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House of Representatives,
Subcommittee on Courts and Intellectual Property,
Committee on the Judiciary,
Washington, DC.

    The subcommittee met, pursuant to notice, at 1 p.m., in room 2237, Rayburn House Office Building, Hon. Howard Coble (chairman of the subcommittee) presiding.

    Present: Representatives Howard Coble, Edward A. Pease, Christopher B. Cannon, and Barney Frank.

    Also present: Representative Ed Bryant.

    Staff present: Mitch Glazier, chief counsel; Diana Schacht, deputy staff director and counsel; Blaine Merritt, counsel; Eunice Goldring, staff assistant; and Samara Ryder, minority counsel.


    Mr. COBLE. Good afternoon. The subcommittee will come to order.
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    The subject of our hearing this afternoon is what role, if any, Congress should play in determining the amount of attorneys' fees to be recovered by outside counsel in the event that Congress enacts a national settlement of tobacco-related litigation. Under the settlement as proposed by the State attorneys general, tobacco manufacturers and public health advocates, the industry would make payments totaling at least $368.5 billion over a 25-year period. I realize that other figures have been floating around. But that is the figure for the number we will work with.

    I regret to say that some written correspondence under my signature contained an amount of $386.5, and I think those numbers were just reversed.

    In exchange, the pending State cases would be settled, as would all private class actions. Many of the State cases are being prosecuted with the assistance of outside counsel who have entered into agreements with the States as to how they are to be compensated. The terms of these arrangements vary significantly, but some would entitle counsel to recover costs, expenses and 25 percent of the amounts received by the State.

    The magnitude of these potential awards is staggering. In Florida, for example, where the State case was settled for $11.3 billion, the applicable contingency fee contract would entitle 11 law firms to $2.8 billion. The Wall Street Journal recently reported that two firms could receive $89.5 million in 1997 for their work in the Florida and Mississippi cases alone.

    In the event of a global settlement, this type of result would be replicated across the country. According to an analysis performed by the Seattle Times, private lawyers would be entitled to more than $14.7 billion in fees if the proposed resolution is enacted.
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    Let me say at this point—I won't be speaking for Mr. Frank, because he will speak for himself, but I suspect I am speaking for him—I am not in favor of any attorney being penalized one red penny for work that he or she has performed. On the other hand, I think if an amount does on its face appear to be irregular and excessive, that is where we come into play here. So I want to get that on the record to begin with.

    Many question whether this is a proper allocation of monies in the context of this unique agreement. If enacted, the settlement will represent more than just the resolution of private suits, it will constitute the embodiment of a national tobacco policy with far-reaching social consequences. While attorneys are entitled to be compensated for their time and effort in litigating the underlying cases, there is a strong sentiment that the public policy considerations should prevent the recovery of grossly excessive fee awards.

    Today we will hear from the parties to the settlement as to how they anticipate the issue of attorneys' fees should be and would be resolved. Several counsel in the Florida case will be here to describe how the attorneys' fees issue has developed in that State. We also look forward to testimony from the sponsors of legislation which would impose caps on attorneys' fees, and from scholars who will assist us in assessing what a fair and reasonable amount of fees might be.

    We are pleased to have each of you here.

    I am now pleased to recognize the gentleman from Massachusetts, the Ranking Democrat Member, Mr. Frank.
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    Mr. FRANK. Thank you, Mr. Chairman. I look forward to this hearing. It is not an issue on which I have firmly fixed views because this is, for me, as I think for all of us, an issue of first impression. So I think there is a great deal to be learned from the hearing.

    This is one of those unusual congressional events, a hearing in which a lot of people have open minds and are prepared to listen to what is said and make a judgment based in part on that. I would not want to have too many of those, Mr. Chairman, because it could be taxing, but I think it is useful to have one, particularly when we are out of session.

    I would note, first, it is true that there are very large amounts being thrown around here. I think arguments can be made for some kind of limitation. I must say, however, people who did not think there was anything untoward about Mr. Eisner getting $565 million in compensation recently at Disney will have a hard time persuading me that they are sincerely outraged over lawyers getting that amount. A lot of people in this society get a lot more money than I would ever pay them. If we are going to talk about high compensation, we ought to keep that context in mind.

    Secondly, I think for many people this is going to be a real test of peoples' arguments about constitutionality. Constitutionality is like States' rights and some other things. It tends not to be an independent variable in the decision-making process around here. People tend to decide what they want to do and then they look for reinforcement.

    We may very well have a case here where the constitutionality is a very significant obstacle to what some people would like to do. I must say, I just read the memorandum that the Library of Congress, I guess, had done. Anyone who thinks that we have the power, leaving aside whether or not it is public policy, but anyone who thinks the Congress has the power to pass a law which compels a State to change a relationship that that State voluntarily entered into with an attorney for work already performed has, I think, a serious set of constitutional issues to deal with, one—of course, we have the States' rights issue.
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    I have colleagues who are, at least rhetorically, far more dedicated to the notion of States' rights than I. We are talking here about what a State decides to do with State money to some extent. The question about whether or not we should get a share for Medicaid is separate. It is not within this committee's jurisdiction; it is being discussed elsewhere. But we are talking about now a State through its own money and decision-making processes should decide to pay lawyers something. The notion that this is a fit subject for a congressional assertion of power is one which has to be made, and I would be particularly interested from some of my friends who think that States' rights in general ought to be talked about.

    We also have the question of what a taking is. It is true, by traditional standards it would not be a taking unless we took over the whole law firm, and certainly none of us want to do that. I don't think we would have a place to put them. But as I understand the distinction in constitutional law, it has been considered a taking when the entity involved—that would be the Federal Government here—is appropriating the whole entity for its own use.

    There are many of my colleagues who have said, no, that is much too limited a view of taking. Indeed, any time you go and substantially diminish a right that people had because of a regulatory purpose, then that is a taking.

    Well, it does seem to me there is an argument that people have to make again here if they want to see the Federal Government step in and through the use of its regulatory power, limit the amount. And again we are talking here about contracts already written—it is a different story here when you are talking prospectively—a contract written and the work performed; then I want to know why that is not a taking.
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    So I am sympathetic to the notion of some kind of limitation. I have voted for some limitations in the past and will do so again. But I really do hope that people will address the constitutionality, because just every so often I would like to have people tell me, yes, I favor this as a matter of policy, but it is unconstitutional. That happens very rarely. I would say that anybody who has never said, gee, I'd like to do that, but it's unconstitutional probably is not a true believer in the constitutional doctrines involved. You've got to be willing to accept the fact that they are barriers.

    I cite those, for those are really open questions in my mind, Mr. Chairman. I look forward to getting people's conversations about what they are.

    I would like to make one last promise and that is, I would just hope the witnesses—and I am looking forward to a good day, but if somebody else has already told us the basic facts, you probably can assume either that we heard it the first time or that we won't be paying attention the second time, either. So I would urge the witnesses to minimize their repetition.

    Thank you, Mr. Chairman.

    Mr. COBLE. I thank the gentleman.

    Folks, let me visit informally with you and set some ground rules here. We are not going to muzzle anybody, but each of you was told when you received your information regarding the hearing that we operate under the 5-minute rule here. We apply the 5-minute rule to ourselves as well as to you all. When that red light illuminates, that is your warning that your 5 minutes have expired. You won't be keel-hauled if you violate it, but we would like for you to begin to wrap down when that red light illuminates.
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    Our congressional witnesses have asked whether they can question witnesses. I would invite our congressional witnesses to join us on the podium for the testimony, but I intend to restrict the questioning of the witnesses to the members of the subcommittee. You are welcome to stay with us, however, without objection.

    Without objection, furthermore, Mr. Bryant, the gentleman from Tennessee, who is not a member of the subcommittee but is a member of the full committee, has asked permission to give an opening statement of less than 5 minutes.

    Ed, is that the idea?

    Without objection, we will permit him to do that at this time.

    Mr. BRYANT. I thank the Chairman, and I thank the Ranking Member, also, for the courtesy in allowing me to make this statement and to participate on this limited basis in the hearing today, which I think is very timely.

    As he said, I am not a member of this subcommittee, but as they say in Tennessee, I do have a dog in this fight. Like you, Mr. Chairman, I represent a large number of tobacco farmers and am very concerned about how they will be affected by the universal tobacco agreement. However, since the issues pertaining to tobacco growers will be debated in another committee, I am here today not as an advocate of the farmer, but rather as a lawyer, as a lawyer who practiced for a number of years, who was a United States Attorney and practiced in the civilian community and as a citizen concerned with how in the world a relative handful of lawyers stand to make fees of millions and possibly a billion dollars from money which ought to be going to the States, specifically today, the States of Mississippi and Florida.
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    I don't think anyone in this room would disagree that, as a profession, lawyers are suffering from a huge public relations crisis. On the lighter side, we have all heard the jokes. But on the more serious side, we in the legal community see survey results like the recent statewide poll in California assessing the public's confidence in several institutions, government and professions, research scientists scored 500, colleges and universities scored 308 and the legal profession only rated 20.

    Personally, I am a little hurt by both the jokes and the negative public perception. I know that most in our profession are good, honest citizens who believe in serving justice. Yet for all the good most of us do, the image of the greedy, self-serving lawyer is only enhanced by recent headlines such as, quote, ''A Fee Fight Worth $2.8 Billion, Lawyers Want 25 Percent of the Florida Tobacco Settlement''; or, quote, ''Tobacco Pact Will Enrich Two Law Firms, Small Southern Practices Could Split $90 Million''; or one of my favorites, quote, ''$50 Million Men, Tobacco Lawyers, Become Sultans.''

    On the Wall Street Journal editorial page, one article pointed out that ''The brother of Hillary Rodham Clinton has just won America's next best thing to a lottery, a lawsuit—make that the mother of all lotteries, otherwise known as a $368.5 billion tobacco settlement, the likely enrichment of a man with no previous plaintiffs bar experience.''

    In another situation, my office was recently contacted by a high-powered Washington law firm in an effort to lobby for one of these law firms, that I think will be testifying today, that is involved in this battle for money. While I didn't meet with him, I wondered if this high-priced lobbying firm charged $500 per hour, because if they didn't, I was going to suggest that they move to Pascagoula, Mississippi. This is the hourly rate of $500 is what one of the Mississippi law firms would have to have charged in order to justify their claim to a portion of the $90 million in fees that are at stake in that State—this, according to the Wall Street Journal's own calculation.
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    This type of greed only serves to further the public's negative perception of our profession, and I would remind those who believe that attorneys' fees of this size are completely warranted of a Florida State judge's recent remarks. Circuit Judge Harold Jeffrey Cohen ordered the attorneys representing the State of Florida and who are seeking $2.8 billion in fees in the tobacco settlement to arbitrate these fees, citing them as, ''unconscionable and clearly excessive.''

    As mentioned, I cannot participate fully in this hearing because I am not on the subcommittee, but I know there are witnesses here who can answer these questions, and I have a commitment back in Tennessee at 6 o'clock today; but I hope, for the record, you folks will answer these questions, and I will certainly review your responses and certainly try to keep as open a mind as I can about this.

    My questions are, what were the States' attorneys general thinking when they signed the apparently standard contingency fee contracts with these law firms? Their States and the millions of citizens that they represent had not been rear-ended in a traffic accident and suffered a whiplash injury. They were not hobbling around with a neck brace or a ''dollar collar,'' as we used to call them.

    No, this litigation put potentially billions of dollars at stake, and their lawsuits clearly sought these amounts when they filed them. Did the attorneys general not realize that any recovery would be from public funds? This may be the difference here that we are talking about between Michael Eisner. These are public funds that these attorneys general are representing here and that they are cavalierly, I believe, and in violation of their fiduciary responsibility contracting away with these attorneys.
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    Did they not know how to spell the words ''capping attorneys' fees''? And what about the trial lawyers? I ask now, where is all the high, lofty language we heard at the beginning of these matters, helping the poor who are dying from tobacco-related illnesses, discovering a cure for cancer, and ensuring that children are protected from tobacco? Where are those mighty saints clothed in righteousness that were taking on the so-called evil empire of tobacco? Have these saints fallen so far as to be rolling around in the gutter of greed, fighting among themselves for the millions of dollars?

    In spite of all this, I believe that the pursuit of the law is still a noble profession and that attorneys can and should do all in their power to change the public's negative perception.

    In conclusion, for my part, Mr. Chairman, your hearing today is a step in the right direction, to fight to ensure that legal fees awarded resemble an honest day's wage rather than the winning numbers in a national lottery.

    Again, I thank the Chair and the Ranking Member.

    Mr. COBLE. I will take the liberty and advise the uninformed in the audience, who may not know it from the tenor of the gentleman from Tennessee's voice, he is in fact an attorney. We are still glad to have him here.

    Let me say this. We will get into this as the hearing develops, but when you talk, Ed, about digging into the coffers of moneys that belong to the citizens of the respective States, it is my understanding that the attorneys' fees will be over and above the settlement figure. We can get into that later, but that will be over and above that figure. We do have some luxury of time here.
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    Does the gentleman from Indiana and/or from Utah have an opening statement?

    Mr. PEASE. Very briefly, Mr. Chairman, I want to thank the Chairman, the Ranking Member and all those persons who are participating in today's hearing.

    I find myself scrambling to educate myself as much as I can as quickly as I can on this subject. On the one hand, I have a general predisposition to favor settlement over continued extensive litigation. On the other, I have read the terms of the proposed settlement, and it has some concerns for me both in the area of expansion of Federal regulatory authority and in waiver of First Amendment freedoms.

    But I have worked extensively with the attorney general of Indiana, Jeff Modisette, for whom I have tremendous personal and professional respect, and have met with representatives of the industry as well in what I hope will be a process that leads to a conclusion where we can support a resolution of this matter through the settlement agreement as proposed. For that reason, I intend to listen a lot today.

    I am grateful to all those who are participating in helping us.

    Mr. COBLE. I thank the gentleman.

    The gentleman from Utah.

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    Mr. CANNON. Mr. Chairman, I would ask unanimous consent to submit a written statement and would just add to that that I have a deep concern about the prerogatives of this body of Congress in this matter and am looking forward to the testimony today. I appreciate those who are willing to come.

    I have been a cosponsor of Mr. McInnis' bill, and I think in the process of sorting through these issues, we need to take a very careful look at how this body is going to effect such major changes in public policy as are proposed here.

    Thank you.

    Mr. COBLE. I thank the gentleman.

    [The prepared statement of Mr. Cannon follows:]


    Mr. Chairman, today we are here to consider the attorney fees in the tobacco settlement.

    As we all know, this settlement is historic, unusual and precedent setting. During the course of the next year we, as a Congress, will be tackling an array of related issues: Should tobacco companies be exempt from future liability from tobacco-related illnesses? Should we designate billions of dollars for smoking reduction programs, child health care and Medicaid?
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    But, the central question today is much narrower. Specifically, the issue is whether the trial attorneys who sued the tobacco companies are entitled to multi-billion dollar fees or something more reasonable.

    The proposed settlement stipulates that the tobacco companies will ante up $368.5 billion.

    Included in many of the state contracts with outside law firms were contingency fee arrangements, usually for 25% of any recovery, but some were more and some were less. The assumption when these agreements were signed was that the states would not bear the risks of litigation.

    I know that those who helped bring the settlement about deserve substantial compensation. The issue is: Given that the tobacco settlement is really a legislative solution rather than judicial, should Congress have a substantial say in the compensation granted to the law firms who worked for the states? I believe the answer is yes.

    This settlement is not just a enhanced form of garden variety litigation. No, this deal had and has many ancillary components.

    For instance, it is important to remember that the state lawsuits were but one factor in this deal. The tobacco companies were under tremendous pressure. A few years ago, Congressman Waxman forced tobacco executives to swear under oath that tobacco was not addictive, an event that has dramatically undermined the clout of the tobacco companies with the public. The Federal Drug Administration has been moving inexorably towards regulating tobacco as a drug, with the consequence that the FDA would have inevitably sharply constrained marketing and product content. And, it is important to remember that numerous bills had been filed in the Congress to boost tobacco taxes, restrain youth access to tobacco products and boost smoking prevention programs.
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    Thus, it is fair to say that the pressure that other parties brought to bear was a substantial if not critical factor in triggering the settlement with the states. Some even argue that even if the states had not struck this agreement last Summer, the pressure would have created a similar proposal as the screws of public, legislative and administrative pressure had continued to turn into the tobacco companies.

    It is important to note that, unlike traditional civil litigation, the states and the tobacco companies realize that they must seek congressional and presidential authorization before any provisions of the settlement can be adopted. In a sense, this settlement is not a settlement but a package of ideas, ready to be tweaked and changed in the legislative process.

    Thus, it is my opinion that the agreements between the states and outside counsel are not binding on the Congress. Nor should they be. The compensation proposed is absurd.

    For purposes of analysis, let me set forth the impact of the proposed settlement on my home state of Utah. Utah was the 15th state to sue the tobacco companies in an action announced on October 1, 1996. The state approached and retained two outside law firms which had begun to deflect attempts by the tobacco companies to dismiss the action.

    Of course, on June 20th of this year, the states and tobacco companies jointly announced the proposed tobacco settlement we are considering today. Calculations indicate that Utah's share of the proposed settlement is $618 million dollars.

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    Under the contingency fee agreement struck by the State of Utah, two law firms—one in South Carolina and one in Utah—will be entitled to $154.5 million. That is nearly $155 million that won't be available to reduce teenage smoking or help cover the ravages of smoking. That is $155 million that will not be available to improve child health. Instead, that $155 million would be divided among two law firms, allowing each to fund, if it so chose, a luxurious retirement for each member of the firm, probably even its associates. To put that sum in perspective, $155 million is more money than Utah receives in federal highway money each year. It is a sum that is roughly one-third of what Utah spends on the criminal justice system each year. That number is utterly and completely absurd.

    The law firms that assisted the states should be compensated. But, they should not be granted the equivalent of winning multiple Publisher's Clearinghouse Sweepstakes.

    That is why I am cosponsoring H.R. 2740 to cap attorney fees at $150 per hour for every hour of time actually spent on the settlement. We can argue whether that number should be higher or lower. We can argue what hours are legitimate to bill. But, given the fact that the tobacco settlement is not traditional plaintiffs' litigation and given that Congress is essential to implementing the pact, I believe these or similar restrictions are appropriate.

    Mr. Chairman, I yield back the balance of my time.

    Mr. COBLE. As has already been said, folks, this is complex, it is intricate, it is complicated, it is involved. Having said that, let's get rolling.

    We are pleased to have received requests by several Members of the Congress to give statements at today's hearing. Because we have other witnesses who will testify today, I want to reiterate, gentlemen, the 5-minute rule for your information.
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    I ask unanimous consent that a full written copy of any testimony any Member would like to contribute be placed in the hearing record. The member panel will consist of the Honorable Scott McInnis, who represents the Third District of Colorado; the Honorable Chris Cox, in absentia for the moment, and he may or may not appear; I understand he is involved in another meeting now—Mr. Cox represents the Forty-seventh District of California—and the Honorable Paul McHale, who represents the Fifteenth District of Pennsylvania.

    We will begin our testimony with Mr. McInnis. Or either of you, whichever prefers to start.


    Mr. MCINNIS. Thank you, Mr. Chairman.

    Initially, I would like to thank Mr. Cox and Mr. McHale for their efforts and their cooperation. Second, I wanted to point out to you we had a cameraman walk by here just a minute ago and almost trip on the wire. Considering all the plaintiffs' attorneys we have in here, we had better cover that wire; that has got me worried.

    Mr. Chairman, I want to thank you and the other members of the subcommittee for holding a hearing on this very important issue of attorney fees as they relate to the proposed tobacco settlement. Several points have been made by Mr. Frank; I would like later on to address the constitutional issues.
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    Mr. Chairman, you have made the point about, will the tobacco settlement or the lawyer fees would be over and above the proposed tobacco settlement. To me, that is money that the tobacco companies are willing to pay out for the victims of smoking or other causes.

    Finally, Mr. Bryant has brought up a number of good points that I will address in here as well.

    I think we need to start with the basic premise that we have a fiduciary responsibility as Members of the United States Congress to the clients in this case. The clients in this case are not the attorneys general individually. The clients in this case, as pointed out by Mr. Bryant, is the American public. Those are the ones that are the clients. They are entitled to disclosure; they are entitled to reasonable compensation; and we are charged with that type of oversight.

    A comment was made, well, what right do we have to go into States' rights. As you know, Mr. Frank, I have a strong policy about States' rights in regards to property issues and so on. This is not a States' rights issue. This is an issue that calls for action by the United States Congress. It calls for intervention by the United States Congress for the settlement to work. That makes us a party to the action.

    As a party to the action and as a fiduciary responsibility representing the American public, we have every right to demand reasonable compensation. Overall, I think the proposed nationwide tobacco settlement raises a number of important issues which must be thoroughly examined prior to implementing the proposed settlement. Hearings such as today's, along with those that were held earlier this week by the Subcommittee on Health and Environment, are vitally important to determine whether the proposed settlement, as presented, is in the best interests of the public or whether Congress should build upon this proposed settlement.
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    Personally, I am interested in squeezing every penny I can out of the tobacco industry pockets to save people's lives by reducing or eliminating teenage smoking. I might also note, as we get into the attorney fees, that all three members of the panel up here, the primary sponsors of the bill, are attorneys.

    As you are aware, under the terms of the proposed settlement reached in June, the tobacco industry will pay $368.5 billion over 25 years to fund the treatment of smoking-related illnesses. I might point out, however, under any other agreement that I have ever witnessed in my practice of law or witnessed in my studies in law school, this agreement is an agreement in perpetuity. These attorney fees could continue in perpetuity if we don't put some kind of limitation on it. It is not capped at $368.5 billion; this goes on in perpetuity.

    Our goal of course is to fund the treatment of smoking-related illnesses, the enforcement of new marketing restrictions and the enlarging of antitobacco education programs. In exchange for the money, the tobacco industry will have all pending State actions and State lawsuits dismissed. That is our part; that is what makes us a party.

    Additionally, future litigants will be prohibited from banding together in class action suits. Because no national settlement can take effect without congressional action to change the existing law, as I said earlier, the approval of Congress is necessary for this to be carried out.

    As it stands, the settlement will become a huge windfall for a few plaintiffs' attorneys—Mr. Bryant mentioned earlier, $500 an hour. The judge in Florida calculated the rates being asked by those attorneys. If the attorneys worked every hour of every day, 24 hours of every day, beginning in July of 1994, their rate was $7,716 an hour.
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    Some States have entered into contracts, as mentioned earlier, by asking for 25 percent of any money collected by the State as a result of the settlement. Thus, for every dollar going to Connecticut, Maryland, Massachusetts and Minnesota to pay for the treatment of smoking-related illnesses, 25 cents may be paid to a few private attorneys. According to the Governor of Minnesota—and I would ask to submit the letter from him—he wrote in a letter dated November 6, in Minnesota alone, trial lawyers stand to make over a billion dollars from tobacco litigation, not one dime of which will go to reducing consumption of tobacco.

    Government leaders are obligated to ensure the overwhelming share of the settlement is targeted to children's health and taxpayers, rather than the pockets of a small group of attorneys.

    I would add, Mr. Chairman, very briefly to wrap this up, that the bill, as introduced, H.R. 2740, does several things.

    [The Bill follows:]


    Mr. MCINNIS. One, it does call for compensation. The attorneys in here have put together a reasonable effort to make this happen. They would have this panel believe that they are solely responsible for bringing this settlement to the table. I would venture to say that the primary reason that this settlement, the primary reason we are here today is because of a whistle-blower called Liggett tobacco. That is what brought these tobacco companies to the table.
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    Our bill calls for reasonable compensation of $150 an hour, which is 1 1/2 times what the average senior attorney in this country makes. Number two, it calls for complete disclosure. There should not be any agreements in secret when the American public is the client. It calls for complete disclosure.

    With that, Mr. Chairman, I appreciate the time and would welcome any questions you have.

    Mr. COBLE. Good to have you with us, Scott.

    [The prepared statement of Mr. McInnis follows:]


    Mr. Chairman. I want to thank you and the other members of the subcommittee for holding a hearing on the important issue of attorneys' fees as they relate to the proposed tobacco settlement. Overall, the proposed nationwide tobacco settlement raises a number of important issues which must be thoroughly examined prior to any legislative action which implements the proposed settlement. Hearings such as today's, along with the those that were held earlier this week in the Subcommittee on Health and Environment, are vitally important to determine whether the proposed settlement is in the best interest of the public.

    Personally, I am interested in squeezing every penny out of the tobacco industry's pockets to save people's lives by reducing, or eliminating teenage smoking. As you are aware, under the terms of the proposed settlement, reached in June, the tobacco industry will pay $368.5 billion over twenty-five years to fund the treatment of smoking-related illnesses, the enforcement of new marketing restrictions, and the launching of anti-tobacco education programs. In exchange for $368.5 billion, the tobacco industry will have all pending class actions and state lawsuits dismissed. Additionally, future litigants will be prohibited from banding together in class actions suits. Because no national settlement can take effect without Congressional action to change existing law, the approval of Congress is necessary for the terms of the settlement, including the proposal relating to attorneys' fees.
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    As it stands, this settlement will be a huge windfall for a few plaintiff's lawyers because some states have entered into contracts assuring these private lawyers 25% of any money collected by the state as a result of this settlement. Thus, for every dollar going to Connecticut, Maryland, Massachusetts and Minnesota, to pay for the treatment of smoking related illnesses, 25 cents may be paid to a few private attorneys. According to the governor of Minnesota, Arne Carlson, ''[i]n Minnesota alone, trial lawyers stand to make over a billion dollars from tobacco litigation, not one dime of which will go to reducing consumption of tobacco. . . . Government leaders are obligated to ensure that the overwhelming share of the settlement is targeted to children's health and taxpayers rather than the pockets of a small group of trial lawyers.''

    Recognizing that such a windfall could appear unreasonable to the members of Congress, who will have to vote to approve this settlement, high priced lobbyists and settlement proponents are roaming the halls of Congress claiming that the existing contracts between these private lawyers and the various states will not carried out. Instead, the private attorneys' fees and expenses will be set by a panel of independent, respected arbiters.

    Is it likely that this ''independent panel of respected arbiters'' would find a mere 16%, instead of 25%, to be a reasonable fee? Possibly, and suddenly a few private attorneys are billions of dollars richer. No problem, the proponents of the current attorney fee structure argue, because the attorneys' fees won't be taken from the $368.5 billion settlement, but will be paid directly by the tobacco industry.

    Simply put, the tobacco industry has decided it is willing to pay $368.5 billion plus whatever the independent panel decides is reasonable to pay the private attorneys. Clearly, if implemented, the proposed national tobacco settlement is likely to be the only time society is paid for the harm caused by the tobacco industry. Therefore, we should thoroughly consider whether the additional money the tobacco industry is willing to pay to the trial lawyers would be better spent on children's health care or care for the elderly who suffer from smoking related illnesses rather than creating a few billionaire lawyers.
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    H.R. 2740, which was introduced by Representatives Cox, McHale and myself, would provide fair compensation to those attorneys, who have spent a great deal of time and effort on the states' individual cases, but the legislation is also intended to ensure the maximum possible amount of moneys from any tobacco settlement should go directly to benefit public health. H.R. 2740 would compensate attorneys at a rate not to exceed $150 per hour and reimburse their actual out-of-pocket expenses. Additionally, this legislation would ensure the complete disclosure of the attorneys' fees by requiring that a detailed time accounting be provided to Congress and made available to the public.

    I welcome any questions you might have at this time.

    Mr. COBLE. Mr. McHale is recognized for 5 minutes.


    Mr. MCHALE. Thank you, Mr. Chairman. Mr. Chairman, at the outset of my testimony, I would like to make two points in response to Mr. Frank.

    Barney, the points that I would emphasize at this stage would be the following. Number one, Michael Eisner's paycheck was not defined or legitimized by an act of Congress. If it were, I suspect both you and I would have voted against that bill.

    Number two, on the question of constitutionality, I don't think that our legislation compels a State to do anything. If this were a true State-based settlement without the prerequisite of a Federal act, I would assert, as I think you imply, that the terms of the settlement would be beyond our reach.
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    But crucial to this settlement and not a factor under consideration at the time that it was negotiated is a prerequisite of Federal action. If, in fact, to create the pool of funds necessary to achieve this settlement, a congressional act were not required, if using only State money in satisfaction of a State agreement, we would find ourselves in a constitutional position of being unable on policy grounds to reach out and alter that agreement.

    But the money for this settlement comes from us. The pool of funds is dependent upon Federal action; 33- 1/3 percent is still zero if the pool is zero. We create the pool of funds.

    As you may know, I have been a longtime opponent of the tobacco industry. I have sponsored and cosponsored a number of bills that are intended frankly to eliminate our Nation's consumption of tobacco. Smoking not only affects the lives of the people who smoke, but the interests of all taxpayers who pay for the medical costs of smoking.

    In my home State of Pennsylvania, more than 2 million adults, close to 24 percent of the population, smoke; and tragically, nearly 15 percent of Pennsylvania's youth in grades 9 through 12 smoke. With roughly 400,000 Americans dying each year as a direct result of tobacco use, I believe tobacco consumption is the number one health challenge confronting our Nation.

    As a lawyer, I applaud the professional effort of the plaintiffs' attorneys who brought this litigation. I would like to see them be fairly compensated. I support the concept of a contingency fee. But clearly when you have a $368 billion settlement producing legal fees of $111 billion, where individual law firms may receive legal fees of $1 billion, that shocks the conscience.
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    While I believe attorneys are entitled to be paid for their time and effort, the maximum possible amount of money from any tobacco settlement should go directly to benefit public health. The money produced by this litigation, if in fact we get to that point, should go to those who are harmed by the tobacco industry.

    Those who provided legal counsel to the plaintiffs should be fairly, should be equitably compensated, but should not receive a windfall. At a rate of $150 per hour, as defined by this legislation, a lawyer working full-time in this case over a 1-year period of time could receive nearly $1 million in legal fees. That is $1 million as opposed to $1 billion.

    Our legislation is intended to revise the terms contained in the original contingent agreements and maximize the amount of money available for those who have been the victims of the tobacco industry. The contingency fees reflected in the tobacco settlement are unconscionable and unenforceable. In fact, ''unconscionable and unenforceable,'' were the very words used by Florida Circuit Judge Harold Jeffrey Cohen in his rulings against the attorneys' demands for the original 25 percent contingency fee negotiated with the State of Florida. Under this contingent arrangement, the lawyers could be paid $2.8 billion, or more than $200 million each, for their work on behalf of the State.

    We should be ashamed that the tobacco settlement has turned into a money chase by a handful of lawyers and lobbyists. I commend Judge Cohen's decision and I believe that he ruled correctly.

    Private parties—and, Barney, this comes back to the constitutional issue that we discussed briefly earlier—private parties in the absence of prior approval by the Congress cannot set legal fees pursuant to a settlement agreement where that settlement, in turn, requires subsequent congressional action. We were not at the table when the fees were set, and in my view, therefore, we are not bound by the terms of the contingent agreements.
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    I think we will likely see complicated litigation on this issue if we are successful in passing this legislation. The argument will probably be made that this is a private contract and that we cannot ex post facto modify the terms of that contract. In fact, I think these were tentative and modifiable agreements where the premise of the proposed compact was the cooperation and subsequent action of the United States Congress. Without that action, this settlement agreement does not exist.

    Under the proposed settlement, the tobacco companies would pay $368.5 billion to be allocated among the States for various public health programs. Furthermore, it has been projected that as much as $111 billion could go to pay the contingency fees of various attorneys working on behalf of the States. While the average gross receipts for the 100 top-grossing law firms in America last year was $18 million, a 30 percent contingency fee would yield an average of approximately $925 million per law firm involved in the litigation. I believe that that is an unconscionable figure, an unenforceable figure.

    I think it is unfortunate that the attorneys general signed these agreements. If they had settled on terms funded by the individual States, we could not constitutionally intervene. But because this entire settlement is premised on the linchpin of Federal congressional action, we not only have the right, we have the duty to intervene in order to guarantee that the contingency fees not be unconscionable.

    Mr. Chairman, I thank you for the opportunity to appear.

    [The prepared statement of Mr. McHale follows:]
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    I would like to thank Chairman Coble and Ranking Member Frank for the opportunity to testify before the Subcommittee on legislation which I have cosponsored with Representatives McInnis and Cox to limit attorneys' fees in the tobacco settlement.

    As many of you may know, I have been a long-time opponent of the tobacco industry. I have sponsored and cosponsored a number of bills that are intended, frankly, to wean our nation from the consumption of tobacco. Smoking not only affects the lives of the people who smoke, but of all taxpayers who pay for the medical costs of smoking. In my home state of Pennsylvania, more than two million adults—close to 24 percent of the population—smoke and nearly 15 percent of Pennsylvania's youth in grades 9–12 smoke.

    With roughly 400,000 Americans dying each year as a direct result of tobacco use, I believe tobacco consumption is the number one health challenge confronting our nation. As a father of three young children, I want to ensure that the tobacco companies no longer target children to take up this deadly habit.

