Jack Calfee has given you a survey of the state attorney general and class action litigation against pharmaceutical companies. My assignment is to put the regulation-by-litigation outbreak in this industry sector into a broader context. That context is provided by litigation campaigns, carried on by coalitions between trial lawyers and state attorneys general, against other industries-especially the campaign against the tobacco industry, which terminated in a 1998 settlement that imposed a quarter-trillion dollar national sales tax; and the on-going state and private actions against brokerage and investment firms, culminating (for now) in a $100 million settlement between New York Attorney General Eliot Spitzer and Merrill Lynch. I present you with two conclusions.

First, you ain’t seen nothing yet. The pending actions are only the first trickle of what will be a flood of lawsuits against the pharmaceutical industry. Nor will that industry long remain the last to be hit.

Second, not much that can be done about regulation-by-litigation campaigns. In particular, and contrary to a cherished belief among the leaders, lawyers, and lobbyists in the affected industries, federal preemption is not going to provide relief or protection. The AG-trial bar campaigns exemplify a systemic federalism problem, which requires a systemic remedy. That will take time.

The New Deal model of state-federal relations was one of concurrent and cooperative regulation. The feds would provide a general, uniform regulatory framework, typically run by an administrative agency. In the interstices of federal regulation, though, the states would continue to play a role. In particular-and this will prove important-federal statutes typically do not preempt, and in fact explicitly preserve, state fraud and other common law-like actions.

Despite occasional conflicts between state and federal regulators, the New Deal arrangements proved by and large workable, even if untidy. In the 1980s, however, those arrangements collapsed in industry after industry. Two factors explain the collapse.

First, the federal government became more skeptical of the merits of regulatory intervention. Interest group demand for regulation, however, did not simply go away; it shifted to the state level. The very first deregulatory showpiece-airline deregulation-immediately produced an attempt by the National Association of Attorneys General (NAAG) to re-regulate the industry through "cooperative" enforcement guidelines and actions. Similarly, when the Reagan administration and federal courts adopted an efficiency-oriented antitrust policy, the move produced more interventionist NAAG Guidelines and, in due course, private and governmental endruns around the federal rules, utilizing state law.

The pattern has since become familiar. Uniformly, state-based anti-industry campaigns have come in the wake of a perceived federal failure to regulate-quite often, of a deliberate federal decision not to regulate or to de-regulate.

Second, the 1980s witnessed the organizational integration of the litigation industry. This development, which has yet to run its full course, is characterized by the emergence of a highly organized, sophisticated trial bar; a dramatic increase in the size, portfolios, and professionalism of state attorney general offices; close cooperation among the AGs through the NAAG; and finally, a symbiotic relationship between trial lawyers and AGs.

Trial lawyers are the single biggest source of campaign funds for attorneys general, who have many ways of returning the favor. Cooperation may take the form of direct trial lawyer participation in state-sponsored lawsuits, accompanied by a fee-sharing arrangement (i.e., a direct kickback). That has been the model in the tobacco litigation and now in some of the pharmaceutical cases. But the exchange need not be so formal. For example, Eliot Spitzer’s investigation of Merrill Lynch has generated mountains of evidence that class action lawyers can now use in litigation. In other words, Mr. Spitzer has reduced the trial bar’s discovery costs-and, besides, obtained a settlement that will prejudice every future jury. Those benefits can and of course will be monetized. Merrill Lynch’s exposure to private class actions is estimated at upwards of $5 billion.

One should think of the trial bar as a litigation industry with a distinctive product line. Competition occurs in this as in all other industries. But the industry also has its own trade associations (ATLA, Trial Lawyers for Public Justice), market-share agreements (such as the agreements developed by plaintiffs firms in the course of the tobacco litigation), and its very own captured agency (the AGs).

Naturally, corporate leaders and lawyers-especially in targeted or at-risk industries-have thought about means of curbing the trial lawyers’ and the AGs’ appetites, or of cracking the coalition between the two. In my judgment, that will prove inordinately difficult. In establishing a united front and political force, corporations-but not the litigation industry or the AGs-face acute coordination problems. One of these problems is sectoral; the other, jurisdictional.

Divided We Fall. The litigation industry operates across economic sectors. Within the constraints noted below, trial lawyers and AGs don’t care what industry they are going after. The campaign against the drug industry is being brought to you by the same cast of characters that brought you the tobacco settlement. It is partially financed with the proceeds of the tobacco settlement, much of which has been sitting on the sidelines in search of investment opportunities. These people are repeat players. They build up resources, relationships, and expertise as they go.

In contrast, corporate America is and will remain compartmentalized. Gun makers, beer, wine, and liquor producers, and fast food companies all had good reasons to ally themselves with the tobacco industry. But they had better reasons to distance themselves and to protest that their industry and conduct is utterly unlike anything in the cigarette context. That argument is unlikely to sway the litigation industry. Still, every industry will propound it, in the hope of being targeted farther down the line. Suppose the pharmaceutical industry now tried to mobilize a united corporate front against the litigation industry ("This could happen to you."): no industry group would rally to the drug companies’ defense.

