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Financing Lawsuits with Bailout Money

By Anonymous

The WSJ reports that one of the sticking points in the negotiations over an auto bailout between the Dem leadership and the White House is:

A demand by senior Democrats that funds under the bailout not be used by the automakers to finance lawsuits challenging state car-emission limits.

On a theoretical level, I think I have to side with the White House on this one; although on a practical level, I suspect the Democrats are right. It's tempting to view such lawsuits as frivolous and akin to playing the lottery?and they may well be. I don't know nearly enough about the suits at issue to offer an informed opinion on the merits of the claims.

But two justifications for using bailout money to finance these lawsuits come to mind.

First, I know from experience that states often promulgate regulations that stretch the limits of the authority they were delegated when the state knows that a powerful industry, such as automakers, will challenge the regulations in court regardless of how stringent they are. The mentality in state capitals is that they need to stretch the limits of their authority because the more authority their initial regulations claim, the more authority they'll end up with when the dust settles from the inevitable legal challenge. Indeed, I've promoted this mentality to state officials in the past, and I still think it's the best strategy if the state simply wants to maximize the authority it has available in a certain policy area. State courts tend to work within the framework presented to them by the litigants, so states need to claim as much authority as possible in order to move the goalposts.

Unfortunately, the strategy of "claim as much authority as possible in the initial regulations" often devolves into a different strategy: "promulgate regulations that wildly overstep the authority actually delegated, and let the court work it out." If this is what happened with the state car-emissions regulations, then the automakers should absolutely be allowed to use some of the bailout money to finance lawsuits challenging these regulations. My gut tells me that this isn't the case, and that the automakers' suits are probably unnecessary, but like I said, I'm not nearly familiar enough with this area of law to say one way or the other. I'm just offering a theoretical justification for using bailout money to finance these lawsuits.

Second, from a pure cost-benefit perspective, it's possible that successfully challenging a state's car-emissions regulations could give the automakers the most bang for their buck. That is, if a court overturned a state's current car-emissions regulations (on whatever grounds), that could reduce the automakers' costs enough that financing the lawsuits would be the most cost-effective way to use the bailout money. Again, I doubt this is the case (especially given the extremely high legal costs of those kinds of suits), but it's at least possible.

I'd be interested to hear from someone who is familiar with the merits of the automakers' suits challenging states' car-emissions regulations. Of course, in the time it took me to write this post, I probably could've figured out whether the automakers' suits have much legal merit, but then again, you're a jerk.

Full post as published by Economics of Contempt on December 07, 2008 (boomark / email).