    As a lawyer myself, I applaud the professional effort of the plaintiffs' attorneys who brought this litigation. I would like to see them be fairly compensated. I support the concept of a contingency fee, but clearly, when you have a $368 billion settlement, producing legal fees of $111 billion, where individual law firms may receive legal fees of $1 billion, that shocks the conscience.
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    I come here today to testify on legislation, H.R. 2740, which I have cosponsored with Representatives McInnis and Cox, to limit attorneys' fees in the tobacco settlement to $150 per hour, in addition to reimbursement of actual expenses. While I believe attorneys are entitled to be paid for their time and effort, the maximum possible amount of moneys from any tobacco settlement should go directly to benefit public health, with the highest priority being given to efforts focused on persuading children not to smoke, rather than to unreasonable attorneys' fees.

    The money produced by this litigation, if in fact we get to that point, should go to those who were harmed by the tobacco industry. Those who provided legal counsel to the plaintiffs should be fairly compensated, but should not receive a windfall from their work. At a rate of $150 an hour, as defined by this legislation, a law firm working full time on this case over a one-year period of time, could receive nearly $1 million in legal fees. That is $1 million as opposed to $1 billion. Our legislation is intended to revise the terms contained in the original contingent agreements and maximize the amount of money available for those that have been victims of tobacco consumption.

    The contingency fees reflected in the tobacco settlement are unconscionable and unenforceable. In fact, unconscionable and unenforceable were the very words used by Florida Circuit Judge Harold Jeffrey Cohen in his ruling against the attorneys' demands for the original 25 percent contingency fee negotiated with the state. Under this contingent fee arrangement the lawyers could be paid $2.8 billion, or more than $200 million each, for their work on behalf of the state. We should be ashamed that the tobacco settlement has turned into a money chase by a handful of lawyers and lobbyists. I commend Judge Cohen's decision vacating the contingency fee in the Florida case. He observes that ''perhaps tens of millions or hundreds of millions of dollars might be reasonable . . . but $2.8 billion simply shocks the conscience of the court.'' I might add that $2.8 billion shocks the American people too, many of whom have died or lost family members and friends to tobacco use.
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    Private parties, in the absence of prior approval by the Congress, cannot set legal fees pursuant to a settlement where that settlement in turn requires Congressional action. We were not at the table when these fees were determined and, in my view, therefore, we are not bound by the terms of the contingent agreements. I think we will likely see complicated constitutional litigation on this issue if we are successful in passing this legislation. The argument will probably be made that this is a private contract and that we cannot ex post facto modify terms of that contract. In fact, I think these were tentative and modifiable legal agreements where the premise of the proposed compact was the later cooperation of the United States Congress. Federal action is the lynchpin for settlement.

    Under the proposed settlement, the tobacco companies would pay $368.5 billion to be allocated among the states for various public health programs. Furthermore, it has been projected that as much as $111 billion could go to pay the contingency fees of various attorneys' working on behalf of states in the tobacco settlement. While the average annual gross receipts for the 100 top-grossing law firms in America last year was $18 million, a 30 percent contingency fee would yield an average of approximately $925 million per plaintiff law firm involved in the litigation.

    The issue of lawyers' fees in the tobacco settlement has attracted considerable attention. To those who charge we are trying to cast this debate in partisan tones, I disagree. This is a bipartisan matter. One may disagree on the level of compensation between the tobacco companies and the individual attorneys that they have retained, but this compensation represents a private contract probably arranged on an hourly basis.

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    In sharp contrast, the compensation paid to the plaintiffs' attorneys is wholly dependent upon the settlement and, in turn, is dependent upon our waiver of existing liability law provisions. Let me make it very clear that I would like to see similar limits placed on the tobacco industry's lawyers, but as Members we do not have that authority. According to a recent Wall Street Journal article, the tobacco industry is estimated to be spending about $600 million a year on defense attorneys. These expenditures, however outrageous we may consider them to be, are not ultimately being paid out of public revenues. Therefore, as a matter of law we can only affect the multi-million, or even billion dollar, legal fees awarded to the plaintiffs' attorneys.

    I strongly urge my fellow Members to keep the public health objectives at the forefront of our efforts to craft legislation and not allow the agreement to become a cash cow for a handful of lawyers and lobbyists. Direct medical costs in Pennsylvania related to smoking total almost $2 million annually. The legislation I have cosponsored with Representatives McInnis and Cox will ensure that the maximum amount of monies from this settlement go toward the protection of public health and not into the pockets of a few prominent lawyers.

    Each year, the decisions by more than one million youths to become regular smokers commit the health care system to $8.2 billion in extra medical expenditures over their lifetimes. Sadly, one-third of these young people will die prematurely as a result of tobacco use. These costs to our economy and in the loss of human life can be avoided if we can prevent children from taking up smoking. I would like to add that the Coalition for a Smoke-Free Valley, located in my congressional district, has endorsed H.R. 2740 for seeking to draw increased attention and resources to combating tobacco use among young people.

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    Finally, this initiative to limit attorneys' fees is not without precedent in the Senate. In September, Senator Sessions offered an amendment to the fiscal year 1998 Labor, Health and Human Services Appropriations bill that would limit attorneys' fees in the various states' tobacco suits to $250 per hour and a total of $5 million. For these reasons, I am optimistic that we can secure bipartisan, bicameral support for limitations on attorneys' fees in the tobacco settlement.

    I would like to close by again thanking Chairman Coble and Ranking Member Frank for the opportunity to appear before the Subcommittee to testify on the issue of attorneys' fees in the proposed tobacco settlement. I look forward to working with the Subcommittee on this important issue as the House begins to develop legislation to implement the tobacco settlement.

    Mr. COBLE. Thank you, Paul, and Scott. Good to have both of you with us.

    The gentleman from Massachusetts.

    Mr. FRANK. Let me say, first of all, with regard to the Disney situation, I chose that one deliberately. The description of Mr. Eisner as purely free enterprise, not dependent on the government, leaves out the fact that this body just agreed over my objection to give him the spectrum for nothing. I think if I had to choose between a contingency fee and a big chunk of the spectrum, I would take the spectrum.

    It is hardly arguable that the revenues of Disney are unrelated here. Maybe I should have even said, up front, that auctioning off the spectrum—put an amendment in that said, they can't pay people too much out of it. I will try that one next time. There is apparently more support than I thought.
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    But on the constitutional argument, there may be less of a difference than I thought. I may have misread your bill. If we do not pass a global settlement, then your argument is that your bill wouldn't affect what Florida and Mississippi have done; is that correct, Paul?

    Mr. MCHALE. That is correct. Barney, what I would indicate is that if we would choose to take no action whatever with regard to the settlement, that does not preclude a settlement. The individual States could still negotiate a settlement in the absence of Federal action and pay whatever they wanted to pay in legal fees.

    Mr. FRANK. That is your effective date. I wasn't sure exactly what it meant.

    Mr. MCHALE. They would have the constitutional right to be foolish.

    Mr. FRANK. All of us do, and it is probably a widely exercised right in America. But that does alter it somewhat in my judgment.

    So that you are saying now is that this only applies if there is a global settlement enacted by Congress; and if a State, on its own, makes such a decision, we have no role in that, Mr. McInnis?

    Mr. MCINNIS. Mr. Chairman, if it requires action of the United States Congress, as outlined by Mr. McHale, then we become a party and, yes, we have a right to cap that. If we are not a party to the action, if it is the State of Florida and their attorneys and does not require global action that requires approval of the United States Congress, then you are correct.
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    Mr. FRANK. That narrows it significantly in my judgment, but then the question is, would it depend on what we do? In other words, would any global settlement, do you think, give us that constitutional power? Or what if we limited a bill to increasing the power of the FDA and fining them in the future if there were to be youth smoking, but didn't get into some of these other things? Would that then also give us the constitutional power to limit the fees?

    Mr. MCHALE. I think it does. I think, Mr. Frank, if any settlement is contingent upon the decisive action of the United States Congress—for instance, we must change——

    Mr. FRANK. Any settlement that is contingent on the decisive action of the United States Congress is in big trouble.

    Mr. MCHALE. This is. And perhaps it is for that reason. There is no settlement that has been proposed that could be achieved in the absence of our action. If we are expected to change Federal liability law——

    Mr. FRANK. Excuse me.

    Mr. MCHALE. If we are expected to change—may I finish my statement?

    Mr. FRANK. You said there is no settlement. We have two lawsuits that were settled. They are not contingent on our action. If we don't do anything, as I understand it, those settlements stand on their own; isn't that true?
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    Mr. MCHALE. In my view, if a settlement is achieved in the absence of required Federal action, it is beyond the reach of this Congress to alter the terms of that private contract.

    But that is not the factual situation before us today. Not only is there an expectation of congressional action, I think the terms of this settlement are wholly dependent upon Federal action in limiting, for instance, future FDA authority, in changing the liability laws of the United States. My understanding, for instance, is that the American Trial Lawyers Association opposes this settlement because it would, in fact, alter the liability laws——

    Mr. FRANK. Excuse me.

    Mr. MCHALE. Barney, may I finish my statement?

    Mr. FRANK. No, because that is not before us.

    Mr. MCHALE. That is not polite. May I finish my sentence?

    Mr. FRANK. You are off on a totally different issue and we have a time limit.

    The question is, we are not talking here about limiting liability. I am unclear. My understanding is, two States have already settled and those settlements, if we don't do anything, will stand.
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    Mr. MCHALE. I think we have made that clear earlier.

    Mr. FRANK. That you wouldn't affect those?

    Mr. MCHALE. That's right.

    Mr. FRANK. And they were not dependent on a national settlement?

    Mr. MCHALE. That is correct. I think that was clear from the outset of my first statement.

    But clearly the factual situation today is the anticipated Federal action by the Congress that would change the liability laws of the United States and limit in the future the FDA authority, an agency of the Federal government.

    We are in the middle of this settlement negotiation. I think it is unreasonable, unfair and constitutionally flawed to believe that private parties can approach the table, negotiate a settlement that is premised on Federal action and then argue that our later intervention is unconstitutional.

    Mr. FRANK. I just want to be clear that if we are involved, then it is a different constitutional issue.

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    Mr. MCHALE. And clearly we are.

    Mr. FRANK. That is all I have.

    Mr. COBLE. I thank the gentleman.

    Mr. McHale, let me be sure I am following this ball as it is bouncing around. Let's assume, for the sake of discussion, that the global settlement is not enacted and approved by the Congress. Is it your contention that we in the Congress would still have a role with the various and sundry State actions as to attorneys' fees?

    Mr. MCHALE. When you use the word ''role,'' in my view, we would not have a role. But it is conceivable, based on interstate commerce, that we would have a right. Giving you a public policy answer to your question, whether or not we would have a constitutional right to intervene, for instance, based on a theory of interstate commerce, I don't think that we should intervene. If the States wish to settle these claims using only State law and dependent only upon State funding, it is not our role to step in and protect them from the foolishness of earlier contingency agreements that, in my view, should never have been signed.

    Mr. COBLE. The gentleman from Indiana.

    Mr. PEASE. Thank you, Mr. Chairman.

    My questions are more at the specifics than the philosophical. I think those have been addressed already and that is how you arrived at your figure of $150 an hour. You mentioned it briefly, I think, Congressman McInnis, in your remarks; and I have some follow-up questions, if I heard it correctly.
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    Mr. MCINNIS. Mr. Chairman—if I might, Mr. Pease, I would refer you to an article, I think we are going to hear a statement from a Lester Brickman, professor of law at the Cardozo School of Law. He has an excellent statement that—I would be happy to provide you with a copy which goes through some detail of what average attorneys make in this country, that these fees—for example, the fees being provided for the 400 would exceed the top 42,000 attorneys.

    We came up with $150 an hour because we thought, given that rate, that the rate was—$100 an hour, I think, was the senior average rate across the country, that what the plaintiffs' attorneys have done here did require some ingenuity, did require some work, and that the $150 was a fair compensation. If you multiply that out on an annual basis, that probably puts you in the top 1/2 percent of income in this country, I would guess, or top 1 percent in the country.

    Mr. PEASE. I appreciate that. If we are going to have an expert on it—I won't go into it in great detail, except to say that it has been my experience in the practice of law that the average fees paid to senior partners varies tremendously based on a lot of things, including the skill of the firm, the reputation of the firm, the special expertise of the firm. I would expect, even though I am generally sympathetic with where you are headed on this, that the specialists that would be needed for this kind of work are probably in a higher per-hour fee arrangement than the average across the country. But if one of your experts is going to address this, I will reserve those questions.

    Mr. MCINNIS. If I might clarify a point, it is not an expert of mine. In fact, I have not met Mr. Brickman; I've just read his statement, and drew those out of his statement.
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    But I would add, I'm not objecting to reasonable compensation nor, do I think, are the other primary sponsors. If the panel and if the Congress decides that $500 an hour is what is reasonable, considering the skills, that is acceptable to us. What is not acceptable is $7,000 an hour 24 hours a day since 1994; $183,000 per hour, where several of these lawyers will become instant billionaires. We can't say that this is limited at $18 billion, because this is an agreement in perpetuity. That is the obscene part that we are trying to redress to a reasonable, just compensation for these attorneys' efforts.

    Mr. PEASE. I appreciate that.

    My other concern, which I guess I will let you know now, but raise later is, I don't view this as strict per-hour compensation for the attorneys who were involved, even though, as I have said, I am sympathetic with some of the things you raise here. However—and we could argue about how much risk was assumed by those that were involved and what actions may have forced the settlement more than others—it appears to me that this is an unusual—obviously, it is an unusual circumstance where something more than just even among the best firms that would handle this kind of case on an hourly basis ought to be considered as part of your formula at some point. I don't know what that is, but I raise that subject.

    Mr. MCHALE. That is a legitimate concern. I think that there is deserving compensation for the degree of risk that has been assumed. But as a lawyer who has handled a case on a contingency basis and who supports the concept of the contingency fee, it is hard to imagine a magnitude of risk that would not adequately be compensated by a million dollars per year.
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    Mr. PEASE. I appreciate your statement. Thank you very much.

    Mr. MCHALE. If I may make one other very brief point. We need to also bear in mind these are not purely private contracts in the sense that one of the parties to the contract is an attorney and officer of the courts and the courts have traditionally limited in most, if not all, of our States the level of compensation that can be negotiated in the free market when the negotiator is a lawyer.

    There is a duty to the court, and so purely private contracts would not normally be limited by public authority. But where one of the parties is a lawyer, the supreme courts of the individual States throughout the Nation have routinely limited what can be negotiated.

    Mr. PEASE. A point well made. I appreciate it.

    Mr. COBLE. I thank the gentleman.

    The gentleman from Utah.

    Mr. CANNON. I just want to be sure from where you are sitting, my understanding, Scott, of what you have said is that the 150 is sort of a starting point; we are going to debate it here, and then as a sponsor of the bill, you would consider that adjusting it up, or down perhaps—I think probably up—but you are open to that kind of debate, right?

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    Mr. MCINNIS. The key point of this bill, Mr. Cannon, is that the attorneys want to receive just and reasonable compensation. Whether the $150 an hour matches that, I can tell you from my own personal representation in the State of Colorado, I can be well represented at $150 an hour by some very qualified and capable attorneys. So that is okay with me. But if this Congress determines that that rate should be higher, I am willing to live with that. It is just that if we don't take action, the rate is—it will be the largest payment to attorneys in the history of the world.

    A month ago—and you are involved in corporate business—a month ago, MCI, somebody, WorldCom or somebody, bought MCI or vice versa; it was the largest business transaction in the history of the world at $38 billion. These attorneys' fees could exceed that and that is the unreasonableness that we are trying to bring back into focus, because this money is money that is being taken away from, I think, educating and fighting youth—tobacco smoking by youth and other tobacco education-related programs.

    Mr. CANNON. That is all I have, Mr. Chairman.

    Mr. COBLE. I thank the gentleman.

    The subcommittee thanks you all for your testimony and your interest and invites you to hang around if you would like to.

    Mr. MCINNIS. Mr. Chairman, I would seek unanimous consent to submit a written statement. I missed what you had said earlier. Was it within 24 hours?

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    Mr. COBLE. We will keep the record open for 5 days.

    Thank you, gentlemen.

    Panel number one, if you all would come forward and I will introduce you as you are doing that. The first witness will be D. Scott Wise, who is a partner in the law firm of Davis, Polk & Wardwell. He has practiced law for 18 years. He will testify on behalf of the tobacco industry.

    Mr. Wise has represented clients in product liability, antitrust, mergers and acquisitions and securities litigation. He was graduated from Yale University in 1974 and, in 1977 received his J.D. from the New York University School of Law.

    Our second witness on this panel is Richard F. Scruggs, who is a senior member of Scruggs, Millette, Lawson, Bozeman & Dent. The firm specializes in mass tort cases for workers injured at industrial sites in the southeast. He and members of his firm are part of the core groups of attorneys and other professionals who originated the litigation against the tobacco industry that precipitated the settlement of June 20, 1997. He earned his Bachelor of Arts and law degrees from the University of Mississippi.

    Our next witness is Lester Brickman, who is professor of law at the Benjamin N. Cardozo School of Law at Yeshiva University. Professor Brickman is a member of the New York State bar and the U.S. Court of Appeals for the Third and Fifth Circuits.

    Our final witness is Alan Morrison, who is an attorney at Public Citizen litigation group since 1971. Mr. Morrison received his Bachelor of Arts degree in 1959 from Yale University and his law degree from Harvard in 1966.
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    Obviously, each of you is a gentleman of letters, so I don't want to by any means insult your obvious intelligence, but let me reiterate what the gentleman from Massachusetts said. You had better conserve your time. If a point has been made, you might want to make another point, because we will have picked up on that first point.

    Unlike my friend from Pennsylvania, Mr. McHale, I live and work in the tobacco belt, so I am not an adversary to the tobacco industry. But I am going to keep my hat of objectivity on today as we go about this.

    Gentlemen, you all can go in any order you desire, if you will keep in mind the red light; and we are glad to have each of you here.

    Why don't we start with you, Mr. Wise?


    Mr. WISE. Thank you, Mr. Chairman.

    I arrive here in front of your subcommittee maybe from a little bit different perspective. My firm was asked by our client, RJR Nabisco, about a year ago to get involved with them trying to explore with the new management of that company what they were considering in terms of really striking out in a new direction in the tobacco industry in a multitude of ways, for the first time really in history, I think, thinking that they could perhaps start a process that would have a chance of achieving a different level of sort of regulatory footing for the industry in the United States; in so doing, perhaps put behind them quite an avalanche of litigation that the industry was facing, put to rest significant regulatory controversies over how their products were regulated and sold and marketed in the United States, and most important, put to rest to a degree of public satisfaction the controversy surrounding underage use of their products.
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    So literally, just about a year ago, I got involved in this process; and I have said before, when we sort of look back on where we started, sitting around a conference room in New York last year thinking, trying to imagine a process that would lead us to where we are today—it was even very hard to imagine that process. And it is really quite remarkable, I think, that we have gotten as far as we have gotten and been able to come to the Congress and seek the Congress' help to implement what has been called the ''proposed resolution'' that the attorneys general and the private bar and the tobacco companies came to last June.

    That is where I am coming from in my involvement here. I thought just—really just as a factual matter, I could help describe how the negotiators attempted to deal with this difficult, complex fee issue, because in the context of our negotiation, one of the things obviously that we were trying to accomplish was a settlement of, if not all, as much of the litigation facing the industry that we could achieve.

    We were, I think, in somewhat of a unique circumstance, to use the Congressman's words, negotiating with an array of actors in the drama, AGs and private plaintiffs' lawyers, class action lawyers, public health and community representatives; and in the context of a multifactorial negotiation—if that is the right word—ultimately, as in any settlement negotiation, once you reach some sort of understanding on the economic terms of what might be acceptable, there is a demand from the other side that you must address their legal fee problem.

    That was a demand in our situation that had a couple of purposes attached to it from both sides. Let me just describe how the negotiation went, because it might be interesting legislative history to where we ended up. The demand was that somehow the industry had to satisfy this liability of the plaintiffs and the State attorneys general in connection with reaching a mutually acceptable resolution of these issues, and that it had to be done in a way that did not impair or otherwise make insecure the consideration that they had just achieved in the context of the settlement negotiations flowing pursuant to the settlement terms; so that the demand was, it had to be satisfied and had to be satisfied over and above the consideration flowing pursuant to the proposed resolution which, as you all know, is quite substantial, and that is the $368.5 number that the Chairman has used.
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    From the industry standpoint, there are a couple of more unique circumstances that needed to be considered. First, we are talking in this very unusual context about settling legislatively through this proposed resolution quite a number of big litigations going on in the United States. There are—I think 40 is the right number of State attorneys general actions; there are probably big class actions in every State of the Union pending against the tobacco industry, and probably others that would be impacted in one way or another by the settlement terms that the proposed resolution contemplates.

    We are talking about a lot of cases, dozens and dozens and dozens of cases where the industry was being asked to suggest something that could meet all of those plaintiffs' demands with respect to plaintiffs' legal fees. That is a problem.

    It was just a problem practically. We obviously could not negotiate each one of those separately. That would have taken a number of years.

    Secondly, there is a theoretical problem. The industry felt very strongly—the companies, each of them, felt strongly that they did not want to be in a position or be seen to be in a position of being the determiner of any plaintiffs' lawyer's fee or of being the determiner of what is fair and reasonable compensation for a plaintiff's lawyer. They did not want to be put in that position. They thought they could be subject to great criticism if they were, and so we made every effort not to do that.

    And so what we came up with, given these dynamics in the settlement negotiation, was the proposal that you have seen advanced in the papers that we submitted, and that is this idea that we could create an independent decision-making body, a three-member arbitration panel, whose goal would be to award fair and reasonable compensation to the lawyers involved with, from the industry's perspective, some sort of financial cap to give some certainty to their financial planners about what that might ultimately end up being. And that is what the proposal advanced by the industry ended up being.
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    The industry and the companies really think it is the most straightforward, honest, above-board and fair way to deal with what is really a very complex problem in a number of different cases pending all over the country, probably which would involve different procedural laws, et cetera, if you got involved in doing this in each and every case.

    We thought the fairest way and most efficient way to do it was to do it on a national basis with an independent tribunal appointed for that purpose with members that were completely above reproach and of the highest integrity and reputation. That is what the industry proposed.

    I would just take two more seconds Mr. Chairman, if it is okay, to explain that the settlements—Congressman Frank is right; there are settlements in Florida and Mississippi independent of this national proposed resolution. The treatment of the attorneys' fees in Mississippi and the proposal for the treatment of the attorneys' fees in Florida made by the industry is really an attempt to replicate to the greatest extent possible what would happen if a national resolution was implemented by the Congress.

    In Mississippi, the plaintiffs' lawyers have agreed to abide by this approach of the appointment of a three-person independent panel, and the same offer is outstanding in Florida, which has not been accepted. But that is where you see the same caps that the industry insisted on in the national debate being imported into those individual State settlements.

    I will be happy to answer any questions. I'm sorry if I took up a little bit more time.
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    Mr. COBLE. I thank the gentleman.

    [The prepared statement of Mr. Wise follows:]


    My name is Scott Wise. I am a partner in the law firm of Davis Polk & Wardwell,(see footnote 1) which has served as counsel to R.J.R. Nabisco and R.J. Reynolds. I was one of the negotiators of the Proposed Resolution that was signed on June 20, 1997—a comprehensive tobacco agreement negotiated by a core group of attorneys general, counsel for plaintiffs in tobacco class actions, representatives of the public health community, and the tobacco industry. I am also knowledgeable about the settlements of the lawsuits brought against the industry by Florida and Mississippi, and the Broin class action lawsuit in Florida.

    I appreciate the opportunity to provide testimony regarding the treatment of attorneys' fees under the Proposed Resolution and the settlements in these three cases.

Proposed Resolution

    From our perspective, five points deserve emphasis with respect to attorneys' fees under the Proposed Resolution.

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    First, although plaintiffs' attorneys' fees typically come out of the amount paid by a defendant to settle a lawsuit, none of the $368.5 billion of funding provided for under the Proposed Resolution will go to pay attorneys' fees. Any fees paid to plaintiffs' lawyers will be above and beyond the $368.5 billion pledged by the industry. Their payments will not come out of the monies paid to the States and the federal government under the Proposed Resolution.

    Second, no set amount has been pledged by the industry to pay attorneys' fees under the Proposed Resolution. As in most settlements, the defendant tobacco companies are prepared to pay reasonable attorneys' fees to the plaintiffs' attorneys, but there has been no discussion of, or agreement on, specific amounts. The industry has offered to pay reasonable attorneys' fees to the lawyers for the States, the class action plaintiffs, and others who may be found to be entitled to a fee for having substantially contributed to the Proposed Resolution.

    Third, by agreement with the State attorneys general, the industry has proposed that the amount and distribution of attorneys' fees be decided by an independent panel of arbitrators consisting of three well-known public figures with reputations for integrity. One would be selected by the industry, one by lawyers for the States and other plaintiffs, and a third by the first two.

    Fourth, while the industry has made clear that it is not willing to pay more than $500 million in attorneys' fees in any single year, it certainly has not agreed to pay that much in any single year or even as a total amount. The cap represents the maximum amount the industry believed it could bear in any one year if fees that high were to be awarded. In view of the size of the claims against the industry, the industry had to acknowledge the possibility that fees of that magnitude might be awarded. To repeat, however, the industry has not agreed to pay fees in any specific amounts to any of the lawyers whose fees would be determined by the panel.
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    Fifth, although the industry has agreed with the attorneys general to offer this fee-setting mechanism described above, as far as I am aware none of the plaintiffs' attorneys has yet accepted the proposed mechanism for determining fees or capping the industry's annual exposure to fee awards. No lawyer is required to seek payment from the industry under this mechanism; payment of attorneys' fees can still be sought from clients in the traditional fashion.

Florida, Mississippi, and Broin

    With respect to Florida, Mississippi, and Broin, each of these cases was settled by the industry, and the issue of attorneys' fees had to be addressed in connection with each of those settlements. The industry has attempted to approach all three settlements in a manner consistent with the Proposed Resolution (and subject to a $250 million cap for cases settled in the last six months of 1997).

 In Mississippi, the industry agreed that if the Proposed Resolution is enacted into law by November 15, 1998, the fees of Mississippi's lawyers will be determined by the arbitration panel established in connection with the Proposed Resolution. If not, their fees will be set by an arbitration panel similar to the panel contemplated by the Proposed Resolution. In either case, their fees will be subject to the overall cap on industry payments for fees under the Proposed Resolution (which would apply to all fees to be paid by the industry, not just fees awarded to Mississippi's counsel).

 In Florida, the industry agreed to pay reasonable fees of the State in connection with the settlement. To date, the attorneys representing the State have as a group been unwilling to agree to the mechanism advanced in connection with the Proposed Resolution. Various of the lawyers have insisted upon enforcement of their 25-percent contingency fee contract with the State. Whether or not that contract is enforceable as against the State—a matter between Florida and its counsel—the industry has simply agreed to pay reasonable fees determined in accordance with the mechanism advanced in connection with the Proposed Resolution.
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 In Broin—the airline flight attendant case—as in the usual class action settlement, the trial judge will determine what fees are appropriate. Unlike the State suits, Broin is a class action subject to Florida rules providing for the determination of fees by the trial judge. There is, therefore, an independent mechanism for the setting of attorneys' fees at reasonable and fair levels by an impartial third party—the trial judge. The industry has not agreed to pay any specific amount of attorneys' fees but has agreed not to object to fees of $46 million or less. The court could well set the fees at a lower amount.

    I hope this information will be useful to the Subcommittee as it considers the issue of attorneys' fees in connection with the Proposed Resolution and related tobacco litigation. I would be glad to answer any questions.

    Mr. COBLE. Mr. Scruggs.


    Mr. SCRUGGS. With the Chair's permission, I would submit my prepared written remarks and simply try to summarize, given the time limit.

    Mr. COBLE. Without objection. And all of your statements will be made a part of the record without objection.

    Mr. SCRUGGS. Thank you, Mr. Chairman. My name is Richard Scruggs. I was the lead private lawyer in the State of Mississippi's case. I was privileged to be one of the core group of attorneys and public officials and public health advocates who initially formulated the idea of this cost recovery litigation and litigation in equity to reform the tobacco industry's marketing practices aimed at children.
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    This process began in 1993, and we spent at least a year trying to formulate ways to tackle the tobacco industry. I am cocounsel in another 30 State cases. I was one of the leaders, at least in the private bar, in negotiating the June 20 agreement, which Congress now has before it.

    I think it is important for us to understand where we were in 1993. We were dealing with the most intractable public health problem probably in this century; 400,000 Americans were dying every year prematurely from tobacco-related illness. The taxpayers of this country were spending billions of dollars treating people who had tobacco-related illness, indigents and others who smoked or used tobacco and got sick. Many of those who smoke, as you know, are less educated and most are economically deprived and end up on the public dole in their later years, so that the toll of smoking cigarettes is not borne by the industry, it is borne mostly by the public.

    So there are billions of dollars that are being spent every year, were and are, on tobacco-related illness. Approximately 1 million American children were starting to smoke every year; about a third of those will die prematurely from their habit. Our children were facing an unprecedented assault of tobacco marketing, where these industries were competing with each other to capture what they called the ''young adult smoker''; that was euphemistic for ''teenagers.'' So that is what we were facing in 1993.

    Despite all of this, despite this carnage, despite the fact that over 400,000 Americans were dying prematurely every year, the tobacco industry had been able to evade effective regulation. The legislative system had failed to impose any effective regulation; the judicial system had failed to impose any sort of accountability for the death and harm that tobacco caused. There was no effective means of restricting their marketing because of the First Amendment concerns of trying to restrict marketing which ostensibly was aimed at 18-year-olds, but which had an effect on 13-, 14-, 15- and 16-year-olds.
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    One of the reasons for the strength and success of the tobacco industry in this country is that they have enormous resources. The cigarette industry is one of the most profitable industries in the world. It has been estimated by many that the tobacco industry spends more than $600 million every year on its own lawyers defending these cases, $600 million a year on lawyers, paid by the tobacco industry to their own lawyers.

    The tobacco industry has evaded successful congressional legislative regulation. They have paid enormous—millions of dollars in hard and soft money to politicians of both parties. They were very, very skillful in evading any sort of effective regulation.

    In 1993, as a result of courageous actions initially by Attorney General Mike Moore from Mississippi, followed by other attorneys general who banded together with him and a partnership with the private bar—using private funds, not public funds, because not even the State governments could afford to compete with the tobacco industry with those sorts of resources—we now have a chance to enact some of the most meaningful public health legislation in this country's history. The reason we have that chance is because of the partnership between State government and the private bar that was willing to risk its own capital on this enterprise.

    The contingency fee system worked as it was supposed to. In most cases—Mississippi is not one of them—in most cases, the private lawyers were hired on a contingency fee, simply because of the mismatch in resources between the tobacco industry and the State governments.

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    Congress now, as a result of this litigation and the actions that these people took, has an unprecedented opportunity. Not only has this settlement produced billions of dollars that were unthinkable just 12 months ago—$368 billion was an unthinkable amount, if you are honest, just even 6 or 8 months ago.

    The package of countermeasures, over and above the money—the money is really not that important except as a public health tool. Over and above that—Mr. Chairman, I have got a red light. May I continue?

    Mr. COBLE. Wrap it up quickly, Mr. Scruggs, if you can.

    Mr. SCRUGGS. I will wrap it up quickly.

    You have an unprecedented opportunity; you have got a package of public health countermeasures and measures to stop kids from smoking. You have got clean indoor health provision opportunities here, and you have the opportunity to regulate nicotine and the other harmful products in cigarettes and tobacco products. This was made possible by the contingency fee.

    We know the contingency fee is controversial. Human nature being what it is, no one really objected. There weren't hearings like this when these contracts were entered. There weren't hearings in State legislatures in very many places when these contracts were entered. Everybody thought, this was so risky that these lawyers may be nuts if they would take this industry on on a contingency fee. There were no objections to it of any consequence. It is only—and that is human nature. It is only when the rats are out of town, that the people decide that the Pied Piper didn't earn his money. That is what has happened today.
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    I can appreciate the outcry at the amount of money that is being bandied about in the press. I can understand that. In order to avoid the outcry and the fact that contingency fees could, if applied, literally result in what could be construed to be exorbitant fees, we agreed that an independent panel of arbiters would decide the attorneys' fees in most of these cases.

    Now, my firm and one other firm, the Ness, Motley firm, who you will hear from later, are the firms that have probably been at this the longest and have been most involved in this, both in money and time, and have produced the most results. We represent more States than anybody else. I can't speak for all of our colleagues, but we are willing to go to the arbitration system to have an independent panel of three arbiters decide how much money we make, and we intend to urge that on our colleagues and our cocounsel in other States.

    Mr. FRANK. Mr. Scruggs, in your written statement, do you make clear who in your analogy are the rats in this?

    Mr. SCRUGGS. I am talking about the rats being the tobacco industry. We got them out of town.

    Mr. COBLE. Let me think aloud, folks. I suspect that many in this room have strong feelings about the tobacco industry, for or against it, but I believe we would be better served, for the purpose of this hearing, if we can isolate on attorneys' fees. It is, after all, the reason we are here. So why don't we try to do that.

