The Jean Monnet Program

Professor J.H.H. Weiler
European Union Jean Monnet Chair

Jean Monnet Working Paper 8/01

Holger Spamann

Choice of Law in a Federal System and an Internal Market

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The Jean Monnet Working Papers are published under the auspices of the
 Jean Monnet Program 
hosted at Harvard Law School from 1995 to 2001
and now based at New York University School of Law

ISSN 1087-2221
 Holger Spamann

Holger Spamann*:

Choice of Law in a Federal System and an Internal Market

This paper tries to develop a general framework for choice-of-law in a federal system and an internal market. The framework consists of two elements:
The first element is the criteria that should guide us in forging a choice-of-law rule, i.e., the answer to the question: How do we determine which choice-of-law rule is preferable? Recent European literature scrutinizes choice-of-law rules under the Dassonville / Cassis de Dijon test of Art. 28 EC, the parallel of the US Constitution’s Dormant Commerce Clause, in the first ever intensive exploration of the influence of the concept of the internal market on choice-of-law. But this European literature overemphasizes a few “private interests”, while largely ignoring the “state interests” involved, i.e., the horizontal power distribution of the federal system, an important element extensively addressed by the US literature. This paper joins these European and American ideas on a topic of common interest, to develop more sound criteria for forging choice-of-law rules in a system that is both federal and an internal market.
The second element is the authority to make choice-of-law rules, i.e., the answer to the question: Who gets to determine which choice-of-law rule is right? In a federal system, this authority should be exclusively the union's. It should ideally be vested in the federal legislature, otherwise possibly in the federal courts. This paper agrees with a growing body of US literature that finds this ideal state to be embodied in the US Constitution. In Europe, authors merely advocate a federal control of state choice-of-law rules (under the EC Freedoms), but this seems to be no more than a third-best cost-inefficient substitute for the (supposedly) missing European federal law-making power in choice-of-law matters.

Table of Contents
I.	Introduction	1
A.	The European Debate	1
B.	Answers From the US ?	1
C.	Purpose and Content of this Paper	2
D.	Disclaimer	3
II.	Prologue: Choice-of-Law Methodology	3
A.	Interest Analysis	3
B.	Non-Discrimination	4
C.	Rules vs. Standards or ad-hoc Decisions	5
D.	Territorial Criteria	6
III.	General Thoughts on Choice-of-Law in a Federal System	6
A.	The Case for Establishing a Union, and Choice-of-Law	7
1.	Beneficial Cooperation	7
2.	Beneficial Cooperation and the Federal System	8
3.	Diversity in Choice-of-Law ?	9
a)	Introduction	9
b)	A Case For Diversity in Choice-of-Law ?	9
c)	The Case Against Diversity in Choice-of-Law	10
B.	The Case for Preserving the States, and Choice-of-Law	10
1.	Democracy and Local Self-Governance – The Enactment of Local Preferences	10
2.	Comparative Regulatory Advantage – Adaptation to Local Conditions	11
3.	Laboratories and Regulatory Competition	12
a)	The Principle	12
b)	Putting the Idea into Practice: The Examples of Protection of Minors, and of Product Liability	13
c)	State Competition, and Nationality / Domicile	13
C.	Substantive Bias in Particular	14
D.	Summary	15
IV.	Constitutional Requirements for Choice-of-Law in the US and EU Federal Systems	16
A.	US Constitutional Requirements	16
1.	Contemporary US Supreme Court Jurisprudence	16
2.	Alternative Interpretation of the US Constitution	16
a)	General Overview	16
b)	Privileges & Immunities Clause	17
c)	Full Faith & Credit Clause	17
d)	The Role of the Federal Courts	17
3.	Conclusion	18
B.	EU Law	18
1.	Non-Discrimination, and Neutral Choice-of-Law Rules of the Member States	18
2.	EU Choice-of-Law Rules	19
V.	Federalism and the Single Market	19
A.	Positive Integration	20
B.	Negative Integration	20
1.	The Burden-Test – Dassonville / Cassis de Dijon & Pike	20
2.	Possible Limitations on the Scope of the Burden-Test	21
3.	The Policy of the Burden-Test	22
a)	A Stringent Burden-Test is not Objective	22
b)	Courts vs. Legislatures	23
c)	Federal Courts vs. State Legislatures	23
d)	Substantive Content of the Freedoms and the Dormant Commerce Clause ? – Concluding Remarks on Federalism and the Internal Market	24
4.	Annex: Private Law Rules as a Burden ? The Allegedly Special Enabling Function of Private Law	24

VI.	Choice of Law in an Internal Market	25
A.	Introduction	25
1.	No Discrimination Against Interstate Commerce	25
2.	Tension between Federalistic Legislative Diversity and the Internal Market	26
3.	Content of this Section	26
4.	Relevance of the following Discussion	26
B.	The Tension Between Federalistic Diversity and the Requirements of an Internal Market Revisited – Bibb v. Navajo Freight Lines	27
1.	The Argument: Conflicting State Regulations	27
2.	The Consequence: Invalidation of the Law	27
3.	Making Sense of Bibb	28
C.	Auxiliary Dormant Commerce Clause Doctrines in Edgar v. MITE and CTS v. Dynamics	28
1.	Preliminary Remarks on the Holdings and the Consistency of the two Decisions	28
2.	No Direct State Regulation of Interstate Commerce	29
3.	State Laws Subjecting Activities to Inconsistent Regulations of Different States	29
D.	The Burden-Test as Applied to Choice-of-Law	30
1.	Burdens on the Level of Substantive Rules	30
2.	Burdens on the Level of Choice-of-Law	32
a)	Which are the Burdens on the Level of Choice-of-Law ?	32
(1)	Diversity of Choice-of-Law Rules	32
(2)	Diversity of Substantive Rules	32
(a)	Splintering of the Legal Regime	33
(b)	Familiarity with a Legal Order – Information Cost	34
b)	Intermezzo: A Note on the Structure of the Burden-Test	34
c)	Can We Do Anything About These Burdens on the Level of Choice-of-Law, or Are They Inevitable ?	35
(1)	Uniform Choice-of-Law Rules	35
(2)	What Can We Do About Diversity of Substantive Rules ?	35
(a)	Information Cost	35
(b)	Splintering of the Legal Regime	37
(3)	A Contractual Solution ?	37
d)	Do Private Interests Change in Foreign Lands ?	38
e)	Evaluating the Different Interests – A Task for A Court ?	39
(1)	Summary of the Prior Results	39
(2)	Adding the Level of Substantive Law	39
(3)	Role of the Courts	40
3.	Localization of Redeeming Legitimate Interests ("Extraterritoriality")	41
a)	The Concept	41
b)	Practical Relevance, and (again) the Role of the Courts	43
VII.	Conclusion	43
I.	
I.	Introduction
A.	The European Debate
In the past decade, the possible influence of the Dassonville / Cassis de Dijon doctrine of the (Fundamental) Freedoms of the European Community on intra-Community choice-of-law questions has been a favorite, and fiercely debated, topic among European choice-of-law scholars. The Dassonville / Cassis de Dijon doctrine of the Freedoms doctrine forbids, roughly speaking, all undue burdens on intra-Community trade. This requirement, some say, demands that absent special justification for applying the law of the importing state, the law of the home state of a product or service has to be, and can be, applied to everything from product specification to unfair competition and even the contract law under which the product or service is sold to consumers. Others contend that as between the laws of the importing and of the home state,  the law more favorable to the supplier has to be applied, barring special justification for applying the stricter law. The practical effect of these theses depends largely on how generously one admits justifications. So far, the debate has been inconclusive, with positions ranging from a complete denial of such possible influence, to a complete overhaul of present choice-of-law rules, or at least present choice-of-law doctrine. There is no jurisprudence of the ECJ to date.
B.	Answers From the US ?
The US has almost 200 years of constitutional experience with a Dormant Commerce Clause, which operates very much like the Freedoms. In particular, the US has over 200 years of experience with a federal, i.e., fragmented, legal system to which the Dormant Commerce Clause is juxtaposed. One might thus expect to find ready solutions to the European questions in US jurisprudence and legal scholarship. But, to the disappointment of the comparativist, the search for such solutions in the US case reports and law reviews is to a large extent fruitless. True, two US Supreme Court decisions, Edgar v. MITE Corp. (1982) and CTS Corp. v. Dynamics Corp. of America (1987), touch the issue. They are widely understood as constitutionally endorsing the internal affairs doctrine (which holds that the internal affairs of a corporation are to be governed by the laws of the chartering state). But these two decisions do not advance a ready theory, and are perhaps not even consistent with one another, as we will see later. There is, however, a vast jurisprudence and scholarship on general questions of federalism and choice-of-law, centering around the Full Faith and Credit Clause, the Privileges and Immunities Clause, and Due Process.
C.	Purpose and Content of this Paper
This paper will draw upon, and expand on, these two strings of literature to develop some elements of a general framework for choice-of-law in a federal system and an internal market. This framework contains two elements:
The first element is the criteria that should guide us in forging a choice-of-law rule. The aforementioned European literature merits praise for bringing more pragmatism into the European choice-of-law discussion. In analyzing particular choice-of-law rules, this literature has addressed the private interests involved in choice-of-law in more realist terms than most prior European choice-of-law scholarship. This is a highly welcome development that this paper will try to push even further, most of all by questionning the simplifying assumptions that have been made by the European authors. However, the European literature largely ignores the state interests involved, i.e., the horizontal power distribution of the federal system. This is an important element extensively addressed by the US literature.
The second element is the authority to make choice-of-law rules. In a federal system, this authority should be exclusively the Union's. It should ideally be vested in the federal legislator, otherwise possibly in the federal courts. The control of state choice-of-law rules under the Freedoms as advocated by the European authors seems to be a third-best substitute for the (supposedly) missing European parallel of the federal power in choice-of-law matters provided for by the US Constitution. If one does not make unwarranted simplifying assumptions, the task of controlling state choice-of-law rules under the Freedoms (or, for that matter, the Dormant Commerce Clause) is just not feasible for the federal court(s). Or, to be more precise, it is not worth the time – if the federal courts engaged in forging their own federal choice-of-law rules, the complexities would be similar, but the benefit much greater, such that the same margin of error would be less of a problem. In Europe, however, it seems impossible that the ECJ, with at most the Court of First Instance to support it, could devise a new set of European choice-of-law rules. The ECJ should therefore simply abstain from controlling non-discriminatory state choice-of-law rules. If a more far-reaching control were a result of a straightforward application of Freedoms doctrine, this would just be one more reason to reconsider that doctrine. It is good instinct to think that the Union should get involved in choice-of-law – but the ECJ is not the right organ of the Union for the task, least of all under standard Dassonville / Cassis de Dijon doctrine.
The first step in developing this framework will have to be some short remarks on the disputed basics of choice-of-law to position this paper in the larger methodological discussion (II.). Non-discrimination will be dealt with briefly in these methodological remarks – however important non-discrimination is for an internal market, this paper is mainly concerned with what goes beyond non-discrimination. The preliminary methodological remarks on choice-of-law will also set the stage for the first major part of the paper, general considerations on what choice-of-law should look like in a federal system (III.). Here, I will try to show that a federalistic state should vest the authority to make choice-of-law rules in the union (III.A.). I will also try to expand on the preliminary methodological remarks as to what considerations should guide the creation of such rules, although my findings will be rather unspecific and very fragile. Incidentally, my findings seem to vindicate the position that state interests matter in choice-of-law (III.B.). I do think, though, that quite a clear case can be made against substantive bias in interstate choice-of-law (III.C.). I will then briefly explore if, and to what extent, the current state of the law in the US and the EU conforms to what I found choice-of-law should be in a federal system. The results are mixed (IV.). With this federalistic background established, both in the abstract and in positive law, I will try to ascertain what the concept of the internal market can add to choice-of-law in a federal system. To this purpose, I will first need to make some general remarks on federalism and the internal market (V.). Most importantly, I will attend to the doctrinal uncertainties, and complex policy considerations, surrounding the Dassonville / Cassis de Dijon test (and its American counterpart, the Pike test) (V.B.). On a narrower view of this test, most choice-of-law rules would be outside the test's scope. I will show into what complicated problems a broader view of the test would lead with respect to choice-of-law rules, and argue that in view of these complexities, even if one were generally to retain the broader view, one should make an exception for choice-of-law (VI.D.). I will also analyze other approaches that have been proposed under the Dormant Commerce Clause (VI.B., C., D.3.). Only one of these approaches, founded on territoriality considerations, makes sense on a theoretical level, though. Even here, the practical impact should be minimal (VI.D.3.). Section VII concludes.
A reader of this paper might complain that except for some minor details, this paper is doing nothing but recasting in new language, and perhaps under the pressure of some controlling norm like the Freedoms or the Commerce Clause, centuries-old choice-of-law policy arguments. Indeed, this is true, and the same can be said about the "new" European literature discussing choice-of-law and the Freedoms. I would have two replies to this complaint. One, the complaint is one more argument why one would think that the whole discussion is nothing a federal court should bother about, unless it goes so far as to create its own federal choice-of-law rules. Two, I have a faint hope that the rearrangement of the centuries-old arguments in this paper is sufficiently informative as to make the paper worth reading.
D.	Disclaimer
The focus of this paper is conceptual rather than positivistic. It is comparative only to the extent that different ideas are taken from courts and scholars from different legal systems. On many points, this paper will be extremely cursory. Most importantly, it will often simply ignore many fine differences between US and European concepts – this paper is concerned with a rough systematic outline, and it is hoped that none of said small differences will be relevant for this purpose. Naturally, none of the propositions in this paper should be understood as what the law "is". They are merely recommendations as to what sensible courts and judges might want to make of it. Even as such recommendations, they should be taken with great caution. The subject is extremely complex, and greater minds have not been able to give clear contours to it, yet alone in a short paper like this. This paper is merely a first approach, an idea on how one might want to think about the issues covered.

II.	Prologue: Choice-of-Law Methodology
Before we can turn to choice-of-law questions in the federal system, a little prologue is necessary. This prologue concerns the jungle of choice-of-law methodology. "Jungle" seems to be an appropriate word. Theories on choice-of-law methodology are as diverse as species in a tropical rain forest. This paper is an inappropriate instrument for thinning out this jungle. But some general remarks seem necessary on the methodology used, or rather the assumptions made, in this paper. The brief remarks may not convince someone who does not agree anyway, but they will at least make clear between which trees of the jungle this paper stands.
A.	Interest Analysis
One assumption made throughout this paper is that states are not, and should not be, indifferent to whether their (mandatory) laws are applied in a particular case or not. States can have a more or less strong desire to have their laws applied depending on the case. This puts me on the American side of what is largely an Atlantic divide in choice-of-law theory. Being European, I guess I owe a brief justification in the form of answers to the questions: Why would a state care about the application of its laws ? Would it care at all ?
I cannot help thinking that the answer to the last question is a clear yes: If a state enacts a law, it does so for a reason – it wants to pursue some kind of policy, or, if we do not want to call any state decision (or any judge-made case law, for that matter) a policy, mediate between opposing private interests in conformity with some conception of "justice", this state's conception of "justice." This policy gets thwarted to a greater or less extent (this depends on the content of the other state's law, and on how many cases "escape" the state's law) if the state's law is not applied. A state would and should therefore not be indifferent to the application of its laws. The (mainly European) counter-voices contend that what matters in choice-of-law with regard to private law (= private international law, as opposed to choice-of-law in administrative law, social security law, and so on) is the interests of the private parties involved. Such interests surely exist, and we will discuss them later in section VI., in the context of the burden-test. But the argument that they are the only interests that matter is founded on a mistakenly sharp distinction of private law and public law, a distinction that we will encounter again, and try to refute, when discussing the burden-test. This paper acknowledges that both state and private interests exist and matter.
B.	Non-Discrimination
The answer to the question if states care at all about the application of their laws was also already the answer to why they would care: in order to realize their respective substantive policies. Now it is a common argument that states' policies are designed to further the interests not of any citizens, but only of their own citizens, and that consequently states have an interest in having their laws applied only if this is advantageous for one of their own citizens in the given case.
Factually, it is of course conceivable, although by no means obvious, that states want to further only the interests of their own citizens. Be it submitted here that even if that were the case, a state would be well advised not to withhold the beneficial application of its laws from out-of-state individuals in any given case. This is because the out-of-state individuals will in anticipation of the state's partiality change their behavior, with potentially highly detrimental consequences for the state's citizens. For example, a state might decide to apply all its consumer protection legislation, including anti-fraud statutes and the like, only if the consumer is a state citizen. At first sight, this might benefit business in the state, since the local businesses would not bump up against protective legislation anymore when they sue out-of-state consumers in the state's courts. But the out-of-state consumers might eventually notice this, and stop shopping in the state altogether. For a more drastic example, imagine a state which does not enforce its criminal laws if the victim is an out-of-state individual – presumably, not many tourists from other states would come to visit. Even an "egoistic" state might therefore want to apply its laws to the benefit of out-of-state individuals in many instances.
But quite apart from these factual issues, states in a federal system are legally barred from so limiting the application of their laws. The reason is the non-discrimination requirement. This would be abundantly clear if a state enacted a law protecting a person in a certain situation, or with certain attributes, with the addition "... and if the person is a citizen of this state." (The criminal law example in the last paragraph is another obvious demonstration.) It should not be different in the choice-of-law context. Attempts have been made to save the narrow (i.e., strongly egoistic) definition of state interests, and the resulting choice-of-law system, from the verdict of discrimination by clever reformulation of the problem, but these defenses are ultimately unconvincing. 
The preceding assertion calls for some clarifying remarks. First, following the conceptual line of this paper, one might want to ask if a non-discrimination requirement is a necessary part of a federal system. This is an interesting question, but not one that will be asked in this paper, for the simple reason that almost all federal systems have a non-discrimination requirement, at least the ones we are mainly concerned with here, the US and the EU. Second, and most importantly, one might want to object to the short treatment of non-discrimination that the issue is not so simple after all. Non-discrimination poses important problems in a federal system, especially in connection with the provision of government subsidies (like welfare payments). Choice-of-law in particular faces a dilemma: Is it discriminatory to apply a different law to a person in function of her different residence/nationality, because non-discrimination requires that people in otherwise (i.e., apart from residence/nationality) identical situations are submitted to the same rules? Or is it discriminatory not to apply a different law in function of her different residence/nationality, because equal treatment requires that everybody be submitted to their "own" law ? We will take up some aspects of this question in pragmatic terms in later sections – the dilemma seems to be inevitable (one way or another, there is some kind of discrimination), and so one should look pragmatically at which solution is better for the individuals concerned.
So if the interests of a state in the application of its laws are not defined by the wish to favor the state's own citizens, what can we say about these interests in order to determine which law to apply in a given case ? The answer was given above: The substantive policies of a state determine its interest in having its law applied in a given case. The interest of the state will depend on how strongly its policies are implicated (i.e., to what extent they would be furthered by application of its law, or thwarted by non-application), and, arguably, on how much importance the state attaches to the policy that is implicated. One of this paper's purposes is to develop some guidelines as to the limits of these policies, or as to how conflicts between two states policies should be resolved.
C.	Rules vs. Standards or ad-hoc Decisions
If state policies matter for choice-of-law, predictability should matter for choice-of-law, too. The simple reason is that many (and some, including myself, would say: most) rules' policies are implemented primarily through anticipation of positive or negative sanctions provided by the rule, i.e., through (dis-)incentives. Incentives only work where the sanctions can be foreseen, and sanctions can only be foreseen where the applicable rule is clear. If it is not clear whether a rule is applicable, the incentive mechanism will not work properly, because private actors will have to expect too much or too little sanctions with some degree of likelihood.
Even if one does not buy into last paragraph's argument, it seems clear that unpredictability as to the applicable law will not only protract existing litigation, but also lead to too much or too little litigation (or both, in different places), since potential litigants have more difficulty predicting the outcome of the suit.
Predictability as to the applicable law can only be achieved by some degree of specificity of choice-of-law rules. Of course, it is not possible to design choice-of-rules which perfectly allocate legislative spheres for all individual cases. Even if it were, the rules would have to be so complex that they could only be understood by a handful of specialists, and would be ignored in practice. At the same time, rules do not need to be inflexible and metaphysical as the First Restatement, always cited as the negative example of choice-of-law rules by those who dislike them. Substantive law, too, follows and embodies policies, and still it is, and must be (to make the task of judging feasible) at least partially laid down in rules, not broad standards - the judge who cannot understand a complex (choice-of-law) rule is unlikely to make a better (choice-of-law) decision free-handedly. Generally, the (theoretical) benefits (in terms of substantive policy realization) of refining choice-of-law through more complex rules should be weighed against the added administrative cost and risk of non-observance. Some set of choice-of-law rules is thus needed. This paper will proceed on that basis, and we will give some additional reasons for the superiority of rules vs. standards in choice-of-law below.
D.	Territorial Criteria
Lastly, the criteria relevant for choice-of-law are overwhelmingly territorial, at least in interstate choice-of-law in a federal system.
"Territoriality" has been somewhat of a bad word in choice-of-law theory of most of the last century. If territoriality of a choice-of-law approach meant that the approach attaches primary, or exclusive, importance to the place where a (or: the last) physical act was committed, territoriality would indeed deserve to be discarded. The standard negative example is Beale's First Restatement. But if territoriality means that choice-of-law is concerned with regulatory authority of states, and that regulatory authority of states is (at least primarily) defined as the regulatory authority for some territory of this planet's surface, the concept seems almost self-evident. The alternative would be a system that vests a legislature or administration with the power to regulate the affairs, or certain affairs, of a certain group of people. But a US State is not an entity responsible for, say, all Scottish immigrants and their descendents; it is an entity responsible for a certain part of the US territory. And a Member State of the EU is not, or at least not only, an entity responsible for a certain people, e.g., all Francophones, or all French; it is an entity (at least also) responsible for a certain part of the territory of the EU. This is not to say that US States and EU Member States are responsible only for their territory. EU Member States may have certain responsibilities for, or authority on, their nationals, US States may have the same for their residents. Determining the respective realms of territorial and personal repartition of state responsibilities and powers is in fact quite a complex matter which we will briefly discuss below. But given the (at least dominantly) territorial definition of states, the general idea of using territorial criteria in choice-of-law should be unquestionable.

