Academic journal article Northwestern University Law Review

Private Ordering

Academic journal article Northwestern University Law Review

Private Ordering

Article excerpt



The sharing of regulatory authority with private actors (i.e., private ordering) can occur in many ways.1 For example, government often delegates the authority to make specific regulatory determinations to private actors, or sanctions and enforces privately made rules.2 Private ordering has lengthy historical precedent3 and, in recent years, has been rapidly expanding in scope, both domestically and abroad.4 Nowhere is its expansion as prevaIMAGE FORMULA6

lent as in the commercial, financial, and business sectors.5 Examples include the United States government's recent entrusting of the Internet domain system and the assignment of Internet protocol numbers with the Internet Corporation for Assigned Names and Numbers (ICANN), a private nonprofit corporation,6 or the delegation by the Securities and Exchange Commission of the power to promulgate public accounting standards to the privately organized, but independent,7 Financial Accounting Standards Board (FASB).8

The motivation behind commercial private ordering is different than that behind traditional private ordering; more significantly, it is deemed legitimate for reasons different than those that legitimize its traditional counterpart. Traditional private ordering, such as that performed by the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) and Underwriters Laboratories, is primarily motivated by the desire to "foster pluralism in the regulatory state,"9 as well as to reduce costs and delegate IMAGE FORMULA8

policymaking responsibilities to private interests.10 In contrast, the sole motivation for commercial private ordering is to reduce the cost of regulation.11 Traditional private ordering derives legitimacy from costly procedural safeguards--essentially the same as those protecting the legitimacy of administrative agency rulemaking-designed to ensure fair process and reasoned decisionmaking by the private actor.12 The purported legitimacy of commercial private ordering comes from other premises: private institutions can operate more efficiently than government by using market incentives to allocate public resources without having to take account of such extraneous matters as the state's legitimacy13 and the interests of the politicians, legislatures, and special interest groups.14 If the goal of commercial regulation is economic efficiency,15 private institutions can achieve IMAGE FORMULA10

that goal more easily than public actors. Thus, commercial private ordering is rarely restricted by the procedural safeguards that bind traditional private ordering.16

I question, however, the premise that the only goal of commercial regulation is efficiency.17 Even in a commercial context, society sometimes has other regulatory goals.18 There may, for example, be distributional goals such as fairness.19 Unrestricted private ordering should not attain legitimacy without safeguarding those goals.20 I also believe, however, that the safeguards by which traditional private ordering derives legitimacy may not be feasible for commercial private ordering. The cost of instituting those safeguards would likely offset any cost savings that motivate commercial private ordering in the first place, thereby undermining its raison IMAGE FORMULA12

d'etre.21 I propose that distributional and other nonefficiency regulatory goals22 be safeguarded directly by imposing constraints on the private actors-requiring them to demonstrate how actual regulatory goals are being protected-as a less costly way to promote legitimacy.23

Before beginning the analysis, it should be cautioned that most of the literature concerning private ordering-commercial or otherwise-either discusses the subject using amorphous generalities or else focuses on specific examples of private ordering without considering their place within the subject's overall framework. …

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