Pro-Business? Cuccinelli Hires Contingency-Fee Lawyers to Sue Manufacturer

By November 30, 2010Briefly Legal, General

Attorney General Ken Cuccinelli of Virginia is working to build his reputation as a forceful opponent of government excess and overreach. In his first year in office, the Republican has used the courts to challenge the Environmental Protection Agency’s endangerment finding on greenhouse gases and to block the new federal health care law as unconstitutional.

Cuccinelli has also described himself as leading the fight to “keep Virginia a low-regulation and pro-business state.”

Admirable goals, which is why it’s so disappointing to see the attorney general embrace one of the worst excesses of state governments, the contingency-fee lawsuit in which private, for-pay attorneys are hired to sue a business on behalf of the state.

Cuccinelli announced in February his office was intervening in a lawsuit filed in the U.S. District Court for the Central District of California against JM Eagle, the world-leading manufacturing of plastic and PVC piping. The attorney general threw the state’s lot in with a disgruntled former employee, John Hendrix, who filed a “whistleblower” lawsuit against the California-based company after he was fired, claiming JM Eagle produced inferior pipe that burst under high water pressure.

However, as we described in a September post, “Qui Tam, Attorneys General, and a Company Defends Itself,” the lawsuit rests on thin allegations the company has since refuted, time and time again. (See this recent summary, for starts.)

After three years of investigation, the federal government itself declined to back Hendrix’s suit under the federal False Claims Act. Other attorneys general chose to keep their states out of the litigation: Indiana, California, Massachusetts and Florida. In October, Attorney General Beau Biden took the unusual step of withdrawing  Delaware after it had previously filed as an intervenor. (JM Eagle news release.)

No wonder. In reality, the suit bears all the signs of being another profit-making exercise by the litigation industry, in this case, the qui tam branch of trial lawyerdom.

Successful qui tam – or “whistleblower” – suits allow a winning plaintiff to get a substantial share of the dollars recouped from a company found to have defrauded the government. (The federal False Claims Act, relevant in this case, involves wrongdoing by federal contractors and suppliers.) By trolling for such suits, signing on plaintiffs, and then running a PR and legal campaign to damage the targeted company’s reputation, law firms try to increase the size of their take.

Hendrix is being represented by the biggest player in this branch of anti-business law, the Washington, D.C., and San Francisco law firm of Phillips & Cohen. Given the amount of time, effort and money invested in its legal pursuit of JM Eagle, the lawyers are obviously hoping for a big payday.

Well, that’s what motivates private lawyers, isn’t it, maximizing their law firm’s profits? But attorneys general should first and foremost be representing the interests of a state’s citizens. To start with, Virginians would be best served by officials eschewing flimsy anti-business lawsuits, but for argument’s sake, let’s assume a valid claim. In such a case, Virginians might be better served by an expedited settlement or a non-monetary agreement instead of the biggest payout possible for some San Francisco lawyers.

Attorney General Ken Cuccinelli

Nevertheless, Attorney General Cuccinelli has decided that private contingency-fee attorneys can better represent Virginians than his own office can. He has hired Phillips & Cohen and Washington, D.C., law firm Day Pitney LLP, to serve as “special counsels” to carry out Virginia’s litigation against JM Eagle.

The Aug. 9 contract letter from Assistant Attorney General Eric A. Gregory (available here) specifies the terms of the arrangement, in which Hendrix would receive 20 percent of the state’s recoupment and the two law firms would split a 5 percent contingency fee according to their own terms. The two firms already represent other government plaintiffs, including Tennessee, Santa Cruz and Vallejo, Calif., and various water districts, so they are amassing quite a list of cash-seeking clients – again, with interests distinct from Virginia’s.

JM Eagle also makes a solid argument that Virginia law precludes the arrangement made by the attorney general’s office. In an Oct. 22 letter to Attorney General Cuccinelli attorney John Beisner of Skadden Arps expressed the company’s “serious concerns” that the AG’s appointment of Phillip & Cohen and Day Pitney did not comply with state law.

Beisner asks the attorney general’s office to document that the law firms’
appointments were made according to proper procedures. Otherwise, the company contends, the law firms’ activities will be outside the authority of state law and “therefore a nullity.”

Virginia state law is by definition a central consideration, but important policy issues are also involved. The National Association of Manufacturers and other business advocates have long opposed states hiring contingency-fee attorneys to carry out lawsuits, a practice that began with tobacco and then spread to firearms, lead pigment, energy companies and drug makers. These contingency-fee arrangements encourage speculative litigation that targets businesses, and the lawsuits often move forward with no input from the policymaking branch of government, the state legislature.

Contingency-fee arrangements also foster a political climate of “pay for play,” in which trial lawyers contribute to politicians who then hire the firms to conduct a state lawsuit against a deep-pocket defendant. As this Washington Legal Foundation 2008 backgrounder summarized, “The experience of other states that have engaged in the practice of entering contingency fee contracts demonstrates cause for concern as government-hired private attorneys are often political donors,

friends, or colleagues of the hiring government official – creating, at the very least, the appearance of impropriety.” The Wall Street Journal has editorialized against the practice, shedding light on Pennsylvania’s suspect suit against a pharmaceutical manufacturer in “The Pay-to-Sue Business,” and the “State Lawsuit Racket.”

Meanwhile, trial lawyers have persuaded Congress to expand the opportunities for qui tam lawsuits, including via the federal health care law.

JM Eagle has aggressively defended itself against the qui tam claims, while taking extraordinary steps to affirm its reputation and its products’ quality; in April the company announced an unprecedented 50-year warranty. (Video summary.)

That a respected, globally successful manufacturer and other companies have to undertake this kind of expensive and time-consuming defense is just more evidence that the U.S. system of civil liability is fundamentally flawed, encouraging litigation instead of economic growth and judgments instead of jobs. State attorneys general who contract with private law firms to bring suits the states might otherwise not pursue make that flawed tort system even worse.

One term can definitely NOT be used to describe this kind of action by any state attorney general, and that’s “pro-business.”

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