Going on Offense against State Deceptive Trade Practices AG Actions

by Reed Smith

We have posted many times about cases where a manufacturer of a regulated product is sued over alleged violations of a state consumer protection or deceptive trade practices act because of something allegedly amiss in the product’s name, labeling, advertising, or sales practices.  We know that drug and device manufacturers like the ones we represent can spend resources dealing with state attorneys general over the threat that such suits will be brought.  We cannot recall seeing, let alone posting on, a case where the manufacturer sued the state attorney general because its threat of suit—relayed to major retailers, who stopped selling the product—allegedly hurt its business and constitutional rights.  There would seem to be lots of reasons why an action like this might not be taken by a company that wants to keep doing business in the particular state for other products it manufacturers.  But if you are a one product, dietary supplement company and your presumably large market in Texas disappeared after letters went out based on a determination by the Texas AG’s office, not by a court, then you might be the one to bring suit preemptively.  That is what happened in NiGen Biotech, L.L.C., v. Paxton, No. 14-10923, 2015 U.S. App. LEXIS 17223 (5th Cir. Sept. 30, 2015).

The unusual posture of the case—in comparison to those we usually handle or read—means that it delves into constitutional issues that we knew better back when we clerked and the docket was sprinkled with cases against state actors.  The ones brought by prisoners are remembered more for their unique fact patterns and brand of advocacy than for the constitutional principles they implicated.  NiGen, likewise, holds our interest not because its treatment of sovereign immunity, federal question jurisdiction, and standing has direct implications for the sort of cases that normally fill our posts.  Rather, it shows that a manufacturer can go on the offensive against a state AG who probably thought it could do just about whatever it wanted prior to bringing its own suit.  It is not that we think the manufacturer Nigen is right on the underlying issue of whether the product’s label was deceptive, which touches on some complex constitutional issues, especially since Amarin has come down since this case started.

The dietary supplement at issue is called “hCG,” short for the hormone human chorionic gonadotropin, which is the active ingredient in some prescription drugs.  It escapes being regulated as a drug, apparently, because it is made of the “individual amino acid building blocks” of hCG.  We do not know if the body actually converts these amino acids into the hormone or why this would be different that a number of “pro-drugs” that work based on metabolism creating the desired active substance and are regulated as drugs.  From the opinion itself we also would not know that the prescription drugs containing hCG are approved for fertility and the supplements here are sold for weight loss.  This dynamic is apparently what is alluded to when the Texas AG found the supplement’s label was deceptive “because, among other reasons, ‘the claim is trying to mimic claims that FDA considers off-label for the prescription drug.’”  Id. at *2.  This certainly tees up some juicy issues of the interaction between federal regulation and state law and, to us, raises the continuing issue of the inconsistency between the regulation of drugs and the regulation of supplements, especially those where the FDCA’s definition of a drug as “A substance (other than food) intended to affect the structure or any function of the body” seems to fit absent major mental gymnastics.  Two months after the Texas AG sent a letter to the manufacturer and retailers about its determination that the supplement’s labels were deceptive, the manufacturer sued the AG in the Northern District of Texas under § 1983.  (We marvel at the use of the old anti-Klan statute coming to be used by a Utah supplement company to keep selling its pseudo-drug in Texas, but making sure that state actors do not violate constitutional rights matters.)

