SB 147: Strengthening Due Process and Accountability,

by Limiting Public Contingent Fee Arrangements

By David B. Kopel

April 19, 2000

Issue Backgrounder 2000-N.

What the bill does

SB 147 limits government use of outside lawyers on large contingent fee contracts. Under a contingent fee, a lawyer receives a large fraction of the winnings from the case. SB 147 bars contingent fee arrangements in most cases with more than $100,000 at issue, and provides that contingent fees awarded to attorneys for government work may not amount to a rate of more than $400 per hour.

Summary

* Contingent fee lawyers with government contracts are by their own words a fourth branch of government. But they are subject to none of the controls (e.g., financial disclosure, elections, etc.) applicable to the three real branches of government. These contracts usurp the proper functions of the legitimate branches of government.

* It is a huge violation of due process for any government official (including a lawyer hired by the government) to have a personal financial interest in the outcome of a case he is in charge of. Contingent fees for government lawyers are like paying a police officer contingent fees out of the traffic tickets he writes. Government workers are not supposed to be able to make themselves rich by picking targets to persecute. Contingent fees encourage predatory lawyers to use the power of government to extract huge winnings from various victimized businesses.

* The contingent fee contractors invent lawsuits, and then shop for local governments to serve as nominal plaintiffs. For example, the anti-gun contingent fee lawsuits were invented by contingent fee lawyers and lawyers for anti-gun groups, who then solicited mayors as clients.

* These abusive lawsuits are already spreading beyond tobacco and guns. Paint manufacturers have already been sued by the contingent fee government contract lawyers, and HMOs are being targeted.

I. Government contingency fees are a version of tax farming.

As tort reform scholar Walter Olson observes: Contingency fees for representing governments are a corrupting analogue to the widely deplored practices of tax farming (letting tax collectors keep a share of the revenue they take in) and of hinging traffic cops bonuses on the volume of tickets they write.

Historically, contingency fee arrangements for lawyers developed as a narrow exception, limited to cases in which the plaintiff could not afford to pay a normal hourly fee, such as a coal miner who was injured in an accident. In contrast, local governments are capable of paying ordinary attorney fees, or of hiring their own in-house attorneys.

More fundamentally, it is a violation of due process for a government employee (including a government contractor) to have a personal financial interest in persecuting someone. That is why the U.S. Supreme Court has held that it is unconstitutional for a magistrate to be paid more for issuing search warrants than for rejecting warrant applications. Similarly, the Colorado General Assembly has forbidden the use of forfeiture revenues to pay law enforcement salaries.

Yet when private lawyers enter into contingent fee arrangements with governments, the lawyers are using the power of government to turn themselves into millionaires and billionaires. If staff attorney for a government agency made himself millions of dollars by using government by extracting loot from vulnerable businesses, the attorney would be sent to prison. A private attorney, using the power of government, should not be able to perpetrate similar conduct.

II. Contingency Fees for Government Legal Work are an Invitation to Corruption.

Kansas

One of the first attorneys general to launch an anti-tobacco suit was Kansas's Carla Stovall. She farmed the work out to three law firms, two outside Kansas, and one in-state. In Kansas, she chose Entz & Chanay of Topeka--her old law firm. The firm will share in the 25% contingency fee of the 1.5 billion dollars of extortion which Kansas will receive.

Stovall claims that her former firm was the only firm in the entire state willing to take the case. (For more see, Topeka Capital-Journal: Roger Myers, Fees likely to exceed cap, Jan. 22, 2000; State will be rewarded for early entry to suit,: March 12, 2000; Jim McLean, "Battle between Stovall, critic a draw", March 13, 2000.)

New Jersey

The contingent fee government lawyers in the Garden State will collect $350 million. The state attorney general chose six firms to enjoy the contingent fee loot, and five of the six had little or no experience in tobacco litigation, or even in mass tort cases. The six firms did little of New Jersey's actual legal work, which was instead performed by a South Carolina lawyer. The six New Jersey firms had almost nothing to do with the national settlement that will lead to the new revenue for New Jersey. But they will collect $350 million dollars for themselves.

The consortium which is collecting this windfall includes five former presidents of the New Jersey chapter of the Association of Trial Lawyers of America. The consortium at first created a nonprofit foundation for charity and public  interest purposes; but the foundation's role was later quietly eliminated, if it ever existed, reports the New Jersey Law Journal. At the same time, ATLA's PAC gave almost $100,000 in campaign contributions to the legislature. Not a bad investment for a 350 million dollar return! (Tim OBrien, "A $350M Boardwalk Bonanza," New Jersey Law Journal, Sept. 27, 1999.)

Hugh Rodham

As Peter Boyer explains in an article the New Yorker:

When Hugh Rodham, a Florida lawyer who had no experience with product liability, was brought into the [tobacco contingent fee] group as a lead litigator, few supposed that it was for any reason other than that he was Hillary Clinton's brother. The move proved fruitful when, over Thanksgiving with the first family in 1996, Rodham suggested to his brother-in-law the President that the White House might want to get involved in settlement talks.

Shortly after this Thanksgiving meeting, which showed that the President's brother-in-law would could get rich from tobacco money, the President announced that he would be getting personally involved in making the tobacco companies settle, and he put his top aide Bruce Lindsey in charge of the project.

III. Contingent Fee Government Lawsuits are Invented  and Coordinated by Private Interests who then Solicit Government Officials to Serve as Nominal Plaintiffs.

A long article in The American Lawyermagazine explains how the recent wave of anti-gun lawsuits was invented by an anti-gun group, then taken up as a business enterprise by aggressive contingent fee lawyers. ("Long Shot at Gun Tort Dollars," by Douglas McCollam, June 1, 1999.)

