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Business litigation is a form of business regulation

In 1933, the first synthetic antibiotic was discovered by German chemists working with industrial dyes. One particular dye reliably killed bacteria without harming healthy tissue. The chemists patented the dye and their employer, Bayer AG, promoted it to the skies, dreaming of massive profits.

Then a French team discovered that only one component of the complex dye was actually effective against bacteria. The active component, known as sulfanilamide, had been around for decades. Its patent had long since expired. Which meant that sulfa drugs could be manufactured by anybody without paying royalties. The profits that Bayer had hoped to monopolize were instead shared by the entire pharmaceutical industry.

As Thomas Hager explains in his terrific book, “The Demon Under the Microscope,” pharmaceuticals were essentially unregulated in the United States in the mid-1930s. Manufacturers had used the courts to block the first tentative Progressive Era attempts at regulation. The Roosevelt administration’s Food, Drug and Cosmetic Act, introduced in 1933, was stalled in Congress. Making things worse, no one understood the concept of bacterial resistance. Sulfa drugs went from discovery to overuse in a remarkably short time.

When Tennessee-based S.E. Massengill Co. decided to sell a sulfa syrup for sick children, it needed a sweetener. It opted for a cheap one: diethylene glycol. The company wasn’t required to perform any kind of safety testing before marketing its syrup, so it didn’t. Company chemists later claimed they didn’t understand diethylene glycol’s toxicity, which can only mean they didn’t bother to research it. More than a hundred children were killed by Massengill’s poisonous elixir.

The slaughter shocked Congress into finally passing the administration’s long-stalled bill, creating the modern FDA, with its strict, science-based safety protocols. The essence of regulation, as business owners know only too well, is government oversight of profit-seeking business practices. Today, the pharmaceutical giants regularly complain about the FDA, but the United States hasn’t had another mass poisoning event like the Massengill tragedy.

Direct regulation by specialized executive branch agencies such as the FDA is only one way in which government regulates business. Another is litigation. It’s not conventional to think of business litigation as a form of regulation, but thinking in those terms provides a clarifying perspective.

Consider glyphosate, the subject of a recent blockbuster trial. Glyphosate is the active ingredient in Monsanto’s herbicide Roundup. Once applied only sparingly by farmers because it kills desirable plants as effectively as undesirable ones, its worldwide use has skyrocketed since Monsanto’s development of glyphosate-tolerant crops. Researcher Charles M. Benbrook found that “glyphosate use in the agricultural sector rose 300-fold from 1974 to 2014.” Americans used 276 million pounds of the stuff in 2014.

In 2015, one unit of the World Health Organization, conducting a hazard assessment, concluded glyphosate was “probably carcinogenic to humans,” although another unit, assessing risk, concluded that it “is unlikely to pose a carcinogenic risk to humans from exposure through the diet.” (For a discussion of the difference between hazard and risk, check out the WHO website, www.who.int/foodsafety/faq/en/.) In late 2017, the Environmental Protection Agency issued a draft risk assessment finding that glyphosate “is not likely to be carcinogenic to humans,” although “there is potential for effects on … mammals,” the taxonomic class to which humans belong. All in all, not a clear picture.

Problems predictably arise any time the benefits of a certain course of action are reaped by one party while the costs are borne by another. That happened with Massengill’s elixir. (It’s a little shocking to me that Massengill remained in business.) The enormous growth in the market for Roundup enriched Monsanto, and continues to enrich its new parent, none other than Bayer, discoverer of sulfa drugs. But have Monsanto and Bayer unfairly externalized the costs associated with the chemical’s widespread use?

Earlier this month, a San Francisco jury answered that question with an emphatic “yes,” awarding $39 million in compensatory damages and $250 million in punitive damages to groundskeeper Dewayne Johnson, who used Roundup on the job and developed terminal cancer. California’s generic jury instructions usefully explain the two purposes served by punitive damages: “to punish a wrongdoer for the conduct that harmed the plaintiff and to discourage similar conduct in the future.”

The first of these is backward-looking, imposing a penalty for past behavior. But the second is forward-looking, explicitly seeking to alter the defendant’s ongoing course of conduct. Johnson himself told CBS’ “This Morning” that he hoped the verdict would spur Monsanto to change the label warnings on Roundup.

When a government agency takes action to change a company’s business practices, it is engaged in regulation of that business and its industry. It doesn’t matter whether the agency in question is assigned to the executive or judicial branch, or whether it’s called a bureau or a court. Business litigation is business regulation.

Joel Jacobsen is an author who retired from a 29-year legal career. If there are topics you would like to see covered in future columns, please write him at legal.column.tips@gmail.com.

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