Obama Regulatory Review Could Spur Product Lawsuits

By reversing a Bush practice preempting state food and drug regulations, the Administration could reopen a variety of products and practices to lawsuits

By Theo Francis

President Barack Obama told federal agencies on May 20 to review a decade's worth of regulations to identify and fix any that improperly supplant state law. The move could reopen a variety of consumer products and business practices to lawsuits or to the scrutiny of state regulators and attorneys general.

Lauded by the plaintiffs' bar and downplayed by some business groups, Obama's decision reverses a highly charged Bush Administration practice and could help rewrite the legal landscape for everything from pharmaceuticals and beauty products to car safety equipment, mattress flammability, and food sweeteners.

At the core of the Presidential memorandum issued Wednesday afternoon is the practice of stating in a regulation's preamble that it trumps state law. Under the Constitution, Congress can preempt state law in many areas, and federal regulatory agencies have long included preemption language in rules issued after carefully soliciting and responding to public comment. But plaintiffs' attorneys, consumer advocates, and some state officials began complaining after agencies started inserting similar language in the preambles to new regulations, in some cases bypassing the usual rule-making process.

Patchwork of State Rules

In many cases, the preemption clauses were warmly received by industry, which said the alternative would be an unwieldy and inefficient patchwork of state rules and laws that are costly or difficult to comply with.

But critics said the device was increasingly used to shield entire industries from lawsuits by consumers, or even to dodge tighter regulation by state attorneys general and regulatory agencies. The federal rules, they add, often lacked the teeth that state consumer-protection laws provide. "On behalf of the thousands of people whose cases have been affected by complete immunity preemption, we are heartened by the Presidential memo released today," said Les Weisbrod, president of the American Association of Justice, a trial lawyers' lobby, in a statement. "The Obama memo on regulatory preemption makes clear that the rule of law will once again prevail over the rule of politics."

In addition to ordering the review, Obama said his Administration wouldn't preempt state law in its own regulatory preambles, and would do so "only with full consideration of the legitimate prerogatives of the states and with a sufficient legal basis."

"Soup-to-Nuts Review"

The practice of preemption through preamble had already taken a hit earlier this year, when the U.S. Supreme Court ruled against drugmaker Wyeth. The court said the company was still subject to a suit under state law in Vermont from a patient whose arm was amputated after an anti-nausea drug was inadvertently injected into an artery instead of a vein.

That case hinged largely on the fact that the Food & Drug Administration attempted to preempt state law through a regulatory preamble, so Obama's review "is not unexpected," said Robin Conrad, executive vice-president of the U.S. Chamber of Commerce's litigation center. "What he's ordered is a soup-to-nuts review of regulatory authority that is on the books," Conrad said. "The devil's in the details, and also in what the outcomes of the individual reviews are."

Revising any regulations found to have improper preemption clauses could take weeks or months, attorneys and government officials said. Where the preemption clause was part of a formal rulemaking process, a full-fledged revision could be necessary, with a new comment period and all. But some lawyers said preamble preemption clauses might be more quickly revised.

On the financial front, consumer advocates urged federal officials to rethink a stance that they say has blocked meaningful regulation of mortgages, credit cards, and other financial products by state officials. Many consumer advocates, and a number of influential congressional Democrats, have blamed much of the housing crisis on a combination of federal preemption, which they say prevented better state regulation of mortgage practices, and shoddy federal regulation.

"We would call on bank regulators to withdraw their ill-advised and harmful preemption policies, so that state regulators can once again be allowed to protect their consumers against unfair and deceptive financial-service industry practices," said Kathleen Day, a spokeswoman for the Center for Responsible Lending, a consumer advocacy group.

Francis is a correspondent in BusinessWeek's Washington bureau.

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