Here and there the American Association for Justice has tried to defend its claim for a $1.6 billion federal tax break by arguing that trial lawyers want to be treated just like any other business. One AAJ spokesperson made the claim in a recent interview with The Hill, but apparently refused to be identified. Talk about the courage of your convictions.

As issue is the attempt to deduct loans extended in support of contingency fee litigation as business expenses. Bills to accomplish that goal have died in Congress, so the trial lawyers quietly appealed to the U.S. Treasury for a special-interest tax intepretation.

But what about the point? Is it really just about fairness?

A Washington Times editorial this week refuted the claim. From “Pushback on trial-lawyer tax breaks“:

“The Treasury is looking to clarify a provision in the tax code that prohibits trial lawyers from deducting expenses for contingency cases in the year they are incurred,” according to The Hill. “Instead, these expenses can only be deducted after the case has concluded. The [lawyers] seek to make it so trial lawyers can deduct these expense in the year they are paid. … Currently, expenses incurred by trial lawyers for contingency cases are considered to be loans that the client will eventually repay.”

Victor Schwartz, author of a prominent textbook on tort law and a leading opponent of jackpot-justice lawsuits, has estimated for about 25 years without contradiction that plaintiffs’ lawyers win at least some money by judgment or settlement from some 95 percent of their cases. In other words, these are loans for which repayment is quite likely. As the Heritage Foundation’s Jack Park explains, “When a carmaker or dealer, [or] a furniture company … makes a loan to the buyer by selling over time, those loans are part of a related business, not a deductible business expense. In fact, those loans generally do not become deductible unless and until there is a default. Why shouldn’t the trial lawyers wait until there is a default to deduct their loans like everyone else?”

The difference is important because if the lawyers get the tax subsidy, the Treasury will be floating the lawyers’ interest costs.

The Times noted the July 22 letter to Treasury from the ranking Republicans on the tax-writing committees, Sen. Grassley of Senate Finance and Rep. Dave Camp of House Ways and Mean, that made a clear case that the tax break was not justified and would circumvent the policymaking branch of government, Congress.

Twenty-four Senate Republicans added their opposition in a letter Thursday to Treasury Secretary Geithner on Thursday, recognizing — we assume — how politically repellant this kind of lawsuit-subsidizing, special interest tax break would be to most Americans. From the letter organized by Sen. John Thune (R-SD): (continue reading…)

Developments on two issues we wrote about last week.

Ecuador-related litigation against Chevron: The Second Circuit Court of Appeals has rejected a motion by trial lawyers suing Chevron who wanted to limit even further the release of footage from the movie, “Crude.” Chevron originally wanted to see all footage not shown in the movie, but the court had ordered the director, Joe Berlinger, to turn over only footage that documented actions of the plaintiffs’ legal team,  and court and government officials in Ecuador. It was a victory for Chevron: The company has access to information necessary to defend itself and for its employees in Ecuador to defend themselves from ginned-up criminal charges. At the same time, Berlinger described the outcome as a limited victory for his side.

As we wrote last week, the lawyers for the Amazon Defense Coalition, the PR front of the U.S. trial lawyers campaign, responded with alacrity and alarm, asking for an emergency stay and further restrictions on the footage. Huh. Wonder what event they wanted to keep under wraps.  The Second Circuit quickly responded, rejecting the motion. Here’s the court’s ruling.

Trial lawyer tax break: The American Association for Justice has been keeping its head down on the stories about the trial lawyers going to the U.S. Treasury to get a tax break for speculative, contigency-fee litigation, circumventing Congress in the process.The Hill now has a response blog post, “Change in trial lawyer deduction would put firms on equal footing, advocate says.”  The AAJ feels so strongly about it, its “spokesperson” is not identified by name.

We’re confident that trial lawyers deserve this $1.6 billion tax break, just don’t quote us on it!

The ranking Republicans on the Senate and House’s tax-writing committees have written U.S. Treasury Secretary Geithner, urging him not to allow Treasury to circumvent Congress by letting trial lawyers deduct loans to clients in contingency litigation as business expenses.

