Public Problems, Private Answers: Reforming Industry Self-Governance Law for the 21st Century

Abstract

For the past twenty years, large corporations have routinely developed and enforced industry-wide standards to address problems that are only distantly related to earning a profit. This includes writing detailed private regulations for environmental protection, national security, working conditions, and other topics formerly reserved to governments. At the same time, the US Supreme Court has said that the Sherman Act forbids any “extra-governmental agency” that “provides extra-judicial tribunals for the determination and punishment of violations.” This seems to ban enforceable rules. Despite this, many US policymakers continue to argue that private standards are efficient and desirable. Many corporations are sympathetic but fear legal liability and are reluctant to participate unless and until the law is clarified. This article asks how existing law can be reformed to arrive at principled rules for deciding when private standards violate the Sherman Act. We begin with an historical account of recent private initiatives to regulate food processing, fisheries, forestry, and coffee production. We argue that these private rules are often just as effective – and burdensome – as government regulation. We then generalize from this evidence to explain when and how large corporations are able to impose their preferences through industry-wide standards. We also describe the politics that determines how large corporations use their power. We argue that the need to earn positive profit and defend market share frequently encourages – and sometimes forces – large companies to choose standards that please consumers. In these cases, consumers act as a shadow electorate that constrains private power in much the same way that real voters constrain elected officials. Finally, our examples show that big corporations often decide to share power with smaller rivals, suppliers, NGOs, and other stakeholders. We argue that these delegations are genuine and make private standards more accountable. The article concludes by asking how current law can be reformed. We argue that the Sherman Act serves two goals. The first is economic efficiency. We argue that private standards advance this goal by addressing problems (“externalities”) that lack well-defined market prices. We argue that private bodies should be allowed to address such problems in the first instance knowing that government may later step in to change or supplement policy. The second goal is to protect democracy from private power. We argue that this danger is minimal so long as (a) market structure encourages corporations to make choices that please consumers and other shadow electorates, (b) the standard setting body represents a wide range of affected stakeholders, or (c) industry selects the prevailing standard from multiple competing proposals. Significantly, all of these tests can be determined from objective evidence without obscure metaphysical inquiries into when private power becomes “illegitimate” or “poses a threat” to democratic politics.