Texas' New World Record for Lawsuit Abuse: The 2,300,000,000 Tobacco Legal Fee

    
Texans for Reasonable Legal Fees, Friday, May 1, 1998

 

The $2.3 Billion Legal Fee: Unlawful and Unconscionable

The $2.3 billion in legal fees contemplated by the Texas tobacco settlement is both unprecedented and unconscionable. Unprecedented because the next largest legal fee in the history of the world is a mere "$0.3" billion, the real legal fee for the remarkable, fully litigated case that became a wonder of the legal world: Pennzoil v. Texaco. It is doubtful that a fee approaching $2.3 billion has ever been considered a realistic possibility on any case, regardless of risk or novelty, in the history of civil or criminal justice. Unconscionable because $2.3 billion for a case that never even went to trial, and which tracked work pioneered and litigated by other States, offends both the law and the moral senses.

The few proponents of the $2.3 billion fee, primarily Attorney General Dan Morales, the plaintiffs' attorneys themselves (self-designated as "Private Counsel" in the Settlement) and their hired public relations consultants, have advanced an ever-changing series of claims. They claim that the case was extraordinarily risky, that theirs represented brilliant, original legal work, that they do not have to prove up the hours they worked or account for the expenses they incurred, and that "a deal is a deal" even if the law says otherwise. Common sense recognizes a fee of that size as outrageous, and informed analysis reveals that these arguments have no support in law or fact. Practical political observers recognize that allowing such a fee is antithetical to sound public policy. Their $2.3 billion fee demand is as unsupportable as it is enormous.

The plaintiffs' lawyers for Florida in its tobacco case made a multibillion-dollar fee demand against that State. Florida's Attorney General said such a fee "would choke a horse," and opposed it. A Florida court ruled that, although their legal work was brilliant, the lawyers deserved only "tens of millions of dollars, perhaps hundreds of millions" at most. A multibillion-dollar fee was "per se unreasonable and unconscionable."

General Morales' January 16 Maneuvers

On January 16, 1998, General Morales and the Private Counsel planned and executed four extraordinary maneuvers. On that single day, they announced in Austin final settlement of the State's case against the tobacco companies for $15.3 billion. Simultaneously, they filed motions with the court in Texarkana seeking an immediate hearing and fee approval. Also on the same day they executed new fee-related contracts attempting to waive all rights Texas might otherwise have retained to reconsider this incredible fee. Finally, also on the same day, General Morales diverted attention from the behind-the-scenes activities by firmly and publicly dismissing reports of multibillion-dollar fees as "laughable" and a "fantasy."

By the time a more complete set of facts was known, the maneuver had already succeeded in obtaining a wholly unopposed court order approving all aspects of the settlement and the entire $2.3 billion legal fee. The strategy almost worked. But despite very short time deadlines, Governor George W. Bush, a bipartisan group of legislators led by Senators Troy Fraser and Ken Armbrister, and Attorney General candidate John Cornyn were able to mount legal interventions to challenge the fee.

Texans for Reasonable Legal Fees has now acquired the relevant documents and can begin to tell a more complete story about this legally indefensible fee.

Texans for Reasonable Legal Fees (TRLF) was formed by the Texas Association of Business and Chambers of Commerce, Texans for Lawsuit Reform, Texas Citizens for a Sound Economy and other organizations and individuals long committed to the cause of litigation reform. TRLF believes that payment of this legal fee would single-handedly reverse the progress made to correct the reputation Texas gained in the 1980's as the "lawsuit capital of the world." More fundamentally, TRLF and its members are convinced that permitting such an action would generate massive long-term damage to the public interest.

The $2.3 Billion Fee Fails Every Known Legal Test

1. In Legal Fee Disputes, "A Deal Is Not A Deal." The Law Has Always Intervened When Fees Are Found Unreasonable, No Matter Who Purported to Agree to Them.

The rule of law in Texas and nationally, quite simply, is that a legal fee must be reasonable, regardless of any contingency fee contract, or any other contract. In fact, General Morales and the Private Counsel conceded this legal principle when they filed official papers in Texarkana.

These little-noticed but conclusive judicial concessions are stipulated on the face of the Private Counsel's Motion for Approval of Attorneys' Fees filed January 16, 1998. This motion expressly called on the Court "to exercise its discretion in determining attorneys' fees," taking into account all proper considerations "including those set forth in the Disciplinary Rules of Professional Conduct, the American Bar Association's Model Rules of Professional Conduct, and all other legal considerations."

When courts say "discretion" and lawyers admit it applies, they all understand that "a deal is a deal" talk is meaningless. The judge is going to set the fee, and while he can consider the contract, the rules of ethics are the ultimate yardstick.

If you sell your car or house, "a deal is a deal" is a reliable rule of thumb. "Discretion" is not available to permit a judge to tell you to charge a different price. No judge has discretion to step in and change any commercial contract the way the law requires him to do on legal fees.

