Results matching “lawyer misconduct”

By Glenn G. Lammi

As Federal District Court Judge Loretta A. Preska wrote last summer in Kensington Int'l Ltd. v. Republic of Congo, 2007 U.S. Dist. LEXIS 63115, *1 (S.D.N.Y. Aug. 23, 2007), "Civil litigation is not always civil." The high stakes and cost of much litigation today, and the commercialization of the legal profession, have created greater pressure on lawyers to, in the words of lawyers' Model Rules of Professional Conduct, "zealously assert[] the client's position under the rules of the adversary system." When that pressure leads attorneys astray, judges possess the authority under federal statutes, civil procedure rules, and courts' inherent powers, to impose sanctions. Over the past year, federal judges in high-profile litigation have invoked these powers to take action against lawyer misconduct, either imposing sanctions or using their bully pulpit to put the legal profession on notice that judges will protect the public and legal consumers from abuse.

In the Kensington case, Kensington, a "financial institution which invests in debt and equity instruments issued by domestic and foreign entities," id. at *3, sought to collect on a nearly $57 million judgment against Congo. Kensington subpoenaed a Congolese citizen, Medard Mbemba, who Kensington believed would assist it in locating the whereabouts of the nation's assets. Difficulties in scheduling the time and place of the deposition ensued, and it came to light that an attorney from Congo's counsel of record, Cleary Gottlieb Steen & Hamilton, had contacted Mr. Mbemba directly. As the court noted, this partner had "extensive connections with Congo's political leadership." Id. at *5. Mr. Mbemba testified when asked if he felt the Cleary Gottlieb attorney was pressuring him to avoid the deposition, he replied that he was aware of the attorney's connections in Congo and that, "It is not an impression, he told me as such not to go." Id.

Judge Preska noted the court's inherent authority to sanction attorneys for bad faith acts. She found that "a mass of evidence" existed that Cleary Gottlieb's actions "were taken with the purpose of preventing Mbemba's deposition," id. at *16, and that "Cleary feared Mbemba might reveal damaging information or offer evidence of illegal conduct and thus attempted, in bad faith, to influence Mbemba's testimony or, better still, to avoid the deposition altogether," id. at *32. Because Cleary "show[ed] a willingness to operate in the murky area between zealous advocacy and improper conduct, and here it crossed the line," id. at *33, Judge Preska imposed monetary sanctions on the firm.

Another recent example where "aggressive representation [gave] way to misconduct," arose from trade secret litigation between rival financial software makers. Wolters Kluwer v. Scivantage, 2007 U.S. Dist. LEXIS 88052 (S.D.N.Y. Nov. 29, 2007). Judge Harold Baer issued a 129-page ruling peppered with regret that the standards of civility and professionalism in law have declined as legal representation has been transformed from a profession into a business. Much of the dispute focused on documents submitted under a protective order by the defendant to plaintiffs' counsel Dorsey & Whitney; the use of those documents in a nearly identical suit in a Massachusetts federal court; and the refusal of a now-former Dorsey lawyer to return the documents on order of the court once Wolters Kluwer had voluntarily dismissed the New York-based action. Judge Baer's opinion relates the dispute's particulars in exhaustive detail, after which he concludes that the lead plaintiffs' counsel or Dorsey & Whitney engaged in twenty-two instances of bad faith, sanctionable conduct. Judge Baer declined to financially punish the lead lawyer or Dorsey & Whitney, choosing instead to "impose a public reprimand" and forwarding a copy of his decision to "the Grievance Committee for the Southern District of New York" and to the state court's attorney disciplinary committee. Id. at *292.

A third instance in 2007 of a judge invoking his inherent powers involved insurance coverage litigation in the wake of Hurricane Katrina and noted plaintiffs' attorney Richard Scruggs. In an employment contract dispute arising out of a Katrina coverage issue, Federal District Court Judge William Acker ordered that Mr. Scruggs return covertly copied insurance documents he obtained from former employees of the insurance services company plaintiff. Scruggs instead sent them to Mississippi Attorney General Jim Hood. Judge Acker wrote in response that such behavior "is precisely the type of conduct that criminal contempt sanctions were designed to address." E.A. Renfroe & Co. v. Moran, Civ. Action No. 06-AR-1752-S (N.D. Ala. June 15, 2007), slip op. at 20. Judge Acker referred the matter to federal prosecutors, and when they declined to bring charges against Scruggs, Judge Acker invoked his authority under Federal Rule of Criminal Procedure 42(a) and appointed two private attorneys as special counsel to prosecute the case. E.A. Renfroe & Co. v. Moran, Civ. Action No. 06-AR-1752-S (N.D. Ala. July 26, 2007). In addition to having to defend against this criminal action, Mr. Scruggs was indicted last November on charges that he conspired to bribe a Mississippi state judge. A trial is scheduled for February 25. Donna Leinwand, Bribery case stemming from Katrina lawsuits makes waves, USA TODAY at http://www.usatoday.com/news/nation/2007-12-25-Scruggs_N.htm?csp=N009.

One further 2007 decision of note did not directly involve attorney misconduct or the application of sanctions, but the tone and force of the ruling displays how judges can use their bully pulpit to express their disdain with some lawyers' actions. In In Re Chiron Corp., 2007 U.S. Dist. LEXIS 91140 (N.D. Calif. Nov. 30, 2007), Judge Vaughn Walker rejected a class action settlement in a case involving a vaccine company's alleged market misrepresentations. In addition to rejecting the proposed $7.5 million attorneys' fees in a case which "appears to have proceeded almost directly form pleading to settlement with no ruling on the pleading," id. at *6, Judge Walker ruled that the settlement was "inconsistent with the interests of absent class members and the class action process itself." Id. at *38. The court strongly questioned the adequacy of the lead plaintiff, finding it to be a "serial plaintiff" whose involvement "seems to have been confined to an endorsement of lead counsel's proposed fee." Id. at *31.

