⁹⁰ The cryptocurrency exchange Coinbase road-tested this argument in federal district court in the Southern District of New York, where Judge Katherine Polk Failla swatted it away. “Simply put, the cryptocurrency industry cannot compare with those other industries the Supreme Court has found to trigger the major questions doctrine,” Judge Failla wrote.⁹¹ Stymied in the Southern District of New York, cryptocurrency firms have recently filed suits in the Northern and Western Districts of Texas to challenge the Commission’s interpretation of the term “security.”⁹²

Whereas Judge Failla rejected Coinbase’s major questions argument on grounds specific to cryptocurrency and the structure of the securities laws, Todd Phillips and Beau Baumann have argued that the major questions doctrine should never apply to enforcement actions “when courts, not agencies, interpret statutes in the first instance.”⁹³ Phillips and Baumann acknowledge that a categorical exception from the major questions doctrine for agency enforcement actions in federal court would incentivize agencies to bypass the rulemaking process altogether—another instance of scholarship anticipating major questions avoidance, though the authors do not use that term.⁹⁴ Nonetheless, they argue, an enforcement action is “less major” than a legislative rule “because it does not sweep in an entire industry,”⁹⁵ and enforcement actions brought in federal court should lie outside the major questions doctrine’s “domain.”⁹⁶

If courts take up Phillips and Baumann’s suggestion, then bypass via enforcement is likely to become a frequent means of major questions avoidance, at least for agencies such as the Securities and Exchange Commission with authority to bring judicial enforcement actions on their own.⁹⁷ Even if courts do not carve out a categorical exception for enforcement actions, bypass via enforcement may become attractive to agencies seeking to reduce—though not eliminate—the risk of a major questions setback. But as we will see in the next part, the incentives for major questions avoidance—via bypass or via slicing, lumping, or glossing—sometimes can come into conflict with considerations of administrative efficiency, litigation strategy, and political advantage. Major questions avoidance will be an enticing option for agencies in some circumstances, but not in all.

II. The Benefits and Costs of Major Questions Avoidance

A. Benefits

On first glance, major questions avoidance may seem like it brings obvious benefits to an administration or agency seeking to advance a regulatory agenda, at least when a rule might otherwise run aground on the major question doctrine’s shoals. As a general matter, the stricter standard of scrutiny associated with the major questions doctrine—whether in the form of the elephants-in-the-mouseholes canon or the denial of Chevron deference or West Virginia v. EPA’s clear statement requirement—reduces a rule’s survival probability. As a result, major questions avoidance will typically bring a benefit—a lower chance of judicial reversal—that agency and administration officials must weigh against the costs of avoidance.

But before leaving the benefits side of the ledger, it is important to acknowledge that agency and administration officials may not always see major questions avoidance as a benefit. First, sometimes an agency may promulgate a rule not because officials at the agency or the White House think the rule is a good idea but because they are responding to political pressure from outside groups. For example, when the CDC announced a two-month extension to its eviction moratorium in August 2021, the Washington Post described the action as “a move that bent to intense pressure from liberal House Democrats.”⁹⁸ According to the Post, President Biden did not want to extend the moratorium—evidently because he believed that it overstepped the constitutional bounds on executive power—but “House Democrats responded angrily” to the administration’s position.⁹⁹ One progressive Democrat, Representative Cori Bush of Missouri, staged what the New York Times described as “a round-the-clock sit-in on the steps of the United States Capitol that galvanized a full-on progressive revolt,” camping there for four days and nights “in rain, cold and brutal summer heat.”¹⁰⁰ From the perspective of Biden administration officials, issuing the moratorium and then having it be struck down by the Supreme Court may have been exactly the outcome that they needed to get progressives off their backs.

Second, even when administration and agency officials support the policy behind a rule, they still may see a political benefit in having the rule be struck down by the courts—and especially by the Supreme Court. For example, in the case of student debt forgiveness, President Biden arguably stood to gain electorally from his clash with the Court’s conservatives. In a March 2024 poll, seventy percent of young voters, seventy-two percent of Black voters, and sixty-eight percent of Hispanic voters said that student debt cancellation was an “important” issue to them in the upcoming election.¹⁰¹ White House officials might have anticipated that the student debt issue would give a boost to President Biden in his then-anticipated rematch with Donald Trump, whose three appointees to the Supreme Court supplied critical votes against the debt relief rule. (That electoral rematch—of course—never ultimately happened.)

Third and finally, a court decision invoking the major questions doctrine may be useful to an administration that seeks to entrench its policy position. For example, the Supreme Court’s major questions holding in King v. Burwell—in which the Court ruled that the availability of premium tax credits on federally established health insurance exchanges was a “question of deep ‘economic and political significance’ ” beyond the discretion of the Internal Revenue Service¹⁰²—prevented the Trump administration from denying credits to exchange participants after the end of the Obama presidency. Notably, the version of the major questions doctrine that was applied in King v. Burwell simply denied Chevron deference to the Internal Revenue Service’s interpretation of the Affordable Care Act; the agency still could—and indeed did—persuade the Court that its interpretation of the statute was correct as a matter of first principles.¹⁰³ Still, the King v. Burwell episode illustrates the more general point that when agencies are thinking about threats to their regulatory policies, they are thinking about threats not only from the judiciary but also from the next administration.¹⁰⁴ For policy entrenchment reasons—as well as for the above-mentioned reasons related to interest group pressure and electoral opportunity—a judicial determination of majorness may not always be a net-negative for the current occupants of the executive branch.

B. Costs

Notwithstanding the caveats in the previous Section, high-ranking officials at agencies and across the administration generally will not want the courts to classify their regulatory initiatives as implicating the major questions doctrine. Still, they must weigh the benefits of major questions avoidance against the considerable costs. This Section focuses on three

especially significant costs of major questions avoidance: administrative burdens, litigation risks, and political costs.

Administrative Burdens

Major questions avoidance—especially when it takes the form of slicing or lumping—is likely to increase the total burden on agency officials responsible for drafting and promulgating rules. As Jennifer Nou and Jed Stiglitz observe, agencies incur certain “fixed production costs” whenever they issue a new rule: they must establish a docket, write language that goes into every rule, complete internal paperwork, and—for non-independent agencies—secure sign-off from the Office of Information and Regulatory Affairs within the White House.¹⁰⁵ Nou and Stiglitz note that “[t]he presence of fixed production costs generally encourages regulatory bundling”—in other words, encourages agencies to cover more ground in a single rule rather than splitting one rule into several.¹⁰⁶ Slicing—along with the related phenomenon of lumping (in which agencies issue a series of rules under different statutory authorities)—both cut against the incentive to minimize regulatory production costs.

The extent to which regulatory production costs deter avoidance will vary across agencies and across time. First, some agencies are much more adept at issuing rules than others. For example, according to data from Regulations.gov, the EPA issued 384 rules in 2023, while the Equal Employment Opportunity Commission (“EEOC”) issued only three (one of which was a technical amendment to correct a typographical error in an earlier rule and one of which adjusted certain figures for inflation).¹⁰⁷ For an agency that churns out rules like they are cars coming off an assembly line, the costs of a few additional rulemakings may be manageable. For an agency like the EEOC that exercises its rulemaking muscles on rare occasions, the prospect of issuing several rules rather than a single rule may be more daunting.

Second, administrative burden of bypass via enforcement is likely to depend on whether an agency has independent litigation authority. Some agencies—such as the Securities and Exchange Commission and the Consumer Financial Protection Bureau—have authority to initiate litigation in federal court on their own.¹⁰⁸ Others—such as the Department of Health and Human Services—must rely on the Justice Department to bring enforcement actions in federal court.¹⁰⁹ As Kirti Datla and Ricky Revesz note, “the Environmental Protection Agency has independent litigation authority over only a few discrete violations of the Toxic Substances Control Act.”¹¹⁰ Otherwise, the EPA’s ability to enforce the environmental laws in federal court depends on the cooperation of Justice Department attorneys.

Even when Justice Department attorneys are ideologically aligned with an agency’s policy agenda, bypass via enforcement is likely to be more burdensome for agencies without independent litigation authority. Every substantive filing in a case will require coordination—and potentially negotiation—between agency officials and Justice Department counterparts. As a result, we might hypothesize that agencies with independent litigation authority will be more likely to pursue bypass via enforcement than agencies without. Returning to the EPA/EEOC comparison, the EPA may be more likely to pursue slicing or lumping as an avoidance tactic because it is quite adept at issuing rules but lacks independent litigation authority; the EEOC may be more likely to pursue bypass via enforcement because it lacks the EPA’s well-practiced rulemaking infrastructure, but possesses independent litigation authority at the district court and circuit court level.¹¹¹

Finally, the administrative burden of avoidance is likely to be more salient near the end of a presidential term. This is because administrative burden results not only in a costlier regulatory process but also a slower process. The need for speed is greatest in an administration’s final days: executive branch turnover on January 20 of every fourth or eighth year means that regulatory projects not completed before that date are likely to die if the next administration does not support the effort, leading to the familiar phenomenon of “midnight rulemaking.”¹¹² Even when the President hands the baton to a successor of the same party—something that has happened outside the context of resignation or death only once since World War II—rulemaking activity may accelerate at an administration’s end. According to one account, the Reagan administration rushed in its waning days to finalize regulations that were deemed “too hot to handle” during the 1988 presidential campaign, “hoping to minimize the divisive controversy George Bush might otherwise face” if those issues were resolved before the general election or after Bush’s inauguration.¹¹³ If time is of the essence—either because the next administration has different policy priorities or because the current administration wants to shield a politically aligned successor from blowback—then major questions avoidance via slicing, lumping, or bypassing will be less viable strategies.

Speed also matters at an earlier juncture in an administration’s final year because of the Congressional Review Act, which allows Congress to block a regulation from taking effect by enacting a joint resolution.¹¹⁴ If a rule is finalized within the last sixty Senate “session” days or sixty House “legislative” days before Congress adjourns, the next Congress will have an opportunity to block the rule—and, importantly, the joint resolution will be immune from a Senate filibuster.¹¹⁵ Because a House “legislative day” can span multiple calendar days—and because both the House and Senate may adjourn earlier or later than expected—the deadline for finalizing a rule in order to avoid fast-track review by the next Congress is variable. In an election year, it may fall anywhere from the spring to the late summer.¹¹⁶

Joint resolutions of disapproval under the Congressional Review Act are still subject to presidential veto, so absent a change in administration or an extremely unpopular rule that is opposed by a veto-proof supermajority of Congress, the Congressional Review Act does not pose a significant threat to agency action in most years. But in the last year of a presidential administration, agencies have strong incentives to finalize controversial rules early enough that the next Congress and the next President cannot use the Congressional Review Act to undo the agencies’ handiwork. Almost certainly for that reason, April 2024—which was thought to be the last month before Biden administration rules became subject to the fast-track disapproval procedure in the next Congress—was “the busiest month on record” for major regulations, with the Office of Information and Regulatory Affairs reviewing more than eight times as many economically significant final rules as in the typical month.¹¹⁷ One might describe this phenomenon as “8 p.m. rulemaking”—rather than “midnight rulemaking”—because it occurs roughly five-sixths of the way through a President’s term (just as 8 p.m. strikes five-sixths of the way through the day). As the 8 o’clock hour approaches, the efficiency drawbacks of slicing and lumping increase because delay raises the risk of reversal under the Congressional Review Act. In that timeframe, agencies must weigh the benefits of major questions avoidance against the benefits of Congressional Review Act avoidance.

Litigation Risks

So far, the analysis in this Part has proceeded under the guiding assumption that major questions avoidance raises the probability that a regulation will survive judicial review. That assumption is probably accurate most of the time—but not all of the time. In at least three scenarios, certain forms of major questions avoidance may increase an agency’s litigation risk.

First, when an agency slices a single rule into several smaller rules issued sequentially, it may expose itself to challenges asserting that the distinctions it has drawn (for example, among industries or among regions) are arbitrary and capricious. As the D.C. Circuit put it, “[t]he great principle that like cases must receive like treatment” is “black letter administrative law.”¹¹⁸ A regulatory scheme may fail in court both because it is “overinclusive” and “underinclusive.”¹¹⁹ The merits of any underinclusivity challenge to a sliced rule will depend on the details, but it would be an overgeneralization to say that smaller rules always fare better in court than larger ones.

Second, to the extent that an agency engages in avoidance via glossing, it may open itself to attack under the State Farm doctrine, according to which a rule may be set aside as arbitrary and capricious if the agency “entirely failed to consider an important aspect of the problem.”¹²⁰ As the D.C. Circuit has put it, administrative law’s “reasoned decision-making” standard “requir[es] the agency to focus on the values served by its decision.”¹²¹ Courts will—on occasion—strike down an agency rule because the agency explained itself in entirely technical or legalistic terms when its decision required a substantive value judgment.¹²² To be sure, courts typically grade agency explanations on a generous curve: an agency usually won’t have to say all that much to satisfy State Farm.¹²³ But an agency that engages in hyperaggressive glossing—denying or significantly downplaying the economic, political, or ethical stakes of its decision—may leave itself vulnerable on the State Farm flank even as it seeks to shield itself from the major questions doctrine.

Finally, when an agency pursues bypass via guidance document, it may reduce the risk that its pronouncement will be deemed a final agency action subject to judicial review but raise the risk that the guidance document will be deemed a “legislative rule” in disguise that ought to have gone through a notice-and-comment process. Many more regulatory initiatives have failed on notice-and-comment grounds than on major questions grounds: as Ronald Levin observes, “the question of whether a supposedly informal pronouncement of an administrative agency is actually a rule that should have been adopted through notice-and-comment procedure may well be the single most frequently litigated and important issue of rulemaking procedure before the federal courts today.”¹²⁴ Note that the notice-and-comment concern does not apply to avoidance via slicing and lumping provided that the sliced or lumped-together rules each go through notice and comment. But, returning to the regulatory-production-costs point above, the rigamarole of multiple notice-and-comment procedures—necessary to insulate sliced and lumped-together rules against litigation risk—further raises the administrative burden of avoidance.

Political Costs

Along with its administrative burdens and litigation risks, major questions avoidance potentially comes with significant political drawbacks. Presidents want credit from voters for their regulatory achievements. Agency heads with ambitions for higher office want the world to notice their accomplishments. These outcomes are more likely when agency actions generate media attention, and the media is much more likely to cover rules that are larger in scope. Thus, even when the major questions doctrine discourages agencies from issuing broad rules, political incentives may push in the opposite direction.

The political costs of major questions avoidance will vary across time, across agency, and across subject matter. Electoral incentives are likely to be most salient in the last year of an administration—roughly around the same time that the costs of regulatory delay reach their peak. Meanwhile, career incentives do not affect all agency heads equally. Although it is often said that “every senator looks in the mirror and sees a future president,”¹²⁵ the CDC Director may look in the mirror and see no one other than the CDC Director. For some agency heads without further political ambitions, staying out of the spotlight may be an added benefit of major questions avoidance. Moreover, in some cases, an administration may—for electoral reasons—want to minimize attention to a controversial rule. For example, Biden administration officials may have been happy to regulate coal through a series of smaller rules because coal regulation—though popular among environmentalists—carries electoral risks in the swing state of Pennsylvania, the third largest coal-producing state in the country.¹²⁶ In those instances, major questions avoidance and electoral politics may work hand in hand.

Finally, agencies and administration officials may be able to capture both the benefits of major questions avoidance and the political benefits of larger regulatory initiatives by emphasizing the combined effect of several smaller rules. President Biden’s “anti-glossing” approach to student debt forgiveness is arguably a case in point: by touting the combined effect of several different student loan relief initiatives, President Biden successfully vaulted his series of smaller debt cancellations onto the front page of the New York Times and into the national spotlight.¹²⁷ Still, a drawback of major questions avoidance is that even when the combined effects of multiple rules, guidance documents, administrative adjudications, or enforcement actions are far-reaching, the consequences will typically be more difficult to explain to the average voter than a single sweeping rule. Thus, the political cost of major questions avoidance may be not only that avoidance leads to less attention but also that it engenders lower comprehension.

Ultimately, whether the political costs of major questions avoidance outweigh the benefits depends on a question much larger than the major questions doctrine itself: what motivates regulators? Perhaps counterintuitively, major questions avoidance may be more likely if the “public interest” theory of regulation applies: if regulators are “benevolent . . . , trustworthy, disinterested, and public-spirited experts who produce rules that ensure general economic efficiency and maximum welfare for society.”¹²⁸ If agency and administration officials respond more strongly to personal or partisan motives, then the political costs of major questions avoidance may outweigh the benefits from those officials’ self-interested perspective. To be sure, this conclusion comes with caveats. Regulators motivated by private interests may embrace avoidance if—for example—they are responsive to inducements from sophisticated interest groups that will appreciate the combined effects of several sliced or lumped rules. And public-interested regulators may eschew avoidance if they conclude—perhaps after weighing the considerations laid out in the next part—that major questions avoidance has a corrosive effect on the legitimacy of the administrative state.

III. Major Questions Avoidance and the Legitimacy of the Administrative State

So far our analysis has been primarily positive and predictive: how—and how often—will agencies modify their regulatory strategies to avoid the major questions doctrine? This Part shifts into a normative gear, asking what the phenomenon of major questions avoidance means for the legitimacy of the modern administrative state. Following Richard Fallon’s tripartite classification of legitimacy claims into sociological, legal, and moral categories, I use the term “legitimacy” here in the moral sense: “legitimacy inheres in the moral justification, if any, for claims of authority asserted in the name of the law.”¹²⁹ As we shall see, different theories of administrative state legitimacy lead to different implications for major questions avoidance. This Part focuses on four prominent theories, which vary based on the source to which they ascribe the administrative state’s legitimacy: (1) presidential legitimacy, (2) legislative legitimacy, (3) expert legitimacy, and (4) participatory legitimacy.

