Crony Capitalism in America 2008-2012: Legal Predators

Posted: Feb 16, 2014 12:01 AM
Crony Capitalism in America 2008-2012: Legal Predators

Just as the military is supposed to protect us from invasion and the police from criminals, lawyers are supposed to protect us from predatory misuse of civil or criminal law or from legal injustice. Because of their quasi-official role, they have historically regarded themselves rather like doctors, members of a “helping” profession bound to a demanding code of ethics.

Until 1977, lawyers could not legally advertise. They could set themselves up as partnerships but not corporations. If a lawyer built up a huge firm from scratch, he was not able to sell his interest or otherwise profit from it after retirement. The law was supposed to be a calling, not a business.

There are still vestiges of the old legal ethics, but much of it is gone. Most lawyers now regard law as a business. If so it is not your run-of-the-mill business. When it is profit maximizing, it is often feeding parasitically off other successful businesses. In addition to the traditional services—drawing up wills, contracts, court defense—some lawyers are now engaged in what might be described as legal “shakedowns,” or in providing “protection” services against such “shakedowns.” Moreover, there are so many laws now, and they are often so vague or unintelligible, that almost anyone might need “protection”— if not against predatory lawyers, then against ambitious “on-the-make” public prosecutors.

If lawyers become predators themselves in addition to protectors, that puts all of us at risk. If predatory lawyers form alliances with public officials, that is even more dangerous. If in some instances courts collude with them, that destroys the very fabric of a society. Examples follow.

1. Asbestos

Some of the most useful work on what he calls Trial Lawyers, Inc. has been done by James R. Copland of the Manhattan Institute. Copland writes about asbestos:

Much of modern asbestos litigation has involved the filing of lawsuits by individuals who aren’t sick [from exposure to the product] against companies that never made the product. . . . As recently noted by Chief Judge Dennis Jacobs of the Second Circuit US Court of Appeals, judges in asbestos litigation have all too often processed massive caseloads “without regard to whether the claims themselves are based on fraud, corrupt experts, [and] perjury.” . . . A Pennsylvania judge was convicted of soliciting bribes from attorneys with asbestos dockets before him.358

Famed asbestos attorney Dickie Scruggs of Mississippi was jailed for attempting to bribe a judge, although not in an asbestos case. The case in question involved a claim by another law firm for $26.5 million of fees from successful suits of insurers after Hurricane Katrina. Scruggs, also a veteran of tobacco and other liability cases, allegedly the richest man in Mississippi, celebrated for his airplanes, yachts, and lavish lifestyle, brother-in-law of a US senator, offered a state judge $40,000 to rule for him.

2. Healthcare

The Manhattan Institute says about healthcare litigation:

The insurance firm Tillinghast Towers-Perrin places[s] the total direct cost of medical- malpractice litigation at $30.4 billion annually—an expense that has grown almost twice as fast as overall tort litigation and over four times as fast a healthcare inflation 1975–[2008]. . . .359 A . . . Harvard Medical Practice Group study . . . found that the vast majority of medicalmalpractice suits did not involve actual medical injury—and that most cases in which there was actual injury involved no doctor error. . . . 360

A . . . survey published in the Journal of the American Medical Association [revealed that] 93 per cent of doctors said they . . . practiced defensive medicine [because of the threat of lawsuit]. . . .361 PriceWaterhouseCoopers estimated that 10% of all health-care spending is consumed by medical malpractice-liability-related defensive medicine and insurance costs—a total sum of $210 billion a year.362

Former senator, presidential candidate, and vice presidential nominee John Edwards (D-North Carolina) amassed a personal fortune estimated by Money Magazine in 2007 at $55 million as a trial lawyer specializing in medical malpractice, especially childbirth. He won awards of as much as $6.5 million by arguing that children born with cerebral palsy were damaged by the delivery, although most experts believe this condition already exists before delivery. A sharp increase in C-section births, thought to be driven by lawsuit fears, has not reduced its incidence, which supports the idea that it is not associated with delivery.363

It is not known how much of his awards Edwards shared with his clients, but the industry standard is 50% or less. Asbestos plaintiffs have received an estimated 42%, with the rest going to “expenses” and lawyer’s fees.364 When lawyers receive more than plaintiffs, there is both money and incentive to file ever more suits.

It is not, of course, easy to know exactly why defensive medicine is being practiced. For example, an Archives of Internal Medicine study found that many more colonoscopies for older people were performed, and billed to Medicare, than were indicated by professional guidelines.365 This might have been for lawsuit avoidance reasons. But it could also have been because the procedure, however uncomfortable and even dangerous for an elderly patient, is expensive and profitable. It is, in effect, a thriving medical industry, and because it is so-called preventive medicine, abuses are almost impossible to spot.