Because of the "serial" nature of the lead plaintiff and the law firm representing it - Milberg Weiss - Judge Walker reluctantly found it "necessary to address criminal charges pending against lead counsel." Id. at *38. The judge noted that the case before him is not directly implicated in the criminal case, which involves alleged payment of kickbacks to lead plaintiffs. "But given the temporal proximity of this settlement and the criminal proceeding against lead counsel," he wrote, "whether the charges bear on this case is a determination best left to the class following full disclosure." Id.

Whether it is imposing monetary sanctions, issuing a public "censure", or appointing special counsel to enforce a criminal contempt ruling, judges possess the authority to regulate lawyers and the litigation process. As Judge Baer stated in Wolters Kluwer, not only is attorney misconduct and incivility "a drain on valuable judicial resources," supra at *7, it also "undermine[s] public confidence in the legal system" and works "to the serious detriment of the very individuals that have sought counsel." Id. at *8. Reasons abound for judges to use their considerable statutory and inherent police powers. With these recent decisions, the momentum to do so will hopefully continue to grow.

* Chambers v. Nasco, Inc., 501 U.S. 32 (1991). See also Thomas E. Baker, The Inherent Power to Impose Sanctions: How a Federal Judge Is Like an 800-Pound Gorilla, 4 LGL. OPINION LTR. 6 (WASH. LGL. FNDT.), Mar. 25, 1994.

By WALTER OLSON

This piece originally appeared in the Wall Street Journal, 5-18-07

The terse four-page judicial order handed down in a California courtroom last month hasn't made much of a ripple among commentators. But if it stands as precedent following the near-inevitable appeal—and if states and municipalities also follow President Bush, who signed an executive order on Wednesday barring the federal government from entering into contingency fee agreements with trial lawyers—the ruling by Superior Court Judge Jack Komar might slow down the destructive litigation trend of ambitious private lawyers' enlistment of government as a client.

Some background: In the case of County of Santa Clara v. Atlantic Richfield, a number of California counties and cities filed suit asking that lead paint manufactured and sold decades ago be (retroactively and creatively) declared a "nuisance" so that the paint's original makers could be ordered to pay for its removal. As usual in such suits, the localities had hired private lawyers on a promise to share in the winnings if a recovery was made.

Long regarded as ethically suspect if not unthinkable, the public-client contingency fee can be traced back to a case in the 1980s when the state of Massachusetts decided to hire private lawyers to pursue claims over asbestos removal. The innovation quickly spread to other states and issues, most notably the late-1990s tobacco-Medicaid crusade which resulted in multibillion-dollar payouts to both the states and their lawyers.

Trial lawyers love these deals. Even aside from the chance to rack up stupendous fees, they confer a mantle of legitimacy and state endorsement on lawsuit crusades whose merits might otherwise appear chancy. Public officials find it easy to say yes because the deals are sold as no-win, no-fee. They're not on the hook for any downside, so wouldn't it practically be negligent to let a chance to sue pass by?

Now, only two decades later, trial lawyers representing public clients on contingency fee are suing businesses for billions over matters as diverse as prescription drug pricing, natural gas royalties and the calculation of back tax bills. The South Carolina law firm now known as Motley Rice moved into the state of Rhode Island and quickly made itself the No. 1 political donor there, just as it was winning a contract from then-Attorney General Sheldon Whitehouse (now a U.S. senator) to file the first action on behalf of a state against former lead paint makers.

Mayors of over 30 cities signed up for a gun-control-through-legal-coercion campaign of suits against firearms makers so abusive and unpopular in other parts of the country that Congress stepped in to pass a law against it. Authorities in New Jersey, California and elsewhere have hired percentage-fee lawyers to pursue groundwater contamination claims; in the resulting litigation, other environmental aims have tended to be subordinated to the overriding goal of maximizing deep-pocket dollar payout.

But the ethical doubts about the practice haven't gone away, which brings us to Judge Komar and his April 4 ruling in the lead-paint case. The defendants were able to cite a 1985 precedent in which the California Supreme Court ruled contingent fee representation improper as "antithetical to the standard of neutrality that an attorney representing the government must meet when prosecuting a public nuisance abatement action." Agreeing that the case was on point, Judge Komar granted a motion to disqualify the private lawyers.

The principle here isn't hard to grasp. Lawyers who act on behalf of government as distinct from private clients come under special ethical obligations of impartiality. If a lawyer claiming to speak in the name of the people charges you with misconduct, his judgment on whether to drop the charges should not be clouded by the prospect that one-third of any penalties extracted from you would drop into his own private pocket.

Such at least is the logic almost universally accepted when it comes to criminal prosecution. Many court opinions confirm that public prosecutors must not be given a financial stake in the success of the actions they press. In a 1987 trademark-infringement case, for example, the U.S. Supreme Court held it a violation of due process for the government to delegate control of a criminal contempt action to a nongovernment party with a financial stake in the outcome.

What about when the fines or penalties are civil in nature? That question came up in a 1985 case from the city of Corona, Calif. The city had enacted a civil nuisance statute aimed at closing adult bookstores, and then to enforce it hired James Clancy, the attorney who'd drafted the statute, with a bonus to be paid if he succeeded in closing the stores. But the high court in Sacramento disqualified Mr. Clancy, saying that such a proceeding "demands the representative of the government to be absolutely neutral" and that "any financial arrangement"—such as a contingent fee—"that would tempt the government attorney to tip the scale cannot be tolerated."

The California counties and cities that had filed the lead-paint suit—including some of the nation's most populous, with some of the richest tax bases—absurdly tried to plead poverty, suggesting it would prove a hardship for them to hire lawyers on hourly fees. Judge Komar rejected this argument. In reality state and municipal plaintiffs often have more extensive resources than the businesses they sue, as when cities like Boston and Atlanta sue family-owned gunmakers. It's also a practical irrelevance, since smaller governments can and do band together in groups to facilitate litigation that is of common benefit.

The fact is that most such suits are dreamed up by the private law firms and sold to the local officials, not vice versa. Competitive bidding is the exception rather than the rule in retaining the law firms, which routinely recycle handsome donations to the campaigns of the mayors, attorneys general and other officials who hire them. Pay-for-play is so routine that it hardly raises even a shrug anymore. When government legal officers refuse the overtures and instead employ their own staff attorneys to handle such suits, they can face bitter resentment and political pressure for not playing the game in the expected way.