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    Do you want to be heard?

    Mr. FRANK. I just want to reinforce, Mr. Chairman, because I think the problem is people give us their general views, and then they run out of time when they get to the attorneys' fees, so why don't people start with the attorneys' fees, and then you can give us the philosophy on the over time.

    Mr. COBLE. Thank you, Mr. Scruggs.

    [The prepared statement of Mr. Scruggs follows:]


    Good afternoon, Mr. Chairman and distinguished members of the subcommittee. My name is Richard Scruggs. I'm the senior partner in the law firm of Scruggs, Millette, Lawson, Bozeman & Dent from Pascagoula, Mississippi.

    I represent the State of Mississippi and more than 20 other states in litigation against the tobacco industry. As you may know, Mississippi was the first state to take on Big Tobacco. I am proud to have been part of the legal team that planned and executed the first successful suit against the tobacco industry under the leadership of Attorney General Mike Moore. And I am proud to have been part of the legal team that negotiated the June 20, 1997 proposed Global Agreement, under the leadership of General Moore and the other attorneys general.

    This Agreement provides the framework for one of the most significant public health advances in history. It tackles head-on the challenge posed by America's number one public health problem, responsible for 419,000 deaths every year. The American Cancer Society estimates that the proposed Agreement's restrictions on youth marketing and access will save the lives of one million teenagers between the ages of 15 and 19 in its first 10 years, if its targets on youth smoking are met.
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    In your deliberations on what is arguably the most important and surely the most complex legislation before this session of Congress, I hope that you and your distinguished colleagues will keep the well-being of America's children front and center.

    With this in mind, let me address the specific subject of this hearing, starting with a review of how far we have traveled from where we were at the start of this litigation to the historic juncture we have arrived at today.

    Back in 1993 and 1994, when Attorney General Moore, a small group of attorneys and myself were discussing the prospect of bringing legal action against the tobacco industry to reimburse the taxpayers of Mississippi for the costs of smoking-related illness and to stop marketing to children, it all seemed like an impossible task.

    The tobacco industry had been untouchable in the courtroom. No tobacco company had paid a penny in damages to anyone. Big Tobacco took no prisoners. It would never be outspent or outmanned in any legal venue.

    On top of that, we were applying innovative legal theories untested in this context—ones that made eminent sense to us, but whose chances in the courtroom were always questionable.

    Given these harsh realities and given Mississippi's tight budget situation—one which was a prime motivating factor for bringing this lawsuit—there was no way Attorney General Moore could ask his state's taxpayers to foot the legal bills. So he asked my firm and several others to do so.
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    We knew the costs—both in attorneys' time and outside expenses—would be immense. We knew the litigation would take many years to proceed, and that Big Tobacco's legal strategy at the time—to delay, depose and stonewall at every opportunity—would only make things worse. And we knew our chances of success were iffy at best.

    But we did it anyway, because someone had to.

    It was the only way for the litigation to proceed. It was the only chance to bring the tobacco industry to justice. It was the only opportunity to protect our children from Big Tobacco's lure.

    In exchange for fronting all of the legal costs, which to date are in the many millions of dollars, we agreed to an undertaking that in the event of a plaintiff verdict or a settlement, attorneys' fees would be determined by the courts. We also specified that such fees would be paid for by industry—not by taxpayers—over and above any damages.

    In the state of Florida, which was also in the very first wave of the litigation, we signed a contract specifying a contingency fee of 25 percent—one which is quite low, relative to the risks involved and the market standard. Similarly, the contract states that fees would be paid for by industry over and above damages.

    Mr. Chairman and members of the subcommittee, I think you understand that contingency fees are an extremely common and appropriate practice in civil litigation. Frequently, plaintiffs cannot afford the costs of litigation and have no other way to redress grievances or seek their day in court. Moreover, contingency fees make counsel a full partner in the effort. They put the onus on us—we only get paid if we win justice for our clients.
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    In every respect then, I believe our arrangements with Mississippi and Florida as with all of the states we assisted were reasonable, fair and appropriate. And they were in the best interests of our clients, the taxpayers of these states.

    As the litigation progressed, as more states joined the battle against Big Tobacco, and as early court rulings indicated that we had a fighting chance after all, contingency fee rates declined to reflect the reduced risk involved. As the last states filed suit while the negotiations surrounding the Global Agreement were underway, fees dropped even further—in one case, they are capped at a flat $200,000. All of these arrangements are also reasonable, fair and appropriate.

    Each and every one of these civil actions proved to be complex, expensive, cumbersome, and hard fought. Let me assure you that outside of Mississippi and Florida, each and every one of the 40 pending state lawsuits remains hotly contested and hard fought as we sit here today.

    Now, the fact is that the private counsel to these states are all very much at risk. If comprehensive tobacco legislation is not passed by this Congress, and the industry chooses not to settle as it did in Mississippi and Florida, then we will assist the attorneys general in taking these cases to trial. Given the realities of the courtroom, the odds are that we will win some and lose some. Under the latter circumstances, private legal counsel will be out millions of dollars. This is the risk we accept when we take on these cases.

    Now, in the case of Mississippi and Florida, what was once unthinkable has happened—the tobacco industry settled. And it did so on terms that are exceedingly favorable to the taxpayers, with public health and youth marketing provisions mirroring those in the proposed Global Agreement.
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    While we continue to believe that our contracts with the states are fair and reasonable, because of the new realities of the Mississippi and Florida settlements, we agreed in these two states to a provision proposed by the tobacco industry—that our fees be determined by an independent arbitration board.

    Because the tobacco industry will pay attorneys' fees directly—over and above its compensation to the states—the arbitration board is a reasonable means of determining fees.

    This is the process that is underway in Mississippi. In Florida, it has been proposed and my firm supports it, but unfortunately, there is no longer unanimity in the trial team on this question. It is my hope that this vexing and unwarranted disagreement will soon be resolved in favor of this process, so that we can move forward and the state starts benefitting from the settlement as it should.

    The process for determining legal fees in other states has not and cannot be decided until there is resolution of their lawsuits by verdict, individual settlement or enactment of a national settlement. Ultimately, I would urge that this question be decided at the state level, by the individual attorney general, the trial team for that state, the tobacco companies, and the courts. There may be some variation, depending upon the unique circumstances of each state and its case. But you can have confidence that the process will be fair, reasonable and appropriate, as has already occurred in Mississippi and, I believe, will soon occur in Florida.

    Mr. Chairman and members of the Subcommittee, the American legal system may not be perfect, but it is the best system of justice in the world—and the process of litigation that led us to where we stand today is a perfect case in point. An idea that started with one dedicated attorney general advanced as other attorneys general joined the cause, and as a small group of capable attorneys worked hard to win justice. This spark painstakingly grew into a national movement that forced the tobacco industry to take responsibility for its actions. As a result, we have an unprecedented opportunity to protect children and the public health that would have been available through no other means. Without the contingency fee process that is the standard practice in civil litigation, none of this would have transpired. Joe Camel and the Marlboro Man would still be preying on America's children, and the industry would remain unaccountable for the havoc it wreaks on our public health.
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    I hope that this distinguished body will keep this in mind as it debates this vitally important issue. Thank you very much for the opportunity to share my views with you today.


    Richard F. Scruggs was born in Brookhaven, Mississippi on May 17, 1946. He grew up in Pascagoula, Mississippi, a shipbuilding and industrial community on the Mississippi Gulf Coast.

    Mr. Scruggs graduated with a Bachelor of Arts degree from the University of Mississippi in 1969, whereupon he was commissioned an Ensign in the United States Navy. He earned his wings as a Naval Aviator in December, 1970, and deployed with the Sixth Fleet on the aircraft carrier U.S.S. Franklin D. Roosevelt from 1972–74, where he flew A–6 Intruder aircraft. Mr. Scruggs received a special commendation from the carrier airwing commander for developing and flight testing war-at-sea tactics still used today by carrier strike forces. He was honorably discharged as a Lieutenant in August 1974, after completing five years active duty.

    After completing his Naval service, Mr. Scruggs enrolled in law school at the University of Mississippi, served on the Law Journal Editorial Board, and received his Juris Doctorate in 1977. He is admitted to practice in numerous federal and state courts, including the Courts of Appeals for the Fifth and Second Circuits. Mr. Scruggs served as Editor-in-Chief of the Mississippi Lawyer, which is the official publication of the Mississippi Bar Association.
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    Mr. Scruggs is currently the Senior member of Scruggs, Millette, Lawson, Bozeman and Dent, P.A. The firm specializes in mass tort cases for workers injured at industrial sites in the Southeast. He was co-lead counsel in a successful consolidated trial of 7,000 workers injured from exposure to asbestos. Mr. Scruggs' firm currently represents the states of Louisiana and Mississippi in suits to recover the costs of removing asbestos from state facilities.

    Mr. Scruggs and the members of his firm were part of the core groups of attorneys and other professionals who originated the litigation against the tobacco industry that precipitated the settlement of June 20, 1997. The Scruggs firm is co-counsel in approximately 30 state suits against the tobacco industry.

    Mr. Scruggs has been a director of his community's legal services corporation. He is President-elect, of his local chapter of the American Inns of Court, but has deferred serving until the conclusion of the tobacco litigation.

    Mr. Scruggs was recently selected Mississippi's Citizen of the Year by the March of Dimes. He is a member of the First Presbyterian Church. He was married to the former Diane Thompson in 1971, and the couple have two children, Zach Scruggs, 23, a law student, and Claire Scruggs, a 10th grader at Pascagoula High School.

    Mr. COBLE. Mr. Brickman, you are recognized for 5 minutes.

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    Mr. BRICKMAN. Mr. Chairman and members of the subcommittee and other Members, I want to take this opportunity first to thank you for inviting me to speak on the matter of the legal fees to be generated by a global settlement of the tobacco litigation.

    You have heard, stated repeatedly, that a settlement has been reached calling for payment of $368.5 billion over 25 years, coupled with and contingent upon passage of extensive congressional legislation. If the contingency fee contracts with the State attorneys general were to be enforced, my calculations indicate that attorneys' fees would be approximately $18.6 billion over a 25-year period. As referred to in prior testimony today, and by way of comparison, this amount exceeds the total revenues of the hundred largest law firms in the United States in 1996, which was $18 billion dollars, and that was generated by a total of a little over 40,000 lawyers.

    In my prepared testimony, which I have submitted, I review a litany of reasons for subjecting each of these contingency fee agreements to close ethical scrutiny and finding some, or even all of them, not enforceable, but this one-by-one analysis is not the task that I have undertaken. Rather, I have been asked to consider from both perspectives of policy and constitutionality whether the contingency fee agreements, in toto, and all other fee setting agreements in the tobacco litigation, ought to be, and, if so, constitutionally can be, superseded by congressional action.

    I will be direct and unequivocal. Regulation of attorney fees should be included as part of a legislative settlement which would comprehensively regulate the production, advertising and sale of tobacco products, and litigation arising therefrom. All attorney fee agreements between the State attorneys general, or the tobacco companies and the private attorneys, should be overridden by that legislation.
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    And this recommendation applies as well to the plans set forth in the so-called side agreement to create an arbitration panel to set fees as part of a global settlement. I suggest to you that the probability that any such panel would actually exercise independent judgment rather than fulfill a necessary public relations role is quite low. More importantly, the panel's role would be a parochial one, lacking a public policy perspective, that only Congress can bring to bear.

    It is essential to recognize that if the tobacco settlement is accomplished through congressional legislation, it will no longer be a settlement, no matter how achieved. It then becomes a statement of national policy. The legislation will extend to and bind parties who never agreed to any of the settlement terms. Effectively, Congress will be entering into a public bargain with Big Tobacco on behalf of the Nation.

    Because this is legislation, and not simply a settlement, Congress should not be wooed into rubber-stamping this measure on the false theory that nothing should be done to upset the agreement between an alliance of State attorneys general and a group of contingency fee lawyers motivated by financial incentives, measured in billions of dollars in fees. Such a precedent, I suggest, would have troubling implications for our system of representative government and political accountability, because it would allow self-interested groups to reach legislated ''agreements'' that affect the vital interest of those not party to the ''agreements.''

    Where Congress is asked to legislate a proposed settlement, it should perform its ordinary and proper function as the national Legislature to assure that the public policy outcomes created by the legislation are consistent with congressional objectives. Necessarily, I suggest, this includes exercising dominion over the fees of those who would benefit the most from the congressional legislation. Moreover, if the legislated settlement yields attorneys' fees of such magnitude that it merits public disdain, Congress will bear the brunt of that disdain, and rightfully so. Congress has the responsibility to assure the Nation that the legislation it is enacting is not merely or principally for the purpose of facilitating the payment of vast sums of money, unprecedented sums, to a small group.
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    The major parts of my prepared statement, at pages 20 through 41 of that statement, focus on the constitutional issues raised by legislation that would apply to attorney fees. I note in that prepared statement that the nature of the constitutional issues raised by congressional legislation to regulate fees is both a function of the specific regulation being proposed and the structure of the legislated settlement.

    As I discussed, certain structures avoid, or at least minimize, any serious constitutional challenges. After reviewing due process, spending power, interstate commerce, takings, that is fifth amendment, and Federalism, that is 10th amendment issues, in my prepared statement, I conclude that a properly drafted act of Congress to regulate attorney fees as part of a comprehensive legislative settlement would be constitutional.

    As a postscript, I would add that I cannot let this opportunity pass without noting that following me, Alan Morrison will be testifying about the constitutionality of fee regulation. I await with relish Alan's discovery of the long lost amendment to the Constitution, the one that comes between the 9th and 11th amendments.

    Mr. COBLE. Thank you, Mr. Brickman.

    [The prepared statement of Mr. Brickman follows:]


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    Mr. Chairman and members of the Subcommittee, I am Lester Brickman, a Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. I want to take this opportunity to thank you for inviting me to speak on the matter of the legal fees to be generated by a global settlement of the tobacco litigation.

    I am going to address two aspects of the legal fees issue: (1) the propriety and enforceability of the contingency fee agreements entered into by lawyers retained by state attorneys general to sue tobacco companies and seek recovery of Medicaid monies spent by states to treat those with tobacco-related illness; and (2) the constitutionality of Congress enacting a law that, as part of a comprehensive plan to regulate the manufacture, advertising and sale of tobacco products and litigation arising there from, would supersede the contingency fee agreements with state attorneys general and limit the fees to be paid by both state attorneys general and tobacco companies to the attorneys representing the states. (I will not, however, be addressing the constitutionality of the various legislative elements of the proposed settlement, details of which are discussed infra. I would note that some features of the proposed settlement such as those mandating that states enact and carry out a comprehensive program to assure ''no sales to minors'' require careful study.)

    A brief overview of the contingency fee agreements entered into by the attorneys general is first in order.

    Approximately 40 states, by their attorneys general, have brought some form of action in state courts against the tobacco companies to recover Medicaid outlays. In 36 states, the attorneys general have entered into contingency fee agreements ranging from 3% to 33 1/3%, with 89 law firms. In Connecticut, Florida, Maryland, Massachusetts, New Jersey and Utah, the fees are 25%, while in Arizona, Hawaii, Illinois, Kansas, Oklahoma and Texas, the fees range from 10% to 20%. (The sole one-third fee agreement was declared invalid by a West Virginia court.) Some fee agreements differ substantially from others. Indiana's is graduated and provides 13.5% of the first $30 million and 10% of any additional recovery, as is Washington's which provides for 15% of the first $100 million and 3% of any recovery in excess; Idaho provides for a flat $100,000 fee; Maine provides for $150 per hour for partners and $120 per hour for associates but with a cap on the total hourly rate fee of 13%.
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    In addition to variations in percentages, the fee agreements vary on the basis of whether they apply to the gross or net recovery—that is, whether expenses are paid for entirely out of the states' shares of recoveries or are shared between the states and their hired attorneys. Substantial significance may attach to the gross/net difference if, as the federal government claims, the Medicaid law requires that states rebate a large share of their recoveries to the federal government because the latter paid and pays between 50 and 77 percent of states' Medicaid expenditures. (The rebate would be in the form of an offset against future federal payment to states for Medicaid expenditures.) A state that agreed to pay 25% of the gross recovery, which has to repay 60% of its recovery to the federal government, could end up paying a contingency fee that was over 60% of its net recovery.

    As announced by a group of state attorneys general, plaintiff lawyers and the tobacco companies, a settlement has been reached calling for payment of $368.5 billion over 25 years coupled with and contingent upon passage of extensive Congressional legislation. (A description of the proposed terms of the legislated settlement is set forth infra.) Of the $368.5 billion, approximately $193.5 billion would be paid to the states over the next 25 years to settle claims against the tobacco companies for recovery of Medicaid funds expended by the states for treatment of tobacco-related illnesses. (If the federal government lays claim to any significant portion of these payments, it is likely that the agreement will be modified to avoid such eventuality. The federal claim and legislation to eliminate such a claim is discussed infra.)

    In addition to the $193.5 billion to the states, the following sums constitute the 25 year settlement total:
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  (1) $25 billion to a permanent federal trust support that will fund research into smoking-related diseases;

  (2) $25 billion at the rate of $1 billion a year for smoking cessation programs which includes reimbursement of smokers who enroll in such programs;

  (3) approximately $25 billion to fund public health programs designed to discourage smoking, underwriting additional costs to be incurred by the FDA in administering various aspects of the legislated settlement and enabling the FDA to make grants to the states for tobacco sale restriction enforcement; and

  (4) approximately $92 billion to pay any tort judgments obtained against tobacco companies by individual litigants. The aggregate amount to be paid out each year in tort claims will be capped and a federal commission will decide how to allocate any unspent monies under the annual caps.

    The attorney fees to be generated by the settlement relate to two principal elements of the settlement: individual tort case outcomes and the payments to the states of Medicaid recoupments. With respect to tort claims, if standard contingency fees between one third and forty percent are charged and if annual tort judgments at least equal the aggregate amount set forth in the settlement for such claims, then the tort cases will generate contingency fees of $30–$37 billion over the first 25 years of the settlement.

    Moreover, if the proposed settlement is enacted into law in essentially the form sent to Congress and if the contingency fee contracts with the state attorneys general were to be enforced, then with regard only to the $193.5 billion Medicaid reimbursements, attorneys' would be approximately $18.6 billion. This amount exceeds the total revenue of the 100 largest law firms in the United States in 1996—$18 billion, which was generated by a total of 40,042 lawyers. See, THE AMERICAN LAWYER, JULY/AUGUST 1997, AT 16. BY CONTRAST, THE $18.6 BILLION CONTINGENCY FEES AGGREGATE IN THE TOBACCO SETTLEMENT WOULD BE DUE TO AN ESTIMATED 300–400 LAWYERS IN ABOUT 89 LAW FIRMS. (THE MOST COMPLETE AND INFORMATIVE ANALYSIS OF THE ATTORNEY FEES IN THE TOBACCO LITIGATION SETTLEMENT HAS BEEN DONE BY JAMES V. GRIMALDI, A WASHINGTON-BASED REPORTER FOR THE SEATTLE TIMES. See ''Lawyers Could Get Billions in Tobacco Deal,'' THE SEATTLE TIMES, October 5, 1997, at A1. Mr. Grimaldi calculated the fees to be $14.7 billion. However, in several states, including Alaska, Arkansas, Louisiana, Michigan, Mississippi, New Mexico, Oregon and Rhode Island, no specific contingency fee percentage is stated in the retainer agreement. Instead, counsel are permitted to seek reasonable fees from the court. These states' shares of the Medicaid monies is $19 billion and an arbitrary 15% contingency fee would yield $2,850,450,000 bringing the computed contingency fees up to $17,600,000,000. In addition, nine states' fee agreements provide that the fees will increase over time until there is a settlement or judgment. Almost certainly, these time dimensions will all be exceeded; an additional $1 billion will be added under six of these provisions by the millennium bringing the total to over $18.6 billion.)
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    In four states, California, Colorado, New Hampshire and Missouri, the attorneys-general have not hired outside counsel. Instead, they are using in-house staff to prosecute their claims. In Alabama the state's lieutenant-governor has filed suit on behalf of the citizens of the state and reputedly has retained several law firms but has elected to keep the fee agreements secret.

    Even the $18.6 billion fee figure may be understated because additional unspecified monies will be paid to the states under the proposed settlement which may generate additional fees under the contingency fee contracts. Moreover, though the dollar amounts of the settlement are an aggregate sum for the first 25 years, the settlement contemplates payments in perpetuity so, in theory, contingency fees will be higher than those calculated on the basis of the $368.5 billion amount.

    The national settlement announced between the tobacco industry, the plaintiff lawyers and the states' attorneys general (with the exception of at least the Minnesota Attorney General) reportedly includes a side agreement, see infra, which has not been disclosed. It reportedly calls for superseding the contingency fee agreements entered into with the attorneys general and substituting as a fee setting mechanism, an arbitration panel empowered to determine ''reasonable fees'' to be paid by the tobacco industry to the private lawyers, in addition to the $368.5 billion to be paid to the states, to the federal government and for liability claims.

    In two states, Mississippi and Florida, settlements have been entered into by the states and the tobacco companies in the amounts of $3.6 billion and $11.3 billion, respectively. Mississippi had not entered into a contingency fee agreement and attorney fees to be generated by the settlement were not set at the time of the settlement but news reports indicate a recent fee agreement. See infra. In Florida, the governor's office (not the attorney general) had entered into a 25% contingency fee agreement with the private attorneys. The settlement, however, provided that the fee agreements would be superseded by use of an arbitration process to set fees. Some of the Florida lawyers are claiming that they are not a party to the superseding agreement and are suing to obtain $750,000,000 in attorney fees. A further account of this litigation is set forth infra.
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    Although the side agreement, as noted, calls for superseding the contingency fee agreements if there is a legislated national settlement, the ongoing litigation in Florida makes clear that at least some lawyers who entered into contingency fee agreements with state attorneys general may nonetheless seek to enforce them. Accordingly, I will address the propriety of the contingency fee agreements.

The Propriety of the Contingency Fees

    Ethical rules in all states restrict attorney fees to ''reasonable'' and ''not excessive'' levels. Surely, contingency fees generating $18.6 billion cannot possibly be regarded as reasonable. If such fees are not excessive, then what would be? In fact while the dollar amounts are staggering and indeed in the immortal words of Senator Everett Dirkson are REAL money, resolution of the ethical issue is not a slam dunk. A brief primer on the ethical rules regulating contingency fees is first in order.

Ethical Mandates Governing Contingency Fees

    Contingency fees are a system for financing tort litigation that enables injured persons to gain access to the legal system when they would not otherwise be able to do so. Lawyers assume the risk of receiving no fee or a low fee in exchange for a share of any recovery and charge a premium for doing so. ''The rationale . . . which justifies permitting contingency fee arrangements . . . [that is,] the underlying premise[,] is the existence of risk—the contingent risk of non-payment. Thus, for a contingent fee to be appropriate, there must be a realistic risk of nonrecovery.'' In re Combustion, Inc., 968 F. Supp. 1116, 1132 (W.D. La. 1997) (citations omitted).
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    Effective hourly rates received by lawyers charging contingency fees, reflecting the risk premium being charged, are usually higher than normal hourly rate charges. To justify these higher fees, that is, to meet the ethics codes' requirements that fees be reasonable and not clearly excessive, Model Code of Professional Responsibility DR2–106(A)(1986) [hereinafter: Model Code]; Model Rules of Professional Conduct Rule 1.5(a)(1995) [hereinafter: Model Rules], ''courts in general have insisted that a contingent fee be truly contingent. The typically elevated fee reflecting the risk to the lawyer of receiving no fee will be permitted only if the representation indeed involves a significant degree of risk.'' Charles W. Wolfram, MODERN LEGAL ETHICS §9.4, at 532 (1986).

    Indeed, the ethics codes mandate that contingency fees are legitimate only when there is an assumption of meaningful risk. Model Rule 1.5(a)(8) and Model Code DR2–106(B)(8) each provide that one of the factors to be considered in determining the reasonableness of a fee is ''whether the fee is fixed or contingent.'' This factor can be read literally to mean that simply calling a fee contingent thereby entitles a lawyer to charge a higher fee—but to do so would be wrong. However self-serving the ethical codes may otherwise be, see Lester Brickman, ABA Regulation of Contingency Fees: Money Talks, Ethics Walks, 65 FORDHAM L. REV. 247, 250–59 (1996), they should not be interpreted with such utter cynicism and total disdain for the profession's responsibility ''to assure that its regulations are conceived in the public interest and not in furtherance of parochial or self-interested concerns of the bar.'' Model Rules, Preamble (1995). The obvious intent of the drafters was to allow lawyers ethically to charge a higher fee provided that they were bearing a meaningful fee risk. The ethical codes are correctly read to mean that a contingent fee must be more than just contingent in name—it must be contingent in fact.
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    Although most tort claims involve risk that justifies the charging of substantial risk premiums, that is, standard contingency fees, a significant fraction of claims involve no meaningful risk. Because of the severity of injury, the absence of any issue of liability, and the existence of insurance, lawyers representing such claimants often anticipate at the time of undertaking the representation that substantial settlement offers will be made without the need for significant expenditure of time. Nonetheless, most lawyers charge standard and substantial contingency fees in such cases. As former Harvard President and Law School Dean Derek Bok has observed:

  Most plaintiffs do not know whether they have a strong case, and rare is the lawyer who will inform them (and agree to a lower percentage of the take) when they happen to have an extremely high probability of winning. In most instances, therefore, the contingent fee is a standard rate that seldom varies with the size of a likely settlement or the odds of prevailing in court. DEREK BOK, THE COST OF TALENT: HOW EXECUTIVES AND PROFESSIONALS ARE PAID AND HOW IT AFFECTS AMERICA, at 140 (1993).

    It is beyond dispute that the charging of standard and substantial contingency fees in all cases violates the ethical codes' mandates that fees be reasonable and that contingency fees are justified only when there is commensurate risk. These routine violations of ethical mandates occur because of the enormous windfall fees generated. The lure of easy money in cases with ''clear liability and high return'' is overpowering. Andrew Blum, Big Bucks, But . . . Cash Flow a Problem, Nat'l L.J., Apr. 3, 1989, at 1, 47.

    When approached from the perspective of the ethical justifications for contingency fees which are mirrored in judicial decisions, it is apparent that the circumstances surrounding the negotiation of the contingency fee agreements with the state attorneys general differ from those extant in the typical tort suit. In the latter, an uninformed client is required to pay a standard contingency fee of 33 1/3 to 40 percent in order to access the courts irrespective of the risk of his or her claim. The contingency fee agreements entered into with the state attorneys general were bargained for, consent was apparently informed, and the liability risks were considerable. Indeed, as to the lawsuits, while state laws vary considerably, in most states, prevailing doctrine limits recovery of medical costs by states to cases where individuals are entitled to recover. Accordingly, new law would have to be fashioned by the courts (or the state legislatures) to accomplish the massive wealth transfer from the deep-pocket out-of-state corporations to the states' taxpayers.
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    When viewed from the perspective of traditional tort claims—putting aside for the moment any claim of excessiveness—the contingency fee agreements with the state attorneys general appear presumptively valid.

    Are they then excessive? From the perspective of hindsight, $18.6 billion is obviously excessive but the appropriate measure of excessiveness is at the time the fee agreements were entered into—not after the fact when everyone knows where the roulette wheel has come to rest. Even so, when viewed one-by-one, a number of arguments can be raised that in varying measure support declaring some of the contingency fees either excessive or otherwise unenforceable.

    First, the suits are being brought by the states in their capacity as parens patriae. It may be expected—as has already occurred in West Virginia and Florida—that the agreements will be invalidated because they are illegal or the fees excessive.

    Second, the Medicaid suits are, in reality, suits on behalf of injured smokers (dressed up Medicaid garb to skirt the defenses that the tobacco companies have so successfully raised against individual claimants). Thus, the suits are more in the nature of class actions where private fee setting is displaced by courts. Indeed, these cases most resemble mass tort claims where the initial suits establishing liability involve significant risk but where lawyers continue to charge standard contingency fees thereafter, despite the substantial reduction if not elimination of risk—resulting in unethical fees unrelated to any underlying risk. This perspective would differentiate between fees negotiated in the first round with state attorneys general and subsequent fee agreements where the risk equation had changed considerably.
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    Third and as further elaboration on the changing risk equation, it is apparent that many of the attorneys general did not coordinate their bargaining strategies. The agreements fail to reflect either the economies of scale or reduced risks accruing to the lawyers: most actions filed were copy cats and outlays for research and expert witnesses for state A's suit would be reusable in State B's suit; in addition, if the initial litigations were unsuccessful, it is likely most of the other actions would not then have proceeded—thus considerably reducing the risk for some of the attorneys. Likewise, if the first suits were successful, the increased likelihood of settlement of later-brought actions would again significantly differentiate risk.

    Fourth, there is reason to believe, at least in some cases, that the agreements were not always arms-length transactions but self-interested ones based upon past relationships and future financial support expectations. The ''pay to play'' aspects of some of the fee agreements mandate close scrutiny. See Editorial, The Mud Splatters, ST. PETERSBURG TIMES, NOV. 12, 1997, AT 14A (INDICATING THAT THE FLORIDA GOVERNOR'S CHIEF INSPECTOR GENERAL OBTAINED LOANS FROM ONE OF THE PRIVATE ATTORNEYS RETAINED BY THE STATE AND THAT THE GOVERNOR'S SIGNATURE MAY HAVE BEEN FORGED ON CERTAIN DOCUMENTS RELATING TO THE REPRESENTATION).

    Finally, the traditional ethics calculus for ascertaining the enforceability of the contingency fees may simply not be appropriate. The tobacco litigation is sui generis and only distantly related to the kinds of contingency fee representations which are the empirical basis for the ethical construct. Just as the traditional ethics calculus is woefully inadequate to deal with modern mass tort litigation, leaving clients in aggregated actions with no recourse against attorneys who have acted self-interestedly, see Jack B. Weinstein, INDIVIDUAL JUSTICE IN MASS TORT LITIGATION (1995), so too the uniqueness or at least the differentness of the states' suits against the tobacco companies, would appear to merit a different and specially constructed ethical calculus. Moreover, for reasons of self-interest, there is considerable reason to doubt that the American Bar Association or state bars are either capable or willing to create an ethics regime that would meet the needs of the mass tort-class action era. If Congress does act to exercise dominion over fee issues raised by the tobacco litigation, it will begin a much needed process of filling an immense void created by bar inaction.
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    These are some reasons for subjecting each contingency fee agreement to close scrutiny and finding some or all not enforceable. Such a one-by-one analysis, however, is not the task I have undertaken.

    I have been asked to consider from both perspectives of policy and constitutionality, whether the contingency fee agreements, in toto, and all other fee setting agreements in the tobacco litigation ought to be, and if so constitutionally can be, superseded by congressional action. I will be direct and unequivocal. Regulation of attorney fees should be included as part of a legislated settlement which will comprehensively regulate the production, advertising and sale of tobacco products and litigation based thereon; all attorney fee agreements between the state attorneys general or the tobacco companies and the private attorneys should be overridden by that legislation. This recommendation applies as well to the plan set forth in the side agreement to create an arbitration panel to set fees as part of the global settlement. The probability that any such panel would actually exercise independent judgment rather than fulfill a vital public relations role is high. More importantly, the panel's role would be a parochial one, lacking a public policy perspective that only Congress can bring to bear.

    If there is a tobacco settlement replete with the required congressional legislation, it will no longer be a settlement—no matter how achieved—but a statement of national policy. Effectively, Congress will be entering into a public bargain with Big Tobacco on behalf of the nation. The precedent being established of a national bargain created by an alliance of state attorneys general and contingency fee lawyers motivated by financial incentives measured in billions of dollars has troubling implications for our system of representative government and political accountability. At a minimum, Congress ought to assert the aurhority of the national legislature to assure that the public policy outcomes created by the settlement are consistent with congressional objectives. Necessarily, this would include exercising dominion over the fees of those most instrumental in driving the settlement. In addition, if the legislated settlement yields attorney fees of such magnitude that it merits public disdain, the bona fides of the congressional action will be called into question. Congress has the right if not the responsibility to assure the nation that the legislation it is enacting is not for the purpose of facilitating the payment of vast sums of money to a small group. Only the Congress has the responsibility or the capacity to assure public confidence in the terms of a national settlement.
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    The method that Congress chooses to set attorney fees should take into account the varying risks borne by different attorneys in the course of the litigation. An hourly rate ukase—whether $150 or $250 an hour—does not succeed in rewarding attorneys differentially. It would overcompensate some and undercompensate others. To be sure, those most involved in bringing about the settlement will have logged the most hours but the principle of rewarding risk should be preserved. At the same time, congressional control over the magnitude of the fees ought also to be manifested.

