Commentary

The Great Tobacco Robbery: Lawyers Grab Billions

Legal Times, February 1, 1999, as “The Great Tobacco Robbery”, p. 27.>

How’d you like to work for $7,716 an hour? That’s a long way from the minimum wage. But it’s less than what each lawyer who negotiated the recent Florida tobacco settlement is scheduled to receive after a panel of arbitrators got through with the case. Private attorneys in Texas, Mississippi and Florida made out like bandits, fleecing tobacco companies, smokers and taxpayers for $8.2 billion in legal fees — billions more than the lawyers themselves had demanded! “Incomprehensible!” said former federal judge Richard Renfrew, the dissenting voice on the panel of three arbitrators. “These excessive fees will undermine public confidence … in our profession and in our civil justice system,” he added. Even lawyer John Coale, a heavyweight litigator who has been a major thorn in the side of the tobacco industry, complained that the “figures are beyond human comprehension. The work does not justify them.”

Never mind that the novel legal theory that led to these settlements stood the law of torts on its head — retroactively altering the rules to punish the sale of a legal product by a deep-pocketed and unpopular industry. By eliminating the requirement to prove that smoking caused a particular injury, and by rejecting all claims that smokers are personally responsible for the consequences of their behavior, the states and their co-conspirators in the plaintiffs’ bar effected a shakedown — no better than extortion — holding tobacco companies accountable for Medicaid expenditures allegedly related to smoking. What is noteworthy at this stage is how brazen the lawyers became once they tasted victory in the underlying case. Having forced the settlement, they went in for the spoils.

Here’s how it unfolded. In undertaking the initial Medicaid recovery suits, a handful of private attorneys entered into contingency fee contracts with state governments. In effect, members of the private bar were hired as government subcontractors. Once hired, their financial incentives were geared to the magnitude of their conquest; thus the sword of the state was brandished by outside counsel with a direct pecuniary interest in the litigation. On the one hand, the private attorneys were driven by the anticipation of a huge payoff. On the other hand, they were public servants, beholden to all citizens, including the defendant, and filled a quasi-prosecutorial role in which their overriding objective was supposedly to seek justice. Imagine a state attorney general corralling criminals on a contingency basis, or state troopers paid per speeding ticket.

 


Assuming that the attorneys worked 24 hours per day, 7 days per week, for 42 months, they would earn $92,593 per hour — that’s $7,716 per hour for each of the 12 lawyers.


States are not poor, unable to afford salaried attorneys. In Texas, for example, the attorney general’s office employs more than 600 lawyers and has an annual budget of $271 million. Nevertheless, state prosecutors doled out multi-billion-dollar contracts to private counsel — not per-hour fee agreements, which might occasionally be justified to acquire unique outside competence or experience, but contingency fees, a sure-fire catalyst for abuse of power. And what is yet worse, those contracts were awarded without competitive bidding to lawyers who often bankrolled state political campaigns.

Texas attorney general Dan Morales chose five firms to file the state’s tobacco litigation in March 1996. Four of the five firms contributed a total of nearly $150,000 to Morales from 1990 to 1995. Less than two years later, when the tobacco companies agreed to a $15.3 billion settlement, the Texas attorneys entered their claim for the 15 percent fee that they had agreed on — $2.3 billion. Initially, Morales characterized the fee as “laughable”; later he joined in seeking a federal judge’s approval of the payment.

According to Texas state senator Troy Fraser, the $2.3 billion — to lawyers who never had to try their case in court — “is enough to pay the yearly salary of 7,500 teachers or police officers for the next 10 years.” Fraser calculated that the fee to each of the five firms — assuming they worked 8 hours per day, 7 days per week, for 18 months — amounted to $105,022 per hour. But we now know that the final fee — after what should have been hard-nosed and impartial arbitration — will be not the $2.3 billion that the attorneys requested, but $3.3 billion, fully 43 percent more than requested. So much for the fairness of the arbitration process.

In Mississippi, Attorney General Mike Moore selected his number-one campaign contributor, Richard Scruggs, brother-in-law of Sen. Trent Lott (R-Miss.), to lead the Medicaid recovery suit. In 1992 Scruggs had received a $2.4 million contingency fee for a state asbestos lawsuit, after contributing over $20,000 to Moore’s reelection campaign the year before. This time around, Scruggs helped negotiate a $4 billion tobacco settlement for his state. The state’s contract called for payment of legal fees, if the state prevailed, in a reasonable amount to be determined by the court. Arbitrators have since decided that “reasonable” means $1.4 billion in fees — an astonishing 35 percent of the state’s recovery. To be sure, the industry, not the state, will be paying the lawyers; but that liability obviously affected the size of the negotiated settlement. One way or another, the cost of legal counsel will be borne by Mississippi’s taxpayers.

In Florida, judge Harold J. Cohen — arch-villain to the tobacco industry — denounced the state’s 25 percent contingency contract on the basis of which private attorneys were asking for $2.8 billion of the state’s $11.3 billion settlement. Judge Cohen observed that the fee came to over $233 million per lawyer, which “shocks the conscience of the Court.” He cited Florida case law and rules regulating the state bar, which ban enforcement of contracts if, “after a review of the facts, a lawyer of ordinary prudence would be left with a definite and firm conviction that the fee exceeds a reasonable fee for services provided.”

Cohen characterized the $2.8 billion fee sought by the attorneys as “patently ridiculous.” Assuming that the attorneys worked 24 hours per day, 7 days per week, for 42 months, they would earn $92,593 per hour — that’s $7,716 per hour for each of the 12 lawyers. Cohen concluded, “No evidentiary basis can possibly exist for fees of that nature and this Court can never enter an order justifying such hourly rates on any grounds.” Little did he guess that the arbitration panel would later toss in an extra $600 million for good measure, raising the pot to $3.4 billion. Incredibly, the arbitrators ignored Cohen’s warning, disregarded the law, abandoned common sense and, ultimately, rejected the $92,593 hourly fee as a pittance, gratuitously upping the ante to $112,000 per hour plus change.

Of course, the lawyers won’t be receiving all of their money at once. Tobacco companies negotiated an annual cap of $500 million to cover attorneys’ fees. So the higher the arbitration awards the more years it will take the industry to complete its payments. That means inflation will erode their value to some extent. Still, at $8.2 billion, there’s a lot of fluff to cover increases in the cost of living. As tobacco analyst Gary Black put it, the lawyers “got a bonanza. They hit the jackpot. None of that group is crying the blues.”

How could this outrage have happened? Government is the single entity authorized, in narrowly defined circumstances, to wield coercive power against private citizens. When that government functions as prosecutor or plaintiff in a legal proceeding in which it also dispenses punishment, adequate safeguards against state misbehavior are essential. That is why we need the protections of the Fourth, Fifth, Sixth, and Eighth Amendments; that is why we demand proof beyond reasonable doubt in criminal proceedings; and that is why in civil litigation we rely primarily upon private remedies with redress sought by, and for the benefit of, the injured party and not the state.

Quite simply, contingency fee contracts between a state and a private attorney should be illegal. We cannot in a free society condone private lawyers enforcing public law with an incentive kicker to increase the penalties. As the Supreme Court cautioned more than 60 years ago, an attorney for the state “is the representative not of an ordinary party to a controversy, but of a sovereignty whose obligation to govern impartially is as compelling as its obligation to govern at all.” With 38 states yet to settle claims by tobacco lawyers, arbitrators — or courts if necessary — should shut down this plunder by the plaintiffs’ bar.

Robert Levy is a senior fellow in constitutional studies at the Cato Institute.