Jurisdiction. Two related asymmetries obtain between corporate America and the trial bar. First, trial lawyers generally know their playing field in advance. Their incentive is to buy their home state judges and their home state attorney general. Corporations, in contrast, can be sued anywhere. This reduces their incentives to counter the litigation industries’ efforts.

Second, a litigation campaign by the litigation industry and AGs in substantially all states is often a foregone conclusion once the first state has made its move. To preclude AG-trial bar regulatory litigation campaigns, industry would have to stop the first mover, meaning that it would have to "own" all fifty state AGs and state courts. The trial bar, in contrast, needs to own only a few states-in the limiting case, only one. The point hangs on one central fact-the extraterritorial reach of state jurisdiction. It is most easily explained by way of example.

Suppose all state AGs persuaded themselves that federal environmental standards for some type of industrial facility are grossly inadequate: could they start a tobacco- or pharma-style litigation campaign for more demanding standards? They could not. That is because regulatory costs would accrue principally within each individual state. At the limit, firms might leave hostile states. No state will want to make the first move. Each state would gain by not joining the coalition.

Organized state-based litigation campaigns occur in areas where the litigation industry and state AGs have managed to solve this hold-out problem-or, more precisely, where they have found ways to make the hold-out problem work in reverse, such that no state can afford not to join the campaign.

The reverse hold-out problem arises wherever the costs of a regulation-by-litigation campaign fall principally on out-of-state parties. Consider the structure of the tobacco settlement: four states obtained large settlements against manufacturers. The costs of those settlements were distributed to consumers across the country, while the proceeds accrued to the suing state. It therefore became rational for each state to jump on the bandwagon. It also became rational for the regulated industry to encourage that process. The tobacco agreement was eventually hammered out, with the industry’s support, by then-Colorado AG Gale Norton, who quite probably did not believe one word in the complaint her office filed against the manufacturers. The last hold-out was Alabama AG Bill Pryor, whose opposition to the deal was so vehement that he is still not on speaking terms with some of his so-called colleagues. But even he eventually signed the agreement. He could opt out of the proceeds of the settlement-but not, of course, out of the payments his citizens would incur in any event. In other words, he had no choice.

The same dynamic operates in the campaign against the pharmaceutical industry. The first-mover states will probably win settlements that will then be distributed, cost-wise, over the remaining states. Every rational AG-even one favorably disposed toward the industry-will join the crowd.

What corporate America is up against is not some ideological obsession (which might blow over) but something worse-the inexorable logic of extraterritorial jurisdiction and, hence, systematized interstate exploitation. In a sense, that logic creates its own political demand.

A perfectly sensible state AG candidate, with pro-corporate sentiments, will run on a two-issue platform: make "tough-on-crime" noises, and promise to loot out-of-state companies. (The latter agenda is usually couched as "consumer protection.") Rational voters will embrace that agenda, which is why even conservative states like Arizona or Kansas now sport socialist AGs. The Bristol-Myers case is supported by 28 states of all political stripes; the AWP cases come, not from some collectivist haven but from Nevada. Perfectly sensible state judges will tend to favor in-state plaintiffs, private and public; if they don’t, judges in some other state will. In the end, what one has to explain is not the existence of regulation-by-litigation campaign but rather the dearth of such campaigns, on a grander scale.

One reason is a kind of regulatory capacity constraint: the litigation industry can attend to only so many projects at any given time. That problem will fix itself, as the industry builds up capital and manpower.

A second constraint has to do with the regulatory ambitions that accompany the quest for monetary transfers. If those ambitions are to be satisfied, the states and the targeted industry as a whole must be able to reach an agreement. This presupposes, on the part of the states, an ability to reach an agreement on dividing the spoils (which, in the tobacco and investment industry campaigns, has proven surprisingly easy) and, on the part of the industry, an ability to agree on regulatory standards. The highly concentrated tobacco industry cheerfully carved up the market and turned itself into a public utility. At the other extreme, I suspect that the fragmentation of the fast food and snack food industry explains why that sector has so far escaped an organized attack. It remains to be seen whether the investment houses and the pharmaceutical industry are sufficiently cohesive and concentrated to lock themselves into a state-sponsored regulatory cartel. The AGs suspect, with some justice, that the answer is "yes."

The reflexive industry response is to demand preemptive federal regulation-or, in ongoing litigation, an insistence that the state law actions are already preempted. I’m afraid that this strategy will prove unavailing.

The trial bar and the AGs launch their campaigns against a background perception of widespread industry abuses and massive regulatory "failure" at the federal level. Against these powerful sentiments, industry insistence on the need for uniformity, and dire warnings about regulatory balkanization, inevitably ring hollow. For what it’s worth, those protestations are also mostly false. We have uniform tobacco regulation-except, it is not the national government’s. At the end of the Eliot Spitzer-initiated campaign, we will have uniform standards for the investment industry-though not the SEC’s. When Nevada and other states are through with the pharmaceutical industry, we will have uniform AWP rules-but they will be sanctioned by a state cartel, not the United States Congress. The danger, in other words, is collusion, not balkanization.