After the AG moved to dismiss, the district court took two years before dismissing the case entirely based on sovereign immunity, which apparently had not been raised as a defense to all counts.  During the now close to three years since the AG’s determination, no suit had been brought by the AG against the supplement manufacturer, meaning the manufacturer was not getting its “day in court” any time soon.  In stepped the Fifth Circuit, which reviews dismissals de novo and systematically addressed the asserted counts and defenses, including some the AG raised for the first time on appeal.  Sovereign immunity ordinarily precludes suits against states or state officials in their official capacity “unless that state has waived its sovereign immunity or Congress has clearly abrogated it.”  Id. at **5-6 (quoting Moore v. Louisiana Bd. of Elem. & Sec. Educ., 743 F.3d 959, 963 (5th Cir. 2014)).  Under the Ex part Young doctrine, sovereign immunity is not available, however, for suits that seek “prospective, injunctive relief from a state actor . . . based on an alleged violation of the federal constitution.”  Id. at *6 (quoting K.P. v. LeBlanc, 729 F.3d 427, 439 (5th Cir. 2013)).  Applying this principle, the manufacturer’s claims for monetary damages for harm that has occurred are barred by sovereign immunity—and cannot be brought in federal court by a citizen of another state under the Eleventh Amendment.  (We have not mentioned the Eleventh Amendment in a DDL blog post in more than five years!)  Likewise, a claim for tortious interference of contract does not get around sovereign immunity because it is not tied to the federal constitution.  The meat of the manufacturer’s claim, however, was prospective, injunctive, and federal.  Despite a late challenge to the pleading as being focused on the past more than on the future, the court found that “the complaint’s straightforward allegations, of which there are many, that the AG’s continued refusal (now after nearly four years) to justify its threatening letters still inflicts, inter alia, an unconstitutional restraint on its commercial speech, punishment without due process, and other constitutional violation” were enough to get around sovereign immunity.

What was left of the suit after sovereign immunity and the Eleventh Amendment was for federal constitutional violations under § 1983, so there would not normally be a question of federal question jurisdiction.  But the AG raised the dusty “well-pleaded complaint rule” to argue that anticipatory defenses based on federal law do not create federal jurisdiction.  (State courts decide preemption motions all the time, so readers probably knew the import of this rule if not its name.)  For a declaratory judgment action like NiGen, however, there is jurisdiction when “the federal issue [would be] part of the hypothetical well-pleaded complaint that the declaratory judgment defendant would have filed but for the anticipatory action.”  Id. at *9 (quoting Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671 (1950)).  The AG’s hypothetical complaint would have been based on the state DTPA, so a four part test from Singh v. Duane Morris LLP, 538 F.3d 334, 338 (5th Cir. 2008), applies.  Cutting to the chase, the complaint’s request for declaratory judgment—i.e., the label does not violate the DTPA—fails the test, but the requests for injunctive relief—i.e., make the AG do something going forward—pass.

The AG also contended that the manufacturer lacked standing because its alleged injury could not be redressed through the injunctive relief it seeks under Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992).  The Fifth Circuit considered this argument with a jaundiced eye because it was raised for the first time on appeal.  It appears that the AG argued that its actions, through its letters, were not really directed at the manufacturers, but at the retailers and an indirect effect on the manufacturer is not enough.  The letters to the manufacturer and the retailer “effectively enjoined [the manufacturer] from selling its products” and the injunctive relief now sought would allow it to sell its products again.  “As the Supreme Court has noted, where a plaintiff’s complaint alleges a continuing violation or the imminence of a future violation, a prayer for injunctive relief satisfies redressability.”  Id. at *14 (citing Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 108 (1998)).  So, the claim for prospective injunctive relief was remanded for further proceedings, with the recognition that “if NiGen succeds in enjoining the AG’s conduct, which would require a retraction of the offending letters and/or the instigation of procedurally adequate enforcement measures, NiGen could again conduct business as usual.”  Id. at *16.  Those proceedings would include ruling on a an outstanding 12(b)(6) motion that maybe needs to be viewed as a Rule 56 motion given reliance on matters outside the pleading, which means there may be something more substantive coming out of this case fairly soon.

To the extent that pointers can be gleaned from this case for a drug or device manufacturer that feels its due process rights have been compromised by AG action short of initiating a lawsuit and is willing to take the step of asking a federal court to step in, we offer these.  Well-pleaded claims for prospective and injunctive relief based on continuing violations of federal constitutional rights might work.  Do not expect to get redress for money lost from past actions or just a declaration that you would win if the AG ever sues.  It is said, along with some of the other tired adages we have mixed in here, that the best defense is a good offense.  Time will tell whether that is true here, but there is another play to add to the litigation playbook.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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