A deal is also not a deal merely because it takes the form of a contingent-fee contract, as acknowledged by Private Counsel: "The fact that the right to payment was conditioned on a [contingent] recovery," their brief admitted, "does not mean that special ethical considerations apply." Again, they cite the same ethical sources as governing this contract. Lawyers are held to these standards as officers of the court and must in addition meet the same exacting standards that govern trustees, guardians and other persons entrusted with fiduciary responsibility--areas where "a deal is a deal" usually marks the reverse of what the law allows.

Strong public policy reasons explain why legal fees are subject to ethical standards. Judicial supervision of lawyers' fees is a crucial check and balance to the inherently dangerous grant of coercive state powers to private individuals. Trial lawyers holding unchecked contingent fee rights would present dangers to society comparable to those that would arise if policemen were paid contingent fees for the number of citizens arrested or judges were paid contingent fees in proportion to the percentage of guilty findings in their courts. A doctor, accountant, engineer or businessman cannot legally demand your records or your appearance for deposition and file public papers exposing your family, property, or business to the threat of ruin. But any licensed lawyer can do all of these things. These are the principal reasons why lawyers' fees, unlike many other fees in a marketplace economy, remain subject to special judicial control.

The fear that profit motives will sweep ethical considerations aside explains why all contingent fees to this day are still forbidden as unethical in England, the intellectual and historical source of our legal system. American lawyers are proud to affirm their historic status as officers of the court, and judges should be vigorous in enforcing ethical standards on all lawyers.

Class action rules will likely he applied in this context. The body of law most likely to guide the courts in this emerging area of government mass litigation was developed in class actions. In the pre-tobacco era, most of the biggest-dollar cases were "class actions," where a lawyer represents thousands or even hundreds of thousands of plaintiffs with similar claims. The lawyer has an inherent conflict with the clients when it comes to dividing up the money that the defendants are willing to pay to settle, and as a practical matter, the clients cannot defend themselves against the lawyer. So, the courts require a careful check of the lawyers' actual time records and expenses, and limit the lawyers to a reasonable fee in light of both their hours and their risks.

A state's plaintiffs' lawyers have the same inherent conflict with their client. And the politician who hired the plaintiffs' lawyers cannot always be trusted to fight his friends' fee demands.

2. A Probable Fifth Circuit Fee Award of Below $100 Million Explains Private Counsel's "Deal is a Deal" Posture and Their Refusal to Submit Actual Hours or Expenses

Because anyone who invests the time to review established case law in the U.S. Fifth Circuit or in Texas courts recognizes that the "deal is a deal" fee claim is legally defunct, it is understandable why General Morales and his Private Counsel colleagues are stonewalling any attempt to document their actual work. They understand, probably better than anyone else in the picture, that application of traditional fee guidelines would shrink this $2.3 billion bonanza to a fair but life-sized level that probably would not exceed $100 million.

Under traditional rules, as carried forward in the Fifth Circuit "Johnson factors," all fee awards must include an assessment of time and effort expended by the lawyers representing the client. A full recitation of the Johnson rules hearing is attached. In general, the Court first multiplies the hours reasonably spent on the matter by the lawyer by an hourly rate in light of prevailing community standards and the lawyers' experience, skill and reputation (sometimes called the "lodestar" rate) for a particular lawyer, then multiplies or adjusts the rate for the various Johnson factors such as risk, creativity, success and other factors determined by the Court in its discretion, within the limits established here by the U.S. Fifth Circuit Court of Appeals. This traditional legal fee approach is always subject to the limits inherent in a rate that includes time and effort as an essential element. For example, a lawyer so well-connected or feared that he could recover his client a ten million dollar settlement with no more than a ten minute call could not obtain court approval of a $3 million fee to a client who objected. But the rate awarded by the Court under Fifth Circuit precedent would doubtless be measured in thousands of dollars per hour.

Private Counsel cited a recent antitrust case in which a highly regarded Houston law firm collected a fee of $190 million for successfully pursuing an antitrust case. The contrast illustrates the fallacy of $2,300 million fee in this less novel, less complex and less risky tobacco case. Private Counsel in the tobacco case refuse to disclose their hours or expenses; but in the antitrust case, the law firm submitted work records totaling nearly 200,000 billable hours. The court setting the antitrust fee used the lawyers' time and expense records to award the firm's clients a $41 million fee-shifting award against the losing railroad. The contingent fee in question -- about $190 million -- totaled between 4 and 5 times the normal or "lodestar" rate. The antitrust case presented novel legal theories and did not (unlike the tobacco cases) have numerous similar cases to draw from. The tobacco case benefited from a national policy decision by the defense, was not taken to trial, and consumed less than two years of work. The antitrust case enjoyed none of these advantages, and spent over six years in the litigation, which settled only after a two month jury trial, including jury verdict and judgment by the Court.

