States Are Going Where the Feds Won't Tread

Filling a regulatory void, they're out to tackle Big Business

If the business-friendly Justice Dept. doesn't halt the marriage of satellite-TV giants Hughes Electronics Corp. (GMH ) and EchoStar Communications (DISH ), there's a feisty fellow in Missouri who just might take on the job. State Attorney General Jay Nixon is prepared to lead a coalition of 30 states in challenging the merger, which he claims would snuff out what little pay-TV competition there is in rural areas. "If [federal] antitrust regulators allow this monopoly to happen, it doesn't seem like there would be much work left for them," says Nixon.

States lining up to block corporate mergers? It's all in a day's work for a vocal group of activist regulators, lawmakers, and attorneys general out in the heartland. Convinced that Washington's watchdogs are asleep, a growing number of states have decided to take the lead on consumer-protection issues as diverse as battling corporate polluters and fighting for lower drug prices. Impatient and ambitious, they have been galvanized by the laissez-faire regulatory doctrine of many Washington regulators. With Bush Administration appointees staunch backers of industry deregulation and self-policing, the grassroots rebellion stands to gain momentum--a trend that has Big Business worried.

One fertile new target for the rebels: corporate malfeasance. In the aftermath of the Enron and Arthur Andersen scandals, state officials are now investigating a broad array of investor ripoffs. Some 12 states, led by New York, California, and New Jersey, have launched probes of financial-analyst conflicts and are weighing regulations to deal with abuses. "With gridlock in Congress and a Republican in the White House, states are the only place that progressives can make a difference," says Bernie Horn, an attorney with the Center for Policy Alternatives, a liberal think tank.

One consequence of the new activism is a slew of individual state restrictions on Corporate America. Many wouldn't stand a chance on Capitol Hill, where the business lobby holds sway. But outside the Beltway, they have fared much better. Georgia, North Carolina, and California have all passed curbs against "predatory lending" practices that aim at low-income borrowers. Maine has restricted drug-price hikes for some residents. Hawaii has capped gasoline prices. And California is nearing passage of a bill that limits auto emissions of carbon dioxide, a gas thought to cause global warming. State officials say that the White House's decision to punt on the Kyoto global warming protocol made them act on their own.

State activism isn't new, of course. It's been evident since the Reagan era. But the trend has clearly accelerated, prompted by the perceived vacuum in Washington and the sense that coordinated state action can make a difference. A huge catalyst turned out to be Big Tobacco's mind-boggling $246 billion settlement of a state-inspired legal action in 1998.

That's why states aren't in awe of corporate giants such as Microsoft. Today, nine states--led by Connecticut, California, and Iowa--are pressing a separate antitrust case against the software maker, convinced that the Justice Dept.'s decision to settle the dispute lets the company off the hook. Although many of their arguments may fall by the legal wayside, there is still a chance the upstarts could force a major a rewrite of the Windows operating system.

Drug companies don't scare the states, either. Washington has been stymied in attempts to reform Medicare and implement a new prescription drug benefit for the elderly. So some states are barging ahead on their own by mandating buying cooperatives and by importing cheaper drugs from north of the border. "We couldn't wait for the wheels of the [federal] bureaucracy to work," says Elizabeth Wennar, CEO of the United Health Alliance in Vermont, a group fighting for drug discounts. "In Washington, it's become about politics, not policy."

Although many of the state crusaders are liberals, the activists' club is not an exclusive Democratic preserve. Two of the nine AGs pursuing Microsoft are Republican. Among them: Utah's Mark Shurtleff, who received the backing of the company in his 2000 election bid. And states like Georgia and North Carolina, hardly hotbeds of liberalism, have adopted stronger consumer laws in recent years as the political demographic shifted from the rural piney woods to bustling new suburbs and growing cities. "State officials are closer to the people," contends Roy Cooper, North Carolina's AG. They "sense problems more acutely."

When the states get belated offers of help from Washington, the answer is often "thanks, but no thanks." None of the 12 states investigating stock analysts, for instance, has shown any inclination to back off since the Securities & Exchange Commission announced its own probe. Says Andre Pineda, Assistant Commissioner of the California Department of Corporations: "We've seen little on the federal level that shows us that California investors are being protected."

Of course, there's a certain irony in the current state of affairs. For years, conservatives and their business allies have been preaching at the altar of states' rights. But now, with activist voices coming out of the Albany, Sacramento, Augusta, and elsewhere, conservatives are no longer so keen on the locals. That's forcing them to change their tune. "The commerce clause [of the Constitution] gives Congress a lot of power to preempt states," notes Jim Wooten, a top legal adviser for the U.S. Chamber of Commerce.

Don't expect Corporate America to stop bashing pointy-headed Washington regulators overnight. But after dealing with emboldened state officials and AGs, business may soon be feeling a bit fonder of its old Uncle Sam. Better the bureaucrat you know than the one you don't.

By Dan Carney, with Lorraine Woellert in Washington, Christopher Palmeri in Los Angeles, and Brian Grow in Atlanta

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