On its face the Santa Clara ruling (like the Clancy case before it) applies only to nuisance-abatement cases, and it's uncertain to what extent courts will agree to extend its logic to other sorts of suits filed by states and municipalities. Moreover, a number of courts in other cases have turned down defendants' motions challenging such fee deals. So it's not the beginning of the end for today's trial-lawyer public-entity alliance. It's more likely just the beginning.

By Ted Frank

This piece originally appeared in the Class Action Watch, 03-31-07

On September 30, 2004, Merck withdrew its painkiller Vioxx from the market because of a study showing a small but statistically significant increase in risk of cardiovascular events from long-term usage of the drug. What had been a trickle of litigation over the drug became a flood. As of January, there were over 27,000 personal-injury lawsuits involving over 45,000 plaintiff groups, and another 265 putative class actions filed. Plaintiffs' attorneys, it seems, are using the procedural class-action mechanism to achieve substantive advantages in litigation. The vast majority of the class actions Merck faces can be placed in one of four categories.

Personal Injury Class Actions

Many seek to try personal-injury cases as a class action. There is very little chance a nationwide personal-injury class will be certified in any jurisdiction. Pharmaceutical products liability litigation requires the substantive law of fifty different states, and product liability law (as well as the learned intermediary defense) has substantial differences from state to state, making a class impossible. "No class action is proper unless all litigants are governed by the same legal rules[1]."This is because variations in state law may swamp any common issues and defeat predominance[2]."Thus, In re Vioxx Products Liability Litigation held that a nationwide personal-injury class was inappropriate in the Vioxx litigation[3].

Moreover, as Judge Fallon noted, the individualized issues are complex:

The plaintiffs' allegations that Merck failed to warn doctors adequately regarding the alleged health risks of Vioxx--whether they sound in strict liability or negligence--necessarily turn on numerous individualized issues such as: the alleged injury; what Merck knew about the risks of the alleged injury when the patient was prescribed Vioxx; what Merck told physicians and consumers about those risks in the Vioxx label and other media, what the plaintiffs' physicians knew about these risks from other sources, and whether the plaintiffs' physicians would still have prescribed Vioxx had stronger warnings been given.

Constitutional due process demands Merck have the opportunity to defend against each case individually: "one set of operative facts would not establish liability and the end result would be a series of individual mini-trials which the predominance requirement is intended to prevent[4]." Similarly, the fact that plaintiffs have individualized damages claims, including claims for non-economic damages, prevents compliance with the predominance requirements. (In the now-infamous Dukes v. Wal-Mart case, in order to shoehorn the case into certification, the Ninth Circuit permitted the class plaintiffs to waive what would be billions of dollars of non-economic damages if the complaint's allegations were true, a mechanism that seemed designed to benefit the trial lawyers ahead of any class member that had actually suffered injury.) One would not expect Judge Fallon to certify even the individual state personal-injury class actions.

An interesting question is whether Judge Fallon will be willing to hold that his federal decision would bind pending state-court class action certification decisions, or whether plaintiffs will have the opportunity to shop for a better ruling. Judge Easterbrook in In re Bridgestone/Firestone, Inc. held that a federal ruling that a class certification was inappropriate precluded state courts from certifying a class action on the same facts, and that the Anti-Injunction Act did not prohibit a federal court from enjoining such proceedings[5].

Given the unlikelihood of a personal-injury class action certification, why would the plaintiffs' bar devote any resources? The answer can perhaps be found in the Supreme Court's decision in American Pipe & Construction Co. v. Utah which held that the statute of limitations for individual class members' causes of action were tolled while a class action certification was pending[6]. As Jim Beck and Mark Herrmann point out on their Drug and Device Law blog, this decision creates an incentive to file putative class actions that are not necessarily strong on the merits. Ironically, as the two note, the American Pipe Court justified its holding on the grounds that, without a tolling rule, courts would be deluged with duplicative filings. But American Pipe has had no administrative advantage in practice.

Medical Monitoring Class Actions

Merck faces a variety of class actions seeking medical monitoring relief. Medical monitoring was originally devised as a remedy in the unique case of an airline accident. The case involved depressurization and hypoxia where there was no question that the plaintiff children, refugees from Vietnam, faced irreparable harm without an immediate comprehensive medical exam. Plaintiffs took that precedent and ran with it, seeking to extend it to situations where relief was not so clear-cut.

Courts have differed on the appropriateness of expansion of this new cause of action to cases where plaintiffs have suffered no physical injury. The Supreme Court, for one, rejected medical monitoring as a remedy under the Federal Employers' Liability Act in Metro-North Commuter Railroad v. Buckley, noting the dangers of creating a new cause of action that might create unlimited liability, the difficulties of having a court administer a complicated medical plan, and the individualized nature of plaintiffs' medical conditions[7]. Indeed, a wide-open medical-monitoring cause of action would expose nearly every manufacturer in America to liability, given the possibility of arguing that any given substance from automobile pollution to over-the-counter medicine to saturated fats could bring rise to the need for medical monitoring. Meritorious and meritless claims would be difficult to distinguish, and the confusion would almost certainly encourage fraud. The West Virginia Supreme Court, at the other end of the spectrum, created a medical monitoring cause of action in Bower v. Westinghouse Electric and North American Philips Corporation. A very small risk of injury was sufficient to create a cause of action, and there was no requirement that the medical monitoring be effective, or even that there be oversight by the court to ensure that lump sum payments were used for the sought-after remedy[8].