A. Presidential Legitimacy

Probably the most prominent normative theory of the administrative state in American legal thought today locates the source of agency legitimacy in the presidency.¹³⁰ The leading exponent of the presidential legitimacy theory in the legal academy—before she became Solicitor General and then Associate Justice of the Supreme Court—was Professor and Dean Elena Kagan.¹³¹ As then-Professor Kagan observed in an enormously influential 2001 Harvard Law Review article, “Presidents . . . are the only governmental officials elected by a national constituency in votes focused on general, rather than local, policy issues.”¹³² Paraphrasing the earlier work of administrative law scholar Jerry Mashaw, Kagan wrote that bureaucratic action thus “turns out to have a democratic pedigree purer even than Congress’s in our system of government.”¹³³

Kagan’s arguments regarding the democratic bona fides of presidential administration are both backward-looking and forward-looking. From a backward-looking perspective, “a President has won a national election,” and “this election, exactly because it was national in scope, probably focused on broad policy questions, conveying at least some information to the public about the future President’s attitude toward regulation.”¹³⁴ But in Kagan’s view, the “more important point is prospective.” As she puts it:

[B]ecause the President has a national constituency, he is likely to consider, in setting the direction of administrative policy on an ongoing basis, the preferences of the general public, rather than merely parochial interests. . . . In his first term, the desire for reelection alone provides a reason to do so, including through the adoption of policies favored by a majority of the voting public. And even in his second term, a President retains strong incentives to consider carefully the public’s views as to all manner of issues—incentives here related to his ambition for achievement, and beyond that for a chosen successor or historical legacy.¹³⁵

This theory of “presidential legitimacy”—whereby the exercise of executive power derives its democratic justification from the relationship between the President and “the People”—also bears implications for the relationship between the President and the agencies. According to Kagan’s theory of presidential legitimacy, “enhanced presidential control of administration serves democratic norms.”¹³⁶ This conclusion counsels for a more robust presidential role in regulatory decision-making.¹³⁷ It also favors a forthright acknowledgement that agency decisions emanate from the President. In Kagan’s words, “[t]o the extent that presidential supervision of agencies remains hidden from public scrutiny, the President will have greater freedom to play to parochial interests.”¹³⁸ By contrast, “[i]t is when presidential control of administrative action is most visible that it most will reflect presidential reliance on and responsiveness to broad public sentiment.”¹³⁹

From a presidential legitimacy perspective, the major questions doctrine seems 180-degrees backwards. Agency decisions of vast economic and political significance are the most likely to involve—and to be perceived by the public as emanating from—the President. Yet as Jodi Short and Jed Shugerman observe, the Court’s decisions in its major questions cases all focus on the role of “unaccountable bureaucrats”—a phenomenon that the authors describe as “presidential erasure.”¹⁴⁰ As Short and Shugerman write, the President “actively supported” and “took public responsibility for” each of the policies at issue in the Court’s major questions cases, and each of these policies provoked “vigorous” national debates.¹⁴¹ Nonetheless, “despite the special national democratic character of presidential involvement in policies that have been struck down in MQD cases, the President is virtually invisible in these opinions.”¹⁴²

Indeed, from a presidential legitimacy perspective, it is arguably “minor questions,” not major ones, that ought to trigger the most stringent judicial scrutiny.¹⁴³ Regulations that address minor questions are the least likely to reach the President’s desk, least likely to generate media coverage, and least likely to swing votes in a general election. Those rules are probably the most likely to advance the private objectives of special interest groups rather than the greater good of the public at large. Yet under current doctrine, regulations that address minor questions escape the searching judicial review that applies to high-profile rules that already have been approved by the President and are likely to be vetted by voters.

Given that the major questions doctrine makes little sense from a presidential legitimacy perspective, one might think that adherents to the presidential legitimacy theory would embrace major questions avoidance. As Daniel Farber, Jonathan Gould, and Matthew Stephenson argue, “if a legal rule produces undesirable effects, a workaround will generally be a welcome corrective.”¹⁴⁴ Major questions avoidance offers a possible exception to this general rule. Sliced rules under the same statutory authority, smaller rules under different statutory authorities, guidance documents, administrative adjudications, and enforcement actions all come with the democratic disadvantages of “minor questions”: they are less likely to reach the presidential level and less likely to garner media and voter attention. As Freeman and Stephenson write, “[i]f agencies downplay the real reasons for their rules, segment actions to make them seem more innocuous, or try to portray significant policy changes as technocratic, it becomes more difficult for the public to know what the executive branch is doing (and why), and therefore harder to hold the President to account for it.”¹⁴⁵ Thus, while the major questions doctrine is undesirable from a presidential legitimacy perspective, major questions avoidance is also undesirable from a presidential legitimacy perspective. Indeed, major questions avoidance may be particularly pernicious because—in Freeman and Stephenson’s telling—it redounds to the advantage of “[s]ophisticated, well-organized interest groups,” who are “more likely than ordinary citizens to understand how a collection of seemingly technocratic, incremental regulations contribute to some larger policy agenda.”¹⁴⁶ For presidential legitimacy theorists who value presidential administration precisely because it makes agencies accountable to a national electorate, major questions avoidance may be a cure even worse than the disease.

B. Legislative Legitimacy

Whereas the presidential legitimacy account locates the justification for administrative power in the executive (in other words, Article II), the legislative legitimacy account shifts focus to Article I: Congress. Members of the House and—for the last century¹⁴⁷—the Senate are the only national officials who are elected directly by the people. Ordinary citizens face a much higher chance of having their concerns heard by their Congressmember or home-state Senators than by the President. And, of course, the Constitution assigns all lawmaking powers to Congress¹⁴⁸—a fact that matters more to formalists than to functionalists but still may matter to functionalists who see some value in achieving “fit” between the constitutional framework and the practical reality of the modern administrative state.

The major questions doctrine fares better from a legislative legitimacy perspective than from a presidential legitimacy perspective. Given the scope and complexity of a modern state, it would be impossible for the legislature to weigh in on every policy choice, but policy choices of vast economic and political significance should be made by officials who are accountable to voters through direct elections—or so the argument goes. Risk-averse lawmakers who are concerned about their own reelection may be tempted to pass the buck for controversial decisions to administrative agencies,¹⁴⁹ but the major questions doctrine prevents legislators from sloughing off responsibility for those choices. Seen in this light, the major questions doctrine reflects the not-altogether-unreasonable proposition that Congressmembers must not be allowed to escape responsibility for important and controversial questions of climate change, public health, student debt, and so on—or if Congressmembers do pass the buck, they should have to fess up to it.

But while the legislative legitimacy theory leads to greater sympathy toward the major questions doctrine, it also—like the presidential legitimacy theory—engenders antipathy toward major questions avoidance. Sliced rules, lumped-together rules, guidance documents, administrative adjudications, and enforcement actions are not only more likely to escape presidential attention but also more likely to evade legislative oversight. Congressional committee hearings are an important mechanism through which the legislature regulates the administrative state: when members of the House and Senate have questions about an agency’s policies or performance, they can summon agency officials to appear before committees and—if dissatisfied with the officials’ responses—can restrict or condition funding, hold up appointments, or potentially amend the relevant statutes.¹⁵⁰ But these accountability mechanisms are less likely to operate when incremental regulatory actions fly below Congress’s radar.

From a legislative legitimacy perspective, then, the relationship between the major questions doctrine and major questions avoidance conforms to the general relationship between first-order rules and workarounds identified by Farber et al.: when the first-order rule (here, the major questions doctrine) “tends to produce desirable effects,” then “a workaround will generally be undesirable.”¹⁵¹ In this case, though, the undesirability of the workaround also calls into question the wisdom of the first-order rule. Insofar as the major questions doctrine results in agencies effectuating their policies through incremental regulations, guidance documents, administrative adjudications, and enforcement actions that escape legislative oversight, the upshot may be that the House and Senate will exert even less influence over the questions of vast economic and political significance that—according to legislative legitimacy theorists—ought to remain within the province of Congress. Thus, for legislative legitimacy theorists who are sympathetic to the major questions doctrine ab initio, the possibility of major questions avoidance should lead to reconsideration—and perhaps revision—of that initial view.

C. Expert Legitimacy

A third normative theory of the administrative state—which emerges most clearly in the academic writing of former Supreme Court Justice Stephen Breyer¹⁵²—focuses on the role of expertise as a legitimating force. In Breyer’s view, neither the public nor Congress is well-suited to understand and respond to health and safety risks.¹⁵³ For Breyer, the only hope for effective risk regulation lies with an expert bureaucracy. As he put it in Breaking the Vicious Circle, his last book on administrative law before joining the Supreme Court:

A bureaucracy’s rationalizing tendencies match the need for consistency through system-building and prioritizing; a bureaucracy’s use of expertise matches the need for technically related regulatory improvement; a bureaucracy’s insulation matches the need for protection from the vicissitudes of public opinion based on a single substance or on a single issue; and a successful bureaucracy can begin to build public confidence in its systems, thereby making its results more authoritative.¹⁵⁴

According to this view, the justification for the administrative state’s claim to authority rests not only in the technical qualifications of individual bureaucrats but also in the institutional structure through which bureaucratic expertise is developed and deployed.

Some version of the major questions doctrine might be justifiable under an expert legitimacy account. Indeed, the doctrine’s name traces back to a line in a 1986 law review article by then-First Circuit Judge Breyer: “Congress is more likely to have focused upon, and answered, major questions, while leaving interstitial matters to answer themselves in the course of the statute’s daily administration.”¹⁵⁵ Judge Breyer made this point in the context of Chevron and congressional intent: a statutory ambiguity is less likely to reflect an implicit delegation to an agency when the relevant issue is major.¹⁵⁶ But the major questions doctrine arguably also fits within Breyer’s larger theory of expert legitimacy. If an issue is non-technical—if it implicates substantive value judgments with respect to which expert agencies enjoy no particular advantage—then the case for shifting authority from Congress to the bureaucracy is relatively weak. The major questions doctrine potentially serves to sort between the issues on which Congress can be trusted to channel public values and the issues that require depoliticized bureaucratic management.

An expert legitimacy version of the major questions doctrine might differ from the version adopted by the current Court. Rather than emphasizing the economic or political significance of an issue, the expert legitimacy version might focus on whether the relevant regulation implicates the agency’s experience and expertise. Framed this way, some of the Court’s major questions decisions might be better understood as what Jody Freeman has called “wrong agency” cases: cases in which the Court denies deference to an agency because the regulation at issue lies within a different agency’s bailiwick.¹⁵⁷ Moreover, adherents to the expert legitimacy account might conclude that some of the Court’s major questions cases were wrongly decided on the facts.¹⁵⁸ But the major questions doctrine is not as anathema

from an expert legitimacy perspective as it might be from a presidential legitimacy perspective.

What about major questions avoidance? The possibility that agencies might split their rules into smaller pieces that fly below the radar of the President and Congress is less disturbing from an expert legitimacy perspective than from a presidential or legislative legitimacy perspective. As Jody Freeman and Adrian Vermeule observe, the Court’s decision in Massachusetts v. EPA,¹⁵⁹ arguably the jurisprudential apogee of expert legitimacy theory, is motivated by a concern about White House meddling in agency scientific judgments.¹⁶⁰ For expert legitimacy theorists, keeping certain regulatory issues off the President’s desk is a desirable feature, not a bug, of major questions avoidance. So, too, with respect to Congress: “Congress is highly responsive to public opinion, as it ought to be,” Breyer wrote in Breaking the Vicious Circle.¹⁶¹ “This means, however, that if the public finds it difficult to order risk priorities, Congress is also likely to find it difficult.”¹⁶² At least for risk regulation decisions such as the choices related to cigarettes, climate change, and COVID-19 transmission at issue in some of the Court’s major questions cases, major questions avoidance—insofar as it also leads to avoidance of presidential and congressional oversight—is not an entirely unwelcome outcome.

From an expert legitimacy perspective, major questions avoidance may bring ancillary benefits beyond simply keeping certain issues away from the President and Congress. When an agency slices a broad rule R into a series of smaller rules R_a, R_b, R_c, and so on for industries A, B, C, and so forth, the agency may be more likely to leverage industry-specific expertise—from its own ranks or from the ranks of other agencies—in crafting each of the smaller rules. Drafting a regulation for a single industry focuses the bureaucratic apparatus on the particular characteristics of that industry—characteristics that might be ignored in an omnibus rulemaking. Moreover, if the agency proceeds sequentially—for example, promulgating rule R_a for industry A before it applies rule R_b to industry B—then the agency may gain on-the-ground knowledge from its experience with industry A that allows it to design a better rule for industry B. And by the time the agency reaches industry Z, cumulative knowledge from earlier efforts may allow the agency to craft a significantly superior regulatory regime.

This conclusion comes with qualifications. First, the types of rules to which an expert legitimacy theorist may wish to apply the major questions doctrine—nontechnical rules of vast economic and political significance—are not the same rules that they may wish to see sliced into a series of sub-rules. From an expert legitimacy perspective, major questions avoidance is most beneficial with respect to technical regulations that are likely to escape the major questions doctrine in the first place. And second, the benefits of slicing from an expert legitimacy perspective do not necessarily carry over to other forms of avoidance. For example, expert legitimacy theorists might not welcome bypass via enforcement if enforcement shifts influence toward generalist litigators in the agency’s enforcement division or at the Justice Department. In those instances, major questions avoidance—rather than empowering subject-matter experts within an agency—may relegate them to the regulatory sidelines.

D. Participatory Legitimacy

A fourth normative theory of the administrative state locates the legitimacy of agency authority in public participation. This theory of participatory legitimacy draws inspiration from the work of John Dewey, a prominent figure in early twentieth century pragmatist and progressive thought. In Dewey’s words:

No government by experts in which the masses do not have the chance to inform the experts as to their needs can be anything but an oligarchy managed in the interests of the few. And the enlightenment must proceed in ways which force the administrative specialists to take account of the needs.¹⁶³

Blake Emerson, the leading exponent of participatory legitimacy theory in the American legal academy today, has identified elements of Dewey’s vision across the modern administrative state. According to Emerson, the notice-and-comment process “institutionalizes the Progressive concern for public participation in agency policymaking.”¹⁶⁴ As Emerson continues, “Courts then police this process to ensure that agencies draw reasonable conclusions from the comments they receive, address all significant comments, and ensure that all major policy choices are sufficiently ventilated.”¹⁶⁵ The result is democratic legitimation of a different sort from what is contemplated by Kagan’s presidentialist account—a form of democratic legitimation that depends less on votes than on voice.

For Emerson, both the major questions doctrine and major questions avoidance are normatively problematic. “The problem with the [major questions] doctrine,” Emerson writes, is “that it discounts and short-circuits rational public deliberation between administrative officials and the public at large.”¹⁶⁶ The problem with major questions avoidance is even more acute. In particular, Emerson anticipates that the doctrine will lead agencies to gloss—to explain their decisions on questions of vast economic and political significance in highly technical terms. “This retreat into technocracy will further imperil democratic transparency,” according to Emerson, “because important value choices will be kept from public view, and dressed up in the supposedly neutral language of expertise.”¹⁶⁷

Participatory legitimacy theory—though it takes a dim view of glossing—may reach different normative conclusions regarding other avoidance strategies. Arguably, participatory legitimacy theorists should welcome slicing. From a participatory legitimacy perspective, smaller rules may be preferable to larger rules. While individuals have the formal opportunity to participate in the notice-and-comment process for all rules regardless of scope, any single individual’s voice is more likely to be heard in a smaller rulemaking than a larger rulemaking, since in the latter case, hundreds of thousands of other individual and organizational commenters are likely to drown out a lone voice. This participatory legitimacy argument for smaller rules runs parallel to the classic argument in the federalism literature for smaller jurisdictions: that “thicker forms of participation” such as contacting officials and attending civic meetings increase as jurisdictional size decreases.¹⁶⁸ On this account, the problem with major rules—like the problem with national governments—is that their scope is too broad, whether in subject-matter or geographic terms, to facilitate efficacious individual participation in their design.

Not all participatory legitimacy theorists are likely to be convinced by this argument, and this argument does not apply to all other forms of major questions avoidance. A possible participatory benefit of larger rules is that they are more likely to generate media coverage and debate, facilitating the “value-oriented process of public engagement” that, per Emerson, is key to participatory legitimation.¹⁶⁹ The benefit of greater opportunities for individual voice in the small-rule context must be weighed against the benefit of greater public attention for larger rules. Moreover, the tentative argument for slicing on participatory legitimacy grounds does not apply to bypass: guidance documents—if they do not go through notice-and-comment—as well as administrative adjudications and enforcement actions deprive the public of the participatory opportunities that notice-and-comment rulemaking allows. So, participatory legitimacy theory’s verdict on both the major questions doctrine and major questions avoidance appears to be mixed: a doctrine that incentivizes agencies to slice their larger rules into smaller pieces may yield some participatory benefits, but other responses to the major questions doctrine generate participatory costs. The justification for the first-order rule may thus depend on which workaround predominates.

***

Summing up so far: We have sought in this Part to answer a relatively narrow normative question: is major questions avoidance desirable? Attempting to answer that narrow question requires a broader normative theory of administrative state legitimacy. Different normative theories of administrative state legitimacy bear very different implications both for the major questions doctrine and for major questions avoidance. Moreover, thinking through the phenomenon of major questions avoidance from multiple normative perspectives yields fresh insights regarding the relationship between first-order rules and workarounds in public law.

