Governmental Privileges for Private Corporations: What's the Stopping Point?

by Deepak Gupta

Consider these questions for a moment:

• Does a private debt collector become an "arm of the state" -- meaning that it enjoys the same sovereign immunity from suit in federal court as the state itself -- when it collects on bad checks under a business partnership with a state prosecutor?    

• Does a major tobacco company constitute a "person acting under [a federal] officer" -- meaning that it enjoys the same ability as a federal official to remove a suit against it from state to federal court -- because the Federal Trade Commission has regulatory authority over the way cigarettes are marketed?

These might seem like outlandish possibilities that are hardly worth discussing . . . were it not for the fact that federal courts have recently answered yes to both questions.   In one case, a district court in Florida dismissed a consumer class action against a private debt collector on the grounds that the company was entitled to state sovereign immunity.  Last week, I filed this brief in the Eleventh Circuit urging the court to reverse the district court's ruling.   In another case, the Eighth Circuit allowed Philip Morris to remove an unfair trade practices suit to federal court under the federal officer removal statute.  (I previously blogged about the case here and here.)  My colleague Scott Nelson has just filed this brief in the Supreme Court urging the Court to reverse the Eighth Circuit's ruling.

Although the two cases involve very different legal doctrines, there are some interesting parallells.  In both cases, the lawyers for private corporate defendants in consumer class actions made long-shot arguments that invoked special privileges ordinarily reserved for the government itself.  And in both cases, they won, allowing them to deprive the consumer plaintiffs of their chosen forum.  Both decisions extend the privileges at issue well beyond the purposes for which they were originally designed-- protecting the autonomy of governmental actors within a federal system.  The federal officer removal statute protects federal officers from potentially hostile state courts, while state sovereign immunity protects the dignity and solvency of the sovereign states by immunizing them from federal legal process.  Under these two decisions, for reasons that are hard to discern and even harder to apply in a principled way, the same privileges would protect private corporations as well.  This is federalism run amok.

You can't blame the defendants' lawyers for trying out these creative arguments, I suppose, but you can certainly find fault in the reasoning of the courts that accepted them.   

If you take the defendants' positions seriously, there's no principled stopping point.  Under the Florida court's decision, virtually any private government contractor would have a legitimate claim to the state's sovereign immunity--an outcome that, in Judge Posner's words, would turn privatization into a "farce."   

And the logic of the Eighth Circuit's decision would presumably extend to an even broader scope of defendants:  whole industries that happen to be regulated by federal agencies but whose allegedly unlawful conduct was not the result of federal direction.   As the amicus brief in the Philip Morris case explains, the range of state-law tort actions potentially subject to claims of removal would be virtually unlimited.  Here are some illustrations:

• Actions against manufacturers of drugs and medical devices alleging design or manufacturing defects or failure to disclose risks associated with use of the products;

• Actions against automobile manufacturers alleging defective design, manufacture or testing of safety equipment;

• Consumer fraud actions involving improper disclosure of energy consumption figures for vehicles and other consumer products;

• Personal injury actions against manufacturers or sellers of virtually any product subject to regulation by the CPSC;

• Actions by consumers sickened or injured by contaminated or unsafe foods or food additivies;

• Consumer fraud actions based on misleading labeling of the contents or nutritional qualities of foods;

• Consumer or commercial fraud actions involving bank transactions.