Blawgletter®

Golden State Supremes to Decide If Government May Pay Contingent Fee to Lawyers

Kimberly Kralowec at The UCL Practitioner has the story and links here.

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A Contrarian View of Exxon Valdez

In Bleak House (1852-53), the cost of litigation exhausted the Jarndyce estate.

In The Washington Post today, business columnist Steven Pearlstein offers a contrarian take on the capping of punitive damages as a matter of federal common law in Exxon Shipping Co. v. Baker, No. 07-219 (U.S. June 25, 2008).  (Blawgletter post here.)  In "Altering the Economics of Civil Litigation", Mr. Pearlstein opines that "the problem with court's decision in the Exxon case is not that it went too far in trying to reform the civil justice system, but that it didn't go far enough."

He explains that the Court did a good thing in Exxon Shipping but that the Justices should also rein in defense-side abuses:

[I]t ought to be equally offensive to our sense of justice that corporate defendants are routinely allowed to manipulate the judicial process with an endless stream of motions, depositions and appeals, many as frivolous as anything served up by the plaintiff's bar. For years, federal and state judges have turned a blind eye to this obvious and rampant abuse of process, which rivals anything conjured up by Charles Dickens in his famous novel, "Bleak House." Symbolically, the case of Exxon Shipping Co. v. Baker is to 21st-century jurisprudence what Dickens' Jarndyce v. Jarndyce was to the 19th century.

By limiting abusive punitive damage awards without limiting the abusive tactics of the corporate defense bar, Justice Souter and his colleagues have fundamentally altered the economics of civil litigation and slammed the courthouse door on average citizens with legitimate claims against big and negligent corporations.

To which Blawgletter says, on this Independence Day, amen.

Rhode Island Supreme Court Upholds State's Contingent Fee Contract with Private Counsel

The state attorney general won the right to hire contingent fee counsel -- but lost the case on the merits.

The Supreme Court of Rhode Island today held that the state attorney general acted properly and within his authority in hiring private counsel to help prosecute a public nuisance case on a contingent fee basis.  The court nonetheless imposed conditions:

In order to ensure that meaningful decision-making power remains in the hands of the Attorney General, if is our view that, at a bare minimum, the following limitations should be expressly set forth in any contingent fee agreement between that office and private counsel:  (1) that the Office of the Attorney General will retain complete control over the course and conduct of the case; (2) that, in a similar vein, the Office of the Attorney General retains a veto power over any decisions made by outside counsel; and (3) that a senior member of the Attorney General's staff must be personally involved in all states of the litigation.

Moreover, not only must the Attorney General have absolute control over all stages of the litigation, but he or she must also appear to the citizenry of Rhode Island and to the world at large to be exercising such control.

State of Rhode Island v. Lead Industries Ass'n, Inc., Nos. 2004-63-M.P., 2006-158-Appeal & 2007-121-Appeal, slip op. at 74-75 (R.I. July 1, 2008) (footnote omitted).

(The ruling may influence other states' courts.  The Supreme Court of California, for example, has recently granted review on the issue.  County of Santa Clara v. Atlantic Richfield Co., No. S163681 (Cal.).)

The court also concluded that the nuisance claim against lead paint manufacturers lacked merit, in part because the defendants lacked control over their product at the time it caused injury, and that the trial court erred in holding the attorney general in contempt for out-of-court statements.

See Drug and Device Law analysis here.

Milberg, Weiss to Get Punishment

A federal judge today sentenced Melvyn Weiss to 30 months in prison, Bloomberg reports.  Mr. Weiss must also pay a $250,000 fine and forfeit another $9.75 million.

The sentencing comes two months after the former name partner in Milberg Weiss Bershad Hynes & Lerach pleaded guilty to participating in a racketeering conspiracy.

Bloomberg also notes that, according to an article by Nathan Koppel in The Wall Street Journal, Mr. Weiss's former firm -- which now goes by Milberg LLP -- may soon resolve its own troubles stemming from the imbroglio.  Mr. Koppel reports that Milberg "is in advanced talks with prosecutors to settle the charges against it by admitting wrongdoing and paying a fine in the neighborhood of $75 million, according to people familiar with the talks.  If the sides can not strike a deal, Milberg, which has so far denied wrongdoing, is due to stand trial in August."

