Copyright 1999 American Lawyer Newspapers Group, Inc.
February 15, 1999
SPOILS OF THE TOBACCO SHAKEDOWN; CONTINGENT FEE CONTRACTS
BETWEEN STATE AND PRIVATE ATTORNEYS SHOULD BE ILLEGAL
Robert A. Levy
- How would you like to work for $ 7,716 an hour? That's a
long way from minimum wage. But it's less than what each lawyer who
negotiated the recent tobacco settlement on behalf of the
state of Florida may receive.
- The private attorneys who represented Florida, Texas and
Mississippi in litigation against the tobacco industry
have made out like bandits, fleecing tobacco companies,
smokers and taxpayers. In December, arbitration panels awarded the lawyers
$ 8.2 billion in legal fees.
- "Incomprehensible!" said former federal Judge
Charles Renfrew, who was appointed to all three panels by the tobacco
industry and dissented from the awards. These excessive fees will
undermine public confidence . . . in our profession and in our civil
justice system," he added.
- Even Washington, D.C., lawyer John Coale, a heavyweight
litigator and major adversary of the tobacco industry, complained that the
"figures are beyond human comprehension," explaining, "the
work does not justify them."
- The feeding frenzy is just beginning. The November 1998
settlement between the states and the tobacco industry provides for
attorney fee arbitration state by state. Besides Florida,
Texas and Mississippi, in 38 other states private lawyers have yet to
settle their fee claims. If the windfalls awarded so far
are any indication, it's time to rethink the wisdom of hiring
contingent-fee lawyers to enforce public laws.
- A Windfall
- These outrageous fee awards resulted from the states' efforts
to obtain reimbursement for Medicaid expenses allegedly incurred in
treating ailing smokers. With their co-conspirators in the plaintiffs bar,
the states forced settlement by retroactively altering tort principles to
punish the sale of a legal product by an unpopular industry with deep
pockets. The states ignored traditional causation requirements and
rejected arguments that smokers are personally responsible for the
consequences of their behavior. What is noteworthy is just how brazen the
private lawyers became once they tasted victory in the underlying
litigation. Having shaken down the industry, they swooped in for the
- Here's how it unfolded. In undertaking the initial Medicaid
recovery suits, a handful of private attorneys entered into contingent-fee
contracts with state governments. In effect, members of the private bar
were hired as government subcontractors. On the one hand, the private
attorneys were driven by the anticipation of a huge payoff; on the other,
they were public servants, beholden to all citizens - including the
tobacco defendants - and had a quasi-prosecutorial role in which their
overriding objective was supposedly to seek justice. Imagine a state
attorney general corralling criminals on a contingent-fee basis or state
troopers paid per speeding ticket.
- Unlike many individual plaintiffs who can afford lawyers only
on a contingent-fee basis, states can afford full-time 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 not hourly fee
agreements, which might be justified to acquire unique outside competence
or experience, but multibillion dollar contingent-fee contracts. Even
worse, those contracts were awarded without competitive bidding to lawyers
who often bankrolled state political campaigns.
- In March 1996, Dan Morales, then Texas attorney general, chose
five firms to file the state's tobacco litigation. Four of these firms
together had contributed nearly $ 150,000 in campaign contributions to
Morales from 1990 to 1995. After the tobacco companies initially agreed to
a $ 15.3 billion settlement in January 1998, the private attorneys
submitted a claim for $ 2.3 billion, 15 percent of the state's recovery.
At first, Morales characterized the fee request as "laughable."
Later, he joined in seeking a federal court's approval of the payment.
- According to Texas state Sen. Troy Fraser, the $ 2.3 billion
award - 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 each of the five firms
- assuming eight hours of work per day, seven days per week, for 18 months
- would receive $ 105,022 per hour.
- Incredibly, this windfall was sweetened further by the
arbitration panel, which increased the award for the Texas private
attorneys to $ 3.3 billion, 43 percent more than the attorneys originally
requested. Rather than award fees that fairly reflected the lawyers' work
and expertise, the arbitrators used a complex set of calculations that
resulted in a treasure trove for the attorneys. So much for the fairness
of the arbitration process.
- In Mississippi, Attorney General Michael Moore selected his
leading campaign contributor, Richard Scruggs, brother-in-law of Sen.
Trent Lott, to lead the Medicaid recovery suit. Scruggs had received a $
2.4 million contingent fee for a state asbestos suit in 1992, after
contributing more than $ 20,000 to Moore's re-election 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
"reasonable" legal fees if the state prevailed.
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 pay the
lawyers, but that attorney fee liability obviously
affected the size of the negotiated settlement. One way or another, the
cost of the state's private counsel will be borne by Mississippi's
- In Florida, the private lawyers originally requested $ 2.8
billion of the state's $ 11.3 billion settlement, based on their 25
percent contingent-fee contract. That sum even "shock[ed] the
conscience" of state Judge Harold Cohen - a tobacco industry nemesis
- who noted that the fee came to more than $ 233 million per lawyer. He
cited Florida case law and state bar rules, which ban enforcement of
contracts if "a lawyer of ordinary prudence would be left with a
definite and firm conviction that the fee exceeds a reasonable fee for
- In a November 1997 ruling, Cohen characterized the $ 2.8
billion request as "patently ridiculous." Assuming that the 12
attorneys who represented Florida worked 24 hours per day, seven days per
week, for 42 months, each lawyer would receive $ 7,716 per hour. 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." Incredibly, the arbitrators ignored Cohen's
warning, disregarded the law, abandoned common sense and upped the
lawyers' award by $ 600 million for a total windfall of $ 3.4 billion.
- The Great Tobacco Robbery
Of course, the states' private lawyers won't receive all their
money at once. Tobacco companies negotiated an annual cap of $ 500 million
to cover attorneys' fees. The greater the arbitration awards, the longer
it will take the industry to complete its payments. That means inflation
will partially erode their value. Still, with $ 8.2 billion, there's a lot
of spare change 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 is a 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 we rely primarily on private remedies sought
by injured parties - and not by the state - in civil litigation.
- Quite simply, contingent-fee contracts between a state and a
private attorney should be illegal. In a free society, we cannot condone
private lawyers using the sword of the state to enforce public law - with
an incentive to increase the penalties. As the U.S. Supreme Court
cautioned more than 60 years ago in Berger v. United States, 295 U.S. 78
(1935), 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
- Remember, the $ 8.2 billion giveaway to the lawyers in
Florida, Texas and Mississippi is only the beginning. Thirty-eight states
have yet to settle fee claims from their private tobacco attorneys.
- Some of the same lawyers who orchestrated the great tobacco
robbery already have identified their next contingent-fee gold mine:
helping New Orleans, Chicago and other cities sue gun manufacturers. In
response, the National Rifle Association has mobilized to lobby
legislators in at least six states to bar cities from entering into these
- Before the lawyers for the other states cash in - and before
another industry is fleeced - arbitrators, legislators and courts should
shut down this plunder by the plaintiffs bar.
- Robert A. Levy is a senior fellow in constitutional studies at
the Cato Institute. This article is distributed by the American Lawyer
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Make Billions at Expense of Sick and Dying Smokers in the Web site
entitled Legal Reform Through Transforming the
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