Economic rent is the difference between what you should be earning if the cards weren’t so stacked in your favor and what you in fact earn.
If you are a lawyer, part of your income is economic rent derived from barriers to entry to the law business — three years of law school, bar exams, rules against the unauthorized practice of law and the like. If you are a software company and happen to be turning a profit, at least part of that profit is economic rent from the protection afforded your software by intellectual property laws. If you invest in real estate, part of the return on your real estate is economic rent derived from zoning laws and other restrictions that burden your neighbors.
Economic rent isn’t just for manipulators in three-piece suits who throw widows and orphans off trains in their spare time. Economic rent arises from, among other sources, the rules that govern a complicated society.
The government — with its rules, its procedures — is the great dispenser of economic rent opportunities. Tip O’Neill taught us that all politics is local. Had Tip been an economist, he would have added that all politics is rent-seeking.
Here’s an interesting fact: Economic rent includes the premium value in a home in a neighborhood with good schools and classy neighbors. And therein lies the fodder for much of local politics. High-minded formulations of town hall democracy notwithstanding, local politics draws its most fervent citizen participation when matters affecting most people’s primary source of economic rent — the homestead — come before public bodies.
Progress being the ugly, unplanned beast that it is, grassroots action occurs most frequently when real estate developers apply for permission to shoehorn in one more retail strip, one more housing development across the street from your house. Furthermore, because a lot is at stake for the developer and for the existing homeowners, each is willing to bring a large budget to bear in defending or enhancing its economic rent status.
For a developer with cash, that means cadres of lawyers and engineers. For a homeowner with no cash, that means an intense, dogged focus on the regulatory process, attending meetings, organizing neighbors and barking self-righteously into the microphones of TV reporters.
Sometimes that intensity shades into shrill, and it sometimes shades — at least to hear the real estate developers on the receiving end tell it — into defamation, abuse of process and other sanctionable conduct.
Therein lies a genuinely difficult policy issue. The point of friction between a citizen’s exercise of his or her First Amendment right and the right of businesses to conduct business free of bad faith interference creates a mismatch between the dollars at stake and the capacity of the noncommercial property owner to stay in the fight.
Here is what happens: A real estate developer proposes a project that residents dislike. Opponents throw everything at the developer — delaying tactics in the regulatory process, noisy demonstrations and some nasty words for consumption on the nightly news. The aggrieved developer in response sues the project opponents under theories of defamation and abuse of process. (Actually, in Maryland, it’s tough to win an abuse of process case.)
If the defendant in the counter suit is a private citizen or a community group, then there is a troubling mismatch of adversaries. Here is where the conceit of homeowners as economic rent-seekers breaks down. Yes, they want to keep up neighborhood values by keeping the new interstate spur at a sound-muffled distance, but their budget for doing so does not extend beyond the payment recited in their monthly mortgage coupon books. A real estate developer prices a project to cover the cost of regulatory hurdles. Homeowners, in contrast, don’t have a line item in their housing budget for the defense of lawsuits.
Lawsuits that developers file against project opponents are called “strategic lawsuits against public participation.” (shorthand: “SLAPP suits”) Rent seeking aside, SLAPP suits are problematic because they punish people who elect to participate in a public process, and they discourage the exercise of First Amendment rights.
Although SLAPP suits have a populist, Goliath-hitting-on-David connotation, the first significant SLAPP suits in which courts addressed the constitutional issue percolated up in the quintessentially robber baron realm of anti-trust disputes.
In a series of cases decided in the early 1960’s (the Noerr case and the Pennington case, hence the “Noerr-Pennington” doctrine), the U.S. Supreme Court ruled that even plaintiffs who are motivated by a desire to stifle competition are protected in the exercise of their First Amendment rights.
For example, Sun Microsystems and AOL avidly supported the Justice Department’s recent anti-trust efforts against Microsoft. Had Microsoft elected to respond with a SLAPP suite against either or both, such a suit would have been dismissed under the Noerr-Pennington doctrine.
While the SLAPPors in Noerr and Pennington accused the SLAPPees of anti-trust violations, a SLAPP suit arising from a real estate development controversy typically contains allegations of defamation or abuse of process, that is, spreading lies about some element of the developer’s past or lodging bad-faith objections at every step of the approval process.
Courts have struggled to balance competing interests. When a defendant is accused of defamation in a SLAPP suit, the standard for dismissing the suit is often whether the SLAPP defendant either knew that the statement was false, or acted recklessly regarding its truth.
When a defendant is accused of abuse of process in a SLAPP suit, the standard (outside Maryland) for dismissing the suit is generally whether the SLAPPee is exercising its procedural rights in the public process for the express purpose of grinding down the opposition, that is, without a good faith belief in the merits of the positions taken. (In Maryland, a plaintiff in an abuse of process case would have to have suffered a seizure of person or property. Who says Maryland is anti-business?)
This can get confusing. A SLAPP suit is, by definition, itself intended to grind down the opposition, and yet the basis for the developer bringing the SLAPP suit is that the other guy is doing just that, trying to grind the developer down.
Consider Village of Lake Barrington, an Illinois case in which village elders filed a SLAPP suit against some village residents, claiming tortious interference with contract. The court dismissed the village’s tort claim, ruling that the defendants in the SLAPP suit, the property owners, enjoyed a conditional privilege under Noerr-Pennington.
