System Rules

The Economics of Regulatory Reform:
Termination of Airline Computer Reservation System Rules


The Department of Transportation's announced plan to terminate all federal regulation of airline computer reservation systems (CRS) in 2004 is somewhat surprising in light of modern economic

theories of regulation that highlight barriers to reform. This Article presents evidence on how CRS regulation affects the market for CRS services from the perspectives of both traditional and modern theories of regulation. We conclude that the announcement of a plan to terminate CRS regulations is consistent with traditional theories of regulation in which the government acts to maximize social welfare. We also demonstrate that the traditional approach to evaluating the merits of regulation, as sometimes applied, exhibits a bias toward rule retention by assuming that the relevant alternative to regulation is a state of laissez-faire. In fact, the relevant alternative is typically other forms of intervention by the government, such as antitrust enforcement, which poses as the government's strategic alternative for most if not all prior DOT regulation of CRS markets. Finally, we examine the practical relevance of modern theories of regulation for explaining the recent move towards deregulation. The occurrence of entry and technological change prior to CRS deregulation is of special interest from this perspective. The termination of CRS regulations is indeed consistent both with the traditional theory of deregulation in the public interest and with the modern interest group theory of deregulation in which deregulation is the ultimate conclusion of a process. Other modern theories of regulation appear not to explain the timing of reform in this instance.IMAGE TABLE 1


I. DRAFTING CHOICE-OF-LAW RULES

The European Community Regulation on the Law Applicable to Non-Contractual Obligations ("Rome II") will take effect on January 11, 2009.1 This regulation is part of a widespread effort to draft new choice-of-lawrules. For example, in 2007 a new conflict-of-laws code took effect in Japan.2 China is drafting a comprehensive civil code, which includes choice-of-law rules.3 What should be the objectives of these drafting projects? Should the new rules, as law-and-economics scholars urge, be simple and afford clearly predictable results? Or should choice-of-law rules endeavor to select the jurisdiction that experiences the consequences when the chosen law is applied? A third possibility is to draft rules that provide substantial predictability and are likely to be consistent with a consequences-based approach. Rome II falls into this third category: reasonably predictable results that are likely to give effect to the policies of the jurisdiction that will experience the consequences when the chosen law is applied.
IMAGE TABLE1

I. DRAFTING CHOICE-OF-LAW RULES

The European Community Regulation on the Law Applicable to Non-Contractual Obligations ("Rome II") will take effect on January 11, 2009.1 This regulation is part of a widespread effort to draft new choice-of-law
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rules. For example, in 2007 a new conflict-of-laws code took effect in Japan.2 China is drafting a comprehensive civil code, which includes choice-of-law rules.3 What should be the objectives of these drafting projects? Should the new rules, as law-and-economics scholars urge, be simple and afford clearly predictable results? Or should choice-of-law rules endeavor to select the jurisdiction that experiences the consequences when the chosen law is applied? A third possibility is to draft rules that provide substantial predictability and are likely to be consistent with a consequences-based approach. Rome II falls into this third category: reasonably predictable results that are likely to give effect to the policies of the jurisdiction that will experience the consequences when the chosen law is applied.

There is now an extensive law-and-economics literature devoted to choice of law. Sections II and III summarize this economics approach to drafting conflicts rules and evaluate Rome II under this perspective. Sections IV and V outline a consequences-based approach to choice-of-law and appraise the extent to which Rome II is consistent with this methodology. The Appendix contains the complete text of the Regulation.



II. LAW-AND-ECONOMICS SCHOLARSHIP ON CHOICE OF LAW

In the third edition of his classic work, Economic Analysis of Law,4 Judge-formerly Professor-Richard A. Posner, inserted a one-page section on "Choice of Law."5 He poses a case in which "a resident of State A, while driving in State B, injures a resident of B who sues."6 He states that the law of B should apply because that state has "a comparative regulatory advantage in regard to accidents which occur in B."7 It is likely that by "comparative regulatory advantage" he is referring only to rules of the road, such as speed limits: "Presumably B's Rules are tailored to driving conditions-the state of the roads, weather, etc.-in B."8


Judge Posner goes on to decry the fact that the place of tort rule "has given way in most states to a more complex analysis of the respective 'interests' of the states affected by the suit."9 He then states, "The issue ought not to be interests; it ought to be which state's law makes the best 'fit' with the circumstances of the dispute."10 When explaining what he means by "fit," however, he engages in the very interest analysis that he purports to disapprove, including an inquiry into the purposes of the rule in question.11 He concludes by changing the hypothetical with which he began to "a case where two residents of state A are involved in a collision in state B."12 Judge Posner then departs from the place-of-tort rule in a manner that devotees of interest analysis would applaud: "The tort rules of B will be better adapted to location-specific factors such as the state of the roads and climate conditions, but the tort rules of A will be better adapted to person-specific factors such as ability to take care."13


