The Seattle Times
October 05, 1997
LAWYERS COULD GET BILLIONS IN TOBACCO DEAL --
ATTORNEYS ASSUMED HUGE RISK IN TAKING SUITS;
AGREEMENTS GIVE THEM FROM 3 TO 30 PERCENT
BYLINE: JAMES V. GRIMALDI; SEATTLE TIMES WASHINGTON BUREAU
- WASHINGTON - Private lawyers representing 40
states in their suits against the tobacco industry stand to get more than
$ 14.7 billion over 25 years if the national settlement between the states
and cigarette makers is approved by Congress and the White House, a
Seattle Times analysis shows. The record-smashing fee is
potentially so large that it could threaten the passage of the $ 368.5
billion settlement with the tobacco industry and arouse the skepticism of
a wide range of observers regardless of their views on the lawsuits
against cigarette makers.
- "I don't think billions of dollars are going to sit well with the American
people," said David Kessler, the former Food and Drug Administration commissioner
and a tobacco-industry critic. "It certainly doesn't sit well with me."
- Knowing how controversial the fees could become, the attorneys general
have sidestepped the issue of legal fees since announcing their deal in
June, while some of their private lawyers have attempted to neutralize
the issue by saying they don't expect to earn the gargantuan fees promised.
- "We'd go to the tobacco industry and say, Here's what we want,' " said
Steve Berman of Hagens & Berman, a Seattle firm that could share a
large part of $ 2.6 billion in fees from 12 states - including $ 120 million
from Washington - according to a review of his contracts.
- "Other than that, we don't have any plan at this point," Berman said.
"I know the skeptics have trouble believing this, but we really spent ourselves
putting this together and have not thought about the fee thing."
- While many declare nonchalance, a handful of the law firms have quietly
hired lobbyists specifically to win the necessary approval from Congress
and the White House, where many of these attorneys carry noteworthy clout
as campaign donors.
- The 89 law firms hired by the states have contributed $ 3.8 million
to federal candidates in the past two years, according to Federal Election
- The attorneys general have said that the fees will be paid by the tobacco
industry later, after the settlement is approved.
- "The agreement is that they (law firms) are free to go by the contingency-fee
agreements if they want to," said Mississippi Attorney General Michael
Moore, who anchored the negotiations for the national settlement. "But
our preference is that we do this three-judge panel" to review what the
lawyers got done and decide what they deserve.
- But questions remain unanswered about how such a panel could be created,
what its legal authority would be in the 40 state courts where the suits
were filed and whether most of the law firms would even agree to throw
out their contracts.
- The tobacco industry's lead attorney, J. Phil Carlton, was cryptic when
asked about the fees: "We don't have anything to do with that. Our position
is we'll pay what we've promised to pay, and we're not getting into the
plaintiff's attorney fight."
- Indeed, the only tangible evidence of what the private attorneys are
legally entitled to demand for their work are the binding contracts with
the attorneys general.
Firms took enormous risk
- Under Freedom of Information laws, The Seattle Times obtained
the contracts from the states that have signed with outside law firms.
Most are basic contingency-fee arrangements in which the firms earn a percentage
of the states' recovery - from as little as 3 percent to one-third of the
settlement amount. Others are more complicated schemes based on how long
the legal battles continue; some specify limits on fees of as little as
- The Times determined the potential $ 14.7 billion legal fees
by calculating the figure for each state, in many cases multiplying the
contingency percentage specified in the contract by the projected settlement
amount for the states. Those state-by-state settlement figures were determined
under formulas devised and made public by attorneys general last month.
- For now, only $ 193.5 billion of the $ 368.5 billion national settlement
has been divvied up by the states, said Attorney General Jeff Modisett
of Indiana, who figured the payouts.
- The national settlement actually provides for payment in perpetuity,
but the attorneys general have estimated that over 25 years the payments
would equal the $ 368.5 billion. The Times used that 25-year period to
calculate the legal fees.
- More settlement money will eventually come back to the states, but those
amounts have not been calculated. When the states receive those funds,
The Times' estimate of legal fees could actually grow.