Interestingly, the court also ruled that the residents’ civil rights counterclaim against the township could proceed under the “sham litigation” exception to the Noerr-Pennington doctrine.
In other words, the residents out-SLAPPed the town fathers. Not only did they persuade the court to dismiss the SLAPP suit, but they used the township’s SLAPP suit as grounds for their own claim of harassment. (If this column already contains more economic theory than you can bear, don’t get me started on externalities. Externalities explain the undesirable cost shifting that leads to the spiral of litigation found in the Village of Lake Barrington case.)
A Maryland SLAPP suit bill has been percolating in the General Assembly for several years. Its primary sponsor, Assistant House Majority Leader Sandy Rosenberg (D-Dist. 41) of Baltimore, is optimistic about passage this winter.
The draft legislation directs courts to either postpone proceedings in the SLAPP suit until the underlying public controversy is resolved, or to address the case in a motion to dismiss “as soon as practicable.”
Rosenberg’s bill defines a SLAPP suit as one brought in bad faith against someone exercising his or her free speech and related rights.
SLAPP suits against private citizens are a nasty business, and there needs to be a special rule to even the playing field between the guys with the money and private citizens who have legitimate interests, but not much cash to play.
Rosenberg’s bill is seductively simple, but steers SLAPP controversies deeper into the forest of uncertain, cash-draining litigation.
For example, under the proposed legislation, a lawsuit is a SLAPP suit if it is brought in “bad faith.” There are already rules, however, against bringing lawsuits in bad faith, and there are sanctions against lawyers for doing so. This bill directs courts to consider whether to merely “stay proceedings” in a lawsuit filed in bad faith, and yet existing law already directs courts to summarily dismiss such suits.
The proposed bill also provides that the defendant in a SLAPP suit is not civilly liable for exercising its First Amendment rights, provided it is doing so “in good faith.” But isn’t that already the law?
The bill also contemplates that a court may quickly hear a motion to dismiss the case. Typically a motion to dismiss involves the validity of the pleadings, rather than an inquiry into the underlying facts. The question of whether a lawsuit is a SLAPP suit requires a factual inquiry. Consequently, a motion to dismiss is not an appropriate proceeding for the issue. Instead, a plaintiff is entitled to engage in some discovery before dismissal of a case on factual grounds.
Finally, the bill contemplates an alternate remedy, postponing the SLAPP suit until the underlying public controversy is resolved. That’s a reasonable compromise between competing substantive interests. The bill, however, does not provide a procedural context for making the factual determination that the suit in question is in fact a SLAPP suit.
In the interests of full disclosure, permit me to state that I am a principled opponent of any law that would in any way impair my real estate developer clients’ full and prompt recourse to the courts in response to defamatory statements by project opponents. Unless, of course, I represent opponents to a development, in which case I believe I can state without fear of contradiction that the rights enshrined in the First Amendment are paramount over commercial interests, and therefore trump, everywhere and at all times, the mercenary pursuits of the real estate industry.
I shall now put aside my personal bias and propose an alternative to Rosenberg’s bill that addresses the legitimate concerns of all interested parties.
My statute might read something like this: A lawsuit is a SLAPP suit if it is brought against a party exercising his, her or its First Amendment rights; the lawsuit is materially related to the defendant’s First Amendment activities; and the bringing of the suit has, as one of its principal purposes, the intention to inhibit the exercise by the defendants of their First Amendment rights.
Within 10 days of a motion by any party, a court will conduct a preliminary hearing to determine whether the suit in question constitutes a SLAPP suit. The plaintiff in the alleged SLAPP suit (the respondent in the preliminary hearing) has the burden of persuading the court that the suit in question is not a SLAPP suit.
If the court rules that the suit is a SLAPP suit, then three things happen: First, the plaintiff in the SLAPP suit must pay the defendant’s attorney’s fees incurred in connection with the preliminary hearing.
Second, all proceedings with respect to the SLAPP suit, including discovery, are postponed until the earlier of two years (three years?) from the date of the preliminary hearing or the date the matter about which the defendant communicated is no longer pending before a government body.
Third and last, if the defendant prevails in the actual disposition of the SLAPP suit, the SLAPP suit plaintiff pays the defendant’s attorneys fees.
Procedurally, there are fewer moving parts, the standard of proof is clear, and the law doesn’t clash with the procedural conventions surrounding motions to dismiss. Indeed, courts are accustomed, in the context of temporary restraining orders and preliminary injunctions, to making a preliminary, tentative factual determination based on hurriedly assembled and presented facts. Deciding whether a lawsuit is more likely than not a SLAPP suit is not burdensome or substantively difficult for a court.
This proposal also will navigate litigants past competing substantive areas of law, such as attorney ethics and civil liability arising from the exercise of constitutional rights.
Returning to the beginning thesis, while trying to keep the other guy out of your neighborhood is economic rentseeking, exercising your First Amendment rights is not.
A perfectly wise bill will minimize the cost of exercising our civil rights, and it will in addition allow real estate developers to fight the honest fight. Keeping barriers to entry low in the world of commerce is good. It diminishes the rent-seeking opportunity of others.
© Maryland Gazette. Reprinted with permission.