This short and somewhat self-contradictory statement prompted many law-andeconomics scholars to apply their analyses to choice of law. The key difference between "traditional" and law-and-economics conflicts scholarship is the importance given to choice-of-law rules that produce easily predictable results. In Reich v. Purcell, Chief Justice Traynor of the Supreme Court of California, a devotee of interest analysis, states, "ease of determining applicable law and uniformity of rules of decision, however, must be subordinated to the objective of proper choice of law in conflict cases, i.e., to determine the law that most appropriately applies to the issue involved."14 Most law-and-economics scholars would disagree. They prefer clear choice-of-law rules, such as the place of injury for torts and the situs of land for issues concerning real estate.15 Clear rules, they contend, are efficient because they enable the parties to know before they act which law will apply and to conform their conduct to that law. After a claim arises, clear choice-of-law rules facilitate settlement and reduce the costs of litigation.16 For the same efficiency reasons, lawand-economics scholars would permit contracting parties complete freedom in choosing the law to apply to their transaction.17 Some would permit no judge-made exceptions to enforcement of choice-of-law agreements and reserve to legislatures the power to indicate what mandatory rules are not subject to avoidance.18

Most law-and-economics scholars find modern approaches to choice of law unpredictable, chaotic,19 and prejudiced in favor of plaintiffs and forum law.20 They reject any analysis that focuses on the purposes of underlying conflicting rules because of the difficulty of determining those purposes.21

III. ROME II THROUGH THE LAW-AND-ECONOMICS LENS


Does Rome II satisfy the law-and-economics demand for simple rules leading to easily predictable results? "[Predictability of the outcome of litigation" is the aim of the regulation.22

Article 4 of Rome II states the "general rule":

Article 4: General rule

1. Unless otherwise provided for in this Regulation, the law applicable to a non-contractual obligation arising out of a tort/delict shall be the law of the country in which the damage occurs irrespective of the country in which the event giving rise to the damage occurred and irrespective of the country or countries in which the indirect consequences of that event occur.

2. However, where the person claimed to be liable and the person sustaining damage both have their habitual residence in the same country at the time when the damage occurs, the law of that country shall apply.

3. Where it is clear from all the circumstances of the case that the tort/delict is manifestly more closely connected with a country other than that indicated in paragraphs 1 or 2, the law of that other country shall apply. A manifestly closer connection with another country might be based in particular on a pre-existing relationship between the parties, such as a contract, that is closely connected with the tort/delict in question.23

Article 4 governs choice of law for non-contractual liabilities that are not covered by other articles on specific forms of liability.24 Four of the articles covering specific liabilities have references to Article 4.25 Thus Article 4 is of central importance in evaluating the regulation.


IMAGE TABLE1

I. DRAFTING CHOICE-OF-LAW RULES

The European Community Regulation on the Law Applicable to Non-Contractual Obligations ("Rome II") will take effect on January 11, 2009.1 This regulation is part of a widespread effort to draft new choice-of-law
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rules. For example, in 2007 a new conflict-of-laws code took effect in Japan.2 China is drafting a comprehensive civil code, which includes choice-of-law rules.3 What should be the objectives of these drafting projects? Should the new rules, as law-and-economics scholars urge, be simple and afford clearly predictable results? Or should choice-of-law rules endeavor to select the jurisdiction that experiences the consequences when the chosen law is applied? A third possibility is to draft rules that provide substantial predictability and are likely to be consistent with a consequences-based approach. Rome II falls into this third category: reasonably predictable results that are likely to give effect to the policies of the jurisdiction that will experience the consequences when the chosen law is applied.

There is now an extensive law-and-economics literature devoted to choice of law. Sections II and III summarize this economics approach to drafting conflicts rules and evaluate Rome II under this perspective. Sections IV and V outline a consequences-based approach to choice-of-law and appraise the extent to which Rome II is consistent with this methodology. The Appendix contains the complete text of the Regulation.

II. LAW-AND-ECONOMICS SCHOLARSHIP ON CHOICE OF LAW

In the third edition of his classic work, Economic Analysis of Law,4 Judge-formerly Professor-Richard A. Posner, inserted a one-page section on "Choice of Law."5 He poses a case in which "a resident of State A, while driving in State B, injures a resident of B who sues."6 He states that the law of B should apply because that state has "a comparative regulatory advantage in regard to accidents which occur in B."7 It is likely that by "comparative regulatory advantage" he is referring only to rules of the road, such as speed limits: "Presumably B's Rules are tailored to driving conditions-the state of the roads, weather, etc.-in B."8