- Four states - Mississippi, Louisiana, Michigan and New Mexico - provided
absolutely no way to calculate a fee other than promising to pay "reasonable
fees" customarily charged for complex litigation. Traditionally, that means
a quarter to one-third of the recovery.
- Under those fees that can be calculated, attorneys representing Florida
would receive the biggest compensation - $ 2.4 billion - followed by $
1.8 billion for Massachusetts' attorneys, $ 1.6 billion for New Jersey's
counsel, $ 1.5 billion for Texas' lawyers and $ 1 billion each in legal
fees for Minnesota's and Maryland's lawyers.
- Attorneys representing these states would reap the highest fees because
their states filed the first lawsuits, at a time when the risk in taking
on such a speculative legal fight was considered enormous.
- Minnesota, Florida, Massachusetts, Maryland, Connecticut, New Jersey
and Utah have agreed to pay attorneys 25 percent of the settlement amount,
while Arizona, Texas, Oklahoma, Kansas, Hawaii and Illinois have agreed
to pay between 10 and 20 percent.
- Most states selected home-state attorneys and one of four national firms
coordinating a strategy among all states. The firms have a fee-sharing
agreement that they have not made public.
- The four national firms - based in Seattle, Mississippi and South Carolina
- stand to reap the most if the national agreement passes Congress. Together,
these firms represent two dozen of the states and could reap the lion's
share of $ 10 billion in fees from those states.
Congress may drive fees up
- Congress, which has expressed some criticism of potential steep fees,
might inadvertently cause fees to increase dramatically. Here's why:
- Nine states negotiated deals that provide for the fees to increase over
time until there is an out-of-court settlement or a court judgment. That
means that Congress' careful examination of the 68-page national agreement
could actually cause the fees to rise; President Clinton's extended review
and ultimate call to strengthen the agreement has set the stage for a debate
expected to extend into next year.
- If it does, prospective fees will rise by $ 1 billion when contract
provisions trigger increases at the first of the year in six states' contracts.
- Attorneys defend any increase in fees over time, saying that they still
must work furiously to prepare for trial in case the deal falls through.
And trial dates are approaching: Texas' trial is set for this month, Minnesota's
in January and Washington state's next September.
Fee issue coming to a head
- The question about attorney's fees had been simmering in Congress for
three months, since the settlement was announced in June, then reached
a boil in mid-September. By one vote, the Senate passed an amendment by
Sen. Jeff Sessions, R-Ala., limiting the fees to a total of $ 250 an hour
with a cap of $ 5 million.
- Sessions' victory was short. Moments later, another amendment exempted
every state that has a contract with outside attorneys.
- Washington Attorney General Christine Gregoire, who has emerged as the
No. 2 negotiator for the national agreement, was in the White House when
she learned of the close call. A phone call to Sen. Slade Gorton, R-Wash.,
helped win the exemption - even though Gorton had cast the swing vote to
pass Sessions' initial amendment.
- Either way, the vote on Sessions' amendment marked a warning shot that
the attorneys general consider a major threat to their litigation. Said
Sessions: "I assure you we won't legislate on this unless we deal with
the legal fees. There is a strong sentiment that there is a real windfall
- Last week, House Speaker Newt Gingrich, R-Ga., told reporters after
meeting at the White House to discuss the settlement that he had asked
the president to sign a bill that would establish a cap on legal fees.
- "The way the settlement is now proposed, there are attorneys who will
not become instant millionaires. . . . Some of them will become billionaires,"
Gingrich said. "And that's not a justified fee.
- "That (money) could be spent on health in general and on children's
health in particular rather than enriching a small group of trial lawyers."
- Gregoire said the growing controversy must be quelled.
- "We have to answer Congress' questions about attorneys' fees," Gregoire
said. "We can't answer the questions right now."
- It might be quite a difficult task if Florida is any example.
- Some private law firms representing Florida are now fighting over their
fees in court following the state's settlement with tobacco companies this
summer - a settlement that would be overridden if a national settlement
wins approval. At least three firms are demanding the 25 percent promised
in their contingency-fee agreements and have placed liens on the state's
- With billions of dollars at stake and the potential of a nasty cat fight
over fees, many critics think what the attorneys will earn should be clarified
now while the settlement is being debated.