Since Private Counsel decline to share their hours or expenses, only estimates are possible. One rough but fair approximation would compare the two years of tobacco litigation to the six years of the antitrust case Private Counsel cited in Texarkana. This comparison would imply a total of 70,000 billable hours, somewhat more than a third of the antitrust case hours in less than a third of the time, with no jury trial. At the same effective $200 per hour average found by the Court in the antitrust case, the straight "time and effort" fee would add up to $14 million. This calculation would result in a $56 Million fee using a four times multiplier at the lower end of the antitrust example, or $70 Million at a five times multiplier.

Comparing $70 million to $2,300 million tells why General Morales' lead sound bite has been "a deal is a deal". The $2.3 billion stands no chance of survival before the Fifth Circuit. Hence the Morales-led statewide publicity campaign featuring catchy "deal is a deal" and "where were you in March, 1996" themes. If you can't win in court, try to find somewhere else to win. Why else would General Morales play to the press by first denouncing Governor Bush's intervention as being pro-tobacco, then drop that claim in favor of a Cry Wolf campaign claiming that anyone challenging the fees is endangering the settlement? A simple stipulation separating fee disputes from the rest of the suit would end that claim without prejudicing anyone's position, just as has already been done in the Mississippi companion case. Lost in the fog of political bluster is the fact that Morales, not Governor Bush or the other intervenors, is holding the settlement hostage.

Should the largest legal fee in the history of the world escape an effective and correct application of the rules all parties agree apply, does anyone doubt that this will brutally damage both those rules and the crucial public policies they embody? A rising tide of lawsuits, particularly "mass tort" lawsuits and government-based claims, will be the certain and disastrous consequence. Centuries of real-world experience underpin the foundations of these rules of the legal profession, all of which General Morales and Private Counsel would have us exchange for "a deal is a deal."

3. General Morales Has Allowed $38 Million of Totally Unexplained "Expenses."

The only records released publicly concerning the $40 million in expenses agreed to by General Morales document only $1.7 million. This $40 million total raises questions when compared to the total quoted in the Wall Street Journal by famed plaintiff lawyer Joe Jamail of "just over $5 million" for the entire expenses of Texaco v. Pennzoil, which included years of preparation and a five-month trial. This lack of public accountability is especially troubling because the underlying contracts required that such expenses be proven.

If the 1996 "expense" records are any guide, the final disclosure promises to be sensational. The records disclosed so far reveal a number of very interesting items--charges to the Texas case for Louisiana and Florida bar exams, $900 lunches, and lawyer salaries. Who knows what scrutiny of the full 1996-1997 time and expense records would show?

4. General Morales and the Private Counsel Group Quietly Amended Their Contract and Made a New Fee Agreement January 16, 1998,

On January 16, 1998--the day General Morales and his legal and press forces attempted to secure the $2.3 billion legal fee--Private Counsel and General Morales privately signed a so-called "Memorandum of Understanding" whose words expressly amended the original contract. This eleventh hour amendment materially changed the March 22, 1996 contract. In that crucial amendment, the Attorney General abdicated his independence in considering the reasonableness of the fees demanded by Private Counsel. He agreed to submit the fee issue to the federal court (which does not have jurisdiction over claims against the State) and to "abide by" and "not to appeal" its rulings "so long as" the federal court "does not award fees in excess of" 15%, i.e., $2.3 billion.

Yet on the same day January 16, 1998, in what now appears to have been a ruse to focus public attention away from attorneys' fees and on to the $15.3 billion principal amount of the settlement, General Morales proclaimed: "I think any discussion or speculation of fees in the multibillion-dollar amount range is laughable. I think that the court is going to do something appropriate, something responsible." See "Morales denies lawyers will get billions," Austin American-Statesman, January 17, 1998, at A-8. The Dallas Morning News quoted even stronger dismissive language, that the reports were "improbable . . . fantasy . . . ridiculous."

5. The Private Counsel Group Cannot Validly Make Deals With Tobacco to Evade State Authority and Control Over Its Case.

In normal lawsuit practice, lawyers and client manage toward a single, undivided settlement. But here, instead of negotiating a single-dollar recovery for damage settlement plus an arbitrated attorneys' fee contribution to be added on top of the $15.3 billion later, the lawyers carved out the fee arrangements into a special vehicle, designed to fend off public criticism and providing a means to bypass the State coffers and put the money directly into the pockets of the Private Counsel.

The lawyers' claim that the defendants' legal fee contributions to the settlement belong solely to them and are no business of the public is simply wrong under both common law and the statutes.

In fact, the law is both clear and recognized in the agreements between the State and the five private lawyers: that only the client--not the lawyer--owns the whole lawsuit. This includes all rights to collect direct and indirect damages, together with any related costs, interest and attorneys' fees as set by the Court.

A strange tobacco gag clause applies to the arbitration. Adding to the suspicion caused by the separate fee channel that sends a huge part of thc settlement directly to Private Counsel, the tobacco arbitration contract also contains what must stand as one of the most peculiar provisions ever included in an arbitration clause: the tobacco companies are not permitted to contest the attorneys 'fees charges claimed by Private Counsel. The words read as follows:

"Settling Defendants [the tobacco companies] will not take any position adverse to the size of the award requested by Private Counsel nor will they express any opinion (even upon request) as to the appropriateness or inappropriateness of any proposed amount." (Settlement Agreement, Appendix l(d)(1)).