    Based upon these criteria, I recommend that Congress include in its legislated settlement either (1) a nominal percentage to be applied to specific recoveries, e.g., the Medicaid payments to the states, which will yield an aggregate fee or (2) specify a sum to be the total fee payable upon consideration of the quantum of payments to the states or other settlement generated payments. For example, assuming that the Medicaid payments to the states were to be $193.5 billion over a 25 year period (and ignoring the issues of recapture by the federal government, the periodic nature of the payments, and expenses), setting the fee at one percent would generate a total of $1.935 billion for fees; one-half percent would generate $967,500,000; 0.4 percent would equal $774,000,000. If these percentage-derived amounts appear overly high, it should be kept in mind that they will be payable over a 25 year span and in current dollar terms, would be appreciably less. In the alternative, legislation could simply determine an aggregate fee amount, e.g., $500,000,000. As a next step in the legislated settlement process, it would have to be determined whether some or all of the fees thus set would be paid out of the Medicaid monies or, per the side agreement, would be paid wholly by the tobacco companies in addition to the payments to the states.

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    The criteria for apportioning the fees among the claiming attorneys should be set by Congress as part of the legislation. Reward for risk should be at the top of the list. The criteria should also reflect the fact that some of the attorneys were instrumental in managing the litigation on a national basis, whereas others were only retained in one state and among the latter there were wide variations in the amounts of work done. The process of apportioning the fees among the 89 or more law firms with claims should be delegated to a commission set up for that purpose or to a federal court, with one or three judges. Appeals from the determination of either should be limited or precluded.

    Finally, Congress may direct the commission or court to require each attorney to provide time records, contemporary or reconstructed, which will be disclosed whether or not such records were used for fee setting purposes.

Proposed Legislation to Restrict Lawyers' Fees

    The proposed settlement of tobacco litigation has led to considerable attention being focused on the fees to be paid to the private attorneys. See, e.g., At Issue: Contingency Fees: Should Plaintiffs Lawyers in the Tobacco Settlement Receive Billion of Dollars?, A.B.A.J., September 1997, at 74; Adriel Bettelheim, McInnis' Bill Limits Lawyers' Fees From Tobacco Settlement, DENV. POST, NOVEMBER 9, 1997, AT A–08; RICHARD S. DUNHAM ET AL., Alright, Everybody, Back to the Table, BUS. WK., SEPTEMBER 29, 1997, AT 34; Fair Solution, ORLANDO SENTINEL, NOVEMBER 20, 1997, AT A22; SCOTT MCINNIS, Should Lawyers Reap Billions From the Tobacco Settlement? DENV. POST, OCTOBER 24, 1997, AT B–07; ROBERT L. RABIN, A Job For Arbitrators, Not Politicians; Tobacco: The Settlement Leaves the Question of What is Fair Compensation for the Attorneys, L.A. TIMES, AUGUST 21, 1997, AT 9; GEORGE RODRIGUE, Tobacco Deal Lawyers Stand To Make Billions; House GOP Proposal Would Cap Fees, THE DALLAS MORNING NEWS, OCTOBER 24, 1997, AT 1A.
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    A number of proposed bills dealing with the tobacco litigation settlement fees have been introduced into the Congress, and one has been enacted into law. Public Law 105–78 (appropriating funds for the Departments of Health and Human Services and Education), at section 519, stated that attorney fees to be paid to attorneys for both plaintiffs and defendants in connection with actions maintained by a state against one or more tobacco companies to recover Medicaid expenditures or with other causes of action against tobacco companies, which were a part of the tobacco settlement agreement, shall not exceed $250 per hour and will be limited to $5,000,000 per state (plus expenses in each instance). Before adoption, the section was amended to provide that it would not apply to any agreement previously entered into between a state and a private attorney, 143 Cong. Rec. (daily ed.) S9088 (Sept. 10, 1997) (text of Amdt. 1126). See id., S9034–S9047, S9048 (Sept. 10, 1997) (debate on and adoption of the provision). The law further provides that no fees would be paid to an attorney unless that attorney provides the governor of the appropriate state a detailed time accounting of the work done for which fees are requested. Amounts provided for attorneys' fees in excess of the fee limits are to be paid into the Treasury for use by the National Institutes of Health for research relating to children's health. The fee limit section will become effective on the date of enactment of any act of Congress providing for a national tobacco settlement. Accordingly, if there is a legislated settlement, it may be expected that Congress will revisit the fee issue.

    Senator Orrin Hatch, Chairman of the Senate Judiciary Committee has introduced a bill, which in addition to setting out terms to resolve the tobacco litigation by a legislated settlement, creates an arbitration panel to determine fees for the private lawyers who were hired by the state attorneys-general and also the lawyers representing private clients in suits against the industry. Under the bill, lawyer fees would be paid by the tobacco companies, and would be in addition to $398.3 billion to be paid by the tobacco companies but the aggregate legal fees would be capped at 5% of the amount the industry had to pay in any given year.
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    In the House, Representative Scott McInnis of Colorado, joined by Representatives Christopher Cox of California and Paul McHale of Pennsylvania, introduced H.R. 2740 (105th Congress, 1st Session) which would limit attorney fees to a maximum of $150 per hour plus reimbursement of actual out-of-pocket expenses and would further require attorneys seeking fees to provide the Congress with a detailed time accounting. No doubt, if prospects for a legislated settlement appear favorable, additional bills will be introduced that will contain provisions limiting fees.

    In reaction to proposals to regulate fees, tobacco companies have agreed to pay as much as $250 million to 11 law firms representing Mississippi and possibly additional lawyers in other states. These contractual arrangements are reported to be an attempt to bypass congressional proposals to regulate fees. See Suein L. Hwong & Milo Geyelin, Tobacco Concerns Set Pact on Legal Fees, THE WALL STREET JOURNAL, DECEMBER 2, 1997 AT A2. WHETHER CONGRESS HAS THE POWER TO REGULATE ATTORNEY FEES IN THE TOBACCO LITIGATION AND IF SO, TO WHAT EXTENT AND UNDER WHAT CIRCUMSTANCES, IS THUS OF PRIME CONCERN TO CONGRESS AND TO THE VARIOUS PARTIES TO THE PROPOSED GLOBAL TOBACCO SETTLEMENT.

Structure of the Proposed Legislated Settlement

    The nature of the constitutional issues raised by congressional legislation to regulate fees is both a function of the specific legislation being proposed and the structure of the legislated settlement. As will be seen, certain structures avoid or at least minimize any serious constitutional challenges. It is, however, a challenge in itself to describe the structure of the proposed settlement. The parties to the settlement, i.e., the tobacco companies, the state attorneys-general and the plaintiff lawyers, did not send up proposed legislation. Instead, they sent up a 68 page document titled ''Proposed Resolution'' (June 20, 1997) and a ten page document titled ''Summary of the Proposed Resolution'' (undated).
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    These documents sketch out the terms of the settlement—in some places in detail and in others in a very abbreviated and sometimes shorthand form; the latter are no doubt meaningful to the negotiators but the reader can only guess at the meaning of certain terms and phrases. Moreover, there are many gaps and undefined terms and certain critical documents which are referred to, e.g. a ''protocol'' among the tobacco companies and ''consent decrees,'' are not included. Consequently, in setting forth what I believe to be the structure of the proposed legislated settlement, it has been necessary in some instances to include interpolations and educated guesses about critical features of the proposed legislated settlement. (A detailed and unexpurgated summary of the ''Proposed Resolution'' is set forth as an appendix to this prepared statement.)

    Congress is to enact a law which will provide for (1) settlement of the suits brought by the state attorneys general; (2) dismissal of state court class actions based upon addiction or dependence claims; (3) limitation of the civil liability of tobacco companies which elect to participate in the settlement limitation by paying capped annual amounts for individual liability claims; (4) further payment of funds into a federal trust fund and to states; and (5) entering into consent decrees with state attorneys general which contain the terms of the settlement and include significant limitations on advertising and sale of tobacco products.

    Under the terms of the Proposed Resolution, states are obligated to undertake certain measures. Within its own jurisdiction, each state must enact a ''no sales to minors'' law and conduct random inspections of retail sites in order to assure compliance with such law. In addition, each state must submit an annual report to the FDA concerning its enforcement efforts, progress in reducing tobacco product availability to minors, the methods used in compliance and its strategies for further reducing underage tobacco use. Each state will be required to meet its attainment goal which the FDA will determine. A state's failure to meet its goal may result in a reduction in its allocation of money from the FDA.
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    For those tobacco companies that elect to participate (''participating companies''), the claims settled will include the actions by the attorneys general and state court class actions which will be dismissed. New individual actions can be brought against the tobacco companies for past conduct but cannot seek punitive damages, and there can be no joinder of claims, class actions or other aggregations without a defendant's consent.

    There is to be an annual cap on the aggregate amount of judgments and settlements to be paid by the tobacco companies, which is one-third of the annual amount paid by each company into the trust fund (not including annual amounts designated as health trust payments). As of year nine of the settlement, this annual cap will rise to approximately $5 billion. Amounts above the cap will roll over into succeeding years; individual judgments over $1 million will have the excess over $1 million rolled over until the time that the annual aggregate cap is not exceeded.

    Tobacco companies that elect not to participate in the settlement will receive no protection from civil liability and will have to make two types of payments: (1) a user fee equal to the portion of payments by participating companies to fund public health programs; and (2) an amount equal to 150% of what the company would pay if it were a participating company, which funds would be set aside for potential liability payments. These funds can be reclaimed after 35 years to the extent they have not been paid out to satisfy liability claims.

    The proposed legislation would establish federal standards governing smoking in public places and work sites and would set out the scope of the FDA's and states' authority to regulate the sale of tobacco products. The legislation includes restrictions on marketing and advertising of tobacco products, a requirement of new warning labels, restrictions on access to the purchase of tobacco products, and ''look back'' provisions that would fine the industry if underage tobacco use targets were not met.
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    Payments for tort liability and to the trust fund, the states and for other purposes by the participating tobacco companies would aggregate $368.5 billion over twenty-five years though payments would continue in perpetuity. The first payment upon signing of the new law is $10 billion and annual payments thereafter would start at $8.5 billion and increase to $15 billion in year five and essentially continue at that level.

    Tobacco companies would enter into a binding and enforceable national tobacco control ''protocol'' which will contain certain terms of the settlement. In addition, after the enactment of the proposed legislation, the tobacco companies will enter into consent decrees with the states, which will reiterate some of the terms of the legislation including restrictions on advertising and access, disclosure of industry documents relating to health, toxicity and addiction, and obligations to make monetary payments to the states reflecting their share of the total provided. States will also undertake certain responsibilities upon entering into consent decrees. The consent decrees will be enforceable in state courts but only by injunctive relief. Moreover, the act of Congress will be enforceable by the federal government.

    The ''Proposed Resolution'' does not address attorney fees. Reportedly, there is a side agreement between certain of the plaintiffs' attorneys retained by the attorneys general and the tobacco industry that provides for fees to be set by arbitration and to be paid directly by the tobacco companies to the lawyers, in addition to the $368.5 billion to be paid over 25 years. Apparently, the attorneys general were not a party to this side agreement. See statements of Senator Jeff Sessions, 143 Cong. Rec. S9002, S9011, 1997 WL 558273 (Cong. Rec.), pp.3, 28 (September 9, 1997).

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Constitutional Issues Raised by Proposed Legislation to Restrict Lawyers' Fees

    Assuming that the legislated settlement has a provision that directly limits the fees that either the states or the tobacco companies shall be obligated to pay to the attorneys, or that designates a process to determine the fees and sets criteria to be used in that process, or requires that the fee limitation provision or fee determination process be a part of the tobacco company protocol and the state consent decrees, the question that is the focus of this testimony may be stated as follows:

    Does a legislated settlement, that is, an act of Congress, which provides that (1) tobacco companies which pay (a) designated sums into a federal trust fund, (b) other funds for smoking cessation programs and public health programs to discourage smoking, (c) aggregate annual prefundings of tort judgments against tobacco companies and (d) Medicaid expense reimbursement sums to states which agree to enter into consent decrees with the companies, (2) for which the companies will receive in exchange certain federal immunities from state tort law and certain other rights under federal law, and (3) which sets as a condition in the legislation that there be an agreement to limit attorney fees or to a fee setting process or mandates such limits, pass constitutional muster?

The Spending Power and Interstate Commerce Clauses

    At the outset, I would point out that a slightly different legislated settlement structure would likely yield a clear and unobstructed path through the constitutional thickets. If it were the case that the tobacco companies, instead of paying the Medicaid money directly to the states, were to pay the money into a federal trust fund and then the identical payments contemplated by the settlement were to be paid from the trust fund to the states, then a provision limiting attorney fees to be paid from those funds, or fees to be paid in addition those funds but as a consequence thereof, would appear to pass constitutional muster as valid exercises of Congress' authority ''to pay the debts and provide for . . . the general welfare of the United States,'' Art. I, §8, cl.1, commonly referred to as the ''spending power'' clause, and its authority to ''regulate commerce . . . among the several states . . . .'' Art. I, §8, cl. 3.
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    A law regulating the form and substance of tort actions against the manufacturers of certain products in interstate commerce fits squarely within Congress' interstate commerce power. A law conditioning payments to the states upon their acceptance of provisions involving tort liability and the payment of legal fees falls within its spending power. As the Supreme Court stated in South Dakota v. Dole, 483 U.S. 203, 206 (1987), ''[i]ncident to this [spending] power, Congress may attach conditions on the receipt of federal funds, and has repeatedly employed the power 'to further broad policy objectives by conditioning receipt of federal moneys upon compliance by the recipient with federal statutory and administrative directives' '' (citations omitted). See also, Oklahoma v. Civil Service Comm'n, 330 U.S. 127, 143 (1947). Moreover, ''the power of Congress to authorize expenditure of public moneys for public purposes is not limited by the direct grants of legislative power found in the Constitution.'' U.S. v. Butler, 297 U.S. 1, 66 (1936). ''Thus objectives not thought to be within Article I's 'enumerated legislative fields,' id. at 65, may nevertheless be attained through the use of the spending power and the conditional grant of federal funds.'' Dole, id. at 207.

    In assessing the application of this case law to the proposed enactment, the tobacco industry payments should be seen as federal funds once they are paid into the trust account, and the allocation of these funds to the states is then a spending of federal funds. While the spending power is not unlimited, but is instead subject to several general restrictions, Dole, id. at 207, none of the restrictions listed would appear to apply to the conditional allocation of the tobacco trust funds to the states.

    Under its power to regulate interstate commerce, Congress would have the authority to directly regulate the sale of tobacco products, see, e.g., Pub. L. No. 103–272 (conferring on the National Highway Traffic Safety Administration and the Secretary of Transportation authority to recall a motor vehicle), and litigation against tobacco companies. [For examples of Congressional regulations of interstate commerce which include regulation of litigation, see General Aviation Revitalization Pub. L. Act of 1994, No. 103–298, 108 Stat. 1552 (Aug. 17, 1994) (limiting personal injury suits against manufacturers of general aviation aircraft to 18 years from date of delivery); Medtonic, Inc. v. Lohr, 116 S. Ct. 2240 (1996) (holding that Congress did not preempt state law defective design tort claims when it enacted the Medical Service Amendments, but had it so desired, Congress could have preempted all general common law damage claims against covered manufacturers); Mitchell v. Collagen Corp., 126 F.3d 902 (7th Cir. 1997) (holding that the Food & Drug Administration's premarket approval process can, under the Medical Service Amendments Act, preempt state common law tort actions against a manufacturer that adhered to the process).].
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    Accordingly, such regulation stands on an even stronger footing than congressional legislation conditioning payments of federal highway funds to states on the basis of whether they enact a minimum drinking age of twenty-one years which was upheld in Dole. Since ''the constitutional limitations on Congress when exercising its spending power are less exacting than those on its authority to regulate directly,'' Dole, id. at 209, a fortiori, Congress can condition the receipt of monies from the tobacco trust fund on state approval of the conditions previously described including regulation of fees to be paid to private attorneys by the states.

    If instead of limiting the attorney fees payable by the states to the private attorneys, the legislation limited the fees payable by the tobacco companies to the plaintiffs' attorneys, the same reasoning and the same conclusion would result. Since the payments into the federal trust fund become federal funds, then Congress has the authority to set the attorney fees payable by the tobacco companies to the private attorneys who represented clients in suits against the tobacco companies which have been settled by these payments, just as Congress has the authority to set attorney fees in suits seeking Social Security benefits, Hopkins v. Cohen, 390 U.S. 530 (1968) (inferentially upholding Congressional act limiting attorney fees in Social Security Act cases to 25 percent), or Veterans' benefits, Walters v. Nat'l Ass'n of Radiation Survivors, 473 U.S. 305 (1985) (upholding Congressional act, since changed, limiting attorney fees for representation of veterans seeking benefits for service-connected death or disability from the Veterans Administration to $10).

    It is not absolutely clear from the ''Proposed Resolution'' that the Medicaid funds are to be paid directly to the states though that appears likely, nor why that method was selected rather than running the payments through a federal trust fund intermediary. Perhaps it was so provided out of concern that payments to the states from a federal trust fund intermediary would almost certainly be deposited into states' treasuries. Any attorney fees paid from these funds would then almost certainly have to be appropriated by the state legislatures and signed into law by the governors—a complication that may be thought to be circumvented by the payment of monies by the tobacco companies to state attorneys general or to the plaintiffs' attorneys themselves (as is apparently provided for in the ''side agreement'').
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    Whether either of these arrangements in fact avoids state legislatures' appropriations powers is not an issue of state law that I am presently prepared to discuss. I do note, however, that a similar arrangement, if conducted on the federal level, would raise serious legal questions under various statutes including the Miscellaneous Receipts Act and the Anti-Deficiency Act, that protect Congress' constitutional power of the purse. Indeed, before Congress approves this settlement, it may want to assure itself that the contingent fee arrangements do not, by improperly circumventing state legislative powers of the purse, create a dangerous precedent concerning the limits of legislative appropriation powers generally.

    (More generally, the litigation strategy followed in the tobacco suits raises the broader question of the role of legislatures in the creation of public policy and the effect on that role of the alliance between contingency fee lawyers and states' attorneys general. This alliance appears to portend a new source for creation of public policy—one outside of the ordinary machinery of representative government. This policy issue may be the most significant of those posed by the tobacco litigation settlements and merits the close attention of Congress as well as public policy scholars.)

    If the tobacco company payments to the states will not be run through a federal trust fund, it is necessary to consider whether the spending power clause still acts to legitimate any fee restrictions imposed by Congress. The outcome is clearest if the tobacco company payments may be seen as a form of federal spending. The payments, even those that are voluntary, are an integral part of a federal scheme to limit the sale of tobacco products, assert federal authority over their manufacture and sale, settle certain civil liabilities of the tobacco companies by abrogating state common and statutory law, and recapture states' Medicaid payments. In the context of the entire legislation, the tobacco company payments to the states may therefore be seen as an exercise of Congress' spending authority. The argument is strengthened by the fact that more than half (approximately 57 percent) of the Medicaid expenditures that form the basis of the states' claims against the tobacco companies were paid by the federal government. Under the Medicaid laws, the states are required to reimburse the federal government when they recapture Medicaid monies improvidently spent. Accordingly, the tobacco company payments are more than 50 percent federal funds and the federal government's participation in the settlement may therefore be seen as facilitating the recovery of its funds.
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    The argument is further strengthened by the fact that although the payments by the tobacco companies are designated as voluntary, Congress could, if it so chose, mandate such payments under its authority to regulate interstate commerce. See Lester Brickman, The Asbestos Claims Management Act of 1991: A Proposal To The United States Congress, 13 Cardozo L. Rev. 1891, 1896–1901 (1992). The trade-off of reduced civil liability for mandatory payments would appear to be sufficient to overcome either due process or ''takings'' claims.

    When viewed in this light, the tobacco payments may be seen as ''federal funds'' for the purpose of sustaining fee limitations under the authority of the interstate commerce and spending power clauses.

    (The entitlement of the federal government to more than half of the tobacco company payments to the states has brought forth both a chorus of boos from Florida newspapers, see, e.g., Snuff out feds' claim to state's tobacco $$, THE TALLAHASSEE DEMOCRAT, POSTED NOVEMBER 14, 1997, AND A BILL INTRODUCED BY CONGRESSMAN BILIRAKIS OF FLORIDA TO ALLOW THE STATES TO KEEP ALL OF THE MEDICAID REIMBURSEMENT PAYMENTS. See H.R. 2938, U.S. Rep. Mike Bilirakis ( November 8, 1997) (to prohibit the Secretary of Health and Human Services from treating any Medicaid-related funds recovered as part of state litigation from one of more tobacco companies as an overpayment under the Medicaid program).)

    The ''federal funds'' argument may be advanced even if a substantial part of settlement funds do not pass through a federal trust fund. Under the terms of the proposed settlement, all payments made by the tobacco companies pursuant to the settlement are to be deemed ''ordinary and necessary'' business expenses for the year of payment and no part of the payment is to be considered a fine or civil or criminal penalty. Accordingly, the public fisc will be funding a part of the settlement in the form of tax reductions. (The principal funding of the cost of the settlement is to be provided by higher prices to be charged to consumers of tobacco products.)
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    Even if the ''federal funds''—spending power argument were unavailable because the funds were not run through a federal trust fund and the tax expenditure argument as a source of federal power were rejected, the fee limits could be sustained under the interstate commerce clause. Under the proposed legislated settlement, Congress would pervasively regulate the production, advertisement and sale of tobacco products and litigation arising therefrom. Power to do so is conferred on Congress by the interstate commerce clause. As a part of that regulatory scheme, Congress is setting attorney fees to be paid by tobacco companies and by state attorneys general. Such a regulatory component, when viewed as a part of the larger regulatory package, is well within the scope of the interstate commerce power. Consider that without the congressional legislation, states would not receive any funds from a legislated settlement (and would be relegated to their state court actions), attorneys would not be entitled to any fees because there would be no recoveries and tobacco companies would not be receiving certain immunities from civil litigation. Each party is conferred benefits—but at a price set by the Congress. The pluses and minuses are within the congressional power to regulate interstate commerce.

    As for any claim that focuses solely on the attorney fees to the exclusion of the commerce issues that clearly pervade the entire proposed regulatory scheme, it is well settled that the interstate commerce clause affords Congress the power to regulate intrastate activities as well. ''Even activity that is purely intrastate in character may be regulated by Congress, where the activity, combined with like conduct by others similarly situated, affects commerce among the States or with foreign nations.'' Fry v. United States, 421 U.S. 542, 547 (1975). See also, Perez v. United States, 402 U.S. 146 (1971), and Summit Health Ltd. v. Pinhas, 500 U.S. 322 (1991). The scope of judicial review of legislation enacted under the interstate commerce clause power is limited. ''A court may invalidate legislation enacted under the Commerce Clause only if it is clear that there is no rational basis for a Congressional finding that the regulated activity affects interstate commerce, or that there is no reasonable connection between the regulatory means selected and the asserted ends.'' Hodel v. Indiana, 452 U.S. 314, 323–24 (1981). See also Hodel v. Virginia Surface Mining & Reclamation Assn., 452 U.S. 264, 281 (1981); Preseault v. ICC, 494 U.S. 1, 17 (1990).
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    If there is to be a challenge to fee regulation as part of a pervasive regulatory scheme, it will have to arise from a claim of a violation of a constitutional right rather than a claim of lack of authority to regulate. The fact that the fee regulation would displace pre-existing contractual agreements may therefore be addressed.

The Takings Clause

    Assuming that a fee provision in the legislated settlement would apply retroactively to directly cap contingency fees for work already done, or do so indirectly by creating a fee setting process and thus act to nullify portions of pre-existing contracts between states' attorneys general or tobacco companies and private attorneys concerning fees, an argument can be raised that such a provision takes property in contravention of the Fifth Amendment's Takings Clause. The relevant part of the Amendment provides that ''private property [shall not] be taken for public use, without compensation.'' U.S. Const. Amend. V.

    The first issue is whether there is a property right cognizable by the Takings Clause. Since contract rights are generally regarded as property, see, e.g., Concrete Pipe & Products of Calif., Inc. v. Construction Laborers Pension Trust, 508 U.S. 602, 642 (1993), the clause is applicable because the contingency fee contracts create contract rights. Moreover, even if we ignore the contingency fee contracts, the work done by the private attorneys creates contractual rights to quantum meruit recovery which are being superseded.

    For the reasons set forth below, it is highly likely that congressional legislation capping or setting fees in the context above described would not be regarded as a taking in violation of the Fifth Amendment.
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    Any fee setting legislation would be an integral part of a legislated settlement which would impact a substantial number of interests as previously described and would, inter alia, regulate tobacco product production, advertising and sale and litigation against the tobacco companies for civil injuries. The regulatory scheme would be complex and pervasive. As part of such a regulatory scheme, Congress may displace contracts creating property rights and substitute regulatory outcomes. See, e.g., Louisville & Nashville Railroad Co. v. Mottley, 219 U.S. 467 (1911) (upholding application of act making it unlawful for a carrier to charge different rates for passengers, to negate a free rail pass for life given in settlement of litigation, as exercise of interstate commerce power).

    The United States Supreme Court has repeatedly declared that regulatory schemes enacted by Congress are presumed to be constitutional, unless they are found to be irrational or arbitrary. [''It is by now well established that legislative Acts adjusting the burdens and benefits of economic life come to the Court with a presumption of constitutionality, and that the burden is on one complaining of a due process violation to establish that the legislature has acted in an arbitrary or irrational way.'' Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 15 (1976). ''[L]egislation adjusting rights and burdens is not unlawful solely because it upsets otherwise settled expectations. This is true even though the effect of the legislation is to impose a new duty or liability on past acts.'' Id. at 16 (citations omitted).]

    To be sure, the effect of the regulatory scheme on property rights must be examined and a determination made whether the permissible degree of regulatory impact has been exceeded. When examining regulatory schemes that retroactively displace contract rights, the Supreme Court has applied a balancing test developed in Penn Central Transportation Co. v. City of New York, 438 U.S. 104 (1978), to uphold contract-altering provisions of the Multiemployer Pension Plan Amendments Act of 1980. See Concrete Pipe & Products of California, Inc. v. Construction Laborers Pension Trust, 508 U.S. 602, 641–47 (1993); Connolly v. Pension Benefit Guaranty Corp., 475 U.S. 211, 221–28 (1986).
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    In the Connolly case, the issue was whether enactment of the Multiemployer Pension Plan Amendments Act, which supplemented ERISA and imposed withdrawal liability in a pre-existing ERISA multi-employer pension plan retroactively, constituted a taking. The Court held, as it has consistently declared, that the imposition of a new obligation in a field that is regulated by Congress does not constitute a taking. If it did, the Court held, parties could privately contract to eschew governmental obligations.

  In the course of regulating commercial and other human affairs, Congress routinely creates burdens for some that directly benefit others. For example, Congress may set minimum wages, control prices, or create causes of action that did not previously exist. Given the propriety of the governmental power to regulate, it cannot be said that the Taking Clause is violated whenever legislation requires one person to use his or her asset for the benefit of another. . . . [T]he fact that legislation disregards or destroys existing contractual rights does not always transform the regulation into an illegal taking. This is not to say that contractual rights are never property rights or that the government may always take them for its own benefit without compensation. But here, the United States has taken nothing for its own use, and only has nullified a contractual provision limiting liability by imposing an additional obligation that is otherwise within the power of Congress to impose. That the statutory withdrawal disability will operate in this manner and will redound to the benefit of pension trusts does not justify a holding that the provision violates the Taking Clause and is invalid on its face.

Connolly, 475 U.S. at 223–24.

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    Economic regulation—whether of pension plans or other forms of economic activity—is typically viewed by the Supreme Court as ''adjust[ing] the benefits and burdens of economic life to promote the common good and under our cases, does not constitute a taking. . . .'' Connolly, 475 U.S. at 225; Concrete Pipe, 508 U.S. at 643. Indeed, ''[t]he exercise of appropriate regulatory powers has never been held to constitute a taking which would require compensation under the Fifth Amendment.'' Local Union No. 11, International Brotherhood of Electrical Workers v. Boldt, 481 F.2d 1392 (Temp. Emer. Ct. App. 1973).

    Other examples of economic regulations that have been upheld though they abridged contract rights include restraints on wages, prices, rents and common carrier rates. See, e.g., Federal Communications Comm'n v. Florida Power Corp., 480 U.S. 245 (1987) (upholding FCC rule determining rates that utility pole operators could charge for permitting cable television companies to attach wires to their poles even though the rule superseded higher rates contracted for between the parties); Pension Benefit Guaranty Corp. v. Gray, 467 U.S. 717, 728 (1983) (''provided that the retroactive application of a statute is supported by a legitimate legislative purpose furthered by rational means, judgments about the wisdom of such legislation remains within the exclusive province of the legislative and executive branches''); Fleming v. Rhodes, 331 U.S. 100, 107 (1947) (upholding injunctions to prevent future evictions of tenants under Emergency Price Control Act of 1946, notwithstanding the fact that landlords had previously received state court judgments for restitution of leased property); Garelick v. Sullivan, 987 F.2d 913 (2d Cir. 1993) (upholding fee caps on anesthesiologists treating Medicare patients as against a takings claim); Local Union No. 11 v. Boldt, 481 F.2d 1392 (Temp. Emer. Ct. App. 1973) (upholding government's disallowance of wage increase due under existing collective bargaining agreement).
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    It is important to note that the displacement of contract rights by statute does not transfer assets from the attorneys to the federal government as would possibly be the case if the federal government were abrogating its own contracts. Acts of self-enrichment which do not primarily further the general welfare are entitled to much less deference and, indeed, have been declared invalid as violations of substantive due process, see Lynch v. U.S., 292 U.S. 571 (1934), or breach of contract, see U.S. v. Winstar Corp., 116 S. Ct. 2432 (1996).

    The factual basis for this argument may possibly be impeached, however. Speaking only to the contingency fees and not to the ''side agreement'' establishing a superseding fee determination process, and assuming that there will be federal recoupment of a substantial portion of the Medicaid payments to the states, payments of the fees could decrease the amounts of Medicaid recoveries forwarded to the federal government. Superseding these fees may therefore generate additional revenues for the federal government. Even so, because of the pervasive nature of the regulatory scheme and because the dominant purpose of the provision regulating fees would not be to enrich the federal government, it is quite unlikely that the fee regulatory provision—when examined as part of the entire regulatory scheme—would be declared a taking.

    Yet, even if a court were to reduce the level of deference afforded Congress because of the financial benefit flowing to the federal government, two additional factors make any takings challenge unlikely to succeed. First, the reasonable investment-backed expectations of the private lawyers who entered into the contingency fee agreements necessarily included the possibility of displacement of those fees by a regulatory event. Second, the enactment of federal legislation to ''settle'' state tort litigation is an event so outside the normal course of litigation that contingency fee lawyers' claims to have produced the states' recoveries may be challenged and so too their contractual rights to a percentage of such recoveries. At the very least, contingency fee lawyers cannot reasonably expect that their ordinary contingency fee agreements will be applied without modification to these new circumstances.
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    From their very outset, contingency fees have been subject to close regulatory scrutiny. Thus, the first code of ethics of the American Bar Association stated that contingency fees ''should be under the supervision of the court, in order that clients may be protected from unjust charges.'' 33 A.B.A. Rep. 80, at 579 (1908) (Canon 13 of the Canons of Ethics). Courts have repeatedly asserted that they have inherent authority to regulate contingency fees. See Lester Brickman, Contingent Fees Without Contingencies: Hamlet Without The Prince of Denmark?, 37 UCLA L. Rev. 29, 42 (1989). Accordingly, the attorneys who entered into the contingency fee agreements knew that their fees would be reviewable by courts and subject to even considerable adjustment, in exercise of courts' inherent powers or as a result of application of the ethical codes regulating lawyer behavior which require that fees be ''reasonable'' and ''not excessive.''

    The ethical aspects of the contingency fee issue are being squarely faced now in Florida where the state has entered into a settlement with the tobacco companies estimated to approximate $11.3 billion. The contingency fee contracts provide for a twenty-five percent of gross fee or about $2.8 billion. See, Tobacco Lawyers' Fees, THE MIAMI HERALD, NOVEMBER 14, 1997, HTTP://WWW.HERALD.COM/OPINION/EDITDOCS/031911.HTM. A FLORIDA JUDGE HAS FOUND THAT THE FEE VIOLATES FLORIDA RULE 4–1.5 BECAUSE IT IS A ''CLEARLY EXCESSIVE'' FEE AND ''PER SE UNREASONABLE'' AND HAS ORDERED THAT THE CONTINGENCY FEE AGREEMENTS BE SUPERSEDED BY LANGUAGE IN THE SETTLEMENT AGREEMENT PROVIDING FOR THE FEES TO BE SET BY ARBITRATION. State of Florida v. The American Tobacco Co., Order Granting Plaintiffs' Motion to Quash Charging Liens, Order Quashing Charging Liens and Directions to Counsel and Parties (Circuit Court, 15th Judicial Circuit, Palm Beach County, Florida, November 12, 1997, Judge Harold J. Cohen).
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    As to the second factor mentioned above, it must be recognized that the federal legislation being proposed here is an event well outside the normal scope of state tort litigation. The plaintiffs' attorneys could not reasonably expect that their contingency fee contracts—written, as they were, for the vicissitudes of ordinary litigation—would be applied to the more certain recovery afforded by the contemplated federal legislation. Indeed, if the lawyers here were to bring a constitutional challenge to any fee-regulating legislation, their claim would truly be unprecedented. Unlike the plaintiffs in Usery and Connolly—which sought only to be free from a new federal regulation—the lawyers here would be seeking to reap the benefits of the federal legislation (a very large, certain recovery) without bearing any of the burdens of the legislation (some or even substantial adjustment to the contingent fee structure).