The next (and final) Part shifts focus from the administrative state to the judicial branch: how should courts respond to major questions avoidance? For presidential legitimacy theorists, the answer is easy: the major questions doctrine should be eliminated, in which case we would not need to worry about major questions avoidance. Meanwhile, expert legitimacy theorists and participatory legitimacy theorists may not necessarily see major questions avoidance as a problem to be solved—at least when avoidance takes the form of slicing (and in a similar vein, lumping). But for legislative legitimacy theorists, major questions avoidance poses a genuine dilemma: avoidance has the potential to undermine the benefits that legislative legitimacy theorists ascribe to the major questions doctrine. Indeed, the major questions doctrine—to the extent that it incentivizes avoidance—may be counterproductive to legislative legitimacy theory’s larger goals. Yet, as we will see in the next part, crafting an effective judicial response to major questions avoidance will prove to be a Herculean—and perhaps Sisyphean—challenge.

IV. Major Questions Anti-Avoidance

Anti-avoidance rules abound in American law. For example, the Bank Secrecy Act’s anti-avoidance rule prohibits individuals from splitting larger cash transactions into smaller ones to evade the Act’s $10,000 reporting threshold—a practice colloquially known as “smurfing.”¹⁷⁰ Anti-avoidance rules in bankruptcy law such as the fraudulent conveyance and fraudulent transfer provisions prevent debtors from evading creditors’ efforts to enforce valid claims.¹⁷¹ Tax law—in particular—is replete with anti-avoidance rules, including the economic substance doctrine,¹⁷² the substance-over-form doctrine,¹⁷³ and the step transaction doctrine.¹⁷⁴

Courts typically apply anti-avoidance rules ex post—after all, the relevant avoidance actions have occurred. For example, under the step transaction doctrine, a court or the IRS will look retrospectively and wholistically at a series of completed steps and assess the federal tax consequences based “on a realistic view of the entire transaction.”¹⁷⁵ Theoretically, a major questions anti-avoidance rule could be applied ex post or ex ante. In the ex post version, the court would consider whether sequential regulatory actions, taken together, resolve a question of vast economic and political significance. In the ex ante version, the court would seek to intervene at the beginning of the sequence. As we shall see, both the ex ante and ex post versions lie within the bounds of imagination, but courts that seek to instantiate either strategy in the real world will encounter formidable challenges.

A. Ex Ante Anti-Avoidance

Ex ante anti-avoidance is easiest to conceptualize in the context of slicing. Imagine that an agency applies rule R_a to industry A and that the single-industry rule would not itself trigger the major questions doctrine. Now imagine that the same statutory theory that justifies the application of rule R_a to industry A also would authorize the application of R_b to industry B, R_c to industry C, and so on, all the way to industry Z, and that rules R_a through R_z would have a combined effect of vast economic or political significance. An ex ante version of major questions anti-avoidance would allow a regulated party in industry A to challenge rule R_a on major questions grounds, even though the sequence of rules might not cross the majorness threshold until much later down the line.

An ex ante version of major questions anti-avoidance would encounter serious difficulties in practice. First, the ex ante version would require courts to anticipate all—or at least many—of the possible regulations that follow logically from the statutory interpretation that justifies R_a. Only then could courts begin to evaluate whether these regulations, considered cumulatively, rise to the level of majorness. Many commentators have observed that this latter step—the determination of majorness—is itself an unmanageable inquiry.¹⁷⁶ As Ronald Levin writes, “criticisms of this sort should be taken with a grain of salt” because “[m]any administrative law doctrines implicate judgment calls,” but “[i]n this instance,” the manageability critique “is well founded.”¹⁷⁷ An ex ante major questions avoidance doctrine would be doubly difficult from a judicial manageability perspective—perhaps much more than doubly, because the first step (conjuring up regulations that do not yet exist) places a much heavier tax on the judicial imagination than determining whether an already-existing regulation implicates a major question. The difficulty is especially daunting when avoidance takes the form of lumping rather than splitting: judges will have to imagine not only the possible applications of a single statute but also possible similar uses of other statutes that the agency has not yet invoked.

To be sure, a court that is dead set on advancing a deregulatory agenda may be tempted to test out an ex ante anti-avoidance doctrine anyway. But judges—even deeply ideological judges—still usually assign some weight to other values, such as predictability and judicial economy. Even for judges with strong conservative or libertarian leanings, an unpredictable and unmanageable ex ante avoidance doctrine may prove to be a game not worth the candle.

Along with judges, regulated parties may shy away from an ex ante version of major questions anti-avoidance. Consider the dilemma facing a regulated party challenging the application of rule R_a to industry A. To prevail on an ex ante anti-avoidance theory, the challenger would have to make two showings: (1) that the same statutory interpretation that justifies the application of rule R_a to industry A also would justify the application of R_b to industry B, R_c to industry C, all the way through R_z for industry Z; and (2) that rules R_a through R_z rise to the level of majorness when assessed in the aggregate. If the challenger wins at the first step but not the second—if the court (1) agrees with the challenger that the agency’s authority to apply rule R_a to industry A also implies its power to promulgate similar rules for B through Z but (2) disagrees with the challenger’s claim that the resulting regulatory bundle would reach the majorness threshold—then the challenger will have blazed a path for much more extensive regulation in the future. And given how amorphous the majorness standard is,¹⁷⁸ litigants can rarely be confident at the outset of the first step that they will prevail if they reach step two.

Granted, a firm in industry A may not care about throwing its counterparts in industries B through Z under the bus. The calculus could change, though, if the firm is a multi-sector conglomerate with subsidiaries not only in industry A but also sprinkled across the rest of the alphabet. Likewise, a firm may be reluctant to press an ex ante avoidance argument if A, B, C, and so forth—instead of representing different industries—represent different products made by the same factory, different pollutants emitted by the same facility, or different trade practices of the same company. In those cases, winning a half-victory in an ex ante anti-avoidance case amounts to scoring on one’s own goal.

None of this is to say that litigants will never raise ex ante anti-avoidance arguments or that these arguments will never succeed. At least debatably, Utility Air Regulatory Group v. EPA presents a real-world example of ex ante anti-avoidance. In that case, the EPA argued that the Clean Air Act authorized it to regulate carbon dioxide and other greenhouse gas emissions from stationary sources that release 100,000 tons or more of carbon dioxide equivalent units each year.¹⁷⁹ The Supreme Court, in a majority opinion by Justice Scalia, observed that the same statutory theory would allow—indeed, would require—the EPA to regulate emissions from units that release just 100 to 250 tons of carbon dioxide equivalent units each year, which would sweep in “millions[] of small sources nationwide.”¹⁸⁰ The Court held that the more expansive rule would trigger the major questions doctrine even though the EPA had not yet (and probably never would) assert such far-reaching authority. “EPA’s interpretation . . . would bring about an enormous and transformative expansion in EPA’s regulatory authority without clear congressional authorization,” the Court stated.¹⁸¹ “We expect Congress to speak clearly if it wishes to assign to an agency decisions of vast ‘economic and political significance.’ ”¹⁸²

Utility Air is an unusual case. There, the EPA explicitly acknowledged that its statutory interpretation would open the door to the regulation of millions more facilities.¹⁸³ In other words, the agency connected the dots from Rule R_a to R_z itself. Utility Air thus did not require litigants to make the highly risky move of arguing for a more expansive understanding of an agency’s authority, nor did it require courts to embark on an unguided imaginative journey into the land of regulatory hypotheticals. These unusual features of Utility Air help to account for the willingness of industry litigants and Justices to travel down the ex ante anti-avoidance path. In other cases, the difficulties of ex ante anti-avoidance from both a judicial-management and litigation-strategy perspective are likely to encourage a greater emphasis on the ex post alternative.¹⁸⁴

B. Ex Post Anti-Avoidance

Whereas ex ante anti-avoidance requires a court to anticipate what future regulations might follow from an agency’s interpretation of a statute, ex post anti-avoidance allows courts to adopt a wait-and-see approach. Consider again the example of an agency sequentially applying a series of rules (R_a, R_b, R_c, and so forth) to different industries. Ex post anti-avoidance would let a litigant challenge a later rule in the sequence (say, R_z) on the ground that rules R_a through R_z—in combination—trigger the major questions doctrine. Thus, ex post anti-avoidance averts two of the major difficulties facing ex ante anti-avoidance: (1) ex post anti-avoidance does not require litigants to argue for a more expansive understanding of agency authority, and (2) ex post anti-avoidance does not require courts to conjure up rules that do not yet exist.

For these reasons, major questions anti-avoidance—to the extent that it ever takes shape—is likelier to crystallize in ex post rather than ex ante form. Still, ex post anti-avoidance encounters difficulties of its own. The first is jurisdictional: even if a court concludes on a challenge to rule R_z that the combination of rules R_a through R_z trigger the major questions doctrine, regulated actors in industry A may not be party to the case involving Z. Moreover, the court’s anti-avoidance decision in the Z case may have uncertain implications for A, B, and C, as the agency may have additional area-specific rationales for its rules in those industries that require individualized adjudication. Thus, the class action mechanism may be a poor fit for ex post anti-avoidance cases,¹⁸⁵ requiring a flood of follow-on cases in order to wipe the regulatory slate clean.

Aside from the jurisdictional challenges (which may turn into docket management challenges if an ex post anti-avoidance decision for industry Z sets off a deluge of follow-on suits from regulated parties subject to earlier rules in the sequence), ex post anti-avoidance confronts courts with the challenge of determining which rules are sufficiently similar that they should be considered as part of the aggregate that is analyzed for majorness. Not all regulatory sequences will announce themselves as clearly as the alphabetical examples in this Article. And the aggregation challenge will prove particularly burdensome in the lumping context, where aggregation requires a comparison of regulations promulgated under different statutory authorities. Granted, courts make difficult determinations of similarity in other settings—ranging from anti-discrimination law to antitrust law—though, in many of those settings, courts struggle with the similarity inquiry.¹⁸⁶ What we can say with confidence is that while ex post avoidance may not be impossible, it will place new doctrinal-development demands on the judiciary.

Finally, the most significant challenge for ex post anti-avoidance is that it may come too late to change on-the-ground realities. Most of the Court’s major questions cases—including the COVID-19 vaccine mandate case,¹⁸⁷ the Clean Power Plan case,¹⁸⁸ and the student loan case¹⁸⁹—reached the Court in a pre-enforcement posture. Once a rule has gone into effect and parties have begun to comply—once vaccine doses have gone into arms or scrubbers have been installed on power plants—those regulatory consequences are difficult to undo. That was the rationale for the Court’s Abbott Labs doctrine favoring pre-enforcement review of regulatory action: if a court decision was to shield regulated parties from a rule’s consequences, the decision ought to come before parties “change[d] all their labels, advertisements, and promotional materials,” “destroy[ed] stocks,” and “invest[ed] heavily in . . . new supplies.”¹⁹⁰ With ex post anti-avoidance, by contrast, rule R_a might remain in force for industry A for several months or years before a court concludes in an industry Z case that the agency’s sequence of rules R_a through R_z trigger major questions scrutiny. Thus, even if courts can overcome the judicial manageability challenges of ex post anti-avoidance, agencies still will have opportunities to reshape entire industries before ex post anti-avoidance cuts off their regulatory efforts.

Conclusion

Major questions avoidance illustrates the concept of question size elasticity in both directions. Not only can a larger regulatory question be subdivided into several smaller ones, but the seemingly self-contained topic of major questions avoidance also inspires much larger theoretical and empirical inquiries that go to the heart and soul of the modern administrative state. Predicting the probability of major questions avoidance required us to delve deeply into the motives of agency officials. Evaluating the normative desirability of avoidance necessitated a broader theory of administrative state legitimacy. And playing out the chess match of anti-avoidance highlighted the limits of judicial power: when agencies respond strategically to new administrative law doctrines, courts will struggle to counter the agencies’ moves—especially when the clock is running and regulations that are in force only temporarily can have permanent practical effects.

With respect to all the major questions raised by major questions avoidance and anti-avoidance, our answers at this early stage are—and can be—only tentative. What already seems clear, though, is that careful and critical reflection on the empirical, normative, and jurisprudential dimensions of major questions avoidance and anti-avoidance can generate insights that travel far beyond the major question doctrine’s domain. Mapping and exploring the terrain of major questions avoidance and anti-avoidance can give us a clearer view of the theories that justify agency power and the extent to which that power can be constrained by the judiciary. In the end, major questions avoidance and anti-avoidance—whether or not they are desirable developments—have the virtue of offering us a new, richer, and more nuanced perspective on both the legitimacy and the adaptability of the modern administrative state.

98 S. Cal. L. Rev. 1497

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Daniel J. Hemel*

*Professor of Law, New York University School of Law. For helpful comments, the author thanks Beau Baumann, Blake Emerson, Barry Friedman, Jonathan Gould, Oren Tamir, and participants in workshops at the New York University School of Law and the University of Southern California Gould School of Law. Bhargav Tata provided excellent research assistance.

The Supervisory Power of State Supreme Courts

October 2025October 2025Adam B. Sopko*

State supreme courts are currently center stage as they face some of the most important issues of our time. But nearly all of the attention is focused on their ability to interpret state constitutions to provide rights guarantees that the U.S. Supreme Court has diminished or eliminated from the Federal Constitution. While important, judicial review is but one instance of a state high court’s authority. Their supervisory power—the primary source of judicial administrative authority—has served as a vital source of policymaking power to safeguard individual rights and enhance the public good. Supreme courts have relied on their supervisory power to reimagine state criminal justice systems, reduce homelessness, strengthen voting rights, expand protections for immigrants, and more. Despite its significance, this feature of state court practice has gone virtually unnoticed. As advocates increasingly look to state courts to address more and more of society’s complex and consequential issues, this distinctive aspect of their power is worth exploring.

This Article unpacks the supervisory power by mapping its sources, applications, and limits. The supervisory power has a basis in all fifty state constitutions and enables supreme courts to oversee their judiciary’s workload and operations. But as this Article shows, high courts are using this power beyond the humdrum of judicial administration to enhance substantive rights and remedies, facilitate their law development and agenda-setting capabilities, and mediate interbranch frictions. This Article’s core claim is that these more expansive applications of the supervisory power are generally defensible based on the evolution of state judiciaries and supreme courts’ unique roles in state governments. The twentieth century saw a dramatic reimagining of state high courts from inferior instruments for the other branches to powerful, coordinate members of the state policymaking apparatus. In addition to overseeing the judiciary’s operations, the supervisory power thus plays an important role in a high court’s ability to contribute to state governance.

This account of the supervisory power is broad but not unlimited. The Article highlights the supervisory power’s internal and external limits and sketches its metes and bounds to help frame its future applications. The Article then considers this judicial practice within larger debates on judicial policymaking and state constitutional structure. It engages with critiques of a more active judicial role and lawmaking powers. It explains that the key institutional assumptions behind such assessments do not map so easily onto the unique structure of state judiciaries. Stepping back, the Article encourages a broader but more nuanced view of state judicial power and the function of state high courts that wield it.

Introduction

In recent years, advocates have increasingly looked to state judiciaries to serve as a backstop against federal rights retrenchment.¹ More and more, state high courts are taking up some of the most consequential issues of our time, ranging from abortion rights and climate change to gender and racial equality.² Driving this turn to the states is the realization that state supreme courts can interpret state constitutions to provide greater rights protections than their federal counterpart.³

But as some court scholars have reminded us, a narrow focus on judicial review risks an incomplete understanding of how these institutions function.⁴ For those who study state courts, limiting our attention to conventional features of judicial power is more likely to result in undertheorized conceptions of what it is state courts do. However, for those looking to state courts as a possible response to regressive federal policies, such a singular view risks overlooking the full potential of state judiciaries. Indeed, for state high courts, their supervisory power—the primary source of their administrative authority—has played an essential part in their roles as constitutional innovators and in providing for the public good.

The supervisory authority is a freestanding source of flexible, discretionary power.⁵ It can supplement or enhance other aspects of court authority, as well as serve as a standalone basis for judicial action. It is not subject to many of the traditional limits on judicial authority, like justiciability and stare decisis, enabling courts to act where they might otherwise be unable to. And courts can use the power through adjudication as well as outside of resolving a case. Thus, at its most basic level, the power enhances a state supreme court’s capacity.⁶

The supervisory power has roots in all fifty state constitutions and provides the authority for supreme courts to manage the judiciary. It enables them to oversee judiciary personnel, control the court systems’ workloads, and supervise their general operations.⁷ Courts rely on this power to close courthouses due to inclement weather, impose workplace vaccination policies for judiciary personnel, manage complex litigation, revise and implement new jury instructions, and more.

However, this Article shows that state high courts use the power for much more than that. Indeed, despite its seemingly managerial focus, state supreme courts have relied on their supervisory power to craft sub-constitutional rights, strike statutes, and fill policy gaps left by the legislative and executive branches, among other more expansive applications.

In the past few years alone, the supervisory power has been at the center of some of the highest-profile cases in state courts. For example, following a report revealing a Massachusetts drug lab had fabricated evidence in thousands of cases over several years, the Commonwealth’s highest court fashioned a historic remedy, ordering dismissal of more than 24,000 convictions obtained as a result of the lab’s work.⁸ Several states have reformed their jury systems, emphasizing the harsh realities of racial bias in jury selection, porous nature of federal constitutional protections, and the bleak outlook at the U.S. Supreme Court for revitalizing relevant doctrines.⁹ Nearly a dozen supreme courts sought to limit the harms associated with homelessness in their states during the COVID-19 pandemic by preventing trial courts from hearing eviction proceedings.

Additional examples abound. High courts have relied on their supervisory power to craft sub-constitutional privacy rights; enhance administrative protections for incarcerated people; provide a right to civil representation for indigent parties; allow non-parties to appeal adverse decisions; and facilitate global settlements in complex civil cases.¹⁰ Further, courts have used their supervisory power to collaborate with other branches to make policies across a host of important areas, ranging from public health to criminal justice to housing.

