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Ever since the massive $246 billion settlement between the tobacco companies and state attorneys general in November 1998, there has been an increasing number of lawsuits filed by state and local government officials against various industries. Generally, this latest wave of lawsuits follows the pattern established in the tobacco litigation. Government officials or agencies from differing states or localities are now working together to coordinate the prosecution of litigation against particular industries. The objective of this coordinated, multigovernment litigation seems to be to put added pressure on the large corporate defendants to change their business practices, not only within the government entities’ respective jurisdictions, but also commonly outside their jurisdictions. Thus, in the past year or so, at least two dozen cities or municipalities have filed suits in jurisdictions throughout the country to force the major firearms manufacturers to alter their methods of firearms manufacturing and marketing guns throughout the United States. A large number of states have also similarly brought coordinated suits against the world’s largest recording companies, seeking changes to the pricing of musical recordings nationwide. Still other lawsuits claiming false and deceptive advertising have been filed by various states against the long-distance telephone carriers. Numerous other examples exist. In the end, all these examples of recent coordinated multigovernmental litigation have one thing in common — the government plaintiff in each case (working alone or in combination with other local government plaintiffs) is attempting to use its local laws to bring about changes not only within its borders, but also usually throughout the entire country. The question that this new trend in state and local governmental lawsuits raises is whether suits seeking extraterritorial changes in a defendant’s conduct are permissible. The answer to this question arguably lies in the “dormant” Commerce Clause of the U.S. Constitution, which generally prohibits states and local governments from attempting to regulate interstate commerce outside their local borders. THE COMMERCE CLAUSE Article I, � 8 of the U.S. Constitution provides, in pertinent part: “The Congress shall have Power … To regulate Commerce with foreign nations, and among the several States.” As such, the Commerce Clause grants an exclusive right to the U.S. Congress to regulate interstate commerce. Early on, the clause was interpreted to mean that the states and their political subdivisions have essentially no power to regulate interstate commerce. See H.P. Hood & Sons v. Du Mond, 336 U.S. 525, 534-536 (1949). This implied limitation on state power to regulate interstate commerce is referred to as the “dormant” Commerce Clause. In deciding whether a particular state action impermissibly regulates interstate commerce, the U.S. Supreme Court has generally followed a two-tiered approach. First, “[w]hen a state statute directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests over out-of-state interests,” the Supreme Court has “generally struck down the statute without further inquiry.” Brown-Forman Distillers Corp. v. New York State Liquor Authority, 476 U.S. 573, 579 (1986). Second, “[w]hen, however, a statute has only indirect effects on interstate commerce and regulates evenhandedly,” the Supreme Court has “examined whether the State’s interest is legitimate and whether the burden on interstate commerce clearly exceeds the local benefits.” Id. The Supreme Court has also recognized, however, that “there is no clear line” between these two approaches and that “[i]n either situation the critical consideration is the overall effect of the statute on both local and interstate activity.” Id. The wave of lawsuits brought by state and local government authorities in the wake of the tobacco litigation should be examined in light of these Commerce Clause principles. Virtually all these lawsuits seek changes in the business practices of the target industries, which — either directly or indirectly — affect interstate commerce. These lawsuits are usually designed to effectuate changes in the defendants’ conduct occurring both inside and outside the jurisdictional borders of the state or local government body. Such attempts to regulate extraterritorial conduct arguably run afoul of the Commerce Clause. REGULATION OF EXTRATERRITORIAL CONDUCT A large body of law has held that state attempts to regulate, or impose liability for, a defendant’s extraterritorial conduct violate the Commerce Clause. Recently, for example, the U.S. Supreme Court addressed this issue in BMW of North America Inc. v. Gore, 517 U.S. 559 (1996). In BMW, an Alabama jury had imposed punitive damages of $4 million against the car manufacturer based on BMW’s failure to disclose that the plaintiff’s new car had been repainted after being damaged prior to delivery. The jury based its punitive damages award not only on BMW’s conduct within Alabama, but also on BMW’s nationwide practices in repainting damaged vehicles, which practices BMW claimed were legal in many states outside Alabama. Against this backdrop, the U.S. Supreme Court opined:
[O]ne State’s power to impose burdens on the interstate market for automobiles is not only subordinate to the federal power over interstate commerce, … but is also constrained by the need to respect the interests of other States. … [I]t follows from these principles of state sovereignty and comity that a State may not impose economic sanctions on violators of its laws with the intent of changing the tortfeasors’ lawful conduct in other States.