- "The history of class actions shows that when something has gone wrong
and you see a suspiciously weak settlement you also see a suspiciously
fat fee for the attorneys," said Columbia University Law Professor John
Coffee, an expert on legal fees.
- Coffee is worried that the fee issue will be dodged while Congress is
under pressure from the attorneys general - and their outside counsel -
to approve the deal: "Attorneys will be awarded a fee based upon their
success in lobbying Congress to approve a settlement."
Gregoire kept a lid on fees
- For the law firms, the stakes are enormous.
- So significant were the risks that when Berman took on Washington state's
case, he asked for unanimous support from his firm.
- "I called all the partners in and I said this is a case that has the
potential to bankrupt this law firm," Berman said.
- Under most contingency-fee schemes, firms must advance most of the costs
of the litigation, including document production, depositions, copying,
travel and securing expert witnesses. The incentive is a judgment or a
favorable settlement and a percentage of the recovery.
- In this case, the risk was considered almost incalculable.
- Still, Washington's Gregoire worried about the implications of a potential
windfall. She insisted that a lid be kept on the fees and became the only
attorney general to negotiate an early contract with tight limits.
- Washington agreed to pay Berman's firm and Seattle attorney Paul Luvera
15 percent of the first $ 100 million recovered and a mere 3 percent of
any award above that. The next eight states to sign contracts with law
firms over the next six months agreed to pay between 10 percent and 25
- With the state figuring to get $ 3.6 billion from the settlement, Gregoire's
deal has worked out to be one of the best, especially considering that
Washington's was the ninth lawsuit filed, said John Strait, a Seattle University
law professor who analyzed the states' contracts for The Seattle Times.
- "What I don't understand is why the other attorneys general didn't do
something similar," Strait said. "We're not talking about groundbreaking
techniques in negotiations. It's just odd that so many went with vague
definitions and large fee amounts."
- When news leaked about negotiations between the attorneys general and
the tobacco industry, states generally signed contracts with more restrictions,
limits and caps on fees. On the other hand, if it takes longer than anticipated
to win approval for the settlement, some of the contracts allow the fees
- But even the later contracts varied widely.
- Berman won a contract in May with South Carolina that today would bring
25 percent of the state's payout from the settlement, or at least $ 500
million. A few weeks later, he signed a contract with Vermont that capped
his fees under a national agreement at $ 200,000.
- And, Berman said, he took a lot of heat from his colleagues for accepting
lower fee contracts: "They think my willingness to be creative, be flexible
and be fair hurts their ability to get a higher fee."
Pessimism pushes up fees
- Most plaintiffs enter legal-fee negotiations primarily worried about
what might happen in the worst case, such as a major loss with staggering
court costs, said Geoffrey Miller, a New York University law professor.
And the states' contracts go to some length to ensure the law firms have
the means to go up against the well-funded and well-represented tobacco
- "Everybody worries about what happens if something works out badly,
but they rarely look out for the chance that things might work out very,
very well, beyond their wildest dreams," Miller said.
- Nevertheless, University of Texas Law Professor Charles Silver argues
that the contracts amount to the market rate for agreeing to foot the costs
with remote chances of success against an industry that has never been
forced to make a payment in a liability case.
- Trashing the contracts, Silver said, would set a terrible precedent.
- "You could risk tens of millions of dollars over the high likelihood
of coming back with nothing," Silver said. "You have to have an astronomical
payoff to justify that kind of risk."
4 states used own attorneys
- With much of the spade work done by other states, four attorneys general
hired no outside counsel at all. California, Colorado, New Hampshire and
Missouri are fighting their lawsuits with in-house attorneys.
- But California has done it with the backing of the California Assembly,
which reversed a law limiting liability of the tobacco industry and then
appropriated an additional $ 14 million to hire 132 staffers, including
32 lawyers to fight this case.
- Using the state's own attorneys has permitted California Attorney General
Dan Lungren to claim high ground and dismiss suggestions that the lawsuits
were motivated by the plaintiff's bar.