    This point bears emphasis. Attorneys who presumably would be arguing that their property had been taken would be receiving significant benefits from a legislated settlement. Without the congressional legislation, there would be no recoveries by most of the states and therefore no entitlement created to attorney fees. To be sure, in the absence of legislation, recoveries might nonetheless be attained through litigation but that is highly speculative. The very legislation that displaces fee agreements and fee arbitration creates fee rights. Even were it the case that an economic benefit was being taken within the meaning of the Fifth Amendment, there is an economic benefit being provided which easily amounts to ''just compensation.'' In any event, the ''give and take'' elements of the legislated settlement are simply not a taking.

    A somewhat different analysis is called for with regard to the fees payable to attorneys for Mississippi and Florida since these states have settled their litigations against the tobacco companies, and as indicated supra, the attorneys for Mississippi have just entered into fee agreements with the tobacco companies. Since the act of Congress creating the legislated settlement would not be creating the recovery that generates the right to a fee, the takings issue presented is a more challenging one than that posed by fee regulation of other states' private attorneys. Even so, formidable arguments can be advanced that application of fee regulation to the Florida and Mississippi attorneys is not a taking under prevailing constitutional jurisprudence.
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    First, at least some of these attorneys represent other states as well and would therefore benefit from a global legislated settlement which would offset losses from congressional fee regulation.

    Second, fee regulation would not deny the reasonable investment-backed expectations of these lawyers who are aware—even as they are negotiating their fee agreements with tobacco companies—that all such agreements are subject to regulatory displacement.

    Third, the right of Congress to retroactively apply a regulatory regime to displace contract rights is well established. See Concrete Pipe, Connolly, FCC, Pension Benefit, Garelick and Local Union, supra. ''To be sure, . . . retroactive legislation does have to meet a burden not faced by legislation that has only future effects. 'It does not follow . . . that what Congress can legislate prospectively it can legislate retrospectively. The retroactive aspects of legislation, as well as the prospective aspects, must meet the test of due process, and the justifications for the latter may not suffice for the former.' But that burden is met simply by showing that the retroactive application of the legislation is itself justified by a rational legislative purpose.'' Pension Benefits Guaranty Corp. v. Gray, id. at 730.

    The fact that fee agreements with the tobacco companies have just been entered into by the attorneys for Mississippi in an attempt to escape regulation is supportive of the constitutionality of extending fee regulation to the Mississippi and Florida lawyers. If individual parties could insulate themselves from congressional legislation by entering into private contracts before such legislation were enacted, ''the result would be that individuals and corporations could, by contracts between themselves, in anticipation of legislation, render of no avail the exercise by Congress, to the full extent authorized by the Constitution, of its power to regulate commerce. No power of Congress can be thus restricted. The mischiefs that would result from a different interpretation of the Constitution will be readily perceived.'' Louisville & Nashville Railroad, id. at 485–86.
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    Fourth, the application of fee regulation to the attorneys for the two settling states is certainly rational. The settlements may and ought to be seen as part of the global settlement process and the fee generating efforts of these attorneys as a part of and indistinguishable from that process.

    Finally, it must be emphasized that the settlements involve litigation to recoup Medicaid outlays principally financed by the federal government. Under current law, approximately 57 percent of the recoveries are federal monies. The federal interest in the recoupment litigation and attorney fees generated by the litigation is manifest.

All Power to the People or at Least Some Power to the States—Issues of Federalism

    While the interstate commerce and spending power clauses would appear to provide ample constitutional basis for Congress to regulate attorney fees as part of a comprehensive regulation of the production and sale of tobacco products and litigation based thereon, and the Fifth Amendment taking clause would appear to offer no significant impediment, the improvident use of legislative language barring the states from paying more than $X per hour or Y percent of any recovery to the private attorneys who have contracted with the state attorneys general could implicate federalism concerns. While the appropriate choice of legislative language would at least minimize and likely eliminate such concerns, the likelihood that some will raise the issue justifies its consideration.

    The issue is most likely to be raised by attorneys who have not specifically agreed to forego their contingency fee contracts in favor of fees established as a part of the national settlement. Recall that the settlement reached between the states attorneys general, the plaintiff attorneys and the tobacco companies contemplates—at least in a side agreement—that the contingency fee agreements will not be enforced and that a fee setting mechanism would be substituted providing for fee payments to be made directly by the tobacco companies to the plaintiff lawyers. A legislated settlement that effectively rejected the side agreement in favor of a federally mandated standard would raise no issues of federalism. However, if there were some lawyers that continued to claim fees under their contingency fee contracts, and the regulatory scheme established by Congress in contemplation of such a possibility negated those agreements entered into with the state attorneys general, then federalism issues may be raised—specifically whether such an act infringes upon the rights of states.
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    In a recent series of cases, the Supreme Court has revitalized the Tenth Amendment to the Constitution which provides: ''The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.'' U.S. Const. Amend. X.

    The relevant constitutional jurisprudence, now to be reviewed, is set forth in a relative handful of leading cases though there is the usual extensive surrounding cast of supporting cases. Paucity, however, does not lead to pellucidness. ''The Court's jurisprudence in this area has traveled an unsteady path.'' New York v. U.S., 505 U.S. 144, 160 (1992). Accordingly, those who offer guidance must tread cautiously and with caveats more suitable to an IPO document than a constitutional dissertation.

    When Congress ''is acting within the powers granted it under the Constitution [e.g., the interstate commerce clause], Congress may impose its will on the States.'' Gregory v. Ashcroft, 501 U.S. 452, 460 (1991). Under this line of cases, the application of federal wage and hour laws to state operated schools and hospitals has been sustained, Fry v. U.S., 421 U.S. 542 (1975), as well as to a public mass-transit facility, Garcia v. San Antonio Metropolitan Transit Auth., 469 U.S. 528 (1985). (For a number of reasons Garcia may be seen as an unstable precedent. If it were overruled, that might reinstate consideration of whether the subject of federal regulation was a traditional state governmental function. A jurisprudence based upon such a taxonomy is likely to be unedifying and inherently unpredictable.)

    However, the authority of Congress to regulate the states when it is acting under a grant of power in the Constitution has been limited in several recent cases. In New York v. U.S., 505 U.S. 144 (1992), a provision of the Low-Level Radioactive Waste Policy Amendments Act of 1985, mandating that states that failed to provide for the disposal of all internally generated radioactive waste by a certain date had to ''take title'' to the waste, violated the Tenth Amendment. In distinguishing Garcia, the Court said that it is one thing to subject state governments to generally applicable laws—laws that also apply to private parties, id. at 160; it is another to single out state government for ''use . . . as implements of regulation,'' id. at 161. Requiring states to take title to the waste, even though part of an extensive regulatory scheme, constituted ''commandee[ring] the legislative processes of the States by directly compelling them to enact and enforce a federal regulatory program,'' id. (citation omitted), in violation of state sovereignty protected by the Tenth Amendment.
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    Expanding on this thesis, the Court in Printz v. U.S., 117 S. Ct. 2365 (1997), struck down provisions of the Brady Law requiring state and local officials to conduct background checks on those seeking to purchase hand guns.

  ''We held in New York that Congress cannot compel the States to enact or enforce a federal regulatory program. Today we hold that Congress cannot circumvent that prohibition by conscripting the States to address particular problems, nor command the states' officers, directly. The Federal Government may neither issue directives requiring the states to address particular problems, nor command the states' officers, or those of their political subdivisions, to administer or enforce a federal regulatory program. It matters not whether policy making is involved, and no case-by-case weighing of the burdens or benefits is necessary; such commands are fundamentally incompatible with our constitutional system of dual sovereignty.''

Id. at 2384. As for Garcia, it was distinguishable because here ''it is the whole object of the [Brady] law to direct the functioning of the state executive,'' id. at 2283, whereas in Garcia, the minimum-wage and overtime requirements of the Fair Labor Standards Act was universally applicable and was not destructive of state sovereignty. Garcia, id. at 547–55.

    Applying the New York/Printz template to tobacco settlement legislation that includes a provision regulating legal fees indicates that a properly drafted provision that is part of a comprehensive regulation of tobacco production, advertising and sale and litigation arising therefrom is not imperiled by Tenth Amendment or federalism issues.

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    First, if the proposed legislation gave states the option of joining the legislatively-created national settlement, then adherence to fee regulation would be voluntary and no serious constitutional challenge could be raised. Such legislation could not be said to ''commandeer'' states' legislatures (as in New York), nor to ''conscript'' state officers into federal service (as in Printz). Indeed, no case has suggested even in dicta that states could challenge on Tenth Amendment grounds conditions relevant to their voluntary participation in a federal program.

    Second, even if the legislation applied to fees paid by states that did not choose to enter into a settlement, all Tenth Amendment issues could still be avoided if the fee regulation applied only to state recovery of Medicaid funds and the regulation was made contingent on states continuing their participation in the Medicaid program. Of course, it could be confidently predicted that no state would choose to exit the Medicaid program. But this fact does not make the tie-in to Medicaid constitutionally suspect. Rather, the Medicaid tie simply reminds us that the underlying claims of the states grew out of the federal Medicaid program, so that any federalism objection to continuing congressional regulation in this area is quite weak indeed.

    Finally, if the legislation creating the comprehensive settlement would apply the fee regulation to states that did not choose to enter into a settlement and to claims not arising from Medicaid recoupments, then and only then would there be a possibility that principles of federalism might be implicated. Even there, however, the fact that the fee regulation was a part of a comprehensive regulatory scheme, that state officials would not be compelled to ''administer or enforce a federal regulatory program,'' Printz, id. at 2384, and that the fee regulation was not a ''directive . . . requiring the states to address particular problems,'' id., would be most persuasive.
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    For the policy reasons discussed above, Congress should include fee regulation as part of legislation comprehensively regulating the production, advertising and sale of tobacco-containing products and litigation arising therefrom. Such fee regulation should not take the form of an hourly rate because that does not adequately reward risk. I recommend instead that Congress set an aggregate fee and establish criteria for a commission or a federal court to apportion fees.

    A properly drafted fee regulation would be a permissible application of congressional power under the spending power and interstate commerce clauses and would be consistent with due process, takings (Fifth Amendment) and federalism (Tenth Amendment) requirements.


    The documents that were sent up to Congress, entitled ''Proposed Resolution,'' dated June 20, 1997, and ''Summary of Proposed Resolution,'' purport to set forth the terms of the proposed national tobacco settlement that have been entered into between the state attorneys general, the plaintiffs' attorneys, and the tobacco companies. However, no legislative language is provided. Moreover, while the documents provide some insight as to the terms of the settlement, they do not provide a clear understanding of the structure of the agreement. In a number of instances, the terms are unclear. Other documents that are unavailable are referred to, and numerous questions remain as to the precise terms of the agreement. The following highlights the content of each section of the Proposed Resolution.
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    The stated goal of the Proposed Resolution is to decrease the incidents of underage tobacco use. Title I proposes to reform the tobacco industry by modifying marketing, advertising, manufacturing, packaging, warning labels, accessability, and licensing requirements. By its terms, its seeks to change the corporate culture of tobacco product manufacturers. Failure to comply with the provisions of the Act will expose participating tobacco companies to additional penalties, which are described in Title II. In order to facilitate enforcement of this Act, the legislation states that the tobacco companies will enter into a Protocol among themselves, as well as into Consent Decrees with state attorneys general. These requirements are elaborated upon in Title III.

    The Proposed Resolution does not mandate participation by the tobacco companies. Those companies that do participate will be accorded certain advantages, namely not to be subjected to punitive damage awards or aggregation of claims, including class actions. Therefore, the proposed legislation contemplates different provisions relating to those companies that choose to participate and those that do not. The Proposed Resolution defines these different types of companies as participating and non-participating. The terms of the legislation that do not apply to the non-participating tobacco companies are highlighted in Title III below.

    Additionally, Title IV of the Act creates new federal guidelines for reducing involuntary exposure to tobacco in public areas, while providing leeway for state and local governments to enact more stringent requirements. The scope of federal and states' authority is detailed in Title V.

    The Proposed Resolution creates a framework for the programs that are to be created to help reduce underage tobacco use and help people quit smoking. The funding for these programs thereof is set forth in Title VI, and Title VII describes some of the programs. They include funding for efforts to discourage minors from beginning to use tobacco products, as well as cessation programs for current users. In addition, there will be funding for states' enforcement measures and community involvement in reducing tobacco use. The Secretary of Health and Human Service will be provided with moneys to create programs to reduce tobacco use and for research and development of technologies to decrease tobacco dependence and injury. Also, funding will be provided for a public education campaign.
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    One of the most important goals of the legislation is settlement of civil actions against tobacco companies. The details of this proposed settlement structure are set forth in Title VIII, including limitations on liability of the tobacco companies.

Title I: Reformation of the Tobacco Industry

A. Restrictions on Marketing and Advertising

    Since public health authorities have determined that tobacco advertising substantially contributes to the increased underage use of tobacco products, the Proposed Resolution sets forth specific prohibitions on advertising and marketing. It states that the participating tobacco companies will specifically consent to these restrictions and not raise constitutional claims. Under the Act, virtually all forms of non-text tobacco advertising accessible by adolescents will be banned.

B. Warnings, Labeling and Packaging

    The Proposed Resolution requires a new set of rotating, prominently placed warnings on packages of tobacco products. Also, the Proposed Resolution would expand the health warnings concept as applied to advertising. The FDA would have the power, but not the obligation, to modify advertising restrictions with respect to tobacco products that it concludes present sufficiently reduced health risks.

C. Restriction on Access to Tobacco Products
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    The Proposed Resolution will sharply restrict adolescents' access to tobacco products. Some of these provisions include setting a minimum age of 18 to purchase tobacco products, requiring face-to-face transactions for all sales of tobacco products, banning sales of tobacco products from vending machines, requiring retailers to check photo identification of anyone under age 27, banning self-service displays of tobacco products except in adult-only facilities, banning distribution of tobacco products by mail, and imposing retailer compliance obligations to ensure that all displays, advertising, labeling, and other items conform with all applicable requirements.

D. Licensing of Retail Tobacco Product Sellers

    Any entity that sells directly to consumers—whether a manufacturer, wholesaler, importer, distributor, or retailer—would need to obtain and maintain a license. The legislation would enact federal minimum standards for retail licensing and would enable state and local governments to adopt more stringent standards. Sellers would be subjected to stiff penalties and potentially to suspension or loss of their licenses if they do not comply with the access restrictions. These provisions will be enforced by federal, state and local authorities through funding provided by annual tobacco industry payments.

E. Regulation of Tobacco Product Development and Manufacturing

    The tobacco industry will be subject to ''good manufacturing practice'' standards imposed on other FDA-regulated industries. These standards include requirements regarding quality control systems, FDA inspections, and record-keeping and reporting. However, these standards would not subject tobacco farmers to any greater regulatory burden than producers of other raw products regulated by the federal government.
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F. Non-Tobacco Ingredients

    The government's regulatory authority over non-tobacco ingredients that are used in tobacco products will also be expanded. Full disclosure of these ingredients will be required, and within five years, the tobacco manufacturers must submit a safety assessment for these ingredients. The FDA's approval must be given for any new ingredients. Manufacturers are required to have procedures for the selection, testing, purchase, storage, and use of ingredients; to keep records regarding the foregoing; and to allow FDA access to such records, with protection of proprietary information.

G. Compliance and Corporate Culture

    The Proposed Resolution requires fundamental changes in the way that participating companies do business. Participating tobacco manufacturers will be required to create, and to update each year, plans to ensure compliance; to identify ways to reduce underage use of tobacco products; and to provide internal incentives for reducing underage use and for developing products with reduced risk.

    Participating tobacco companies must also provide incentives for employee compliance, including forbidding delegation of substantial discretionary authority to individuals that have shown a propensity to disregard corporate policies. Employees will be directed to report any known or alleged violations to a designated company compliance officer. Tobacco manufacturers would educate employees and establish training methods. Also, they would institute appropriate disciplinary measures and steps for responding to violations and prevention of their recurrence.
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    Companies would be subject to fines and penalties for breaching these obligations. Also, ''whistleblowers'' would be accorded the maximum protection under current federal statutes.

H. Effective Dates

    The Proposed Resolution sets forth the effective dates for implementation of these various factors, including access restrictions, retail displays, labeling, and corporate compliance, among others.

Title II: ''Look Back'' Provisions/State Enforcement Incentives

A. Provisions Regulating Manufacturers

    These provisions impose mandatory penalties, or surcharges, to be paid to the FDA if certain targets for reduction of underage tobacco use are not met. The purpose is to provide tobacco product manufacturers with incentives to comply with the Act. These mandatory penalties would be capped at $2 billion for the cigarette industry and a comparable amount for smokeless tobacco products, based on sales. Manufacturers could receive an abatement (up to 75% of the penalty) if they demonstrate that they have attempted to comply with the Act and have not taken any steps to undermine the Act. This surcharge will be a joint and several obligation among the tobacco manufacturers, depending upon market share.

    The FDA may use the sucharge moneys to help reduce the level of underage tobacco use. After abatement proceedings, the FDA would transfer 90% of the surcharge to state and local government public health agencies, retaining 10% for its administrative fees. These agencies would be required to spend the money on efforts to further reduce underage tobacco use.
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    ''Look Back'' provisions are described in greater detail in Appendix V to the Proposed Resolution.

B. Provisions Regulating States

    The states also have incentives to take steps to reduce the amount of underage tobacco use. These enforcement efforts will be funded by the ''Industry Payments,'' which are described in Title VI below. If a state does not maintain specific levels of enforcement, it risks the loss of a portion of the health care programs funds otherwise payable to it. The amounts withheld from one state will be reallocated to other states with superior ''no sale to minors'' enforcement records.

    The Act requires states to enact ''no sale to minors'' laws regarding manufacturing, selling and distributing tobacco products to persons under the age of 18. States must also conduct monthly random inspections.

    Another condition for states' receiving moneys from the Act is that they must submit reports to the FDA and make public those reports that include descriptions of: enforcement activities; progress in reducing the availability of tobacco products to underage persons; methods used in compliance checks; strategies for further reducing availability of tobacco products to minors; and the identity of the state agency responsible for fulfilling the Act's requirements.

    The Act sets required attainment goals for state enforcement. Before allocating any moneys, the FDA is to make annual determinations as to whether each state has pursued all reasonable methods for ensuring a prohibition of sales of tobacco products to minors. If a state does not meet these goals, the FDA may refuse to pay the state the certain moneys payable to it under the Act. The FDA may withhold 1% of the money (up to a maximum of 20%) for each percentage point by which the state has failed to meet its required performance target. The FDA will then reallocate those moneys to states that have exceeded their performance targets as a reward.
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    The state may appeal such a decision and has the burden of proving that it has pursued in good faith all rules and regulations of the Act, as well as tried all reasonable measures to attain compliance. If it does so, the FDA will order a release of up to 75% of the amount withheld, with interest. Any manufacturer or state attorney general aggrieved by this decision may appeal to the Court of Appeals for the District of Columbia. There will be no appeal from a decision of this court.

    For further elaboration of the states' enforcement provisions, see Appendix VI to the Proposed Resolution.

Title III: Penalties and Enforcement; Consent Decrees; Non-Participating Companies

A. Penalties and Enforcement

    The Act is enforceable by the federal government, including the FDA and the civil and criminal divisions of the Justice Department, and by the several states. The states may enforce these provisions under their own consumer protection laws, if applicable.

    Even though not all states have filed suits against tobacco manufacturers, and because this legislation is intended to provide the benefits of settlement to all states, the tobacco industry will enter into a binding and enforceable national tobacco control Protocol, which will contain certain terms of the resolution. (The details of the Protocol are not set forth in the Proposed Resolution.) The Protocol will not be subject to facial constitutional challenge and will provide benefits and enforcement rights to the federal government and all states.
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B. Consent Decrees

    In addition, the tobacco companies will enter into Consent Decrees with the states, which will not take effect until after the enactment of this proposed legislation. The Consent Decrees will reiterate some of the terms of the legislation including: (1) restrictions on advertising, marketing and access to tobacco products; (2) trade associations; (3) restrictions on lobbying; (4) disclosure of tobacco smoke constituents; (5) disclosure of non-tobacco ingredients; (6) disclosure of existing and future industry documents relating to health, toxicity and addiction; (7) compliance and corporate culture; (8) obligations to make monetary payments to the states reflecting their reasonable share of the total provided by the Act; (9) obligation to deal with distributors and retailers that obey applicable provisions of the law concerning distribution, sale and marketing; (10) warnings, labeling and packaging; and (11) dismissal of other pending litigation specified by the parties.

    The Consent Decrees will not contain provisions as to: (1) product design, performance or modification; (2) manufacturing standards and good manufacturing practices; (3) testing and regulation with respect to toxicity and ingredients approval; and (4) the national FDA ''look back'' provisions.

    The terms of the Consent Decrees will be construed in conformity with the terms of the Act and the Protocol. The Consent Decrees will be enforceable in state court, and only injunctive relief will be allowed. No criminal or monetary sanctions may be imposed. However, a subsequent violation of an injunction may lead to criminal or monetary sanctions.

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    The terms of the Consent Decrees will remain enforceable regardless of subsequent changes in the Act or other laws that diminish the obligations of the companies, except (1) where such changes create federal requirements that produce obligations in conflict with those contained in the Consent Decrees; (2) with respect to allocation of funds; and (3) with respect to warnings, labeling, and packaging. If the warnings, labeling, and packaging requirements change, the terms of the Consent Decrees will be modified accordingly. However, if Congress eliminates warnings requirement on tobacco packages, the warnings provisions in the Consent Decrees remain applicable.

    By entering into Consent Decrees, the tobacco manufacturers and the states expressly waive any claims that the provisions thereof violate either state or federal constitutions.

C. Non-Participating Manufacturers

    Since non-participating companies will not be subject to the advertising restrictions, full required payments, and corporate culture requirements of participating companies, the resolution avoids constitutional questions that might otherwise be raised by establishing a separate regime for non-participating manufacturers.

    Non-participating manufacturers would be subject to the same access restrictions and regulatory oversight as the participating manufacturers. Their products would be subject to a user fee equal to the portion of the payments by participating manufacturers allocated to fund public health programs and federal and state enforcement of the access restrictions. However, they will receive no protection from civil liability described in Title VIII below.
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    Non-participating manufacturers would not have contributed to the funds to settle the governmental actions or provided consideration for the partial settlement of individual tort actions. Because such actions would remain wholly unsatisfied, the Proposed Resolution states that it is vital that the claimants be ensured that funds will be available to satisfy any judgments that may be obtained. Therefore, non-participating manufacturers will be required to place into an escrowed reserve fund each year an amount equal to 150% of their share of the annual payments required by participating manufacturers (other than the portion allocated to public health programs and federal and state enforcement). These funds would be set aside for potential liability payments, and manufacturers could reclaim these moneys with interest 35 years later, to the extent they have not been paid out in liability.

    Also, since these non-participating companies will not be subject to the corporate culture requirements, described in Title I, the exemption from civil liability applicable to distributors and retailers of the products of participating manufacturers does not apply to distributors and retailers who handle the non-participating manufacturers' products.

Title IV: Nationwide Standards to Minimize Involuntary Exposure to Environmental Tobacco Smoke

    This provision establishes a federal standard governing smoking in public places or at work. States and localities will retain power to impose stricter requirements. Indoor smoking in public facilities will be restricted to ventilated areas that exhaust the smoke directly outside, maintain the smoking area at ''negative pressure'' compared with the adjoining areas, and do not recirculate the air inside the public facility. Also, this provision ensures that no employee will be required to enter a designated smoking area while smoking is occurring. Also, it exempts restaurants (and other fast food restaurants), bars, private clubs, hotel guest rooms, casinos, bingo parlors, tobacco merchants, and prisons. The Occupational Safety and Health Administration will have enforcement authority.
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Title V: Scope and Effect

    The scope of the FDA's authority includes all products sold in U.S. commerce and covers new entrants, imports, and U.S. duty free. The Bureau of Alcohol Tobacco and Firearms will retain fiscal authority over tobacco products. The Federal Trade Commission will retain existing authority, except for tar, nicotine, and carbon monoxide testing. The U.S. Department of Agriculture will have exclusive authority over the growing, cultivation, and curing of raw tobacco.

    This legislation sets the federal ''floor'' for tobacco control measures, but it preserves the states and local governments' authority to enact additional measures to further restrict or eliminate the use and accessibility of tobacco products to minors, employee workplace exposure and general public exposure to smoking in public areas and in private places and facilities. Also, they may further regulate, restrict, or eliminate the sale or distribution of tobacco products, as well as impose state and local taxes on such products. This legislation also retains similar flexibility for Indian tribes, military facilities, and other federal agencies.

    Although the Proposed Resolution provides for national uniformity in warning labels, packaging requirements, and advertising, the FDA is granted express authority to require changes in the language of warnings, subject to the standard requirement that it provide notice and a hearing opportunity prior to making such changes. Also, the provisions of the Federal Drug and Cosmetics Act, which are designed to provide uniformity in product manufacture and design requirements relating to medical devices, will apply to the tobacco products, except any application by a state or locality for an exemption permitting it to adopt additional or different requirements may only be granted if such requirements would not interfere with interstate commerce. No exemption relating to non-tobacco ingredients may be applied for by a state or locality until the fifth anniversary of the effective date of the Act.
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Title VI: Programs/Funding—25 Year Package Face Value $368.5 Billion

    On the date of the signing of the statute, the tobacco manufacturers will have to pay an aggregate $10 billion payment. Thereafter, the tobacco companies will make annual payments, which will equal $358.5 billion for the first 25 years, for a total of $368.5 billion. The annual payments will equal $743.5 billion for the first 50 years. These payments will continue in perpetuity, commencing on December 31st of the first full year after statute signing. Of the $368.5 billion, approximately $193.5 billion would be paid to the states over the next 25 years to settle claims against the tobacco companies for recovery of Medicaid funds expended by the states for treatment of tobacco-related illnesses, described in Title VIII below. In addition to the $193.5 billion to the states, the following sums constitute the 25 year settlement total: (i) $25 billion to a permanent federal Public HealthTrust Fund for research into smoking-related diseases; (ii) $25 billion at the rate of $1 billion a year for smoking cessation programs, which includes reimbursement of smokers who enroll in such programs; (iii) approximately $25 billion to fund public health programs designed to discourage smoking, underwriting additional costs to be incurred by the FDA in administering various aspects of the legislated settlement and enabling the FDA to make grants to the states for tobacco sale restriction enforcement; and (iv) approximately $92 billion to pay any tort judgments obtained against tobacco companies by individual litigants. The aggregate amount to be paid out each year in tort claims will be capped and a federal commission will decide how to allocate any unspent monies under the annual caps.

    The Annual Payments amount are broken down into two amounts, a ''Base Amount'' and ''Public Health Trust.'' The Base Amount will begin at $6 billion for the first year and grow to $15 billion by the ninth year. The $25 billion Public Health Trust Fund will be completely paid into by the eighth year of the Act. Beginning in the fifth year, the tobacco companies will be required to pay $15 billion annually in perpetuity. These amounts include annual inflation protection for the greater of 3% or CPI and will be adjusted if there is either an increase or decrease in volume of the units sold each year. If there is a decrease in the volume of products sold, but the industry's profit for that year is larger than its 1997 profits (as adjusted for inflation), the reduction in the annual payment would be offset to the extent of 25% of the increase in profit.
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    These payments would be the joint responsibility of the participating companies, would receive priority in any bankruptcy or reorganization proceeding, and would be the obligation only of a company's manufacturing entity selling domestically.

    The Proposed Resolution contemplates that the tobacco companies would pass the annual payments through to consumers in the form of higher prices in order to promote the maximum reduction of underage use.

    Under the legislation, all payments pursuant to this Agreement are deemed ordinary and necessary business expenses for the year of payment, and no part thereof is either in settlement of an actual or potential liability for a fine or penalty (civil or criminal) or the cost of a tangible or intangible asset.

Title VII: Public Health Funds From Tobacco Settlement as Recommended by the Attorneys General for Consideration by the President and the Congress

    The Act sets forth a proposed allocation of the funds, adjusted annually for inflation, among various programs. The Secretary of Health and Human Services will receive annual funding for development of programs that reduce the use of tobacco, research and development of technologies that reduce tobacco product usage dependence and injury from exposure therefrom, and testing and evaluation of health effects of tobacco and non-tobacco components of tobacco products. The FDA will receive funding for enforcement of this Act, including for making grants to the states to assist in enforcement. There will be funding for state and local efforts to encourage community involvement in reducing tobacco use and implementation of policies to achieve these goals. Events and teams will be compensated for loss of sponsorship from tobacco companies if they are unable to replace its tobacco company sponsorship. In addition, there will be a public education campaign designed to discourage the use of tobacco products. Also, money will be paid into a Trust Fund to be used to help people who want to quit using tobacco to do so. The Secretary of Health and Human Services will oversee this tobacco use cessation program.
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    The legislation also provides for the creation of a Public Health Trust Fund Presidential Commission, which will include representatives of the public health community, state attorneys general, class action attorneys, and others to determine the medical research for which the $25 billion Public Health Trust Fund will be used.

Title VIII: Civil Liability

A. General

    The present state attorneys general actions, parens patriae and class actions are legislatively settled. All ''addiction''/dependence claims are settled, and all other personal injury claims are reserved. As to signatory States, pending Congressional enactment, no stay applications will be made in pending actions, based upon the fact of this resolution, without mutual consent of the parties.

    Third-party payor (and similar) actions pending as of June 9, 1997 are not settled, but governed by provisions regarding past conduct (see Section B below).

B. Provisions as to Civil Liability Concerning Past Conduct (i.e. relating to claims or injury caused by conduct taking place prior to the effective date of the Act).

    All claims for punitive damages are resolved as part of this settlement. Individual claims against tobacco companies for punitive damages are precluded.

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    In tort claims against tobacco manufacturers, no class action or joinder of actions or aggregation of actions will be permitted; only individual trials may occur. A defendant may enforce this prohibition by removing and having the right to remove any such action to federal court.

    The Federal Cigarette Labeling and Advertising Act and applicable case law remain unchanged.

    Provided that the five negotiating companies enter into the Protocol, these manufacturers will enter into a joint sharing agreement for civil liability. Protocol manufacturers will not be jointly and severally liable for liability of the non-Protocol manufacturers. Trials involving both Protocol and non-Protocol manufacturers will be severed.

    The proposed resolution preserves access to the tort system by individuals. Existing legal doctrine regarding the type of tort claims that can be brought, as reflected in the Supreme Court's Cipollone v. Liggett Group, Inc. decision, 505 U.S. 504 (1992), is also preserved. Claims could be maintained only against tobacco manufacturing companies (and not their retailers, distributors or affiliated companies). In addition, claimants could seek punitive damages only with respect to claims predicated upon conduct taking place after enactment of the proposed resolution, since, as noted above, part of the aggregate industry payments are in settlement of punitive damages claims. Finally, except with respect to already pending actions, third-party payor (and similar claims) could be maintained only on a subrogated basis.

    The development of ''reduced risk'' tobacco products after enactment is inadmissible and not discoverable. The statute of limitations will be determined by the state in which an action is brought.
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    Judgments and settlements arising from tort actions would be paid as follows: The proposed resolution sets an annual aggregate cap for judgment/settlement equal to 33% of annual industry base payment. Any excess judgments or settlements above the cap in a year would roll over until the next year. Moreover, while judgments and settlement would run against the defendant, they would give rise to an 80-cent-on-the-dollar credit against the industry's annual payment. Finally, to ensure that the available funds are not allocated disproportionately, any individual judgments in excess of $1 million would be paid at the rate of $1 million per year unless every other judgment and settlement could first be satisfied within the annual aggregate cap. In all circumstances, however, the companies would remain fully responsible for costs of defense.

    If the annual cap amount is not reached, a Commission appointed by the President will determine the proper allocation of the unused amount of the credit.

C. Provisions as to Civil Liability for Future Conduct (i.e. suits claiming injury or damage caused by conduct taking place after the effective date of the Act).

    All of the same provisions apply to suits concerning future conduct, except for the provisions concerning resolution of punitive damage claims and joint sharing of liability for Protocol manufacturers. Also, no third-party (or similar) claims not based on subrogation can be brought.

Title IX: Board Approval

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    The proposed resolution is subject to the approval of the Boards of the companies involved.


    In addition, Appendix IV to the Proposed Resolution states that within 90 days of the effective date of the Resolution, the manufacturers will disband and dissolve the Council for Tobacco Research, U.S.A. and the Tobacco Institute. Thereafter, they may create new trade associations with the specific provisions concerning the composition of the Board of Directors, appointment of independent legal counsel, and by-laws.

    Also, these new associations will be subject to continuing oversight by the Justice Department and by state antitrust authorities, which may have access to books and records of the trade associations.