Id. at 571-572 (citations omitted). The Court reasoned that “Alabama does not have the power … to punish BMW for conduct that was lawful where it occurred and that had no impact on Alabama or its residents. Nor may Alabama impose sanctions on BMW in order to deter conduct that is lawful in other jurisdictions.” Id. at 572-573. Similarly, several other seminal decisions have indicated that states (or local jurisdictions) cannot attempt to regulate conduct occurring outside their borders without violating the Commerce Clause. For example, in Healy v. The Beer Institute, 491 U.S. 324 (1989), the Supreme Court struck down a Connecticut statute that had the effect of controlling liquor prices outside the state. Among other things, the Court in Healyrecognized that a long line of precedent has held that the “Commerce Clause … precludes the application of a state statute to commerce that takes place wholly outside of the State’s borders, whether or not the commerce has effects within the State.” Id. at 336 (emphasis added). “[A] statute that directly controls commerce occurring wholly outside the boundaries of a State exceeds the inherent limits of the enacting State’s authority and is invalid regardless of whether the statute’s extraterritorial reach was intended by the legislature,” wrote the Court. Id. By limiting each state to regulation of conduct solely within its borders, the “Commerce Clause protects against inconsistent legislation arising from the projection of one state regulatory regime into the jurisdiction of another State.” Id.at 337. In Southern Pac. Co. v. State of Arizona, 325 U.S. 761 (1945), the Supreme Court struck down an Arizona regulation, adopted as a safety measure, that attempted to regulate conduct outside its boundaries. The Arizona regulation restricted the length of railroad trains and had the practical effect of establishing a maximum limitation on train lengths throughout the entire southwestern United States. As the Court observed:

If one state may regulate train lengths, so may all the others, and they need not prescribe the same maximum limitation. The practical effect of such regulation is to control train operations beyond the boundaries of the state.

Id. at 775. These decisions and other precedents lay down a solid rule that a state may not attempt to control the activities of industries outside the state’s borders, even if this extraterritorial conduct has clear and direct effects within the state. See also Brown-Forman, 476 U.S. 573 (invalidating a state liquor law that affected liquor prices in other states); Edgar v. Mite Corp., 457 U.S. 624 (1982) (holding that a state anti-takeover statute was invalid as conflicting with the Commerce Clause). This precedent has, for the most part, not been applied to the recent wave of multigovernmental suits discussed above. Yet, there is no apparent reason why these suits should not be evaluated in light of the dormant Commerce Clause. When one state, or a group of states banding together, bring litigation and a major objective of the litigation is the alteration or punishment of defendants’ practices throughout the nation, then arguably the plaintiff governments are violating the Commerce Clause by impermissibly interfering with interstate commerce. Coordinated multigovernmental lawsuits against unpopular industries, such as tobacco, lead paint, and firearms, are just some examples of lawsuits which may exceed the limitations of the Commerce Clause by attempting to affect standards nationwide. In the future, if this trend of state and local governmental lawsuits against target industries continues to grow, we should begin to see more of these cases analyzed under the Commerce Clause. As long as a few states or local governments attempt to establish, through litigation, standards of conduct applicable throughout the country, it will remain an issue to be addressed by the courts as to whether plaintiffs’ lawsuits are, in fact, proper exercises of state power. Gregg A. Farley is a partner in the Los Angeles office of Brobeck Phleger & Harrison LLP, specializing in product liability and complex litigation. Telephone: (213) 489-4060.

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