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Imagine people bringing a consumer protection claim against a manufacturer for “misrepresenting” a product as “light” or “fat free” or “heart smart” and seeking billions of dollars in restitution. In this class action, plaintiffs do not seek recovery for any personal injuries. No one claims he or she relied on the representations. Class members even continue purchasing the product (at the same price!) while the suit is pending. Could such a suit possibly succeed? Ask the tobacco industry. In 2003, a court in Madison County, Ill., upheld such a claim and awarded the plaintiff class more than $10 billion in damages, at least until the decision was overturned by the Illinois Supreme Court. And the tobacco industry is not alone. Such cases are becoming more common, as plaintiffs, especially in class actions, increasingly seek to bypass traditional common law tort requirements and turn to consumer protection acts to bring product liability claims. Why the increase? In many states, consumer protection statutes offer plaintiffs striking advantages, mostly by relaxing the burden of proof. For example, states take varying approaches about whether and how a plaintiff must show reliance to recover on a consumer fraud claim. It is no secret that consumer protection acts provide plaintiffs with new weapons at a time when efforts at common law tort reform are gaining strength. In light of the increasing use of these consumer protection statutes, defendants must look beyond traditional defenses to product liability claims and must identify and apply the unique defenses that these statutes provide. One of the most important defenses in most consumer protection statutes is one that exempts conduct from liability if it “complies” with or is “authorized” by federal or state agency action. This defense in many cases offers complete protection even to allegedly fraudulent conduct that nonetheless was conducted under the auspices of a regulatory agency. STATE STATUTES In the 1960s and 1970s, every state adopted a consumer fraud statute prohibiting unfair and deceptive marketplace conduct. Most of these statutes derive from one of three model statutes: the Consumer Protection Act, the Uniform Deceptive Trade Practices Act, and the Uniform Consumer Sales Practices Act. Although these model acts differ, each has some kind of state law “compliance” defense. Section 4 of the Consumer Protection Act provides: “Nothing in this Act shall apply to . . . [a]ctions or transactions permitted under laws administered by the state public service commission or other regulatory body or officer acting under the statutory authority of this State or the United States.” Section 4(a)(1) of the UDTPA includes a similar defense that covers “conduct in compliance with the orders or rules of, or a statute administered by, a federal, state, or local government agency.” And the Uniform Consumer Sales Practices Act provides another version: This act does not “apply to an act or practice required or specifically permitted by or under Federal law, or by State Law.” The majority of states (all but 14) have included some form of this defense in their consumer protection statutes. The different versions all share the same basic purpose: They are designed to protect from liability any conduct — even allegedly fraudulent or deceptive conduct — that a regulatory agency has approved. BETTER THAN PRE-EMPTION The “compliance” defense is similar to the doctrine of conflict pre-emption. Among other things, conflict pre-emption bars any state law claim that, in the words of the Supreme Court, stands as “an obstacle to the accomplishment and execution of the full purposes and objectives” of Congress or a federal agency. The compliance exemption has two advantages over conflict pre-emption, however. First, the exemption allows the defendant to avoid the heavy presumption that courts often apply against pre-emption, especially implied pre-emption. This presumption is based on concerns of federalism and comity. These considerations are not present when a defendant invokes the state-law compliance defense. Second, in many instances, the compliance exemption may be an easier standard for defendants to meet. Conflict pre-emption applies only if the defendant can show a conflict between the state law and the federal agency’s policy objectives. By contrast, under the state law compliance defense, all a defendant need do is show that the conduct “complied with” — or was “specifically authorized” by — the agency. ABSENT FORMAL REGULATION One issue that courts have just begun to address is the type of regulatory action necessary to trigger the compliance defense. Although agencies often use formal rulemaking, regulatory agencies also often employ a series of devices, ranging from consent decrees to informal letters, to regulate a company or an entire industry on an informal basis. Courts have long recognized that agencies often regulate through means other than formal rulemaking. The question thus is: What type of regulatory action is sufficient to trigger the state law compliance defense? It is helpful in addressing this question to look at what kind of regulatory activity courts require to apply the doctrine of conflict pre-emption. Courts have had no problem finding conflict pre-emption based on agency action substantially less formal than traditional rulemaking. For example, the U.S. Court of Appeals for the 2nd Circuit held in 1990 in General Motors Corp. v. Abrams that a