Should state AGs be allowed to use contingency fee lawyers?

December 20, 2012

One of my themes of the year, beginning with a post way back on Jan. 3, has been the shifting relationship between state attorneys general and private plaintiffs’ lawyers. In several cases with major developments in 2012, state AGs have operated at odds with the private bar, a change from their traditional cooperation in pursuit of defendants. Those cases, however, remain the exception. State agencies continue to make a habit of hiring private lawyers on contingency, most notably to prosecute securities class actions and consumer fraud cases. To cite one prominent example, in the biggest class action settlement of the year, Bank of America’s $2.43 billion settlement of claims related to its acquisition of Merrill Lynch, the Ohio pension funds that served as lead plaintiff contracted for representation from Bernstein Litowitz Berger & GrossmannKessler Topaz Meltzer & Check; and Kaplan Fox & Kilsheimer.

It’s so common, in fact, for state AGs to turn to outside counsel that the Institute for Legal Reform, the litigation arm of the U.S. Chamber of Commerce, has targeted the issue. In February, former Florida AG Bill McCollum testified on behalf of the ILR before a congressional subcommittee on the U.S. Constitution, arguing that recent laws, including Dodd-Frank, have expanded the enforcement powers of state attorneys general, and, with that, the opportunities for private plaintiffs’ lawyers employed by AGs. He asserted that AGs’ use of contingency fee lawyers is a problem that demands congressional action.

“At the very least, use of such counsel without proper safeguards can give the appearance of impropriety and undermine public confidence in our legal system,” McCollum said. “State attorneys general should only enter into private attorney contingency fee contracts when their own office does not have the expertise or ability to handle a matter and the AG cannot locate an appropriate outside counsel to handle the matter on an hourly fee/non-contingency basis. Then only with complete transparency, a competitive bid process and caps on attorney fees, should contingency fee counsel be retained.”

Despite the ILR’s attention, few states and defendants have been willing to step up and confront AGs who hire outside lawyers, according to a terrific overview that Husch Blackwell published in 2011. According to the Husch paper, as of winter 2011, only 10 states had passed legislation addressing AGs’ use of contingency fee lawyers — and only five of them (Texas, Wyoming, Arkansas, Kansas and North Dakota) have imposed any limits on the practice. (Those states have since been joined by Alabama.) And judges in the half-dozen cases in which defendants challenged state governments’ use of outside counsel have overwhelmingly rejected arguments that defendants’ due process rights are violated by such arrangements, according to the Husch survey. In the most prominent recent cases, California’s state Supreme Court upheld Santa Clara’s hiring of contingency fee lawyers to prosecute nuisance claims against manufacturers of lead paint, and Pennsylvania’s high court ruled that the pharmaceutical company Janssen did not have standing to disqualify outside counsel hired by the state to litigate claims of off-label marketing of the antipsychotic Risperdal. (In January 2011, the U.S. Supreme Court sidestepped the issue when it declined to review the California court’s decision in the Santa Clara case.)

That’s the not very encouraging background to the declaratory judgment suit Merck filed in August 2011 against the attorney general of Kentucky, Jack Conway. Kentucky had entered into a contract in September 2010 with the plaintiffs’ firm Garmer & Prather to investigate and prosecute any Vioxx-related claims the state might have against Merck under its consumer protection act. The state subsequently sued the pharma company. Merck responded with its declaratory judgment action in federal court in Frankfort, Kentucky. The company asserted that because the AG was seeking penalties against it, he was operating in a quasi-prosecutorial capacity. And as a prosecutor, Merck argued, he violated his duty to serve the public interest by ceding control of the case to private lawyers incentivized to maximize the recovery against Merck. Merck claimed that as a result, its due process rights were compromised.

“Under these circumstances, contingency fee counsel’s participation in Commonwealth of Kentucky ex rel. Conway v. Merck & Co., Inc. offends the requirement of fundamental fairness embodied in the Due Process Clause of the Fourteenth Amendment,” the complaint said. (It’s notable that Merck is represented by John Beisner of Skadden, Arps, Slate, Meagher & Flom, a noted tort reform advocate.)

On Wednesday, U.S. District Judge Danny Reevesdenied the AG’s second motion to dismiss the case, ruling that he’s not required to abstain from interfering in the AG’s underlying case against Merck, even though that case is proceeding in state court. The AG had argued in his motion to dismiss that Franklin Circuit Court is a viable forum to adjudicate Merck’s constitutional claims; Reeves did not dispute that assertion but said that the particular jurisdictional history of the AG’s case, which has bounced between federal and state courts, permits Merck to raise its constitutional arguments in federal court.

The fact-based specifics of Reeves’s ruling aren’t important to the larger question of whether defendants can limit AGs’ right to hire outside lawyers working on a contingency basis, but the effect of his decision is: Merck can proceed with its argument that the practice is an unconstitutional violation of defendants’ due process rights. There’s even a trial date in the first half of 2013 in the case, which appears to make this the leading court challenge to the practice. If tort reformers are going to make inroads on due process grounds, this case is their best shot, at least at the moment.

Merck counsel Beisner declined to comment, as did the Kentucky attorney general’s office.

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