How Does Privatization Affect Government Liability?

Commentary

How Does Privatization Affect Government Liability?

Recent Supreme Court cases explore government contractor immunity

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. This is nicely illustrated by two cases from the U.S. Supreme Court’s recent term: Campbell-Ewald Co. v. Gomez, which was released in January 2016, and Sheriff v. Gillie, which was released in May 2016.

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The United States Navy wanted to encourage young people to learn more about the Navy. It contracted with Campbell-Ewald Co., an advertising and marketing agency, to send text messages to likely recruits. “Destined for something big? Do it in the Navy. Get a career. An education. And a chance to serve a greater cause. For a FREE Navy video call [phone number].” Campbell-Ewald, in turn, contracted with Mindmatic LLC to get a list of over 100,000 cell phone numbers of 18-24-year-olds who had agreed to receive text message solicitations.

Jose Gomez got one of these text messages, but he had never opted in (and he was nearly 40). He understandably found the unsolicited text message annoying. But it wasn’t just annoying: Gomez argued that it also violated the Telephone Consumer Protection Act (TCPA), which prohibits “mak[ing] any call [including a text message] . . . using any automatic telephone dialing system . . . to any telephone number assigned to a . . . cellular telephone service” without the express prior consent of the recipient. He filed a class-action complaint, seeking damages and an injunction to prevent Campbell-Ewald from continuing its involvement in unsolicited text messaging.

The district court dismissed the class action based on the idea that Campbell-Ewald, as the Navy’s contractor, benefited from the same sovereign immunity that would have applied to the Navy itself if it had been doing its own text messaging.

The basis for this holding was a 1940 Supreme Court case named Yearsley v. W.A. Ross Construction Co. In that case, W.A. Ross Construction Co. had built dikes in the Missouri River and, in so doing, washed away part of Yearsley’s land. Yearsley sued for damages. But W.A. Ross explained that it was doing the work under a government contract to improve the navigation of the Missouri River, under the direction of the Secretary of War and the supervision of the Chief of Engineers of the United States, as authorized by an Act of Congress.

The Supreme Court held in Yearsley that W.A. Ross wasn’t liable: “[I]t is clear that if this authority to carry out the project was validly conferred . . . there is no liability on the part of the contractor for executing its will. Where an agent or officer of the Government purporting to act on its behalf has been held to be liable for his conduct causing injury to another, the ground of liability has been found to be either that he exceeded his authority or that it was not validly conferred.”

(Yearsley also argued that the act of the contractor was a government taking of his property for which he was entitled to just compensation—but if so, the Court held, the remedy would be to sue the government in the Court of Claims for just compensation, and again there would be no liability for W.A. Ross, the contractor.)

Just as W.A. Ross Construction Co. acquired a sort of “derivative sovereign immunity” by doing the government’s dike-building work under contract, so, the district court said, did Campbell-Ewald Co. acquire the government’s sovereign immunity from TCPA damages by doing the government’s text-messaging work under contract.

The Ninth Circuit reversed the district court, and the Supreme Court (by a 6–3 vote, with Justice Ginsburg writing for five Justices) agreed with the Ninth Circuit that the case shouldn’t have been dismissed. Most of the Campbell-Ewald Co. v. Gomez opinion deals with an unrelated procedural issue, and all of the disagreement on the Court related to that issue. On the government contractor immunity issue, no one disagreed with Justice Ginsburg’s analysis.

The 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. (Or Campbell-Ewald’s subcontractor, Mindmatic—but Campbell-Ewald is responsible for its subcontractors.) 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.

Alert readers might remember a post from May 2013 about federal contractor immunity, and wonder whether the tort immunity recognized in Boyle v. United Technologies Corp. (1988) has any applicability here. Boyle was a tort case, based on Virginia law, against a military contractor that had built an allegedly defective helicopter. The Supreme Court, in Boyle, had held that United Technologies was immune from suit because of the strong federal interest in avoiding liability for its contractors that would ultimately be passed on to the federal taxpayer.

It turns out that Boyle doesn’t apply, for at least two reasons. One is a reason noted by the Ninth Circuit: Boyle was about federal contractors’ immunity to state tort law. It was an opinion about when strong federal interests can preempt a state liability rule. So it was primarily about the federalism aspects of federal-state preemption. But Campbell-Ewald is a lawsuit under federal law, the TCPA, so these federalism issues don’t arise.