III.	 General Thoughts on Choice-of-Law in a Federal System
We had already seen that choice-of-law in a federal system (interstate choice-of-law) is different from international choice-of-law because of the non-discrimination requirement. We will now consider if interstate choice-of-law is different in other respects, too.
In a federalistic state (union), legislative powers are divided between the federal government and the constituent states, such as in the US and the EU. The federal government assumes certain tasks that the states have deemed useful, and agreed, to centralize. Legislative power for non-centralized tasks remains with the states. The result is vast legislative diversity (of the laws of the different states). Choice-of-law administers this diversity; it determines which of the laws of the different states will be applied in a given case.
One can approach the federalistic model from two sides. One side is: Why do states come together to form, and partly abandon legislative powers to, a union in the first place ? If there is advantages from centralization in certain fields, why do only some groups of states enter into federation agreements, while many others stay on their own ? The flipside is: Why do states in a federation not go all the way to full centralization ? After all, maintaining multiple levels of government seems costly and complicated. The answers to these questions are, of course, highly complex, and the actual genesis and shape of federations are often the result of historical coincidences. The purpose of this section is merely to recall some basic, and rather common place, arguments, and to draw some inferences for inter-state choice-of-law from these arguments.
A.	The Case for Establishing a Union, and Choice-of-Law
This section will try to show that the same reasons as for forming a union should make a mutually beneficial cooperative approach to choice-of-law (1.) especially palatable, and almost mandatory, to states in a federal system (2.).
1.	Beneficial Cooperation
Whether united in a federal union or not, states can increase the effectiveness of their own laws by submitting themselves to a system of neutral choice-of-law rules. Neutral choice-of-law rules are choice-of-law rules that do not favor any particular state's law, or any particular substantive policy. They are of the type "in matters of type X, apply the law of the state, and only of the state, where element Y of the case points to." The beneficial effect of such a system has been demonstrated by Lea Brilmayer and Larry Kramer.
A state could try to give preference to its own laws in every case even loosely related to its legislative domain. This would mean enforcing its laws in many cases where enforcement furthers the policies of the state very little. In other cases, where the state has a strong interest in having its law applied, other states' courts may obtain adjudicative jurisdiction. These other states, following a similar approach as the first state, would follow their respective laws, thus setting aside the first state's law in this case where applying the first state's law would further that first state's policy considerably. All states face this dilemma. The solution lies in cooperation. If the other states reciprocate, each state is better served if it commits itself not to apply its own law where another state's policies are more strongly implicated, or the other state places more importance on the policy implicated. This "increases the pie" of policy realization,  or of the realization of important policies, and presumably each state stands to benefit from that. The cumulative application of more than one state's law is not an alternative – every rule is a dividing line, if just between individual freedom and the interests of other parties, and cumulative application of two laws wipes out all except one of them.
One problem with this approach is, of course, that it might be quite difficult to determine which state's policy is more strongly implicated, or is more important to the state, in a given case. We will get back to this point later. For now let us assume that we can at least for most cases make a satisfactory determination of which state has, or should have, a stronger interest to have its laws applied in a given case.
The other problem with the cooperative approach is that the states are facing a prisoners' dilemma type situation. Each state (or its court) has an incentive in (almost) each case to apply its own law, but overall they are all better off if they refrain from applying their own law if another state has a stronger interest in the case. As William F. Baxter put it: "Baseball's place as the favorite American pastime would not long survive if the responsibilities of the umpire were transferred to the first team member who managed to rule on a disputed event." One solution, the one Baxter was primarily advocating, is the neutral umpire that makes Baseball a (more or less) orderly sport. Baxter's proposal was not only about bringing in the federal courts as an umpire, though. He wanted the federal courts to craft choice-of-law rules for the entire American legal system, i.e., rules more specific than the pure principle of maximizing the realization of states' interests. Choice-of-law rules, rather than lose standards, have many advantages in terms of predictability for the parties, and administrability for the courts, and thus, ultimately, for state policy realization. But for the cooperative choice-of-law approach, what is most important about more specific rules is that their implementation is better observable than that of a broad standard. To wit, the federal courts in Baxter's proposal would not decide every choice-of-law dispute. Often state courts would rule on choice-of-law issues, and the federal courts would only control that the state courts play by the rules. But controlling that the state courts play by the rules is a very onerous task if the rule is a broad standard, which requires to take into account all the circumstances of the case. Creating more specific rules thus helps solving an agency-problem as between the federal courts (principal) and the state courts (agent). In fact, with more specific rules, one might even be able to get along without a neutral umpire. If rules are clear cut enough so that their (non-)observation by a state's courts is readily observable, fear of retaliation by other states in future cases (= repeat-game situation) might be enough to overcome the prisoners' dilemma situation in each individual case. Put in a positive way, clear cut rules might enable a state to credibly commit to following neutral choice-of-law rules, such that other states may find it worthwhile to follow suit. There are many caveats to this "self-regulating" situation. For present purposes it is sufficient to note that rules, rather than lose standards, are preferable for the cooperative approach to choice-of-law, and that ideally a neutral umpire controls the observation of these rules.
2.	Beneficial Cooperation and the Federal System
This beneficial cooperative approach to choice-of-law commends itself in a federal system. To begin with, the federal system has the convenience of having a preexisting neutral umpire, the federal judiciary and legislator. But the cooperative approach is not only more practical in a federal system, it is also inherent to the reasons for forming a union in the first place. The case for establishing a union among formerly independent states can be made, grossly simplifying, from two different perspectives, idealistic and pragmatic, both of which point towards a cooperative approach to choice-of-law.
From an idealistic perspective, states may feel that they belong to a larger community, be it ethnic or cultural, which they feel the desire to join. This spirit of community should go along with respect for the other states and their laws, making it more palatable for the states to apply the sister states' laws. To be sure, this argument is very fragile, perhaps even speculative, as an empirical claim. A state might be pragmatic about abandoning some powers to a federal structure, while sticking to its chauvinistic approach for all remaining, i.e., not federalized, powers. But hindsight suggests that states do not join a federal structure if they do not have mutual respect for each other, and that encompasses respect for the other states' laws, and the policies embodied therein.
Even more important, and less speculative, is the argument based on the shared value system in a federalistic state. States entering a union usually belong to some cultural or ethnic community with shared values anyway. In addition to this, and perhaps more importantly, the union usually makes some of these shared values mandatory for all states, thus reinforcing (or newly creating) the shared value system. This encompasses human rights bills as well as harmonizing legislation. It reduces the variance , or at least prevents egregious differences, between the laws of the different states. The degree to which a state compromises its own policies in applying a sister state's law should thus be limited, making such application easier. In hip game theory jargon, the benefit from shirking in an individual case is smaller than in an average international case, making shirking less likely.
From a pragmatic perspective, states may decide to join a union in order to benefit from economies of scale in legislation and administration, tackle otherwise unmanageable border-transcending problems, and avoid being locked in a race-to-the-bottom. This presupposes that in order to further their policy objectives, even if diluted in a union-wide decision-making process, they are willing to give up some of their "sovereignty" to the benefit of the union. It seems that states that were willing to abandon some of their "sovereignty" to a union might have a more pragmatic way of dealing with "sovereignty" issues. One might think that they should then be equally willing to give up some of their "sovereignty" vis-à-vis the sister states in individual cases under the cooperative approach, if this furthers the implementation of their own policy objectives on the whole. Again, the degree to which a state's policy is compromised in a given case should be reduced in a federal system anyway, because of the shared underlying values.
Finally, if one conceives of federalism as a delegation of power from the federal entity to the states, rather than as a delegation of power from the states to the federal entity, the cooperative approach seems to be inescapable: The federal entity would not delegate to the states a power mutually to thwart their respective policies.
3.	Diversity in Choice-of-Law ?
a)	Introduction
In the preceding paragraphs, I advocated a neutral umpire as part of a cooperative choice-of-law approach. I somewhat rashly (and tacitly) jumped to the conclusion that the neutral umpire would not only be the federal courts, but also the federal legislator, i.e., that we need federal choice-of-law rules. It is true that by Baxter's baseball allegory, the point seems to be obvious: Baseball's place as the favorite American pastime would presumably not be preserved if the umpire just controlled that the first team member who managed to rule on a disputed event did so according to some neutral rule defined by that team. Choice-of-law, one could argue, needs common rules for everybody just like baseball does. But is this allegory enough to dispose of the general federalistic arguments for legislative diversity as applied to choice-of-law ? If, in a federal system, we encourage legislative diversity in many fields, should not the same reasons support diverse (state) choice-of-law rules ? In fact, the states' power to make their own choice-of-law rules has been considered by some a vital part of their remaining independence.
The discussion of these questions anticipates a little bit the general discussion of reasons for legislative diversity in the following section B. However, it seems adequate to raise these questions now to round off the discussion of the cooperative approach in general, and of the neutral umpire and the neutral rules in particular.
b)	A Case For Diversity in Choice-of-Law ?
For the purpose of making the cooperative approach work, it might be sufficient, as noted above, if every state committed to a system of neutral rules, albeit its own system of neutral rules, in order to convince the other states that one is not favoring one's own laws, i.e., that one is playing the cooperative game. Unless some state or the union is more skilled and resourceful to devise optimal choice-of-law rules, no one state (or the union, for that matter) is more likely to come up with the optimal rule than others, so that one might think that the expected degree of policy realization is the same whether one has federal or state choice-of-law rules. Better still, experimentation would be furthered, and an optimal rule would seem to be more likely to be found, if all states devised their own choice-of-law rules. State choice-of-law rules might also be better adapted to local preferences in two regards. First, the citizens of different states might have different preferences as to the allocation of specific choice-of-law costs, like information cost (often called "multistate interests"). Second, I have repeatedly been alluding to the possibility that maximizing state interests might not only have to take into account the degree of potential impairment of different policies, but also the relative importance a state attaches to one or the other of its policies. For example, Germany might put its consumer protection policy above all else, while Spain favors its (anti-)divorce laws, so that both would profit if Germany compromised its divorce laws in exchange for an extension of its consumer protection in relation to Spain. Lastly, if some local circumstances are relevant for choice-of-law decisions, the state legislator has a regulatory (i.e., informational) advantage in making such decisions. These arguments do not stand up to closer scrutiny, though.
c)	The Case Against Diversity in Choice-of-Law
Local preferences, and local circumstances, certainly might matter for choice-of-law (it is another question if they matter much, i.e., if the local differences are significant). But since a choice-of-law necessarily involves the local preferences and circumstances of at least two states, it is not particularly helpful to leave the assessment of these preferences and circumstances to one of them alone. Only a bilateral treaty would be superior to a federal rule – if only two states are concerned. If there is more states' policies involved in a case, the treaty would have to include all these states. It is not hard to imagine that following through on this line (of treaties between individual states) would result in an extremely complex, and presumably totally impracticable system. Rarely, if ever, would one expect local differences to be at the same time so important as to justify the hassle of negotiating and implementing such tailor-made rules, and complementary such that an agreement (like the fictional agreement between Germany and Spain mentioned above) departing from neutral rules would significantly increase state interest maximization.
As to the experimentation with different choice-of-law solutions, the experiments will be flawed if, and to the extent that, plaintiffs can avoid even the best choice-of-law rule by choosing another forum which follows another choice-of-law rule.
Most importantly, states cannot be assured of other states' cooperation in choice-of-law just because the other states adopt nominally neutral choice-of-law rules. States have ample opportunity to discriminate in fact with nominally neutral choice-of-law rules. An example: Imagine, not completely unrealistically, that Germany's major contacts with Spain are German tourists going to Spain, and Spanish workers coming to Germany. Then a set of nominally neutral choice-of-law rules that both divorce and consumer contracts are governed by the law of residence of the divorcing couple and the consumer, respectively, assures application of German law, and realization of German policies, in all cases in relation to Spain. It seems therefore not enough that the union control that all states adopt nominally neutral rules. The union should set neutral rules itself.
In sum, the case for diversity in choice-of-law rules is untenable. At most, one could argue for federal or treaty choice-of-law rules which, while not trying to advantage one state or the other, are not all nominally neutral, in order to accord for local conditions. This should be a rare exception, though. Generally, choice-of-law in a federal system requires neutral choice-of-law rules set by the federal legislator (or the federal courts, for that matter). After all, choice-of-law describes the boundaries of states' regulatory authority, and as with other boundary conflicts between states, the union seems to be the only adequate arbiter.
B.	The Case for Preserving the States, and Choice-of-Law
I argued that states in a federal system would, and should be ready to, maximize their policy interests implicated in choice-of-law by submitting themselves to neutral choice-of-law rules, ideally rules devised and controlled on the federal level. But which rules would achieve this goal ? I said that state policies might be more or less strongly implicated in a given case, and that a state might attach more or less importance to one policy or the other. Concerning the latter point, no abstract indications seem to flow from federalism. Concerning the former point, the arguments for forming a union seemed to have nothing to say, i.e., these arguments were agnostic to the question which law should be designated as applicable. The arguments for preserving the states might fill that gap. The reasons why we have different laws in the first place might guide us in determining which of them to apply. This section will therefore be dedicated to scrutinizing the different reasons for federalist plurality for their possible implications for choice of law.
1.	Democracy and Local Self-Governance – The Enactment of Local Preferences
The most obvious explanation for decentralized government and decentralized law-making is based on fundamental principles of democracy. The voice of a single citizen is the stronger the smaller the entity within which it is exercised. At the same time, many questions handled by governments are exclusively or overwhelmingly local in their implications, so that participation by others than local citizens in the rule-making process would dilute the votes of the locals for no reason. Democratic participation and self-rule thus seem to be enhanced by delegation of power to local entities. This way, the local citizenry may enact its preferences, which may differ from those of the larger population, for local questions. Of course, there is limits to how small the local entities can be, or, rather, to which questions they should handle. The smaller the entity, the bigger the probability that any given question will have relatively large implications outside of the local realm, or that addressing the question will necessitate the use of resources outside of the state. But the basic argument remains: Local questions should be submitted to local government in the name of democracy. Which questions are considered "local" instead of "federal" is a question of vertical distribution of power.
For the horizontal distribution of power, i.e., choice of law, the question to be asked from the perspective just presented seems to be simply : To which local entity does the question belong? In other words, the local governance argument for federalism seems to call for localizing the legal dispute – unfortunately, the answers to be given to this question have been disputed ever since Savigny discovered it in the 19th century. Savigny was the first to frame choice of law as the quest "[t]o discover for every legal relation (case) that legal territory to which, in its proper nature, it belongs or is subject (in which it has its seat)." Similarly, the dominant school in contemporary European choice of law scholarship looks for "the closest relationship" of the question with one state or another. The failed First Restatement, although much more formalistic than modern European choice of law, might also be counted in this corner. One look at the widely differing answers to specific choice of law questions that the different legal systems have come up with in different times should be enough to show that the localization question does not seem to have a definite answer. That is not to say that framing choice of law as a localization problem is meaningless. At the very least, it might be a different focus than interest analysis, and it definitely points towards neutral choice of law rules.