    My statement concerns the legal fees to be generated by a global settlement of the tobacco litigation. I address two aspects of the legal fees issue: (1) the propriety and enforceability of the contingency fee agreements entered into by lawyers retained by state attorneys general to sue tobacco companies to recoup Medicaid expenditures for treatment of tobacco-related illness; and (2) the constitutionality of Congress enacting a law that, as part of a comprehensive plan to regulate the manufacture, advertising and sale of tobacco products and litigation arising therefrom, would supersede the contingency fee agreements as well as any other fee agreements between the plaintiff attorneys and tobacco companies.
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    The contingency fee agreements—if enforced as written—would generate fees of $18.6 billion. After a review of the ethical mandates governing contingency fees, I conclude that there are ample grounds for declaring some or even many of them unenforceable. I do not conclude, however, that the fee agreements are unethical or ethical—that is not my focus.

    As a matter of policy and for reasons stated, I do conclude that Congress should include a free regulation provision as part of a comprehensive regulation of the manufacture, advertising, and sale of tobacco products and litigation arising therefrom. The precedent being established of a national bargain created by an alliance of state attorneys general and contingency fee lawyers motivated by financial incentives measured in billions of dollars has troubling implications for our system of representative government and political accountability. At a minimum, Congress ought to assert the authority of the national legislature to assure that the public policy outcomes created by the settlement are consistent with congressional objectives. Necessarily, this would include exercising dominion over the fees of those most instrumental in driving the settlement.

    I then discuss forms of fee regulation and some of the criteria that should be considered. I do not recommend setting an hourly rate fee because that fails to reward risk and would undercompensate some and overcompensate others. I recommend that Congress determine an aggregate fee and establish a commission or delegate to a federal court the task of apportioning the fee among the 89 or so law firms that have claims.

    Finally, I discuss the constitutional issues raised by fee regulation as part of a comprehensive regulated settlement. After reviewing due process, spending power, interstate commerce, takings (5th Amendment) and federalism (10th Amendment) issues, I conclude that a properly drafted act of Congress to regulate attorney fees as part of a comprehensive legislated settlement, would be constitutional. However, I acknowledge that abridgement of the fee contracts of the lawyers for Mississippi and Florida where settlements have already occurred could be seen to raise constitutional questions of greater gravity though I still conclude that regulation of those fees, as well, is constitutional.
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    Mr. COBLE. Mr. Morrison.


    Mr. MORRISON. Mr. Chairman, thank you for the opportunity to appear here today.

    I want to begin with a one-sentence statement: Public Citizen opposes the settlement and the deal and any legislation, and therefore we oppose any bill, regulating fees contingent upon it. I will say nothing further on that subject today.

    Second, I want to say that Public Citizen takes a back seat to no one in the United States in actions to cut down on unreasonable attorneys' fees. My prepared statement explains in detail what we have done to control excessive legal fees in the courts under existing law, and I think it is fair to say that we are pariahs among many lawyers in this country. Many lawyers involved in tobacco cases, some in this room today, have felt the sting of our objections to their unreasonable fees. We have done all of that under the existing law as it now is, and, we want to be clear about this, we do not stand to receive a penny from this case.

    Now, notwithstanding our long-term concern about excessive fees, we oppose this legislation or anything similar to it because it is unnecessary, unconstitutional and unwise. Let me explain why.

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    It is unnecessary because there are already adequate State laws to deal with many of the problems. When the Congress enacts, the first question that should be asked is is the law necessary, and when you are legislating on a national basis, you should say unless there is some reason for Congress to do it, even if we have the power, we ought to leave it to the States; that is, if you believe in Federalism.

    The statements of Mr. Brickman, as well as the sponsors of this legislation, make clear that there are a number of avenues under existing State law under which these fees could be challenged as unconscionable or unreasonable, including failure to comply with any applicable contracting procedures. I do not have an opinion as to whether these fees are or are not excessive, but this is not an area in which there is a State law void.

    Nor is there any reason to think the attorneys general of 43 States are incompetent or are minors or otherwise disabled from entering into contracts and need the umbrella protection of the Federal Government. They did what they did based on State law. They may have made a mistake, they may not have made a mistake, but the one thing that is certain is they will be held accountable by the people of their States who are the beneficiaries of the settlement agreements entered into.

    I want to briefly talk about unconstitutionality, and there are two separate sets of concerns that you have to think about. The first is, as you all know, Congress has limited powers, as the Lopez case reminds us, and it can only act if there is one of the enumerated authorizations. There are two arguable authorizations. One is the commerce clause, and two is the spending power.

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    As far as commerce clause is concerned, the mere incantation of the words ''interstate commerce'' doesn't do the trick anymore. The Supreme Court has made that clear, and the problem for this legislation is not that Congress couldn't legislate about fees in future cases. The question is, how could it ''regulate,'' which is the word in the Constitution, commerce which has already taken place. The cigarettes have already been sold, the people have already been injured, the Medicaid payments have already been made, the lawsuits have already been brought and in most cases settled. And the question is, how does this bill involve the regulation of commerce within the meaning of the commerce clause.

    Second, as far as spending is concerned, this is not Congress's money. I heard what struck me as being somewhat of a shell game today—that money is going to come from the tobacco industry, which is where it is coming from, and instead of going to the States, they will funnel it through the Congress, and that somehow makes it Federal money, even though it has all been earned as a result of these lawsuits. I don't understand it. South Dakota against Dole, the principal case relied on, doesn't stand for it.

    The second set of objections, even if Congress has the power, it must surmount federalism concerns under the 10th amendment; that is, in this case, Congress has to say to the States, you lack the power, or we are overriding your decision on what is a reasonable fee between you, a sovereign State of the United States, and people with whom you have contracted, your lawyers. I don't think Congress could do that prospectively, but they surely can't do it retrospectively from the perspective of States.

    But there is another interest at stake, and that is the interest of the attorneys. They have a valid contract here, valid at least as far as the Federal Government is concerned. It may or may not be subject to defenses under State law, but if the Congress of the United States comes in and expropriates that money from the lawyers and gives it to somebody else, it is violating their rights under the Constitution not to have their property rights in that contract taken. That doesn't mean they can't be regulated; it is subject to all legal defenses, but this is a new rule put in just for these cases. And it would be the height of irony, to me, for the various States which are opposing this settlement, that do not want to settle, to be told not only do they have to be brought into the settlement, dragged kicking and screaming, before the Congress and made to settle their cases, but then they cannot pay their attorneys what they have agreed to pay their attorneys.
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    It is unwise because it is impossible for Congress to judge a reasonable rate. It has no business saying. I would say that if the figure in the bill was, instead of $150 an hour, $1,500 or $15,000. The States have adequate means of policing these fees, and Congress should stay out of it.

    Last, the point which I have not fully focused on until today, and it is not in my prepared statement, if you invalidate these arbitration procedures, do you know who is going to get the money? That money is not going to go to Congress, it is not going to go to the States. The tobacco companies will keep every single bit of it. I assure you that is the way they have drafted the agreement.

    Thank you, Mr. Chairman.

    Mr. COBLE. Thank you, Mr. Morrison.

    [The prepared statement of Mr. Morrison follows:]



    H.R. 2740 should be rejected because it is unnecessary, unconstitutional, and unwise. Because H.R. 2740 is tied to the global settlement, which Public Citizen opposes for a variety of reasons, that is another reason to reject it.
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    Public Citizen believes that it is imperative to maintain strong financial incentives to encourage plaintiffs' lawyers to take on difficult and important cases, with high risks of non-recovery, against powerful corporations. There are no cases for which that need is greater than those against tobacco companies. It is only because of the contingent fee cases brought by states and private parties that the tobacco industry is now seeking a deal from Congress.

    However, there are lawyers who seek unreasonable compensation, and Public Citizen has worked to prevent lawyers from obtaining excessive fees. But if the fees in the tobacco cases brought by the states are excessive, H.R. 2740 is the wrong way to deal with the problem.

    H.R. 2740 is unnecessary because there is no reason to believe that there was an imbalance in the bargaining positions between the states and the lawyers who were being hired to take on tobacco litigation so that the bargains struck over fees were unfair. In addition, states have their own laws that prevent lawyers from receiving fees that are unreasonable, and there is no showing that federal price controls for one limited category of attorneys' fees are required.

    H.R. 2740 is unconstitutional for two separate sets of reasons. First, there is no basis under either the Commerce or Spending Clauses for this law. It is not designed to ''regulate'' commerce because any commerce that is involved has already taken place in the form of tobacco sales and litigation. Thus, because this bill seeks to alter the effects of prior conduct, it is not a proper subject for Commerce Clause regulation. Nor can it be justified as a condition on federal spending. The money to be spent—the proceeds of the tobacco settlement—already belongs to the states and not the federal government since it was their lawsuits that were the primary catalyst for the settlement. In addition, any attempt to tie future medicaid payments to limits on attorneys fees would be an impermissible attempt to regulate past conduct and not a proper use of the spending power.
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    The bill also runs afoul of the Tenth Amendment, which prevents the federal government from trammeling on the sovereign interests of the state, and the Fifth Amendment's prohibition on the taking of private property without just compensation. It offends the Tenth Amendment because it attempts to dictate to the states how much they can pay for legal services in a situation in which the states have a very strong interest in making that determination on their own. Furthermore, the only federal interest is the impermissible desire to transfer money from attorneys to the states, which is also the principal reason H.R. 2740 violates the rights of attorneys to enforce their fee agreements under the Takings Clause. Because the United States has threatened to exercise its subrogation rights to obtain a significant part of the settlement proceeds, and because reductions in fees paid to attorneys may enable Congress to lower medicaid or other payments to the states, the federal government is not a neutral bystander under this bill.

    Finally, H.R. 2740 is unwise because it is not a bill to regulate attorneys fees generally, but applies only to one type of legal work: tobacco suits brought by states. Moreover, it restricts only the fees for the lawyers for the states, leaving the tobacco companies free to pay (and deduct from their taxes) any amount they choose to pay their counsel. It also sets fees at rates that are far below the market, especially considering the risk of the litigation, the skills required, and the expenses to be advanced. It also seeks to require attorneys to justify their fees on the basis of hours spent, when their contracts were on a contingent fee basis and many, if not most, of the attorneys did not maintain time records that would satisfy the statute. Even if these defects were not eliminated, and the rates allowed were reasonable, there is no basis for Congress to step in and attempt to alter the effect of contracts freely entered into regarding a matter in which the states, not the federal government, have the primary interest.
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    Mr. Chairman, Members of the Subcommittee. Thank you for your invitation to appear here today to testify on H.R. 2740, a bill to limit attorneys' fees in the proposed tobacco settlement. Since Public Citizen strongly opposes that settlement, as well as the variations that have been supported by the Clinton Administration and others, we oppose any legislation such as H.R. 2740 that is based on that settlement.

    I am an attorney with Public Citizen, having been with the Litigation Group since I co-founded it with Ralph Nader more than 25 years ago. Before explaining why we believe this bill is unnecessary, unconstitutional, and unwise, I first wish to give you some background regarding Public Citizen's involvement on the issue of excessive attorneys' fees and then describe the bill briefly.

    Although we oppose this legislation, we too are concerned about the size of some of the fees that are being sought in the tobacco lawsuits that are being settled. In fact, there is no organization in the United States that has done more to limit the excessive fees by attorneys than the Public Citizen Litigation Group. Beginning shortly after I founded the group in 1972, we took on the representation of Lewis and Ruth Goldfarb in their antitrust challenge to the minimum fee schedule system of the Virginia State Bar under which lawyers were subjected to discipline if they charged less than the official rates set by the bar associations. Our lawsuit eventually led to the Supreme Court victory in Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975), holding that minimum fee schedules of lawyers are price fixing and therefore violative of the antitrust laws. Since that time, we have attacked the legal profession's attempts to monopolize the provision of legal services through its unauthorized practice rules, its attempts to deny consumers information, through its advertising and solicitation rules, and its residence requirements designed to fence-off competition from out-of-state lawyers. In every one of these areas, as well as others, we have sought to increase the availability and affordability of legal services for the average American.
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    Public Citizen is acutely aware that any effort to determine the appropriate level of attorneys' fees, especially in cases like the ones that are the subject of H.R. 2740, is fraught with difficulty. On the one hand, it is imperative that fees be sufficiently generous to induce lawyers to assume the enormous financial risks that class action litigation entails. These cases are generally handled on a contingency fee basis, meaning that the plaintiffs' lawyers get paid only if the class prevails. Press accounts focus only on those class actions that result either in a judgment in the plaintiffs' favor or a settlement. But lurking beneath the surface are cases that result in dismissal or a defense judgment, with the plaintiffs' lawyer not only losing the case, but an enormous investment of time and money as well.

    For these reasons it is vital to maintain a system that retains fair incentives to encourage lawyers to undertake the considerable risks of non-compensation in handling class action lawsuits. This means that those of us who care about the civil justice system must explain to the public at large that our system of justice depends on the availability of counsel willing to undertake substantial risks of time and money. Given our market economy, the incentive for doing so must be the prospect of a substantial fee if the case settles or is decided in the plaintiffs' favor.

    On the other hand, there is no justification for windfall awards that bear no relation to the value that has been conferred on the class by the litigation. For that reason, from early in its existence, but with greater attention in the last few years, Public Citizen has entered class actions and stockholder derivative suits to object to fees that it believed were excessive (as well as to object to settlements on a variety of other grounds, particularly where class members receive little or no benefit from the deal). In virtually all of the cases, we were the only one arguing that the fees sought were excessive, and that a significant portion of those fees belonged to the class members and should not be paid to attorneys. In doing so, we have made ourselves extremely unpopular with many members of the plaintiffs' bar, including some considered to be the leaders of the bar, who, but for our efforts, would have received very large fees from these class action settlements. A summary of our activities in class action settlements, as of June 12, 1997, is being submitted for the record.
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    It is also significant that the defendants have almost never sided with us in these class actions, but have always acquiesced in the fees, no matter how excessive they may be. This is no doubt due to the fact that, in many of these cases, the relationship between class counsel and defense counsel is all too cozy, with the real victims being class members. It is obviously to the defendant's advantage to pay a large legal bill so long as the total cost of the settlement is kept down and class members are foreclosed from further litigation. While we have not always succeeded in achieving our goal of lowering fees, we have done so in a number of cases, and in virtually every case the courts have been compelled to analyze the issues very carefully.

    Perhaps most significant for this bill is our effort in a state court case in Texas, which is not a class action, but in which we intervened solely to object to the amount of fees. The case involved the massive damages from polybutylene plumbing that was installed in millions of homes, but unfortunately did the one thing that plumbing should not do: produce massive leaks and water damage. The case in which we intervened, Adkins v. Hoechst Celanese Corp., Cause No. 92–24674, was in the District Court for the 334th Judicial District in Harris County, Texas, and involved an attempt by the plaintiffs' lawyers, who represented more than 60,000 individual clients, to collect attorneys' fees and expenses of $108.8 million out of a cash settlement of $170 million. After a two day hearing on fees, in which we were the principal objectors, the court reduced the amount to $10,024,179 in expenses and $33,115,164 in fees for a total of $43,139,343, or a reduction of approximately 60%, because it found that the fees were excessive and unreasonable as a matter of Texas law. The attorneys have appealed, but we believe that the decision will be sustained. A copy of the court's unreported opinion is being submitted for the record of this hearing. I would also note that this is one of the few cases in which we have been involved in which the defendants supported our objection to plaintiffs' fees, both at the hearing and in the appeals court.
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H.R. 2740

    Before explaining our objections to H.R. 2740, I want to explain clearly what it does and what it does not do since these elements form an essential part of our criticism of the bill. The bill limits attorneys' fees only in lawsuits brought by a state, only with respect to tobacco, only for attorneys for the state and not for the defendants, and only for those cases resolved by the proposed tobacco deal. It applies to cases that are settled and those that go to judgment, it applies to cases in the state courts (none of these cases is in the federal courts), and it applies to lawsuits in which the party contracting with the attorney is a sovereign state, not a minor or an individual suffering from mental incapacity or other disability. The statute applies only to existing lawsuits and similar ones that might be brought with respect to tobacco and that would be settled by the proposed tobacco deal. It has no impact of any kind on any future lawsuit but affects only cases already on file, some of which have now been finally settled, including partial payment of attorneys' fees.

    The operative portions of the bill limit the fees that the states (the plaintiffs) may pay their attorneys to $150 an hour for actual time spent, plus actual expenses. The bill would also require the filing of detailed records of hours, even though most of these cases were brought under a contingency contract, and the lawyers are likely not to have kept time records at all. It also requires the public disclosure of all fee agreements, hours, and expenses, even though the agreements would be void as a result of this bill.

    The sponsors of H.R. 2740 are clear about the purpose of this legislation: they want the money to go for public health benefits rather than to attorneys, and in particular they support efforts to persuade children not to smoke. The question before this Committee and ultimately the Congress is not whether money should go to prevention and cessation of smoking—we strongly support all of those efforts—but whether taking money from attorneys who have entered into solemn contracts with states and have produced benefits to the states is a proper function for the Congress. For the following reasons, we believe it is not.
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There Is No Need for This Legislation.

    A fundamental premise of all legislation, particularly that which interferes with the free market and private contracting arrangements, is that there is some necessity for the government to step in and legislate, instead of allowing the parties to negotiate for themselves. Thus, when laws were enacted to limit the number of hours that children could work, to establish minimum wages, and to create safe conditions for workers, those decisions were made only after legislatures carefully analyzed the existing market structures and saw that the beneficiaries of these laws lacked the bargaining power to negotiate on their own. Therefore, the first question to be asked is not where would Congress like the money from the tobacco companies to go, but is there some reason to believe that the states were not able to negotiate reasonable fee contracts for themselves?

    I have seen one or two of the actual contracts between states and outside counsel and have followed the press accounts about them, from several propositions are clear. First, not all of the contracts are the same, with various states negotiating various ranges of fees, in some cases dependent upon the level of recovery, while in others the fees applied an agreed percentage across the board. Second, all of the agreements are purely contingency contracts, which means that the lawyers do not get paid or even get their expenses reimbursed in most cases unless they prevail by trial or settlement, no matter how much time they may have put into the litigation.

    Third, given the enormity of the financial and time commitments involved, there were initially very few lawyers who were willing to take on these cases, and so it is hardly surprising that some states may have entered into agreements with no cap whatsoever or without a declining rate of fees based on the size of the recovery. As this Committee is well aware, the tobacco industry had never lost a case and never paid a money judgment, in settlement or otherwise, thereby putting these cases into a category of highest risk, with the certainty that the defense would be fierce and without limitation. In addition, there are apparently significant differences among the fee agreements depending on whether the State Attorney General's office is also participating in the litigation and the time at which the case was brought relative to the time of the settlement. The point of this discussion is not to approve or disapprove a fee agreement in particular case, but to demonstrate that there is no reason to think that states as a whole were uniformly in such a bad bargaining position that they had no choice but to accede to whatever demands class action lawyers made on them.
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    Moreover, existing state laws provide various forms of protection against unreasonable contracts, and there is no reason to think that the contracts here do not comply with the various state laws. Thus, there are applicable procedures, including in some case competitive bidding and in some cases sole source contracting, applicable to state agencies generally. To the extent that those do not apply to legal services for which a state contracts, that is not because the state does not have the power to make those restrictions applicable, but because it has chosen not to do so for its own good reasons. It may be that states should rethink their policies on contingency fee agreements, but there is no reason for Congress to dictate that decision to them.

    In addition, even for contracts that are validly created, state courts may have the power to interpret them or set them aside in whole or in part on grounds that the fees actually being paid are unreasonable or unconscionable. The Adkins case described above establishes that state courts are fully capable of setting aside signed fee agreements resulting in fees that are wholly unreasonable. In addition, a state court judge in Florida, involving one of the tobacco cases that will be subject to H.R. 2740, has determined that the fee contract with the state produces unconscionable fees and that he would not enforce it. Whether that judgment will be sustained in the higher courts of Florida is not significant; rather, what matters for this Committee is that the state courts and state laws are available to assure that, as the code of professional responsibility applicable to every lawyer in the country provides, lawyers may not charge unreasonable fees, whether the client is a state or a private party.

    There is one other reason why H.R. 2740 is unnecessary: the proposed tobacco deal of June 20, 1997, is an unwise, unnecessary, and in many respects probably unconstitutional concept that should not be enacted into law. Since its announcement, Public Citizen has strongly opposed the settlement and continues to oppose it, even with the proposed modifications suggested by President Clinton and some public health organizations. We oppose it both because it is not strong enough in its public health benefits, and because it insists upon a trade-off of the rights of individuals, who have already been victimized by tobacco and are and will be suffering great damages in the future, to seek justice in our court system, as the price for the industry claiming it will not continue to attempt to seduce children into starting to smoke. This trade-off, which is explained more fully in an article that I authored in the Legal Times of Washington of November 10, 1997, a copy of which is attached, constitutes an undue interference with state law, of which H.R. 2740 is a similar manifestation. Both the Legal Times article and a detailed statement that I gave at a symposium at Harvard Law School this summer on the issues of immunity under the proposed tobacco deal can be found in Public Citizen's Web site at www.citizen.org. Since H.R. 2740 is intended to be enacted only if the tobacco deal goes forward, and since we expect that Congress will reject the deal, H.R. 2740 will fall by the wayside with it.
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H.R. 2740 Is Unconstitutional

    Even if H.R. 2740 were necessary, it should be defeated because it is almost certainly unconstitutional in a number of respects, that fall into two basic categories. The first involves the absence of any basis for congressional action, under the limited grant of authority to legislate under Article I of the Constitution, in particular under the Commerce and Spending Clauses. The second set of objections assumes that Congress has the power under Article I to enact H.R. 2740, but results in a finding of unconstitutionality because the bill would violate both the 10th Amendment and the Takings Clause. We deal with these two sets of objections in turn.

A. Absence of Article I Authority

    Under our constitutional system of federalism, Congress has only the power to legislate on subjects set forth in Article I, unlike the states which have the right to legislate on any subject whatsoever within their geographic reach. The principal basis on which H.R. 2740 is likely to be justified is the Commerce Clause. We recognize that tobacco moves in commerce and its sale and use could be regulated, but that does not end the inquiry.

    The problem for H.R. 2740 is that it does not regulate tobacco or anything else that moves in commerce, but attempts to set price ceilings on fees for cases that are based entirely on the laws of a single state, are brought by a single state, limited to the damages to that state, and are tried in state courts. The fact that money may move in commerce is no answer because if that were sufficient grounds to invoke the Commerce Clause, there would be no limits on the power of Congress under the Commerce Clause. Perhaps even more significant is the fact that there is no case of which we are aware in which the regulatory power of Congress has been exercised, let alone upheld, for a transaction that is already completed and there are no future effects on commerce.
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    Until 1995, it might be argued that there were no longer any limits on the right of Congress to invoke the Commerce Clause to do whatever it wanted, but the Supreme Court's decision in United States v. Lopez, 514 U.S. 549, 115 S.Ct 1624, changed that assumption by striking down a statute that it made it a federal offense to possess a gun in a school zone. The fact that guns regularly move in commerce and the possibility that even the gun involved in Lopez may have so moved were not enough to alter the decision because the statute imposed no commerce requirement, nor did Congress make any findings about commerce and firearms and the relation between their use and their proximity to schools.

    The reach of Lopez is not entirely clear. The Court based its decision in part on the fact that Congress had made no findings of impact on interstate commerce, but there are many who believe that the opinion can be read as saying that, even had Congress purported to do so, those findings could not have been upheld. In our view, at the very least, Congress must spell out in the law itself the connection with commerce since, like Lopez, it is far from obvious exactly how interstate commerce will be affected by voiding contracts entered into by the states with attorneys in tobacco litigation that has already been concluded by the time this bill will become law. Even if Congress can make such findings, we doubt that they could be sustained, but that can only be determined once Congress purports to connect this conduct with interstate commerce.

    It has also been suggested that Congress might justify these restrictions on attorneys' fees under its spending power by making certain payments to states conditional upon the states' agreement to abide by H.R. 2740, relying on South Dakota v. Dole, 483 U.S. 203 (1987). In that case, the Supreme Court upheld a condition imposed on federal grants for highway funds that the states raise their drinking age to 21.
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    Once again there are serious difficulties with applying that approach in this case for the same basic reason the Commerce Clause difficulty arises: the statute is retroactive only and does not purport to govern future conduct. Thus, this is not a law that would condition the rights of states to receive future medicaid benefits upon their agreement to enter into only contracts that provide for reimbursement at the rate of $150 an hour for future tobacco litigation. Even if the statute made the right to future medicaid payments contingent upon compliance with H.R. 2740, all of the applicable conduct has already taken place, and thus the future quid pro quo justification given in South Dakota v. Dole cannot be applied here.

    Nor could Congress condition the receipt of the settlement proceeds on reduction in the attorneys' fees since, at least for Florida and Mississippi, those states already have binding settlement agreements, and therefore the money is not even arguably federal funding as it would be for future medicaid benefits. Indeed, even for the other states, their rights to receive money from the settlement are entirely state based rights, and the attempt to use medicaid as a justification would be seen by a court as an obvious ruse, since the source of the settlement funding is the leverage created by the state court actions and not by the federal government.

    It is possible that others will seek to justify H.R. 2740 on other grounds, but to date these are the only ones of which we are aware. But if those justifications are put forth, they are likely to run into the same barrier as is present in the two justifications offered so far: Congress is attempting to retroactively adjust rights instead of legislating prospectively.

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B. Other Constitutional Barriers

    There are at least two other sets of constitutional barriers that H.R. 2740 would have to surmount before it could be sustained: those under the Tenth Amendment and the Takings Clause of the Fifth Amendment. We deal with each in turn.

    As described above, this legislation has a retroactive effect, and hence its proponents have a special burden because of the bill's interference with settled expectations that prospective legislation would not. For purposes of this discussion on the Tenth Amendment, however, we assume that, even if Congress were to make this legislation wholly prospective—i.e., the states were prohibited from entering into contracts for tobacco litigation which paid more than $150 an hour for any attorney—that would clearly falter under recent interpretations of the Tenth Amendment.

    As this Committee is undoubtedly aware, in a series of cases, the Supreme Court has breathed considerable new life into the Tenth Amendment, which provides that ''the powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.'' That litigation course began with several cases involving Congress's extension of the minimum wage and overtime provisions of the Fair Labor Standards Act to employees of the states. In Garcia v. San Antonio Metropolitan Transit Authority, 469 U.S. 528 (1985), the Court upheld the federal power to set minimum wages for state employees. As I discuss below, there is at least some question as to whether Garcia continues to be good law, but even assuming it is, it plainly does not apply here for several reasons.

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    First, the goal of Garcia, to equalize wages in the public and private sectors, has no applicability here when the sole focus of the ''wage controls'' is on a single class of attorneys representing states in a single category of cases—medicaid type tobacco litigation. It is one thing for the Court to uphold wage rules imposed on states as part of the general regulatory scheme, but it is quite another to insist that states limit their spending for only a single category of attorneys' fees without regulating the state or anyone else in any other payments for lawyers.

    More importantly, however, there are three recent decisions of the Supreme Court, all of which make clear that a majority of the current Court sees state sovereignty as a very important concept, and it is unlikely to allow interference with states rights except in the most extraordinary circumstances. While the facts and laws at issue in each of the three cases are distinguishable from those that will be presented in a challenge to H.R. 2740, all three of them stand for the proposition that the interests of the states will be zealously protected by the Supreme Court. See Gregory v. Ashcroft, 501 U.S. 452 (1991); New York v. United States, 505 U.S. 144 (1992), and Printz v. United States, 117 S.Ct. 2365 (1997).

    Two aspects of H.R. 2740 stand out and strongly suggest that the Court would find it unconstitutional under the Tenth Amendment. First, there is a powerful state interest in deciding for itself whether and on what terms and conditions it wants to employ outside counsel of its choosing, to be governed by state law, in actions to recover vast sums of money for the state treasury, in a situation involving extremely high risk of non-recovery. In contrast with the interest in Printz, where the Brady law required only that law enforcement officers conduct background checks in order to determine whether applicants who purchased hand-guns might be disqualified from doing so, the interest of the state here is far greater. Indeed, in Printz, there were no penalties if a state official failed to comply with federal law, and the provision was an interim measure lasting only a few years until the more comprehensive federal system could be put in place. In fact, the burden was so minimal that most state officers were complying with the law, yet the Supreme Court struck it down. The massive interference with state contracting rights here would be far harder to justify than the minimal intrusion in Printz.
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    Second, the federal interest in telling states that they should pay less for their legal fees than the states have willingly agreed to do is difficult to discern if it exists at all. The decision to bring these cases was made entirely by the states with no support or involvement of the federal government whatsoever. To be sure, the federal government has now claimed a subrogation right to some of these funds, and the existence of these massive payments to the states may enable the federal government to reduce its medicaid payments in the future, but those are hardly the kind of federal justifications that were found in the minimum wage statutes in Garcia, in the anti-age discrimination provisions in Ashcroft, in the control of radioactive materials in New York, or in the prevention of a felon from obtaining guns in Printz.

    By contrast, the federal interest in diverting payments from attorneys to the states is itself a cause of suspicion, as I will argue in the next section of this testimony, and not the kind of justification needed under the Tenth Amendment. In fact, if the saving of federal dollars were an appropriate justification, that would have been enough to sustain the laws in both New York and Printz when in fact the basis for the Court striking down these laws was that the Congress was attempting to commandeer states into doing things which, if they needed to be done at all, should have been done and paid for by the federal government. Put another way, the most likely justification for this law—its economic benefits from depriving attorneys of a large portion of their fees—only underscores its inappropriateness and its unconstitutionality under the Tenth Amendment.

    H.R. 2740 also violates the rights of the attorneys whose contracts would be abrogated because of the Takings Clause of the Fifth Amendment to the Constitution, which forbids the taking of private property without just compensation. It is clear that, had a state tried to pass a law such as this, which in effect voids an existing contract between the state and attorneys for the state, there would be no question that it would violate the Contracts Clause of the Constitution. The only question is whether Congress can do this without violating the Takings Clause which is intended to achieve similar ends: to prevent the government from interfering with property rights, including those protected by contract. See E.P. Concrete Pipe & Products of Calif., Inc. v. Construction Laborers Pension Trust, 508 U.S. 602, 642 (1993).
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    At the outset, it is important to note that this is not a situation in which the United States has disclaimed all economic interest in the results of H.R. 2740. As noted above, the United States has formally notified the states that it is seeking subrogation for its share of the medicaid payments that states will receive though their tobacco settlements. If the states have to pay out 25% in attorneys' fees, for example, there will be less for the federal government to receive back. Similarly, even if the subrogation argument were not present, the massive influx of tobacco money into the state coffers will undoubtedly cause some in Congress to question the level of medicaid and/or other funding that the states will receive from the federal government in future years, thereby creating a second economic incentive for Congress to take money from attorneys and nominally give it to the states. In short, the United States is hardly an innocent bystander with respect to the outcome of any dispute between lawyers and states over attorneys' fees in the tobacco settlement. Second, this is not a typical regulatory statute of the kind that have been unsuccessfully challenged under the Takings Clause. Most obviously, it ''regulates'' only past conduct and does not deal with future relations, which is the hallmark of virtually all regulatory statutes. It does not say that henceforth all attorneys fees shall be set at the rate of $150 an hour, nor does it even do that for lawsuits against tobacco companies generally or even those brought by the states in the future. It simply says that, with respect to lawsuits that have already been concluded, the fee can be no more than $150 an hour.

    Third, unlike the other regulatory cases, where there are normally benefits as well as costs imposed on those who are complaining about the legislation, here all of the costs are imposed on the attorneys, and they receive no benefits whatsoever from this or any other legislation. Consider Mississippi where the case has already been fully resolved, and there is nothing left for the federal government to do. Under this legislation, attorneys will have their fees drastically reduced (and there is no doubt that this will occur since that is the very purpose of the law) with no conceivable benefit of any kind accruing to them. We know of no such one-sided statute, let alone one that acts only retrospectively. Particularly given the clear statement of the purpose of the legislation both in the law itself and in the Dear Colleague letter from its sponsors—to transfer money from the attorneys to the states—and given the economic interest of the federal government in enlarging the pot for the states, this is a classic case of taking of private property without any compensation, let alone just compensation. As such, it cannot be defended under the notion that it is the kind of regulation to which attorneys and others are regularly subjected under our system of government. Therefore, H.R. 2740 would almost certainly fall as an unconstitutional taking.
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The Bill Is Also Unwise

    In addition to the lack of necessity and the almost insurmountable constitutional problems, H.R. 2740 should be rejected because it embodies bad public policy. The lack of wisdom in H.R. 2740 can be illustrated by changing its provisions slightly, making it applicable only to future cases, only to those brought by states against the tobacco industry, and only for those fees paid by states to their lawyers. Why would any legislature, Congress or otherwise, pass such a limited measure? Why would it be limited to suits brought by states, and why would it be limited to suits against the tobacco industry? And if the cost of tobacco litigation is the problem, why does it deal only with fees paid by the plaintiffs' lawyers and not those paid to defense counsel? And why only lawyers? There were many other high priced professionals, such as doctors, scientist, and economists, who were paid very handsomely by both sides in these cases, yet they are escaping all price controls.

