The Problem
Over the past decade, state governments and especially state attorneys general have assumed unprecedented powers to regulate the national and, indeed, the international economy. Trial lawyers and state attorneys general have led the way with novel and aggressive litigation campaigns. Those powers should be constrained through constitutional and democratic controls, and they should be exercised sparingly and responsibly. But to an alarming extent the controls have failed, and responsibility has been lacking.
What’s Wrong With State Activism?
Some “states’ rights” advocates have wrongly defended regulatory activism as “federalism” and a victory for state “experimentation.” The problem with this new type of state-level activism is that the consequences extend well beyond a state’s own boundaries. Uniformly, the states “experiment” on someone else’s guinea pigs—corporations and consumers in other states. Federalism, as originally designed, allows localized experiments—but only if the local citizens bear the costs, as well as the benefits, of the experiment. Extraterritorial regulation, by contrast, results in over-regulation and a lack of accountability and restraint on government power.
A few egregious examples include:
- The 1998 tobacco settlement - The 1998 agreement among state attorneys general and leading tobacco manufacturers imposed a $246 billion sales tax on cigarettes. This tax was explicitly rejected by the United States Congress, and no state legislator ever voted for it.
- Attorney general suits against utility companies – In July 2004, eight state attorneys general filed lawsuits against five major electric utility companies, asking that the courts require the utilities to reduce their emissions of carbon dioxide. The plaintiffs, who are from high-cost electricity states, seek a version of emissions control policy repeatedly rejected by the Congress, most recently in the failed “Climate Stewardship Act.” As CEI’s global warming scholar Myron Ebell has noted, higher energy costs resulting from such policies would largely be paid by residents of states other than those whose attorneys general are suing.
- litigation threat against other industries- When trial lawyers lose, they regroup and try again. “The dismissal [in 2003] of a law suit charging McDonald’s with contributing to the obesity of minors in New York City was expected and will not deter the filing of additional law suits,” public interest law professor John Banzhaf has vowed. “Indeed, the judge’s original opinion spelled out at least two winnable legal theories under which such law suits could be brought.” One year later, trial lawyers gathered for the second annual conference on “Legal Approaches to the Obesity Epidemic.” Delaware Attorney General Jane Brady has said that attorneys general are regularly approached by trial lawyers pitching new tobacco-style lawsuits.
Our Mission
CEI’s CAP project (“Control Abuse of Power”) is the first systematic effort to reverse the rising tide of state activism. CAP pursues this mission through public education, regulatory interventions, litigation, and policy research. CAP’s initial focus is on the ongoing abuses stemming from the 1998 tobacco settlement, the threat to other politically vulnerable industries and consumer groups, and attorney general efforts to assume legislative and federal powers.
What’s wrong with the tobacco settlement?
Americans have been led to believe that the 1998 tobacco settlement punished “Big Tobacco” for decades of dishonest business practices, including lying to the public about the health risks of smoking. But the truth is that the settlement created a cartel arrangement between state governments and big tobacco companies.
The winners in the tobacco settlement were sitting at the negotiating table. Attorneys general generated new revenue for their states and earned public and media attention for themselves. Trial lawyers associated with the state lawsuits would receive an estimated $ 13 billion windfall. Health activists won long-sought restrictions on cigarette marketing and a new anti-smoking group, the American Legacy Foundation, funded with tobacco money. Tobacco companies negotiated and won a degree of predictability regarding future liability (precluding additional state lawsuits on past smoking-related injuries) and market share (using the settlement agreement hinder competitors from gaining market share). In short, once the industry decided to settle, the former adversaries--attorneys general and major tobacco companies--shared similar interests: to keep major companies solvent and thriving.
The losers in the settlement agreement include smokers, small businesses, and democratic government. The direct financial burden (higher cigarette prices) is born by smokers, who are disproportionately low-income. The growth of unchecked government power affects everyone, now that state attorneys general wield national tax and regulatory power.
In short, it’s about the money -- not public health, fair laws, or equitable tax burdens.
Now, more than five years after the settlement:
- Most of the money isn’t going to treat smoking related illnesses, help smokers quit, or prevent teenagers from smoking.
- Low-income smokers are paying for massive trial lawyer fees, state and local spending to cover budget deficits, a wide range of general state expenditures, and pork barrel projects .
- Attorneys general are scrambling to preserve the financial well-being and market shares of major tobacco companies and impede sales by smaller companies that did not sign onto the settlement.
- Trial lawyers are an estimated $13 billion richer, in some cases having earned well over $7,000 an hour for work on the settlement.
- Tobacco companies are still getting sued.
- Attorneys general and trial lawyers are using the tobacco lawsuits and settlements as a template for targeting other industries and inducing settlements.
- The good news is that smoking rates among high schoolers have fallen, and smokers seem to be smoking fewer cigarettes. However, overall smoking rates among adults have not fallen appreciably.
WHO’S AT RISK FROM ATTORNEY GENERAL ACTIVISM?