Sen. Charles Grassley (R-IA) of the Senate Finance Committee and Rep. Dave Camp of the House Ways & Means Committee sent Geithner the letter late Thursday, the Chamber-backed Legal Newsline reported. The letter is available online here.

According to their joint news release, “Camp, Grassley Question Whether Executive Branch is Again Bypassing Congress to Impose Tax Policy“:

Grassley and Camp said they are concerned that Treasury might be establishing a pattern of unilaterally making tax changes in contravention of congressional intent. In November 2008, Treasury and the IRS came under fire from Grassley and others for giving a tax break that allowed banks to acquire one another. The Treasury ruling helped to accommodate the sale of the Wachovia Corporation to Wells Fargo. Grassley questioned whether Treasury had the authority to bestow such a tax break independently of congressional action.

Regarding the legal expenses issue, Camp and Grassley noted:

• No other Circuit Court has affirmed the Ninth Circuit decision;
• On other matters, the IRS has maintained its policies despite unfavorable decisions from multiple Circuit Courts; and
• Despite the introduction of provisions in both the House and Senate to affirm the Ninth Circuit Court decision, Congress has failed to enact such a law.

The two also demanded relevant documents from Treasury, including any that would explain why action was so urgent considering the issue wasn’t mentioned in the latest update of Treasury’s 2009-2010 Priority Guidance Plan.

The American Association for Justice, the trial lawyer lobby, has lobbied two successive Congresses for legislation to make the expenses deductible. Making the expenses deductible would be worth $1.57 billion over 10 years, the Joint Committee on Taxation estimated in May 2008. (Page 6, “Uniform treatment of attorney-advanced expenses and court costs in contingency fee cases.”)

It’s tough to sell a trial lawyer bailout in a time of soaring federal debt, and the sponsors of this year’s bills, Rep. Artur Davis of Alabama and Sen. Arlen Specter of Pennsylvania, lost clout after they were defeated in Democratic primaries. So the trial lawyers’ lobbying strategy became more recondite. The AAJ had been lobbying Treasury and the IRS along with Congress, according to page 12 of its first quarter 2010 lobbying disclosure form, but the association dropped its executive branch contacts in the second quarter. (Page 15 of the latest disclosure form.)

Instead, the AAJ hired the specialists at the Washington Tax Group to lobby the issue to the tune of $60,000 so far in 2010. (Lobbying disclosure forms show $20,000 in the first quarter and $40,000 in the second quarter report.) Patton Boggs also started lobbying Treasury for the AAJ in the second quarter for the deduction (but not in the first quarter). Well, there’s nothing wrong with turning to the experts.

What’s wrong is the policy itself that the AAJ is trying to achieve via Treasury. (continue reading…)

Or, as today’s Wall Street Journal’s editorial puts it, “A Bill Lerach Tax Cut“:

Taxes are going up in January for millions of Americans, but that means it’s even more important to have friends in Washington. And nobody has friends in higher places than the plaintiffs bar.

The American Association of Justice, or the trial bar lobby, is meeting in Canada this week to raise money for Senate Democrats and plot new openings for its legal raids on business. According to Legal Newsline, AAJ director of federal relations John Bowman told attendees the awesome, fabulous, wonderful news that he expects the Treasury Department to soon issue an order giving a tax break for contingency fee lawsuits.

The AAJ announced its new president for 2010-2011 yesterday, C. Gibson Vance, a stockholder in the poiltically connected Alabama law firm of Beasley Allen. So here’s his first challenge, handling the crisis PR: Will he choose to be upfront, open with the media, explaining why the news accounts of the Treasury action are wrong or, alternatively, why the $1.6 billion tax cut to stimulate litigation is necessary?

More …

• Daily Caller, “Payday: Trial lawyers could get major tax cut despite major federal deficit“
• The Louisiana Record (blog), “LLAW decries potential trial lawyer tax break“
• Southeast Texas Record, “Watchdog groups fear trial lawyer tax break will ‘suck marrow out of economy’“
• Washington Examiner, “No special tax cuts for wealthy trial lawyers “
• Legal News Line, “Treasury not commenting on trial lawyer tax break“

Legal News Line, a Chamber of Commerce-backed publication, broke this story. Love this detail from its follow-up: The White House referred questions to the Treasury Department, which declined comment.

