Mitt Romney's View on Corporations

Liberals and Democrats are having a field day with Mitt Romnhttp://www.blogger.com/img/blank.gifey's off-the-cuff remarks yesterday (responding to hecklers at the Iowa State Fair) that included this line: "Corporations are people, my friend."

Here's the entire exchange, as per the Washington Post:

ROMNEY: We have to make sure that the promises we make — and Social Security, Medicaid, and Medicare — are promises we can keep. And there are various ways of doing that. One is, we could raise taxes on people.

AUDIENCE MEMBER: Corporations!

ROMNEY: Corporations are people, my friend. We can raise taxes on —

AUDIENCE MEMBER: No, they’re not!

ROMNEY: Of course they are. Everything corporations earn also goes to people.

AUDIENCE: [laughs]

ROMNEY: Where do you think it goes?

AUDIENCE MEMBER: It goes into their pockets!

ROMNEY: Whose pockets? Whose pockets? People’s pockets! Human beings, my friend. So number one, you can raise taxes. That’s not the approach that I would take.

At a top level, Romney is right: corporations have been long treated by courts as independent "people", able to enter into contracts, commit torts, and -- perhaps, most important -- shield their investors from personal liability.

That's consistent with the Citizens United court's finding that corporations are entities that are subject to First Amendment protections: to paraphrase Romney's words, "Corps are people, too."(*)

(* - Robert Clark's seminal treatise, Corporate Law, declares that "One of the law's most economically significant contributions to business life, and one often ignored by lawyers because it generally generates less litigation than many other contributions, has been the creation of the fictional but legallly recognized entities or "persons" that are treated as having some of the attributes of normal persons." Sec. 1.2.3)

But read Romney's words again. He's actually not arguing that corporations are people, the way Dean Clark and the Citizens United court does.

Rather, he's arguing that corporations are made up of people. Every dollar that a corporation earns in profit is eventually paid to a real person, who owes taxes on that profit. And accordingly, Romney argues, corporation taxes should be reduced.

(We will put aside the political wisdom of Romney -- who's being painted as Mr. Corporation in the GOP primary, at least by Tim Pawlenty -- defending lower corporate tax rates.)

But under Romney's vision, corporations are little more than unincorporated associations: partnerships, if you will, who just happen to have stock tickers.

But if corporations are just the collection of people whom comprise them (i.e., stockholders), why should we grant them status as "legal persons"?

And why should the corporate shield on liability (the shield that kept Mr. Romney, and the rest of Bain Capital from suffering ill-effects from the bankruptcy of Ampad) be recognized?

To quote a different Supreme Court (albeit minority) opinion: "Taxes are what we pay for civilized society"

Changing the Landscape for FDA Approvals

New column (co-written with Terry Klein of HPLLP and Decisionism) on the Mass High Tech page today. Text below:

The U.S. Supreme Court revisited the balance between federal and state authority over drug regulation last month. The result may have long-lasting impacts for drug researchers and manufacturers. By affirming a multi-million dollar verdict in a product liability case -- rejecting a drug maker’s argument that a federally approved label bars state law claims -- the court effectively required drug manufacturers to closely monitor side effects even after U.S. Food and Drug Administration approval. This decision deviates a bit from recent case law and deserves an explanation. There may also be implications for device manufacturers.

The case of Wyeth v. Levine involved administering Wyeth’s anti-nausea drug Phenergan by the “IV-push” method. Susan Levine, a professional musician, suffered from migraines and received a needle-with-plunger injection of Demerol (for the headache) and Phenergan (for nausea). Because the latter drug accidentally entered one of Levine’s arteries – rather than a vein, as advised by the label – gangrene set in that resulted in the loss of Levine’s arm, and her livelihood.

Levine sued on state law grounds, and a jury found that because the risk of gangrene and amputation could be almost always avoided by the “IV-drip” (a drip bag using saline solution) rather than the “IV-push” method (as was used). Wyeth was negligent and that IV-push-administered Phenergan was a defective product. Wyeth had been aware of the gangrene risk since at least 1967.

Wyeth’s defense relied on FDA approval, and therefore federal “preemption” of state law. The FDA approved Phenergan in the 1950s, subject to labeling that included a general gangrene warning. But over the years, even as Wyeth became aware that the IV-drip method all-but-eliminated the catastrophic risks, the company did not sufficiently update its label. After all, it argued, the label described the risk, and the FDA had approved the language.

The Supreme Court held that Wyeth had a duty to update its labeling to reflect the knowledge that it acquired over the years. (Interestingly, Congress authorized the FDA only in 2007 to compel label revisions in the face of new [adverse] information.) FDA requirements, according to the court, are a “floor” and not a “ceiling” for state regulation.

The Wyeth result –- allowing a tort case to proceed even though there was FDA approval –- initially appears to contradict the Court’s decision a year ago in Riegel vs. Medtronic. There, the Court reviewed a different statutory section, which empowered the FDA to review medical devices prior to introduction and explicitly pre-empted state regulation. As a result, the court in the 2008 Medtronic case barred state tort claims arising from damage caused by FDA-approved medical devices. (Further complicating matters, in a 1996 device case involving Medtronic and a still different section of the statute, the court found that state tort claims were not preempted.)

Because the applicable federal pre-emption provision for drugs is narrower, the Wyeth decision came out the opposite way (i.e., against the manufacturer). This means that even after FDA approval, drug makers have a duty to monitor their products and update their labels.

Finally, there is an unanswered question for device manufacturers: Having obtained FDA approval, what obligations do they have when a defect comes to light after approval? Justice Ginsburg, the sole dissenter in the 2008 Medtronic case, raised that question in her first footnote in that case. The question for the future is whether the court will find the statutory device preemption language (whether-or-not subject to a product recall) or a pattern of post-FDA-approval harm to be more compelling. And for observers who assumed that there is a reliable pro-business majority on the Roberts court, the Wyeth decision suggests a less certain result than the industry might prefer.