But the democracy explanation for local government might have a slightly different implication for choice of law. As said above, local government is (partly) about enacting local preferences into local policies for local questions. A federal system should make sure that, as a general rule, local policies are followed where a case has implications for the locality, and that other localities do not interfere and frustrate these policies. So, where only one state's policies are affected by the decision in a given case (this resembles the "false conflict" in Currie's theory and terminology), this state's law should govern. The problem with this is that choice of law problems more often than not implicate more than one state's policies, if these policies are properly understood (this resembles the "real conflicts"). The solution might be to apply the law of the state whose policies are the most strongly affected by a given case (and, in extension, the incentives following from deciding the case one way or another), or, inversely, whose policies would be most impaired by applying another law. This methodology to choice of law in a federal system has been proposed as early as in 1963 by Baxter, and has since been known as "comparative impairment" analysis. The theory seems plausible, but it should be clear that it is very hard to implement in practice. How do we know which state's policy is more impaired ? Attempts have been made to formulate precise rules under this approach, and the results look strikingly similar to contemporary European choice of law rules which are based on the "closest relationship" approach.
2.	Comparative Regulatory Advantage – Adaptation to Local Conditions
A related reason for decentralized law-making is to adapt rules to local conditions. It is related to the democracy argument in that it, too, aims at providing a closer fit of rules with local circumstances. Unlike the democracy argument, however, the local circumstances it aims at are not the preferences of the local citizens, but rather the local empirical data that go into formulating appropriate rules. Differing climates, landscape, economic situation, and so on, all call for differing rules fine-tuned to the respective circumstances. Theoretically, this could be done by a centralized rule-maker with an open eye for local differences. But it seems that local governments and voters are better positioned to assess local facts than even the most diligent central government could ever be. The idea is old; Richard Posner has given it the catchy name "comparative regulatory advantage." For choice of law, it means that a case should be governed by the law of the state with the regulatory advantage, i.e., who is in a better position to assess a case of the given kind.
Again, the approach seems plausible, but it is by no means clear cut. In an automobile accident case, for example, one might think that the state where the accident appears knows its roads better – but the state where the driver is from might know its drivers better, and the state where the car is registered probably knows the condition of its cars better. And that is not even all the states with a potential regulatory advantage in a case like this. Recovery for tortious injury might be seen as a protection of the victim against being left a cripple with no resources to support oneself (after the accident occurred, i.e., not from a deterrence perspective). It seems that the state best positioned to judge whether and to what extent such support from monetary damages is necessary is the state of residence of the victim, which would also be the state to pay disablement pensions and the like. The overall assessment of which state enjoys the comparative regulatory advantage would have to be made depending on what facts go into forging rules in a particular area. In conclusion, whereas regulatory advantage can be an element in choice of law theory, it provides no abstract answers.
3.	Laboratories and Regulatory Competition
a)	The Principle
Another reason for decentralized lawmaking could be that it has important advantages for regulatory innovation.
Legislatures, ideally, strive to develop the best possible solutions to the problems of their state. A multitude of state legislatures is more likely, it is assumed, to come up with, and, most importantly, test a good idea on a smaller state scale than a single central legislature could for the nation as a whole. If the idea is successful, other states or the federal legislature can then copy it. Thus, the states function as regulatory laboratories.
As to why the states legislatures would strive to develop and implement good solutions in the first place, much discussion has been devoted in more recent times to the argument of regulatory competition. The argument is highly controversial, and many commentators think that "regulatory competition" is but a pseudonym for a race to the bottom. States, the argument assumes, compete for citizens and businesses (most importantly, but not only, in their capacities as tax-payers) like commercial enterprises compete for clients. They do this by trying to offer the best possible package of state activity and regulation.
This involves both finding the best solution as judged by shared standards, and catering for the tastes of different groups of society. Competition through offering "objectively" superior solutions furnishes an alternative explanation (other than benevolence of legislators) why states would strive to find good solutions to problems of their state in the first place, and why they would copy better solutions of other states. Trying to attract a particular "client group" is to some extent related to the point made above that federalism enables legislation to be adapted to the preferences of the local population. The local population is not static - people may move to states whose policies are aligned with their preferences, and states may actively seek to attract such immigration, with different states attracting different groups.
As with all competition, it seems that regulatory competition can only work if externalities are kept to a minimum. To the extent a state can reap the benefits of its policy while shifting the costs to a "competitor", its success will not be the result of it offering a better "product", and "competition" will not bring about the best "product". The test of new regulation in a state "laboratory" might be thwarted by such positive or negative externalities. In many cases, a race to the bottom might result – the target of the critique against the idea of regulatory competition. Of course, some areas of legislation are more likely to give rise to significant externalities than others. In a federal system, many or most areas likely to produce strong externality problems are confined to the federal legislature. Where state legislatures remain competent, it seems that the authority of the states vis-à-vis each other should be allotted such as to minimize externality problems on the margins. This would be the task of choice-of-law: horizontal allocation of rule-making authority such as to minimize externalities from state rule-making.
b)	Putting the Idea into Practice: The Examples of Protection of Minors, and of Product Liability
The application of this yard-stick for choice-of-law rules will often be extremely difficult, and may even lead to an irresolvable tie. Consider the case of a resident of state A entering into a contract in state B, when this person is considered a minor under state A's law, and of legal age under the law of B. Applying state A's law to the question of legal capacity would add the benefit of comprehensiveness in protection of minors to state A's product. The cost of "producing" this product, however, would most likely be borne mostly by the residents of state B, leaving state A's product unaltered, and making B's less attractive. The cost results from the increase in the risk for people entering into transactions of finding themselves with empty hands against a minor, or the increase in monitoring required by the addition of a new group of minors. People entering into transactions in state B will accordingly have to marginally increase their prices. Some customers might decide to rather enter into a transaction in state C (where there is less state A residents). Assuming that most people paying those higher prices will be state B residents, and most people losing customers as well, state B residents bear the cost, and state B cannot deliver as good a product in this regard as it could without minors from A entering into state B transactions. Applying state B's law, on the other hand, would give B the benefit of being able to deliver the "product" of safer, and therefore cheaper, transactions. But it would shift the cost of burdening a person needy of protection with legal obligations to a resident of another state.
However, there are areas where it seems that avoiding externalities could be a useful guiding principle for choice of law. One of them is product liability. Whatever theory of tort law one may adhere to, it is undeniable that stricter products liability comes at a price – the higher demands on making a product safe will be factored into the retail price of the product. Each state may experiment with which combination of safety, compensation for injury, and prices it finds suitable, and, following the argument of regulatory competition, citizens may then choose between the different options offered by different states. State competition on this level is distorted if a state can offer its citizens the benefits of high safety and compensation for injury under one state's strict products liability rule, while making them pay the low prices resulting from another state's lax products liability rule. Stated the other way around, state competition is distorted if one state's citizens have to pay the high prices resulting from a high protection rule, while getting only low product safety and low compensation under another state's low protection rule. This kind of distortion would arise if products liability were governed by the law of the state of the place of manufacturing. While theoretically every buyer could inquire into the origin of the product, and the products liability regime hence applicable, so that the products liability regime would be factored into the price, transaction costs would be prohibitive. In fact, the high transaction cost of explicit contracting on questions concerning damages caused by faulty products, and the ensuing potential for a market for lemons, are the reason for products liability regimes in the first place. Since in practice an individual buyer cannot obtain, lest process, the necessary information on product liability to factor it into his buying decision, products from a state with a lax products liability regime would fetch the same high price as other states' products, while offering only low safety and potential compensation. Manufacturers, on the other hand, are repeating the same transactions over and over and are therefore much more likely to be in a position to ascertain products liability cost. If the law of the market where the sale was made governs product liability, prices will then automatically reflect the applicable products liability regime. Competition works. The capacity of the manufacturer to factor in products liability into its prices is what sets products liability apart from the problem of legal capacity discussed above. A manufacturer of state A held to the stricter products liability standard of state B where the product was sold, is not suffering a set back (in ex ante perspective), since it was able to be compensated for the risk of liability through higher prices. There is an important caveat, however: If arbitrage is possible, and if we do not want to, or cannot, link the applicable law to the place where the arbitrageur bought the merchandise (because this would recreate the information problem for the consumer), a producer cannot sustain higher prices in the state with higher products liability. In this case, strong harmonization of products liability law, or restricting the flow of the product from one state to the other, are the only solutions – the latter being precluded in an internal market.
c)	State Competition, and Nationality / Domicile
The idea of state competition at first glance seems to be at loggerheads with the use of an immutable citizenship (like the national citizenship in the EU), or a semi-immutable domicile, as relevant factor for choice of law. States can compete for citizens only in so far as choice of law allows them to apply their laws to their residents (or in other cases where citizens seek to benefit from the state's laws, for example by going there for shopping). If immigration to another state does not change the applicable law on some point, because the applicable law is fixed in function of an immutable citizenship, the states cannot compete on this point.
At closer look, the use of an immutable nationality criterion might encourage competition, rather than prevent it. If all applicable law, like family law, inheritance law, child support law, and so on, changes with a change of residence, then citizens can only get a full-package-deal. If, on the other hand, some questions remain attached to citizenship, they can choose to enjoy the commercial law, tax law, and so on, of another state, while preserving the more personal legal environment that they are attached to.
Full competition in the sense of optimal "consumer" satisfaction would require that citizens be able to choose whether they want to preserve certain aspects of their old home state's law, and which, or not. If such freedom of choice would be socially acceptable would depend on the interrelationship of different areas of law, and on the normative basis of family law and others. This demonstrates not only the problematic of the regulatory competition model. It also points to a central dilemma of choice-of-law in general, and of legislative diversity in a federal system in particular, which is that distinct, but related questions are subjected to different states' rules, despite the fact that within one legal system, all these rules are, or should be, adapted to one another. Finally, it drives home the point made earlier that non-discrimination can be a very tricky issue in choice-of-law in a federal system. These are all fascinating questions. But since we are here mainly concerned with the impact of the internal market on choice-of-law in a federal system, and the areas where the citizenship criterion is used are almost exclusively areas only loosely related to market activities, we will not try to develop the answers to these questions.
C.	Substantive Bias in Particular
Exemplifying, clarifying, and expanding on, what we have learned so far, we can now quickly turn to some elements of traditional choice-of-law theory that should be banished from choice-of-law in a federal system. All rules with a substantive bias have no place in a federal system. The basic reason is that diversity as such is not a bad in a federal system; rather, it is precisely what federalism is all about. The preceding section canvassed the reasons why such diversity is desired.
Consequently, the forum law approach, i.e., simply applying the forum's law to any legal question presented to the forum, is not an option in a federal system. Whereas an independent state might take the stand that it would be ideal if all people and states in the world lived by its laws, which it considers to be the best for everybody, and whereas such an independent state might therefore apply its own laws to all cases it gets its hands on, such a stance seems to be inconsistent with a state's integration into a federal system. This is not to say that the application of the forum's law as, and because it is, forum law is excluded. A neutral rule submitting certain questions to the law of the adjudicating state can be the optimal rule from a state interest maximizing standpoint. Naturally, most procedural questions will be governed by forum law, as tradition has it too. Also, the cost of applying foreign law in form of search costs, and perhaps an imprecise application of the foreign law, can be high, and the benefit from applying foreign law in form of state policy realization marginal. In this case, the alternative of applying forum law might sometimes be the optimal solution for all states – but mind you that if the benefit from applying the foreign law would be high, declining jurisdiction will usually be the better solution to the problem. My guess is that in situations where actors can anticipate the application of forum law by the courts, the negative impact on states' policies can be expected to be substantial. After the event, a race to the courthouse will result if courts apply forum law, and multiple forums are available. In most cases then, the balance will be against the forum law rule.
Similarly, it is not admissible for a court to select the rule which it considers superior, as suggested by Leflar's "better-law approach." This approach is dubious (mainly under separation-of-powers considerations), to say the least, in the habitual choice-of-law setting. In the federal setting, it is impermissible as a matter of power allocation between the different states and the union – a court of one state, or of the union, cannot rule on the merits of another state's law.
The more recent history of (European and international) choice-of-law has seen a proliferation of rules providing for the application of whichever rule out of a set of states is more favorable to a certain substantive result. These rules favor a substantive result. But in a case where certain states' substantive rules would provide for this substantive result, and others would not, applying the former states' rule potentially thwarts the latter states' policy. As usual, the question should be which state's policy is more strongly implicated in the case, and which state attaches most importance to its policy that is implicated in the case. There is no reason why one or the other policy should be favored. Of course, one can observe certain trends in substantive law (perhaps of all the states) to favor certain parties, for example children. But these trends have limits (otherwise, all the laws would rule for the same result), and a choice-of-law rule which favors the result conforming with the trend overlooks these limits. To say, as Louise Weinberg does, that we generally want to provide injured parties with a remedy against the injurer, and that we should therefore allow the injured party to select the law which is most favorable to recovery, is simply forgetting that we grant a remedy only under certain circumstances, and for a reason. Choice-of-law rules with the kind of substantive bias described should thus be eliminated. This is, in my view, recommended for general choice-of-law; it is mandatory for choice-of-law in a federal system.
Lastly, and most importantly, the public policy exception ("ordre public") has hardly any place in a federal system. Under the public policy exception, a court can eschew or modify the application of the otherwise applicable foreign law, if the substantive result of applying that law unmodifiedly is considered too shocking by the standards of the forum. One can argue that the limits of what can be considered shocking are fixed by the federal constitution, which sets limits to all state legislation, and that a state is therefore preempted of adding to these limits of acceptability. This argument is dubious, though, because a federal rule setting minimum standards for the internal legislation of a state does not necessarily preempt questions relating to the enforcement of such legislation in other states. Accepting that another state do something is not the same as being obliged to participate in it. But if a state may refuse to participate in enforcing another state's policy, it certainly must not interfere with it either, if the federal choice-of-law system allocates regulatory authority in a case to that other state. All the state invoking the public policy exception may do at the adjudication stage, if at all, is refuse to decide the case – declare itself a substantive forum non conveniens, so to speak. However, the public policy exception may maintain a (very limited) role at the enforcement stage.
D.	Summary
In sum, although federalism theory, not surprisingly, does not present clear cut solutions to complex conflict of law issues, it can give important general indications. First of all, choice of law rules in a federal system should be neutral and without substantive bias. In addition, some recommendations as to the content of these rules can be derived. Depending on the federalist argument used, one might recommend a comparative impairment approach, look for regulatory advantages, or try to avoid regulatory externalities in so far as possible. The comparative impairment approach and the desire to avoid externalities seem to be largely overlapping, or even identical. A regulatory externality necessarily impairs the effectiveness of one of the implied states' policies. Minimizing externalities should therefore serve to minimize impairment of state policies. Regulatory advantage could theoretically point to a different solution in any single case. In general, however, it would seem that where one state has a clear regulatory advantage, it is unlikely that strong externalities would result – otherwise, the regulatory advantage would not be clear.
The preceding discussion also suggests that, and why, choice of law does matter. Does it get the attention it deserves, and the content it needs, in the EU and the US ?