Politics aside, the industries’ demand for preemption is futile for a more fundamental reason. In essence, it seeks to salvage the New Deal model: let the feds establish a uniform regulatory system for a common market, and let the states regulate fraud etc. in the niches. But that system presupposes a certain respect-on the part of states, and on the part of organized interests that operate at that level-for the federal concerns. The constitutional expectation, however, is that states have every incentive, and countless ways, to evade federal preemption, and for most of our history, the states have acted accordingly. They have now reverted to that posture.

The state campaigns have occurred under federal statutes that contain the most expansive preemptions in federal law. This happens, and it will continue to happen, because the campaigns rest on state-based causes of action that are variations on the common law of fraud. (That was true of the tobacco cases. It is true of the Merrill Lynch cases and of the class action and Nevada cases against the pharmaceutical industry.) One cannot contain fraud actions without abolishing them. And since every fraud can be couched as a breach of contract, one would have to abolish state contract law, too. But common-law actions are the hard core of state autonomy; that is exactly why federal regulatory statutes explicitly preserve them. Asking Congress to preempt them is like asking it to abolish the states. It will never happen.

If preemption affords no refuge, what can be done? I offer two suggestions, albeit with little hope that either will enjoy adequate political support.

Institutional Incentives. In all but four or five states, state attorneys general are independently elected. That is one of the weirdest institutional practices in American government. In virtually all respects-bicameralism, two-party systems, and so forth-all states mirror the federal government structure, even though they don’t have to. Not so here. At the federal level, we think that the executive must be unitary, and that law enforcement is the hard core of executive power. At the state level, in contrast, law enforcement authority is disconnected from responsibility, accountability, and larger concerns of public welfare. If some industry were to explain to the attorney general that his regulatory initiatives create an unfavorable business climate, the rational AG will respond that that is the governor’s problem. (He may even welcome the fact, inasmuch as he hopes to succeed the sitting governor.)

If state AGs were appointed-like the U.S. Attorney General-by the chief executive, their interests would be more balanced, and more consonant with the state’s broader interests. They would have to play to a broader array of constituencies, and they would be more sensitive to the federal government’s concerns (as governors are sensitive to those concerns).

Jurisdiction. As noted, the secret to the trial lawyers’ and the AG’s success is interstate exploitation-or, legally speaking, the extraterritorial reach of state law. Mississippi AG Mike Moore got to apply his home state’s law to out-of-state corporations and their consumers, and was off to the races. Eliot Spitzer can reach investment houses everywhere (so long as they have customers in New York). Nevada can sue-and hence homecook-foreign corporations under its own law, in its own courts.

Suppose, by way of contrast, that corporations and their customers could choose their venue and law by contract; or suppose that the law of the seller’s state, rather than the customer’s state, governed the transaction: in that case, state AG or trial lawyer campaigns would become thoroughly unattractive. They would simply punish in-state industries and, at the limit, induce them to move elsewhere. Coordinated state-trial bar campaigns would never get underway; there would be no first mover.

Neither of these proposals is radical. All the arguments against independent attorneys general can be found in the Federalist Papers. The jurisdictional proposal would effectively restore the pre-New Deal choice-of-law rules. The New Deal "reformed" those rules, precisely so as to unleash the states’ regulatory authority. It did so, however, on the understanding that the states would exercise that authority under federal oversight. Now that the states have reneged on their end of the bargain, it is not only fair but imperative to subject them to rules and incentives that would more nearly approximate the status quo ante.

Still, I harbor no illusion that either of these options will be pursued. Both bump up against demagogic passions. Both would require a concerted corporate strategy, and I do not believe that corporate America is capable of agreeing on, let alone executing, such a strategy.

The most likely scenario, therefore, is a series of regulatory cartels under the sponsorship of the NAAG and its principal constituency, the trial bar. In other words, the trial bar and NAAG will increasingly perform the function that Congress and regulatory agencies are supposed to perform. (Cartelization is simply another word for "regulation.")

I would not look to Congress to arrest this development. State-based regulation-by-regulation will always move faster than Congress-because attorneys general are more mobile and energetic than a fractious legislature, and because the "process" they have invented reduces the range of interest group conflict to two constituencies-trial lawyers, and regulated industries. Once an agreement has been reached through that process, it can no longer be dislodged in Congress, since the states, trial lawyers, and regulated industries will all work to defend it.

What we have here, then, is a parallel Constitution for the enactment of federal economic regulation. A constitutional republic is not supposed to have a parallel Constitution, and as I have argued elsewhere, the actual Constitution, properly understood, actually forbids stratagems such as the tobacco settlement and the investment and pharmaceutical sequels, coming to you soon in this theater. That argument is properly addressed to the Supreme Court. I would not hold my breath for judicial intervention, either, but it may be the only option.