- "The fact that we are not using outside counsel lends a lot more credibility
to the legitimacy of these claims," said Tracy Buck Walsh, special assistant
attorney general, who is managing California's case.
- Colorado Attorney General Gale Norton, who also had the political backing
of the governor, had another motive: She said she is philosophically opposed
to her state using contingency-fee attorneys because these outside counsel
are motivated by more than the pursuit of justice.
- "We tend to be more objective than private counsel who are employed
on a contingency basis and who maintain their own personal financial interest
in the outcome of the litigation," said Norton, a Republican. "It gives
them different motives."
- The state of West Virginia's one-page contingency-fee contract agreeing
to pay one-third of the recovery, by far the largest contemplated by any
state, was thrown out of court as unconstitutional.
- In arguing against the contract, tobacco-industry attorneys suggested
that it was unethical because it compromised the independence and impartiality
of the quasi-judicial role vested in state prosecutors.
- "The litigation team is wielding the coercive, regulatory and punitive
powers of the state," tobacco attorney Robert King argued. Such a contract
"permits the power of the state to be exercised by attorneys with a direct
financial stake in the exercise of that power."
- But such contingency-fee arrangements with states meet most ethical
standards, and, though rare, they are often the only way to fight complicated,
massive and costly cases, most legal ethicists agree.
- "It is good for the state because they are very aggressive," said the
Rev. Robert Drinan, a Georgetown University law professor.
- I'm proud of what I've done'
- One alternative to contingency fees is paying outside attorneys on
an hourly basis - if a firm can be found to take the case under such terms.
- Preston Gates & Ellis of Seattle worked for the state of Alaska
in its lawsuit after the Exxon Valdez tanker crashed onto a reef in 1989
and spilled 11 million gallons of crude oil.
- The state and federal government won a $ 900 million settlement. Cost
of legal fees: $ 32 million - less than 3 percent of the recovery.
- By comparison, in another Exxon Valdez case, private class-action plaintiffs'
attorneys won a judgment of $ 5 billion for their clients and are to get
a 20 percent fee of $ 1 billion, a record. Exxon is still appealing.
- For the state of Alaska, said Assistant Attorney General Craig Tillery,
"It was fairly cost-effective litigation." Outside counsel could not have
been hired, though, without political backing. After a catastrophe such
as the Valdez, that was virtually assured.
- "The Legislature very quickly appropriated a substantial amount of money,"
Tillery said. "That allowed us to get aggressive and get into the case
- Such backing was not available for many attorneys general in the tobacco
case - especially in Mississippi, where Attorney General Moore was mocked
when he first filed suit in 1994. But Moore did one other thing to avoid
public criticism - he decided not to put his contingency agreement in writing.
- "I didn't want the focus to be - as I knew it would be, as it is now
- on attorneys' fees and have people say there must be something wrong
because lawyers are going to make all this money," Moore said.
- Mississippi attorney Don Barrett was one of the first attorneys involved
and now represents six states. He said he resents some of the criticism
after fighting liability cases against the tobacco industry for more than
- "I have devoted half of my time to cigarette litigation, spent almost
$ 800,000 of my own money and never been paid a nickel. Now we beat 'em,
we defeated the cigarette industry and caused the greatest public-health
advances in the history of this country, and all you read in the press
is how rich the lawyers are going to get," Barrett said.
- "Tell my wife how rich we've gotten in the last 12 years," he said.
We took a huge risk. It is easy because everybody hates lawyers. It is
wearing on me. I'm proud of what I've done. I think the Lord will honor
it. I think what we've done is the right thing. I think I had the right
- Under the contracts, Barrett would be owed more than $ 1.6 billion.
But Barrett said the fees should be set by an outside judicial panel.
- "We have been wildly successful because of our efforts, killing
ourselves for years, and we beat 'em and we're entitled to be paid."
- If the national tobacco settlement is approved by Congress and
President Clinton, private attorneys representing the states could collect
$ 14.7 billion in legal fees, according to a Seattle Times
This is a page in the section entitled Lawyers
Make Billions at Expense of Sick and Dying Smokers in the Web site
entitled Legal Reform Through Transforming the
Discipline of Law into a Science.