IV.	 Constitutional Requirements for Choice-of-Law in the US and EU Federal Systems
A.	US Constitutional Requirements
In the US, the above listed desiderata for choice of law in a federal system stand at odds with the fundamental structure of choice of law, as it is understood by many of the children of the so called Conflicts Revolution. In fact, most of the ideas that have been found incompatible with the federal system, such as forum law bias, substantive bias, or limiting a state's interests to benefiting its own citizens, have been developed by this US American school of conflicts scholarship. But these ideas are not only irreconcilable with the federal model as developed above, they also seem irreconcilable with the legal requirements set forth by the US Constitution.
1.	Contemporary US Supreme Court Jurisprudence
Reading US law as it "is", i.e., as it is interpreted by the US Supreme Court, one will probably be quite puzzled by the last sentence. In the last decades, the Court has become increasingly lax in controlling state choice-of-law decisions, culminating in the much discussed Allstate Ins. v. Hague decision of 1981. The Court merges Due Process Clause and Full Faith & Credit Clause with regard to state choice-of-law decisions. The standard "is that for a State's substantive law to be selected in a constitutionally permissible manner, that State must have a significant contact or significant aggregation of contacts, creating state interests, such that choice of its law is neither arbitrary nor fundamentally unfair." In this test, it is the interests of the individual litigant which are considered and weighed against the state's interest in claiming legislative jurisdiction (and in practice, the state's interests are weighed very generously, giving states such broad freedoms that one can legitimately ask whether there are any real limitations at all). The test is thus concerned with the relationship of state and individual, i.e., the vertical relationship between sovereign and citizen, in line with the basic structure and purpose of the Due Process Clause.
As Justice Stevens pointed out in his concurrence in Allstate, properly distinguishing between Due Process and Full Faith & Credit analysis would have brought out the different structure and purpose of the Full Faith & Credit Clause, which is concerned with the horizontal relationship between sovereign states. "The Full Faith and Credit Clause is one of several provisions in the Federal Constitution designed to transform the several States from independent sovereignties into a single, unified Nation. ... [It] implements this design by directing that a State, ..., respect the legitimate interests of other States, and avoid infringement upon their sovereignty." However, the test Justice Stevens ultimately proposes for the state-state relationship under the Full Faith & Credit Clause is almost equally tolerant of States' choice-of-law preferences. "[T]he Clause should not invalidate a state court's choice of forum law unless that choice threatens the federal interest in national unity by unjustifiably infringing upon the legitimate interests of another State." Like the majority, Justice Steven is of the opinion that "[i]t is not this Court's function to establish and impose upon state courts a federal choice-of-law rule."
2.	Alternative Interpretation of the US Constitution
a)	General Overview
The Supreme Court's reading of the Constitution with regard to choice-of-law has been the object of heavy criticism, though, both before and after the Allstate v. Hague decision. Reducing the constitutional scrutiny of state choice-of-law decisions to a Due Process test, giving attention only to the interests of the adjudicating state and of the individual litigant, ignores the special relationship between the States implicated in any choice-of-law decision. The Full Faith & Credit Clause, the Commerce Clause, and the Privileges & Immunities Clause were "all added [to the constitutional text] precisely so that states would not stand in relation to one another as independent nations." The Full Faith & Credit Clause and the Privileges & Immunities Clause embody the principles of equal states and equal citizens, respectively, which mandate neutral choice-of-law rules. Such rules can only be territorial. Under the Full Faith & Credit Clause, Congress has the power to make such central choice-of-law rules. Absent such congressional action, the federal courts are charged with arbitrating between the interests of the different states, as laid down in the federal jurisdictional grant for diversity cases, and for conflicts between the states.
b)	Privileges & Immunities Clause
The Privileges & Immunities Clause prescribes that "[t]he Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States." Citizens of different states have to be treated equally; discrimination against out-of-state citizens is forbidden. The idea that a state has an interest in applying its laws only when it benefits one of its citizens in the case at hand, as proposed by many supporters of interest analysis, is incompatible with this constitutional requirement. This would be plain if one were to consider the case of a state not prosecuting perpetrators under its criminal laws if the victim is an out-of-state citizen; private law questions are only gradually different.
c)	Full Faith & Credit Clause
While it is thus impermissible under the Privileges & Immunities Clause to discriminate against litigants from other states, it is also impermissible to discriminate against laws from other states under the Full Faith & Credit Clause. In fact, giving "Full Faith and Credit ... to the Acts ... of every other State" can only mean that those "Acts" have to be given the same consideration as the forum state's laws – otherwise, the "Faith and Credit" accorded sister states' laws would be less than that given to forum state's laws, i.e., not "Full". Obviously, this does not mean that the forum state always has to apply the other state's law, as the argument has sometimes been distorted by its critics. It only means that any asymmetric preference for forum law, or the content of forum law (in form of a better-law approach, or the like), is forbidden. The Full Faith & Credit Clause mandates neutral choice-of-law rules. In fact, the drafters of the constitution apparently presupposed a shared set of choice-of-law rules operating in the background of the Full Faith & Credit Clause. The power to specify such rules lies, according to the second sentence of the Full Faith & Credit Clause, with Congress. 
d)	The Role of the Federal Courts
So far, Congress has not used its authority to provide federal choice-of-law rules. But the federal courts were granted jurisdiction for diversity cases and disputes between states precisely in order to prevent any discrimination against out-of-state citizens, or, for that matter, against other states, in the adjudication of disputes. If the federal courts are to fulfill this role not only against informal, but also against explicit bias, they have to assume their role of arbiters between the states by forging federal choice-of-law rules (in the absence of congressional legislation). The Erie doctrine, which safeguards the federalistic diversity of state laws, has no place in choice-of-law, because diversity has no place in choice of law. Just as the Supreme Court has considered disputes over physical borders between states as a federal matter per se, so should disputes over the borders of legislative jurisdiction between states be considered a federal matter. The Klaxon decision, which transposed the Erie doctrine to choice-of-law, should be overturned.
3.	Conclusion
Although present Supreme Court jurisprudence hardly presents any constraints on states' choice-of-law decisions at all, a proper reading of the Full Faith & Credit Clause and the Privileges & Immunities Clause brings out constitutional requirements for choice-of-law in line with the general desiderata for choice-of-law in a federal system, as developed above. Choice-of-law rules in the US must not discriminate against other states' citizens, nor against other states' laws, i.e., they have to be neutral. The union, i.e., Congress or, if Congress stays inactive, the federal courts, have the competence and responsibility to develop such rules.
B.	EU Law
In Europe, the situation is inverse: The Constitutional framework does not embody the general desiderata for choice-of-law in a federal system as developed above, but current practice is closer to these desiderata than in the US..
1.	Non-Discrimination, and Neutral Choice-of-Law Rules of the Member States
EU law forbids, of course, discrimination against the citizens of other Member States, under Art. 12 EC, or, where applicable, the Freedoms or other more specific provisions. Discriminatory rules in the private international law of the Member States have been weeded out by the ECJ, or withdrawn by the Member States.
But no provision of the EC Treaty seems to mandate equal respect for other Member States' laws in the way the Full Faith & Credit Clause does in the US. While the EC thus prohibits discrimination against the citizens of other Member States, it does not seem to prohibit discrimination against the laws of other Member States. This is relevant, among other things, for the assessment of unilateral choice-of-law rules ("Eingriffsnormen", "lois de police"), and the public policy exception.
All Member States still use unilateral choice-of-law rules for the enforcement of certain policies, while enforcing such unilateral rules of other Member States only on a case-by-case basis. It has been suggested that Member States are under the obligation of solidarity (Art. 10 EC) to apply other Member States' unilateral rules, if they are in conformity with the Freedoms and other EC law. But it is unclear why a Member State would be obliged to subdue its own policy (equally respectful of EC law) to that of another Member State, where that other Member State is not implementing, but only respecting, EC law.
A more plausible proposal is that where the EC harmonizes an area of law by mandating certain minimum standards through a directive, Member States are barred to invoke the public policy exception against other Member States' laws which respect these minimum standards. However, the Member States seem to be free to adopt any choice-of-law rule they deem appropriate (if it does not discriminate against other Member States citizens; and ignoring for the moment the possible impact of the Freedoms). A prohibition to depart from the chosen multilateral choice-of-law rule for substantive reasons in a given case (the public policy exception) would therefore have to be inferred directly from the directive setting the minimum standard.
In, sum, the EC Treaty does not seem to require the Member States to adopt strictly neutral choice-of-law rules, as would be desirable in a federal system.
2.	EU Choice-of-Law Rules
The importance of this shortcoming of the EC Treaty is mitigated by the fact that as a general tendency, Member States adopt neutral choice-of-law rules anyway, and by an important and growing body of uniform choice-of-law rules. For example, the Rome Convention determines the applicable law for contractual obligations.  Scholars had for some time suggested that uniform intra-Community choice-of-law rules could be decreed EC-wide per directive or regulation under Art. 94, 95, or 308 EC. The EC had, rather unsystematically, sometimes attached a choice-of-law provision to directives harmonizing substantive private law. The power to adopt (at least) intra-Community choice-of-law rules has now been formally established under Art. 65(b) EC. "[I]nsofar as necessary for the proper functioning of the internal market," this provision gives the EC the power to "promot[e] the compatibility of the rules applicable in the Member States concerning the conflict of laws and of jurisdiction." The interpretation of this provision gives rise to a number of uncertainties, and the procedural questions surrounding this grant of community power are complex. Undeterred, the Commission seems to have quite far-reaching plans for creating European choice-of-law norms.
One can therefore expect a boost of uniformization of choice-of-law within the EU, and this uniformization will, by the force of things, reinforce the prevalence of neutral choice-of-law rules in Europe. Although the "constitutional" requirements for choice-of-law leave more to be desired than those in the US from a federalistic perspective, the fact that the federal legislator is making use of its power to devise federal choice-of-law rules should push European choice-of-law rules further towards the federalistic ideal.