This extraordinary gag provision was followed by a requirement that attorneys for two of the companies appear as witnesses for Private Counsel:
"The undersigned Private Counsel for Settling Defendants Philip Morris Incorporated and R. J. Reynolds Tobacco Company will appear, if requested, to provide information as to the nature and efficacy of the work of Private Counsel and to advise the [Arbitration] Panel that they support an award of full reasonable compensation under the circumstances." (Ibid.)

These extraordinary arrangements appear intended to prevent effective opposition and to support some kind of backup strategy by the plaintiffs' lawyers in the case of a public outcry and if responsible action by state officials--as in Florida--rises up to challenge the proposed $2.3 billion fee. These lawyers were obviously aware that similar arrangements had set off the Florida conflagration between public officials and some of the lawyers only a few months earlier, followed by indignant rejection of the contingent fees by the presiding district judge. In a highly supportive development for Private Counsel here, the Texas Attorney General has devoted himself to guarding his colleagues' $2.3 billion fees, rather than seeking to reduce them, as other attorneys general have done.

6. Sustaining This Fee Would Severely Damage Existing Law Controlling Government Contracting.

Unlike most other lawsuit abuses, the potential for government contracting abuse has been well understood for at least as long as politicians have had financial supporters. Not just decades but centuries of law and precedent are available to reverse the Texarkana rulings and prevent them from maturing into a long-term public policy problem.

Mere enforcement of rules long on the books will maintain valuable protections. The principal rule would enforce the strict contracting limits of the Texas Constitution. Art. III, Section 44 expressly extends the legislature's exclusive control over financial matters to the payment of compensation to all state employees and public contractors: "The Legislature shall provide by law for the compensation of all officers, servants, agents and public contractors, not provided for in this Constitution."

The Texas Supreme Court has been unwavering over the past century in its protection of the legislature's constitutional control over the state's purse strings. The strictness of this rule was reaffirmed just last year, in Federal Sign v. Texas Southern University, where the Court held that only the legislature had the authority to waive the state's sovereign immunity from contract claims. It has held repeatedly that no aspect of the legislature's financial authority may be transferred to an official of the executive branch (such as General Morales) by implication. Neither Texas legislation, constitutional law nor case law precedent authorizes the Attorney General to sign up contingent fee contracts without legislative authorization. The Louisiana Supreme Court only last year held under similar constitutional provisions that the attorney general has no such power, under reasoning parallel to that discussed here.

These bedrock principles of the Texas Constitution grew out of lessons in human nature and political life that are no less applicable today than they were when incorporated into the 1876 Texas Constitution. At that time, outraged by the politics of Reconstruction Texas, the framers of that Constitution strictly limited the powers of government and provided that no state official can enter into contracts without preexisting constitutional or statutory authority, neither of which TRLF believes Dan Morales had when contracting with Private Counsel. These rules are simple and absolute: they do not inquire into the merits or the circumstances of a particular contract, or question the good faith of those who fail to meet the constitutional standard. Indeed, these constitutional provisions have been applied literally to cut off transparently innocent, uncontroversial but unauthorized claims against the State.

Perhaps the 1876 Constitution supplies the solution: declare the contingent fee contracts null and void, and proceed legislatively from that point. After a full airing of relevant considerations, the Legislature could take such necessary steps as may be required to authorize the fair fee Private Counsel have earned.

7. General Morales' Claims to the Contrary, the $2.3 Billion Buck Stops at the Texas Taxpayer's Desk, Not With Big Tobacco or the Federal Government.

Attorney General Morales continues to claim that no "State funds" will be used to satisfy the $2.3 billion attorney fee award, that the entire award will be paid either by the settling tobacco companies or out of the portion of the State's recovery owed to the federal government. This is dead wrong.

Certainly the tobacco companies focused the attention of some of New York's and Chicago's most expensive lawyers to guarantee that when they make whatever payments are ordered by the private arbitration, any further claim against the tobacco companies on this score is totally barred. That amount will be set by a three-member private arbitration panel. The January 16, 1998, agreement between the Attorney General and the Private Counsel specifically provides that the State can offset the arbitration award dollar-for-dollar against the $2.3 billion but does not take the State off the hook for dollars over and above what the arbitrators' order contributes. So if the arbitration panel orders $40 million, the $2.3 billion obligation of the State to Private Counsel becomes $2.26 billion; if the arbitration panel awards $1 billion, the net obligation of the State drops to a "mere" $1.3 billion, etc.

It is doubtful that national tobacco legislation will cover the $2.3 billion. Most national legislation proposals impose limits on how much in attorneys' fees the tobacco defendants would pay, but the amounts discussed (all in hundreds of dollars per hour, not thousands, and certainly not hundreds of thousands) fall hugely below the proposed $2.3 billion Texas fees. it is therefore unlikely that the rest of the states will rescue Texas from the obligations being imposed by General Morales.