    Second, why $150 an hour now rather than $100 or $50, all of which are multipliers of the $12.14 per hour wage earned by the average working person in the United States, cited by the sponsors of this legislation in their Dear Colleague letter? If the objective is to put as much money as possible into the hands of the states and take as much as possible out of the hands of lawyers, what is the limiting principle that led to the $150 an hour figure? Surely, it cannot be that it is the figure which is representative of what the trial bar would command for handling a case like this, even if the fees were paid in advance and without any contingency. Surely, the $150 per hour rate is far less than what defense counsel are paid, and they are paid regularly and their expenses promptly reimbursed, with no risk of nonpayment whatsoever. It is inconceivable that anyone would take on a case of this magnitude, with this risk, knowing that the maximum recovery was $150 an hour, particularly when overhead, including cost of paying associates, secretaries and paralegals, would likely consume most of that rate, leaving very little for the attorneys who are running the case.
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    We wish to be clear that, although we think that the $150 an hour fee is wholly unreasonable, that is not the principal basis for our concern. We would also be opposing this legislation if the fee were $500 or $1500 an hour. The reason is that it is not the role of the federal government to replace the marketplace in the absence of the most compelling circumstances, and surely no one has made a case for mandatory price controls only for plaintiffs' lawyers in tobacco litigation brought by states. Federal intervention in this manner is particularly inappropriate because H.R. 2740 would compel the attorneys to justify their fees based on the hours spent, and most if not all of these attorneys did not maintain the necessary records, in large part because their agreements with the state were on a percentage of recovery, not hourly basis. As a result, they may be able to recover no fees at all if the substantiation requirement is strictly followed.

    We also wish to be clear that we are taking no position on whether the fees either in the contracts themselves or those which might be awarded as a result of an arbitration or court proceeding are in any way proper. In our experience, defendants all too often are willing to pay fees far in excess of what is reasonable simply to get rid of troubling cases, and we have no reason to doubt that the tobacco industry is any different from other defendants in this regard.

    In our view, the proper way to decide whether the fees being sought are excessive is not through a legislative proceeding in Congress, but in the ordinary course of proceedings in the courts where fee matters are regularly handled under the usual rules described above. Only after the fee applications have been fully set forth on the record, and the justifications for the amounts sought been made clear, would we or anyone else be in a position to make a determination as to whether the amounts sought are proper. The only thing of which we are certain is that the Congress of the United States is not the appropriate place for that determination to be made for the fees in this or any other case.
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    H.R. 2740 is a rare statute for which there is no need, which has major constitutional flaws, and whose policies are unwise on their own. Any one of these reasons would be sufficient to reject H.R. 2740, and in combination they should clearly produce its demise. Moreover, its supporters defend it only as part of a larger tobacco deal which also should be rejected. In short, Congress has no business upsetting settled expectations of contractual relations between states and their attorneys in tobacco litigation or in any other matter. If there is a problem, the states and the courts can handle it. H.R. 2740 should be promptly rejected by this Committee, and nothing further should be heard from it.

    Thank you Mr. Chairman, and we stand ready to assist the Committee further.


    Mr. COBLE. Mr. Wise, how would you define the counsel which would be entitled to petition the arbitration panel; would it be limited to counsel of record in the State attorney general cases, or one of the private class action suits by the agreement? Would it include, on the other hand, attorneys in the lawsuits where the issue is the power of the Food and Drug Administration to regulate nicotine? Would it include counsel, for example, at any other tobacco-related litigation or counsel who have played only an advocacy role? Where do you draw the line?

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    Mr. WISE. That is, of course, a very good question, Mr. Chairman, and the line has not yet been drawn with precision. But I would say you would have to understand that the concept comes out of this negotiation. It was fundamentally addressed to the demands of the attorneys general and their lawsuits and the private class action bar and their lawsuits against the industry, and primarily those are the cases that are being settled or would be settled by the implementation of this national resolution.

    Beyond that, I think the parties contemplate that the three members of the panel would have some discretion to hear claims from other people who had arguments about why they should be entitled to a fee, but we haven't attempted to have a negotiation to define, you know, in a long written document who would be in that category of people. So that is the answer. I think it is principally the people involved in the AG cases and the class cases.

    Mr. COBLE. Mr. Scruggs, it has been reported by the press and others, perhaps, that your firm would have an agreement whereby you would recover 46 percent of whatever fee is finally set in the Florida case; is that correct thus far?

    Mr. SCRUGGS. On its face, Mr. Chairman, it would say 46 percent. Actually, it is more like 31 percent because of other associations.

    Mr. COBLE. Well, under your contingency fee agreement, outside counsel would be entitled to 25 percent of the $11.3 billion settlement, so your two firms then would stand to gain 1.29 billion of the 2.8 billion total fee if the contingency is enforced.

    Now, you have indicated, or at least it is my belief that you have indicated, that rather than insist to go on forcing that contract or agreement, you would be willing to be paid under the arbitration route. Now, that is a heap of money that you appear to be maybe giving up. Are you doing that out of the goodness of your heart, Mr. Scruggs? And I am not being cute about that, but are you being a good team player, thinking let's let the arbitrators take care of this?
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    Mr. SCRUGGS. Mr. Chairman, when we launched this litigation in Mississippi, and Mississippi being the first State to file in 1994, we didn't have any contract with the State of Mississippi. The agreement was that the Court would award attorneys' fees and ask the tobacco industry to pay it. That is it. There was no piece of paper in writing or anything else, just a complaint in the lawsuit that said that.

    We are willing to take that risk on the very first case, and we are willing to take that risk on all subsequent cases. It may indeed result, if you simply apply the contingency fee, and take our percentage of whatever the fee would be, in the sort of money you are talking about. We are willing, and we will strongly urge our colleagues in every State, to use the arbitration panel to set their fees, even if it means the loss of money, if we are willing to accept and abide by the resolution of the arbitration panel.

    Mr. COBLE. I thank you, sir.

    Mr. Brickman, what are the consequences of allowing a private contractual arrangement to trump the ability of the Congress to regulate commerce? And I guess I can make that a two-prong question and maybe say one of the consequences of permitting the Congress, as it goes about regulating commerce, to trump an agreement otherwise entered into by private parties in a willing, negotiating exercise.

    Mr. BRICKMAN. Actually, that issue has been addressed by the United States Supreme Court on a number of occasions, and the Court has noted that in an area where Congress has the authority to legislate, the fact that parties have entered into agreements that would seek to insulate themselves from congressional regulation is not a basis for depriving the Congress of any of its enumerated rights under the Constitution. So that precise issue has been addressed by the Supreme Court. It responded by saying private contactual action prior to congressional legislation does not diminish congressional power one iota.
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    Mr. COBLE. Mr. Morrison, you believe, and I think I am using your word, that the defense attorneys and plaintiffs' attorneys in class—well, there is the red light, but I beat it, so I will go ahead and ask the question—that plaintiffs' attorneys and defense attorneys in class action suits have become too cozy. Now, if this is so, and it may well be so, if this is so, Mr. Morrison, would that not be justification for Federal preemption of private compensation agreements pertaining to the global settlement?

    Mr. MORRISON. Mr. Chairman, I have said that they are too cozy, I believe they are too cozy, and they may even have been too cozy here. My point is that existing means, the court system and/or independent arbitrators operating under the existing law of the jurisdiction where the fees are earned, are adequate to control excessive fees.

    We are coming into these cases, in many situations, because there is nobody there to represent the absent class members. I can assure you if these cases go to arbitration, there are going to be lots of people coming in to express the views of the citizens of Mississippi, Florida, Texas or wherever else known, and that is a protection already there.

    If I may, in just 1 second, respond to the question you asked Mr. Brickman. I know of no case in which Congress's authority to regulate attorneys' fees extends backwards to cases that are concluded, fee agreements that are already entered into. There is no question that Congress could regulate fees in the future for matters affecting interstate commerce, and that is the retrospective/perspective difference that I believe is going to be significant in this case.

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    Mr. COBLE. Thank you, gentlemen. The red light appears, so I will yield to the gentlemen from Massachusetts and recognize Mr. Frank.

    Mr. FRANK. First a factual question from me. Will you people explain to me what happens in the States which you have already concluded settlements with, Florida and Mississippi, if we pass a global settlement—because we can obviously change it, but if we were to pass the proposal that has been adopted, would that preempt the Florida and Mississippi settlements; would they then fold into the national one, Mr. Scruggs?

    Mr. SCRUGGS. Congressman Frank, it generally would preempt the State-by-State settlements in Mississippi and Florida.

    Mr. FRANK. What is ''generally''?

    Mr. SCRUGGS. I think it means if an arbitration panel is set up under the——

    Mr. FRANK. No, I meant the whole thing. I am persuaded, at least initially, that if, in fact, we don't get a global settlement, and I guess if there is consensus with the sponsors, it is really none of our business, we may dislike some of the fees, but cannot affect them, but if, in fact, what we have is a national settlement that is negotiated and legislated, I think that our ability is greater. My question would be how does that interact if the two States have their own settlements, and they would be folded in the way the bill now——

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    Mr. SCRUGGS. That is correct.

    Mr. FRANK. Because then that does seem to me—the question is what is the operation, what is giving effect to it, and it does seem to me that we are giving effect to it.

    I guess I would ask Mr. Morrison this, on the constitutional issue now, if what we have is Congress using its legislative powers to effectuate a deal, and it is doing things that only Congress could do, and Congress is allocating benefits and costs throughout the system, because that is what the deal would do, you get this money, you get the right not to be sued, this, that and the other, what would be unconstitutional in that context about regulating the fees?

    Mr. MORRISON. Well, you have to start by asking two questions: What is the congressional basis for the particular part of the legislation, for future regulation of tobacco products? The question is what is Congress's basis for settling these prior lawsuits that are already out there for commerce that has already taken place? Mr. Brickman does not defend the control over attorneys' fees——

    Mr. FRANK. Excuse me, Mr. Morrison, do I look like Mr. Brickman? Why don't you answer my question.

    Mr. MORRISON. I am trying to figure out the basis you are——

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    Mr. FRANK. I will tell you the basis. Excuse me, if I didn't make the question clear. I will tell you, it is this: Congress has jurisdiction over the question of interstate commerce and public health and a few other things, and public health is clearly one of the things we have legislated on and commerce, and we have decided to do a global bill in which gains are offset by penalties. And my issue then is a question of occupying the whole field. What we would be saying is for this to make sense, we are going to balance off this and that. We are limiting your right to sue. I know you are not for it, but that would be what the legislation would be, traditionally a State issue, saying you can't bring the suits, you get an exemption from this kind of liability, you get this amount of money. And it is in that context—well, do you think we have the power to do everything but fix attorneys' fees, constitutionally?

    Mr. MORRISON. No, but I don't want to rest my answer on that ground. It seems to me that using the word ''global'' doesn't give you power over each element of the settlement agreement and the deal.

    Mr. FRANK. But you really believe that other elements are unconstitutional as well.

    Mr. MORRISON. I do.

    Mr. FRANK. What else in the settlement—because I think this is directly relevant—what else would you think is unconstitutional?

    I must say, I won't go for the advertising restrictions. I believe the first amendment provides the right for rotten people to do despicable things, as long as they do them in writing and orally. I don't mean to suggest that is the tobacco industry, people do worse, but other than advertising, what would be unconstitutional in the proposed overall settlement?
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    Mr. MORRISON. I think it is very highly questionable whether the Congress of the United States has the authority to tell the State of Minnesota, for example, that it cannot continue with its lawsuit against the tobacco industry if Minnesota wants to do it. I think the most serious 10th amendment questions arise.

    Mr. FRANK. I agree with that, and I do think those come together, it is true. If we don't have the right to tell them that they can't entertain liability suits——

    Mr. MORRISON. They can't continue existing ones.

    Mr. FRANK. Yes, then we can't deal with the fees. But I don't see that if everything else is constitutional, including the fee regulations, particularly since what we would be saying was we have preempted your settlement process. The fee, I assume, was based on the assumption this was going to be settled in State court, wasn't it, or at the State level? Are you arguing that?

    Mr. MORRISON. It's assumed that most fee agreements talk about a percentage of the recovery, whether through settlement, judgment or otherwise; it is fairly standard language.

    Mr. FRANK. But it is probably not explicit. I guess, is there anything explicit that says—and this also covers an act of Congress, which preempts the lawsuits.
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    Mr. MORRISON. I have not seen most of the agreements. I would be shocked if——

    Mr. FRANK. Let me ask, I just have a couple other questions. Mr. Wise, one logical thing occurs to me. How much are you making? I mean, if we are going to get comparisons and we are being asked what is fair and what is not fair, you are representing the other side in this. How much do you make?

    Mr. WISE. You mean in terms of an hourly number, Congressman, or for the year, or what is on the tax return?

    Mr. FRANK. Well, what would be comparable? If you were for an hourly limitation here, what would you—what is your hourly billing?

    Mr. WISE. My hourly rate is around $500 an hour.

    Mr. FRANK. Last question, if I could, Mr. Chairman. Can someone tell me on the arbitration panel what are the terms—is the arbitration panel governed by any set of rules with the settlement; are they in the agreement or the settlement, because it seems to me the terms of reference are obviously very critical as to what is in the arbitration panel. What are the terms of reference? Are they set out somewhere, or will they be set out in the bill?

    Mr. SCRUGGS. Congressman, I think the ABA canons would pretty much govern what the standard would be for awarding attorneys' fees. There is a list of considerations; being risk; there is time, novelty and skill of the lawyers, various things like that that would be used as a guideline for the panel to judge any fee application.
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    Mr. FRANK. Anybody else? Does anyone else want to answer?

    Thank you.

    Mr. COBLE. Thank you. I thank the gentleman from Massachusetts.

    The gentleman from Indiana.

    Mr. PEASE. Thank you, Mr. Chairman.

    Mr. Wise, you testified earlier that you, the industry, made a decision that you did not want to be in the position of determining what attorneys' fees should be or how much was going to be paid in attorneys' fees.

    Let me backtrack. I have been involved in settlement negotiations, which usually do include how much is going to be paid in attorneys' fees. Why was that not done in this case?

    Mr. WISE. I think the companies in the industry knew that this would be a controversial area of the overall resolution, and they did not want to be in a position where the criticism of Mr. Morrison, perhaps, would be even more vehement and acute in the sense that he could accuse the industry of being in some sort of friendly relationship with counsel on the other side of the negotiating table. So I think it was wise of the companies to take the point of view that whatever process was put forward, it was going to be a process that was going to be independent of the companies.
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    The usual case, at least in the usual class case, there is the judge, in any case, who would oversee and actually make a determination about whether he thought a fee request was fair and reasonable, and whatever negotiation occurs among the private parties to the case, at least there is that overall supervisory role of an independent judicial officer. That was really not available to us in this instance, since we had so many cases. To the extent there were class cases, there were too many to deal with on a case-by-case basis, and the industry did not want to be in the position of negotiating one by one with each attorney general whatever he thought was the appropriate level of compensation for his outside counsel.

    Mr. PEASE. I understand that. It just appears to me—I assume one of the reasons for settlement is to bring some certainty to what is otherwise an uncertain situation, and you have left a big uncertainty, and I am having trouble understanding why.

    Mr. WISE. Well, that is the cost of taking this approach. We did try to address that with this cap structure that the financial people at the companies could at least look at that and say no matter what level of magnitude we are having to deal with here, depending on what the panel might do, it won't be any more than this number on an annual basis, and that was adequate for them.

    Mr. PEASE. I appreciate that.

    Mr. Brickman, Congressman McInnis did give me your statement, which was included in our materials, and I have just scanned it quickly. One of the things that appears there is that you question whether the fees here were sufficiently contingent to use that as a benchmark for determination in this case. How do you draw that conclusion?
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    Mr. BRICKMAN. In dealing with specific contingency fee agreements negotiated by various State attorneys' general, I concluded that some of them did not reflect the degree of risk that appeared to be evident at the time, because these were second and third and fourth tranche sets of agreements. To be sure, the first set of agreements involved the greatest degree of risk because these were the pioneers; these were steps that were taken at a time when the possibility of awards recoveries was least likely. So it appeared to me, looking at most of the contingency fee agreements, that while some did reflect the diminished amounts of risk, that others did not, and I have no way of knowing what was behind the negotiation of some of those agreements.

    I also concluded that they did not reflect some of the economies of scale that would be true if there were any litigation. Also, they did not reflect the fact that if there were litigations, and some of these cases went to trial, and they either won or lost, that would have a significant impact on the risk equation with regard to subsequent State litigation. If the first set of cases won, obviously that would put the industry in a much weaker position and would likely lead them to settle subsequent cases. If the first set of cases lost, if the first two or three or four State litigations lost, the likelihood there would be subsequent litigations would be exceedingly diminished, in which case the attorneys in those subsequent cases would not likely proceed with those litigations, so there was a cutoff, if you will, a bottom limit, to the risk that they were really assuming.

    Mr. PEASE. One follow-up, Mr. Chairman. I appreciate that.

    Perhaps it is because I don't follow this regularly, and perhaps it is because my brother works for a subsidiary of Texaco, but the only other case I can think of recently where there has been a question about the size of attorney fees paid on a contingent basis was the Texas Pennzoil litigation.
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    Can you compare—I realize this may be subjective, or if there is an objective way to do it—compare the risk that was assumed in that contingency fee, where the fees ended up being close to a half a billion dollars paid to attorneys.

    Mr. BRICKMAN. The reports I have seen about the Joe Jamail fee, is that it was somewhere in the range of 300 to $400 million, but let's not quibble. The degree of risk at the time of the outset of that litigation had to be as great as any case that you could possibly imagine. Under New York law, which was, in theory, the applicable law, there likely was no basis for a successful outcome, and so when Mr. Jamail took on this case, I would suggest to you that it was at least as risky, if not more so, than the initial set of representations in the tobacco litigation.

    Mr. FRANK. Don't they take off points for a Texas jury, though, in the risk analysis?

    Mr. BRICKMAN. You add some, and you take some depending on the presiding judge and who has most filled his campaign coffers.

    Mr. COBLE. I thank the gentleman.

    The gentleman from Utah is recognized for 5 minutes.

    Mr. CANNON. Thank you, Mr. Chairman.

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    Mr. Scruggs, you mentioned in your testimony that the tobacco industry legal fees are about $600 million a year. That is one of those numbers that has been kicked around a little bit. I wonder if you can tell me what the number means, where it comes from, so we can get a handle on that.

    Mr. SCRUGGS. I can't cite you to a specific reference, but that is a number that has been used in various publications as to the annual attorneys' fees bill the tobacco industry has been paying. I think it would be only fair to say the most serious legal threat to the tobacco industry is represented by these State lawsuits, and what percentage of that 600 or more, and the articles I have seen are upwards of $600 million a year, and maybe Mr. Wise can give you more information than that, but I would suggest, that a significant amount, if not the majority of that money, went into the defense of these cases.

    Mr. CANNON. You suggested the majority of the 600 million, therefore, the majority of that 600 million, would disappear as a cost to the tobacco industry if they entered into the settlement?

    Mr. SCRUGGS. I think a significant portion of their attorneys' fee problem, at least in terms of dealing with threatening litigation like the State cases represented, would disappear.

    Mr. CANNON. Mr. Wise, do you have an opinion—600 million seems to me to be off by maybe a factor of 10.

    Mr. WISE. I don't know that there is any reliable available information from the industry, in fact I don't think there is, on what the industry's defense costs are. I don't think the companies talk about that among themselves, and I don't think there is any reliable way to estimate it, but I think it is reasonable to assume it is quite substantial. I mean, these companies are facing hundreds and hundreds of lawsuits across the United States, so it is not an insignificant number.
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    Mr. CANNON. And when you say ''substantial,'' can you give us an order of magnitude? Is 600 million in the ballpark?

    Mr. WISE. I don't know the answer to that.

    Mr. CANNON. Let me shift gears. Mr. Scruggs, if someone in your association can get us those figures, I mean, if you had everything like contracts that are unrelated, I would like to get a sense of what the magnitude is as it relates to this lawsuit and what we clean out of the court systems and otherwise solve.

    Let me follow up with another question, Mr. Scruggs. Ever since I was a child, I just hated the story of the Pied Piper because the guy got ripped off, you know, and bad things happen to you when you rip people off.

    One of the things I am concerned about, and I don't want to go to the second half, which is that the rats left town, but to follow up the analogy just for a moment, it seems to me—I think everybody wants to be fair, but the rats aren't out of town, or the problem isn't solved, and still much of the burden has been borne by people other than the litigating attorneys in this situation. Don't you think that is a fair assessment?

    Mr. SCRUGGS. I would have to disagree that most of the rats aren't out of town. We have implemented in the settlement agreement virtually every countermeasure that any responsible public health official wanted to impose. If you look at what is contained in the settlement agreement and go back just 12 months, C. Everett Coop himself said that this was unimaginable just a year ago. You have this litigation as the lever that required this industry to submit to FDA jurisdiction.
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    Mr. CANNON. Let me just sort of define it a little bit. You had congressional hearings, among other things, which were a terrifically important part, leading up to the point where litigation really became more central. You had whistle-blowers involved in the system.

    Mr. SCRUGGS. And those whistle-blowers, Congressman, if I might interrupt, actually came out through our efforts. If you examine the history of this litigation, you will see that my law firm and several other law firms are primarily responsible for developing and using the whistle-blowers to a good effect, including Mr. LaBow.

    Mr. CANNON. Granted, there is a great deal of influence that the litigating attorneys had, but there is a lot of effort that was leading up to it. And, subsequently, now we are saying Congress or the tobacco companies will not enter into the settlement unless they have clarity about the down side thereafter, and that means Congress has to act. Does that not change your analogy of the Pied Piper to the guy who comes in, does it all, and then is cheated, to a more complex scenario?

    Mr. SCRUGGS. I am not presumptuous enough to say we did it all. I am presumptuous enough to say it wouldn't have happened, we would not be here today, if it were not for us.

    Mr. CANNON. Thank you.

    Mr. COBLE. Gentlemen, we appreciate you all being here. We will examine your statements again and again, I am sure. You have contributed very favorably, and we thank you for it.
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    The second panel I will introduce and ask them to come forward, if they will. The first witness on our second panel is Mr. Michael Moore, who is the attorney general for the State of Mississippi. Mr. Moore commenced litigation against the tobacco industry 3 years ago.

    Mr. FRANK. Excuse me, gentlemen, could you all leave quietly so we can get going? People ought to just be able to walk out of here without talking.

    Mr. COBLE. Yes, if we could have order while I am introducing the second panel. Let me start over because you may not have heard.

    The first witness is Mr. Michael Moore, who is the attorney general of the State of Mississippi, who initiated litigation against the tobacco industry 3 years ago. Our second witness is Joseph Rice, who is an attorney with the law firm of Ness, Motley, Loadholt, Richardson & Poole. Mr. Rice received his bachelor of science and law degrees from the University of South Carolina. Our next witness is C. Steven Yerrid, who is a trial attorney with Yerrid, Knopik & Mudano, representing the State of Florida in its landmark litigation against the tobacco industry. Mr. Yerrid received a bachelor of arts degree from Louisiana State University and a juris doctorate from Georgetown University. Our final witness on this panel is Dr. Jeffrey E. Harris, who is a physician and an economist. Dr. Harris is a primary care internist at the Massachusetts General Hospital and a professor at Massachusetts Institute of Technology, where he teaches macroeconomics, health economics and a freshman seminar entitled AIDS in the 21st century.

    We have written statements from all of the witnesses on this panel, and I ask unanimous consent to submit into the record their testimony in its entirety. I ask that all witnesses, again, if you will limit your remarks to 5 minutes.
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    The gentleman from Massachusetts.

    Mr. FRANK. The second unanimous consent to put in the record an article by Chris Cobak on contingency fees and a Congressional Research Service memorandum on this subject.

    Mr. COBLE. Without objection, they will be received into the record and, gentlemen, we are glad to have you with us.

    [The information follows:]


    Mr. COBLE. Mr. Moore.


    Mr. MOORE. Mr. Chairman, thank you very much for having us back here today. I have had the pleasure of testifying before a lot of congressional committees over the last few months in the Senate, and this is my second time before committees this week. I appreciate this opportunity because we didn't know we were going to get this much attention this year, and we are glad that many of you have lived up to your words to pay close attention to this tobacco settlement, because it is very important to the attorneys general, and, we think, to the American people.
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    In the interest of being brief, I want to just address some points that I do think were maybe mischaracterized a little bit in some of the opening statements. There is not a foolish person among the attorneys general of this country that I know, and matter of fact, we think the work the attorneys general have done over the last 4 years will inure to the benefit of not only those States who filed suits, but also those States who have not filed suits.

    For example, Mr. Bryant is not here today anymore, but what I have done in Mississippi is going to inure to the benefit of Tennessee, even though Tennessee did not file a lawsuit.

    Two points about attorneys' fees. You have to back up into 1993, when I made the first phone call to Mr. Scruggs and asked him to be part of this team. What I asked him to do at that time was to help me put together a team, put together the amount of money and resources it would take to take on an industry who had never paid out a penny to anybody, and to use a novel application of the law that there was not a single case precedent in America on. He was a little bit confused when I called him and wanted to do a little research, and after about a year's worth of research and investigation, we came up with what we thought was a novel theory that we could use to combat this industry. We put together a team, and the contract that I entered into is a handshake, no written contract.

    The contract that Mississippi entered into to begin this fight against the tobacco company was you lawyers on the other side, I want you to use all your resources, all your money, all your time, all your talents, and we are going to fight the tobacco companies to the very end. The only thing I ask of you is if you get in this fight with me, no matter how much money it costs or how long it takes, you can't ever give up. And I actually drew a line in my office and said, everyone who wants to take on this cause in that manner—it sounds kind of corny to you now, it was kind of corny back then, too, and there was a little hesitation on the other side of the room, I might tell you, but they all came across, one by one, some who had fought the industry before and lost, some who were new to this undertaking.
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    And you might imagine what I did is I found some lawyers who had the talents and resources, but I also found some lawyers who had some money, and some dedication, and some commitment and some perseverance, because that is what it took.

    What Mr. Scruggs and others probably didn't tell you was that every time there was a whistle-blower, Congressman McInnis, the whistle-blower came to Mississippi, whether it was Merill Williams, who brought out the Brown & Williamson documents—you remember those. Those are still the most damning documents against the tobacco industry that have ever been produced. We got those documents in Mississippi, and where did we bring them? We brought them to you. I hand-delivered them, Mr. Scruggs, and I brought them to the Commerce Committee, hand-delivered them to Chairman Waxman, and you have had hearings about them since then.

    Jeffrey Wygan. Who do you think defended him from all the lawsuits from Brown & Williamson Tobacco Company? Again, Mississippi, Mr. Scruggs; those lawyers who had a handshake with their attorney general to represent the State. And every single battle, almost to the exclusion of all others, was fought in our case down in Mississippi. It was 2 years before there were five States involved in this litigation, and the only reason we got States after that was we entered into negotiations with Liggett, and we enticed Liggett to work a deal with us, and we announced that in March of 1996. Then after that, during the next year, we were able to get 22 States by, I guess, February of 1997, and when word came out we were negotiating with the industry for a national settlement, of course we had many other States that got involved.

    You will see from the contingency fee agreements, from Florida, for example, that entered into a 25 percent contingency fee contract, Massachusetts is 25 percent, Minnesota is 25 percent, I will have to tell you, a State like Mississippi, and even a State like Massachusetts, we don't have the resources to take on an industry like this, so there is a tremendous amount of risk and a tremendous amount of work that the lawyers had to do. Now, if you are the last one on, if you are the last State to file, then maybe you didn't do quite as much work as others, so we got into negotiations with the industry, and we thought we had accomplished very much.
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    I had a case pending in Mississippi 2 weeks from the date that the final settlement agreement was announced, so I had two roles there. I wanted to craft a national resolution, and I also was getting ready for my trial, so what I was interested in is how we are going to resolve this issue.

    You might ask me, back in 1993, why didn't I enter into a contingency fee contract? The main reason is because I didn't want to listen to all this about attorneys' fees, and excuse me, but what happens in a fight like this that gets this much publicity is when you do so much good for the public health and the children, you don't want people to be focussed on how much lawyers are going to be making because, frankly, that is a hotly emotional and political issue and will take so much time out of the good you are doing, you waste yourself. So what I did is I entered into an agreement that wouldn't focus on that. The rest of the attorneys general in this country, most of them, had to enter into contingency contracts, and at the time they did so, they didn't do so foolishly, they did so with the best interest of the people that they represented.

    What you have before you is a result of what I think is courageous, noble, persevering work, the type that has never been replicated in this country before. So when you judge the lawyers, whether they are the ones who chase the rats out of town or not, when you judge the lawyers, judge them on the basis of what they began and took on in 1993. Don't judge them on what is here in 1997. We think we have done, in this settlement, more for the public good of this country than anything that has ever been done in history, and we are very, very proud of it. Thank you.

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    Mr. COBLE. Thank you, Mr. Moore.

    [The prepared statement of Mr. Moore follows:]


    Mr. Chairman and distinguished Members of Congress, I have been the Attorney General of Mississippi for the last ten years and was a District Attorney for ten years before that. I have spent most of my last 20 years in public service fighting substance abuse (illegal drugs, alcohol and tobacco).

    In the spring of 1993, we began a project in Mississippi that we felt had the potential to be the most important public health litigation in history. We planned to do what no one else had ever been able to do before: file suit against the tobacco industry to stop them from hooking our children, make them tell the truth about their product, make them pay the millions of dollars that our states were paying treating smoking related disease and punish them financially for all of those things.

    I remember our early discussions in 1993—I remember how most people thought we were crazy—no one gave us much of a chance for success at all! Since we are now in December of 1997 almost 4 years later, critiquing a $368.5 billion dollar settlement, it's very important that those who must review, amend, and improve our proposal know a little about where we started, what we went through, and how we got here today.

    1993 was a year for investigation, research, strategizing and prayerful reflection. Developing the novel legal theories which would eventually be successful was no small undertaking. What we were up against was an industry which paid their lawyers $600 million a year to defend ongoing litigation; they had never lost a case or paid out a penny to anyone. What I needed was a legal team that could match the skills of Big Tobacco's lawyers, have the resources in staffing and finances to fund the litigation and the commitment to stay in the fight no matter how tough it got or how long it took. There was no other way for me to take on such a case without the best outside help I could find.
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    My Governor was against the lawsuit and even sued me in our Supreme Court to stop it. The legislature would not make funds available for such an expensive and risky venture.

    By early 1994, we were ready to file our case and did so on May 23, about three and a half years ago. At the first hearing on our case, there were over sixty (60) lawyers representing the tobacco companies. I think we had three that day. We knew we needed other states to join us so that we could have as big an army as Big Tobacco. It was quite a struggle. After two (2) years there were only five (5) states, Mississippi, Florida, West Virginia, Minnesota, and Massachusetts.

    By February 1996, as we announced the Liggett I settlement, there were a total of six (6) states who had filed suit.

    By February of this year, when we announced the second Liggett Settlement, we had been able to persuade 22 states to join our efforts. When word leaked out about the possibility of a national settlement, our numbers began to grow more rapidly. Today we have 41 states involved.

    This has been a long and very difficult journey for Attorneys General and their legal teams. Against all odds, we are now on the verge of crafting a National Tobacco Policy that just a few years ago most thought was impossible.

    We have an opportunity to prevent millions of our children from becoming addicted to tobacco and the potential to save millions of American lives.
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    We knew early on in Mississippi that our opponents would attempt to direct the public eye away from the public health and children's issues and instead focus on emotional issues like attorneys' fees, tort reform, or simply that our case was bad for business.

    For that reason and others, I did not enter into a contingency fee agreement with my team of attorneys representing Mississippi. We simply asked the Court in our pleadings to award reasonable attorneys fees from the tobacco companies should we win. In the proposed national settlement, we followed an almost identical method of awarding attorneys' compensation. An independent panel composed of three members, one selected by the States and their lawyers, one by the Tobacco Companies, and one agreed upon by both sides would set the fee amount. Our contemplation was that all the teams of lawyers for the various states would make application with the panel. Attorneys' fees would be awarded on the basis of merit, risk, difficulty of work and other factors approved by the ABA and customarily used in awarding fees. The fees would then be paid over a period of time by the tobacco companies above and separate from any funds in the $368.5 billion proposed settlement.

    The Mississippi case, which was settled a couple weeks after the June 20 proposal, contemplates the exact method of determining attorneys' fees only on a Mississippi basis alone. We believe this is the fairest and most reasonable manner to handle this issue. All the attorneys on the Mississippi team have agreed to these terms.

    Most Attorneys General and their legal teams are also in agreement although there are a few exceptions. If the fees are handled in this manner the result will be an additional penalty on the tobacco companies and a further increase in the price of cigarettes, which public health experts agree will help lower teen smoking. The other benefit for the Federal and State governments is that the $368.5 billion settlement can all be used to improve the public health and protect our children.
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    The other scenario of a case by case approach would result in the contingency fees some ranging as high as 25%, depleting the amount available for our public health objectives.