V.	Federalism and the Single Market
So far we have looked at choice-of-law in a federal system, and at Europe and the US as federalistic states. Another defining feature of the US and Europe is that they strive to establish an internal market. Before we turn to the choice-of-law implications of the internal market, we should clarify the concept of the internal market as such. The concept of the internal market aims at establishing a unified economic sphere equivalent to that of a single state. In the words of Chief Justice Marshall, "[i]n all commercial regulations, we[] are one and the same people." The internal market is established through positive and negative integration.
A.	Positive Integration
Positive integration encompasses the creation of federal laws and institutions dealing with aspects of economic activity, such as external economic relations and competition policy. State intervention in these fields is usually, but not always, preempted, at least once the federal government has made use of its powers. In terms of federalism, positive integration is simply the centralization of certain legislative powers at the federal level. A hybrid results when the federal government does not preemptively regulate a certain area, but limits itself to formulate guidelines for the states (harmonization).
B.	Negative Integration
Negative integration, on the other hand, is more complex. Negative integration means limitations on what the states can do. The Dormant Commerce Clause and the Freedoms limit the legislative freedom of the states in areas in which the states, in principle, retain their legislative powers. No state may erect artificial barriers to intra-union commerce such as tariffs and quantitative restrictions. More generally speaking, discrimination against out-of-state commerce is forbidden.
1.	The Burden-Test – Dassonville / Cassis de Dijon & Pike
But neither US nor EU law stop at non-discrimination. Both the Freedoms and the Dormant Commerce Clause require that a state not impose burdens on interstate commerce that are not necessary for the protection of a legitimate interest (hereinafter referred to as the burden-test). This is known in Europe as the Dassonville / Cassis de Dijon doctrine, and in the US as the Pike test.
In its Dassonville decision, the ECJ held that "[a]ll trading rules enacted by Member States which are capable of hindering directly or indirectly, actually or potentially, intra-Community trade are to be considered as measures having an effect equivalent to quantitative restrictions." Such rules thus potentially violate Art. 28 EC – the free movement of goods. However, the Cassis de Dijon decision clarified that "[o]bstacles to movement within the Community resulting from disparities between the national laws relating to the marketing of the products in question must be accepted in so far as those provisions may be recognized as being necessary in order to satisfy mandatory requirements," i.e., "requirements  [that] serve a purpose which is in the general interest and such as to take precedence over the requirements of the free movement of goods, which constitutes one of the fundamental rules of the Community." The ECJ then gradually extended this jurisprudence to the other Freedoms.
The US Supreme Court has for some time been applying an almost identical test, formulated in the Pike decision as follows: "Where the statute regulates evenhandedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits."
To treat the ECJ's and the US Supreme Court's tests as one for the purposes of this paper is not to say that there are no differences between them. The case laws of the two Courts may diverge on particular issues. Different arguments may be made under the Freedoms and the Dormant Commerce Clause, respectively, as to what the underlying philosophy of the two provisions is or should be. The practical operation of the two tests, and the question of their precise scope, seem sufficiently similar, though, to abstract from these fine differences without detriment for the analysis in this paper. Rather, it is important to attend for a moment to the common problems surrounding the scope of the tests.
2.	Possible Limitations on the Scope of the Burden-Test
Read literally, the Dassonville / Cassis de Dijon and Pike formulas would bring any measure with even only incidental effects (hindrances) on interstate commerce under Freedoms / Dormant Commerce Clause scrutiny. This would mean that the courts would have to control if such a measure is necessary to protect legitimate interests of the acting state. In order to ascertain whether the measure is necessary, the courts would have to analyze the precise effects of the measure and alternative measures. Finally, under the Pike formula ("excessive"), the Courts would have to determine the respective magnitudes of both the burden on interstate commerce and the benefits resulting from the measure, and weigh them against one another under some sort of criterion. The last step is not explicit in the ECJ formulas, but it blends into the "necessity" test as applied by the ECJ, perhaps an inevitable result. Taken to its extreme, the analysis would have to be an overall efficiency analysis of the measure at issue, weighing its commerce-impeding consequences against its commerce-enabling, and more generally against all its beneficial consequences. Several proposals have been made to restrict this extremely wide understanding. Some of these proposals shall be sketched here.
The ECJ usually refers to products "lawfully produced and marketed in one of the Member States" when applying the burden-test. This seems to be a condition of the burden-test. Why would the ECJ use this condition? If the burden-test determines the legality of a measure of one member-state, why should it matter how another Member State treats the question at issue ? One answer might be, of course, that it does not matter. The wording of the ECJ's decisions might be redundant, or it might indicate that legality in another Member State is a warning sign that the measure might not be justified by legitimate interests. If legality in another Member State does matter, the reason might be that limiting the burden-test to situations where there is a difference in the legislation of two states is a way of assuring that the Freedoms protect, and the ECJ surveils, only interstate commerce, not commerce as such. After all, if a certain product or practice is not legal in any of the Member States, this prohibition might be a burden on commerce, but it is a burden on commerce in general, not specific to the interstate situation.
The Keck jurisprudence of the ECJ may be seen as a new attempt to limit the workings of the Freedoms in that way. In Keck, the ECJ explicitly reconsidered its prior case law. "In view of the increasing tendency of traders to invoke Article [28 EC] as a means of challenging any rules whose effect it to limit their commercial freedom even where such rules are not aimed at products from other Member States, the Court consider[ed] it necessary to re-examine and clarify its case-law on this matter." The ECJ reaffirmed that "requirements to be met by [imported] goods (such as those relating to designation, form, size, weight, composition, presentation, labeling, packaging) constitute measures of equivalent effect prohibited by Article [28]." But the ECJ stated that "[b]y contrast, contrary to what has been decided, the application to products from other Member States of national provisions restricting or prohibiting certain selling arrangements is not such as to hinder directly or indirectly, actually or potentially, trade between Member States within the meaning of the Dassonville judgment, so long as those provisions apply to all relevant traders operating within the national territory and so long as they affect in the same manner, in law and in fact, the marketing of domestic products and those from other Member States."
The interpretation of Keck and its progeny is highly controversial. The most plausible reading of Keck seems to limit judicial control under the Freedoms to discriminatory measures and product specifications (which can be interpreted as a quantitative restriction at level zero !), and a retreat from the judicial control of mere hindrances. Such a distinction has intuitive appeal, although it is not clear if the distinction between mere hindrances on the one hand and product specifications on the other withstands a more rigorous policy analysis – some hindrances might be much more disruptive of interstate commerce than some product specifications.
Going even further, a close observer of the US Supreme Court has put forward the proposition that the phrasing of the decisions notwithstanding, the burden-test is after all only an instrument to deal with hidden discriminations. The argument holds that since the Court has (albeit solvable) difficulties to observe the precise motives behind a measure, striking down measures lacking a sufficient justification is in the view of the Justices the only way of getting at measures which, despite their appearance, could really only have had the purpose of keeping out out-of-state commerce. The proposal is to go back to a pure non-discrimination standard.
Referring to the aforementioned idea that the Freedoms and the Dormant Commerce Clause are supposed to protect interstate commerce, not commerce as such, many authors, at least in Europe, seem to want to restrict the application of the burden-test to measures which at least in fact impose a heavier burden on interstate commerce (than on purely internal commerce).
3.	The Policy of the Burden-Test
Numerous other restrictions of the scope of Dormant Commerce Clause and Freedoms scrutiny have been proposed. Behind the concrete proposals stand different views of, or implications for, the structure of the federal system and the internal market, and the relationship between courts and legislatures. If the Freedoms and the Dormant Commerce Clause only opposed artificial trade barriers like tariffs in particular, and discrimination in general, they would leave non-discriminatory economic policy decisions of the states untouched. The literal reading of the Dassonville / Cassis de Dijon and Pike formulas described above, on the other hand,  would deeply engage the (federal) courts in the policy decisions of the states in virtually all legislative matters – a road that the ECJ seemed to be headed to go down, until Keck put on the brake.
a)	A Stringent Burden-Test is not Objective
Demanding a valid reason for a freedom-limiting rule is of course common place. Thinking that after all, even a literal reading of the Dassonville / Cassis de Dijon and Pike formulas does not demand more than that, one might find the literal reading unproblematic. But such reasoning would overlook the complexities of the burden-test as it results from a literal reading of Dassonville / Cassis de Dijon and Pike as outlined above. Even if courts could objectively determine the precise effects of a measure, the proportionality test would involve a value judgment of the court – if only the criterion according to which the weighing should be done. Moreover, determining which "legitimate interests", or "valid reasons", are to be taken into account in the first place involves a value judgment as well. In addition, the idea that the courts can objectively determine the precise effects of a measure is, of course, misleading. Nobody can. Just establishing the likely effect of the measure will therefore require educated guesses. In fact, if evaluating different policy options were such an easy and objective task, we could dispense with much of our philosophical and political debate and institutions.
b)	Courts vs. Legislatures
Courts do not seem to be well equipped to carry out the analysis just described. It is dubious if they have the mandate to engage in the necessary value judgments, and they lack the technical expertise and resources to ascertain the effects of the measures they scrutinize. The latter is probably even more true for ascertaining the precise economic effects of a measure than for non-economic effects. This critique of the burden-test has gained publicity through the forceful and persistent attacks of Justice Scalia against the US Supreme Court's Dormant Commerce Clause jurisprudence. According to Scalia, the inquiry demanded by the burden-test "is ill suited to the judicial function and should be undertaken rarely if at all." Scalia pointedly formulated his critique in, among others, the aforementioned CTS decision. The economic merits of the anti-takeover act at issue seemed to Scalia "a highly debatable question, but it is extraordinary to think that the constitutionality of the Act should depend on the answer."
It seems inevitable that courts to some extent engage in value judgments, and make educated guesses. When a court is called upon to decide whether a restriction on freedom of speech is justified to protect some other interest of primary importance against an imminent danger, the court has to make educated guesses on the likely outcomes if the measure is adopted or not adopted, and a value judgment as to how the different dangers and restrictions should be weighed against one another. But the burden-test is special in the breadth of its application (almost any measure can "indirectly" and "potentially" affect trade), and in the scope of the analysis required (in the extreme view, it would be an overall efficiency analysis of the measure). Most constitutions do not provide for such a general judicial control of any legislative measure. Where they do, such as Art. 2 of the German Fundamental Law ("Grundgesetz"), courts act with strong judicial restraint, i.e., the courts largely defer to the legislator.
To the extent that a court does engage in the analysis required by the burden-test, the required value judgments and educated guesses will by the force of things be the value judgments and guesses of the court, or the court's reading of value judgments and guesses into the Constitution or the EC Treaty, respectively. So if the burden-test is taken seriously, the court can implement its version of a free-market economy, personal or implied from other constitutional provisions.
c)	Federal Courts vs. State Legislatures
This is not only a problem of the relationship between courts and the legislature in general. The object of burden-test scrutiny are exclusively or overwhelmingly state laws, and the scrutinizing court is, at least in the last instance, the US Supreme Court or the ECJ, a federal court. The extent of burden-test scrutiny is therefore also, and perhaps mainly, a problem of the relationship between the states and the union – a federalism problem.
Technically, of course, the burden-test concerns only interstate commerce in two respects. First, only measures having a potential hindrance effect on interstate commerce would be scrutinized by the federal courts. But, again, almost any measure can "indirectly" and "potentially" hinder commerce. The history of Congress's legislative powers under the Commerce Clause is a lesson on how far this criterion can be pushed, and how difficult it is to draw a line. Second, the federal courts would scrutinize, and perhaps invalidate, a measure only in so far as it applies to interstate commerce. But realistically, most liberalization by the Court for interstate commerce resulting in reverse discrimination will put such economic pressure on the state concerned that the difference between interstate and internal regulation is not likely to persist for long.
d)	Substantive Content of the Freedoms and the Dormant Commerce Clause ? – Concluding Remarks on Federalism and the Internal Market
The question is if such federal interference with the (economic) policies of the states in the absence of positive integration is desirable, or desired by the Constitution and the EC. Such federal interference would by definition have to be left to the courts. This question goes to the basic conception of the internal market and its relationship with the federal system.
If one were to take seriously the proposition that in an internal market, "market participants have to find the same rules everywhere, or remaining differences must be without influence upon their business decisions", there would hardly be room for any legislative diversity, i.e., for federalism, at all. The mere fact that one will have to deal with a foreign law when engaging in business in another state will influence one's business decision, a point we will come back to later. On a substantive level, most laws have at least a marginal influence on business decisions.
A more debatable question is if the Freedoms (and less plausibly the Dormant Commerce Clause), and more broadly speaking the EC (and the US Constitution), have a substantive economic content, i.e., if they require the states to adopt a certain brand of free-market economy, a requirement which would be enforced by the courts. This substantive content, whatever it may be, would inform the judges in their value-judgments and educated guesses that a strict burden-test requires. The question is fundamental for the relationship between the union and the states. If the answer were yes, the legislative powers of the states would be severely limited. Depending on the stringency of such substantive requirements, the states would be more or less reduced to filling in the details of a grand plan set on the federal level, even in the absence of concrete measures of positive integration. My personal inclination is that constitutional substantive requirements for the economic policies of the states are neither wise, nor mandated by the EC or the US Constitution. In fact, the authors of the EC Treaty and especially of the US Constitutions would probably be very surprised by a substantive reading of, or into, the Freedoms and the Commerce Clause, respectively, that goes beyond a general vote for a market economy. A beneficial functioning of the internal market would seem to be sufficiently served by a non-discrimination requirement encompassing hidden discrimination. For the purposes of this paper, we can assume arguendo a broad conception of the burden-test, and remind us of other, narrower views where this makes a difference.
4.	Annex: Private Law Rules as a Burden ? The Allegedly Special Enabling Function of Private Law
Since most of choice-of-law is concerned with what the civil law systems call private law, it is worth attending for a minute to a special problem in applying the burden-test to private law. Roughly speaking, private law is the part of the law which applies as between individuals, for example general contract and tort law, property law, and so on. Ernst Steindorff has argued that private law cannot be treated like its complementary sibling, public law, for the purposes of the burden-test. According to Steindorff, private law fulfills a distinct function as, what he calls, legal infrastructure. Private law rules are what enables private commercial interaction beyond a primitive level in the first place, and so they cannot be easily treated as obstructing such commercial interaction. At the very least, private law rules should be treated with the utmost judicial restraint.
To a lawyer from a common law jurisdiction, the very idea of distinguishing private and public law may seem bizarre. However, some of Steindorff's argument can be found in the aforementioned U.S. Supreme Court's CTS decision. The Court of Appeals had invalidated the state law on the grounds that it hindered tender offers. The Supreme Court overturned, attributing primary importance to the fact that "state regulation of corporate governance is regulation of entities whose very existence and attributes are a product of state law." The equity market, allegedly hindered by anti-takeover statutes, "depends at its core upon the fact that a corporation ... is organized under, and governed by, the law of a single jurisdiction." The Supreme Court explicitly said that a state corporate governance statute may reduce the number of successful tender offers, since "[t]he very commodity that is traded in the securities market is one whose characteristics are defined by state law. Similarly, the very commodity that is traded in the 'market for corporate control' – the corporation – is one that owes its existence and attributes to state law." The ECJ reasoned almost identically in its Daily Mail decision of 1988.
True, the ECJ has not even mentioned this point in its Centros decision of 1999 which, in the eyes of many observers, overturned Daily Mail. And as a general matter, neither the ECJ nor the U.S. Supreme Court seem to distinguish between private and public law in their Freedoms/Dormant Commerce Clause decisions. But as a conceptual matter, the point is certainly worth exploring, if just to say why it has not resonated in more recent and general jurisprudence of both courts, and rightly so.
The reason why the distinction between civil and public law has not found more attention in Dormant Commerce Clause/Freedoms scrutiny, and in policy-making contexts in general, seems to be that civil and public law seem to be functionally equivalent. True, without legally enforceable contracts, commerce would have remained at a much less developed stage. But legally enforceable contracts need civil procedure law and law enforcement institutions presumably much more than contract law. Civil procedure, and law enforcement in any event, is public law, though. Going away from a purely conceptual towards a more pragmatic view, it is clear that most public law also fulfills an infrastructure function. In addition to all law enforcement mechanisms, one might think of publicly enforced antitrust rules, supervisory agencies like the S.E.C., and other institutions which enable, rather than impede, beneficial and ever more active and complex market exchanges. In general, a functioning legal system including such classic public law fields as criminal law is a necessary infrastructure for commerce. Russia has learned this lesson rather painfully over the last decade.
The burden-test as discussed above does not ignore such infrastructure functions. But they do not exclude scrutiny under the Dormant Commerce Clause/Freedoms. Instead, they are taken into account as legitimate interests on the justification side, once a burden on interstate commerce has been found. As we have seen, such an analysis can of course be extremely difficult, and on average this is maybe more so in areas of private law than in areas of public law. But there seems to be no special reason why the burden-test should be restricted in relation to private law. Hence we will engage in our analysis of choice-of-law rules in the internal market without further attending to the distinction of private law and public law.
VI.	 Choice of Law in an Internal Market
A.	Introduction
We shall now examine if, and if so how, the internal market changes, or reinforces, choice-of-law in a federal system as developed above.
1.	No Discrimination Against Interstate Commerce
The non-discrimination requirement of internal market, as embodied in the Dormant Commerce Clause and the Freedoms, may add to the general non-discrimination requirement in the US and the EU insofar as it prohibits discrimination against interstate commerce (!), rather than (or in addition to) against foreign citizens. This can be relevant when a choice-of-law provision is neutral as to the nationality or residence of the parties involved, but leads to results unfavorable to interstate commerce (even in theory, i.e., we are not referring to hidden discriminations). A nice example is Art. 40 para. 1 of the German Introductory Law to the Civil Code [EGBGB], which gives the victim the option to choose between the law of the place where the act was committed, and the law of the place of injury. In areas like products liability, this leads to an importer being systematically being put in a worse position than a domestic producer. Art. 40 para 1 is incompatible with the Freedoms within their scope of application. For the most part, though, openly discriminatory measures have been weeded out in choice of law at least in the EU.
2.	Tension between Federalistic Legislative Diversity and the Internal Market
The clearest way, although not the object of this paper, how the internal market alters the choice-of-law questions is of course by eliminating federalistic legislative diversity – without such diversity, there is no need for choice-of-law. I take from last section's brief discussion of the internal market that it is at tension with legislative diversity. Positive integration carves out areas of state action for the federal government, thus eliminating legislative diversity on these points. Even where the federal government limits itself to harmonizing measures, or where the states are constrained by a more or less severe interpretation of the Freedoms or the Dormant Commerce Clause, the legislative freedom of the states, and thus legislative diversity, is more or less severely limited, although the states nominally retain their legislative competence. In view of this tension between legislative diversity and the internal market, there is, e.g., nothing unusual about considering costs arising from legislative diversity, or rather the way this diversity is administered by a choice-of-law rule, as a burden subject to scrutiny under the Freedoms or the Dormant Commerce Clause. The categorical objection that legislative diversity, being the essence of federalism, cannot constitute, or give rise to, unwanted burdens, forgets the internal market. As a matter of fact, generally leaving legislative diversity intact, but making it palatable to the internal market by adjusting the choice-of-law rules, might sometimes be a sensible compromise between the benefits of legislative diversity, and the requirements of an internal market. Such might be the working of the burden-test, or auxiliary doctrines.
3.	Content of this Section
This section VI will review the different ideas that have been developed on the working of the burden-test and auxiliary doctrines with respect to choice-of-law. I will narrow in on the genuine choice-of-law questions with some reflections on Bibb v. Navajo Freight Lines, a case frequently discussed in the context of choice-of-law, but really just standard invalidation of a substantive law provision (B.). Next, I will discuss some auxiliary doctrines that the US Supreme Court has toyed with, enriching Dormant Commerce Clause analysis with respect to choice of law, mostly in its Edgar and CTS decisions (C.). Finally, I will complete the circle and come back to the problem this paper started off with, the application of the standard burden-test to choice-of-law issues. As mentioned, European scholars have in the last decade engaged in an elaborate doctrinal-dogmatic exploration of this previously uncharted territory. These contributions will be discussed and developed (D.).
4.	Relevance of the following Discussion
There are several highly important caveats to the following discussion.
First, the scrutiny of choice-of-law rules under the burden-test (infra D.) is of course not an issue if one limits the Freedoms and the Dormant Commerce Clause to a non-discrimination requirement. If one thinks that only discriminatory measures and product specifications come under Freedoms and Dormant Commerce Clause, the impact of the scrutiny on choice-of-law is still marginal. If, on the other hand, one sees the burden-test as applying to all measures which factually weigh heavier on interstate commerce than internal commerce, than at least all (what I will call) choice-of-law burdens come under burden-test scrutiny. Naturally, those who support the broad burden-test as a general tool for deregulation and trade liberalization will tend to draw the most far-reaching conclusions for choice-of-law, too. When reading the following pages, one should constantly ask oneself if the analysis is one that could be undertaken by the courts in their everyday workings. I am almost convinced it could not.
Most importantly, if the general recommendations for choice-of-law in a federal system developed above were put into place, choice-of-law rules would be made on the federal level. Presumably then, the Dormant Commerce Clause would be irrelevant as a control on these federal choice-of-law rules. The Freedoms might still be applied to European choice-of-law rules, but it appears the scrutiny would be limited to market-closing or other discriminatory measures. It would not follow that the following discussion would be entirely irrelevant – the considerations for choice-of-law that will be discussed would still be relevant for the law-making process. But the Freedom and Dormant Commerce Clause scrutiny as such would be moot.