The Vioxx medical monitoring class action that is furthest along arises in Judge Higbee's courtroom in Atlantic City, Sinclair v. Merck. The New Jersey Supreme Court had already endorsed a broad medical monitoring remedy in Ayers v. Township of Jackson, which permitted a lump-sum payment in an environmental tort case involving drinking water[9]. Even so, with the exception of environmental torts, New Jersey had only permitted medical monitoring where there was physical injury. Moreover, the New Jersey products liability law required an injury before bringing suit[10]. Thus, Judge Higbee dismissed Sinclair as outside of New Jersey medical monitoring law: a product-liability suit could not claim risk of injury to support a medical monitoring remedy. The New Jersey Court of Appeals reversed on grounds that the dismissal was premature. Still, even if Sinclair returns to the trial court, there remains no evidence that Vioxx has a long-term effect once it has been metabolized from the system, and thus no scientific evidence supporting a medical monitoring remedy.

"Consumer Fraud" Class Actions

The greatest danger to Merck shareholders comes from the dozens of "consumer fraud" class actions seeking recovery under various broad state consumer fraud laws. These lawsuits seek recovery, claiming not that Vioxx caused them personal injury, nor that Vioxx did not effectively alleviate pain, but that, because Merck allegedly failed to disclose information to the public, it received a higher price than it would have otherwise. Plaintiffs argue that the broadest of these consumer fraud laws do not require any showing of reliance, or a showing that the consumers for whom recovery is sought were affirmatively misled. In one such case, International Union of Operating Engineers Local 68 Welfare Fund v. Merck, Judge Higbee held that New Jersey's consumer fraud laws applied to all of Merck's United States sales and certified a nationwide class of third-party insurers; an intermediate court affirmed that class certification, which is now pending before the New Jersey Supreme Court, which will hear argument shortly.

This class action certification did not take into account basic choice-of-law principles by applying New Jersey law to transactions in all fifty states, regardless of the location of the doctor who prescribed the drug, the patient who took the drug, or the third-party payor. The court's rationale asks, in effect, "What state wouldn't want stricter consumer-fraud liability?" But defendants maintain that it is reasonable to assume that several states are concerned about the disincentives created by overdeterrence when consumer liability attaches without injury at the same time liability attaches with injury[11].

Second, the court undid the statute's requirement that consumer fraud must be shown to cause an individual's injury by rewriting the requirement to fit the class action, and holding that it was sufficient to allege "pervasive" defendant misconduct. But class actions are procedural devices, and cannot change the underlying substantive law or the rights of a defendant to present every available defense (a right reaffirmed by the Supreme Court in Philip Morris v. Williams). Third, it remains unclear how "ascertainable loss" is going to be calculated on a class-wide basis. Every third-party payer has its own individualized means of determining which prescription drugs will be covered by its formulary. Should the Local 68 suit proceed, plaintiffs will seek treble damages disgorging billions of dollars paid to Merck for Vioxx, plus attorneys' fees.

Shareholder Class Actions

Merck stock dropped dramatically when it announced the withdrawal of Vioxx from the market. And where there is a large drop in stock price, a shareholder class action usually follows, demanding that present shareholders compensate previous shareholders' losses (with a substantial commission for the trial lawyers who make the arrangement). Investors who are diversified shareholders are hurt by such lawsuits in the aggregate: the lawsuits merely transfer wealth from their left-hand pocket to their right-hand pocket, because ex ante, one is just as likely to be a seller of an artificially inflated share of stock as a buyer, and shareholder lawsuits do nothing to disgorge wealth from the innocent sellers. (Inside trades are, of course, another matter.) But attorneys' fees are calculated on the aggregate, and, of course, shareholders also pay for the defense of such claims.

A major event in any shareholder class actions comes when the court chooses the lead plaintiff. The internecine battle is especially noteworthy in this instance, because one of the lead firms appointed, Milberg Weiss, is under the shadow of an indictment after two of its regular lead plaintiffs pled guilty to taking kickbacks from the firm. Its lead client fired the firm, but Milberg Weiss did not inform the court, resulting in months of further litigation that was resolved when Milberg Weiss agreed to cut in another firm, Bernstein Litowitz, in the lead-counsel pay-offs. Merck's motion to dismiss the entire case is pending.

Ted Frank is a resident fellow and director of the Liability Project at AEI.


Notes:

1 In re Bridgestone/Firestone, 288 F.3d 1012, 1015 (7th Cir. 2002) ("Firestone I").
2 Castano v. American Tobacco Co, 84 F.3d 734, 741 (5th Cir. 1996).
3 ___ F.R.D. ___, 2006 WL 3391432 (E. D. La. Nov. 22, 2006).
4 Steering Committee v. Exxon Mobil Corp., 461 F.3d 598, 602 (5th Cir. 2006). See also Philip Morris v. Williams (U.S. Feb. 21, 2007).
5 333 F.3d 763 (7th Cir. 2003).
6 414 U.S. 538 (1974).
7 521 U.S. 424 (1997).
8 522 S.E.2d 424 (W.Va. 1999). See generally Victor E. Schwartz et al., Medical Monitoring: The Right Way and the Wrong Way, 70 MO. L. REV. 349 (2005).
9 525 A.2d 287 (N.J. 1987).
10 N.J.S.A. 2A:58C-2.
11 Firestone I; see generally Michael Greve, Harm-Less Lawsuits? What's Wrong with Consumer Class Actions (AEI Press 2005).

By Peter Morin and Walter Olson

Here are stories of three Massachusetts clients victimized by bad lawyers:

Ann, as we'll call her, fell and was seriously hurt in early 2002 on premises owned by a non-profit association. Three months later the association's insurance company settled her claim by cutting a check for $112,000 � which never reached Ann. Her lawyer pocketed it instead, while signing her name to a release for the insurer. Two years later, the lawyer indicated the claim had been settled for $20,000 and sent Ann a check for the sum supposedly owed her after fees and expenses � amounting to $12,834.82.

Brianna, after an auto accident, signed up with one lawyer to pursue an injury claim and later switched to a second lawyer. The second lawyer settled her case for $3,900 and spent the money without informing either Brianna or her first lawyer, who was legally entitled to a portion of the proceeds.

Christine, 64 at the time, was crossing a street in Woburn when a car struck her, inflicting multiple fractures. She was hospitalized and later transferred to a nursing home. An insurer wrote a check for $20,000 payable jointly to Christine, her lawyer, and the Department of Public Welfare. The lawyer deposited the check but did not disburse the proceeds to either his client or the welfare department, spending it instead.

