There are always policy questions about the degree to which public regulation should be enforced by government actors, by private actors, or by a combination of both.  In securities law, for example, striking the right balance is a perennial debate.

Which is why I read with interest this New York Times story about efforts to combat counterfeiting in China. 

China has a serious problem with counterfeit goods.  To some extent, that kind of problem can be addressed via government enforcement actions; however, China also suffers from what one might describe as an extreme case of regulatory capture – namely, corruption at the local level that compromises enforcement efforts.

So China has turned to private enforcement, by bolstering its consumer protection laws: consumers who purchase counterfeit goods can get damages equal to several times the value of the product.  And predictably, these laws have spawned a new profession: counterfeit hunting.

That by itself would not be so bad – why not let consumers, acting like private attorneys general, ferret out counterfeit goods?  The problem is, since damages are based on the number of products purchased, hunters purchase counterfeits in large numbers, filling warehouses with them.  They also target minor labeling errors as much as serious fraud. 

In other words, they exhibit all of the problems inherent in private enforcement: failure to exercise discretion over where to direct resources, arbitraging claims/creating injuries (and failing to mitigate damage) in order to support a lawsuit.  These are precisely the accusations that have been leveled at, for example, stockholder plaintiffs and appraisal arbitrageurs. 

China is apparently considering a new law that would ban counterfeit hunting as a commercial activity – akin to PSLRA provisions that prohibit so-called professional plaintiffs.  But given the unreliability of government enforcement in China, it strikes me that to do so would throw the baby out with the bathwater.  Yet absent such measures, China’s left with an extreme version of a common problem: private plaintiffs don’t draw distinctions between serious problems and minor ones if the monetary payout is the same.  That distinction is one that has to be drawn in the substantive law.  

We do that in securities by, for example, imposing standing, reliance, and loss causation requirements on private plaintiffs that government does not have to satisfy, and allowing government to bring claims based on an expanded set of violations (e.g., aiding and abetting).  And we’ve done that, in a roundabout way, with state law fiduciary claims: there is no government enforcement in that arena, which has led to increasing limitations on private liability (exculpatory provisions, demand requirements) with no corresponding expansion of state enforcement.  But that regulatory gap has been rapidly filled at the federal level with fiduciary-like requirements (independent director requirements, books and records requirements, and so forth) that can only be enforced by regulators.

It’s an imperfect system, of course; it’ll be interesting to see how China grapples with the same problem.