B.	The Tension Between Federalistic Diversity and the Requirements of an Internal Market Revisited – Bibb v. Navajo Freight Lines
Although Bibb has frequently been discussed in the context of choice-of-law, the case really just illustrates the usual working of the Dormant Commerce Clause of invalidating substantive state laws. Bibb does not administer legislative diversity, it eliminates it.
1.	The Argument: Conflicting State Regulations
The US Supreme Court had to decide whether Illinois could require trucks using its roads to be equipped with contoured mudguards, while the other states had no such requirements, and Arkansas required straight mudguards. The Court ruled that the contoured mudguard requirement put an excessive burden on interstate commerce in the form of interstate trucking, and thus violated the Commerce Clause. The reason was that it required trucks with conventional mudguards to either change mudguards at the state border, or refrain from driving through Illinois, while offering no redeeming benefit (as seen by the Court).
But in other cases implicating the (police) power of states to regulate the use of its highways, where one state just adopted a stricter law than others, "[t]he matter of safety was said to be one essentially for the legislative judgment; and the burden of redesigning or replacing equipment was said to be a proper price to exact from interstate and intrastate motor carriers alike."  The interesting part of the decision is the way it distinguishes these other cases. The Court argues that Bibb is different because the Illinois standards "conflict with the standards of another State". In fact, since Arkansas required flat mudguards, the design of a truck could not comply with all the states' laws simultaneously, thus preventing it from operating nationwide. The Court emphasized this conflict, and one might therefore want to call the decision a decision on "conflict of laws". But was the outcome an outcome usually associated with conflict of laws?
2.	The Consequence: Invalidation of the Law
In conflict of laws in the habitual sense of the term, one law is set aside in a given case in favor of another. As a general matter, however, both laws continue to coexist. Bibb, on the other hand, seems simply to invalidate one of the laws in question in so far as it applies to trucks operating in interstate commerce. Of the Arkansas and Illinois laws, only the Arkansas law survives – not just for the case under consideration, but in general.
Admittedly, the Court does not explicate the precise content of its ruling, and it is possible that all it required from Illinois was to limit the application of its statute to trucks registered in Illinois – a choice-of-law rule which would nominally leave diversity in this area of the law intact (if diversity would remain as a factual matter is a different question – motor carriers might simply choose to register their trucks outside of Illinois). But the decision does not even mention where the trucks are registered. The only information is that the appellees are "motor carriers holding certificates from the Interstate Commerce Commission." A choice-of-law interpretation of the decision therefore does not seem to be faithful to the intention of the Court. In fact, it seems the Court was keen on preserving legislative uniformity (absent a specific reason for diversity), as can be gathered from the following argument used by the Court. Justice Douglas writes that "[t]he conflict between the Arkansas regulation and the Illinois regulation also suggests that this regulation of mudguards is not one of those matters 'admitting of diversity of treatment according to the special requirements of local conditions' ... A State which insists on a design out of line with the requirements of almost all the other States may sometimes place a great burden of delay and inconvenience on those interstate motor carriers entering or crossing its territory."
3.	Making Sense of Bibb
If Bibb does not establish a choice-of-law solution to a Dormant Commerce Clause problem caused by legislative diversity, why does it put so much weight on the fact that the laws of two states conflict ? One possibility is, of course, that the Court, under the impression of increasing interstate motor traffic, was just looking for any possibility to get away from its earlier line of cases, which had largely deferred to the states for highway regulation. The "conflict" in Bibb was a way of distinguishing the old cases.
But perhaps what the Court was after was something akin to the interpretation offered for the ECJ's limiting its scrutiny to "products lawfully produced or marketed in another Member State" – making sure that it controls only interstate commerce, not commerce as such under the Dormant Commerce Clause. A "conflict" of state laws would then be a threshold, the crossing of which triggers substantive burden-test scrutiny of the measure at issue. That the "conflict" requirement in the Court's opinion is to be understood as a threshold for substantive analysis of the measure, rather than an element in an overall assessment, weighing in, most of all, the benefits of diversity, is shown by the fact that the Court after exposing the "conflict" centers on a substantive analysis of the measure. In any event, the Court does not seem to have taken up this issue again in any subsequent cases.
C.	Auxiliary Dormant Commerce Clause Doctrines in Edgar v. MITE and CTS v. Dynamics
1.	Preliminary Remarks on the Holdings and the Consistency of the two Decisions
In contrast to Bibb, Edgar v. MITE and CTS v. Dynamics clearly contain reasoning pertaining to choice-of-law. In fact, they have widely been understood as endorsing the internal affairs doctrine on Dormant Commerce Clause grounds. The internal affairs doctrine holds that the internal affairs of a corporation are to be governed by the law of its state of incorporation (lex incorporationes).
The Supreme Court undoubtedly shows sympathy for the internal affairs doctrine in CTS: "No principle of corporation law and practice is more firmly established than a State's authority to regulate domestic corporations." The Court clearly recognizes the general claim of a State to regulate the internal affairs of the corporations it charters. Whereas the Court "agree[s] that Indiana has no interest in protecting nonresident shareholders of nonresident corporations", it notes that the statute at issue "applies only to corporations incorporated in Indiana." Generally, the Court in CTS "reject[s] the contention that [a State] has no interest in providing [protection] for the shareholders of its corporations". And in Edgar, the Court argued that the statute at issue concerned the external affairs of corporations, and that it also applied to foreign corporations, but the Court did not dismiss out of hand the contention that a State "has an interest in regulating the internal affairs of a corporation incorporated under its laws." Beyond the language, there is the fact that the state law struck down in Edgar also applied to some out-of-state corporations, whereas the state law upheld in CTS applied exclusively to domestic corporations.
But whereas it thus seems that the Court accepts the regulatory authority of the state of incorporation, it is far from clear that this is the only state which has the right to regulate the internal affairs of a corporation. The CTS Court writes that a state "indisputably has an interest in protecting [its residents]", meaning its residents in the capacity of shareholders. This statement is unqualified, and read together with a preceding phrase that a state "has no interest in protecting non-resident shareholders of nonresident corporations", it seems to indicate that a state may still regulate out-of-state corporations' internal affairs to protect its resident shareholders.
In general, ascertaining the precise holding of Edgar and CTS is complicated by the fact that the two decisions are not necessarily on the same line of thought. Only one justice (O'Connor) was unqualifiedly part of both the Edgar and the CTS majority. Justice White, who wrote the Opinion of the Court in Edgar, dissented in CTS. True, Justice Powell, who wrote the Opinion of the Court in CTS, joined White's opinion in Edgar. But Powell stated in his Edgar concurrence that he joined the majority "because [White's] Commerce Clause reasoning leaves some room for state regulation of tender offers," regulation which Powell apparently thought necessary to avoid "certain adverse consequences in terms of general public interest when corporate headquarters are moved away from a city and State" – this is the very reasoning that, when stated as a legislative purpose, White found sufficient for invalidating the state law on grounds of protectionism in his dissent in CTS. On the facts, whereas it is true that the state statute in Edgar could have applied to out-of-state corporations, in the case at issue the take-over target was a domestic corporation, just like in CTS.
In light of these apparent inconsistencies and unclarities, there does not seem to be much use, at least for present purposes, to engage in a deeper analysis of the Edgar and CTS decisions as they stand. Instead, the following paragraphs and subsection will try to develop the ideas expressed with regard to choice-of-law in Edgar and CTS.
2.	No Direct State Regulation of Interstate Commerce
The first such idea comes from a prong of Dormant Commerce Clause doctrine (without a parallel in Freedoms doctrine), which holds that direct regulation of interstate commerce by the states is prohibited. The most natural question to ask would seem to be if choice-of-law rules pertaining to commercial activity are a direct regulation of interstate commerce – after all, choice-of-law rules have only one purpose, which is to determine the applicable law in interstate cases. The choice-of-law element of the state anti-takeover statutes, however, is not the flank that Justice White attacked with the named prong of Dormant Commerce Clause doctrine. Instead, White argued that virtually all takeovers of public corporations involve shareholders from different states and are therefore a part of interstate commerce, such that the substantive state rules would directly aim at an interstate transaction.
If White's reasoning is sound, and if the prohibition of "direct" regulation of interstate commerce makes sense in general, is not of concern here, since these questions only affect the vertical distribution of rule-making power, not the horizontal distribution. With respect to choice-of-law rules in particular, only one point deserves to be added. I have tried to show in the preceding sections that choice-of-law rules in a federal structure should be made on the federal level (and that the states should be precluded in this field), and that both the U.S. Constitution and the EC Treaty give such powers to the federal government and, in the U.S., to the federal courts. And it seems that differing state choice-of-law rules will have a particular detrimental effect on interstate commerce, by creating uncertainty as to the law which would be applied in a trial and thereby making business-planning more burdensome. So White would be right if he wanted to take choice-of-law rules out of the hands of the states. However, he would not need the Dormant Commerce Clause for that purpose (Full Faith & Credit will do), and he would not be able to invalidate all state choice-of-law rules without creating his own federal choice-of-law rules.
3.	State Laws Subjecting Activities to Inconsistent Regulations of Different States
The U.S. Supreme Court recognized the problem of differing state choice-of-law rules in Edgar and CTS. Quoting White's (on this point) plurality opinion in Edgar, Powell wrote for the CTS majority that the "Court's recent Commerce Clause cases also have invalidated statues that may adversely affect interstate commerce by subjecting activities to inconsistent regulations. ... [But t]he Act [in question] poses no such problem. So long as each State regulates ... only ... the corporations it has created, each corporation will be subject to the law of only one State. ... Accordingly, we conclude that the ... Act [in question] does not create an impermissible right of inconsistent regulation by different States." Indeed, inconsistent regulation can only result where choice-of-law rules differ, or where choice-of-law rules are not neutral. But saying that there should be only one, neutral choice-of-law rule for all states does not tell us which rule this is supposed to be. The Supreme Court faced a convenient situation where a almost uniform (and neutral) choice-of-law rule already existed across the U.S. (the internal affairs doctrine), such that the Supreme Court could reprimand deviations. Even there, however, things are more difficult than they seem. The different written opinions in Edgar and CTS discussed at some length which kind of takeover regulation concerned the internal affairs of a corporation, and which the external. The justices did not always agree. What does this mean for those areas of corporate law which are peripheral to the internal affairs of the corporation, and, more generally, for areas of law for which no clear choice-of-law rule exists ? Should all state regulation be disallowed where there is no clear and uniform choice-of-law rule across all states ? This seems hardly what the Court could have wanted, and it would be an unnecessary measure, since the Court could rather devise a uniform choice-of-law rule itself, thus eliminating the problem. The question remains what criteria should guide the Court in devising such a rule.
D.	The Burden-Test as Applied to Choice-of-Law
The most interesting part of the Supreme Court's decisions in Edgar, CTS, and others lies in its handling of the main part of the Dormant Commerce Clause analysis, the burden test, once a measure has cleared the auxiliary hurdles discussed above (no direct regulation of interstate commerce; no inconsistent regulation). As early as in 1971, Horowitz applied the burden-test to choice-of-law, and suggested that "where more than one state has an interest in having its law prevail, the court should choose the governing law that would best facilitate multistate commercial transactions. In applying this principle, the court would be giving effect to the federal constitutional policy of keeping interstate commerce free of unreasonable burdens." But simply choosing the "law that would best facilitate multistate commercial transactions" would seem to go way beyond "keeping interstate commerce free of unreasonable burdens." In fact, taken literally, Horowitz' proposal would rule out the possibility that a stricter law be justified by legitimate interests of the imposing state – interests which the other state might have chosen not to protect, or to protect less stringently. Horowitz, taken literally, would thus keep not only unreasonable burdens, but any burden away from interstate commerce, as long as one interested state does not impose such a burden on commerce. This lowest-common-denominator, without the possibility for a state to justify a stricter measure with legitimate interests, is not what the Dormant Commerce Clause (and the Freedoms) are about. A more intricate analysis is needed, and the following sub-sections are an attempt to summarize and complete the work done so far in this regard.
1.	Burdens on the Level of Substantive Rules
The classical application of the burden-test concerns substantive rules (as opposed to choice-of-law rules), like the mudguard-requirement in Bibb. If a substantive rule of a state is found to impose a burden on inter-state commerce, and if this burden is not justified by legitimate state interests, the substantive rule may not be applied to transactions in inter-state commerce. This leads to two possible choice-of-law rules.
First, there is the distinction between transactions in inter-state commerce, and transactions in internal commerce. Recall that the burden-test applies only to the former. So if the burden-test invalidates a certain rule for interstate commerce, this does not affect the rule as it applies to internal transactions. Consequently, the legal regime is then split in two. Different rules apply to transactions in interstate commerce on the one hand, and transactions in internal commerce on the other hand. This means that in any given case, a decision would have to be made between the two regimes – a "choice of law", so to say, although not between the laws of different states, but the laws, or different versions of the same law, of one and the same state. This of course creates the familiar problem of reverse discrimination (against internal commerce, which means, in general, against the state's own citizens), and usually the bifurcation of the state's legal regime collapses very soon under the economic pressure it creates (higher costs for internal commerce weaken its competitive position vis-à-vis interstate, i.e., usually foreign, commerce). These are very interesting and complex problems in themselves, with high relevance for the discussion of the general policy underlying the Freedoms / Dormant Commerce Clause. For the present purpose of discussing choice-of-law between the rules of different states, however, it is appropriate to turn immediately to another conception of the legal regime resulting from the burden-test.
Whereas the first conception just discussed assumes a bifurcation of the law of one state (hereinafter: internal bifurcation), the second conception we turn to now assumes that the alternative is between the laws of different states, where there is only one law in any one state (hereinafter: origin principle).
The second, genuine choice-of-law solution is dubbed the origin principle, and it originates in the already discussed idea that the burden-test applies only to products "lawfully produced and marketed in one of the Member States," or, more generally speaking, only to rules more stringent than in other states. More precisely, the burden-test is supposed to apply only to rules more stringent not just than in any other state, but than in the state of origin of the product, service, and so on. On this understanding, always applying the rule of the state of origin assures compliance with the burden test. If the rule of the state of origin is stricter, the burden-test does not apply in the first place. If the rule of the state of origin is less stringent, applying it avoids the stricter rule of the state of destination. This does not mean that the choice-of-law solution assumes that a state may never apply its own (and more stringent) law to interstate commerce. But if it does, it has to be able to justify this by showing that it has legitimate interests for doing so, and that applying its own law is not an excessive means to pursue these interests. Of course, the state of origin is free to apply its less stringent rule also to interstate commerce. So in the choice-of-law solution, it is not the substantive rule itself which is scrutinized, but the decision to apply it to interstate commerce instead of the rule of the state of origin.
For example, some authors have reinterpreted the whole jurisprudence of the ECJ concerning rules of unfair competition in this way. The ECJ, it is argued, does not invalidate substantive rules of a state when applying the burden-test. Instead, the ECJ simply states a choice-of-law rule which says that the substantive rules of the state under scrutiny cannot be applied to interstate commerce, and that such interstate commerce is instead subject to the rules of its country of origin.
It seems rather dubious if this choice-of-law interpretation of the ECJ's jurisprudence is correct. For the conceptual analysis of this paper, however, this is secondary. What concerns us here is whether such a choice-of-law solution would make sense from a policy standpoint, given the goals of the internal market. The case where the rule of the state of origin is less strict seems unproblematic. It does not seem to make a practical difference whether the less strict rule comes in the guise of a foreign rule, or in the guise of an attenuated domestic rule. The problematic case is where the rule of another state is stricter, and nevertheless applied to interstate commerce originating in that state. From a doctrinal point of view, this seems to be a forbidden discrimination against interstate commerce, and the ECJ has actually invalidated a German statute incorporating the choice-of-law solution on the grounds that it was discriminatory where the foreign law was stricter. From a policy perspective, the proponents of the origin principle seem to see the main function of the internal market in allowing economies of scale, including economies derived from being able to run a uniform marketing scheme throughout the internal market. If the law of the state of origin is stricter for internal commerce in that state, then, one could argue, a market participant from that state could not have a uniform marketing scheme across the internal market anyway. But this reasoning is faulty in two respects. First, if in an internal market of 15 states 1 to 13 allow a certain marketing scheme, it is still advantageous in terms of scale-economies for a market participant from state 15 to be able to implement this marketing scheme in state 14, even if she cannot implement it in her home-state 15. Second, the internal market is not only, not even primarily, about economies of scale. It is also about using comparative advantages, and about increasing general competitiveness. For these purposes, it hardly makes a difference how a product is treated in its state of origin. What is important is equal, undistorted competition in each state. Discrimination against interstate commerce runs contrary to this goal, and the fact that the discrimination results from the application of a stricter rule of the state of origin does not change anything to this analysis. Many scholars have, of course, seen this problem, and they have suggested that the general rule should instead be to apply the more favorable (to commerce) rule of the state of origin or the state of destination. This would indeed solve the problem as between market participants from these two states. However, it would engender a distortion of competition with commerce coming from other states of the union. This is because if a third state has a less strict rule, that third state's rule will apply to commerce originating in the third state (barring justification by legitimate interests of the state of destination), thus favoring commerce originating in that third state over commerce coming from the first two. The only way out is a rule which calls for the application of the most favorable rule (to commerce) of all the states of the union (at least of those where commerce arriving in one state is originating from). This would at first sight look like an extreme version of Horowitz' proposal, but it would allow for stricter rules to be applied if legitimate interests to do so can be shown. So far, so good. But would this really be a choice-of-law rule? After all, no state would be obliged to apply the rule of the least strict state as such – each state would be free to recreate its own rule for interstate commerce (and, if it so desires, for internal matter too), which could be even less strict than that of all the other states, or more strict but justified by legitimate interests. The whole "choice-of-law solution" would be nothing more than the general condition for the application of the burden-test that there be a divergence among interested states' rules, a condition which, as I have hinted above, may or may not be part of the positive law of the US and the EU, and may or may not make sense. In any event, the repackaging as (some strange kind of) a choice-of-law rule does not add to the analysis; if anything, it makes things look more complicated than they are. Lastly, if one does not accept that legality in at least one of the states is a condition for the application of the burden-test to the other states' laws in the first place, even a choice-of-law rule in favor of the laxest law does not assure compliance with the Freedoms. In this view, corrections will have to be made on the level of substantive rules; that is, choice-of-law rules might not be able to solve the problems arising from substantive rules' incompatibility with the Freedoms. This alone does not mean, though, that choice-of-law rules are unaffected by the Freedoms. There might be specific burdens on interstate commerce on the level of choice-of-law which might call into action the Freedoms (or the Dormant Commerce Clause, for that matter). We will turn to this question in the next subsection.
2.	Burdens on the Level of Choice-of-Law
Burdens on the level of choice-of-law are burdens resulting from the very fact that the internal market is split into different legal systems. In other words, the burdens on the level of choice-of-law are burdens resulting from (federalistic) legislative diversity. More concretely, for any given question concerning a transaction in interstate commerce, the choice between the different legal systems can be more or less (dis-)favorable to such transactions, in ways to be examined shortly. Burdens arising from legislative diversity are, by definition, peculiar to interstate commerce. If the Union were a single monolithic legal system, no such burdens would occur (except in international commerce). Likewise, no such burdens befall commerce which is purely internal to one state. The case for scrutinizing such burdens under the Freedoms and the Dormant Commerce Clause might therefore be considered stronger than for burdens arising on the level of substantive law. The burdens on the level of choice-of-law are of course linked to the content of the substantive rules that would be applicable as the result of choosing one law or the other, but they are not the same as burdens caused by substantive rules as such. We shall first attempt to clarify this distinction, and to identify the burdens on the level of choice-of-law (a). After a methodological intermezzo (b), we then we turn to possible remedies, an the costs associated with them (c).
a)	Which are the Burdens on the Level of Choice-of-Law ?
A substantive rule may impose a burden on commerce, even specifically on interstate commerce, even though it is uniform within the whole internal market. Advertising rules are such an example. By restricting certain forms of advertising, the legislator may impede the development of businesses. At least in the developing stage of the internal market, this may hit interstate commerce harder than internal commerce, if and in so far as out-of-state suppliers are not yet established players in the market of a given state. This impediment is not linked to legislative diversity. It is entirely due to the substantive content of the rule.
(1)	Diversity of Choice-of-Law Rules
By way of contrast, consider the uncertainty as to the applicable substantive law resulting from differing state choice-of-law rules in different states (this assumes that choice-of-law is not federalized, such that every forum applies its own choice-of-law rules). This is a burden entirely and exclusively due to legislative diversity – legislative diversity not even of substantive rules, but of choice-of-law rules. Of course, a participant in interstate commerce would not need to worry about the applicable law if she were sure that none of the laws in question contained any substantive rule adversely affecting her affairs. And the burden gets extreme where the substantive rules of different states demand incompatible actions (i.e., where the law of one state does not simply require something more than another state, but something different, which the other state in turn forbids). In this way, substantive rules do matter. But the specific burden resulting from uncertainty, which requires researching all laws in question, gambling as to where the question might be litigated, or both, is independent of the content of the substantive rules in an individual case.
(2)	Diversity of Substantive Rules