Many of these examples drew national attention and helped highlight the possibilities and promise that lie in state institutions to make our legal system more just.¹¹ But while the spotlight shined on the outcomes themselves, what made them possible largely remained in the shadows—the courts’ supervisory power.

Like state high courts, the U.S. Supreme Court has supervisory power as well. To sharpen our understanding of the state-court power, we should consider its federal counterpart, too. As we shall see, the two differ in important ways. The federal supervisory power is rarely used, narrower in scope, and less powerful. Despite this asymmetry, the U.S. Supreme Court’s supervisory power has attracted a significant amount of scholarly attention.¹² That literature has largely viewed the power with skepticism.¹³ Critics question its legitimacy because it lacks a plausible source, is inconsistent with the Court’s role, and is in tension with federal separation-of-powers principles.¹⁴

Things look very different in the states. The supervisory power is a regular part of supreme court practice; its applications are more expansive, and it is significantly more potent than its federal analogue.¹⁵ Further, state supreme courts invoke the supervisory authority proactively, instead of waiting for parties to file suit, challenging certain institutional assumptions as to how courts exercise authority.¹⁶ Despite its significance, the state supervisory power has generated little scholarly attention. This Article thus shines a light on a consequential yet overlooked aspect of state court practice.

The Article’s core claim is that these more expansive applications of the supervisory power are a generally defensible aspect of state supreme court practice that follows from the modern institutional development of state high courts and can be defended as a distinctive feature of their role in state governance.

To advance this thesis, Part I begins by exploring where the supervisory power comes from. It first canvasses all fifty state constitutions, showing that the power has a basis in each state charter. That constitutional foundation alone, however, does not provide the supervisory power’s full genealogy. Part I thus turns to how the relevant state constitutional provisions came to be—as well as the institutional developments that prompted them. It traces the evolution of modern state supreme courts and their need for broad, flexible sources of power. During the twentieth century, state court reformers like Roscoe Pound and the American Judicature Society sought to elevate state judiciaries from simply a collection of courts to a meaningful, coordinate branch. Their efforts changed the structure of court systems, the role of supreme courts in state governance, and the scope of supreme court authority. They gave supreme courts more power—namely, the supervisory power—and revised the background assumptions that governed how courts use it. That background tells us where the supervisory authority came from and provides context for understanding the broader applications at the heart of this Article.

Part II presents a descriptive account of the supervisory authority, highlighting state high courts’ more expansive applications of the power. That account shows us that state supervisory practice is vast and varied. To account for this complexity, the Article provides a taxonomy that describes both the power’s many functions and its key attributes. It shows that the power is a highly flexible, potent form of judicial authority that enables supreme courts to effectuate the judiciary’s prerogatives as well as the public interest. This account is deepened by considering its federal counterpart. A brief review of the U.S. Supreme Court’s supervisory power demonstrates that state supervisory power differs in kind—a feature of state court practice that exceeds the boundaries surrounding its federal analogue.

Part II presents a broad, potent, and highly discretionary form of judicial power. However, the supervisory power is not unlimited. Part III explores its boundaries and limits. To account for the power’s breadth and flexibility, I draw on case law, state constitutional structure, and social science literature to propose a model I refer to as the zone of supervision that sketches the perimeter of the power’s permissible uses. I then turn to how courts are sanctioned when they step outside their zone of supervision. In short, state

constitutional structure provides tools to control and limit judicial power when courts exceed their zone of supervision.

Finally, Part IV considers the supervisory power’s theoretical and normative implications. At a conceptual level, this Article’s account of the supervisory power expands our understanding of supreme courts’ policymaking capacities and roles within a state’s broader governance apparatus. As a normative matter, Part IV considers the arguments against expansive notions of judicial policymaking and concludes such criticisms are based on institutional assumptions that do not track state judicial structures. Thus, broad uses of the supervisory power are not per se problematic; we should instead evaluate each use on a retail level with regard to a court’s own zone of supervision.

Stepping back, this Article makes three contributions. First, it offers a taxonomy that maps supreme courts’ varied uses of their supervisory power and its key attributes. Second, it plots the supervisory power’s limits and proposes a model that explains prior uses of the supervisory power and helps frame its application in the future. Finally, this Article makes a normative claim, arguing that supreme courts’ expansive uses of their supervisory power are a generally defensible and legitimate feature of state court practice.

One additional note before proceeding: this Article is in service of a larger project to understand state courts and their role in state governance. For years, these institutions have largely occupied a scholarly “backwater.”¹⁷ But as we have seen, that relative inattention to state courts has surfaced at the heart of some of the most pressing issues of our time, complicating those questions in the context of both state and federal public law.¹⁸ To that end, this Article’s thesis supports a broader call to conceive of state courts on their

own terms.¹⁹ We should not presume that frames and norms born in the federal courts are appropriate, ideal, or even applicable to state courts. Instead, these institutions deserve their own investment to surface their puzzles and better understand their possibilities.

I. The Creation of State Judiciaries and the Supervisory Power

The supervisory power is the lifeblood of state supreme courts. As this Article shows, it enables them to facilitate the judiciary’s day-to-day operations, protect their institutional interests, advance their prerogatives as a coequal branch in state governance, and more. To understand this power, then, we must evaluate both how it came to be and its relationship to courts’ institutional identities. This Part takes up that task. As shown in the first Section below, the supervisory authority is a constitutional power—it claims a constitutional basis in all fifty states, either through express provision or judicial interpretation of more general language.

But these constitutional roots do not tell us everything. We must also consider the creation of the underlying state constitutional provisions—and the institutions they empower. The second Section traces that story by exploring the institutional development of modern state supreme courts and its connection to the supervisory power. State court reform efforts during the twentieth century sought to elevate state judiciaries from simply a collection of courts to a meaningful coordinate branch. Those efforts changed the structure of court systems, their role in state governance, and the scope of supreme court authority. They gave supreme courts more power—namely, the supervisory power—and revised the background assumptions that governed how courts use it. Those changes set the baseline for both the institution and modern supervisory practice.

Before turning to where the supervisory power comes from, we should note this Article’s definition of the concept. State courts have rarely provided a clear description of the power. They have largely relied on vague statements and citations to capture the wide universe of how they use the power.²⁰ This Article’s definition reflects that ambiguity but attempts to bring clarity to the concept through a synthesis of this distinctive court practice within states and across them.

The supervisory authority is a power that state high courts possess either because it is expressly provided by a state’s constitution or because courts have adopted it by construing more general constitutional provisions.²¹ It is the primary source of administrative authority for state high courts to oversee the judiciary. It facilitates judicial administration, personnel management, and general control of the court system’s workload and operations. Those categories include both judiciary policymaking and case management decisions.²² While this power may at times implicate other aspects of supreme court authority, like regulatory oversight of the practice of law and judicial discipline, courts typically understand these powers as distinct from their supervisory authority.

Figure 1 below approximates the relative relationship between the supervisory power and more familiar forms of judicial authority.

Figure 1. The Supervisory Power versus Other Forms of Court Power

These forms of power overlap because the supervisory authority is its own standalone source of power that courts use as the sole source of a decision. But courts can also rely on the power to supplement other aspects of their authority. For example, to enhance its powers of ordinary judicial review, a court might use its supervisory power to override justiciability defects or find that a party has violated a statute and use its supervisory power to enhance an ordinary remedy.

It can also supplement other distinct forms of judicial power, like courts’ disciplinary authority over judges. For example, a supreme court’s formal disciplinary authority may avail it of only a limited number of sanctions—suspending a judge or removing them—whereas the court can discipline judges in other ways that fall below such penalties via the supervisory power, like transferring a case away from a judge for misbehavior that does not rise to the level of formal suspension or removal. These brief examples highlight the supervisory power’s hallmark of flexibility and informality, which I discuss in more detail in Section II.A.

To be sure, this simplistic diagram does not fully capture the supervisory power’s nuance. That is best demonstrated through the examples provided in Part II. This rough sketch is designed to help complement the basic definition provided above as well as the more detailed historical and doctrinal discussions that follow.

A. State Constitutional Roots

State high courts in all fifty states claim a constitutional basis for their supervisory power. In thirty-two states, high courts locate the supervisory power in the text of their state constitution. The language differs somewhat from state to state, but formulations include “[g]eneral administrative and supervisory authority,” “administrative supervision over all the courts of the state,” “general supervision and control of courts of inferior jurisdiction,” “general superintending control over all inferior courts,” “administration and supervision,” and so on. These clauses vest this power in the supreme court, the chief justice, or both. Of these states, twenty-one have a clause that explicitly refers to a supervisory authority.²³ In the other eleven states, courts rely on the constitution’s general grant of judicial power or another specific clause,²⁴ infer the power from multiple clauses related to the judiciary,²⁵ or from the judiciary article as a whole.²⁶

A further ten supreme courts refer to their supervisory authority as an “inherent” power, one that necessarily flows from the structure of the state’s judiciary and the position of the court at the top of the judicial hierarchy.²⁷ One could fairly describe these states as constitutional as well, since the underlying judicial structure, like the supreme court itself, is a creature of the state constitution.

In another six states, the supervisory power is said to come from both the states’ constitutions and a statutes.²⁸ In the remaining two states, the source of the supreme court’s supervisory power is unclear; the high courts have either declined to offer an explanation or have offered competing explanations without a clear basis to suggest why one may be correct versus the other.²⁹

To be sure, there are additional nuances behind these descriptions and categories. In the hybrid states, all six supreme courts have said expressly that their power comes from both their statutes and their states’ constitutions. However, a close reading of their opinions suggests those may be more claims of form than of substance. Indeed, in five of those six states, courts have noted in footnotes or suggested in dicta that the statute simply recognizes the authority codified in the state constitution—it does not provide it—and that even if the underlying statutes were repealed, their power would not change.³⁰

While it is helpful to know that all state high courts recognize their supervisory authority as a constitutional power, that does not fully account for how courts use it. To deepen our understanding of the supervisory authority, we must consider how the underlying state constitutional provisions came to be by tracing the formation of modern state supreme

courts. As we shall see, that story helps explain this feature of state court practice and provides insights into its normative implications.

B. The Development of Modern State Supreme Courts

This Section reviews the institutional development of state supreme courts and the connection to their supervisory power.

It begins with the need for state judicial reform in the early twentieth century. The diagnosis for these changes came from Roscoe Pound, who argued in 1906 that America’s state courts were too disorganized and complicated, and that their operations and administration were subject to excessive legislative and executive oversight. At the heart of Pound’s critique was the observation that state governments had two branches—executive and legislative—and a collection of courts; they “d[id] not have any true judicial department.”³¹ This observation served as the central theme for the court reform movement.

This Section then examines the changes themselves and their relevance to supervisory practice. In brief, the various reforms to elevate state judiciaries to meaningfully serve as coordinate branches affected the structure of court systems, their role in state governance, and the scope of supreme court authority. Importantly, the court reform movement gave supreme courts more power—namely the supervisory power—and revised the background assumptions that governed how they use it. Those changes set the baseline for both the institution and modern practice.

1. The Need for Reform

From the colonial era through the nineteenth century, state judiciaries largely consisted of complex, fragmented networks of courts. Borrowing from the English tradition, there was a court for nearly every kind of case—admiralty, civil, criminal, equity, probate, et cetera—distributed across a multitude of jurisdictions—city, village, state, et cetera.³² Their jurisdiction often overlapped, and they relied on highly formal, complicated rules of practice and pleading.³³ Suits frequently bounced between courts for years due to being improperly pled for a given forum, and when a case finally reached the proper forum, courts often resolved it on procedural grounds rather than on the merits.³⁴ As a result, routine litigation was incredibly slow, unpredictable, and primarily an “elaborate contest of lawyerly arts.”³⁵

Institutionally, state courts were generally weak and insufficiently insulated from other branches, allowing them to intrude on judicial prerogatives and strong-arm their decision-making. Local governments were typically the source of funding for much of the early state court systems, creating perverse incentives for local political regimes to influence judicial behavior.³⁶ Similarly, legislatures asserted a significant amount of oversight into judicial administration, especially rulemaking.³⁷ They were typically slow to respond to necessary changes to procedural rules, made litigation even more complicated when they did, and used their rulemaking power for patronage and to advance partisan interests and patronage.³⁸

By the turn of the twentieth century, the public viewed state courts as too slow, complex, ineffective, and politicized.³⁹ Enter Roscoe Pound. In a (now famous) speech, The Causes of Popular Dissatisfaction with the Administration of Justice, Pound diagnosed the many flaws and inadequacies in state courts and proposed a solution: a unified court system.⁴⁰ He “attack[ed]” the existing approach to judicial administration in state courts as overly technical and inefficient, rendering courts largely ineffective.⁴¹ He would refine his model judiciary over the subsequent decades, but at the heart of his vision, which served as the intellectual foundation for the state courts we have today, was the goal that “[u]nification . . . result in a real judicial department as a department of government.”⁴²

Pound’s basic view was that judiciaries should consist of a fixed number of courts organized into two or three tiers (e.g., local and statewide trial courts and a supreme court), and that courts use a set of streamlined procedural rules to resolve cases on their merits more often and rely on a set of streamlined procedural rules.⁴³ He also emphasized the need to vest supervisory power in a supreme court, free from legislative override, to oversee the functioning of all judiciary business.⁴⁴ Without these elements, he argued, a state could not have a “true judicial department.”⁴⁵

2. State Court Modernization

Pound’s diagnosis and proposed intervention of a unified judiciary served as catalysts for broader efforts to reimagine state judiciaries. Over the twentieth century, leading scholars like Henry Wigmore and Arthur Vanderbilt, and national organizations like the American Bar Association and American Judicature Society, among others, all built upon Pound’s conceptual foundation by proposing a variety of model judiciary articles for states to adopt in their constitutions.⁴⁶ By mid-century, reformers were in accord that their stated mission could not be accomplished unless state judiciaries had the ability and authority to control their businesses.⁴⁷ This linkage between establishing state judiciaries as independent, coequal branches of government and centralizing control over their operations was a central theme of the reform efforts in the latter half of the twentieth century and is largely what spawned the supervisory power we know today.⁴⁸

Ensuring that supreme courts had the capacity to oversee the judicial branch and function as a coequal branch in state governance motivated many of the judicial innovations we see in current state constitutions. Consolidating and centralizing the many courts within state systems in favor of a clear hierarchy, with the supreme court at the top, ensured a clear chain of command and control over cases and administrative business. Supreme courts were given greater (in many instances, plenary) control over procedural and administrative rulemaking as well.⁴⁹ Together, these changes gave the judiciary absolute autonomy over workload—enabling the supreme court to transfer cases and judges to optimize court resources and craft rules that better met the needs of the judiciary and litigants.

One particular reform along these lines warrants additional discussion: the streamlining of supreme courts’ prerogative writ power. Prerogative writs—mandamus, habeas corpus, prohibition, certiorari, and quo warranto—date back to seventeenth-century England, where they “made up the heart of the supervisory powers of King’s Bench.”⁵⁰ At bottom, these extraordinary forms of relief provided control over lower courts to “secure the lawful and effective administration of justice.”⁵¹ Indeed, for much of their existence, “[t]he authority that a state supreme court exercised over lower courts was generally confined to [prerogative writs]” or writs of error—that is, what we might understand today as an ordinary appeal.⁵² Relief would be issued in summary fashion where remedies at law were unavailable or unable to address the alleged harm. These writs were tools to ensure justice was done if and when a lower court erred in some extraordinary fashion.

That early practice formed the basis for the power wielded by state supreme courts after the founding.⁵³ State high courts referred to their prerogative writ power in sweeping terms: “hampered by no specific rules or means,”⁵⁴ “unlimited,”⁵⁵ “plenary.”⁵⁶ This was because prerogative writs were designed to prevent an “injustice” caused by a lower tribunal, and such errors could come in many forms; thus, the remedial power necessarily had to be sufficiently flexible and adaptable.⁵⁷

Despite this intended flexibility, state prerogative writ practice nevertheless operated within the procedural norms of the time and thus was subject to the same complexity and formality that sparked the reform movement. Indeed, the broader effort to streamline procedure and practice in state courts included the prerogative writ system.⁵⁸ Innovations included “all writs” or “in lieu of prerogative writs” amendments in state constitutions.⁵⁹ These provisions vested more power in supreme courts to provide relief in instances that might not have fallen easily into existing categories and more discretion to grant relief notwithstanding technical errors from a petitioner that would have otherwise foreclosed a remedy under prior practices. In other words, distinct from ordinary appellate review, this reform enabled high courts to intervene at any stage of litigation to correct an error or omission that is sufficiently unfair or unjust.⁶⁰

In addition to prerogative writ powers, changes to state judicial articles granted supreme courts administrative powers, explicitly granting them policymaking power to issue orders and directives to govern judiciary and non-court personnel alike. Relatedly, courts were given regulatory authority over judges and the state bar in the form of disciplinary power.⁶¹ Reformers also recognized that these changes to court structure necessitated a “soft[er]” side to court business.⁶² As a truly coequal branch, judiciaries require the ability to engage in “high politics” to maintain their prerogatives.⁶³ Indeed, as one commentator noted, such capacity is “essential” to realizing the reform movement’s larger goal of elevating the judiciary above a mere collection of courts.⁶⁴ Formal design choices and informal norms, like placing the chief justice as the head of the court system, regularizing the chief’s political responsibilities, and creating government relations offices within the judiciary, for instance, help foster this capability.⁶⁵ All of these changes flow from the need for the supreme court to supervise and oversee

the operations of the court system and each resulted in an expansion of judicial power.⁶⁶

New Jersey was the first state to implement “modern court” reforms.⁶⁷ Numerous states followed suit in subsequent decades, as reformers and scholars continued to refine the ideal judiciary structure and model constitutional article.⁶⁸ This interstate variation sparked a substantial debate among scholars as to what constitutes a truly “unified” judiciary—that is, which features distinguish unified from non-unified states.⁶⁹ By the early 2000s, over half of state judiciaries referred to their court systems as “unified,” notwithstanding significant structural and administrative differences between them.⁷⁰ Due to the widespread, but inconsistent, approach to unification by courts and conceptual disagreements among scholars, commentators have increasingly downplayed the value of evaluating unification at a retail level, with a granular focus on precise constitutional provisions.⁷¹ Instead, viewing the concept at wholesale emphasizes the reformers’ goal of establishing state judiciaries as coordinate branches of government and the associated changes in judicial perceptions and identity.

