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The Virtues of Legal Restraint

By, 06/19/2007

It's good to be hypercritical of the antics of activist judges who legislate from the bench. As if we didn't already have enough laws on the books, federal judges have the filthy habit of establishing "creative" precedents in their decisions (essentially writing new laws) instead of properly interpreting and upholding existing laws.

It's doubly abhorrent when courts are saturated with frivolous lawsuits that reallocate wealth based upon strange interpretive rulings. Such practices impede innovation and erode free commerce. Decisions like the famous multi-million dollar judgment in favor of the plaintiff whose McDonald's coffee was too hot are just the tip of the iceberg. It's typical for major multinational companies to reserve billions each year for expected legal fees and settlements.

The switch from "upholding the law" to "entitlement via government authority" is a major impediment to a free society with property rights. The very possibility a business could be nearly bankrupted by legal fees and outsized punitive charges because of creative judicial interpretations is a huge ongoing risk.

So it will no doubt shock you to read that the fine, upstanding free market capitalists here at the MarketMinder are today applauding the federal legal system. In a practically once-in-a-lifetime chance to soak the big boys with a tide of costly lawsuits, the Supreme Court has thrown out an accusation that Walls Street firms were colluding in "Anti-trust" trading practices. By a count of 7 to 1, members of the wizened high court chose not to entertain the erroneous charge, but leave the matter to the already existing governing body, the Securities and Exchange Commission (SEC).

Justices Harden Wall Street Armor
By Jess Bravin and Aaron Lucchetti, Wall Street Journal (*site requires registration)
http://online.wsj.com/article/SB118210639769538241.html?mod=todays_us_page_one

We quote Justice Breyer (via the Wall Street Journal's Opinion Page):

"Only a fine, complex, detailed line separates" permissible activity from the forbidden. Allowing individual plaintiffs to sue "in dozens of different courts with different nonexpert judges and different nonexpert juries" would introduce uncertainty to the financial markets, he wrote. That risk could discourage underwriters from "a wide range of joint conduct that the securities law permits or encourages" but might nonetheless "lead to an antitrust lawsuit and the risk of treble damages."

It's truly a great thing to behold the judiciary branch showing a little restraint. Clearly, the plaintiffs intended to use federal anti-trust laws in a context they were not intended. (Incidentally, the SEC found no wrongdoing by the Wall Street firms in question.)

Instead of activist decisions, how about getting back to basics? One of the only things a government is truly good for is upholding stable, well defined property rights. That should be the focus—for without property rights, capitalism cannot function. For an insightful and authoritative history on the importance of property rights and economic development through history, read the Cato Institute's article:

Property Rights: The Key to Economic Development
by Gerald P. O'Driscoll Jr. and Lee Hoskins, The Cato Institute
http://www.cato.org/pubs/pas/pa482.pdf

Tort reform means freer markets, strong property rights, and protection from creative legal interpretations. Those things add up to greater prosperity for a society.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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