In one sense all three of these episodes ended with some measure of justice being done: they resulted in disbarment or other removal of a lawyer from practice, according to the reports published by the Commonwealth's Office of Bar Counsel. In the mean time, however, a client's life had been disrupted, perhaps gravely and irreparably. While episodes like these are fortunately not an everyday occurrence in Massachusetts, they are not exactly rare either. In its latest annual report, the state's Client Security Board, which has the mission of compensating clients victimized by lawyer misconduct, reported that it made good on 55 claims against 24 lawyers in 2005. Just three lawyers were responsible for more than two-thirds ($1.59 million) of the total payout of $2.2 million; in the previous year, one of those lawyers had been responsible for defrauding 43 other clients out of $1.1 million.

The sorts of defalcations cited at the outset of this piece—and dozens of others like them that could have been listed—conspire to damage the reputation of the whole legal profession. And most of them were entirely and easily preventable.

The simple fix is a rule that goes by the name "payee notification". It would require insurance companies to notify a claimant when they forward a settlement check to claimant's counsel. At a single stroke, the client is made aware of the timing and size of the settlement, taking away most of the leeway a dishonest lawyer has to withhold the client's funds.

Several other states, including California, New York, and Connecticut, have already instituted payee-notification rules, and they have worked well. The Client Protection Board of the Massachusetts Supreme Judicial Court recently announced its support for such a rule. An ABA Model Rule for Payee Notification dates back to 1991. So who would oppose it?

Interesting that you should ask. According to an article in the Massachusetts Lawyers Weekly, the proposal is running into resistance from some quarters of the Massachusetts bar, principally on the ground that it would "interfere with the attorney-client relationship." In fact, the MLW itself proceeded to publish an editorial opposing the rule change. It said the proposed rule (a) was "overbroad" because it imposes on all lawyers in order to hinder theft by a few, (b) would interject the insurance company into the attorney-client relationship, and (c) would be "burdensome" to insurance companies.

Let's examine each of these objections in turn.

1) It's wrong to inconvenience the honest majority of lawyers just to thwart a dishonest minority.

You'd think this point would long since have been settled. Earlier client-protection measures, today viewed as uncontroversial, impose much more serious inconveniences on ordinary lawyers. For example, there's the requirement that lawyers establish separate client trust accounts, with serious penalties if they convert the moneys therein to their own use. Even more to the point, all fifty states have established some version of client guarantee funds, which help compensate victimized clients. These funds are supported by mandatory cash assessments levied against innocent lawyers, a far greater imposition on them than is at issue here. Moreover, the fact is that payee notification imposes an obligation not on the lawyer but on the insurer.

Most personal injury attorneys in fact appear to recognize this. Edward McIntyre, vice president of the Massachusetts Bar Association and a personal injury lawyer himself, is a former hearing officer and board member of the Massachusetts Client Security Board who has been involved in the payee notification issue for more than three years. He regards the proposed rule as an unobtrusive and prudent means of reducing the temptation available to a few weak lawyers. McIntyre has spoken with representatives from other states' client security boards about their successful experience with payee notification rules, and he has spoken with many members of the plaintiff bar, reporting that the vast majority of them express no opposition or are actively in favor of such a rule.

2) The rule "interjects the insurance company into the attorney-client relationship."

It is difficult to make sense of this objection. The insurance company, which makes this communication only as it departs the stage after a settlement, is merely providing the client with a record of information that the attorney has an obligation to disclose in the first place. (A lawyer has an ethical obligation to "keep a client reasonably informed about the status of a matter"). And the ABA, which is not shy about protecting the lawyer-client relationship from outside meddling in other contexts, expresses in the comments to its Model Rule no disquiet about any danger that notifications would somehow disrupt the relationship.

3) The rule is overly burdensome to insurers.

As implemented in other states (and likely to be implemented here), the rule would be promulgated by the state commissioner of insurance as one more of the myriad of administrative and record-keeping requirements imposed on insurers licensed to do business in the state. As part of the rulemaking process, if insurers have objections to the proposed rule, they have a forum in which to make those objections. Checks with several state commissioners who have imposed the rule indicate that the industry as a whole was more supportive than not in each instance.

In practice, McIntyre notes, the sending of notice becomes swiftly embedded into the insurer's ordinary day-to-day business practice. He likens it to that of banks that send confirmation of electronic deposits to customers, sometimes in the form of "dummy checks," so that the depositor has a paper record of the date and amount of deposit and the identity of the payor. In this instance, the claimant might receive a copy of the transmittal letter from insurer to counsel, or a "dummy" check. So while perhaps the insurance industry might appreciate the Lawyers Weekly editors' apparent solicitousness for their administrative concerns, payee notification appears not to have inflicted a great burden elsewhere.

One has to wonder what is taking a progressive state such as Massachusetts so long to adopt a measure implemented successfully elsewhere. If nothing else, collective self-interest on the part of the state�s lawyers should be a factor promoting change: attorneys� registration fees are what support the Client Security Fund, so it can be fairly said that every lawyer already pays a price for the misconduct of the few who offend. The legal profession does not benefit from a single additional instance in which a preventable crime is committed by one of its own.

* * *

Peter Morin is a real estate, zoning and land use attorney with McDermott Quilty & Miller LLP in Boston. He also writes the WaveMaker blog. Walter Olson, the author of several books on the American litigation system, is senior fellow at the Manhattan Institute and edits Point of Law and Overlawyered.


By Walter Olson

(Reprinted from The Wall Street Journal, 6-22-06)

As the nation's premier filer of class action lawsuits, Milberg Weiss Bershad & Schulman LLP has long presented itself as a fearless watchdog of America's financial markets. Milberg lawyers are famed for their skill at seizing on missteps by the businesspeople they sue—a missed earnings projection, an omitted disclosure, a too-rosy accounting practice—and portraying them as evidence not of inadvertent or technical slip-ups, but of systematic and brazen crookedness.