Former partners in the firm, Bill Lerach, David Bershad, and Steven Schulman, pleaded guilty earlier.

Our feed operates at the speed of light.

The Unbearable Lightness of Crude Oil Prices

OPEC spans the globe.

With the market price of West Texas Intermediate crude oil hovering just above $125 a barrel and regular gasoline prices spiking above $4.00 a gallon, your ordinary American citizen wants to know who to blame.  Count Blawgletter as one of them.

We can speculate about causes.  Does the lack of new refineries in the U.S. explain the price inflation?  If so, can't we blame environmental extremism (and federal law) for making the cost of anti-pollution measures prohibitively expensive?  Nah.  According to the Energy Information Administration, which uses government data, domestic refineries ran at 83.2 to 88.9 percent between October 2007 and March 2008.

What about Big Oil?  In the fourth quarter of 2007 and the first three months of 2008, Exxon Mobil alone raked in net income of $22.6 billion.  Do you think it earned all that strictly through hard work and clever management?  Probably not all.  Suspect no. 1.

Restrictions on drilling offshore and in places like the Arctic National Wildlife Refuge in Alaska may also have contributed to an imbalance between supply and demand.  Skeptics point out that the fat profits of oil companies give them plenty of resources to explore for new reserves.  Not to mention government subsidies.  Plus the fact that ANWR would supply U.S. needs for less than 2.25 years under the best of circumstances.  And yet that sounds like more than a drop in the barrel to us.  Suspect no. 2.

What have we missed?  Oh, yes.  OPEC.  The Organization of Petroleum Exporting Countries, which consists of 12 sovereign nations, including Hugo Chavez's Venezuela and Ayatollah Khameini's Iran.

Congress hasn't forgotten about the most famous price-fixing, quota-setting, and consumer-gouging cartel on Earth.  Earlier this month, the House of Representatives passed a bill, by a veto-proof margin (again), that would call OPEC to account for its antitrusty ways.

H.R. 6074 would amend section 1 of the Sherman Act so that it explicitly applies to restraints of trade in petroleum, natural gas, and other petroleum products.  It would condemn price and supply manipulation and the like by "any foreign state, or any instrumentality or agent of any foreign state," when it acts "collectively or in combination with any other foreign state, any instrumentality or agent of any other foreign state, or any other person, whether by cartel or any other association or form of cooperation or joint action".  The bill also would bar an "act of state doctrine" defense as well as one asserting foreign sovereign immunity.  And it authorizes the Attorney General of the U.S. to bring an action under the new provisions and requires a task force to study stuff like price-gouging and other bad conduct in the energy industry.

H.R. 6074 does not address possibly the most important issue -- the political question doctrine.  As the Fifth Circuit reminded us on May 28, in a case involving death and injury to contract employees in Iraq, that doctrine prohibits judicial action that second-guesses the conduct of the political branches -- the executive and Congress.  Lane v. Halliburton, No. 06-28074 (5th Cir. May 28, 2008) (reversing dismissal of tort claims and remanding cases for further development of record).  We expect that any action under the NOPEC statute would likely implicate all manner of policies -- including the invasion and administration of Iraq, the President's recent request that Saudi Arabia increase production, and the State Department's stances towards OPEC and its individual members.

Which signifies to us that NOPEC will go nowhere even if it does pass the Senate and gets past a veto.  It apparently doesn't allow private litigants to sue OPEC; only the Attorney General has such authority.  And even if the new President in January 2009 instructs the new Attorney General to sue under NOPEC, the political question doctrine may doom any challenge to violations that happened previous administrations.  And probably post-swearing in ones too.  What court can sort all that junk out?

Political theater.  Don't you just love it?

Actually, our feed doesn't like it that much.

No Class for Auction Rate Securities Claims?

Thom Weidlich at Bloomberg reports that "[a]t least 24 proposed class actions have been filed since mid-March against brokerages over claims investors were told the [auction rate] securities were almost as liquid as cash."  The cases stem from the collapse of auctions that supplied liquidity for ARSs in February.  Investors could no longer sell the ARSs and so couldn't get their money out.

