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With FDA/CDC Protected By Sovereign Immunity, Compensation For Losses Looks Bleak Says Professor Richard Epstein

Jim Prevor’s Perishable Pundit, July 25, 2008

Back in the spinach crisis of 2006, many spoke of the importance of efforts to get compensation for innocent spinach farmers who had been crushed by the FDA’s action. Industry leaders emphasized how important it was to establish the principle that those producers who do the right thing should not be penalized, that penalties should be reserved only for those who have done something wrong.

These pleas, for the most part, fell on deaf ears.

Now, many are looking for paths that might get compensation for tomato and other farmers damaged by the broad sweep of FDA’s current actions.

We confess that we have seen little reason to be optimistic about any of these efforts. Yes, via legislation anything can be done, but it is hard to get the various groups to appropriate funds for one particular group. And the judicial approach has struck us as almost hopeless. This is because there is a legal doctrine known as Sovereign Immunity, which basically means that neither the state nor people acting as agents of the state can be sued for acts within the scope of their responsibility.

We say the approach was “almost hopeless” because 23 years ago, a book was published called, Takings: Private Property and the Power of Eminent Domain, which began a renaissance of interest in the “takings” clause of the Fifth Amendment to the United States Constitution.

That clause holds as follows:

“… nor shall private property be taken for public use, without just compensation.”

We wondered if we could make the following argument: In order to obtain a public purpose — in this case public health — the FDA de facto confiscated the property of innocent individuals by depriving them of a market. Could we make an argument before the Supreme Court that this constituted a “taking” of private property for a public use and thus required compensation?

We turned to the author of that book, a man not only brilliant, but with the exceedingly rare trait to not be influenced by the intellectual fashion of the times.

We asked Pundit Investigator and Special Projects Editor Mira Slott to speak with Professor Richard A. Epstein:

Richard Epstein
James Parker Hall
Distinguished Service Professor of Law
University of Chicago
Chicago, Illinois

Q: We are intrigued by your body of work and look forward to receiving your legal analysis and abstract thinking on FDA’s outbreak investigations and produce company restitution.

For example, would constitutional issues in your book, Takings: Private Property and the Power of Eminent Domain, apply to tomato growers who lost their entire crops, or by default couldn’t plant or harvest due to FDA’s consumer warning not to eat tomatoes, and the uncertainty of how long the warning would remain? Are there applicable cases of government compensation based on government actions taken to protect public health and safety, etc.?

A: I am happy to talk, but the information is all grim under the current legal system. Takings was a well known book not because it represented the law but because it attacked it. But here is the bottom line: When the CBS show dumped on Alar, the case for defamation against a private party was summarily thrown out. Government defendants are always in a stronger position, with absolute immunity from suit for all decisions done in the exercise of their discretion. The FDA and its officers get total protection against any and all losses, as far as I can see.

There are small hopes, such as “all clear” calls when the information turns favorable, which help mitigate losses. But once its wheels grind, it has the choice on having wide or narrow bans on any product or product group. There are no examples of restitution for these kinds of decisions. It took over 40 years to get some pittance in compensation for the Japanese interned during World War II, and that took legislation. I don’t like these rules very much, but they are unshakable.

Q: You describe bleak legal prospects for produce company restitution. Alas, sovereign immunity sounds very strong. Still, I know it would be incredibly valuable for our readers to hear your out-of-the-box thoughts, both legal and abstract, on several scenarios.

A: One of the things everyone has to understand is the interactions between regular business and government have multiple dimensions… drive businesses into lamp posts, oversee huge portions of the economy…

One of the largest organizations is FDA — your industry is interested in the food side, but the drug side is just as big and at least as controversial. One will see a lot of uncertainty and confusion. The central problem one has to face is that government itself gets sovereign immunity, and officials get their immunity for actions in the ordinary course of duties.

The essential line one tends to see drawn is this: with any action, be it legislative or administrative oversight, if it is not directed at a particular person or involving culpable malice, the government or government official will use the sovereign immunity defense. These have not narrowed but have grown in the last 20 years. With respect to physical accidents, any effort to try and use a legal remedy produces a breakdown in the inspection process and has failed, and food will be no different.

Q: Could you comment on the government settlement with the guy who was “a person of interest” in the anthrax situation — If the rule is ironclad, why did they give him money? And why wasn’t his lawsuit thrown out?

A: The reason why the anthrax case came out differently is because it combined leak and defamation of a particular individual — the government called him a criminal with little reason to believe it. The courts, to break the hold on sovereign immunity as being absolute, will find cases like that as targets of opportunity.