General Morales also advances the claim that Texas owes approximately $4 billion of its recovery to the federal Medicaid program and that under federal Medicaid law the State can lay off any attorneys' fees it pays against this $4 billion it owes. Wrong again.

Federal payments won't cover the State's legal fees either. In the first place, we consider it bad policy to concede that the State owes the federal government anything. Florida denies that any of its tobacco settlement money belongs to the feds. Even if the State does wind up owing the federal government something, the State cannot count on deducting its own attorneys' fees from that amount. Under federal Medicaid regulations, the State could only deduct at most approximately 23% of any attorneys' fees (not the damage or settlement amount) paid. Further, only "reasonable" attorneys' fees can be offset against any federal debt, and a federal agency will have no reason to accept an exorbitant fee. So, our State is likely to find the federal government will reimburse us little, if any, of the amount we pay out in attorneys' fees.

Finally, as a matter of common sense, any monies the tobacco defendants were in fact willing to pay in January 1998 in settlement of the State's claims over and above a reasonable fee should belong to the State rather than being captured by the private counsel group. Thus, if a reasonable fee had been $100 million but the tobacco defendants wind up paying the full $2.3 billion to Private Counsel, the difference of $2.2 billion should have--and in normal circumstances would have--gone to the State alone. The legal engineering of contracts has attempted to avoid the State's claim. These arrangements, though enforceable against and in favor of the tobacco companies, enjoy no presumption of validity between the State and its lawyers. In a future lawsuit, not involving the tobacco companies, the courts have the power to make the lawyer pay the State any excess over a reasonable fee.

8. Texas Could Very Well Pay More Legal Fees Than Any Other State.

Whether any national tobacco legislation will pass is unclear, but if it does, Texas could find itself entering the national debate with an attorneys' fee claim that dwarfs the bills of any other state, perhaps exceeding the final bills of all other states combined. Because other states and other lawyers pioneered the successful offensive against the tobacco companies, it seems unlikely that Texas will receive any greater share than its allocable percentage of the Medicaid reimbursements that every state in the Union will be getting.

Only three states have reached multibillion-dollar damage settlements with the tobacco companies: first Mississippi, then Florida, and now Texas. Texas is the only state in which the trial court has already ruled in favor of a multibillion-dollar attorneys' fee award. Mississippi, the first state over the wall, did use outside attorneys but without percentage contingency contracts, and the court has set no attorneys' fee award. As discussed above, a Florida court rejected a multibillion-dollar percentage contingency claim by that state's lawyers, holding that the lawyers were entitled to tens of millions of dollars, perhaps hundreds of millions, but certainly not billions. The Florida decision is on appeal.

California, always a key state, has also not hired attorneys on a percentage fee arrangement. Unless they and enough of the other states agree otherwise, the states that recover from the tobacco companies and the compensation their lawyers receive would be set by uniform national legislation at levels irrelevant to the towering fees of the Texas case. If Texas is forced to pay $2.3 billion in legal fees, the prospects for a legal fee bailout by the other states seems remote.

9. Other States Took the Big Risks and Did the Original Work.

A major component of the Private Counsel group's claim to the biggest fee in world history is the assertion that they engineered a uniquely brilliant attack against the tobacco companies. In truth, this is closer to your neighborhood McDonald's claiming to have invented the Big Mac: they may cook a good one, but they didn't invent the formula.

The causes of action, strategies and factual breakthroughs of the tobacco case originated with others. The five lawyers who signed the contingent fee contract grossly exaggerate the risks they ran in taking the case on a contingent fee, and grossly exaggerate their contributions to the results ultimately achieved. See P. Pringle, Cornered: Big Tobacco at the Bar of Justice (1998) and C. Mollenkamp et al., The People v. Big Tobacco (1998).

The Outside Counsel Agreement was signed on March 22, 1996. What had happened by then?

Mississippi had developed the Medicaid subrogation theory and filed the first such suit in March 1994, two years before Texas hired its lawyers. Also in 1994, Mississippi obtained (from the former paralegal who copied them while working at tobacco defendant Brown & Williamson's law firm) the first key liability documents. The documents were made public by 1995 so that everyone could use them. Mississippi also deposed a former chief tobacco scientist who had blown the whistle to the FDA in 1995. In August 1994, Minnesota sued and launched a massive and dogged document discovery effort. In March 1996, shortly before Texas filed suit, one tobacco company entered into a proposed settlement with the five states that had sued by that time.

In August 1996, shortly after Texas filed suit, a proposed national settlement negotiated between Mississippi and the tobacco companies was leaked to the press. Under this settlement, the companies were willing to pay $150 billion.

When Texas filed suit the risk of a zero recovery was modest. Within months it had become publicly known that the tobacco companies feared a national disaster and were finally steering a new course. It would be instructive to learn the extent to which the plaintiffs' attorneys on the tobacco cases may have shared information about tobacco company settlement activity at that time.