Mr. Weidlich explains that the class actions face two serious obstacles.  The first concerns the merits.  Many ARSs paid interest at rates a tad higher than other "liquid" alternatives, such as a money market account.  But the failure of the auctions sent them into default, which in turn triggered a contractual obligation by the issuers to pay a higher rate.  An investor earning interest at the default rate may run into trouble showing that she would've gotten a better return on her money but-for her inability to get at the cash she invested in an ARS.

This damages problem likely doesn't apply to people who bought auction rate preferred securities, which don't reset to a higher return after default.  But the difference between the dividends on the ARPSs and earnings on alternative investments may not amount to much.

The second roadblock relates to the requirements for treating claims on an aggregate basis in a class action.  A court generally won't handle a case for damages on a class basis unless the lawyers can show, on a class-wide basis, that all class members suffered harm.  Note the "class-wide basis" thing.  If the nature of the class claims requires each class member to prove the fact of injury individually, class certification becomes an iffy proposition.

How does one establish class-wide harm?  In price-fixing cases, plaintiffs typically do it by showing that the price fixers elevated the price by a minimum percentage -- 10 percent, say.  Some class members may have overpaid more than the 10 percent, but everybody overpaid by at least one-tenth.

Securities cases do much the same thing.  Experts opine that the fraud inflated the market price of the relevant stock or bond by at least such and such percentage at the time of purchase; damages represent the difference between the purchase price and the "true" value of the security.

But the collapse of auctions for ARSs didn't affect their underlying value.  The issuer's ability to pay didn't change as a result of the withdrawal of liquidity from the auction market.  So how can the investors demonstrate losses?

They conceivably could cite the difference between the buying price and the lower prices on secondary markets.  But where will they get that information for each ARS?  Unlike stocks and bonds, ARSs don't trade publicly and so purchase and sale prices don't show up in the business section of newspapers.

Conceivably an expert will find a way to calculate the minimum value of the liquidity feature of ARSs.  Blawgletter shares Bloomberg's skepticism about whether such an opinion will survive defendants' savage attacks on it, but we will wait and see.

That leaves damages resulting from an investor's inability to access his funds to use for a specific purpose.  He can't make his payroll, for instance.  Or he has to break a contract to buy a company, a piece of land, or other investment.  But such losses of profits don't happen to everyone in a class and would require proof unique to each claimant.  And brokerages that sold ARSs to such people have in some cases loaned them funds to mitigate their harm.  Those sorts of individual circumstances often mean no class action.

ARS investors still may pursue individual claims.  The best candidates are those who couldn't get their money out in time to close a pending acquisition and lost a tidy sum as a result.

There will be blood.

Sixth Circuit Takes Scalpel to Securities Case Involving Illegal Gratuity to Politician

Bribery doesn't necessarily add up to securities fraud.

What happens to a company that pays $420,000 in unlawful consulting fees to a state senator whose legislative committees oversees the company's activities?  Good government?

What about when the truth outs?  Can you say plunge in price per share?

A 42-month series of $10,000 payments to a Tennessee lawmaker lay at the heart of a putative class action against a healthcare company for securities fraud.  The complaint alleged that the bribery resulted in scandal, which produced regulatory action, which gave Wall Street heartburn, which generated a big drop in the market value of United American Healthcare's stock. Zaluski v. United American Healthcare Corp., No. 07-1298 (6th Cir. May 27, 2008).

The concatenation of events gives a clue as to why the district court dismissed and the Sixth Circuit affirmed:  bribery generally doesn't violate section 10(b) of the Securities Exchange Act.  And, because it doesn't, you wouldn't expect a public company to make representations about whether or not greasing the palm of an overseeing solon has gone on.

The Sixth Circuit did a nice job of dissecting the complaint.  Reminding Blawgletter of a grand old common law case -- in which one of the 19th-century English judges pronounced a statement "a mere puff" -- the court deemed a happy assurance (that the state counted the company among "viable" managed care organizations) to constitute "immaterial puffery".

But the guts of the decision emphasized the indirectness of the connection between paying bribes and a plummeting share price.  The jump off a cliff doesn't kill you, the court reasoned; the sudden stop at the bottom does.  Quod erat demonstrandum.

Q.E.D.

ALI Tables Vote on Aggregate Settlement Rules

Will the ALI opt for baby steps on new aggregate settlement principles?