Daniel Fisher of Forbes.com reacts to today’s news that the litigation lobby could win a $1.6 billion tax favor from the U.S. Treasury. From the On the Docket column, “Treasury May Give Trial Lawyers a Sweet Tax Break“:

It would be a victory for trial lawyers who have complained they must eat the costs of prosecuting contingency-fee cases as incurred and only get to write them off against any fee they obtain at the end. Writing off the costs each year would substantially boost their after-tax income and increase the attractiveness of contingency-fee cases as an investment, much as tax writeoffs on drilling expenses dramatically increase the odds of financial success in the oil and gas business. The change would be poorly timed from a political standpoint, though: At the same time as legislators are trying to take away the lucrative carried-interest tax break from hedge-fund operators, Treasury would be giving it to another group of well-heeled and politically powerful professionals.

Shopfloor.org posts today:

• Trial Lawyer Deduction: Stimulating More Lawsuits, Fewer Jobs
• Trial Lawyer Tax Breaks: Congress is the Policymaking Branch

UPDATE (1:10 p.m.): Excellent statement from the American Tort Reform Association, “ATRA Condemns Reported Treasury Effort to Bail Out Litigation Industry,” with comments from ATRA President Sherman “Tiger” Joyce. Excerpt:

“It’s truly baffling,” said Joyce. “The Obama administration insists that it’s determined to create jobs and help the private sector economy expand. But by forcing taxpayers to subsidize still more litigation, it would do the just the opposite.

“Congress has thus far chosen not to advance this trial lawyer tax break with legislation. So, why would the administration even consider creating such a break by fiat?

“We can either create more jobs or more lawsuits,” Joyce continued. “We can’t realistically create both, and surely officials at Treasury and throughout the administration understand this basic reality.”

UPDATE (1:25 p.m.): Ted Frank at Point of Law analyzes the legal issues, including champerty:

The issue is the tax-deductability of loans trial lawyers give their clients when bringing litigation. Under current tax law, the loans are treated as loans, and cannot be deducted unless the client does not pay the loan back at the end of the litigation. The tax break would treat the loans as a cost of doing business, and permit deduction immediately—which is one would think would be problematic if state bar associations enforced their own ethical rules, which prohibit lawyers advancing money to clients as expenses except as a bona fide loan. But don’t count on any investigations by professional responsibility committees to see whether transactions classified as ethical loans are being called business expenses when reported to the IRS.

That said, if professional responsibility committees won’t act, defendants should. Defendants can conduct discovery into whether plaintiffs have received loans from their lawyers, and, if so, conduct reasonable investigations into whether the law firm deducted the “loan” on its taxes the next year. If so, there is a good-faith basis to bring a lawsuit for champerty in many states. (A simple inquiry letter asking the attorney to state under penalty of perjury that they did not deduct the loan on their taxes should be sufficient for Rule 11 purposes to create a reasonable inference to bring a complaint on grounds of information and belief.) Alas, the organized defense bar is probably too cowardly to take that step, and too many corporate general counsels do not insist upon muscular defense representation.

As the American Association for Justice works with Treasury to circumvent Congress and gain a tax deduction for contingency fee litigation (see post below), it’s important to realize how damaging to jobs creation such a tax break could be.

Victor Schwartz and Chris Appel of Shook, Hardy & Bacon wrote a briefing paper on the issue last year for the Washington Legal Foundation, “Federal Government Bailout for Trial Lawyers.” They explain:

How Plaintiff’s Lawyers Weigh Whether to Bring a Case. Those who practice plaintiffs’ lawyer work learn quickly that it is a business similar to other capital businesses. Capital is placed at risk and a judgment is made whether or not it will bring a profit. Today the costs of litigation act as a curb against marginal and frivolous litigation. This is what makes the plaintiffs’ lawyers’ tax proposal of such great practical importance. While one cannot calculate it mathematically, having the federal government bear 40% of the initial costs allows plaintiff’s attorneys to take more cases with higher risks. The result to industries targeted by plaintiffs’ lawyers will be staggering.