But legislative diversity imposes burdens on interstate commerce even where choice-of-law rules are uniform, and where there is thus no uncertainty as to the applicable law. This starts with the obvious fact that legislative diversity necessitates a choice-of-law in the first place – an additional step in any legal analysis, and therefore an additional cost, negligible or substantial depending on the complexity and ambiguity of the choice-of-law rules. But this is an unavoidable consequence of legislative diversity. Other burdens may not be.
(a)	Splintering of the Legal Regime
Choice-of-law can impose a burden on interstate commerce by splintering the legal regime applicable to a single commercial enterprise. A single commercial enterprise may involve multiple (interstate) transactions which are similar or identical except for some of the territorial elements (in which state the transaction is executed, in which state the parties to the transaction reside, and so on). A choice-of-law rule may attach relevance to those territorial elements that differ, and call for the application of the laws of different states for different transactions.
If the different laws in question demand different actions that can only be uniform for the whole enterprise and that are incompatible with each other, the effect of such splintering is fatal for the commercial enterprise as a multi-state enterprise. An example would be differing, and incompatible, requirements as to the control structure of a mutual-benefit association, where a choice-of-law rule calls for the application of the law of the state of residence of a member. The choice-of-law rule would in effect preclude mutual-benefit associations to form with members from different states. If the different laws in question demanded merely different, but not incompatible actions, the mutual-benefit associations could take in members from different states, but it would have to fulfill the different states' requirements simultaneously and cumulatively. Similar situations could arise with differing requirements as to shareholder protection in general and take-over laws in particular, if the law of the residence of the shareholder is applied to these questions. Securities laws that require or forbid certain disclosures are another example, if their application depends, as usual, on the market where the securities are traded, and the issuer issues securities in different markets.
Where the different states' laws demand different actions only for distinguishable parts of the enterprise, e.g., only for the individual transaction, the effect of the splintering of the legal regime is less dramatic. Still, the effect will be to make the administration of the enterprise more difficult and costly. One example would be different statutes of limitations for claims of residents of different states. The different statutes for different claims would not make operations impossible. But it would require the enterprise to familiarize itself with not only one statute of limitations, but with as many as the number of states across which its client-base is spread. Where the delays differ, the enterprise would have to administer its clients separately to a certain extent, possibly charging different prices to residents of different states. The enterprise would therefore incur higher information costs, and lose some of its otherwise possible economies of scale. The same would hold true, for example, for a company launching a TV-advertising campaign, where the applicable law of unfair competition (and so on) depends on the state where the TV-program is received.
Again, where the requirements of the different rules are compatible, although different, a company may unify its operations by conforming with all standards simultaneously and cumulatively. Often, the rules will not be qualitatively different, but rather more or less strict along the same dimension. Then applying all the standards collapses into applying the strictest of the different applicable standards. We would expect a participant in interstate commerce to choose the easier, and cheaper, of the two options either to follow the steps just described and run uniform operations, or to run split operations under the different applicable laws. The burden resulting from the splintering of the legal regime is upwardly bounded then. This upward bound is the extra cost of following the stricter law for the whole operation, or of following the extra requirement of the other law. This extra cost will be smaller the smaller the differences in the substantive laws in question. An exception is the case of incompatible laws, where running a uniform operation is per definition impossible.
(b)	Familiarity with a Legal Order – Information Cost
People generally prefer the application of their own home state's law over any other law, as long as they do not know that another state's law would be more favorable to them on the substantive level in a given case. This is neither just an emotional attachment to "one's own" law, nor only due to a (probably warranted) assumption that the law of one's home state will on average (!) be closer to one's conception of justice than that of other states, such that one would be more willing to submit to the home state's law than to others. A major, and very much an "economic", reason why people prefer their "own" law seems to be information cost. One, people should be much better able to guess the content of their home state's law even without legal education and research, because coming from that state they are more likely to share the values pursued by that state's laws, and, most importantly, they are much more likely to have acquired a layman's knowledge of the rules applicable in that state. Two, specialized legal advise on a particular state's law is easier to obtain within that state. Especially the second point holds for corporate players, too. The mere fact of being faced with a legal order different than that of one's home state will therefore often present a difficulty (and a cost !) for a participant in interstate commerce, making participation in interstate commerce harder. This is a burden on interstate commerce.
Familiarity with a legal order, and ease of access to qualified information on that legal order, are not necessarily confined to one's home state law. In particular, certain legal orders have become standard for certain operations, such as English law for insurance contracts. Also, the parties preferring to work under "their" legal order do not necessarily have to be direct parties to the interstate commerce transaction in question. For example, a financing operation can be entirely internal to one state, but the refinancing will often involve out-of-state parties who prefer their home state's law, or a legal order which is standard for such transactions. For example, the financing of a German firm by a German bank might be refinanced through a French and an English bank, both of which prefer English law to German law, the English because it is their home state's law, and the French because it is a standard law for finance transactions. Again, forcing the application of another legal order then constitutes a burden on interstate commerce.
b)	Intermezzo: A Note on the Structure of the Burden-Test
It seems to be standard practice to treat a cost to a commercial operator as a burden, and avoiding a cost to a consumer as a possible justification for imposing the burden, in applying the burden-test. The Freedoms and the Dormant Commerce Clause do not protect just one party, the supplier, though. The protected object is the interstate transaction (!). Strictly speaking, then, costs to both sides of transaction would have to be taken into account, and it would seem that a rule imposes a burden on interstate commerce only if the rule increases the overall cost of the transaction, i.e., if the rule is not efficient. This is important to keep in mind when analyzing choice-of-law rules under the burden test, since a certain cost from legal diversity seems inevitable. The question can only be to find the rule which minimizes this cost – the efficient choice-of-law rule, so to say (where efficiency is calculated only as between the partners to the interstate commerce transaction in question). Technically, therefore, I would argue that one cannot speak of a burden imposed by a choice-of-law rule until one has looked at the alternative rules, and the respective costs for other parties to the transaction.
However, it seems that ECJ and Supreme Court generally take costs of alternative rules to other parties, e.g., to the consumer, into account only at the justification stage. The results seem to be the same, but the difference in terminology might make a psychological difference. In any event, the point has been raised here since the complex considerations of the next subsection would be even more complicated if we had to distinguish between the different costs and benefits depending on whether they form part of a burden, eliminate the burden, or provide a justification, or eliminate a justification. I beg the reader for indulgence that for the sake of simplicity, the next subsection will just undertake a general cost-benefit analysis without paying attention to these subtleties.
c)	Can We Do Anything About These Burdens on the Level of Choice-of-Law, or Are They Inevitable ?
Conscious of these structural ambiguities, let us now turn to choice-of-law solutions which could reduce the choice-of-law "burdens" listed above. The question is if we can find, and perhaps enforce through the Freedoms/Dormant Commerce Clause, a choice-of-law design which reduces or eliminates the specific possible "burdens" listed above. At this point, the question is not yet whether we can eliminate the specific choice-of-law burdens without imposing a cost in other areas. The question is merely whether it is possible to reduce the specific choice-of-law burdens (or, more generally, costs) in the first place.
(1)	Uniform Choice-of-Law Rules
There is an obvious remedy for costs caused by diversity of choice-of-law rules: uniform choice-of-law rules. I have tried to show above that, in contrast to substantive rules, there is nothing to be gained from diversity of choice-of-law rules, and that as general desiderata of choice-of-law in a federal system, choice-of-law rules should be uniform, i.e., federal, anyway. Also, both the US Constitution and the EC provide federal legislative powers to that effect. But as long as these federal powers have not been used, can the courts do anything about the detrimental diversity of choice-of-law rules under the Freedoms/Dormant Commerce Clause ? The problem is that to achieve uniformity, somebody has to decree a uniform rule, or all states concerned have to agree on a uniform rule. As long as there is no uniform rule that can serve as a benchmark for states' choice-of-law rules, the latter cannot be censored for not conforming with that (nonexistent) uniform benchmark. This problem is similar to that faced by the US Supreme Court's criterion that forbids state legislation that might lead to inconsistent regulation by different states.
Some authors have argued that as a general rule, the Freedoms demand the possibility for the parties to a transaction in inter-Community trade to choose the applicable law by contractual stipulation. Others have argued that as a general rule, the origin state law has to be applied. Even conceding that the Freedoms would take this as a default rule (choice by the parties, or origin state law), would we achieve much towards what we are concerned with here, that is towards reducing the diversity of choice-of-law rules ? The default rule is obviously much too broad and rough to come even close to stating a workable choice-of-law system. Its proponents thus allow for very numerous deviations from the default rule for the protection of legitimate interests of the rule-setting state. States need not protect the same interests, or choose the same way to do it. Some interests may be protected otherwise in one state, making a further choice-of-law adjustment unnecessary and therefore illegal under the Freedoms. The result would be a great diversity of choice-of-law rules between the states – the very situation the whole line of argument is designed to prevent. To be sure, the resulting diversity may be less marked than it would otherwise be. But would that make a significant difference to the actors in inter-Community trade, i.e., would it make transactions in inter-Community trade more than negligibly easier? It would seem that as long as significant diversity in choice-of-law rules exist, the precise extent of such diversity does not change much in the burden imposed by such diversity. The courts under the Freedoms/Dormant Commerce Clause can thus not do anything about this problem as such. We will have to wait for the federal legislator to step in – or, where possible, the courts to make their own (uniform, and more sophisticated) choice-of-law rules.
(2)	What Can We Do About Diversity of Substantive Rules ?
Irrespective of whether choice-of-law rules are uniformized or not, it might be possible to design choice-of-law rules such as to reduce the inevitable burdens resulting from diversity of substantive rules. In section a), we had identified two such burdens. Those arising from information cost (where parties are more familiar with one law than the other), and those arising from the "splintering" of the applicable law. We will deal with possible cures for each of them in turn.
(a)	Information Cost
The problem with the information cost argument is that a law that is familiar to one party may be unfamiliar to another. And transactions in interstate commerce typically involve parties from different states, and therefore with presumed familiarity with different laws, either as direct parties to the transaction (in which case it is already hard to say the application of which law would impose a burden on interstate commerce), or as indirectly affected third parties (in which case the burden might be justified by protecting the interests of those third parties). In fact, it is hard to think of cases where a state has applied, yet applies on a regular basis, a law which none of the directly or indirectly involved parties would have claimed as "their" law. Exceptions might be found in economic regulation like in antitrust laws, but these exceptions would quite easily be justified by the interest of the state where the impact of the violation is felt to pursue that violation (and even then, one might want to say that the law applied is, after all, the law of the institution applying it, i.e., the court or government agency). Incidentally, even under its present lax control standard for state choice-of-law, the Supreme Court censored the (extremely rare) application of a law entirely foreign to the underlying case and the parties thereto in Phillips Petroleum and Sun Oil under the Due Process Clause/Full Faith & Credit Clause anyway.
To get a more systematic view of the matter, let us start with transactions in interstate commerce directly involving two parties from different states A and B, typically a contract between such parties. Legal questions that might arise under such a contract, and that could be subject to either the law of state A or of state B, include all questions of contract law, such as permissible clauses (especially in standard-forms), or products liability as between the seller and the buyer, for example. Now if the, say, buyer resides in B, and the seller in A, there seems to be no a priori reason to prefer either the law of A, or the law of B. Some European scholars have argued, though, that in a first approach (before considering the justification side of the burden-test) the position of the supplier should count. If a reason is given, it is that the supplier side is supposedly more important for economic integration than the consumers. It is true, of course, and economically natural, that suppliers have taken the more visible steps towards integrating the European market (and the US market, for that matter). But the suppliers could only do this because the consumers were buying. Consumers might be less willing to buy foreign products if they had to expect the application of foreign law (more details below). So if there were a "right" for suppliers to operate under their home state's law, there also would have to be a "right" for consumers to consume under their home state's law – the two rights would cancel each other out in a supplier-consumer transaction. Recall that both the Freedoms and the Dormant Commerce Clause protect interstate commerce as such, i.e., transactions in interstate commerce, not only businesses engaged in interstate commerce. The point of reference (a deviation from which would have to be justified) would therefore seem to be the choice-of-law rule which minimizes the overall information costs of both parties. The overall information cost is certainly dependent on the type and size of the transaction and business, the number of consumers involved, and many other circumstances of the individual case. On average, it would seem that it would be cheaper to apply the consumer's law and shift the task of learning about a foreign law to the supplier. This is because the supplier usually enters into many transactions of the same kind, and can therefore realize economies of scale.
A counter-argument might be, and it seems many European scholars think, that the consumer (rationally) does not take the time to inform herself of the precise extent of her rights when she enters into the transaction anyway, so that applying a law foreign to the consumer does not burden interstate commerce. One might think that, by contrast, the supplier has to plan everything carefully, and this is made easier by applying the supplier's law. But the consumer will eventually need to inform herself of her precise rights after entering into the transaction if and when something goes wrong. This might be made easier by lawyers or consumer-protection agencies and associations, but presumably even these experienced players do not have as much routine in dealing with exactly the relevant legal aspects of the foreign law as the supplier (assuming, realistically, that the consumer will have to consult lawyers or consumer-protection agencies at her place of residence). The consumer will rationally expect that, or learn to expect that after the first negative experience, and take it into account when entering into the transaction in the first place. The counter-argument is therefore not valid.
To repeat, the question which choice-of-law rule minimizes information cost is dependent on the facts of the case. It is an empirical question. But I think one can make a very plausible argument that on average, information cost will be minimized by applying the consumer's law. I would propose, therefore, that proving the contrary should be up to whoever challenges the application of the consumer's law.
So far we have dealt only with transactions directly involving two parties from different states. Cases involving parties not directly transacting with each other are similar from the point of view of information cost. An example would be the law of unfair competition – the out-of-state competitor could save information-cost if the law of his home state were applied, but the instate competitors, consumers, consumer associations, or government agencies, enforcing the law of unfair competition, would have to pay the bill. Another example would be all secured transactions, where the secured creditor comes from one state, the debtor and some other creditors from another. Even if they all agreed that the security interest be granted under the secured creditor's law, new creditors (tort claimants, or whatever) might be hurt in terms of information cost. Again, we have no clear-cut case for favoring either the one law or the other.
In sum, if one does not make unwarranted simplifying assumptions, it is difficult to ascertain which choice-of-law rules minimizes information cost with respect to the applicable law.
(b)	Splintering of the Legal Regime
There seems to be an easy solution to reducing the cost resulting from splintering the choice-of-law regime (as described supra) – applying only one single state's law to the whole enterprise in question. Which one ? It could be the law of the enterprise's headquarters, but any other law would do. The question is whether this would only shift the problem and the cost of a splintered legal regime from the enterprise involved to other players. The answer to that question is, of course, empirical. But it would seem that generally, the only party who can reap economies of scale from a uniform organization of its affairs, and who would suffer from inconsistent demands of different laws, is the active party handling multiple and uniform transactions, which is, generally, the supplier / offeror in interstate commerce.
One also has to take into account, however, that players like lawyers, consumer associations, or governments pursue claims of similar sort on a regular basis, and they may face similar behavior in different cases, such that handling these cases under different laws makes things more difficult for them, too. Granted, this impediment may be less frequent and less severe for the reacting party than for the acting party (the supplier / offeror), but it must nevertheless not be forgotten.
(3)	A Contractual Solution ?
The best solution to intricate problems of the sort just described is, of course, to let those who are directly concerned figure out the solution themselves trough contractual arrangements. Thus, where only the parties to a contract are affected by the choice of the applicable law, an easy way of solving the problem of determining which choice-of-law minimizes information cost is to allow contractual choice-of-law stipulations. Let those decide who know the circumstances best – let the parties themselves choose the applicable law by contractual choice-of-law clause. Contractual choice-of-law clauses are indeed the standard solution for choice-of-law in contractual matters. However, there are two major caveats.
First, contractual choice-of-law clauses are no solution in all those cases where the parties affected by the choice-of-law are not in a contractual relationship. Contractual choice-of-law clauses work only for contracts, and only for those problems of the contract that affect only the parties themselves.
Second, contractual choice-of-law clauses are no ready solution where, under whatever theory, we do not have faith in the two parties reaching the optimal result, such as consumer contracts. Thus, contractual choices of the applicable law are limited under present choice-of-law rules for certain areas, mainly for consumer contracts. These are mostly areas in which also the substantive law of almost all states provides for some special limitations on freedom of contract. So if considerations of consumer (or other) protection justify these limitations on substantive freedom of contract, then would it not seem that limitations on the freedom of contractual choice-of-law clauses should also be justified ? After all, what difference does it make whether a consumer loses her rights through a direct contractual stipulation, or through reference to some other law ? But this precise reasoning would assume that the same thing is at stake in the choice-of-law context as in the substantive context. This is not necessarily the case, however. We can assume for the time being that the contract's choice-of-law clause provides for the application of a law which's content is as or even more protective of the consumer than the law of the state of the consumer's residence. Then the contractual choice of the applicable law is only about an allocation of the informational advantage, and possibly about sustaining a uniform marketing system or not. That is, under the assumption of equal substantive protection, the contractual choice-of-law is only about, and the consumer's risk is limited to, the two specific choice-of-law interests discussed in the two previous paragraphs (1) and (2). A contractual choice-of-law provision thus poses a different risk and, be it submitted, should ring a different warning bell for the consumer than a substantive provision. It is not possible, therefore, to infer from the legitimate existence of substantively protective limitations on contractual freedom that barring contractual choice-of-law provisions would automatically be justified. All of this is only valid, of course, under the extremely strong assumption that the level of substantive protection is not influenced by the choice of the applicable law, i.e., that only the means to achieve this protection change. Dropping this assumption, i.e., accounting for substantive differences, leads to very difficult problems which we will talk about in the next and especially the second-next sub-section.
d)	Do Private Interests Change in Foreign Lands ?
In the preceding sections, we have surveyed the different costs arising specifically on the choice-of-law level, i.e., costs arising from legislative diversity as such. To complete the analysis, we have to combine the findings of this survey with the substantive issues involved in any choice-of-law. But before we can do that, we have to deal with an argument frequently made by European scholars, and which would eliminate certain elements or costs ("interests") from the outset, or at least devalue them, for any overall cost-benefit analysis under the burden-test.
In the choice-of-law literature, and in particular in the European literature discussing the influence of the Freedoms on choice-of-law, it is a common-place argument that a party's "interest" in having her law applied, and in enjoying the substantive protection that "her" law provides, diminishes, the more that protected party steps out of her home state environment. Commonplace as the argument is, I find it nevertheless unconvincing. As a purely factual matter, why would, for example, a consumer desire the application of her own law less, just because she travels to another state? Perhaps she is a sophisticated consumer who knows that the other state's law is more advantageous to her, or that she can strike a better deal under that law. But then she would want to be able to transact under that other state's law even at home. And if one were able to identify such sophisticated consumers, one could and would allow her to do that.
The standard argument why a consumer would need less protection if she steps out of her home state is that she has to expect the application of another state's law in another state, that there is, in other words, sufficient warning. But why then is it not enough to put the choice-of-law clause in big, red letters into the contract if the consumer does not leave her state? As always, the argument of expectations is somewhat circular, since a sophisticated market participant expects what the law tells her to expect, and for an unsophisticated market participant the argument would lose its force if that participant either has no expectations in the first place, or is put on notice that she has to expect something else.
In the end, it seems that what the argument of the diminishing "interest" in protection is about is two quite different legitimate concerns, supporting the underlying intuition:
One concern comes from the specific costs from legislative diversity. The cost for the supplier of having to inform herself about the consumer's law gets proportionally bigger where she does not actively solicit a large client base in another state, and only serves foreigners as part of her routine instate operations, perhaps not even knowing that she is dealing with foreigners. Also, the cost of adjusting her business to these different laws become proportionally much more important in such a case.