Q: Our interview with Dr. Michael Osterholm in our June 24 issue provides a blunt critique of FDA and CDC’s seriously flawed Salmonella Saintpaul outbreak investigation, resulting in the decimation of many innocent parties.

A: As disastrous and misguided as I suspect it was, it would be odd for the Saintpaul investigation to get the same status. Massive incompetence wouldn’t be a matter of defamation.

Q: The FDA’s Saintpaul outbreak investigation has already resulted in devastating losses for growers, packers, distributors and other companies down the supply chain. Florida tomato growers, among others, are intent on receiving government restitution for losses they’ve incurred, estimated at upwards of $100 million. Companies also project future sales declines from lingering lack of consumer confidence in produce safety. Are you saying their prospects are futile?

A: Courts don’t want to investigate those cases that involve thousands of decisions — determining what products were involved, whom to inspect first, how much to inspect, what public announcements and warnings, what seizures of individual goods you make — it’s very, very hard and courts are reluctant to enter into a case when they can’t see a clear goal post and limiting principles.

I’ve grappled with this for 20 years. Absolute immunity shields the worst kind of people. Error costs of any rule are extremely high. It just goes with the territory. That’s what’s involved. It’s a stark reality — not a recent development, but more important inspections have increased from security issues to food safety.

Q: Putting aside for a moment the current law, what legal rules could be established to deal with this kind of issue in the future? On the one hand, there is a public policy interest in not having administrators paralyzed by fear of lawsuits. On the other hand, if businesses can be destroyed with no consequence, we will have a lot of businesses destroyed.

A: The usual question, what can we do, and the realistic answer is to reform day-to-day operations, weaseling out the problems in the system. There is the question of voluntary compensation programs where Congress says, ‘here is x sum of dollars’; people are frightened to death of these schemes, myself included.

Q: Why?

A: You could have a tomato farmer who misplanted tomato crops and was going to lose crops anyhow. Another said they plowed over crops when they never planted crops. Restitution programs are ripe for fraud because the government can’t superintend. How many people have farms? You can’t inspect them all and you can’t scrutinize crops before and after. It never quits. The question is can you sell private insurance? It’s very difficult to get anyone to write it. They face fraud risk and complementary risk.

Q: What do you mean by complementary risk?

A: If the government has a national inspection, it becomes a common mode failure. If it triggers one, it triggers all. That’s what happens. People realize how difficult it is to handle. It doesn’t get easier, it gets harder. When you insure risk, you want random acts.

Q: After many innocent spinach growers were bankrupted, and now tomato growers and jalapeno farmers unrelated to any outbreak facing the same fate, it is becoming difficult to attract investment. Could you speculate on what law Congress could pass — not so much to compensate the spinach, tomato or pepper farmers, but to establish a new system to prevent future harm?

A: How do you attract investment? The strategy is difficult to reconcile with small geographically isolated farms. It exposes them to all-or-nothing peril. Diversification is the way to deal with risk. Since you’re never sure if the crop business is good or bad in a particular commodity, invest in a diversified company, with 20 different farms in 20 locations, growing 20 different crops. Farmers can’t diversify like that, corporate shareholders can. It’s a calculated strategy; it doesn’t minimize risk but minimizes its consequences. As far as sovereign risk, I’ve never heard a persuasive account of what to do but diversify.

Q: As far as the current situation goes, what would the argument be if you were before the Supreme Court? Could a spinach grower in New Jersey argue that in banning his product, the government was de facto “taking it” for public use or purpose” to avoid any possible public health threat without paying him compensation?

A: As to your question of government taking property, this gets into an extremely complicated area. You’re combining two tracks. You have to keep them separate. Track one is taking property for public use. Say a government decided on the process of inspecting tomatoes. It needs a warehouse in the tomato belt and has no time to build one, so the government takes a farmer’s facility. The government has to pay rental and the amount of money to get premises back in the position it was in before the government took the lease.

Assume tomatoes are all up there, and the government doesn’t know if they are healthy or contaminated. The general rule is these are police power regulations, and the exercise of the police power never requires compensation. The theory is you have crops to sell into commerce; if the new crops are dangerous, the farmer turns them under. That’s the more simplistic scenario.

Q: What if the tomatoes weren’t even being produced during the time of the outbreak?

A: Suppose you don’t know the tomatoes are dangerous, but just the announcement and they get plowed under when those tomatoes were marketable. The answer from the Supreme Court is no compensation.

