How does privatization affect liability?

I have a new post up on privatization and liability at the Reason Foundation's website. In the post, I discuss two interesting cases from the recent Supreme Court term: Campbell-Ewald Co. v. Gomez and Sheriff v. Gillie—both of them opinions by Justice Ginsburg with no dissent on the privatization-related point.

Here's an excerpt:

The law treats the public and private sectors differently in all sorts of contexts. Sometimes, privatization can increase overall liability-when the government injures people, it generally has sovereign immunity, whereas when it transfers a function entirely to the private sector, the new private operators will generally have to pay for their negligent torts. Sometimes, privatization doesn't change liability at all-for instance, public and private prisons are considered equally "state actors" that must comply with constitutional guarantees. And sometimes, privatization can decrease overall liability-for instance, public schools open themselves up to federal civil-rights liability if they fire their teachers arbitrarily, whereas private schools don't.

The precise contours of government vs. private immunity depend on the context and depend on what laws are involved-as explained in this blog post from March 2013. The relative treatment of the public and private sectors will obviously affect the costs and benefits of privatization, the government's incentives to privatize, and injured parties' prospects for monetary recovery.

. . .

[In Campbell-Ewald, t]he majority opinion stressed Yearsley's distinction between contractors acting within their authority and contractors who exceeded their authority. Here, Campbell-Ewald had exceeded its authority by sending the text message to people who hadn't opted in. . . . The Navy had only authorized Campbell-Ewald to send the message to opt-ins, and a Navy representative had stressed the importance of making sure that all the recipients were "kosher" and made clear that the Navy was relying on Campbell-Ewald's representation that the list was in compliance. So this case was unlike Yearsley, and the government's sovereign immunity didn't transfer to the contractor.

. . .

Campbell-Ewald is a case where privatization increases government liability. By contracting out, the government can move from a no-liability regime to a liability regime, which can potentially increase the costs of contracting out. That might be bad news for governments seeking to save money by contracting out-but perhaps good news to the victims, who can see compensation under privatization that would have been lacking otherwise.

Sheriff v. Gillie presented a similar question under a different statute: whether a government contractor could get the government's immunity under the Fair Debt Collection Practices Act (FDCPA).

. . .

[W]hile the Supreme Court mostly punted on the immunity issue-which may have to be revisited someday-Justice Ginsburg did have some interesting words to say about federalism and privatization of state government functions. "Ohio's enforcement of its civil code-by collecting money owed to it-[is] a core sovereign function," she wrote, quoting the "officer" immunity portion of Judge Sutton's Sixth Circuit dissent. In her own words, she continued: "Ohio's Attorney General has chosen to appoint special counsel to assist him in fulfilling his obligation to collect the State's debts, and he has instructed his appointees to use his letterhead when acting on his behalf. There is no cause, in this case, to construe federal law in a manner that interferes with States' arrangements for conducting their own governments." So to the extent the Supreme Court said anything about FDCPA "officer" immunity, it was in favor of treating the lawyer-contractors the same as public employees.

. . .

[I]n a policy sense, these cases tug in somewhat different directions. In Campbell-Ewald, the contractor was denied immunity because he went beyond the scope of his authorization; he would probably have been fine (and immune) if someone had been injured while he was scrupulously following the government's orders. Whereas in Sheriff, the contractor was doing exactly what the government said. But it's clear that "acting within the scope of one's authorization" isn't the general rule behind these two cases.

To see this, let's change the facts a bit. Consider Campbell-Ewald: What if the text messages had been sent, instead, by a government employee who didn't bother to check for illegal phone numbers? No liability for the employee or the government at all, because of sovereign immunity. So "scope of authorization" is a theory for private immunity but not for public immunity: the public and private sector have totally different rules for liability here.

And now consider Sheriff: What if the Ohio Attorney General himself, using his own letterhead, used debt collection methods that were false, deceptive, and misleading? No liability, because the Attorney General is an obvious "officer" and therefore exempt from the FDCPA. And what if it turned out that private lawyers Sheriff and Jones had used false, deceptive, and misleading methods? Under Judge Sutton's view, which Justice Ginsburg nods to and perhaps endorses, there's likewise no liability, because they, too, would have "officer" immunity. So here, the government and its employees and independent contractors are treated exactly the same: they're immune whether or not they act deceptively.

This makes a difference: legal rules that treat the public and private sectors differently will affect government's incentives to privatize. Perhaps the public and private sectors should be treated differently because they might be expected to act differently, but it's doubtful that mere public vs. private status should be determinative. Intuitively, many believe that private debt collectors are more likely to be abusive than public debt collectors, but surely this depends on the precise incentives, and independent contractors will act differently depending on whether they're paid a flat fee or a percentage of the collected money. It would be nice to see either Congress or the courts engaging in this kind of analysis, but sadly that sort of sophistication is hard to come by.

Read the whole thing here.

You can click here for my full archive of Reason posts, including a couple of posts on antitrust, a couple of posts on public-employee unions and pensions, and a couple of posts on prison privatization.