But a second reason is found in Boyle‘s holding itself. Boyle held that a federal contractor was immune when, among other factors, “(1) the United States approved reasonably precise specifications” and “(2) the equipment conformed to those specifications.” So the reason why Boyle doesn’t apply here is similar to the reason why Yearsley doesn’t apply: Campbell-Ewald exceeded its authorization by sending messages to people who hadn’t opted in. It’s not as if the Navy had specifically asked for Campbell-Ewald to use a broad and sloppy list that hadn’t been checked for non-opt-ins.

Finally, Campbell-Ewald raised an argument for immunity based on Filarsky v. Delia, which has already been discussed in this April 2013 post. Filarsky was a federal civil rights case against a private attorney under contract with a municipality. State officers don’t get the state’s sovereign immunity from suit, but they do get a limited immunity called “qualified immunity”: this immunity kicks in as long as they didn’t violate a “clearly established right.”

But this qualified immunity claim was likewise doomed, because both the TCPA’s requirements and the Navy’s instructions were “clearly established.”

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So 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).

Pamela Gillie and Hazel Meadows received debt collection letters on the Ohio Attorney General’s letterhead. Gillie owed money to a state-run hospital; Meadows owed money on a University of Akron student loan. The letters said that they were attempts to collect a debt and that the senders were debt collectors; one was signed by Sarah Sheriff (not an actual sheriff), “Special Counsel to the Attorney General for the State of Ohio,” and the other was signed by Eric Jones, “Outside Counsel for the Attorney General’s Office.” Sheriff and Jones—though they used the Ohio Attorney General’s letterhead—were actually private lawyers, independent contractors appointed as “special counsel” by the state of Ohio to collect the state’s debts.

Gillie and Meadows filed a class action arguing that Sheriff, Jones, and others, in using the Attorney General’s letterhead, had violated the FDCPA by employing “false, deceptive, or misleading” practices.

The lawyer-contractors pointed out that the FDCPA, by its terms, does not apply to “any officer or employee of the United States or any State to the extent that collecting or attempting to collect any debt is in the performance of his official duties.” And they argued that they were in fact “officer[s]” of the state of Ohio and therefore exempt from the FDCPA. They also argued that even if they were subject to the FDCPA, they weren’t liable anyway, because nothing they did was false, deceptive, or misleading.

The district court granted summary judgment to the lawyer-contractors, ruling that (1) they were “officer[s]” and (2) their use of the letterhead wasn’t false or misleading. The Sixth Circuit reversed, in a 2–1 decision. The majority ruled against the lawyers on both grounds, and in particular held, mainly for textual reasons related to dictionary definitions of “officer” and the like, that an independent contractor couldn’t count as an “officer.” The dissenter, Judge Sutton, on the other hand, would have ruled in favor of the lawyers on both grounds, and stressed the federalism point that denying FDCPA “officer” immunity to independent contractors would interfere with the states’ decisions on how to structure their own governments—in other words, penalize states for their decisions to privatize.

The Supreme Court reversed the Sixth Circuit and agreed with the lawyer-contractors, in a unanimous opinion again written by Justice Ginsburg. The Court (mostly) skipped the FDCPA “officer” immunity issue. Instead, it held that even if these lawyers lacked immunity, they would still win because there was nothing false or misleading about the wording of their letters or their use of the attorney general’s letterhead.

But while 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.

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Are these two cases inconsistent?

In a technical legal sense, no. Sheriff concerned the scope of an “officer” immunity explicitly spelled out in the statute and specific to the FDCPA—Congress can choose in every statute whether to have immunity at all, and if so, who to give it to. Whereas Campbell-Ewald concerned the scope of a general, free-floating immunity, unmoored from any statutory language at all and entirely made up by judges; it’s not surprising to see courts hesitate to expand it, especially in this age that tends to be skeptical of broad assertions of federal common law.

But in 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.

Alexander “Sasha” Volokh is an associate professor of law at Emory Law School. An archive of his previous Reason.org articles is available here.

Alexander "Sasha" Volokh is an associate professor of law at Emory Law School. He joined the Emory Law faculty in Fall 2009.