After August 1996 the risks continued to decline. Sums grew from millions to billions as the tobacco companies prepared to launch a national legislative settlement. By June 1997, little more than a year after Texas joined the queue of states suing the tobacco companies, the proposed national settlement was announced. General Morales publicly exulted that the national settlement was "more than we could reasonably expect with a courtroom victory." Indeed, he claimed that the national settlement "gives Texas every single thing we have demanded plus an awful lot more." Austin American-Statesman, June 21, 1997. In fact, the settlement Texas reached in January 1998 largely tracks the terms of the June 1997 national settlement proposal, the tobacco industry's first full, comprehensive legislative proposal. It was also, in a real sense, tobacco's national opening offer.

10. "Cry Wolf": The Claim That Court Challenges to the $2.3 Billion Fee Threaten to "Kill" the Deal Is Denied by the Tobacco Companies Themselves.

When Governor Bush moved to intervene to challenge the $2.3 billion in attorneys' fees, General Morales was reported telling the public that the Governor's action put the settlement in "serious jeopardy," because if the settlement is changed in any "material respect" it is "canceled and terminated. "Dallas Morning News, " Bush challenges fees in tobacco settlement: Angry AG says deal imperiled," Feb. 6, 1998, pp. lA, 2lA. Indeed, he accused Governor Bush of allowing himself to be used by the tobacco industry "to get out of this agreement and to keep it from becoming final." But tobacco company lawyers, in publicly reported comments in the same article, indicated General Morales is in error, and used even stronger language to describe his statements:

"Senior tobacco industry lawyers involved in the Texas case said late Thursday that the cigarette companies have no interest in modifying or voiding the Texas agreement.

"'The tobacco companies have absolutely nothing to do with the decisions made by Governor Bush,' said Dan Webb, a Chicago lawyer representing Philip Morris. 'Dan Morales is truly crazy to suggest that the tobacco companies are behind this. We are not looking to blow up the deal, and we consider this case done.'

"Mr. Webb said that technically, the issue of lawyer fees does not impact the tobacco companies in any way, saying it therefore does not change the settlement agreement in any material way.

"'If the state of Texas wants to give all their money to lawyers or all the money to sick smokers, they can do it,' Mr. Webb said. 'That's between Mr. Morales and the state of Texas. The tobacco companies don't have a dog in this fight.'"

On March 9, 1998, the tobacco company defendants filed briefs with the district court in Texarkana in which they officially confirmed their public statements:
"[Defendants] take no position with respect to the motions to intervene filed by various state legislators and Governor Bush regarding the payment of attorneys' fees. The Defendants have publicly stated that they have no interest in the outcome of the dispute among Attorney General Morales, the state legislature, and Governor Bush on this issue."

They also confirmed those comments at a hearing in Texarkana on March 20, 1998. A designated representative for the tobacco company defendants stated:
"I need to explain to the Court that under the Settlement Agreement, thc tobacco companies have an absolute obligation to pay to the Counsel for the State of Texas, and to them directly, whatever the arbitration panel awards. That is the obligation of the tobacco companies. At that point their obligation comes to an end.

"What happens to the money after that time, whether it is increased or decreased, does not affect the Most Favored Nation Clause of the Settlement Agreement. And I may have, what I said yesterday was inconsistent with that, and I need to make that correction for the record." March 20, 1998 Hearing Transcript at pp. 81-82.

11. The Attorney General's Blunders in Dealing With Counties and Local Hospital Districts, Not Attorneys' Fee Issues, Pose the Only Real Threat to the Settlement.

The real threat to the Texas tobacco settlement is the challenge by the counties and local hospital districts that General Morales had no authority to settle for them.

Attorney General Morales apparently failed to properly analyze the relative rights of state and local governments in the case. The true and very dangerous delay lies in that omission. The tobacco companies say that the settlement covers tobacco medical care claims by counties and hospital districts, because General Morales had the authority to and did settle on behalf of the counties and hospital districts. The counties and hospital districts say the settlement cannot cover their claims against tobacco companies, because General Morales has no authority to represent them and settle without their consent.

What does General Morales say? It depends on when you ask him. Before March 20, he said he agrees with the counties and hospital districts. On March 20, he said he agrees with the tobacco companies. General Morales' change of position was 180 degrees.

Unless the counties and hospital districts agree to a side deal with the State, the courts will have to decide. The county/hospital district dispute, not the attorneys' fee dispute, is a life-threatening problem for the settlement.

12. The Attorneys' Fee Dispute Is Totally Separate From the Settlement.

The attorneys' fee dispute is entirely separate from the State's settlement with the tobacco companies. It should be handled separately. The federal judge handling the Texas tobacco case has already severed the fee claim against the State made by one lawyer General Morales hired, Marc Murr. Mississippi, the first state to settle, has also separated the issues. The Mississippi Court finalized that state's settlement with the tobacco companies and postponed the attorneys' fee issue until later.

Why not sever the other five law firms and their $2.3 billion claim? Margaret Wilson, the Governor's general counsel, stated in a hearing before the Texas judge that the plaintiffs' lawyers told her they oppose severance of their claims because they would "lose their negotiating posture" against the State. March 19, 1998, Hearing Tr., at 158.