The other concern goes directly to the interest of a party in having the substantive rule of her state applied. I would agree with most American choice-of-law scholars that this is not a private interest at all, or at least that these particular private interests cancel out. If we are looking only at substantive rules, i.e., when the potentially applicable substantive rules are known, each party to a dispute will want to have the law applied that is favorable to her position. In this view, it is dubious if one can even speak of the interest of a party to have her law applied as specifically "her" law, if (and only if !) that law happens to be favorable to her in a given case. Factually, such an interest is presumably inexistent once the content of the potentially applicable substantive rules is known. As a normative matter, why should any party's interest in having "her" law applied trump the symmetrical interest of the other party ? Shouldn't the two cancel out ? One can answer this question in the negative only if one holds the parties' interest in the application of "their" law to be dependent on the geographical circumstances of the case. But even if the case seems geographically more connected with one state or the other – each one of those states would be (or rather, would have been) free to change its substantive rules. This is the fundamental objection against the notion of a private interest in the application of one substantive rule rather than of the other. The only player who is hurt specifically by the non-application of the law of one state, independent of the content of the law of the other state that has been applied, and independent of the outcome of the case, is the state whose law has not been applied. More specifically, it is the regulatory interests of that state which are hurt. The interests in the application of the law of one state are government interests, not private interests. This can also be seen in the fact already mentioned that a party does not insist on the application of "her" law if that law is not favorable to her in the case at hand – the state, however, should, since and if its regulatory plan is implicated. The following section is an attempt to integrate these government interests with the other considerations for choice-of-law in a single market that we discussed so far.
e)	Evaluating the Different Interests – A Task for A Court ?
After this long survey of burdens on the level of choice-of-law, it is time to recapitulate, summarize, and evaluate the findings.
(1)	Summary of the Prior Results
First, we found that burdens arise from the fact that different states follow different choice-of-law rules. But we also found that the only solution to this would be a uniform choice-of-law system imposed by some central authority without the possibility for the states to deviate, and that this is not feasible with the tool of the burden-test (but see infra 3.). This point can therefore be put aside for the rest of this section's discussion.
Second, we tried to identify the burdens, or, more generally speaking, the costs, that relate specifically to choice-of-law even where choice-of-law rules are uniform.
One of these costs is information cost. We speculated that information costs would on average be minimized if the party that enters into many transactions of the same kind, and that can therefore reap economies of scale, be made to bear that cost, i.e., if the other party's law is applied. In consumer transactions, for example, this would point towards applying the consumer's law.
The second cost is related to the splintering of the legal regime. The extreme case is a situation where, as a result of the choice-of-law rule, incompatible substantive rules are applied to a necessarily uniform action or structure, such as a corporation's internal affairs. In this case, the cost is that a business cannot exist with pertinent (as defined by the choice-of-law rule) points of attachment to different states, e.g., shareholders or insurance-policy holders in different states, and thus would have to be divided in sister-companies. If the substantive rules are incompatible, but applicable only to distinguishable parts or transactions of the enterprise, the cost is the lost economies of scale from not being able to run the business uniformly. In the much more common case of different, but compatible rules, the afore-mentioned costs of splintering are upwardly bounded by the extra-cost of complying with the stricter law for the whole operation – since the latter would eliminate the other problems of splintering. In general, it seems that such cost would be minimized by applying a uniform law for the whole operations of the active party, for example of the supplier rather than the consumer.
In sum, we have two costs associated directly with choice-of-law, i.e., without even filtering in considerations of substantive law. If we can make any general assumptions as to what choice-of-law rule would generally minimize these costs, the assumptions for the two costs point in opposite directions. Clear-cut solutions are unavailable. Where clear-cut solutions have been proposed, they were based on unwarranted simplifications, such as a preference for the supplier, or the assertion that the interests of a party in the application of "her" law get weaker with a growing distance from her home state. That leaves us with complicated empirical problems just to determine which choice-of-law rules minimizes the costs specific to choice-of-law, i.e., without even taking into account the issues of substantive law involved.
(2)	Adding the Level of Substantive Law
To see what the issues of substantive law are, consider the only ready solution to the complicated problem of finding the choice-of-law rule optimal from the point of view of the choice-of-law costs just described – contract. To repeat, the contractual solution is available only where the choice-of-law exclusively affects the parties to a contract. We had seen that since under the assumption of equal substantive protection the issues at stake in choice-of-law are different from those at stake in contracting on substantive issues, the limitations on contractual choice-of-law provisions, or the justifications for such limitations, need not be congruent with those on substantive issues.
Now it is time to lift this assumption of equal substantive protection. This assumption is unrealistic for two reasons. First, it would be quite a rare case that two laws provide for exactly the same level of substantive protection, least of all if the means they use are different. Second, even if we conclude that they are, then the consequence should be the invalidation of the narrow substantive requirements of both states' laws for being not necessary to reach their goal, if we are serious about the burden-test. Consequently, if there are differences between the laws of different states, these differences will always have an impact on the level of protection of the laws of different states, and these differences have to be taken into account in the choice-of-law decision. That is, every choice-of-law decision will not only influence the specific choice-of-law costs that we identified, but also make a difference as to the substantive protection of one or the other party, or, more generally, one or the other social interest.
Coming back to our example of the consumer contract, the consumer's substantive protection is at stake in a contractual choice-of-law provision. The "substantive stakes" are lower if the differences between the laws in question are fewer – but then the potential cost from splintering of the legal regime will most likely also be lower, as we have seen above. In the absence of rules-of-thumb, ascertaining the risk for the consumer and the potential for both parties of allowing contractual choice-of-law clauses, and weighing the two against one another, becomes difficult and complicated. At least the latter task (weighing) with its value judgment component is the proper task of the legislator, or more precisely or of the two implicated state legislators together (or of the federal legislator), since both states' policies and usually citizens are involved.
Generally speaking, and to repeat, each choice-of-law is drawing the line between the legislative policies of the implicated states. In a federal system, this process should be guided by the principles laid out above in section III.B, and the application of these principles is in itself quite difficult. The specific costs of choice-of-law that we have been discussing over the last 20 pages are but an additional element to be taken into account. As we have seen, this additional element does not have a general direction, i.e., the direction in which it would push choice-of-law is dependent on the question we are dealing with, and will often be hard to discern because of opposing elements even within the group of these choice-of-law costs. Lastly, whereas the line-drawing according to the federalism principles might get less important as the substantive policies of the states get closer, the specific choice-of-law cost of splintering the legal regime does so, too.
(3)	Role of the Courts
Altogether, evaluating and weighing the different elements to be taken into account for choice-of-law in an internal market and a federal system seems extremely complicated – and we had not even yet taken into account the need for choice-of-law rules and the additional weighing when striking a balance between precision and clearness of the rule. One should therefore ask if a court, be it the ECJ or the US Supreme Court, is in a position to intervene. In other words, even if one generally supports a broad interpretation of the Freedoms and the Dormant Commerce Clause, in particular the application of the burden-test for any hindrance of interstate commerce, one might want to exclude choice-of-law questions from the burden-test.
The very costs which may constitute a burden under the burden-test, choice-of-law costs, are not only hard to ascertain, but do not point in any fixed direction. In addition, they have to be weighed against the federalism considerations which are at the basis of choice-of-law analysis in a federal system. For the courts to engage in such a complicated analysis, at least there would have to be strong reason in the form of significant burdens on interstate commerce. But it seems that once we have legislative diversity, which the courts can do nothing against, the extra-costs generated by a suboptimal choice-of-law rule, namely unnecessary information cost or splintering cost, are rather negligible. Cases where a choice-of-law rule calls for the application of incompatible laws to a necessarily uniform action or structure may be an exception, such as in banking or insurance regulation. In such cases, however, the federal legislator usually intervenes with federal legislation. Such legislation can entirely federalize the area, so that legislative diversity and thus the need for choice-of-law rules is eliminated in that area. An example would be federal banking regulation in the US. The federal legislator can also just strongly harmonize the laws of the different states, and then adopt a choice-of-law rule that subjects the entire enterprise to only one law, if this does not cause high information costs to customers or third parties. Examples are the EC banking and insurance regulation directives. The important element here is, though, that the federal legislator can change, i.e., unify or harmonize, the substantive law before it changes the choice-of-law rule – courts cannot do that. Bibb is an example of a court simply unifying substantive law – decreeing a choice-of-law rule while finding no fault with the substantive rule would have been too problematic.
To repeat, one generally has to keep in mind what limited improvements a court can achieve under the burden-test analysis with respect to choice-of-law burdens. Above, we proposed that the US federal courts should craft uniform choice-of-law rules for the US under the Full Faith & Credit Clause. So, one might argue, if we think the federal courts capable of crafting a whole set of new choice-of-law rules, why should they not be capable of the adjustment of old rules through the burden-test ? The answer is that the federal courts should take the considerations that we discussed under the burden-test into account when crafting their own choice-of-law rules. They will go wrong, they will not get everything right, but the benefit from having uniform and neutral choice-of-law rules will be big enough that the errors do not invalidate the whole endeavor. If the federal courts, for whatever reason, decide not to craft their own rules under the Full Faith & Credit Clause, then scrutinizing choice-of-law rules under the burden-test could not bring the big improvement of uniform choice-of-law rules. The federal courts would merely be tinkering with diverse state rules, and the margin of error of the federal courts in so doing can be expected to be so high as to make the whole activity useless.
In view of the overly demanding complexity of the task, and low corresponding benefits, the ECJ and the US Supreme Court would thus be well advised to abstain from analyzing choice-of-law rules under the burden-test, except perhaps in extreme cases. Evaluating the different elements in choice-of-law analysis discussed in this paper, and crafting choice-of-law rules based on such analysis, would be left to the (preferably federal, otherwise) state legislator (or, in the US, the state courts).
The risks from judicial restraint in this regard are to some limited extent kept in check by another element of the Freedoms and the Dormant Commerce Clause – the non-discrimination requirement, which the ECJ and the US Supreme Court should of course continue to apply to all choice-of-law rules. As outlined above, the non-discrimination requirement calls for neutral choice-of-law rules. If a state wants to give an unfair advantage to its consumers vis-à-vis out-of-state sellers, it is obliged under the non-discrimination requirement to give the same advantage to out-of-state consumers vis-à-vis its own sellers. This should be an incentive for states to make an honest effort of finding the best choice-of-law solutions. As was alluded to above, this incentive is far from perfect. But, once again, the costs from suboptimal choice-of-law rules that might be actionable under the burden-test should in the vast majority of cases be negligible anyway. For the ECJ and the US Supreme Court then, there should be no role in scrutinizing choice-of-law rules under the burden test. If they engage in shaping choice-of-law rules, they should go all the way and craft (uniform) federal choice-of-law rules – a way open to the US federal courts under the Full Faith & Credit Clause.
3.	Localization of Redeeming Legitimate Interests ("Extraterritoriality")
Perhaps the power to craft federal choice-of-law rule is hiddenly vested in the ECJ, too - the burden-test might presuppose a choice-of-law understanding, which the courts would have to develop themselves if need be.
a)	The Concept
One might think of territorially limiting the interests a state may rely on to justify a burden on interstate commerce. Recall that under the burden test, a state regulation which burdens interstate commerce has to be justified by the regulating state's pursuing a legitimate interest, and the measure's not being excessive in relation to these interests. Edgar stresses a small, but for our purposes highly important detail in the Pike formula, the word "local": "[T]he burden imposed on that commerce must not be excessive in relation to the local interests served by the statute." The decision goes on to invalidate a state statute on the grounds that "[w]hile protecting local investors is plainly a legitimate state objective, the State has no legitimate interest in protecting nonresident shareholders. ... [The State] has no interest in regulating the internal affairs of foreign corporations [either]." CTS clarifies that a state "has no interest in protecting nonresident shareholders of nonresident corporations", but it has an interest in protecting all shareholders of corporations incorporated in that state, and, of course, in protecting resident shareholders.
On the basis of territorial criteria, Edgar and CTS thus assign certain (local) interests to the state to protect, while keeping others (foreign interests) off-limit. If this were done stringently, this could result in a full-scale choice-of-law system, determining the applicable law for each question. This were the case if the Court went so far as assigning each protective interest to only one state. For example, the Court might want to assign shareholder protection to the state of incorporation only. However, as we have seen, it seems that the Court would not disallow per se a state's intervention in corporate affairs in order to protect its resident shareholders. Still, territorially limiting the interests a state can legitimately rely on to justify a burden on interstate commerce narrows down the possible discrepancies in state's choice-of-law rules. The Court, while not making conflict rules, would still be making rules of scope; i.e., while the Court would not tell us what to do when two states' laws seem to be prima facie applicably, it limits the cases in which more than one state can claim to interfere in the first place by territorially limiting the interests states are allowed to protect. Three important remarks are in order.
First, it has to be clear that the question of whether a state can legitimately claim to protect a certain interest is external and a priori to the Dormant Commerce Clause complex. There seems to be no indication in the Dormant Commerce Clause doctrine, or the policies sustaining it, which interests a state can legitimately protect (see below). The Dormant Commerce Clause can only tell us what happens if the state cannot claim to be legitimately protecting an interest, and how to weigh an interest if and after we have decided that the state can legitimately protect it. The same holds true for the Freedoms. This is because the Dormant Commerce Clause and the Freedoms deal with the vertical relationship between commerce transactions (or participants) and state (or societal) regulatory interest, whereas the allocation of interests that a state can legitimately protect concerns the horizontal relationship between the states (or, if you will, the different states' societies).
Second, limiting territorially the interests a state may legitimately protect is reminiscent of the Supreme Court's Due Process Clause analysis in choice-of-law outlined above, and one would think that the limits would have to be the same, or almost. Unlike under the Due Process Clause though, the state's (territorially and otherwise) legitimate interests only matter under the Dormant Commerce Clause if the state's measure imposes a burden on interstate commerce (although under the broad view of the burden-test, such a burden might be present almost anywhere). However, if such a burden exists, the state's (territorially and otherwise) legitimate interests are weighed against that burden under the Dormant Commerce Clause, not against the individual litigant's interests as under the Due Process Clause. The Dormant Commerce Clause test might thus add to the Due Process Clause test, and does not just replicate it. At the same time, the Court's extremely tolerant view on state's interests under the Due Process Clause should caution against expecting any practical impact of the outlined territorial reasoning under the Dormant Commerce Clause.
Third, on a theoretical level, it is very ambiguous how one can go about territorially limiting legitimate state interests, and what impact the criterion of territorially limited legitimate state interest might have on burden-test analysis. On the one hand, the criterion might just ask if the regulatory sphere of the regulating state is touched. In this paper, we have given short shrift to the question what legitimate interests in this sense state actually have. Rare will be the case where the regulating state does not at least have some interest in intervening, i.e., where the state's regulatory sphere is not touched at all. Coming back to the Edgar and CTS cases of anti-takeover regulation, it seems plausible to argue, as the Court does, that a state has no interest in protecting out-of-state shareholders of an out-of-state corporation. But does this mean that a state can never have an interest in regulating takeovers of out-of-state targets with no instate shareholders ? If takeovers generally lead to labor turmoil, why should not a state where the target has a major establishment have an interests to regulate the takeover ? What the Supreme Court really seems to be doing is to give preference to some other state's regulatory interests. This, however, seems to presuppose at least a beginning of a prior choice-of-law conception. The question is then where this conception comes from, and where, if at all, a court should stop short of imposing a full-scale choice-of-law system by means of the burden-test's justification side.
Fourth, and lastly, it has been argued that the territorial limitation of a state's regulatory interests derives from the requirement that a measure be necessary (and, perhaps, proportional) to protect the (substantive) legitimate interest in order for the burden on interstate commerce to be justified. This would mean that, after all, the territorial limitation of states' regulatory interests does derive from the burden-test itself, contrary to what we have argued before. However, the arguments based on the necessity (and proportionality) component of the burden-test's justification side are faulty or weak. First, some have argued that a measure is not necessary if another state can intervene instead. But this would assume that the other state has some kind of priority right to regulate the situation – where does this priority come from ? Also, and relatedly, even if the other state does have priority, it would still leave open the possibility for the first state to intervene if the other state does not. Second, one might think that regulation of a rather distant event is usually less efficient, i.e., the burden imposed on interstate commerce heavier than if the state closer to the event had intervened. But again, if the latter state does not intervene, the more distant state's intervention remains necessary. All one could conclude is that regulation of distant events will more often than usual bump up against the proportionality criterion (provided the latter is indeed part of the burden-test). Overall, the argument based on the necessity/proportionality criterion seems to give little leverage.
b)	Practical Relevance, and (again) the Role of the Courts
The idea of territorially limiting the interests states may legitimately advance as a justification under the burden-test could certainly be explored further. For the purposes of choice-of-law, however, we should ask whether this would have any practical relevance, though, before we do so. At most, the line of thought outlined in the preceding paragraphs could enable a court to impose a full-blown choice-of-law system through the burden-test. For the US federal courts, that would be no advance at all – they already have such powers, with less need of justification, under the Full Faith & Credit Clause. For the ECJ, the power would be new – but would the ECJ be in any position to use its new power ? Unlike the US Supreme Court, the ECJ does not have the support of a full court system of federal district and appeals courts for mastering the task of creating a new, or at least unifying the, choice-of-law system. The ECJ has only the help of the Court of First Instance. As a matter of fact, there is already rising concerns about the capacity of the European courts to handle even their present tasks once new Eastern European Member States join the Union. Given that the EU is starting to legislate actively in choice-of-law under its new powers in Art. 65 EC, the European courts would seem to be carelessly wasting their resources if they engaged on a project to craft a new choice-of-law system through the burden-test of the Freedoms. However, the ECJ might want to seize on the proportionality argument in extreme (!) cases of overreaching legislation.
VII.	Conclusion
It should be clear from the foregoing discussion that devaluing the Freedoms' and the Dormant Commerce Clause's theoretical gateway for judge-made federal choice-of-law rules is not to say that choice-of-law is not a federal task. On the contrary, the main and clearest recommendation this paper might give (like others before) is that choice-of-law in a federal system should be federalized. But the US federal courts have the power to craft federal choice-of-law rules under the Full Faith & Credit Clause anyway, and the ECJ would be overwhelmed by this task. The point is that the task of making federal choice-of-law rules is best assumed by, and in both the EU and the US constitutionally vested in, the federal legislator.
The question of who should make choice-of-law rules was not the only aspect of choice-of-law in a federal system that this paper dealt with. I tried to identify some of the considerations that should guide the federal legislator, or else the federal courts, in crafting choice-of-law rules for the federal system. In other words, this paper was also concerned with the question of what choice-of-law rules should look like. Factors to be taken into account in forging choice-of-law rules include "state" interests derived from general federalism ideas, and "private" interests discussed in connection with the burden-test.
The discussion of the burden-test and choice-of-law in the European literature has been helpful in making the discussion of choice-of-law policy in Europe more pragmatic. For the rest, however, it seems that the European scholars have engaged in a largely futile attack on some minor aspects of a system which is flawed in its general setup. It looks almost like an act of desperation to scrutinize national choice-of-law rules under a highly complicated burden-test analysis with, usually, little results, while the real problem is that choice-of-law rules in the EU, as in the US, are still state rules (as opposed to federal rules). In an ideal federal system, choice-of-law rules should not be subject to the burden-test simply because they are federal rules (although the considerations discussed under the burden-test would remain pertinent for the legislator). As long as we have to live with state choice-of-law rules, scrutinizing these rules under burden-test analysis would amount to a waste of resources. If a purely doctrinal and mechanical application of the burden-test demands that state choice-of-law rules be scrutinized under the burden-test to the extent advocated by many scholars, this is just one more reason to reconsider the broad understanding of the burden-test.
This paper could not address many interesting details. One of them was the treatment of harmonized law in choice-of-law. Another "detail" that could not be addressed were the many specificities of individual federal systems and internal markets. Their constitution may contain more specific indications as to how the issues raised in this paper should be treated in that particular system. For example, this paper did not address the question if, e.g., the EC Treaty departs from an overall efficiency analysis in that it puts market integration before certain other interests, such that in a burden-test analysis, market integration concerns would automatically trump these other interests, or at least deserve significantly more weight (as opposed to an open-ended overall efficiency analysis).
Lastly, this paper could not explicitly address the respective role of choice-of-law and substantive federal laws in the integration process. Finding sensible approaches to the horizontal inter-state relations might help easing the vertical tension between the states and the federal government. This paper shows, though, that the possibilities of choice-of-law are limited. As we have seen when discussing the many conflicting interests arising in a system of legislative diversity, choice-of-law cannot resolve these conflicts, it can only alleviate them to a limited extent. A market-integrating federal choice-of-law rule might sometimes be even worse from a federalistic perspective than a substantive federal rule. In the case of a substantive federal rule, any state, or representatives from the state, can at least participate in the legislative process of forging that substantive rule. In contrast, if a federal choice-of-law rule allocates legislative authority badly, a state whose policies are undermined by the choice-of-law rule is left entirely to the mercy of those other states whose law will be applicable under the rule.
Given that choice-of-law has been a declining discipline in the last decades, and has been seen by many as a fascinating but in practice irrelevant discipline, my final hope is that this paper may also have given the reader the feeling that, and why, choice-of-law rules are, after all, important, and that thinking about them is worth the time.