Remember that 1L who talked in class all the time?  The one whose hand shot up even if the prof hadn't asked a question?  The gunner who made you wish Socrates kept his method to himself?

Every law school section had an individual like that.  If you ever wondered where they all went, speculate no more.  They joined the American Law Institute.  And they have gathered at The Mayflower -- the sometime home-away-from-home of a Blawgletter law classmate, Eliot Spitzer, and until Wednesday the temporary headquarters of law geekdom.

(Note the they.)

The session yesterday devoted several hours to chapters 1 and 3 in Principles of the Law of Aggregate Litigation, Tentative Draft No. 1 (Apr. 7, 2008).   Members aimed comments, criticisms, and a few barbs at the Reporter and Associate Reporters, who handled them in good cheer.  The discussion produced several revisions and clarifications.  It also resulted -- with a big exception -- in consensus approval of both chapters.

The sections dealing with aggregate settlements -- 3.17, 3.18, and 3.19 -- failed to gain general acceptance.  At the suggestion of ALI's Director, Lance Liebman, they didn't go up for a vote.  The reporters will instead revisit the provisions and present them again at the next annual meeting in 2009.

Sections 3.17-3.19 would make a major change to what people call the "aggregate settlement rule".  The ASR in general invalidates an agreement by multiple clients to abide by a majority vote on accepting an aggregate settlement.  Section 3.17(b)-(d) would reverse the ASR, allowing enforcement of such agreements if the joint clients knowingly consent, in writing, to an approval mechanism by a "substantial majority" of the clients.

The consensus broke down over concern that the new rule would cede undue authority to mass tort lawyers.  Some commenters suggested support for the rule in the context of business litigants but worried that many personal injury claimants lack enough information and sophistication to give effective consent at the time of hiring counsel.  A third group supported the rule as an improvement over the ASR, which now impels plaintiffs' lawyers to abandon representation of clients who refuse to take their share of an aggregate settlement (think fen-phen and Vioxx as examples).

We can't predict how the reporters will navigate the fault lines within the ALI, but two options look possible if not likely:  First, they will build even more client protections into Sections 3.17-3.19 and, second, they will scale back their ambitions -- for now -- and deal only with classes of clients that satisfy a test for sophistication. 

The latter strikes us as a prudent incremental step towards a better regime for handling settlements in aggregate litigation.  If experience proves it good, the ALI and courts may extend it to other situations.

Our feed likes baby steps.

Aggregate Settlements

Blawgletter wrote this comment to the American Law Institute last week:

Congratulations on your excellent progress towards making Principles of the Law of Aggregate Litigation a reality.  I appreciate and commend your dedication to such a challenging project.

So I ask your indulgence for my suggestion of what I see as an improvement to a draft that I otherwise embrace.  My suggestion relates to section 3.17, which as you know prescribes the "circumstances required for aggregate settlements to be binding".  Subsection (a) says that lawyers may settle non-class claims "on an aggregate basis provided that each claimant gives informed consent, in writing."  So far so good, I think. 

But the accompanying Comment should, and yet does not, address the situation -- familiar to me -- in which clients agree in advance to (a) pay a specific contingent fee and (b) split any aggregate recovery according to a mechanical formula. 

Section 3.17 contemplates an entirely different set of circumstances -- where the prospect of an aggregate settlement gives the plaintiffs' lawyers a powerful incentive to accept the settlement regardless of its impact on individual clients and the value of their unique claims. 

The section makes me think of fen-phen, breast implants, Vioxx, and other mass action cases involving personal injury.  In those cases, clients generally lack sophistication and have claims that may vary widely in value.  Plus they engage counsel without reference to clients that the lawyer already represents and those the lawyer may agree to represent in the future. 

Commercial litigants, by contrast, can assess the value of their claims relative to others' at the outset and intelligently agree to split any proceeds of a lawsuit according to a formula.  In a price-fixing case, for example, clients enter into an agreement that sets each client's share of any recovery in terms of a percentage.  The agreement may, and probably should, specify a voting mechanism for deciding whether or not to accept an aggregate settlement.  The only question at that point concerns the adequacy of the total settlement -- not how the clients will divide the proceeds. 