Several years ago, former Alabama Attorney General Bill Pryor once warned that the entire business community, every industry, is at risk from “a growing number of novel government suits.” Or, as former Mississippi Attorney General Michael Moore once boasted: “No company is too big. No industry is exempt.” Note the attorney general lawsuits filed in July 2004 against five utility companies that run fossil fuel-burning power plants in 20 states. The AGs in California, Connecticut, Iowa, New Jersey, New York, Rhode Island, Vermont, and Wisconsin demand the companies reduce carbon dioxide emissions that allegedly cause global warming.
Indeed, the tobacco lawsuits of the mid-1990s have been only the most notorious of coordinated multi-state litigation aimed at extracting large settlement payments and putting the office of the attorney general in charge of, not merely enforcing laws, but writing new regulations. Towards that end, the National Association of Attorneys General (NAAG) serves as central hatching ground for various task forces and guidelines focused on multi-state lawsuits. Michigan Attorney General Michael Cox has said that his office regularly receives “sign-on” letters from NAAG to join multi-state lawsuits. Attorneys general feel pressure to sign on, Cox said, because their state may lose money in an eventual settlement.
Past and present multi-state suits have targeted Microsoft, America Online, Bausch & Lomb, Sears, General Motors, Merrill Lynch and eight other major investment firms, Visa and MasterCard, Household International, the pharmaceutical industry, and now power plants. American Enterprise Institute scholar Michael Greve predicts that future multi-state lawsuits will mirror the past in several respects: they will feature the same trial lawyers, and they will target industries that cannot differentiate their products from state to state or exercise control over the sale of their products across state boundaries.
A list of special committees and task forces convened by NAAG is also instructive:
Antitrust Committee
Consumer Protection Committee
Environment Committee
Health Care Fraud, Abuse, and Advocacy
Internet Committee
Tobacco Committee
Tobacco Enforcement
Federalism Working Group
Pharmaceutical Pricing Task Force
Prescription Drug Abuse Task Force
Sub-Prime Lending Working Group
REINING IN Attorney General POWER: POSSIBLE SOLUTIONS
A number of possible solutions have been put forward by legal scholars and state policy groups to curtail the power of attorneys general to wield national tax and regulatory powers. Here are a few.
APPOINT ATTORNEYS GENERAL- While the U.S. attorney general is appointed by the president, in all but a few states, attorneys general are elected by voters. The popular election of attorneys general creates a disconnect in the executive branch, with AGs wielding law enforcement powers untempered by the chief executive (the governor) or by a larger concern about public welfare.
BAN STATE SUITS FOR INDIRECT HARM- This would prevent AGs from suing industries for indirect harm sustained by the state or the people. Examples of indirect harm include the costs incurred by Medicaid for treating smoking-related illnesses or the alleged harm caused by a gun manufacturer whose product is used by an individual in a shooting.
RESTRICT CONTRACTS WITH TRIAL LAWYERS- Restrictions could include caps on hourly rates or percentages of final damage awards, competitive bidding, mandatory record keeping on time and expenses, and set up legislative review of contracts. The American Legislative Exchange Council offers a model bill, the Private Attorney Retention Sunshine Act, that requires an open and competitive bidding process when state governments enter into contracts with private attorneys, regardless of whether or not the contract calls for a contingency fee or for an hourly rate. In addition, the Act calls for legislative oversight of contracts likely to result in more than $1 million in attorneys’ fees and expenditures. Several states have already adopted such laws.
RESTRICT CONTINGENCY FEE CONTRACTS WITH TRIAL LAWYERS- This would restrict or prohibit AGs from contracting with private contingency fee lawyers without permission from the governor or legislature. The contingency fee system was designed to foster access to the courts by poor plaintiffs—not government.
EQUAL APPLICATION OF RULES- Require the state to abide by the same legal rules as a private plaintiff. Thus, if a state sues to recover indirect economic losses related to an injury, the state would operate under the same rules of evidence, the same standards of responsibility, and the same burden of proof that apply to a private plaintiff suing on his own behalf. The American Legislative Exchange Council’s “Fairness in Litigation Act” is modeled on these principles, as is U.S. Sen. Mitch McConnell (R-KY)’s “Litigation Fairness Act.”
LIMIT LAWSUITS ON “INHERENTLY UNSAFE PRODUCTS,” like guns or cigarettes, where the dangers are well known to the public. California, for example, has passed a law exempting tobacco, alcohol and other companies from liability for injuries and deaths caused by the proper use of such products.
RESTRICT GOVERNMENT RECOUPMENT SUITS- The state cannot seek recoupment unless there’s an independent violation of the law.
CONSTRICT STATE PARENS PATRIAE AUTHORITY- Eliminate the AG’s powers broad common law powers to sue on behalf of state residents in the “public interest,” except where expressly conferred in a specific law.
FEDERAL PREEMPTION- States would not be permitted to sue if a federal agency is also suing, unless there are state-specific injuries that are not addressed in the federal suit.
LOSER PAY- In government-sponsored suits, require losers to pay attorneys’ fees. When it comes to spending taxpayer money in an ill-conceived suit, loser-pay may incentivize government lawyers to consider the strength of their legal arguments.
For more information about the CEI CAP project, contact Christine Hall, 202.331.2258, chall@cei.org.
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