As big as the malpractice awards can be, they are still dwarfed by class action judgments against drug companies. According to the Manhattan Institute, Wyeth’s (now Pfizer’s) reserve for Fen-Phen litigation in 2005 was $21 billion and Merck’s for Vioxx $50 billion. Drug liability is a particularly complicated subject. The cost of Food and Drug Administration approval for a new drug ($1 billion on average) is so high that there is enormous pressure on all parties to do what is necessary to get the product through. Any failure of disclosure or procedure, however, can lead to gigantic judgments, and some of that judgment is likely to find its way back to politicians in the form of campaign contributions. This creates a dilemma for drug companies. On the one hand, they are granted invaluable monopoly rights by the government in the form of patents and FDA approval. But, on the other hand, if they fail adequately to “feed” the politicians, and thus protect themselves, the trial lawyers may eventually claim more and more of the profits.

3. Alliances with State Attorneys General

Forty-three of 50 states elect the Attorney General. Trial lawyers are often major donors to the Attorney General’s campaign. In 40 states, the Attorney General may then hire the campaign donor to represent the state with a lucrative contingency fee on an important case. Examples follow.

a. Tobacco

In the mid-1990s, the Texas Attorney General’s office had an annual budget of $271 million and employed 600 lawyers. Nevertheless, when private trial lawyers proposed a state Medicaid lawsuit against tobacco companies, they were hired to run it on a contingency fee basis, and never mind that they had contributed $150,000 to the Attorney General’s, Dan Morales’s, campaigns. When the tobacco companies settled, thereby eliminating any trial work, these lawyers claimed $2.3 billion, which on arbitration was not reduced, but rather increased to $3.3 billion, all money that could have and should have gone to the state of Texas.

In Mississippi, Attorney General Mike Moore chose his largest campaign donor, Richard Scruggs (the same one who later went to jail for bribery) to lead that state’s Medicaid suit against the tobacco companies. Arbitrators decided that Scruggs’s firm could take $1.4 billion, or 35%, of the $4 billion settlement.367

In Florida, an arbitration panel ignored a judge’s instruction to reduce the outside counsel’s contingency fee of $2.8 billion and instead increased it by an extra $600 million. It has been estimated that this was equivalent to $112,000 per hour of work.

And why did tobacco companies agree in 1998 to an overall settlement with states costing an estimated $246 billion? Why did they choose to forego the right to trial, when they arguably had a good case, because it is difficult to prove that smoking is the direct cause of most illnesses or that smokers should not be held responsible for their own behavior. The most likely reason they settled is that the states not only promised to protect them against any more claims if they did so; they also promised in effect to grant state-supported monopoly status to the tobacco companies involved. After the settlement, the states had a big stake in protecting the tobacco companies, and with that protection it was easy to raise prices sufficiently to cover all the settlement costs.

In reviewing this, we should also keep in mind who smokers are. They are overwhelmingly poor compared to the rest of the population. Consequently, when states protect major tobacco companies, enable their price increases, lay on additional taxes, and simultaneously outlaw the sale of loose tobacco in conjunction with cigarette paper rolling machines, a low cost and probably healthier alternative, they are mainly striking at the most disadvantaged members of society.

b. State Pension Funds

Whenever the price of a publicly traded stock falls sharply, some trial lawyer is likely to become interested. Will it be possible to charge the company with incomplete financial disclosure, perhaps even fraud? An abusive way to explore this is to claim that a nonexistent and anonymous tipster has provided information, then sue and hope that the “discovery process” (in which the defendant must produce documents, especially emails) will produce some “dirt.”

To get a lawsuit rolling, the lawyer needs a client, and what better client than a state or other public pension fund, if you have been donating to the Attorney General or another official in charge of the fund? It also helps if you have established good relations with the fund trustees. This is presumably why the class action law firm Bernstein, Litowitz, Berger, and Grossman invited several hundred guests, including teachers, police, and firefighters, to a three-day “conference” in New York City featuring talks by celebrities, special dinners, and a Broadway show. Forbes magazine, reporting on this, noted that securities class action suits had pulled in $3.1 billion in 2008, and were likely to increase, thanks to the Crash of that year.369