The activity of the contingency fee lawyer is also not like other businesses. It is a business that threatens other businesses with major lawsuits and is directed at using every possible weapon to settle those lawsuits. Under the present legal system, additional weaponry in the plaintiffs’ bar is not needed. To the contrary, additional weaponry is needed to stop marginal litigation and frivolous claims. Some of that marginal litigation is highly likely to be directed at financial institutions, potentially reducing those companies’ capital at the very time the federal government’s policy is to increase it.

That was written in May 2009 but applies just as well today.

There’s also a timely political angle. If you ever doubted how unpopular the litigation industry is, just look how much effort the trial lawyers and Democratic Senators went to keeping this weekend’s fundraiser in Vancouver, B.C., quiet. Republican campaign operatives certainly thought the news was damaging.

• HotAir.com, “Why are Senate Democrats fundraising in Canada?”
• The Day, Connecticut, “Blumenthal was at Reid’s Vancouver fundraiser, campaign confirms”
• New Orleans Times-Picayune, “Sen. David Vitter criticizes Rep. Charlie Melancon for fundraiser in Canada“
• Town Hall, “Updated: Harry Reid & Co. Attend Weekend Fundraiser… in Canada“
• Politico, “Dems take flak for Canadian fundraiser“
• Chicago Sun-Times, “What Giannoulias did not want you to know: In Canada, fund-raising from U.S. trial …”
• The Hill, “GOP hits Reid and others for raising money in Canada“

Follow these hits with a special-interest tax ruling from Treasury, and you can create a major political story all the way through November.

To summarize: A tax break for trial lawyers would be damaging to the economy and damaging to supporters’ political prospects. On the plus side, it might inspire the major media to pay more attention to one of the most politically powerful special interests, trial lawyers, and their lobbying arm, the American Association for Justice.

The fundraiser for Senate Democratic candidates at the American Association for Justice convention in Vancouver, B.C., continues to make news, despite the trial lawyers’ efforts to keep it out of the press. Senate Majority Leader Harry Reid was in attendance.

Goodness knows, we don’t have a beef with political fundraising: Our recurring complaint is that the AAJ is one of the most powerful lobbying and political groups in the country, and yet the trial lawyers association does not receive the same level of scrutiny from the maintream media that business groups do.

• The Day, Hartford, Conn., “Blumenthal was at Reid’s Vancouver fundraiser, campaign confirms“
• The Hill (blog), “GOP hits Reid and others for raising money in Canada“
• Politico, “SUNDAY NIGHT — DO YOU KNOW WHERE YOUR SENATOR WAS?”
• WRTV-6, Indianapolis, “Ellsworth takes campaign on the road… to Canada“

Now if we could just get people to report on the AAJ’s role in shaping policy.

Last week we alluded to the absence of any media reporting on the American Association for Justice’s annual convention in Vancouver, B.C., observing, “The AAJ has yet to publicize its major speakers at this year’s event — any leading U.S. politicians or candidates? — although trial lawyer extraordinaire Ron Motley will receive the AAJ’s Lifetime Achievement Award.”

David Fredosso of The Examiner newspapers answers our parenthetical question in a blog post, “Trial lawyers raise money for Senate Dems at event in Canada“:

Republicans are pouncing on Sen. Harry Reid, D-Nev., for joining a group of politically active trial lawyers last night in Vancouver, British Columbia, to raise money for himself and other Democratic Senate candidates. The event occurred at the American Association for Justice convention.

Contributors were invited to give up to $43,200, with the default allocation going 20 percent to Reid, 9.3 percent to Sen. Michael Bennet, D-Colo., and about 7 percent to ten other Democratic Senate candidates.

Only coverage we see so far. [Update: Here's CNN's blog.] Trying to avoid examination of its political activism, AAJ has done little to publicize its activities in Canada outside of its own membership. Not eve any Tweets.