General Morales and the lawyers he hired are the ones who want the attorneys' fee dispute tied to the State's settlement with the tobacco companies. The Governor's office has said that they are holding the State's settlement with the tobacco companies hostage to their own attorneys' fee demands against the State. We agree.

13. Avoiding Confusion About Legal Fees Being Funded From Different Sources.

There has always been only one client, the State of Texas, whose obligation it is to pay the entire legally authorized legal fee. All other questions concern the sources of funds to make those payments: the state, the federal government or the tobacco companies. But at the end of the process, the State will pay or claim credits toward their fee obligation as fixed by the courts and as appropriated by the Legislature.

General Morales hired the Private Counsel group of five lawyers in March 1996 and agreed to pay them a flat fee of 15 percent of recoveries from the tobacco companies. The amendment signed January 16, 1998, reaffirmed the same percentage value but in the context of an explosively new and different set of circumstances. In 1998 billions, not millions, were within reach. This amendment was signed even though General Morales on the same day dismissed reports of billion-dollar fees as "laughable". Fifteen percent of, for example, a $100 million settlement would have been quite a reasonable fee totaling $15 million against the tobacco companies, who have been long known as tough and tenacious litigants. But as Judge Harold Cohen in the Florida companion tobacco case held, "What may have seemed to be a reasonable and ordinary contract when the case began has now developed into an unconscionable one." While a businessman will consider a percentage deal to be binding no matter where the deal goes, the same does not apply to legal fees.

The intricacies of attorneys' fee issues need not distract the debate. Only three sources of money are available to fund whatever legal fees the five Private Counsel are eventually allowed by the courts. These are the State of Texas, which is obligated under the current order of the Texarkana court to pay $2.3 billion, less any other amounts that may be credited against that obligation by others; the tobacco companies, who are obliged to participate in a private arbitration and to pay whatever amount is awarded by the arbitrators, presently undefined; and the federal government, which is obligated to pay an undefined amount to cover the State's costs for recovering money to be turned over to the federal government (if any).

The three sources can be compared to an estate that (a) owns three assets that must be sold and reduced to cash, and (b) must then be divided between two heirs whose shares are in dispute. The executor's initial duty will be to identify and maximize the assets in the estate, comparable here to the sum of tobacco, federal and State payments or commitments. That fund must then be divided between the two claimants in the dispute: the Private Counsel group and the State of Texas. The trial lawyers will be limited to an amount approved by the courts, including all rulings on appeal and any subsequent litigation, and which are authorized by and appropriated by the Legislature. The balance reverts to the original and sole owner of the lawsuit, including all rights for compensation for attorneys' fees: the State of Texas.

Plaintiff Sound Bites vs. Reality.

"A deal is a deal."
A legal fee "deal" is never "a deal, "as even General Morales and the Private Counsel openly admit in papers they filed with the court.

"Why did critics of the deal wait so long before objecting to the 15 percent?"
Because the law does not permit excessive legal fees, even if the papers Morales signed allow them, most knowledgeable observers saw no harm in the initial percentage fees. Nobody anticipated that General Morales would fail in his duty to protect the public interest, which other attorneys general have fully discharged. Like General Morales' initial statements, we thought the idea of multibillion-dollar fees was "laughable." There was simply nothing to object to until January 1998.

"Governor Bush and his allies are going to delay so long that big tobacco will walk away from the settlement. Therefore the legal fee fight is endangering the entire settlement."
On the dispute between the State and its lawyers over attorneys 'fees, tobacco emphasizes that it "has no dog in this fight" and affirms the contract. The only danger to the contract arises if General Morales and the counties and hospital districts cannot agree on how to correct the Attorney General's blunders, which has nothing to do with the legal fee debate.

"Isn't this just more politics?"
A $2.3 billion legal fee will never be just politics. But big-time politics will commence if the Attorney General and other public officials become able to pass out contingent fee patronage to their attorney friends and supporters without a vote or approval by the Legislature.

"Don't contingent fees save tax money?"
In the long run, they do not. Turning law enforcement over to contingent fee lawyers will promote lawsuits against corporate and non-corporate citizens, suppress investment and destroy jobs.

Appendix - Fifth Circuit Attorneys' Fees Rules
The following rules were adopted in Johnson v. Georgia Highway Express, Inc. 488 F.2d 714 (5th Cir. 1974) and set forth the factors to be used in setting attorneys' fees in all courts within the Fifth Circuit:

(1) The time and labor required. Although hours claimed or spent on a case should not be the sole basis for determining a fee, Electronics Capital Corp. v, Sheperd, 439 F.2d 692 (5th Cir. 1971), they are a necessary ingredient to be considered. The trial judge should weigh the hours claimed against his own knowledge, experience, and expertise of the time required to complete similar activities. If more than one attorney is involved, the possibility of duplication of effort along with the proper utilization of time should be scrutinized. The time of two or three lawyers in a courtroom or conference when one would do, may obviously be discounted. It is appropriate to distinguish between legal work, in the strict sense, and investigation, clerical work, compilation of facts and statistics and other work which can often be accomplished by non-lawyers but which a lawyer may do because he has no other help available. Such non-legal work may command a lesser rate. Its dollar value is not enhanced just because a lawyer does it.