All the while, if one is to credit the 102-page indictment by a federal grand jury in Los Angeles last week, Milberg Weiss was passing at least $11 million in payoffs under the table to plaintiffs in its suits. Since such payoffs are baldly illegal, prosecutors claim the firm took elaborate steps to keep them concealed from judges and others. They say Milberg funneled much of the money through law-firm cut-outs and other channels, including casinos, and drew on a stash of money kept in a safe located in a credenza in partner David Bershad's New York office, "to which access was strictly limited." Again and again, prosecutors add, the firm submitted sworn statements on behalf of its clients denying any receipt of the sorts of payments they were in fact receiving. The payoffs helped Milberg reap some $216 million in attorneys' fees from the cases prosecutors say they know about; others remain under investigation.

Milberg and partners David Bershad and Steven Schulman (who have taken leaves of absence from the firm) flatly deny the charges and say they're victims of overzealous prosecution. There's irony in this—since the firm is known for zealous tactics akin to those it's now facing, such as the use of charges under the RICO (Racketeer Influenced and Corrupt Organizations) law. Even so, some of the firm's complaints will resonate with critics of today's trend toward criminalizing business practice. The firm's defense Web site, MilbergWeissJustice.com, goes so far as to link approvingly to editorials in this newspaper.

* * *

When is a cash payment to someone an improper "kickback" or "payola"? Sometimes it is hard to discern the line. If you're a record producer who pays radio execs to spin a Jennifer Lopez disc, Eliot Spitzer will land on you with full force. But if you're a publisher who pays book chains to give prime display to your new hardcover thriller, you're safe. Economists and legal analysts typically consult a range of factors, including whether the person taking the payment owes some third party a duty of loyalty or independent judgment, whether an agent discloses his acceptance of a payment to his principal, whether a type of payment is accepted as customary in a given trade, and so forth.

Milberg Weiss lawyers have been in the forefront of efforts to define kickbacks broadly and punish them with rigor. The firm's Web site boasts that it "has sued major providers of private mortgage insurance for kickback violations, resulting in substantial settlements." Melvyn Weiss and others at the firm have expressed indignation at, and filed lawsuits over, alleged kickbacks in the contexts of Wall Street initial public offerings, mutual fund sales, insurance brokerage commissions and doctors' prescribing of pharmaceuticals.

Although there are many debatable cases, concealed payoffs to named plaintiffs in class actions aren't one of them: They're clearly improper under virtually any analysis. As the indictment states, both plaintiffs and their lawyers are under obligation 1) not to place a named plaintiff's interests above those of absent class members; 2) not to behave deceitfully or unethically toward the court or absent class members; and 3) not to withhold from the court "any fact" that might call into question the representativeness of the plaintiff (a financial dependence on the lawyer would be one such fact). As a class action proceeds, plaintiffs repeatedly swear under oath to these matters. Bonus payments to compensate named plaintiffs for their time and trouble are permitted at settlement, but they must be disclosed to absent class members and approved by the judge.
These rules have a purpose. With other class members absent, named plaintiffs are one of the few watchdogs against self-dealing or misconduct by the lawyers—specifically, the pursuit of settlements that result in high legal fees, whether or not they serve the interest of the class. It's true that law firms do seek docile, loyal or merely clueless persons to serve as their named plaintiffs, which means it's rare (though not unheard of) for them to contribute an independent point of view in a case. But if the Justice Department's allegations are correct, Milberg was taking no chances on the watchdogs staying pacified: It threw regular chunks of raw liver into their cages. Significantly, Justice alleges that payoffs were computed not as a share of the class's eventual recovery, but as a share of Milberg's own fee haul—incentivizing the named plaintiff to side with Milberg's interests should the two clash.

Every so often someone will suggest that since the named plaintiff operates as the lawyers' tool 99% of the time, why not dispense with the rigmarole and let law firms seek class action status without having to qualify any particular client as representative? But imagine for a moment a defendant's trying to argue that, because certain legal rules are economically inefficient, it should be okay to break those rules. Imagine what a skilled plaintiff's lawyer, like those at Milberg, would say in response to such an argument. Lawyers, of all professionals, are the last ones who should claim a privilege of ignoring the law.

A more likely source of sympathy for Milberg is its complaint—in common with that of many business defendants—of rough handling by prosecutors. To begin with, the Justice Department, following the line laid down by the now-infamous Thompson memorandum, insisted that Milberg waive attorney-client confidentiality if it wanted a favorable plea deal. The business community is in an uproar over the Thompson rules, with the U.S. Chamber of Commerce joining with groups like the ACLU and National Association of Criminal Defense Lawyers to challenge the waiver provisions as unfairly arm-twisting defendants into yielding up their employees' rights.

As a talking point for Milberg's defense, however, this one is likely to fade—precisely because the firm did hold out rather than cave. Nor is there an issue of favoritism, since the Justice Department subjects conventional businesses to the same unseemly pressure daily.

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Should the feds have indicted the firm as distinct from individual partners? Memories are fresh of the indictment of Arthur Andersen, the accounting giant whose conviction was overturned by the Supreme Court three years later—far too late to save the firm, given the reluctance to let an indicted accountant do a company's books. Defending her Milberg decision, U.S. Attorney Debra Wong Yang cited the firm's lack of repentance: Not only had the "pattern of deception" gone on for decades, but "the conduct occurred all the way up to last year, when they knew we were looking at them."

The probe, in fact, had dragged on for six years, having met with implacable resistance from the Milberg side; prosecutors finally got their break this spring, in the person of businessman Howard Vogel, who, with his family members, had acted as plaintiff in about 40 suits. Mr. Vogel sang, admitting to more than $2.4 million in Milberg payments in a guilty plea, and others have reportedly begun to sing, too, which means further indictments are possible.

In short, the prolonged lack of interest in cooperating with law enforcement may cost the firm as dearly in the long run as the underlying offense. (Yes, now that you mention it, Milberg was the lead counsel in the suits against Martha Stewart.) The two celebrity lawyers who made Milberg famous, Melvyn Weiss and the now-departed William Lerach, have thus far escaped indictment: Of course, if they were prosecuting such a case, they would miss no opportunity to insinuate that misconduct by part of a team of top executives must have been at least tolerated by the others, that the rot goes straight to the top, that senior partners turned a convenient blind eye to signs of misconduct because they profited handsomely from that misconduct, and so forth. Messrs. Weiss and Lerach must count themselves lucky that such reasoning did not lead to their inclusion as defendants.