Judge Posner goes on to decry the fact that the place of tort rule "has given way in most states to a more complex analysis of the respective 'interests' of the states affected by the suit."9 He then states, "The issue ought not to be interests; it ought to be which state's law makes the best 'fit' with the circumstances of the dispute."10 When explaining what he means by "fit," however, he engages in the very interest analysis that he purports to disapprove, including an inquiry into the purposes of the rule in question.11 He concludes by changing the hypothetical with which he began to "a case where two residents of state A are involved in a collision in state B."12 Judge Posner then departs from the place-of-tort rule in a manner that devotees of interest analysis would applaud: "The tort rules of B will be better adapted to location-specific factors such as the state of the roads and climate conditions, but the tort rules of A will be better adapted to person-specific factors such as ability to take care."13

This short and somewhat self-contradictory statement prompted many law-andeconomics scholars to apply their analyses to choice of law. The key difference between "traditional" and law-and-economics conflicts scholarship is the importance given to choice-of-law rules that produce easily predictable results. In Reich v. Purcell, Chief Justice Traynor of the Supreme Court of California, a devotee of interest analysis, states, "ease of determining applicable law and uniformity of rules of decision, however, must be subordinated to the objective of proper choice of law in conflict cases, i.e., to determine the law that most appropriately applies to the issue involved."14 Most law-and-economics scholars would disagree. They prefer clear choice-of-law rules, such as the place of injury for torts and the situs of land for issues concerning real estate.15 Clear rules, they contend, are efficient because they enable the parties to know before they act which law will apply and to conform their conduct to that law. After a claim arises, clear choice-of-law rules facilitate settlement and reduce the costs of litigation.16 For the same efficiency reasons, lawand-economics scholars would permit contracting parties complete freedom in choosing the law to apply to their transaction.17 Some would permit no judge-made exceptions to enforcement of choice-of-law agreements and reserve to legislatures the power to indicate what mandatory rules are not subject to avoidance.18

Most law-and-economics scholars find modern approaches to choice of law unpredictable, chaotic,19 and prejudiced in favor of plaintiffs and forum law.20 They reject any analysis that focuses on the purposes of underlying conflicting rules because of the difficulty of determining those purposes.21

III. ROME II THROUGH THE LAW-AND-ECONOMICS LENS

Does Rome II satisfy the law-and-economics demand for simple rules leading to easily predictable results? "[Predictability of the outcome of litigation" is the aim of the regulation.22

Article 4 of Rome II states the "general rule":

Article 4: General rule

1. Unless otherwise provided for in this Regulation, the law applicable to a non-contractual obligation arising out of a tort/delict shall be the law of the country in which the damage occurs irrespective of the country in which the event giving rise to the damage occurred and irrespective of the country or countries in which the indirect consequences of that event occur.

2. However, where the person claimed to be liable and the person sustaining damage both have their habitual residence in the same country at the time when the damage occurs, the law of that country shall apply.

3. Where it is clear from all the circumstances of the case that the tort/delict is manifestly more closely connected with a country other than that indicated in paragraphs 1 or 2, the law of that other country shall apply. A manifestly closer connection with another country might be based in particular on a pre-existing relationship between the parties, such as a contract, that is closely connected with the tort/delict in question.23

Article 4 governs choice of law for non-contractual liabilities that are not covered by other articles on specific forms of liability.24 Four of the articles covering specific liabilities have references to Article 4.25 Thus Article 4 is of central importance in evaluating the regulation.

Subsection 1 (place of damage) and subsection 2 (unless plaintiff and defendant have the same habitual residence) provide a simple and predictable rule. The problem is the exception in subsection 3 if another country is "more closely connected" to the tort. There is no magic ruler to measure this distance. If Community courts make much use of this exception, the outcomes in similar fact situations are likely to vary. The power of the Court of Justice of the European Communities to forge uniform interpretations of the Regulation will restore predictability,26 but that is likely to be a gradual process over many years. This same "more closely connected" exception also appears in Article 5(2) on product liability, by reference in Article 6(2) on unfair competition affecting exclusively the interests of a specific competitor, and in Articles 10 on unjust enrichment, 11 on negotiorum gestio, and 12 on culpa in contrahendo.

Article 26 provides a "public policy" exception to Rome II's choice-of-law rules.27 Public policy is a wild card. Judges have disagreed whether applying the law of another jurisdiction violates the forum's public policy.28 Moreover, what is a court to do if it rejects the otherwise applicable law under Article 26? Should it dismiss the case without affecting the merits or should it use this excuse to apply its own law? During the time when U.S. courts were in transition from the place-of-wrong choice-of-law rule to a consequences-based approach, some opinions used public policy to reject the law chosen by the territorial rule and applied forum law instead.29 Currently the Supreme Court of Georgia clings to the place-of-wrong conflicts rule for torts, declaring, "The relative certainty, predictability, and ease of the application of lex loci delicti, even though sometimes leading to results which may appear harsh, are preferable to the inconsistency and capriciousness that the replacement choice-of-law approaches have wrought."30 Yet, when the mood moves it, that court uses "public policy" to reject the law of the place of wrong and substitute Georgia law in its stead." The court thus creates the very uncertainty that it purports to eschew, instead of articulating a clear consequences-based reason for the result.