The Contingency Racket, Beware Its Expansion

The Wall Street Journal today takes on the practice of some state attorneys general of hiring private attorneys on contingency to sue businesses, a process that inevitably sets the law firm’s pecuniary interests in conflict against the interests of the citizenry.

From “The State Lawsuit Racket“:

State Attorneys General regularly hire private plaintiffs lawyers on a contingency-fee basis to prosecute cases. The trial bar returns the favor with campaign donations to state office holders. And despite the inherent conflicts of interest and questionable ethics of the practice, corporate defendants have rarely challenged such arrangements. Which is why a motion pending before the Pennsylvania Supreme Court is so remarkable — and deserves more public attention.

Janssen Pharmaceuticals, a subsidiary of Johnson & Johnson, is a defendant in a lawsuit filed by the state of Pennsylvania over Janssen’s antipsychotic drug Risperdal. The state alleges that Janssen has improperly marketed the drug for off-label uses not approved by the Food and Drug Administration. Janssen denies the accusation, but the merits of the case — which hasn’t gone to trial yet — are not what’s at issue in the motion before the court.

Rather, what’s at issue is the fact that the civil action against Janssen is being prosecuted on behalf of the state by Bailey, Perrin & Bailey, a Houston law firm. And it turns out that Pennsylvania Governor Ed Rendell’s Office of General Counsel was negotiating this potentially lucrative no-bid contingency fee contract with Bailey Perrin at the same time that the firm’s founding partner, F. Kenneth Bailey, was making repeated campaign contributions totaling more than $90,000 to the Democratic Governor’s 2006 re-election bid.

A Houston law firm heavily involved in Pennsylvania politics? How worthy of note…

Janssen has moved in the state Supreme Court (Pennsylvania, not Texas) to void the contingency contract, arguing that it violates the state Constitution because the Legislature did not approve it and because it violates the company’s rights of due process. (Here’s the docket: Commonwealth of Pennsylvania v. Janssen Pharmaceutical.)

The Pennsylvania controversy follows one in Rhode Island, where former Attorney General Sheldon Whitehouse (now U.S. Senator) hired the law firm Motley Rice to sue paint manufacturers on behalf of the state for creating a public nuisance through lead paint contamination. The state Supreme Court threw out the suit but uphold the validity of contingency arrangements if the state maintained  absolute and total control over all critical decision-making. But can that standard really be met? (For more, see this Point of Law post.)

In California, a key case is before the state Supreme Court about the legality of contingency suits, County of Santa Clara v. Superior Court (Atlantic Richfield), in which the county hired Motley Rice to sue lead pigment manufacturers. For more on this case, see the NAM’s Legal Beagle entry (including the NAM’s amicus letter), as well as today’s post by Jane Genova at Law & More.

As these issues play out at the state level, it’s also important to watch what happens with the federal government, both the Executive Branch and Congress. The stimulus legislation (American Recovery and Reinvestment Act) included a provision allowing state attorneys general to hire contingency attorneys to litigate against violations of HIPAA, the federal health privacy law. (For more, this Point of Law post.)

The White House could also open up a great Pandora’s box of cash-seeking litigation if President Obama revokes a May 2007 executive order by President Bush, “Protecting American Taxpayers From Payment of Contingency Fees,” that barred the federal government from engaging in this practice. The reasoning is found in Section 1:

Section 1. Policy. To help ensure the integrity and effective supervision
of the legal and expert witness services provided to or on behalf of the
United States, it is the policy of the United States that organizations or
individuals that provide such services to or on behalf of the United States
shall be compensated in amounts that are reasonable, not contingent upon
the outcome of litigation or other proceedings, and established according
to criteria set in advance of performance of the services, except when otherwise
required by law.

The obvious political temptation would be to reward trial lawyer contributors, past and potential, by hiring private law firms to pursue new, potentially lucrative lawsuits against an industry. How about suing companies for causing global warming, yet another line of attack that could run parallel with regulation and legislation. The goal would not be to win a case but to shake down industry and produce a grand surrender, a la the tobacco settlement.

There’s no indication the Obama Administration is contemplating any such action, but the trial lawyers are having a good political year. Rackets are always seeking new people to shake down, so you can be sure the White House will be hearing from the litigation industry.

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