UPDATE (3:52 p.m.): CNN’s Political Ticker blog also has the story, reporting, “According to a Democratic source, eight Democratic Senate candidates also attended the fundraiser, which was held in Vancouver, British Columbia. One of the eight, Rep. Charlie Melancon of Louisiana, became the target of an NRSC email release Monday afternoon.” Yes, the NRSC is milking this for all its worth. You would think the AAJ would shout its influence to the world, wouldn’t you?

UPDATE (7:15 p.m.): Lynn Sweet of The Chicago Sun-Times has the Illinois angle. Why would Senate candidates be embarrassed about attending a trial lawyers’ convention to raise campaign funds? British Columbia. It must be the B.C. connection.

One of the flimsier arguments from the trial lawyer crowd is that supporters of tort reform are hypocrites if they ever file a lawsuit of their own. Anthony Tarricone, president of the American Association for Justice — the trial lawyer lobby — made the claim after states challenged the constitutionality of the federal health care legislation, “Tort Reform Hypocrites: “Do As I Say, Not As I Sue.”

Tarricone is trying a “gotcha moment,” but the argument falls flat. Supporters of medical liability reform believe that frivolous lawsuits and exorbitant punitive damages increase costs for health care by causing doctors to practice expensive defensive medicine.

And in fact, via Kaiser Health News, “Survey Of Doctors Suggests Widespread ‘Defensive Medicine’“:

HealthDay/Bloomberg Businessweek reports that a new survey published in the Archives of Internal Medicine shows that 91 percent of 2,416 doctors believe their colleagues practice defensive medicine by giving patients more tests and treatments as a means of protecting themselves from lawsuits. “In addition, 90.7 percent of the respondents believe better protection against unwarranted malpractice suits is necessary to reduce the number of unnecessary medical tests” (Preidt, 6/28). 

Medical liability reformers argue for changing laws to discourage excessive litigation and unnecessary costs, reducing the need for doctors to practice defensive medicine. Texas is a proven success story.

How does making these sound policy arguments deprive someone of the ability to sue without being called a hypocrite? If someone supports capping punitive damages, he is forever prevented from arguing constitutional issues?

The latest example of this nonsense comes from The Washington Post’s “Rough Sketch” column, a leading practitioner of gotcha-smirk journalism.:

Conservatives hate lawsuits and the trial lawyers who file them — until, that is, they want to sue somebody.

In Florida, two donors to Gov. Charlie Crist’s Senate campaign have sued Crist to get their money back now that Crist has quit the Republican Party and is running as an independent. Tort reform — and conservative demands for the end of frivolous lawsuits — can wait until these aggrieved parties get back the $5,300 combined that they gave Crist.

Crist can’t be surprised that his former supporters are angry enough to sue. His former mouthpiece is now using her mouth against him. Amanda Henneberg, Crist’s former campaign spokeswoman, now has a job with the Republican National Committee, and her duties include bashing Crist. Henneberg, who once sang the praises of Crist, accuses Crist of “singing the praises of the Obama administration.”

That is some stupid snark. Two partisan activists give money to a candidate who then reneges on the principles and political party on which he based his campaign solicitations. We don’t know anything more about the suit than what we read here, and maybe it is bogus — although we don’t see any demand for $100 million in punitive damages.

But the suit is NOT a repudiation of the principles of tort reform. You can support medical liability reform and still use the courts to address a legal grievance — say, a contract dispute — without being a hypocrite. The AAJ’s logic would have the public believe that tort reformers can’t challenge a traffic ticket.

Both the AAJ and the Post’s journalists know this, probably. They just want to say, “Nyah, nyah, nyah.”

Note: We edited this post at 2:55 p.m. so it would read a little better and to correct the spelling of “nyah.”

An educational seminar sponsored by the American Association for Justice, the national lobbying organization for trial lawyers.

Injuries without Evidence: Proving Fault and Damages in the Soft Tissue Case Teleseminar
May 20, 2010

Proving fault without evidence. Now that’s creative.