consent decree with the Federal Trade Commission can pre-empt state law. Similarly, in Dowhal v. SmithKline Beecham Consumer Healthcare (2004), the California Supreme Court found that an advisory letter from the Food and Drug Administration to an industry participant had pre-emptive effect. In the context of the compliance defense, the handful of courts that have addressed this issue have similarly recognized that informal agency action may suffice. For example, in Price v. Philip Morris Inc. (2005), the Illinois Supreme Court reversed a $10 billion verdict in a consumer protection case based on allegations that the defendant tobacco company had committed consumer fraud by marketing cigarettes with the descriptions “lights” and “lowered tar and nicotine.” The court based its reversal on Section 10b of the Illinois Consumer Fraud Act, which provides that the law shall not apply to actions “specifically authorized by laws administered by” a regulatory body. The court found that informal regulatory action by the FTC — in particular, two consent decrees that the FTC reached with another tobacco company permitting the use of similar descriptions — “specifically authorized” the challenged conduct, notwithstanding the trial court’s conclusion that the descriptions were fraudulent. The Illinois Supreme Court first explained that the purpose of the state law defense was deference to regulatory agencies. The court noted that the defense reflects a recognition of the need for regulated actors to rely on the directions received from regulatory agencies without risk that such reliance may expose them to tort liability. The court found that, given this policy, “a regulatory body may specifically authorize conduct by regulated entities without engaging in formal rulemaking.” Specifically, the court found that consent orders with one industry participant “is an implicit authorization for other industry members to conduct themselves in the same manner.” INFORMAL, YET SUFFICIENT The holdings of these courts are plainly correct: The compliance defense should apply as long as there is a clear expression of intent by a regulatory body to approve or authorize the conduct in question. This is so for a number of reasons. First, the issue of what type of regulatory action is necessary to trigger the defense is a matter of statutory interpretation, and the plain language of the statutory provisions should be dispositive. The exemption provisions are not limited to rulemaking or any kind of formal regulation. Rather, they speak broadly that any conduct that complies with or is specifically authorized by a regulatory agency is protected against liability. Many of the statutes specifically contemplate that the authorization may come from action other than formal rulemaking. For example, as noted above, the UDTPA’s exemption applies where the challenged conduct is “in compliance with the orders or rules of, or a statute administered by, a federal, state, or local government agency.” The plain terms of this provision make clear that it is not just “rules” that qualify. Instead, the authorization can come from “orders” or other actions in “administer[ing]” a statute. Second, it is hardly a secret that agencies often set policies and regulate industries through adjudication and other informal means, including advisory letters and staff interpretations. For example, then-FTC Chairman Daniel Oliver explained to Congress in 1987 that the commission prefers informal rulemaking because it is cheaper and faster and just as effective as formal rulemaking. Similarly, the Consumer Product Safety Commission often addresses consumer products not through formal rulemaking but by launching investigations and working with industry to develop corrective action plans. Agencies should be encouraged — not discouraged — to regulate industries through these means, and courts should recognize that this type of informal regulation may reflect policy decisions and objectives no less vital — and no less worthy of deference — than those reflected in a formal trade regulation. The legislatures were aware of such informal regulatory action when they enacted the consumer protection laws, and they could have easily made it plain if they intended the compliance defense to reach only formal rulemaking. Third, informal regulation often has some of the characteristics of formal rulemaking, which makes it as suitable for judicial deference. Again, the FTC is illustrative. The FTC has imposed the key procedural hallmark of rulemaking — the provision of notice and comment — into the process for formulating consent decrees. This practice reflects the FTC’s recognition that consent decrees are not simply agreements between the signatories to the decree but can set the FTC’s policy for the industry as a whole. Consequently, there are good reasons courts apply compliance defenses to more than formal agency actions. To counter the increasing number of lawsuits under consumer protection acts, defendants should consider whether an agency’s informal regulatory activities could furnish state law defenses to such actions.
Murray R. Garnick and James Rosenthal are partners in the Washington, D.C., office of Arnold & Porter. Both were counsel of record in the trial court proceedings in Price v. Philip Morris Inc. (2005) and have been involved in defending consumer protection suits for a variety of clients in states throughout the country. The opinions expressed here are solely their own.

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