Sovereign Immunity

by | Oct 12, 1998 | LAW

How does having legal immunity for completely arbitrary acts preserve this confidence? In Ayn Rand's words, "blank out."

Under the doctrine of sovereign immunity, governmental agencies and government employees are usually immune from law suits. The doctrine originally came from England where it originated in the principle that “The King Can Do No Wrong.” In this country, the rule is justified by the necessity to protect the financial well-being of the government and the (proper) reticence to give the judicial branch leverage over government spending.

There are two modern trends in connection with this doctrine. On the one hand, governments are consenting to be sued in many situations. On the other, with the expansion of government activity, the doctrine causes more unredressed harm.

An example of the latter is found in regulation of the securities industry. In addition to the Securities and Exchange Commission, some stock exchanges regulate the market. A recent case illustrates how a stock exchange, NASDAQ in this case, can use sovereign immunity to avoid the consequences of its actions.

Sparta Surgical Corp. is a corporation traded on NASDAQ. After making applications to, and getting the appropriate rulings from, NASDAQ and the SEC, Sparta and its underwriter began selling its shares. Later, NASDAQ “de-listed” Sparta’s stock and suspended trading without an explanation. It subsequently lifted the suspension, and trading in the stock resumed. However, this did not eliminate the damage to Sparta’s reputation and resulting harm to its ability to sell its stock.

Sparta sued NASDAQ to redress these damages, but the court held that NASDAQ was immune from suit because of its quasi-governmental character—even if its action was done in bad faith.

[According to the court], this immunity is necessary because NASDAQ is “entrusted with the authority to preserve and strengthen the quality of and public confidence in its market.” How does having legal immunity for completely arbitrary acts preserve this confidence? In Ayn Rand’s words, “blank out.”

Copyright © The Association for Objective Law. All rights reserved. Republished in Capitalism Magazine by permission of TAFOL.

The Association for Objective Law is a non-profit corporation whose purpose is to advance Objectivism, the philosophy of Ayn Rand, as the basis of a proper legal system.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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