3. State Supreme Courts and State Governance

The accretion of these reforms had a significant impact on the identity of state supreme courts and informs the supervisory practice as we know it today. Specifically, there are two overlapping effects from the court reform movement that offer support for this conception of the supervisory authority. One concerns the ascendancy of state high courts’ role as a policymaker in state governance. The other relates to the increasing importance of independence for the newly established concept of a coequal branch.

The modern court reform movement came on the heels of broader governmental changes at the state level. These changes significantly influenced the policymaking capacity of state high courts. As Alan Tarr has shown, twentieth-century court reform sprang from a larger effort to shift the largely plenary policymaking power away from state legislatures.⁷² Rather than a commitment to advancing the general welfare, legislators overwhelmingly pursued personal patronage and partisan interests.⁷³ Indeed, by the middle of the nineteenth century, it was apparent that organizing governance around the legislature, based on the idea that they are the most democratic, and thus most responsive branch, proved to be a mistake.⁷⁴

State constitutions were revised to place a substantial number of limits on legislative power, like single-subject rules, the creation of legislative sessions, and “positive” rights. These and related changes enhanced the level of judicial review applicable in state government. Relatedly, courts were increasingly seen as the primary “safeguard against slipshod government” in the states.⁷⁵ Thus, in addition to a more expansive conception of judicial power, these design choices supported the concept of a more active, engaged judiciary.

Further, as part of the larger project of decentralizing policymaking power, state high courts were folded more directly into the state governance apparatus. In addition to their existing ability to craft new causes of action under the common law, courts were given the power to oversee the regulation of the practice of law and judicial discipline,⁷⁶ and they were vested with the authority to exercise appointment powers,⁷⁷ direct prosecutorial discretion,⁷⁸ and issue advisory opinions.⁷⁹ Others were given responsibilities to oversee statutory reform and participate in the legislative apportionment process. Some were even tasked with determining when officials in coordinate branches are no longer able to discharge their duties.

In addition to diffusing policy and governance powers to the courts, other reform-era changes enhanced supreme courts’ policymaking capacity —most notably, the prevalence of discretionary appellate jurisdiction and the creation of intermediate appellate courts. These innovations shifted high courts from a position of mechanical error correction to one of law development. These conceptual changes were broadly felt too, as no one particular combination of reforms was necessarily responsible for shifting a state high court from a reactive, adjudicatory body that intervenes as a last resort, to an engaged, proactive agent of state governance.⁸⁰ Indeed, as Robert Kagan and others have shown, this story of institutional development reflects the “societal consensus” at the time that state supreme courts should serve as coequal participants in state governance who, like the other branches, wield their power to provide for the states’ general welfare.⁸¹

The second relevant factor is the increasing importance of judicial independence—specifically, what that means and its linkage to the supervisory power. Before the court reform movement, considerations of independence were focused on judges—ensuring they were properly insulated to make unpopular decisions—but not on the judiciary itself.⁸² This makes a certain amount of sense, as state judiciaries, as a singular branch of government, were functionally nonexistent, so there was no real institution to protect. They lacked a clear political head, relied almost entirely on the other branches for operations and administration, and were funded by local governments. Institutional independence thus came not from the judiciary’s standing as a branch of government but from the independence each individual judge enjoyed.⁸³

But the reform efforts changed this. As Robert Tobin and Michael Buenger have shown, what emerged is an institutional identity of state judiciaries.⁸⁴ As noted above, the modern court reform movement came on the heels of broader state-level governmental changes.⁸⁵ Those structural changes included experimenting with various methods of judicial selection, like popular elections and various formulations of merit selection, that would ensure greater independence of state court judges wielding this enhanced policymaking power.⁸⁶

Within these broader changes were the more specific judicial reforms discussed above. Relevant here, unification centralized more responsibilities in state judiciaries by assigning control over more programs and social services, vesting administrative and operational control in the judiciary itself —including budgetary decisions—and enhancing the scope of available judicial power to manage this construct.⁸⁷ As a result, the influence of state courts relative to coordinate branches grew tremendously.⁸⁸ Whereas in the past, state judiciaries posed a modest political threat to other branches, their elevation as a coordinate, unified branch thrust state courts deep into the political thicket. Their increased power and influence posed potential threats to the prerogatives and interests of other, now coordinate, branches.⁸⁹

The reform movement thus imposed more responsibilities for non-adjudicative services onto judiciaries, made them more publicly accountable, and increased the level of inter-branch friction. These changes reestablished a baseline assumption of both supreme courts’ role and authority.⁹⁰ These assumptions tracked the central themes of Pound and the other reformers, including the necessity that high courts wield a broad supervisory power to operate the newly established judicial branch.⁹¹ Further, the changes incentivized courts to develop identities that accounted for both their institutional interests as an independent branch of government, as well as the interests of the public, the primary source of accountability. It is in this institutional context that state high courts wield their supervisory power.

II. The Supervisory Power IN the U.S. and State Supreme Courts

Part I explored the source of the supervisory power by highlighting its constitutional basis in all fifty state charters. It further examined the historical context behind these state judicial articles and the broader institutional development that prompted them. At the center of that discussion is the growth of state judiciaries as meaningfully coequal branches, the expansion of the judicial role in state government, and the enhancement of supreme court power. That story provides helpful context for understanding the broader applications of the supervisory power at the heart of this Article.

This Part takes up the question of application by synthesizing the nature of the supervisory power and the ways state high courts use it. It provides a taxonomy that organizes the vast supervisory practice and distills the power’s hallmark features. To deepen our understanding of this aspect of state court practice, this Part considers the U.S. Supreme Court’s supervisory power, as well. That comparison further illustrates the breadth and scope of the state power and raises normative implications taken up in Part III.

A. State Supreme Court Supervisory Power

This Section provides an overview of the nature of the supervisory power as well as the ways state supreme courts use it. It draws on a survey of all fifty state high courts. The survey began with a review of judiciary articles in state constitutions as well as statutory codes to derive a set of keywords. Westlaw searches were then conducted for each state.⁹² Since documents germane to this study, like administrative orders, are rarely collected by Westlaw, judiciary websites were also searched. Due to the significant limitations on access to state court documents,⁹³ secondary sources were also consulted.

This Article’s primary descriptive contribution is surfacing and typologizing the many in which ways state high courts use their supervisory power beyond its quotidian administrative applications. To name a few, it can expand substantive rights and enhance remedies; facilitate supreme courts’ law development and agenda-setting capacities; and help mediate interbranch frictions. In short, the supervisory power expands state supreme court capacity. It can supplement or enhance other aspects of court authority, as well as serve as a standalone basis for judicial action. It is immune from many of the traditional limits on judicial power (e.g., justiciability) and can be wielded both outside and inside of adjudication. To be sure, this Article’s definition describes a vast landscape of judicial practice. As the first Article to provide a comprehensive review of the supervisory power’s more expansive applications,⁹⁴ greater explication is needed to understand the concept. This Part takes up that task by sketching the many uses for which state high courts rely on the supervisory power.⁹⁵ It then provides a holistic account of the nature of the power.⁹⁶

Uses

Uses of the supervisory power by state supreme courts are nuanced and varied. To demonstrate that breadth and complexity, this Section includes applications that are both representative and illustrative of state high court practice. This Section also provides a taxonomy to further conceptualize the power and its institutional implications.

One important descriptive insight this Article offers is that state court use of the supervisory power is not limited to the litigation context. Thus, this Section distinguishes between adjudicative and non-adjudicative uses.

a. Adjudicative

First consider the ways courts use their supervisory power in the course of adjudicating disputes.

i. Rights and Remedies

State supreme courts frequently rely on their supervisory power to reinforce constitutional and statutory rights. This most often comes in the form of ad hoc procedural rules or frameworks that enhance underlying substantive rights, like due process or protections against unreasonable searches. Courts also rely on the power to enhance or expand ordinary remedies. Some have even used their supervisory authority to craft substantive protections from outside their constitution’s bill of rights.

As to ad hoc rules and additional procedures, some state high courts have fashioned rules and procedures that exceed substantive protections under both the state and federal constitutions. For example, courts have enhanced the showing required for criminal defendants to waive counsel; strengthened protections for effective assistance of counsel; and extended the provision of assigned counsel to municipal court proceedings—all under the supervisory power.⁹⁷ Such applications are common among state high courts and, as discussed below, this aspect of state supervisory practice is distinguishable from the U.S. Supreme Court’s narrower approach.⁹⁸

While less common, some state supreme courts have used their supervisory power to craft sub-constitutional substantive rights. Here, courts are announcing a rule under the supervisory power (rather than, e.g., the Speedy Trial Clause or Free Speech Clause) but drawing on constitutional values and principles for its content. New York’s high court, for instance, has developed a privacy right based on the “spirit of the Constitution,” and the Michigan Supreme Court has crafted substantive protections for certain grand jury indictees.⁹⁹ These decisions resemble common-law-like reasoning and center both on an abstract value (e.g., fairness) as well as the proper functioning of the legal system. Indeed, the New Jersey Supreme Court’s “fairness and rightness doctrine,” a body of law that includes several sub-constitutional substantive and procedural rights, is the product of its supervisory authority.¹⁰⁰

Beyond rights, courts also rely on the power to enhance remedies. Specifically, courts use their authority to fashion extraordinary remedies for violations of constitutional and statutory rights and obligations.¹⁰¹ Along these lines, the Massachusetts Supreme Judicial Court’s order discussed in the introduction illustrates how some courts use their supervisory power as a way to provide broad, systemic relief.¹⁰² It is also used to fashion remedies for conduct that is not prohibited by statute or constitution but nevertheless violates notions of “justice,” “fairness,” and the “proper administration” of the criminal justice system.¹⁰³ The key insight here is that courts understand the supervisory power as sufficiently flexible to remedy the variety of forms unfairness and threats to the proper administration of justice may take.¹⁰⁴

The uses thus far have focused on systemic applications to address “pervasive” inefficiencies or injustices. But the supervisory power serves as a tool to correct perceived unfairness for individual litigants as well.¹⁰⁵ As explained in more detail above, this common feature of the supervisory power is a progeny of state high courts’ prerogative writ power.¹⁰⁶ Courts often refer to their supervisory power as a product or consequence of this historical practice.¹⁰⁷ In these cases, courts use their power, via original petition, interlocutory motion, or sua sponte, to correct some aspect of a case, often before a final judgment. The purpose behind this aspect of supervisory practice is “to ensure public confidence in the integrity and fairness of the judicial system.”¹⁰⁸ Accordingly, applications vary widely from revising discovery rulings¹⁰⁹ and correcting improper sentencing procedures¹¹⁰ to modifying the scope of lower-court rulings¹¹¹ and addressing explicit judicial bias mid-trial.¹¹² The representative case among all state judiciaries is where a lower court has erred, with respect to either applying binding law or discretionary decision-making, and where the resulting prejudice cannot be remedied on appeal. However, in some states, high courts have used the supervisory power along these lines where appellate relief was sufficient.¹¹³

ii. Law Development

As the courts of last resort in their respective states, supreme courts are tasked with addressing matters of first impression, updating precedents where necessary, and shepherding the state’s common law, among other law development responsibilities.¹¹⁴ The supervisory power plays an active part in supporting this duty. It serves as a tool to provide more control over what a high court decides and when it decides it.

First, courts rely on the power to reach the merits in cases—a necessary part of doctrinal development. Courts can sua sponte reach cases not presently before them by transferring suits pending in lower courts,¹¹⁵ as well as reach issues not fully developed or raised by parties once a case reaches their docket.¹¹⁶ Additionally, the supervisory power overrides many of the conventional limitations on judicial power and party presentation that may limit judicial review and thus limit a court’s ability to guide state law.

For example, supreme courts from Alabama to Hawaii have said traditional standing and mootness rules do not limit the court’s supervisory power, meaning they can resolve an otherwise nonjusticiable case.¹¹⁷ At least one court has said explicitly that stare decisis does not attach to the court’s supervisory authority;¹¹⁸ others have implied as much.¹¹⁹ In several states, supreme courts have said their supervisory power exceeds the boundaries of subject-matter jurisdiction.¹²⁰ Despite the traditional rule that “[o]ne who is not a party to an action . . . is not entitled to appeal from the judgment of a lower court,” the supreme courts of Iowa and North Carolina have relied on their supervisory power to review appeals filed by non-parties to the underlying suit.¹²¹ The high courts in several states have said filings are not necessary to invoke the supervisory power.¹²² Nor are cases that lack a statutory or constitutional basis for review necessarily beyond a court’s reach.¹²³

Once a case is before a supreme court, various party presentation requirements, like issue preservation, can narrow the scope of judicial review, limiting the reach of a court’s intervention. However, the supervisory power can override these rules as well.¹²⁴ Moreover, courts suspend customary finality requirements, which often exclude certain cases from appellate review until they have reached some level of resolution, enabling courts to reach the underlying merits sooner than they otherwise would.¹²⁵ The supervisory power can also override standards of review, a more subtle

feature of judicial review, like applying a plain error standard but not requiring a showing of prejudice.¹²⁶

Second, courts use their supervisory authority to develop the underlying substance of the law. Supervisory decisions not only presage state constitutional decisions; they set an analytical foundation to help frame the underlying right or value. For example, over a series of decisions, Alaska’s Supreme Court used its supervisory power to sketch a variety of procedures to protect witnesses who are compelled to testify.¹²⁷ In the cases, the court balanced the state’s prosecutorial interests with the risk that compelled testimony may expose the witness to criminal liability. In a third case, the court held that a subsequently enacted statute providing a form of compelled testimony violated the state constitution’s Fifth Amendment analogue, reasoning it exceeded the prior boundaries set out by the court’s supervisory power.¹²⁸ The court “piece[d] together” its prior supervisory decisions to provide the “scope” of the state constitution’s right against self-incrimination.¹²⁹ In these cases, courts draw on the rules, frameworks, values, and policies developed under the supervisory power to, as Chief Judge Judith Kaye put it, “nourish” the state constitution.¹³⁰

Finally, the supervisory power can help supreme courts assert more control over how they decide an issue. Specifically, its highly flexible nature and lack of traditional limitations allow courts to resolve issues temporarily, until internal or external factors provide the basis for a more permanent resting place, like a constitutional decision, amendment, or statute. For example, in cases raising novel questions of federal constitutional rights, courts have recognized that the U.S. Supreme Court has not yet decided the issue and instead used their supervisory power to address the challenged conduct until the U.S. Supreme Court reaches it.¹³¹ In instances where legislation is pending or would be preferred, supervisory authority can act as a placeholder until a relevant statute or regulation is enacted.¹³²

This feature of the supervisory authority has an intersystemic aspect as well. The power can provide stability for state law in the face of federal doctrinal churn. For instance, when a line of U.S. Supreme Court case law is less than clear, state high courts may develop a variety of interpretations before the U.S. Supreme Court finally clarifies the underlying rules. That clarification may reveal that a state’s interpretation was wrong, requiring a change in the law on the books in that state.¹³³ In these instances, some courts have chosen to retain their interpretation but as a matter of their supervisory authority rather than the relevant provision of the U.S. Constitution.¹³⁴ Alternatively, where a state high court has lockstepped the state constitution and the U.S. Supreme Court has “repudiate[d]” the underlying federal rule, some state courts have chosen to resolve the issue temporarily under the supervisory power to decide at a later date whether they wish to retain the old rule under the state constitution or re-yoke it to the U.S. Supreme Court’s new one.¹³⁵

iii. Interbranch Engagement

Some state supreme courts rely on the supervisory power to facilitate another institutional responsibility—engaging with other branches. This includes both collaboration and resistance. In both circumstances, the supervisory power serves as a flexible tool for courts to combine the expertise and interests of each branch and to more easily navigate inevitable frictions.

When collaborating with other branches, courts often develop policies that affect both the judiciary and the state’s legal system writ large.¹³⁶ The supervisory power’s open-ended nature helpfully provides a way to adapt and implement the interests, expertise, and views of the branches to the situation.¹³⁷ For example, the Arkansas Supreme Court’s supervisory power was central to its collaboration with the other branches in revising the state’s criminal code.¹³⁸ It relied on the authority to enact a revised set of procedural rules based on input from a commission consisting of representatives from all three branches, the bar, academy, and activists.¹³⁹

Collaboration might include operationalizing a broad policy objective announced by another branch as well. For example, during the COVID-19 pandemic, New Jersey’s governor issued an executive order allowing certain prisoners to apply for early release in light of certain health risks.¹⁴⁰ Invoking its supervisory power to implement the policy, the court crafted a “framework” and expedited procedure that marshalled judicial resources to effectuate the order while balancing due process considerations.¹⁴¹

The power can also help courts navigate interbranch tension, especially when it implicates the courts themselves. As with examples of cooperation, the supervisory power’s flexibility enables courts to tailor context-specific rules. For example, in response to a series of decisions from executive agencies perceived as coercive to the court system, the Delaware Supreme Court relied on its supervisory authority to hold that executive agencies do not have jurisdiction over judicial branch labor disputes (unlike public employee unions in other branches).¹⁴² Following a gubernatorial veto of judicial salary increases some considered necessary, Illinois’s high court used its supervisory power to invalidate the executive action and set aside procedural defects to enforce a lower court’s order requiring an increase in appropriations.¹⁴³

iv. Oversight

Finally, all state supreme courts, through individual justices, the chief justice, or an administrative office, are responsible for administering the judicial branch.¹⁴⁴ Though this Article is focused on uses of the supervisory power beyond its quotidian administrative applications, some courts have taken notably expansive views of their oversight responsibilities and their judiciary’s overall workload that are worth considering.