New York comptroller Alan Hevesi chose the law firm of Milberg Weiss to represent the state’s common pension fund in securities class actions, a firm that had donated $100,000 to him for the 2002 campaign. 370 Bill Lerach and Mel Weiss of that firm were later convicted of illegal payments to plaintiffs of $11 million over two decades and sentenced to 24 and 30 months in prison. Hevesi was also convicted in 2011 and sentenced to 1-4 years in jail, but for a different crime: steering $250 million in pension assets to an investment firm for $1 million of benefits including campaign donations.371

4. California’s Prop 65

It is not uncommon for California office buildings to put up a sign near the entrance: “Prop 65 notice— there may be carcinogenics in this building harmful to pregnant women. . . .” The reason for the sign is to forestall a suit under Proposition 65, an initiative passed by California voters in 1986 that is formally known as the Safe Drinking Water and Toxic Enforcement Act.

This notorious act requires that buildings and consumer products, including dietary supplements, post a warning notice if any of (now) 775 chemicals are present in “toxic” amounts. If notice is not posted, anyone can file a complaint. If the Attorney General chooses to sue, the state will collect damages. Otherwise, the original complainant may sue and collect a substantial financial award.

Whatever the original intentions of Prop 65, it has become a means for lawyers to blackmail consumer companies, especially supplement producers. How can they test for 775 different chemicals? In most cases, California has not even set a tolerable limit, and when a limit has been set, it is often unrealistically low.

For example, one serving of spinach typically contains 8.5 mcg of lead. This is not a health hazard. The human body easily eliminates a reasonable amount of lead from the diet each day and spinach is rightly considered a health food. But the Prop 65 limit for pregnant and nursing women is 0.5 mcg. Paradoxically, the more natural the supplement, the more its ingredients are made from safe, wholesome food, the more likely it is to be scored as “toxic” in a Prop 65 lawsuit.

As previously noted, lawyers need to represent a client, so they make a deal with a consumer. Complaints are then filed in the consumer’s name, with the same name used over and over again. The object is to wring money out of the defendant without having to do much work, so an offer of settlement is made that is well below the cost of mounting a trial defense. This strategy is usually effective, and an estimated $142 million was paid out in Prop 65 settlements between 2000 and 2010. When legitimate law firms are hired to defend against the Prop 65 legal “bucket shops,” they may like the settlements too. Keeping the predators in business means more legal fees for everyone.

5. Bribery Law

A Forbes magazine headline from 2010 reads: “The Bribery Law Racket: Bad Guys Abroad Extort Money From a Corporation. Back Home, a Bigger Extortion Awaits.” The article under the headline relates how a company that discovers or suspects payment of a bribe by an overseas employee is required to report this to the Justice Department. The company then hires expensive lawyers and accountants to investigate further (with results reported to Justice), pays federal fines, and hires government mandated monitors, often expensive lawyers who have previously worked in government and know the federal regulators.

All of this can be a bottomless pit, costing in some cases hundreds of millions of dollars, and often involving the Securities and Exchange Commission (SEC) as well. Joseph Covington, who headed the Justice Department’s Foreign Corrupt Practices Act division in the 1980s, told Forbes: “This is good business for [many parties including] Justice Department lawyers who create the marketplace and then get . . . a job [there].”373 This particular pattern is not limited to foreign bribery cases. If a company gets in trouble with the Federal Trade Commission (FTC) or Food and Drug Administration (FDA) and agrees to a “settlement,” the terms may include ongoing “monitoring” by highly paid lawyers, who may just happen to
be former FTC or FDA employees.

6. The Brave New World of Court Approved Product Performance Standards

In the spring of 2012, Ohio’s 6th Circuit federal court accepted a class action suit named Glazer vs. Whirlpool. Two Ohio residents claimed that their frontloading washing machines produced an offensive odor, though not a medically harmful odor, and on this basis, the court allowed plaintiffs to represent all Ohio purchasers of washers from any manufacturer since 2001. The court did not even rely on Ohio law, as it should have, but imported some California law with no applicability in Ohio in order to suggest that buyers might have been harmed by paying a high price for what might have been an under-performing product.

If ever there was an Alice-in-Wonderland case, this was it. But it had immense implications. If it succeeded, in effect the courts would put themselves in charge of deciding the product specifications and performance standards of all industrial goods. And every manufacturer would have to build these potential litigation costs into the product’s price.

In a market system, consumers are supposed to judge products and to vote with their dollars. Overpriced or substandard goods will be rejected and producers suffer the consequences. But if the 6th circuit reasoning prevails, this market system will be short circuited by legal claims based on no demonstrated injury. Millions of consumers will be swept into specious cases as plaintiffs with or without their consent.

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