The problem you’re raising of the tomato farmer not producing at the time of the outbreak, when the FDA is looking at all these tomatoes: The government might say there could be some form of transfer contamination. No compensation. In an effort to protect government from being too cowardly, you make it too reckless. There is no way out. You can’t find a judge who would deny public health.

Q: The FDA justifies anything it does on grounds of “public health.” What is the constitutional standing of such a claim? Has it been established through case law and legislation that a specific person known to be contagious can be put under quarantine? If this is the case and we learn that one person had TB, could the government order all people with similar traits to go into quarantine for six months?

A: Is the government allowed to quarantine? You betcha. Could the government order all similar people quarantined? That’s an extremely hard question. With destruction of property, the government has more sway; it is easier killing tomatoes than locking people up. What makes it so complicated is that generally the law won’t allow people locked up when there’s a way to see if they were infected. The disease may be in the latent stage, which testing can’t detect, and then they could be contained.

There’s a famous Jew Ho case versus the City of San Francisco. The city wanted to quarantine everyone in Chinatown. The Chinese couldn’t leave but any white traders could enter. It was struck down because it was a phony quarantine. If you have a legitimate bona fide one, you can hold them, not more than six months I believe… there are some restrictions.

Q: In Florida, the state sought to control citrus canker and ordered all citrus trees within some radius of any infected tree destroyed. In the end, judges ruled it unconstitutional, I believe because the state had to seek out an individual warrant for each tree it sought to destroy. Could you help clarify this case?

I believe later the judges ruled that the program’s “compensation,” a gift certificate for a tree from Wal-Mart, was not sufficient.

A: In the citrus canker case, this was unquestionably OK to destroy the trees. Canker is rapidly contagious. You say “infected.” Infected and contagious are completely different words. If AIDS was contagious, all mankind would be dead. The pressure to put people in confinement would have been enormous. Infections go slower.

I haven’t read the case, but what’s going on is that the procedural hurdles have to be satisfied. We think a tree is contaminated, so we take all trees from a certain distance away. This appears to be a search warrant case from 2002 and there were some procedural defects in how the process was handled on the edges.

Q: The lawyers we interviewed in Miami claimed that FDA was utilizing “Import Alerts” in an essentially lawless way to avoid the restrictions Congress has legislated. Similarly, we are not aware of any statue that calls on FDA to issue recommendations not to eat things. It has recall authority and other authorities, but aren’t those restricted and subject to judicial review?

These actions are arguably not within the scope of authority Congress has given to FDA. Doesn’t that make a difference?

A: Import alerts. This is very serious stuff. It’s a form of defamation again if it’s false. It’s impossible to figure out how to cut back.

The standard rules on liability are either wildly restrictive or wildly generous. I don’t think where we are in the equilibrium there will be any major changes to the system.

Produce companies have to work for better administration on the ground. Maybe they are willing to contribute to a fund essentially to provide better research into epidemiology — self-help stuff. It doesn’t help that the nature of produce makes it difficult to control bacteria.

What’s happening is a tragedy for the produce industry. I think that these issues are interesting enough for further academic work. I would like to send them on to our Law Review so that they could think of possible topics for student notes.

We certainly gave Professor Epstein full permission to share the industry dilemma with his students at the University of Chicago as it just means some of the brightest and most rigorously educated law students will be advancing the thinking on these important topics.

Although Professor Epstein is not particularly optimistic about the chances for the produce industry to win compensation judicially — no real surprise there — he opens the door a bit to individual companies that have been defamed by a false Import Alert.

Our extensive analysis of the Honduran cantaloupe situation has pointed to a great injustice. Perhaps Agropecuaria Montelibano’s attorney ought to consider bringing Richard Epstein in as Special Counsel?

With the following three pieces, we define the weaknesses in the legal and scientific environment in which the CDC and FDA are operating.

Fix Suggested For FDA’s Vigilante System Of Banning Product
Through Import Alerts

Dr. Michael Osterholm, Esteemed Authority On Public Health, Speaks Frankly About The FDA, The CDC And The Incompetent Management of the Salmonella Saintpaul Tomato Outbreak Investigation

With FDA/CDC Protected By Sovereign Immunity, Compensation For Losses Looks Bleak Says Professor Richard Epstein

Although certainly much can be done by discussion with FDA and CDC, in the absence of reform in this basic environment, real progress seems likely to remain elusive.

Many thanks to professor Richard A. Epstein for taking the time to share his thoughts with the industry.

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