For example, the Arkansas Supreme Court has relied on its supervisory power to appoint an “independent consultant” to audit and recommend solutions to address chronic backlog in lower court districts.¹⁴⁵ In response to a constitutional amendment providing California’s lower courts with “unlimited” habeas corpus jurisdiction, the California Supreme Court promulgated a filing procedure to avoid confusion stemming from overlapping jurisdiction that would ensure an efficient and “equitable” case flow.¹⁴⁶ While these examples may seem routine on their face, the courts’ explanations for their choices center “important considerations of public policy” and other normative values. In that sense, these brief examples illustrate additional ways state high courts use their supervisory power to operationalize notions of the general welfare within the proper administration of justice.

Complex litigation is another example where supreme courts rely on their supervisory power to manage systemwide workload and where choice and values can enter the decision. These uses of the power often resemble federal multidistrict litigation practice but are ad hoc and based purely on a supreme court’s discretionary evaluation of what is best in a particular situation for the judiciary, litigants, and public.¹⁴⁷

Here, too, supreme courts have used this oversight aspect of the supervisory power to achieve normative ends through the active management of such mass litigation. For example, at a time when Philadelphia’s trial courts had among the largest asbestos dockets in the country, the Pennsylvania Supreme Court used its supervisory power to consolidate almost 2,000 cases and order all pending matters to proceed immediately to a nonjury trial.¹⁴⁸ At the heart of the court’s decision was its emphasis on achieving “timely justice.”¹⁴⁹ Similarly, Colorado’s high court coordinated a spate of water law cases in a single trial court and promulgated an ad hoc procedure to resolve them as efficiently as possible.¹⁵⁰ Animating the court’s order was its recognition that it is an integral part of the state’s lawmaking apparatus and that the complex cases could frustrate its ability to contribute to state water policy by overloading judicial resources.¹⁵¹

Beyond control over courts and global workload, the oversight function of the supervisory power includes control over judges, too. This use of the supervisory power is distinct from formal disciplinary proceedings.¹⁵² Supreme courts rely on the power to ensure individual members of the judiciary are properly “administ[ering] justice” and comporting themselves with the high court’s conception of fairness and equality.¹⁵³ Thus, race-conscious jury assignments that violate notions of equality, wielding judicial power in a way that is “oppressive and improper,” and presiding over cases in ways that fail to meet the supreme court’s quality standards are the kinds of conduct supreme courts rein in with their supervisory power.¹⁵⁴

b. Non-adjudicative

As judges and commentators have long observed of the federal courts, they are “reactive” institutions that lack a “self-starter,” meaning the judicial power requires “someone outside of the judicial system” to initiate it.¹⁵⁵

To be sure, the U.S. Supreme Court can and does set its own agenda by signaling an appetite for certain kinds of cases to external actors, selecting cases that advance their interests, and defining the questions presented to help ensure particular outcomes.¹⁵⁶ These instances of judicial choice constitute a form of policymaking but nevertheless are still limited by the Court’s reactive design.¹⁵⁷ Indeed, as Martin Shapiro and Alec Stone Sweet put it, “litigants activate” the Court, which, in turn, defines the “parameters” for how it impacts law and policy.¹⁵⁸

Along these lines, state supreme courts operate very differently. Relevant to this Article, wielding their supervisory power is not necessarily contingent on a litigant invoking the judicial machinery. Rather, state supreme courts can and do proactively use their supervisory power to craft policy, contribute to state governance, engage with other branches, protect their institutional prerogatives, and promote their own conception of the general welfare. It is this proactive nature of the supervisory power that enables state supreme courts to serve as more than a passive policymaker, as with their federal counterpart, but instead an active agent in state governance.¹⁵⁹

i. Policymaking for the General Welfare

In addition to the reactive applications above, supreme courts can and do use their supervisory authority as a proactive policymaking mechanism. Specifically, it serves as a source of power that enables courts to advance particular normative ideals and contribute to a state’s general welfare based on its evaluation of what is necessary. Consider some recent examples.

Fines and fees. The supervisory power played an important role in reducing or eliminating the imposition of fees and fines. While the issue is not new, the pernicious effects and racial disparities caused by over-reliance on such penalties and obligations attracted renewed attention in 2014 after a police officer killed Michael Brown in Ferguson, Missouri.¹⁶⁰ The U.S. Department of Justice’s subsequent investigation and report drew a national spotlight on the ways in which some courts and local governments use fees and fines as revenue generators.¹⁶¹ In response to evidence showing the race and class implications of such policies, several state supreme courts used their supervisory powers to rethink the role of these penalties, with a more just judiciary serving as their North Star.¹⁶²

For example, after reviewing a report from a committee tasked with studying the impacts of court fees, the New Jersey Supreme Court invoked its supervisory authority to dismiss nearly 900,000 outstanding municipal cases and over $7 million in fines.¹⁶³ It also narrowed the circumstances in which judges can impose fees and capped permissible amounts.¹⁶⁴ The court’s actions were driven by its conception of a just court system: one that does not allow local governments to use the judiciary as a means of extraction.¹⁶⁵ New Jersey was not alone—high courts in Illinois, Kentucky, Michigan, and Virginia, used their supervisory power to make similar changes to their respective court systems.¹⁶⁶

Housing moratoria. Another recent example arose during the COVID-19 pandemic, which, in addition to the public health crisis, prompted significant social and economic instability nationwide.¹⁶⁷ Among the myriad effects of these shocks was housing security. Indeed, a policy challenge that government at all levels faced during the pandemic was how to balance the public health impacts of mass displacement with the economic considerations flowing from the significant job and wage losses across the country.¹⁶⁸ During this period, state actors enacted a “largely unprecedented” set of housing policies to try and manage the crisis.¹⁶⁹ State supreme courts, it turns out, played a proactive role, using their supervisory authority to initiate and shape these policies.¹⁷⁰

The most common form of housing policy interventions were eviction moratoria, where supreme courts would severely limit, or prohibit entirely, court-ordered evictions. As with most state-level policy responses, interventions varied. Court-imposed moratoria differed in duration, scope, and reach.¹⁷¹ Courts also framed the underlying issue differently in their orders—a feature of the supervisory power. For some, their order defined the issue as eviction itself, whereas for others, courts saw themselves as wielding their supervisory power to help limit larger social issues, like homelessness and the continued spread of COVID-19.¹⁷² For example, the South Carolina Supreme Court suspended all pending and future evictions for a period of months in recognition of the “difficulties,” like “housing insecurity and homelessness,” the pandemic would cause “individuals.”¹⁷³ Tennessee’s high court prohibited all judiciary personnel from “tak[ing] any action to effectuate an eviction . . . based upon the failure to make a rent, loan, or other

similar payment,” due to “the increasing economic issues caused by this pandemic.”¹⁷⁴

In addition to moratoria, supreme courts also crafted policies and procedures that modified or supplemented their existing eviction processes. Supreme courts in Michigan and New Jersey, for instance, instituted diversionary policies requiring landlords and tenants to attempt settlement before an eviction action could be filed.¹⁷⁵ Notably, the courts here were not reactively deciding disputes between parties, but were instead proactively issuing policies to try and limit the perceived social and economic effects of a crisis affecting the state.¹⁷⁶

Problem-solving courts. The instances above are more recent examples of the ways through which state supreme courts have affirmatively used their supervisory power to contribute to state governance. Another use along these lines, perhaps with a longer pedigree, is the creation of problem-solving courts.¹⁷⁷ Supreme courts use their supervisory authority to create specialized dockets, procedures to manage them, and groups of judges to

hear the cases, all within the existing judicial infrastructure.¹⁷⁸ These choices are made “outside the crucible of litigation.”¹⁷⁹

Like the examples above, specialty courts are another way supreme courts are addressing issues they perceive as important and using their supervisory power to fashion responses.¹⁸⁰ Indeed, specialty courts originated as a judicial policy solution to increasing rates of recidivism among drug offenders and spikes in incarceration rates from a turn to tough-on-crime politics. As a former Chief Judge of New York’s judiciary explained, these courts enable judiciaries to affect a “quiet revolution” to give victims and communities “enhanced safety and a greater voice” and a way for the judiciary to meaningfully contribute to society without “simply proliferating legal process.”¹⁸¹ Supreme courts across the country have created and manage specialty courts that touch on a range of issues, from homelessness to guns, to mental health and opioids. It is not the existence of these courts that makes them notable, but the discretion available to state supreme courts to conceptualize and experiment with solutions to address issues they foresee as necessitating interventions to benefit the state’s health, safety, and general welfare.¹⁸²

ii. Interbranch Engagement

In addition to serving as a source of affirmative policymaking, the supervisory power provides a way for supreme courts to engage with other actors outside of litigation. Here, it provides a tool for courts to advance desirable policies and pursue institutional interests.

A common application along these lines was discussed above—courts craft ad hoc rules and procedures that influence the investigative and prosecutorial discretion of state executive branch officers.¹⁸³ But as we know, state courts operate in a federal system, and so we should expect interactions with the federal government as well. Indeed, some courts have

relied on their supervisory power to affect the scope of federal executive authority.

For example, during the Trump administration, U.S. Immigration and Customs Enforcement (“ICE”) officers significantly increased their presence in state courthouses, arresting people coming to court as defendants or witnesses in cases unrelated to immigration.¹⁸⁴ Relevant here, ICE typically relies on “administrative” warrants, which are not reviewed by a neutral party to determine if it is based on probable cause.¹⁸⁵ Contemporaneous studies of this dramatic change in federal policy showed the increased threat of immigration enforcement had a chilling effect on state legal systems, preventing “immigrants from reporting crimes and participating in court proceedings.”¹⁸⁶

Several state supreme courts, particularly in blue states, responded by enacting new policies pursuant to their oversight of their state’s court system. For example, the Oregon Supreme Court promulgated a rule that required a heightened showing from ICE in order to make an arrest within or around Oregon courthouses. The high courts in Connecticut, New York, and Washington enacted similar policies for their respective court systems.¹⁸⁷

Moving beyond the executive branch, high courts can and do use their supervisory authority as a defense against perceived incursions from the legislature or to assert their prerogatives over the coordinate branch.

Consider letters of address. These are formal letters issued by state high courts to coordinate branches that provide legal analysis of pending legislation or possible executive action.¹⁸⁸ In some sense, they are like advisory opinions. However, they differ in at least one important respect—advisory opinions typically require a request from another branch, whereas letters of address are issued sua sponte. For example, the Michigan Supreme Court has sent several letters to coordinate branches, as far back as the nineteenth century, noting that pending or recently enacted legislation was unlawful.¹⁸⁹ Pennsylvania’s Supreme Court issued a similar letter intended to “mak[e] [their] views known” that the state constitution prohibited application of state public records laws to supreme court rulemaking procedures.¹⁹⁰ Maine’s Supreme Judicial Court provided advice that pending legislation purporting to require cameras in courtrooms was unlawful.¹⁹¹ And Massachusetts’s Supreme Judicial Court issued guidance sua sponte concluding various statutes reclassifying certain members of judiciary staff as part of the executive branch were constitutional.¹⁹²

These examples illustrate ways supreme courts can use their supervisory authority to affirmatively engage with other branches, but the key insight is that the supervisory power enhances their ability to act affirmatively. This feature has two notable benefits. It increases their independence, since courts need not wait for a proper case challenging a coordinate branch’s actions that threatens judicial prerogatives. And it can minimize the “risk [of] creating and prolonging unnecessary tension between [the] branches of government.”¹⁹³

But it is the supervisory power that creates opportunities for supreme courts to consider and weigh these factors against their institutional interests and possibly act free from the confines of litigation.¹⁹⁴

Attributes

The prior Section explored various ways in which state courts rely on their supervisory power. Turning from the how to the what, the discussion below examines the nature of the supervisory power by reviewing its key attributes.

a. Freestanding

The supervisory power functions as a freestanding source of judicial authority.¹⁹⁵ It is distinct from conventional aspects of state judicial power, like judicial review and common lawmaking, as well as more distinctive manifestations, like attorney discipline. This has implications on the scope and availability of a court’s authority.

First, because supervision spans a court’s adjudicative and non-adjudicative authority, the power is not limited by a supreme court’s jurisdiction.¹⁹⁶ In other words, when a court’s administrative or operational interests are implicated, their power is not constrained by the various jurisdictional or procedural defects that might otherwise foreclose review.¹⁹⁷ Second, because the power is freestanding and constitutionally based, it means the supervisory power cannot be narrowed by statute.¹⁹⁸

b. Lower Showing Needed

In some states, supreme courts have has conditioned supervisory relief on a certain showing of prejudice, not unlike ordinary judicial review.¹⁹⁹ However, because it is a separate power, some courts have required litigants to make a showing to warrant relief that is correspondingly different from that needed to prevail on a constitutional or statutory claim.²⁰⁰ When invoking their supervisory power, the interests implicated go beyond just the rights of the individual litigant but encompass the court system’s prerogatives, as well.²⁰¹ Additionally, unlike a constitutional claim, courts often use the supervisory power to modify or create new procedures or policies rather than invalidate statutes, further altering the institutional interests at stake in litigation.²⁰²

c. Discretionary

The power is also entirely discretionary.²⁰³ To be sure, some courts have devised standards that purport to cabin its availability, but such decisions are purely a product of choice. For example, they ask whether the underlying issue presents an “extraordinary circumstance,”²⁰⁴ is “sufficiently compelling,”²⁰⁵ or “serves the interests of judicial economy.”²⁰⁶ Others lack a standard along these lines but instead describe use of the power as rare or infrequent to suggest there’s a presumption against its use.²⁰⁷ But these standards are judicially imposed and courts rarely explain why a given case rises or fails to meet these thresholds.²⁰⁸ Additionally, some courts have significantly increased their use of the supervisory power, notwithstanding

continued adherence to such presumptions, as in Connecticut, Illinois, and Montana.²⁰⁹

More often, courts decline to provide any kind of standard governing their supervisory power or explicitly refer to it as a choice.²¹⁰ The structural guardrails that ordinarily cabin discretion are similarly absent. Considerations like text, precedent, and parties’ arguments that generally impose some guidance—even if minimal—on courts in the adjudicative context are not implicated.²¹¹ The discretionary nature of the power is especially acute in the non-adjudicative context, as courts need not wait for a party or litigant to initiate it, thus removing one of the strongest limits on judicial power.²¹²

d. Flexible

In addition to its discretionary nature, a hallmark of the supervisory power is its flexibility.²¹³ This manifests in two respects. First, rather than a fixed set of applications or possible contexts in which the power might apply, courts typically see it as open ended. The supervisory power is primarily a tool that enables the supreme court to address whatever needs arise in its responsibilities overseeing the judiciary. Those needs often result from unpredictable external factors, like a once-in-a-generation pandemic or a national recession.²¹⁴ Thus, the power must necessarily be sufficiently adaptable. Relatedly, the supervisory authority maintains the integrity of a court system and ensures the proper administration of justice. This objective similarly requires a certain level of flexibility, as injustice can come in many forms.²¹⁵

Second, the underlying doctrine generated by the supervisory power is supple.²¹⁶ Conventional constitutional analysis is generally quite rigid; the permanence of constitutional rules, additional factors like precedent and methodological commitments, and the specter of U.S. Supreme Court review can lead to quite wooden forms of decision-making.²¹⁷ Supervisory decisions, in contrast, are explicitly understood by state high courts as closer to generic understandings of policymaking than mechanical application of existing law to fact.²¹⁸ They explicitly consist of interest balancing and weighing various considerations, some of which may be absent from the underlying case.²¹⁹ Further, these decisions are often—though not always²²⁰—applied prospectively, which further blunts the force of precedent, minimizes the cost of overruling, and offers courts the lawmaking latitude “comparable to that of legislatures.”²²¹

However, despite its highly flexible nature, the supervisory power is not without bite. Though the U.S. Supreme Court has never invalidated a statute under its supervisory power,²²² such a result is not uncommon among state supreme courts.²²³ Additionally, not only have state high courts narrowed the discretion of executive and legislative actors; they have also forced state actors to take discretionary action, like ordering the legislature to appropriate a specific amount of funding.²²⁴ As such, the open-ended nature of the power does not necessarily dilute its potency.

e. Normative in Nature

Orders and decisions issued under a supreme court’s supervisory authority are explicitly subjective in their content. To be sure, this is not to say they are arbitrary. Quite the opposite—decisions are often highly evaluative of the underlying needs of the judiciary, the state’s larger legal system, and, in some instances, the population writ large. Courts may draw on various sources of facts, policy, science, and so on, to inform their decision.²²⁵ But paired with its highly discretionary nature and few formal constraints, it is in this sense that the supervisory power is predominantly a means for courts to operationalize normative or subjective views of the state’s law and policy. The underlying premise of decision-making pursuant to the supervisory power is not what a prior case, statute, or other sources provide to address a given issue. Instead, courts start from a place that’s closer to first principles and ask what they “should” do.²²⁶

***

The discussion thus far has shown that the state supervisory power came as a result of broader state-level governmental reforms that elevated the political status of state judiciaries, expanded their role in governance, and enhanced their power. This Part has demonstrated that the power is a discretionary, flexible, standalone form of judicial authority that increases the capacity of courts and overrides many of the traditional limits on their power. Courts have used their supervisory power beyond the day-to-day management of the judiciary to enhance remedies, strengthen rights, and navigate interbranch relations.

