In recent lawsuits filed against the Trump administration, New York Attorney General Letitia James has insisted on the importance of the rule of law in our society. Ironically, James has filed suit against ExxonMobil this week in a manner that poses a direct threat to the rule of law. In this case, the lawsuit remedy has become a tool for political purposes featuring dubious claims about ExxonMobil’s accounting for the cost of carbon emissions.
The rule of law is indeed essential to a functioning and just society. Rule of law is shorthand for the proposition that law should be predictable; should be fairly and evenly applied; should be blind to the identity of particular defendants or aggrieved parties; and should be bounded by principles of fairness and justice. In the ExxonMobil case, James has committed abuses of power that lead observers to question where her commitment to the rule of law is sincere.
James is using the Martin Act in this filing of civil fraud charges against the company. This law is, in itself, a dangerous and unbounded tool. While we can all agree that those who commit fraud should experience appropriate consequences, the Martin Act is notorious for allowing the New York attorney general to bring charges even when the traditional common law elements of a fraud claim are not present.
The Martin Act allows the attorney general of New York to bring an action alleging fraud even when there’s no intent by the defendant to commit fraud. That’s right, the Martin Act allows fraud claims even when they don’t meet the definition of fraud contained in hundreds of years of common law. Many constitutional scholars have called for reform of the Martin Act for this reason.
The flexible boundaries of the Martin Act require the attorney general to exercise discretion when employing it as a tool to protect the public interest. Unfortunately, it is evident that the ongoing case against ExxonMobil flies in the face of prudent and judicious use of the law.
To frame an appropriate view of this litigation, consider the central allegation of the case. The Wall Street Journal editorial board critiqued the case appropriately: “The trial charge boils down to the difference between Exxon’s estimate of the ‘proxy cost’ of a tax on carbon that it shared with the public and a lower estimate of greenhouse-gas (GHG) costs per ton that it used internally. Note that this is the opposite of the original oil-as-tobacco theory, which was that Exxon lied to the public. The charge now is that Exxon told the truth to the public but lied internally.”
So how did the company allegedly commit “fraud” to its investors?
Another point to keep in mind, the SEC opened a parallel investigation into ExxonMobil in 2016. The commission ultimately dropped the investigation in 2018 absent any enforcement actions against the company after finding no wrongdoing on the company’s part. It’s astonishing to think that after two years of reviewing the exact same documentation offered to the New York attorney general, the SEC found insufficient evidence to sustain a reprimand against the company. Soon after the SEC’s decision, the attorney general of New York then opened the current fishing expedition.
Letitia James demonstrates throughout this case a lack of understanding of basic corporate accounting principles. For example, the case alleges that Exxon kept “two sets of books” in accounting for the cost of carbon. She demonstrates a lack of familiarity with the basic difference between external financial accounting and internal cost accounting – two totally distinct metrics.
With other companies, their external financial accounting includes reporting to external investors and follows Generally Accepted Accounting Principles promulgated by the Financial Accounting Standards Board. Other internal cost accounting metrics assess managerial costs and are used for the purpose of internally tracking resources through the production process and to help a company make internal investment decisions.
Also of concern in this entire affair are potential violations of New York government transparency laws committed by James, by conducting official business through private communications. She refuses to comply with requests from ExxonMobil for those messages.
Debates about climate change regulation should take place in the appropriate political sphere, the legislature. By attempting to circumvent voters and the legislative process, and instead regulate climate change through the backdoor of abusive lawsuits unbound by the common law, the New York Attorney General Letitia James shows her office’s disdain for the rule of law.
J.W. Verret (@JWVerret) is an associate professor at the George Mason University Antonin Scalia Law School.