If they are consistent, those who cherish due process for white-collar defendants should spare some pangs for the many talented lawyers at the Milberg firm who, like Arthur Andersen accountants, may face professional shipwreck even though no one has charged them with the least bit of complicity in legal wrongdoing. And if they are consistent, those who applaud the crackdown on business misconduct of recent years should acknowledge that the Milberg prosecution embodies, for better or worse, many of the premises of that crackdown. Those are big "ifs."

By Ramesh Ponnuru

Ramesh Ponnuru and the National Review have graciously allowed us to reprint his article "Social Injustice," which discusses the inroads trial lawyers are making with the political right, through socially conservative populists among their midst. We've also been allowed to attach an exchange in the letters-to-the-editor section of the magazine, in response to the column (download PDF).


The website for the Center for a Just Society, a new social-conservative group in Washington, has a lot of the items you would expect to see: denunciations of embryonic-stem-cell research; calls for an end to the filibustering of Bush's judicial nominees. The quality of the writing at ajustsociety.org is a cut above what you would find from most social-conservative organizations, and the range of issues is slightly wider. The Center attempts to bring "Judeo-Christian perspectives" to bear on topics that social conservatives have traditionally ignored. Thus it makes a moral case for Social Security reform. What most sets the Center's website apart from the sites of other conservative organizations, however, is what it has to say about tort reform. Or, rather, "tort 'reform.'"

In one of the statements on its website, the Center writes: "[T]here is a widespread effort underway to take away our right to a trial by jury. Those pushing this wrong-headed agenda claim that it will reduce the costs of healthcare and eliminate 'frivolous lawsuits.' . . . [T]ruth be told, the agenda behind the agenda [emphasis in original] has less to do with lowering the cost of healthcare and eliminating frivolous suits and more to do with immunizing wrongdoers from the consequences of their behavior."

This perspective reflects the views of the Center's chairman, Ken Connor. He is best known as a social-conservative leader. He was president of the Family Research Council, and he represented Florida governor Jeb Bush in the Terri Schiavo case. (The Center was in the thick of the Schiavo fight as soon as it set up shop, back in March.) But he has also had a long career as a trial lawyer suing nursing homes for what he calls "elder abuse."

The Center is in its infancy. It does not even have an office yet. Its advocacy of tort reform has not received much attention. The most impact it has had came when Focus on the Family, James Dobson's much larger and more influential conservative organization, publicized its description of the Republicans' medical-liability reform bill as an attack on the sanctity of life. But the Center may represent an emerging trend. There are some signs that social conservatives and the trial bar may be making common cause—which means that on litigation reform, the social and economic Right may be headed for a split. Whether that split occurs will depend on whether the social Right can see through the misleading slogans of the trial bar.

ALLIANCES IN FLUX

In the weeks between Justice Sandra Day O'Connor's announcement that she will retire from the Supreme Court and President Bush's nomination of John Roberts to replace her, there were reports of tensions between Bush's social-conservative and business supporters. Social conservatives didn't want a new justice in O'Connor's mold. They were fond of originalist jurists such as federal appeals-court judge Michael Luttig. Business lobbies worried, however, that Luttig was less likely than O'Connor to impose limits on punitive damages in lawsuits against corporations.

Harry Reid, the leader of the Senate Democrats, seemed to pick up on this tension. He said that several Republican senators would make fine replacements for O'Connor: Mike Crapo of Idaho, Mike DeWine of Ohio, Lindsey Graham of South Carolina, and Mel Martinez of Florida. His list omitted two Republican senators who had more frequently been mentioned as possible nominees to the Court: Jon Kyl of Arizona and John Cornyn of Texas. When asked about the omission of Cornyn, Reid said that he had already listed his picks. All six of the senators have socially conservative voting records. Walter Olson, the author of several of the most important books making the case for tort reform, spotted the distinction among them: Kyl and Cornyn have taken the lead on tort reform, while the other four have often voted with the plaintiffs' bar against most of their Republican colleagues. Crapo, Graham, and Martinez are, indeed, former trial lawyers.

In the end, however, Bush ignored Reid's advice. By choosing Roberts, he was able to mollify both business and social conservatives. Neither constituency knows that he will vote with it, but each has some reason to think that he might. The conservative coalition did not split.

At least, it hasn't yet. But that list of senators who used to be trial lawyers suggests one of the reasons that tensions will persist: There are socially conservative trial lawyers. The profession abounds with politically talented, rich, and influential people. While conservatives have not tended to regard the courts as instruments of social change—as much of the tort bar reflexively does—there are bound to be some outliers. With the Republicans in charge of Washington and threatening the livelihoods of trial lawyers, it stands to reason that the latter would, as the lobbyists say, "reach out" to the Republican party. Connor recently spoke at a convention of the Association of Trial Lawyers of America urging the group to do just that. He says he was received "extraordinarily well."

Connor argues that while some Republicans—the "bluebloods" at the "apex" of the party—have an economic interest in fighting trial lawyers, the "blue collars" at the "base" of the party are against trial lawyers only because the trial lawyers have allied themselves with the Democrats. If the trial lawyers end that alliance, he thinks, common ground could be found.

THE MORALITY OF LAWSUITS

Connor's organization argues that the tort system is valuable because it holds corporate wrongdoers accountable. It thus affirms the value of responsibility and, when injuries or fatalities result from corporate misconduct, the sanctity of human life. In certain respects, this claim is obviously true. But tort reformers are not composed exclusively of corporate wrongdoers, their flacks, and their dupes. As Olson puts it, "Much of the popular success of the litigation-reform side has come precisely from people's feelings that the outcomes of litigation don't track our moral sentiments very closely, and seem to track them less well over time."