To expand our understanding of the state supervisory power, we should also consider its federal counterpart. That comparison shows that the state supervisory authority is more expansive, potent, and legitimate. It raises important normative implications for how we evaluate this aspect of state

judicial practice and challenges some institutional assumptions concerning state high courts. I elaborate on these implications in Part IV.

B. U.S. Supreme Court Supervisory Power

Similar to state courts, the U.S. Supreme Court’s supervisory authority refers to powers that enable it to oversee the federal judiciary’s operations “in order to preserve the integrity of judicial processes.”²²⁷ However, as shown below, the federal high court’s supervisory power is narrower, significantly more limited, and generally considered an illegitimate feature of federal practice. Thus, the key takeaway from this brief comparison is that while state and federal supervisory powers share common elements, the former is a distinctive feature of state court practice.

Comparison

Looking at the Court’s use of the power as a whole, it largely falls along two tracks—ad hoc rulemaking and remedial enhancement.²²⁸

Cases fall along the first track when relevant procedural, statutory, or constitutional sources come up short.²²⁹ When the Court perceives an omission in relevant statutes or rules of procedure that affects the “quality” or proper functioning of federal litigation, it uses its supervisory power to address it.²³⁰ On the second track, the Court uses its supervisory power as an auxiliary form of remedial authority to execute statutory and constitutional policies. In these cases, the Court perceives that the existing enforcement mechanism fails to sufficiently implement a statute’s underlying objective or constitutional right’s core values, then uses the supervisory power to span the remedial gap. These features of the Court’s supervisory power are similar to the applications discussed in Part II.A—state high courts use their own authority along the same lines.²³¹

The federal supervisory power is also flexible, consisting largely of balancing by the justices. Some scholars have described it as “procedural common law” or “procedural lawmaking.”²³² Others have referred to supervisory decisions as “essentially legislative” in that the Court’s reasoning is more akin to policymaking than legal analysis.²³³ This, too, parallels the state supervisory power.²³⁴

Despite these similarities, there are significant differences between state and federal supervisory powers. Notably, the Court’s own power is limited to adjudication, unlike its state counterparts. Further, when it crafts ad hoc rules, the protections they afford litigants rarely exceed existing Constitutional limits—i.e., federal supervisory rules seldom offer more protection than the Constitution.²³⁵ And the Court has never invalidated a statute with its supervisory power. In these ways, it is fair to say that the U.S. Supreme Court’s supervisory authority is narrower and less potent than its state-level alternative.

Judicial Administration and Constitutional Structure

The differences between the state and federal powers can primarily be explained by structural features of the state and Federal Constitutions and their respective judiciaries.

As discussed in Part I, state court systems evolved into a unified model, placing the supreme court as the administrative head of the courts and centralizing in the high court operational powers and responsibilities. The federal courts followed a different path. Federal court reformers, like William Taft, pursued a decentralized design. While the Supreme Court is the highest court of the judiciary, administrative and operational responsibility is diffused across a vast network of judicial agencies.²³⁶

For example, the Judicial Panel on Multidistrict Litigation both consolidates complex civil cases in a single trial court for pretrial proceedings and fashions rules that govern relevant procedures.²³⁷ The Administrative Office for the federal courts oversees the judiciary’s pretrial supervision and probation services for criminal defendants.²³⁸ The Judicial Conference serves as the courts’ primary policymaking arm, developing policies to implement the myriad statutes governing the federal courts, as well as advising Congress on the federal judiciary’s needs and interests.²³⁹ Together, they create a constellation of supervision. Thus, whereas supreme courts administer state judiciaries, the federal court system is administered by the federal judiciary.²⁴⁰

Further, unlike state courts, the administrative power of the federal courts is almost entirely statutory.²⁴¹ This structural distinction raises institutional considerations as to the scope of the power courts wield and the source of the prerogatives behind it. Since the various judicial agencies are creatures of statute, many of the first-order policy choices are made by Congress rather than the Supreme Court.²⁴² Even where Congress delegates broad discretion to the judiciary, it is wielded by a vast bureaucratic apparatus, rather than a single decision-making institution.²⁴³ To be sure, the Chief Justice wields a significant amount of influence over this system, but the underlying structure is sufficiently decentralized as to allow for inter-agency conflicts and even for agencies to countermand the Chief Justice’s own prerogatives.²⁴⁴ In these ways, the structural distinctions between how state and federal courts are administered plays a substantial part in the scope of the supervisory authority available to the respective high courts.

Constitutional structure similarly contributes to the differences between the state and federal supervisory powers. The source of the federal supervisory power is contested in the literature,²⁴⁵ but the federal government can only exercise those powers provided for by the Constitution, and scholars generally agree, whatever its source, that Article III significantly limits its scope.²⁴⁶ Broad uses of the supervisory power is said to exceed these limits by providing the justices with a “freestanding” source of policymaking authority that enables them to resolve disputes based on normative assessments of justice and fairness, rather than a statute or constitutional provision. In other words, sketching public policy, crafting the suite of remedies available for violations, and determining the methods of enforcement are all issues that fall to nonjudicial branches. State constitutions, in contrast, limit and distribute powers rather than grant them, and as discussed in Part I, modern government reform allocated greater policymaking responsibilities to supreme courts and created the supervisory power as one of their primary tools to do so.

In sum, the U.S. Supreme Court has a supervisory power that shares several features with its state counterpart. It is flexible and has largely served as a source of policymaking power to craft ad hoc procedural rules and enhance remedies. However, the two differ meaningfully. The federal power is both rarely used and narrower in scope.²⁴⁷ It is limited to adjudication, rarely afforded parties the level of relief seen in state courts, and never served as the basis to invalidate a statute. These distinctions are largely products of the fact that state constitutions generally allocate more administrative policymaking power to state courts than their federal counterpart and that power is centralized in state supreme courts whereas in the federal judiciary it’s diffused across a host of actors.

III. Boundaries and Limits

The discussion thus far has described the supervisory power of state supreme courts and connected this feature of state court practice to the institutional development of modern state judicial systems. That analysis defends the broader uses of the power reviewed in Part II as both institutionally and constitutionally grounded. But this Article’s thesis is a qualified rather than wholesale defense of the practice. This Part thus considers the supervisory power’s limitations. As Part II showed, the supervisory authority’s applications are vast and the power itself quite discretionary. To account for this breadth and ambiguity, this Part proposes a model it terms the zone of supervision to sketch the supervisory power’s boundaries. It then discusses how state constitutional structure provides tools to sanction courts when they cross them.

A. Boundaries

This Section sketches the supervisory power’s metes and bounds through a model that both explains prior uses of the power and helps frame how courts might use it in the future.

The model relies on two variables drawn from the descriptive and institutional accounts above: the legalness of the underlying issue and its proximity to judiciary interests. Together, the variables create a two-dimensional space this Article refers to as the zone of supervision, which represents the idealized conception of the supervisory power. This perimeter demarcates the scope of a court’s supervisory power. Uses that fall outside the scope should be viewed with skepticism. Section III.B explores the various sanctions available when a court does wield its power beyond its zone of supervision. But first, this Section unpacks the model by exploring its two variables.

Legalness

Legalness here refers to the nature of the underlying issue or intended application.²⁴⁸ Based on this attribute, supreme courts may consider the supervisory power to be appropriate or ill-suited to addressing the question. In this context, legalness falls along a spectrum. The spectrum turns on the informal nature of the supervisory power and the fact that it overlaps with other forms of judicial authority. On the one end are applications of the power that are insufficiently legal or too policy-like. At the other end are applications that are too legal.

State high courts consider applications of the supervisory power as too policy-like when they implicate a multitude of competing interests and lack a basis to weigh them, or have multiple potential resolutions without clear criterion to evaluate them. For example, when asked to impose a requirement that jurors in a criminal proceeding identify their race before voir dire, the Connecticut Supreme Court declined, explaining that the central issue—the interaction between the ways jurors self-identify with the perceptions of prosecutors—was too complex.²⁴⁹ Iowa’s high court similarly refused to craft a rule under its supervisory power to require certain probation proceedings precede related criminal trials, explaining that such a rule implicates sufficiently complex questions of public safety best left to the legislature.²⁵⁰

At the other end of the spectrum are applications that are too “legal,” meaning courts decline to exercise their supervisory power because the issue calls for a more formal or durable source of power.²⁵¹ For example, North Carolina’s supreme court declined to use the supervisory power to reach the merits of an as-applied challenge to a statute in a consolidated case because it was appealed before any record development in the individual actions.²⁵² And Kansas’s high court refused to use its supervisory power to issue ad hoc relief, reasoning the precise remedy sought already existed in a statute.²⁵³

Proximity to the Judiciary

The supervisory authority’s purpose as a power supreme courts wield to oversee and manage the judicial branch serves as a boundary as well. Application of the supervisory power is sensitive to its relative proximity to the judiciary and its responsibility overseeing a state’s justice system.²⁵⁴ That is not to say the supervisory power is limited to contexts that only concern the judiciary, but it is to suggest that there must be a sufficient nexus between the policy or relief sought pursuant to the supervisory authority and judiciary operations and its interests.²⁵⁵

On one end is high proximity to the judiciary. While comparatively rare, there may be some contexts where supreme courts might see their intervention as unwarranted or inappropriate. This arises in areas where lower court discretion is typically expected, like decisions related to appointing counsel, courtroom management, contempt orders, and so on.²⁵⁶ But for the most part, situations with a significant nexus to judicial operations or interests will warrant use of the supervisory power.²⁵⁷

On the other end are issues that are too remote from the judiciary’s interests or administration. As the relationship between the judiciary’s interest in the proper administration of justice and responsibility for operations and the sought-after relief grows more attenuated, supervisory power is considered less appropriate. For example, crafting evidentiary rules or rules of criminal procedure is closer to the judiciary than announcing a rule under the supervisory power that would directly control law enforcement conduct.²⁵⁸ And sketching rules concerning public access to internal records for a component of the judiciary differs materially from an agency that is constitutionally separate.²⁵⁹

As noted, both variables—legalness and proximity to the judiciary—exist on spectrums. Bringing them together, we can see a sweet spot where the supervisory power is best suited or most appropriate. This Article terms the area the zone of supervision. It is in this space that courts should wield their supervisory power. Applications that fall outside its contours should presumptively be viewed as overreach. Figure 2 below serves as an illustration.

Two points of clarification are warranted. First, this model is not based on fixed points. In fact, the variables are contingent. As discussed in Part II, the power is highly discretionary and flexible. This adaptability allows courts to frame applications of the power in different ways that may place it within or beyond the zone of supervision.

Figure 2. Zone of Supervision

For example, consider again the pandemic eviction moratoria. Suppose two courts issue moratoria that are identical in every way except the reasons for them. Court A says it is invoking its supervisory power because it feels that the potential harms to unhoused people during a historic pandemic outweigh the economic harms to landlords. Court B explains that due to social distancing requirements, the number of cases the judiciary can process is significantly reduced and that it must prioritize criminal cases, custody disputes, and domestic violence hearings over eviction proceedings due to speedy trial requirements and liberty interests. The outcomes under either framing are essentially the same—no eviction proceedings—but one might reasonably think Court B’s moratorium is closer to the heart of its zone of supervision.

These choices reflect a linkage between how courts frame applications of the power and their understanding of the specific contours of their zone of supervision. To a certain extent, this is to be expected, as the contextual

nature of a given supreme court’s power is well documented in the literature.²⁶⁰ Indeed, interstate variation is not uncommon.

For example, consider how state high courts divided over a rule requiring law enforcement to record custodial interviews. Several courts considered the issue under state and Federal Constitutions as well as the supervisory power and split on the question.

The high courts in Minnesota, New Hampshire, New Jersey, and Wisconsin, for instance, understood the question to be well within the bounds of their supervisory powers’ zone of supervision, as it implicated their duty “to take all appropriate measures to ensure the fair and proper administration of a criminal trial.”²⁶¹ For the supreme courts of Connecticut, Kentucky, Maryland, and Vermont, though, the issue neither raised a constitutional question nor was it appropriate for supervisory relief and was thus best suited for the legislature.²⁶² There are other examples,²⁶³ and they

each illustrate how the variables within the model sketched above are not fixed across states but, due to the nature of the doctrine, are quite fluid.

Second, when an application of the supervisory power falls outside of the zone of supervision, it does not mean such a use of judicial power is inappropriate or illegitimate. Developing a rule or framework may be well within the court’s power—but just not its supervisory authority. For example, a court may determine requiring custodial interrogation of juvenile suspects is outside its zone of supervision, but it is required by the state constitution’s due process clause or a provision of a relevant statute.²⁶⁴ The supervisory authority is a standalone power and can thus supplement other forms of judicial power as well as serve as an alternative basis for a court to act.

Limits

A court’s zone of supervision is subject to both internal and external factors that police its boundaries. But both factors implicate the state’s political environment.

Internally, as multimember bodies, a supreme court’s composition is crucial to how and when it wields power.²⁶⁵ The supervisory authority is no exception. Thus, changes in a court’s composition can influence whether a given application of the supervisory power falls within the zone of supervision or should instead be seen as exceeding authority. For example, in the early 2000s, the Michigan Supreme Court experienced “deep divisions” along these lines.²⁶⁶ After decades construing the supervisory power broadly,²⁶⁷ a new majority of the court took a narrower view of its zone of supervision.²⁶⁸

While these internal factors can limit the supervisory power, the primary checks are external. Indeed, state constitutions “prioritize[] external checks on government more than internal checks.”²⁶⁹ Following the “first wave” of state constitutions at the founding, subsequent charters from California to Connecticut emphasized control of government through novel structural innovations, like single-subject rules, statewide gubernatorial elections (versus legislative selection), and the creation of referendum, initiative, and recall processes.²⁷⁰ It is these unique structural features that offer legal and political tools to constrain government authority.²⁷¹ Thus, the most consequential check on state judicial power is the state’s political processes, as defined by a state’s particular constitutional structure, norms, and history.²⁷²

Consider some of the relevant structural features common to state constitutions. The vast majority of justices stand for some kind of election. And even in the states that rely on a different method of selection, those mechanisms are not distorted by structures like the Electoral College. These features offer some level of majoritarian control over who is wielding judicial power. Further, with one exception, all state constitutions impose mandatory retirement, term limits, or both, which help facilitate churn as to court personnel. And the meaningful availability of popular initiative and amendment can similarly serve as a form of judicial sanction.²⁷³ Taken together, these and other structural considerations play, as Laura Langer has shown, “defin[ing]” roles as to the contours of a supreme court’s power.²⁷⁴

The coordinate branches similarly channel a state’s politics to influence the shape of a court’s power and what judges consider overreach or lack of compliance. As Meghan Leonard has observed, the coordinate branches of state government “have increased ability to fight back” against state supreme courts, relative to their federal counterparts.²⁷⁵

Both branches have constitutional and political tools that can narrow and check courts. In state’s that rely on executive appointment, for instance, governors have used this authority to reconfigure courts they think of as activist, a tack Govenor Chris Christie attempted in New Jersey.²⁷⁶ Executives have also used their fiscal powers to slash court budgets or offer lower court judges raises in exchange for support of measures that check supreme court power.²⁷⁷ As leaders with a statewide base, governors have also successfully galvanized popular support via direct democracy to bypass the legislature and override or countermand the courts.²⁷⁸

State constitutional structure and politics similarly afford legislatures several tools to meaningfully check judicial power. In the states where legislatures play a role in reconfirming or retaining justices, Thomas Gray has suggested the availability of such a sanction can and does chill potential abuses of judicial power.²⁷⁹ Legislatures can also use their impeachment power as a way to threaten or check judicial overreach.²⁸⁰ Similarly, there is a growing literature exploring the effects of court-curbing legislation at the state level that shows it can limit court power through direct (modifying substantive or procedural features) and indirect (galvanizing public support against the court) means.²⁸¹

State constitutions also provide the possibility of constitutional amendment, which can check judicial power and modify its undesirable applications. Studies of the constraining role of such measures suggest that using amendments to keep statutory and constitutional texts brief and detailed through frequent revision can “limit . . . the judiciary’s capacity to shape public policy” by narrowing their interpretive discretion and “minimiz[ing] the need for ongoing judicial determinations in the development of evolving public policies.”²⁸²

As a result of many of these structural features, most state high courts operate in closer proximity to their state’s political thicket than their federal counterparts.²⁸³ As discussed in Part I, this was an intentional design choice as part of court unification efforts. That said, not all courts and chief justices are equally adept at the judicial statesmanship aspect of their jobs.²⁸⁴ In this way, a court’s political savvy can (perhaps subtly) influence the boundaries of a court’s power and thus its zone of supervision as well.²⁸⁵

In sum, the distinctive vision for government that elevated supreme courts to truly coordinate branches and produced the supervisory power was also responsible for the constitutional features that limit it. These structural considerations produce internal and external political factors that can genuinely sanction and check court power. Indeed, the state public law literature has long recognized state courts are subject to political forces to a degree “unknown in the federal system.”²⁸⁶ The accumulation of these elements produces a governance structure capable of “absorb[ing]” broad applications of judicial power “much more constructively than the federal system.”²⁸⁷

With these boundaries and limits in mind, the next Part considers what to make of the supervisory power, as well as its broader implications.