Dennis Henigan is the lead attorney for the Center to Prevent Handgun Violence, which is the legal arm of Sarah Brady's group Handgun Control, Inc. At a breakfast meeting in Washington, Henigan convinced contingent fee attorney Wendell Gauthier to take the lead on anti-gun government lawsuits.

New Orleans lawyer Gauthier is head of the Castano Group, a consortium of sixty contingent fee firms that worked on the tobacco cases. Gauthier convinced many of these law firms to sign up for anti-gun litigation, as the sequel to the their tobacco cases.

The contingent fee lawyers then traveled the country to solicit mayors to serve as plaintiffs. New Orleans, Cincinnati, Newark, and Cleveland are among those who signed on to the Gauthier/Castano solicitations. "These [mayors] have been hoodwinked by the plaintiffs bar into thinking these suits are an easy source of revenue," charges Paul Jannuzzo, general counsel of Glock, Inc., a major handgun manufacturer. 

Although the lawsuits are premised on very dubious legal theories, and have been dismissed in many courts, Gauthier explains that in his line of work, he doesn't have to win, he only has to settle. Of course Castano would take a percentage of any money allocated to the cities under any settlement agreements.

One of the factors that can coerce settlements is that the entire gun industry, put together, would not make a single Fortune 500 company. Thus, the pretrial discovery litigation expenses from the 30 different lawsuits orchestrated by the anti-gun groups can be crippling, even if the plaintiffs never win a single case. Gauthier and his contingent fee government contract lawyers believe that there is nothing like a good discovery battle to make defendants reach for their wallets.

The October 1999 issue of Reasonmagazine fills in the details of the cynical strategy of blackmail through frivolous litigation. ("Big Guns," by Walter Olson):

whatever possessed the mayors to dream up these suits? They weren't the ones who dreamed them up. As the June American Lawyerrecounts in detail, the gun litigation got under way when a bunch of the nation's richest trial lawyers began looking for new worlds to conquer after the successful mugging of the tobacco industry. Following a December pow-wow in Chicago to get their story straight, they began flying around the country to pitch their services to mayors and city attorneys. Under the terms of contingency fee agreements with the cities, they stand to pocket as much as 30 percent of any trial winnings.

the idea is to create as much uncertainty as possible, capitalizing on the difficulty of defending against many different theories in many different places at once, all this aside from the irreducible random factor in all litigation. We "have the resources to start a war instead of taking little potshots," trial lawyer John Coale[1] told The New Yorker's Boyer. Well, we've started a war. Attorney Dennis Henigan of the Center to Prevent Handgun Violence said what he's after is to create a "credible threat of liability....The more cities that file, the greater is the threat. So what you really want is a diversity of cases in lots of different regions, lots of different courts to create the greatest threat of liability." You might call this a "spaghetti strategy": Throw a potful against the wall and see if any strands stick. You might also compare it with what the Irish Republican Army said after its Brighton hotel bombing failed to assassinate Margaret Thatcher: "We only have to be lucky once. You have to be lucky every time."

IV. More targets of government contingency fee suits.

The government of Rhode Island has already sued lead paint manufacturers.

Pushing for reform of public contingency fees, Jim Wootton, executive director of the U.S. Chamber of Commerce's Institute for Legal Reform states: "We think this is one of the biggest threats facing American industry today." The Chamber would not take such a position if the only victims were tobacco and guns.

The Wall Street Journal(Sept. 30, 1999) reports that trial lawyers are preparing a massive attack on managed care HMOs. Leaders include Pascagoula, Mississippi's Richard Scruggs, a leader of the anti-tobacco cases. Professor Jack Coffee of Columbia Law Schools states that he would not be surprised if mayors and other government officials let themselves be the proxy plaintiffs in the new HMO suits. (Barry Meier and Richard A. Oppel, Jr., "States' Big Suits Against Industry Bring Battle on Contingency Fees," New YorkTimes, Oct. 15, 1999.

The Physicians Committee for Responsible Medicine (one of the public interest groups which propagandized for the tobacco and gun lawsuits) is now urging government lawsuits against Big Meat.  ("Physicians Advise Feds to Go After Big Meat Next, U.S. Newswire," Sept. 23, 1999, reported in San Jose Mercury News.)

V. A Fourth Branch of Government?

Wendell Gauthier proudly describes himself and his fellow contingent fee government contractors as the fourth branch of government, which will override the decisions of other branches. If the legislature decides that gun laws will be one way, Gauthier and his contingent fee group will reverse that decision, though their use of litigation.

These contingent fee arrangements allow private attorneys, with executive branch officials as their fronts, to usurp the law-making authority which belongs exclusively t the legislature.

Moreover, all three legitimate branches of government are subject to public oversight, sunshine laws, the Open Records Act, and elections. None of these checks and balances control this new fourth branch of government.

In the three legitimate branches of government, full-time employees work for a salary, and are required to make disinterested decisions in the public interest. But in the fourth branch of government, private individuals can turn themselves into billionaires by picking vulnerable targets for lawsuit predation.

Conclusion

Contingent fee arrangements have become a profoundly corrupt scheme which undermines our very system of government. The problem far transcends the interests of the particular industries which are today's victims. The contingent fee lawyers are an unaccountable, unelected, secretive fourth branch of government which is usurping our legislature, and our republican form of government.

For further research: All the articles cited in this Backgrounder can be found at  www.overlawyered.com, run by prize-winning legal reform advocate Walter Olson, of the Manhattan Institute. More by Kopel on lawsuits against the firearms business.

Prepared by David B. Kopel, Research Director, Independence Institute