(2) The novelty and difficulty of the questions. Cases of first impression generally require more time and effort on the attorney's part. Although this greater expenditure of time in research and preparation is an investment by counsel in obtaining knowledge which can be used in similar later cases, he should not be penalized for undertaking a case which may "make new law." Instead, he should be appropriately compensated for accepting the challenge.

(3) The skill requisite to perform the legal service properly. The trial judge should closely observe the attorney's work product, his preparation, and general ability before the court. The trial Judge's expertise gained from past experience as a lawyer and his observation from the bench of lawyers at work become highly important in this consideration.

(4) The preclusion of other employment by the attorney due to acceptance of the case. This guideline involves the dual consideration of otherwise available business which is foreclosed because of conflicts of interest which occur from the representation, and the fact that once the employment is undertaken the attorney is not free to use the time spent on the client's behalf for other purposes.

(5) The customary fee. The customary fee for similar work in the community should be considered. It is open knowledge that various types of legal work command differing scales of compensation. At no time, however, should the fee for strictly legal work fall below the $20 per hour prescribed by the Criminal Justice Act, 18 U.S.C.A. § 3006A(d)(1), and awarded to appointed counsel for criminal defendant. As long as minimum fee schedules are in existence and are customarily followed by the lawyers in a given community they should be taken into consideration.

(6) Whether the fee is fixed or contingent. The fee quoted to the client or the percentage of the recovery agreed to is helpful in demonstrating the attorney fee expectations when he accepted the case. But as pointed out in Clark v, American Marine, supra,

----[t]he statute does not prescribe the payment of fees to the lawyers. It allows the award to be made to the prevailing party. Whether or not he agreed to pay a fee and in what amount is not decisive. Conceivably, a litigant might agree to pay his counsel a fixed dollar fee. This might be even more than the fee eventually allowed by the court. Or he might agree to pay his lawyer a percentage contingent fee that would be greater than the fee the court might ultimately set. Such arrangements should not determine the court's decision. The criterion for the court is not what the parties agreed but what is reasonable. ----

320 F.Supp. at 711, In no event, however, should the litigant be awarded a fee greater than he is contractually bound to pay, if indeed the attorneys have contracted as to amount,

(7) Time limitations imposed by the client or the circumstances. Priority work that delays the lawyer's other legal work is entitled to some premium. This factor is particularly important when a new counsel is called in to prosecute the appeal or handle other matters at a late stage in the proceedings.

(8) The amount involved and the results obtained. Title VII, 42 U.S.C,A. § 2000e-5(g), permits the recovery of damages in addition to injunctive relief. Although the Court should consider the amount of damages, or back pay awarded, that consideration should not obviate court scrutiny of the decision's effect on the law. If the decision corrects across-the-board discrimination affecting a large class of an employer's employees, the attorney's fee award should reflect the relief granted.

(9) The experience, reputation, and ability of the attorney. Most fee scales reflect an experience differential with the more experienced attorneys receiving larger compensation. An attorney specializing in civil rights cases may enjoy a higher rate for his expertise than others, providing his ability corresponds with his experience. Longevity, per se, however, should not dictate the higher fee. If a young attorney demonstrates the skill and ability, he should not be penalized for only recently being admitted to the bar.

(10) The "undesirability" of the case. Civil rights attorneys face hardships in their communities because of their desire to help the civil rights litigant. See NAACP v. Button, 371 U.S. 415, 443, 83 S.Ct. 328, 9 L,Ed.2d 405 (1963); Sanders v. Russell, 401 F.2d 241 (5th Cir. 1968). Oftentimes his decision to help eradicate discrimination is not pleasantly received by the community or his contemporaries This can have an economic impact on his practice which can be considered by the Court.

(11) The nature and length of the professional relationship with the client. A lawyer in private practice may vary his fee for similar work in the light of the professional relationship of the client with his office. The Court may appropriately consider this factor in determining the amount that would be reasonable.

(12) Awards in similar cases. The reasonableness of a fee may also be considered in the light of awards made in similar litigation within and without the court's circuit. For such assistance as it may be, we note in the margin a list of Title VII cases in this and other Circuits reviewed in the consideration of this appeal.

These guidelines are consistent with those recommended by the American Bar Association's Code of Professional Responsibility, Ethical Consideration 2-18, Disciplinary Rule 2-106. They also reflect the considerations approved by us in Clark v. American Marine Co., supra.

To put these guidelines into perspective and as a caveat to their application, courts must remember that they do not have a mandate under Section 706(k) to make the prevailing counsel rich. Concomitantly, the Section should not be implemented in a manner to make the private attorney general's position so lucrative as to ridicule the public attorney general.

 
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