IV. Implications

During the nineteenth and twentieth centuries, states from Alaska to Maine revised and redefined the structure of their governments through a flurry of constitutional conventions and amendments.²⁸⁸ Among other things, these changes elevated state judiciaries to equal status with other branches, made them more independent vis-à-vis the other branches, reconceptualized the role of state high courts by expanding their responsibilities, made them more accountable to the public, and, importantly, deliberately increased their power.²⁸⁹

The increase in power and political status gave high courts more tools to control their operations and advance their interests. The supervisory power is one such tool and, as Part II shows, courts have used it beyond its routine administrative applications to make and shape policy across a range of contexts. This policymaking dimension of the supervisory power implicates a host of theoretical and normative questions.

This Part works through the major threads of those analyses. Conceptually, this Article’s account of the supervisory power suggests a more active role for courts within the state policymaking apparatus in which they operate as equal partners with the other branches to advance the state’s general welfare.²⁹⁰ The supervisory power provides high courts with a more precise and flexible tool to contribute to a state’s ongoing governance project. To be sure, this account of a supreme court’s role raises normative questions related to the legitimacy of judicial policymaking. While a comprehensive theory of interbranch relations is outside the scope of this Article, Part IV.B engages with some of the primary critiques of judicial lawmaking. In brief, the institutional assumptions that animate these important arguments do not map so easily onto the separation-of-powers principles at the heart of state constitutions, nor the institutional assumptions that underlie how state judicial power is allocated.

A. Theoretical Implications

At a basic level, the supervisory power provides an additional tool for supreme courts to actively participate in state governance, within adjudication and outside of it. While the power can perform that function across a range of applications, its capacity to provide signaling, facilitating, and coordinating functions is especially important.²⁹¹

As a signaling device, supreme courts can call on the other branches to take action or they can share their perspectives on the underlying legal or policy issues outside of the strictures of ordinary constitutional litigation. For example, by enhancing constitutional values via procedural rules,²⁹² courts can share concerns regarding law enforcement tactics without barring the behavior entirely as an “unreasonable search” or “cruel and unusual punishment.” Similarly, an area of law or policy might benefit from the unique tools and institutional capabilities of the legislature, but various exigencies or other factors may necessitate a temporary solution. Here, too, courts can signal the policy gap for the legislature and offer an initial solution that reflects the judiciary’s perspective and expertise.²⁹³

The supervisory power similarly enables courts to operationalize and facilitate policies crafted by other branches. The decision by New Jersey’s high court to fashion a framework implementing the governor’s prisoner release policy during the pandemic is illustrative.²⁹⁴ There, and in similar examples, high courts invoke the supervisory power to effectuate the policy choices other branches have codified.²⁹⁵

Supreme courts can also coordinate actions between and among the branches towards effective governance. Consider again the Arkansas Supreme Court’s decision to bring the branches together to redraft the state’s criminal code from the ground up, or consider the California Supreme Court’s Collaboration on Mental Health Issues that resulted in related legislation.²⁹⁶ High courts across the country have similarly relied on their supervisory power to engage the other branches and channel their collective roles towards a specific policy goal.²⁹⁷ These examples demonstrate how the supervisory power enables courts to help harness the state’s full policy capacity towards a shared objective, or at least provide a venue to align on what those shared objectives are.²⁹⁸

These features illustrate some of the ways in which the supervisory authority empowers courts to contribute to state governance by engaging with other branches. Part II illustrated how supreme courts can make policy directly, in adjudication and beyond it. Together, we see how the supervisory power expands a supreme court’s policymaking capacity beyond the binary means afforded by judicial review. These applications of the supervisory power highlight a distinctive role for high courts in state governance, thus raising broader implications for allocation of powers and interbranch dynamics.

Some recent work on state separation-of-powers principles suggests that a core commitment at the heart of state constitutions is effective government. Scholarly accounts have observed that state constitutional structure favors practical over theoretical conceptions of institutional relations.²⁹⁹ John Devlin, for instance, has argued that the distinctively mixed design of state government also suggests state constitutional structure prioritizes pragmatism and practice over political theory.³⁰⁰ This work rejects generic notions of government structure and institutional assumptions based on the Federal Constitution. Instead, scholars have elaborated on the significance of the unique structural arrangements and deliberate design choices in state charters.

This work frames state interbranch relations almost exclusively around conflict and contestation.³⁰¹ But as Jonathan Marshfield has shown, a Madisonian theory of separation of powers finds little purchase in state constitutions.³⁰² In other words, the notion that “ambition can be made to counteract ambition” between the branches is not the organizing principle behind state institutional structure. Rather, Dan Rodriguez has suggested that the core commitment that animated modern state constitutional development is good government.³⁰³ People prioritized a structural regime that is “pragmatic” and can provide for their general welfare.³⁰⁴ Part I explored this reorientation in the specific context of court reform—it was a catalyst for the

supervisory power—but Rodriguez shows it applies across the entire constitutional structure.

Developing conceptions of interbranch relations that prioritize conflict or minimize collaboration leaves this core aspect of state constitutional structure undertheorized. To be sure, friction and “showdowns” are inevitable (and perhaps desirable).³⁰⁵ But developing conceptions of interbranch relations that focus on contestation limits the explanatory value of such theories and points towards a parochial conception of state constitutional structure.³⁰⁶

This Article’s account of the supervisory power helps widen our lens accordingly and lays the groundwork for a more fulsome analysis of interbranch relations that elevates the role of cooperation.³⁰⁷ It demonstrates some of the ways the supervisory power can serve as a tool for courts to contribute to the governance process through expanded policymaking,³⁰⁸ filtered through the judiciary’s institutional expertise and distinctive political incentives (i.e., their zone of supervision).³⁰⁹

B. Normative Implications

With this conceptual analysis in mind, we might ask then what we should make of the supervisory power. As discussed above, and noted throughout the Article, the supervisory power implicates foundational questions of state judicial power and role. Absent a comprehensive theory of state courts, though, we cannot fully evaluate the supervisory power’s normative implications. Thus, in working through the primary themes of that analysis, this Section’s discussion is accordingly tentative and brief.

We might fairly describe the supervisory authority as a judicial policymaking tool. As noted in Part II, the power plays a direct (e.g., ad hoc procedural rulemaking) and indirect (e.g., reaching a constitutional issue no party raised) part in enhancing a court’s capacity to make and influence state policy. To evaluate such aspects of judicial power, the courts’ literature often inquires as to whether courts are wielding the proper power and whether they are using it appropriately.³¹⁰ This is a vast literature that spans disciplines from law to social science, but two variables common to analysis along these lines are legitimacy and a court’s proper role.

It is fairly uncontroversial to say that American constitutional governance entails some level of judicial policymaking.³¹¹ What is typically contested is how much is too much. Robert Kagan famously offered an institutional frame he termed “adversarial legalism” to help critique what he saw as an overreliance on courts as policymakers.³¹² The thrust of Kagan’s nuanced argument against a broader vision of judicial policymaking is that American litigation is overly formal and participatory, which narrows the inputs and available tools for courts, creates higher political and economic costs, and as a result is generally less desirable than less court-driven alternatives.³¹³

This critique of judicial policymaking is worth considering. However, I think the account of the supervisory power sketched here, and the broader institutional assumptions it brings with it, undermine or perhaps even obviate some of the concerns Kagan’s theory advances. In brief, Kagan’s critique assumes judicial policymaking comes exclusively through adjudication—indeed it is in the very name of his concept (adversarial). But as discussed in detail in Part II, that is not the case with the supervisory power. It can and does operate outside of the confines of adjudication.

In this way, the supervisory power pushes court authority closer to what Kagan sees as an idealized notion of “bureaucratic legalism.”³¹⁴ In this non-adjudicative context, many of the formalities associated with adjudication—rules of evidence, civil procedure, etc.—are not applicable. Instead, the process is substantially less formal, bringing judicial interventions closer to what Kagan sees as a normatively desirable government concept he terms “political and expert judgment.”³¹⁵

And yet, even when courts do rely on the power in the course of resolving a dispute, it can overcome many of what Kagan sees as the problems with making policy through adjudication. Specifically, the structure of adjudication and corresponding formality of procedural rules results in parties seeking broad policy outcomes under the guise of narrow, highly technical legal questions. Here, too, this Article’s account of the supervisory power can address some of these critiques of judicial policymaking. For example, high courts can and do rely on the authority to reframe or expand the questions presented, override otherwise rigid procedural rules, and other features that might narrow judicial inputs. Further, courts can convene commissions or task forces to operate as enhanced evidence-gatherers to supplement a lone appellate record and better inform their decision-making.

As discussed above, the supervisory power helps illuminate the institutional posture of state high courts and the ways that they challenge some of the background assumptions we typically assign to “courts.”³¹⁶ Kagan’s critique further sharpens that point: generic concepts of what courts do do not map so easily on to state courts; and, with that, nor do some of the normative arguments against robust judicial policymaking roles in governance.

The supervisory power may also have normative consequences for a high court’s legitimacy.³¹⁷ The legitimacy of judicial policymaking is the subject of rich literature, but scholars’ central theses generally focus on the concept of unaccountable institutions wielding purely discretionary power to issue sweeping, final rulings on consequential issues of social policy.³¹⁸ In short, the legitimacy considerations turn on institutional aspects of courts and the nature of the power they wield.³¹⁹

As to structural factors, policymaking by courts is thought less legitimate because of how power is allocated between and among the branches. As courts wield their power in ways that look less and less like interpretation and adjudication, some scholars suggest we should be increasingly skeptical, since constitutional design is said to leave lawmaking to the other branches.

These are important considerations, but we should consider them in light of state constitutional structure. As Neil Komesar has shown, institutional evaluation does not proceed in a vacuum.³²⁰ In other words, a narrower view of state court power—that is, rejecting the account of supervisory power advanced in this Article as normatively undesirable—will likely result in enhancing legislative and gubernatorial power. Passively redistributing authority this way towards a generic equilibrium would be generally inconsistent with the deep skepticism of policymaking by legislatures and executives that animated modern constitutional development.³²¹ It could disrupt the allocation of policymaking directed to the judiciary. In short, state constitutional structure perhaps invites more judicial policymaking than our generic conceptions of institutional roles allow.

Moreover, the accountability of courts (or lack thereof, as is often the case at the federal level) often provides a basis for evaluating the legitimacy of their power. As discussed above, and well established in the literature, state courts are more democratic, more accountable, and subject to more horizontal checks than their federal counterparts.³²² For these reasons, normative critiques of judicial policymaking generally do not map well onto state courts, as these arguments are generally tailored to federal features (e.g., life tenure) or universal conceptions of courts.

Beyond these structural elements, normative evaluations of judicial policymaking often focus on the nature of the power itself and the content of the decisions it produces. On the latter, tired rhetoric, like “legislating from the bench” is well known. But it speaks to a more serious concern that courts are straying too far from devices we generally think of as providing some limitations on court power—text, interpretive canons, precedent, etc.³²³

However, these evaluations assume a certain universe of forms of judicial power—largely a binary between constitutional and statutory interpretation. For example, consider the Warren Court’s procedural revolution. The U.S. Supreme Court crafted a host of procedural rules and frameworks that largely enhanced protections for criminal defendants based on its interpretation of the Fourth, Fifth, Sixth, and Eighth Amendments. The critiques of decisions like Miranda and others are that they lack a basis in precedent and their rules cannot reasonably be squared with the underlying text.³²⁴ These cases affected the Court’s legitimacy because for critics, traditional constitutional adjudication required more fidelity to things like text and case law.

The supervisory power, however, is a decidedly different formulation of judicial authority. As discussed in greater detail in Parts I and II, it is ideally situated for the kind of decisional contexts that require more latitude and discretion than might be available under ordinary judicial review. In this way, the power’s very flexibility is what could make it a more legitimate alternative to otherwise conventional methods of power. Indeed, as a distinctive source of authority, the supervisory power offers an additional tool that can serve as an alternative to attempting to craft doctrinal rules or tests based on ill-fitting constitutional text or precedent or engaging in the debates over “lockstepping.”

Further, we might consider judicial policymaking undesirable because the resulting decisions are sweeping and final and often concern consequential issues of social policy. As a general matter, “state judicial review does not have the same finality” as its federal analogue.³²⁵ But more specifically, the supervisory power is understood as even less final than ordinary judicial review. Whereas the latter might be thought of as “a big red stop sign” to the other branches,³²⁶ use of the supervisory power is perhaps better thought of as an invitation to “dance,” as some former chief justices have put it.³²⁷ Indeed, justices have said implicitly and explicitly that a virtue of the supervisory power is its provisional nature.³²⁸ As Chief Justice Ellen Peters put it, relying on “supervisory authority leaves more flexibility for further input from all the interested constituencies.”³²⁹ In these ways, use of the supervisory power does not have the same aggrandizing effects as other formulations of judicial power that are said to risk a court’s legitimacy.

In sum, our evaluation of the supervisory power should account for two considerations. First, our evaluation should consider its potential for courts to advance their prerogatives and conflict with other branches, as well as its potential to facilitate their cooperation and coordination. Second, while the power is broad, flexible, and highly discretionary, it is subject to boundaries and rooted in both text and institutional context of state constitutions.³³⁰ Further, under a closer examination, we see that traditional arguments against judicial policymaking do not readily track the nature of the supervisory power and structure of state constitutions so easily. As a result, our evaluations of the supervisory power should proceed at the retail rather than wholesale levels. In other words, that courts use the supervisory power along the lines sketched in this Article should not per se raise normative problems. Rather, we should take each application on its own terms and consider it in the context of a court’s zone of supervision.

Conclusion

The state supervisory power enables supreme courts to wield conventional forms of their power with fewer constraints and to assert it in seemingly unconventional ways. This Article offers a descriptive and theoretical account of this important aspect of state supreme court practice—as well as a qualified normative defense of it. It shows that the supervisory power is an essential feature of judicial independence and the broader role of state supreme courts as agents of governance. This feature of state high court practice has been an essential aspect of state constitutional structure, before state high courts’ current moment in the spotlight³³¹ and will be after. To overlook this vital feature of state governance comes at our own peril, as state supreme courts are too important—and now more than ever—to overlook.

98 S. Cal. L. Rev. 1543

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Adam B. Sopko*

*Associate Professor, University of Colorado Law School. Aaron Caplan, Zach Clopton, Adam Crews, Colin Doyle, Marcus Gadson, Tara Grove, Andrew Hammond, Jon Marshfield, Tim Mulvaney, Jim

Pfander, Miriam Seifter, Dan Walters, Bob Williams, Abby Wood, Rob Yablon, Quinn Yeargain, and Adam Zimmerman provided helpful comments. The Article also benefited from discussions at the 2025 Emerging Scholars Conference in Public Law and the Brennan Center’s State Constitutions Lab. I am grateful to Wisconsin law students Mary Berg and Charlotte Gude for terrific research assistance. The editors of the Southern California Law Review provided superb editorial assistance. Thanks also to Sarah Alexander for the constant support and Hunter Sopko for the long weekend naps that made this Article possible.

Introduction

I. Today’s Debate About Litigation Finance

A. What is Litigation Finance?

B. The Scholarly Debate

C. The Policy Debate

II. Nonmarket Strategies: A Primer

A. What Are Nonmarket Strategies?

B. The Types of Nonmarket Strategies

Adaptive Strategies

Transformative Strategies

Additive Strategies

C. The Choice Among Nonmarket Strategies

III. Litigation Finance as a Nonmarket Strategy

A. Litigation Finance as Corporate Finance: An Adaptive Strategy

“Market” Methods of Corporate Finance

Litigation Finance as a “Nonmarket” Method of Corporate Finance

B. Litigation Finance to Pursue Litigation: Adaptive and Transformative Strategies

C. Lobbying and Trade Associations: Transformative and Additive Strategies

IV. Policy Implications of Litigation Finance as Nonmarket Strategy

A. A New Dimension to the Policy Debate

A Regulation of the Capital Markets

Implications for Business Competition

B. Implications for the Civil Justice System

V. Scholarly Benefits of the Nonmarket Strategy Framework

A. Legal Scholars

B. Business Scholars and Businesses

Conclusion

98 S. Cal. L. Rev. 1379

Introduction

I. An Overview of Wealth Transfer Taxation

II. The State of The Debate over Estate Taxes

A. Arguments in Favor of Wealth Transfer Taxation

Equality of Opportunity

Dynastic Power

Inheritances and Ability to Pay

A Wealth Transfer Tax as a Periodic Wealth Tax

B. Arguments Against Wealth Transfer Taxation

Equality of Opportunity Revisited

Rejecting Declining Marginal Utility and Progressivity

Private Property Rights

Double Taxation

Efficiency and Administrative Concerns

III. Settling the Debate with a Rignano Tax

A. Attitudes Toward Taxation, Fairness, Redistribution, and Equality

Taxation and Folk Justice

Policy Silos

A Rignano Tax Reconciles These Competing Intuitions

IV. A Rignano Tax

A. The Base

Transfers or Receipts?

Gifts

a. Gifts in General

b. Gifts and Timing Complications

Exclusions and Exemptions

B. The Rate

Initial Transfers

Subsequent Transfers

Adjusting for Age

C. Frequency: Determining the Number of Transfers

Generation-Skipping Transfers

Transfers in Rapid Succession

D. Valuation

The Problem

Risk-Free Rate of Return as the Default Solution

Complications

E. Tracing

The Normative Question

Administration

F. Transfers in Trust

Remainder Interests

Income Interests

G. Transition Rules

CONCLUSION

98 S. Cal. L. Rev. 1439

Introduction

I. The Major Questions Doctrine and Major Questions Avoidance

A. The Major Questions Doctrine(s)

B. Major Questions Avoidance

“Slicing”

“Lumping”