Forcing commercial clients onto the Procrusetean bed of section 3.17 would not further the ALI's aim of protecting clients from their lawyers' indifference to individual circumstances once defendants offer enough aggregate money to buy the lawyers off.  Clients should have the option of entering into an effective agreement (usually pre-litigation) for a formulaic division of aggregate proceeds, if any.  That will facilitate their retention of counsel. 

I therefore suggest adding to the Comment the following language: 

For purposes of this section, clients may give "informed consent, in writing" to a methodology for dividing the benefits of any aggregate settlement when they hire counsel.  This section therefore does not prevent clients from agreeing, at the time of retaining counsel, to divide any aggregate recovery on the basis of a formula, such as a percentage for each client.

The ALI annual meeting starts today.

Law v. Fact: A Tale of Three Cases

The ebb and flow of law fascinates Blawgletter.  Every week brings new surprises. 

We hold special fondness for the hard and messy work of presiding over trials.  We admire even more the jurors who recreate democracy with each verdict they render.

And yet every day we see court of appeals decisions that uphold shortcuts and hindrances.  Sometimes -- often -- we marvel at the rarity of opinions that consider the justness of trial outcomes.  The courts so frequently dwell on preliminary and procedural matters that we wonder how cases get to trial at all.

The three decisions we feature today all concern pretrial matters.  We don't mean that as criticism.  We instead intend to illustrate what a fetish we now make of exactitude in the service of a legalistic and bloodless conception of civil justice.

Our first example comes from the Ninth Circuit.  In Delaware Valley Surgical Supply Inc. v. Johnson & Johnson, No. 08-55105 (9th Cir. Apr. 30, 2008), the court considered the question of who qualifies as a "direct purchaser" of products under Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).  Illinois Brick limited the class of people who may sue for price fixing under federal antitrust law to those who purchased directly from a member of the price-fixing conspiracy.  A plaintiff in Delaware Valley sought an exception to the Illinois Brick rule, arguing that their privity of contract with the manufacturer, Johnson & Johnson, conferred direct purchaser status on them.  The district court and the Ninth Circuit disagreed.  The plaintiff's contract with J&J did assure the customer certain advantages, but still the plaintiff bought the J&J products from an independent distributor.  The court thus affirmed dismissal for lack of standing.

Our second example from this week concerns defining the "relevant geographic market" for purposes of another variety of antitrust claim -- the "tying" of one product to another.  The plaintiffs alleged that 20 cemetery operators and the Michigan Cemetery Association unlawfully tied the purchase of burial plots -- the "tying" product -- to the buying of monuments and memorials -- the "tied" product.  On a motion to dismiss, the district court concluded that the complaint too narrowly defined the geographic market as consisting of grave sites in particular cemeteries.  Affirming, the Sixth Circuit held that the complaint failed to exclude the possiblity that the market for burial plots extended beyond the cemeteries in question and instead included all locations that competed for customers seeking a place of interment.  Michigan Division - Monument Builders of N. Am. v. Michigan Cemetery Ass'n, No. 06-2524 (6th Cir. May 1, 2008).

The third and final case deals with conflicting jurisdiction over the subject matter of a class action.  The district court in Negrete v. Allianz Life Ins. Co. of N. Am., No. 07-55505 (9th Cir. Apr. 29, 2008), signed an order that prohibited the defendant from settling claims at issue in the case without permission of class counsel and the court.  The Ninth Circuit held the ruling to constitute an injunction and concluded that it contravened the federal All Writs Act and the Anti-Injunction Act.  The outcome might have differed, the court noted, if the defendant seemed close to striking a low-ball settlement with another plaintiff or group of plaintiffs.

Our triumvirate of cases doesn't allow us to reach any firm hypothesis about why lawsuits so seldom go to trial anymore.  And yet each fits with the notion that perfection, or near-perfection, has become the do-or-die criterion for judging the trial-worthiness of serious claims.  Would juries have decided Delaware Valley and Michigan Division differently?  Does the outcome of Negrete advance the cause of seeking an efficient and just result?

Without questioning the correctness of the rulings, we must say no to both questions.  We'll say more about why another time.  But, for now, let's just affirm our belief in erring on the side of more decisions on the merits -- by the trier of fact.

If our feed had a hammer, it would hammer in the morning, it would hammer in the evening, all over this land.