Take nursing-home litigation. Until 2001, Connor's native Florida had a "resident's rights" law that allowed plaintiffs to recover damages from nursing homes without proving negligence. Nursing homes were often sued over bedsores—even though they are hard to avoid for invalid patients. Ted Frank, who runs the American Enterprise Institute's Liability Project, points out that "Christopher Reeve, who had the finest medical care money can buy, died from a bedsore infection." And the nursing homes faced a Catch-22: They were not allowed to restrain patients who suffered from dementia, but were liable if those patients hurt themselves in a fall. Frank concedes that some lawsuits involved "really substandard care," but says that too many attempted to "hold companies responsible for things they had nothing to do with."

The law forced many nursing-home companies into bankruptcy, causing a shortage. By 1998, one out of every four Medicaid dollars spent on nursing homes in the state was going to pay liability costs. Connor's partner, Jim Wilkes, the lead attorney on most of Connor's nursing-home cases, spent more than a million dollars trying to block limits on liability. The Florida chapter of AARP actually supported the 2001 reform, perhaps swayed by the thought that elderly Floridians needed nursing homes more than the trial lawyers needed the money.

Or take asbestos litigation, which has done more to reward wrongdoing than to punish it. Asbestos claims have soared in recent years even as the incidence of asbestos-related diseases has declined. Lester Brickman, a professor at the Cardozo School of Law, credibly alleges that the explanation is that 80 to 90 percent of recent claims are fraudulent. Lawyers have coached witnesses to make false testimony and get false diagnoses, and then sued companies that played the most minor of roles in the asbestos industry. Not all trial lawyers are, of course, guilty of these tactics. Many trial lawyers, especially those who represent clients whom asbestos actually made ill, are appalled by the false claims. But it is hard to avoid the conclusion that the system has strayed rather far from holding wrongdoers accountable.

The Center for a Just Society is certainly right to say that not everything that travels under the name of tort reform deserves support. It argues, correctly, that federal tort reform can trample on state prerogatives. If a state has lawsuit laws that lead doctors to leave it, it ought to be the responsibility of the state's voters and politicians to change those laws. On the other hand, frivolous product-liability lawsuits can't be avoided by skipping the border. No state can shield a drugmaker or medical-device manufacturer located in its jurisdiction from abusive lawsuits filed in other states. In such cases, it's up to the federal government to protect interstate commerce by restraining the states. The Republicans' medical-liability bill should be amended so that it touches only interstate commerce. But the trial lawyers, and the Center, oppose the whole thing.

LIFE AND LITIGATION

The Center opposes the bill on the theory that it is "pro-abortion" because it provides immunity to the makers of RU-486 (the "abortion cocktail"), and prescribing doctors, from lawsuits by the families of women who die as a result of the drug. But this immunity is partial. What the bill says is that if a product or treatment complies with federal regulations, the people who made the product or supervised the treatment can't be sued for punitive damages if something goes wrong. They can be sued for compensatory damages, including damages for causing pain and suffering. But if they're compliant with FDA regulations, for example, the courts shouldn't punish them. The makers of RU-486 already enjoy some legal immunities thanks to Bill Clinton. But even if they didn't, the Center's argument would be faulty. Just as conservatives would not favor raising corporate-tax rates in order to drive companies involved in abortion out of business, they should not oppose efforts to improve the legal environment for corporations because they might help companies involved in abortion.

John Edwards illustrates the bankruptcy of the "pro-life" case for pro-plaintiff medical-malpractice laws. Suing obstetricians for causing cerebral palsy by failing to do C-sections was one of his most profitable lines of litigation. He has boasted about how he swayed jurors by assuming the voice of an unborn child pleading for help. But the evidence strongly suggests that cerebral palsy is usually genetic in origin, and almost never the result of a botched delivery. (One piece of evidence: C-sections have grown more common over the last few decades, while the incidence of cerebral palsy has stayed the same.) Lawsuits, and the resulting malpractice-insurance premiums, have driven obstetricians away from some areas.

In a forthcoming paper for the Journal of Legal Studies, law professor Jonathan Klick and economist Thomas Stratmann provide reasons to believe that such lawsuits result in infant deaths. Specifically, they find that caps on punitive damages in medical-malpractice lawsuits bring infant-mortality rates down. More doctors practice in states that adopt them. The health benefits flow primarily to black infants in rural areas. Klick thinks that federal legislation might have a positive effect on infant mortality, too (although he is careful to note that he does not endorse the legislation). The study undermines the claim that medical-malpractice reform is anti-life.

When John Kerry picked Edwards as his running mate and Republicans attacked the latter for being a trial lawyer, Connor rushed to his defense. But if Connor is concerned about the bad name trial lawyers have in some circles, perhaps he should have blamed lawyers such as Edwards rather than their critics. Connor says, "Trial lawyers should be viewed as stewards of the civil justice system." They will not be viewed that way, however, if a sizable number of them are not acting as such.

The right to a jury trial, meanwhile, isn't nearly as threatened as the Center—and the tort bar—would have you believe. There are, it is true, some proposals floating around to handle medical-malpractice cases through the kind of administrative compensation schemes that long ago took over workers' compensation. But legislated caps on damages aren't an affront to the jury system, any more than are statutes blocking juries in criminal trials from imposing life sentences for shoplifting (to borrow a comparison from Olson). The historical value of the jury was as a brake on the power of the courts. Their role has not been to enable the courts to take actions that the legislature refuses to authorize.

The issues involved in tort reform are complicated, and people can disagree about them in good faith. The Center for a Just Society might well lead social conservatives to make a contribution to this debate (among others). Connor says that the Center will come out for making the losing party pay for civil litigation—a potentially far-reaching reform. If the Center does that, it will be hard for anyone to argue that it is merely a front for the trial lawyers.

But social conservatives ought to keep in mind that the current system features, and even encourages, all kinds of squalid behavior. Lawsuits are filed as fishing expeditions. Firms that have not done anything wrong are targeted because of their deep pockets. Simple fraud is more than occasionally perpetrated through the courts. All of these are forms of bearing false witness. And "Judeo-Christian perspectives" on that have not been positive.

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Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.