    Some may argue for caps on attorneys' fees. This attempted abrogation of a states' right to contract would run into considerable constitutional challenge and in the end would probably violate the 10th Amendment, as well as the ''takings clause'' of the 5th Amendment, when applied to the facts here.

    The States have the right to enter into contingency fee contracts in these type cases and such contracts have been approved and accepted by the Federal Government.

    Having said that, it is still our intention that an independent panel be used to determine and award fees. The costs will be a fraction of what they would be if all the states' contingency fee contracts were honored.

    In closing, while attorneys' fees may be a hot, emotional and political issue, it should not be the focus of or divert attention away from one of the most important public health achievement in our nation's history.

    Mr. COBLE. Mr. Rice.

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    Mr. RICE. Thank you, sir.

    Mr. Chairman and members of the subcommittee, thank you for the opportunity to be here with you today. A young man from the Carolinas being on this congressional committee is unexpected.

    Mr. Chairman, I believe that a thoughtful, sober review of this issue will find that if Congress enacts the legislation that has been proposed, and takes no action on the legal fees, the attorneys who brought this complex litigation will be reasonably compensated, commensurate with the risk undertaken and the results achieved and at zero cost to the taxpayers. The money will come from the tobacco industry.

    To summarize the position of my law firm, Ness, Motley, Loadholt, Richardson & Poole, out of South Carolina, and I believe the overwhelming majority of the plaintiffs' attorneys involved in this litigation, first, our contracts with the States are reasonable arrangements between informed parties, under which our firms agreed to take 100 percent of the financial risk of this untested litigation on behalf of the taxpayers, and under which the contingency fees were set reflecting the risk involved at the time. In fact, in many instances, a contingency fee agreement is the only way the litigation could be brought on behalf of the State.

    Second—and if you will note, and I provided with my statement, the risk and the contingency fee amounts were changed as the litigation proceeded. As General Moore said, early in the litigation we had five States involved when we negotiated the Liggett I agreement in March of 1996. Then, by the time we reached March of 1997, we had approximately 20 States involved, and if you will watch the events, the contingency fee amounts changed as the risks were changing.
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    Second, despite the reasonableness of these contracts, given the new reality of the industry suddenly willing to settle on favorable terms, we have agreed, our firm, Mr. Scruggs' firm, have agreed in Mississippi, and I believe in Florida, to the alternative compensation process of the arbitration process, that of an impartial arbitration board to be convened to determine fair and appropriate fees under the actual facts of the State.

    And, third, every last penny won through the resolution is going to come from the tobacco industry and not from the money that the States would get. By going through the arbitration process that has been proposed in Mississippi, none of the money that Mississippi would get under the settlement that has been reached or under the global resolution would be used to pay attorneys.

    I have a statement, I have prepared it, it has been presented. I would like to answer a couple questions, real quick, that have been focused on.

    Defense fees, yes, the 600 million figure is the one that has been reported. Financial Times Business Reports, World Insurance Report, on June 27, 1997, and I quote, BAT's defense costs last year are thought to have come out to $1.6 billion in U.S., although in its statement to the World Insurance Report, it was told that the legal costs were self-insured. In the International Reinsurance Dispute Reporter, on April the 7th, 1997, it was stated, and I quote, although tobacco companies have not revealed their defense costs, they have been placed at $600 million per year. In the Guardian, which is the national magazine in London, March 12 of 1997, reporting on the second Liggett settlement, it says Liggett, the small American tobacco group, tabled the first ever financial concession by a cigarette maker in the 42-year saga, which sucks up something like $700 million dollars a year in defense costs alone.
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    So those numbers have been repeatedly reported in all of the financial journals and all of the analyses that have been done of the tobacco industry. And I believe that Gary Black, who has testified in some of the committees, also has done some studies on looking at the internal records of the tobacco companies.

    One other question that was asked of Mr. Scruggs regarding the impact of the global settlement as it relates to the Florida and Mississippi settlement. In the Florida and Mississippi settlements, they have provisions that could be superseded by the June 20th or a similar settlement, or an equivalent settlement. It would be the position, I believe, of the State of Florida, as well as the attorneys, that a congressional act that imposed a $150-an-hour attorneys' fee cap would not be an equivalent settlement to the June agreement and would not supersede the Florida settlement agreement.

    Also, the Florida settlement agreement would be superseded in the financial terms in that Florida would get what Congress allocated versus the 5.5 percent that was negotiated in the settlement itself. But the money that they have already received stands no matter what Congress did, and that same provision is true in Mississippi. Thank you.

    Mr. COBLE. Thank you, Mr. Rice.

    [The prepared statement of Mr. Rice follows:]


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    Mr. Chairman and members of the Subcommittee, thank you for the opportunity to testify on the proposed tobacco agreement and the issue of attorneys' fees. It is a privilege for an attorney born and raised in the small towns of the Carolinas to appear before a congressional hearing.

    Mr. Chairman, I believe that a thoughtful, sober review of this issue will find that if Congress enacts the historic legislation before it to protect children and the public health from the dangers of tobacco—and takes no action on legal fees—the attorneys who brought this complex litigation will be reasonably compensated commensurate with the risk undertaken and results achieved—and at zero cost to the taxpayer.

    To summarize the position of my firm, Ness, Motley, Loadholt, Richardson and Poole, and, I believe, the overwhelming majority of plaintiffs' bar:

 First, our contracts with the states are reasonable arrangements between informed parties under which our firms agreed to take on 100 percent of the financial risk of this untested litigation on behalf of the taxpayers, and under which contingency fees were set reflecting the risk involved at the time the litigation was brought. In fact, in many instances, a contingency fee arrangement was the only way in which the litigation could proceed. You will also note that over the course of time, as the litigation progressed and risks were reduced, contingency fees with the states dropped commensurately.

 Second, despite the intrinsic reasonableness of these contracts, given the new reality of a once-intransigent industry suddenly willing to settle on favorable terms to our clients, we have agreed in Mississippi and Florida to the alternative compensation process proposed by the tobacco industry—that an impartial arbitration panel be convened to determine fair and appropriate fees to private counsel.
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 Third, every last penny won through resolution of this litigation should compensate our clients—the taxpayers of the states that sued the tobacco industry. Legal fees should not come out of these damages—rather, they should be paid in addition, directly by industry.

    I believe these positions are consistent with the public interest and with accepted standards of legal ethics and practices.

    As you listen to the panels today and when you return next year to further consider the various legislative proposals to reduce tobacco use among children, I ask you to keep in mind the demanding and complex legal battles without which we never would have reached this point today. In particular, I ask you to step back in time to 1992. While just five years ago, it is an eternity in terms of the sea change that has occurred in tobacco litigation.

    In the world of 1992, the tobacco industry had never paid a penny to any party injured by its products. The tobacco industry had never been required by any governmental body to compensate a victim or pay damages to any individual or entity. Nor had the industry agreed to limit advertising targeted to children. Both by its legal tactics and its results in the courtroom, Big Tobacco was the proverbial 500 pound gorilla.

    As one tobacco industry attorney states in a memo dated April 29, 1988, and I quote:

  The aggressive posture we have taken regarding depositions and discovery in general continues to make these cases extremely burdensome and expensive for plaintiffs' lawyers, particularly sole practitioners. To paraphrase General Patton, the way we won these cases was not by spending all of Reynolds' money, but by making that other son-of-a-bitch spend all of his money.
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    At that time, the Ness, Motley firm—and most people thought we were crazy—decided to explore how to bring the tobacco companies to justice. We are a firm with 65 attorneys and a support staff of 400 based in offices in Charleston, Greenville and Barnwell, South Carolina; Raleigh, North Carolina; Providence, Rhode Island; and New Orleans. We had more than two decades of experience representing victims of toxic exposures in complex litigation. And we felt we could bring significant expertise and resources to bear in representing victims of tobacco exposure—though matched against a tobacco industry that spends $600 million annually on legal costs, we were still David compared with their Goliath.

    A small group of attorneys led by my partner, Ron Motley, and Richard Scruggs of the Scruggs, Millette firm, began meeting with other legal counsel, and with Mississippi Attorney General Mike Moore. Attorney General Moore had a deeply-held personal concern about the impact of tobacco on children—particularly the under-age marketing efforts epitomized by the macho man from Marlboro country and that cool cartoon, Joe Camel. He also had a fiscal concern about the drain on his state's treasury from treating victims of tobacco-related illness.

    Together, this group theorized that it was not fair for taxpayers to pay for the injury caused by tobacco, while these companies earned ever-higher profits from a product that is addictive and deadly. We also felt that litigation along these lines could be structured to help protect children from tobacco marketing and usage. Historical principles of law and equity were revived from the shelves of the law libraries. And on May 23, 1994, Attorney General Moore filed the first suit on behalf of a state against the tobacco industry—a suit that was widely described as hopeless, meritless, and even laughable. There were few supporters. No other state was willing to join us in the beginning.
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    Attorney General Moore's decision to bring this lawsuit that would change the world was made possible not only by the untested but innovative legal theories he developed in consultation with legal counsel—but also by the willingness of our firm, the Scruggs, Millette firm, and several others to pay the freight every step of the way. Our prospects for compensation were questionable at best. And I must tell you that there were not many people standing in line to undertake this battle back in 1993 and 1994.

    Similar to what transpired in Mississippi, when Lawton Chiles was elected governor of Florida, he came to office with a longstanding record in support of protecting children and the public health. He also was concerned about the burden on taxpayers imposed by health care costs rising at the rate of 20 percent a year. An analysis revealed one of the biggest causes—that the state was spending more than $400 million a year for tobacco-related injuries. It was this problem that caused Governor Chiles, Attorney General Bob Butterworth and the state to focus on the tobacco industry, and to enact the Recovery Statute. Florida then filed suit in February 1995.

    The contract between the state of Florida and the trial team is attached to this statement, but it deserves focus now:

  The State of Florida cannot handle this lawsuit on its own . . . it is expected to last two to five years. . . . The tobacco companies are known for their scorched earth litigation tactics, and can be anticipated to simultaneously do everything possible to drag out the litigation.

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  If the State handled it, the suit would take literally hundreds of lawyers and expend most of the State's legal resources. . . . In order to obtain taxpayer dollars without having the risk of losing taxpayer dollars, the State of Florida located the top lawyers in the state with experience pursuing similar actions and who would agree to aggressively pursue this case using their own money . . . [with] these lawyers taking the full risk.

  In light of the fact that the trial team is taking all of the risks, and the fact that not a single case of this nature has ever been won, the State of Florida has determined that it is not appropriate to place taxpayer dollars at risk.(see footnote 3)

    Please note as well, Ethical Consideration 2–20 of the Code of Professional Responsibility of the American Bar Association:

  Contingency fee arrangements . . . often, provide the only practical means by which one having a claim against another can economically afford, finance and obtain the services of a competent lawyer to prosecute his claim . . .

    And the courts have held that contingency fee contracts are as much for the benefit of the client as of the attorney.

    Indeed, contingency fee contracts are the ultimate form of ''pay for performance,'' a method of compensation for which this Congress, on other bills, has supported.

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    In this tobacco litigation, it was the dogged determination of the attorneys general and the willingness of the trial lawyers to take all the risks and work under contingency fee arrangements that brought the tobacco industry to the point of entering the settlements compensating the states of Mississippi and Florida, and the proposed Global Agreement.

    Given the enormous risks present in the original litigation, our contract with the State of Florida set contingency fees of 25 percent, as did Minnesota, another early state—a rate significantly lower than the commonly held stereotype about plaintiff attorney fee arrangements. But a review of the more than 30 agreements now in place demonstrate clearly that fee arrangements varied as more states filed suits and other law firms decided to join the fight. As the litigation advanced and its prospects for success grew, contingency fees declined concordantly, to a low of a flat $200,000 cap in one state.

    In fact, if all of the states paid legal counsel according to their contracts, under the terms of the June 20, 1997 proposal Global Agreement, aggregate attorneys' fees would not exceed 10 percent of the total money paid by the tobacco industry to all injured parties.

    Let me repeat—attorneys' fees would not exceed 10 percent of all compensation. And they would be paid by industry over and above that compensation.

    As you know, Mississippi and Florida are the first two states in which plaintiffs' counsel is to receive compensation. Under the process agreed to in Mississippi and proposed by the tobacco industry in Florida, which Ness, Motley has agreed to accept, the industry and private counsel would mutually select a neutral, non-political arbitration board. The arbitration board would be presented all relevant information concerning work done on behalf of the state, including the risks that were taken and the results achieved. The panel would determine what fair and reasonable amounts would fully compensate private counsel for the work performed. At the end of the day, the tobacco industry would accept the arbitration board's findings and pay the fees it sets. Under the industry's proposal, this process would be final and binding. That money would be paid out over a period of time, subject to an annual aggregate global cap.
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    In the Florida contract, it was clearly stated, ''The states will ask the court to require the tobacco companies to pay all the attorneys' fees and costs.'' With the industry paying these fees in addition to the settlement amounts it maximizes the recovery to our clients the states.

    It is my opinion that this proposal was accepted in Florida and was part of the basis for the ultimate settlement of the state's lawsuit. Unfortunately, others have disputed this issue and it is currently in litigation. Regardless of what may be said about the merits of the various sides, if my firm's position prevails, the state—and thus the taxpayers—will receive the most compensation possible under the agreement from the tobacco industry without having to worry about legal fees and the attorneys will be fairly compensated. And regardless of the ultimate outcome, without the work of all the private attorneys on the trial team and many others, we would not have a resolution of the Mississippi and Florida lawsuits, nor the Global Agreement before Congress.

    Let me also emphasize—my firm and others continue to assume significant risk. As we speak, plaintiffs' legal counsel are preparing Attorney General Morales in Texas, Attorney General Humphrey in Minnesota, and Attorney General Gregoire in Washington to bring their lawsuits to trial. If Congress chooses not to enact comprehensive tobacco litigation, and these and other state cases are not settled, it will all come down to what juries decide. And despite my confidence in the merits of our position, we all know that there is no such thing as a lock in the courtroom.

    To conclude, Mr. Chairman, the attorneys fee issue is the reasonable result of equitable and appropriate agreements between informed, consenting parties acting in the public interest.
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    Due largely to the work that resulted from these agreements, you and your distinguished colleagues have an unprecedented opportunity to save children's lives, and address America's number one public health problem—one which results in the premature death of 400,000 Americans annually and costs untold billions of dollars. I respectfully urge this Congress to keep its focus on the enormous public good that can be achieved through comprehensive tobacco legislation modeled on the June 20, 1997 Global Agreement.

    Speaking for my firm, we are extremely proud to have worked with
Attorney General Moore, Attorney General Butterworth, and the attorneys general of many other states in initiating this litigation and achieving a fair resolution that puts children and the public health first. And I am proud to have the opportunity to share my views on this issue with you and your subcommittee as you make vital decisions on these issues.

    Thank you again, Mr. Chairman, for your time and consideration.


    Mr. COBLE. Am I pronouncing your surname correctly, Mr. Yerrid? Is it Yerrid?

    Mr. YERRID. Yes, sir, that is correct. And Chairman Coble, it is a pleasure to be here today.

    Mr. COBLE. Mr. Yerrid, pardon me. My friend from Massachusetts assured me I didn't pronounce anything else correctly, why should I start with you. But it is the Yuletide season. I will hold him harmless for that.
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    Mr. YERRID. My late Lebanese father would be proud and thankful of your pronunciation, however, and I will say that I am privileged to be here.

    I do not mean to disparage any of my other colleagues. I heard with great interest the professor's remarks on how trial lawyers ought to be paid, and I come fresh from the courtroom. I have the distinction of being the only Floridian testifying before you today. I also have the distinction of representing the only State that has gone to trial against Big Tobacco.

    I would like to tell you a few things based not on hindsight, not on comments made by folks that probably are not as enlightened as I would like them to be, but things that I have learned through direct confrontation, being in the trenches, because I have attended hearings, and I have seen judges rule on hearings where there were more tobacco lawyers than there are people in attendance today. Now, if you just want to take $500 an hour and you want to extrapolate that out and get an idea of how many millions or billions of dollars the tobacco industry pays lawyers to defeat the people that take them on, that would be 350 cases plus, in the last 40 years, they have never lost.

    Florida is the only State Attorney General case where a jury has been sworn. We were in the third week of jury selection when they paid the money, and with all deference to Attorney General Moore, who I like very much personally, let me be very clear. One of the best whistle-blowers you can get is a trial lawyer who is a defendant himself. We argued the crime travel exception to the attorney-client privilege, which has long been asserted by the tobacco industry. The judge vitiated that privilege when he found that fraud and deceitful conduct bordering on criminal activity had occurred in the cigarette cartel. So those documents were more than a little useful and more than a little damaging to the tobacco industry.
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    But I digress. Let me just say that, first of all, let us talk about the notion of greed. I have heard it, my 10-year-old son has heard it, my family has heard it, everybody in my State has heard it, and I have just about heard enough. With all respect, Mr. Chairman and Members, when I was in law school, I had the privilege of working on the Senate side of this great, great body, and I will tell you that accuracy was always dealt with at a premium. At $150 an hour, with all respect, you would have to work 6,666.6 hours to get $1 million. No one, except a bionic person incapable of sleeping, making 72-hour days out of 24-hour days, could even come close to accomplishing that task. But if you extrapolated that same effort at $500 an hour—let's be fair. Or, do you want to talk about $150 an hour for people who save places, so the more accomplished or successful persons will have a seat.

    I usually represent the people without arms, the people without fathers and mothers, the people that are sick. Those are the people I usually have as clients. I don't usually have corporate institutions in America as clients, and I don't get any guarantee of $500 an hour. When I take a case, I look at the risks, I look at the rewards, and I always look, because both of my parents died from smoking-related illnesses, at the emotional heartache. I have to right wrongs.

    How many of you people can imagine an individual whose family got incinerated in a Ford motor vehicle, challenging Ford Motor Company with a $150-an-hour lawyer? How many people could even afford 1,000 hours at that rate, $150,000?

    There is something wrong when you walk across the street and see ''Equal Justice under Law,'' and you have a lawyer saying, well, you know, ''$150'' an hour isn't bad, that is a good hourly rate. Contingent fee lawyers don't look at hourly rates. They rarely keep time slips. What they look at is the cause. And in Florida I can tell you with all candor, we had the best of the best. They were hand-picked.
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    In reference to the $500 an hour calculation, because I know sound bites are very important sometimes, the 6,666.6 hours to set one million at $150 an hour would come to a total, over 25 years, of $83 million at $500 an hour.

    And I am sure the professor misspoke when he talked about the hundred top law firms and their gross revenue and then compared it with the outcome in this proposed litigation. First of all, the great professor would have to look at not 1 year, but 25 years of the gross incomes of those lawyers' law firms because that is the figure he is using to basically distort the attorneys' fees and the amount of recoveries that we are talking about. He takes a 1-year projection from the large law firms and then compares it to our 25-year total payment amount. It is called apples and oranges. But I will defer to my colleague here, Dr. Harris, to talk about real numbers.

    I was in Florida when I learned of the $50 billion tax credit. You learned of it much to your chagrin. I found out about the tax deduction big tobacco is going to take. Let me tell you what it comes down to. Whenever courts look at contracts between lawyers, contingent fee lawyers, with all respect, and Joe Jamail is a friend of mine, I am proud of the result he got, and I can't tell you that that case was any more difficult than this one, because everybody was laughing at us when we took this case. But I will tell you that the sanctity of a contract should be held among many things as inviolate. We did not contract with some greviously injured individual, like a quadriplegic, or some desperate uneducated individual. Instead, we dealt with the highest ranking legal official elected to office in our State. We dealt with him at arm's length and they entered a contract, an attorney fee contract, that has now been repudiated.
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    We do not agree with my respected colleagues here that we somehow gave up our contract rights to get into some backroom arbitration where big tobacco picks one arbitrator, somebody else picks another, a third is picked and then our fees are decided behind closed doors. Our contract was very clear. If I can get some questions, I can get some more time.

    But I will show you what the State of Florida acknowledged in our contract. Number one, they couldn't possibly bring the lawsuit unless they had the best of the best. Number two, it would take hundreds of their lawyers, their legal beagles, and they couldn't neglect the rest of the State's business. Number three, it was at our risk and our risk alone. Number four, if we lost, do you think I could have written a letter to Governor Chiles or General Butterworth and said, by the way, my 7-man law firm put up $500,000 of our money, in addition to the other $9.5 million my colleagues put up, and we'd like our money back because things didn't turn out too well for us, we lost. How long would it take for them to laugh us out of here?

    With all respect from you, Mr. Chairman, coming from North Carolina, the thing you said that most impressed me, the hat of objectivity. Now what are we going to do? Tell the lawyers that went to war, you did too well.

    I am glad someone mentioned the Pied Piper of Hamelin because I pulled that up. You know what the last phrase of that is? So Willy, let me and you be wipers of scores out with all men, especially pipers. And whether they pipe us free from rats or from mice, if we've promised them aught, let us keep our promise.

    The lesson there is not about rats and who the rats were, but I will say this. Talk about the Contract With America, the Republicans, with all respect, talk about the Frank Statement the tobacco industry gave the American public in 1954, and whether they kept their word when seven of their executives swore to God before Congressman Waxman that nicotine was not addictive and cigarettes did not cause cancer. You ask us now to go trust that cigarette cartel for our fees? And then you tell us, well, don't worry, they're going to keep their word for the next 25 years and let's use that figure as opposed to the real figure.
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    Gentlemen, with all respect, the real figure sits in a bank account in Tallahassee, Florida, and the real figure is 25% of $750 million, not billions of dollars. I am not going to tell my child, my fellow law partners, or any of our employees they ought to count on year 25 for the tobacco industry to keep its word because it would be the first time in history the industry honored a promise to the public. But I will say this: 25 percent of $750 million is all that is now at issue. Don't be deceived, Congressman, Judge Cohen said that 11 lawyers would divide a $2.8 billion fee. That fee is not something we could now ethically collect. It is from those numbers that you get that exorbitant hourly rate. Eleven lawyers? It was 11 law firms consisting of hundreds of people. Our entire fee right now that is due is only $187.5 million (25% of 750 million dollars). Is that unreasonable? Are you going to micromanage and abrogate our rights when lawyers contract with an enlightened client.? Thank you.

    Mr. COBLE. Thank you, Mr. Yerrid.

    [The prepared statement of Mr. Yerrid follows:]


    Dear Mr. Chairman and Distinguished Subcommittee Members: My name is C. Steven Yerrid, Esqire. I am a trial lawyer from Tampa, Florida and I am one of the eleven trial attorneys and law firms representing the State of Florida in its landmark litigation against the tobacco industry. On behalf of working families, the disabled, and those who cannot afford the best legal talent this country has to offer, I am honored to appear before you to discuss the issue of attorneys' fees in Florida's tobacco litigation. This issue is clearly one of importance to segments of American society far beyond the private attorneys, my home State, its elected public officials and the cigarette company executives who are currently embroiled in controversy.
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    Today, I speak from the position of an insider, one who has been intimately involved in the high stakes and hard fought public interest litigation against a foe commonly referred to as ''Big Tobacco.'' I am also an experienced trial lawyer who has tried numerous and significant cases for both corporate America and individual plaintiffs. (A copy of my background and credentials is attached as Exhibit ''A''.) In addressing the issue of attorneys' fees, I am also here to defend the contingency contract system and the equal access to justice that contingency fee lawyers provide. Consequently, the views I express today at the generous invitation of this esteemed subcommittee are born of real experience, not observations from the sideline or perspectives from tainted hindsight.

    My legal involvement in Florida's fight against the tobacco industry began in early 1995. At that time, I was one of several trial lawyers requested by the Governor and the Attorney General of the State of Florida to become part of a team of private attorneys retained to represent Florida in truly unique litigation. In that lawsuit, the citizens of our State would seek to recover from the tobacco industry the damages and public monies which the plague of tobacco addiction had visited upon the State's already diminishing public coffers. The State would pursue its claim using legal causes of action that included negligence, fraud, conspiracy and civil racketeering. The task to be undertaken was truly daunting. Florida would be utilizing newly-minted and untested legislation as well as common law theories and statutory civil remedies for criminal practices in a bid to recover billions of dollars from a well-financed and crafty cartel of industrialists who had never been successfully challenged for the damage they had wrought upon the American public.

    Facing such a foe, Florida's public officials openly admitted the State's financial and legal resources were entirely incapable of undertaking any legal challenge to Big Tobacco. The February, 1995 Contingent Fee Contract (''the Contract'') between the private lawyers and the State of Florida explicitly acknowledged by its own terms ''[t]he State of Florida cannot handle this lawsuit on its own.'' (A copy of that Contract is attached as Exhibit ''B''.)
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    Therefore, the State wisely sought a team of extremely talented and experienced trial lawyers, largely drawn from within Florida's borders, which (with my own humble exception) can clearly be called the best and brightest trial attorneys available in Florida or, to my mind, anywhere in the nation. Although charged with protecting the general welfare of our people, the State was incapable of independently performing this duty. The State's Contract with its private trial attorneys openly acknowledged both the enormity of the task and the breadth of the risk. Florida's Contract with the trial team could not have been more specific when it stated, ''in light of the fact that the trial team is taking all the risks, and the fact that not a single case of this nature has ever been won, the State of Florida has determined that it is not appropriate to place taxpayer dollars at such risk.''

    The State asked much of the trial team. The eleven law firms, comprised of nearly a hundred lawyers and hundreds of staff, shouldered enormous risk in taking on what was then viewed as, quite frankly, an almost insurmountable legal war. This select group of lawyers, paralegals, investigators, and other specialized staff recruited by the State of Florida were to organize, manage and deliver a ''never before achieved'' result.

    The only resources available to these lawyers in this struggle against well-financed tobacco companies were obliged to come from the lawyers themselves. There would be no help from the federal government and the lawyers could rely only on a supporting role from the State itself. Florida made its position clear (even as it eagerly welcomed the involvement of private counsel) that there would be no change orders and no contractor bailouts . . . we, as trial lawyers, were on our own.

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    By the time the case successfully settled two and one-half years later, the private attorneys retained by the State had expended over ten million dollars in out-of-pocket costs in accomplishing the gargantuan task. Hundreds of depositions had been taken and tens of thousands of documents had been produced. Among these papers were extremely incriminating and devastating admissions made by the tobacco industry. Later named the ''cigarette papers'', the described documentation became the source of widespread dissemination and appeared in medical libraries and texts, newspapers and magazines, as well as numerous health related publications. The ''age of awareness'' quickly transformed into the ''age of astonishment'' when evidence proved that the tobacco industry's decades-old knowledge had been intentionally concealed, distorted and perversely spun to the American public, legislators, regulators and even our medical communities.

    Under the governing Contract, we spent not only hard costs but also untold hours, days, weeks, months and years of professional time, advice and effort with absolutely no guarantee of any recovery of either the out-of-pocket monies or the work effort. Instead, the lawyers were to be compensated and reimbursed if and only if the case was successfully prosecuted. In other words, Florida retained the team of highly regarded lawyers to represent it on a purely contingent basis. The lawyers who signed the Florida Contingent Fee Contract and agreed to fight for Florida are the same lawyers who contractually agreed to be bound to spend their own net worth and lose everything if they lost. Is there any doubt the State would have scoffed at any request for even a dollar of costs had we lost? I think not. Contrary to the statements now made by certain elected officials, it was private counsel who took the entirety of the risk, not the State of Florida.

    The Contract between Florida and its private trial attorneys was the product of arms' length bargaining and was negotiated by representatives of the State who did not want to invest a penny of Florida's dollars. It was drafted by State officials, many of whom are practicing members of the Florida Bar. As previously mentioned, the agreement openly described the State's inability to mount an effective case against the cigarette companies without the financial and professional assistance of its private attorneys. More specifically, the Contract provided that the trial attorneys would receive twenty-five percent of any funds recovered from tobacco in this litigation—that is, out of every four dollars poured into State coffers as a result of the litigation, the State would receive fully three with only one going to the trial lawyers. The Contract was neither draped in secrecy nor opposed by anyone.
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    Frankly, it is my distinct recollection that the State of Florida was delighted to have obtained what it considered to be uniformly high caliber legal talent under such a ''no-risk'' arrangement. The law enabling such a contract was passed by the Florida Legislature in open session and authorized a thirty percent recovery. In fact, we agreed to a lower rate, twenty-five percent rather than thirty percent. It is also instructive to know that the lawyers who signed the Florida Contingent Fee Contract and agreed to fight for Florida specifically agreed to contribute monies from the attorneys' fees . . . ''toward health-related charities and organizations.''

    As is now well-known, the State of Florida's litigation against Big Tobacco was settled as it entered the third week of jury selection. Under the terms of the settlement, Florida may receive up to $11.3 billion over the next twenty-five years. This monetary recovery is coupled with important and sweeping injunctive relief which restricts Big Tobacco's advertising and sales tactics aimed at our youth.

    What are our efforts worth? I would note that, despite the hard work of my brethren in our sister states, Florida was the only state that had gone to trial. In the process, we developed a rock solid case for civil racketeering, and by 1997 many of us believed we were going to win, and win big. In addition to the billions earned, the other nonmonetary achievements will alter the future of public health in my State for generations. Moreover, thousands of pages of secret documents were brought into the public domain and others will be produced in the future. These documents along with the legal strategies and theories developed by our team will assist everyone in their battles against Big Tobacco and the ravages it has wrought.

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    Our own Governor and former United States Senator Lawton Chiles was fully aware of the ramifications of our Contingent Fee Contract when he testified under oath that the Florida trial team would receive twenty-five percent of the recovery thereby entitling the lawyers to hundreds of millions of dollars depending upon the range of the result. (A copy of excerpts of the Governor's sworn deposition testimony is attached as Exhibit ''C''.)

    Although there is the temptation now—after an undreamed of settlement has been reached—to revise history and claim that the risk facing the trial attorneys was not significant because a spectacular victory has been won, I know, as do all of the lawyers and public officials who are candid, that we were fighting an undefeated adversary with unlimited funds and resources. The tobacco companies themselves retained formidable legal talent and engaged in some of the most intense hardball litigation I have ever witnessed. The tobacco defendants clawed, fought and fought some more over virtually every scrap of paper and every ruling in the case.

    No more than three years ago did industry executives stand before this great House flouting their solemn oaths and brazenly telling you and the American public that nicotine was not addictive and smoking did not cause cancer. Despite what I will always believe is a landmark victory and a turning of the tide against tobacco addiction and the carnage it has caused and continues to cause in our country and elsewhere, media attention has now turned from the fruits of the victory and the nature of our opponent to a biased focus upon the lawyers who played such an invaluable role in the favorable result to be enjoyed by generations of Floridians. Now, in hindsight, those with little firsthand knowledge of the events readily characterize the lawyers who still await compensation as ''greedy.'' Still others attempt to recast the settlement proceeds as ''the money of the children of the State of Florida,'' thereby inexplicably suggesting that the very lawyers so instrumental in the State's victory are now somehow seeking to take money from our State's young people.
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    After the litigation commenced, I vividly remember one of the memoranda authored by RJR Nabisco Holding Corporation suggested that RJR won its cases ''not by spending all of RJR's money, but in making the other son of a bitch spend all of his.'' I remember those words even more keenly today. As I sit here, it appears the State of Florida is doing exactly what the tobacco defendants could not.

    And, still other critics suggest that because the lawyers representing the State of Florida all expressed a strong philosophical agreement with the State's purpose in pursuing the case, the lawyers should somehow expect either no compensation at all or compensation arbitrarily determined by some unknown, unnamed, faceless body which was neither a party to the attorneys' fee Contract nor a party to the lawsuit.

    All of these critics widely miss the mark. The contingent fee agreement has been and remains a vital tool in the American tort system for the righting of wrongs. It is second only to the principle of contracts . . . the honoring of a bond and a promise kept. Before there was such widespread lawyer bashing, much of which we ourselves have helped to create, I fondly remember the American tradition that ''a deal is a deal.'' Few in our society can afford attorneys whether the rate is $75.00 an hour or $275.00 per hour. An hourly rate attorney, no matter how inexpensive, is often of little value to the injured parties in these circumstances. There are too few attorneys who can (absent contingent fee arrangements) afford the significant risk of litigation against corporate wrongdoers because such litigation invariably requires substantial out-of-pocket sums of money and untold hours of attorney time.

    The contingent fee agreement has been and should remain the engine which helps to redress public and private wrongs, be it defective automobile design or the bane of addictive tobacco products which we challenge today. Of course, the contingent fee agreement has resulted in some portion of the legal profession enjoying significant wealth. But wealth among lawyers is not confined to those who practice in the contingent fee area. Flaws in the contingent fee system are present just as there are flaws in other aspects of our imperfect but still unparalleled American legal system.
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    Corporate America cannot be provided a tool to interfere with the tort system. If a corporate defendant knows that it is about to lose and lose in a significant way, it cannot be allowed to usurp the attorney-client relationship, go directly to the client and be able to promise the client a settlement award by cutting out the lawyer and his fee. Not only is this course of action by a corporate defendant a threat to the sanctity of a contract, but it also promises to dispossess lawyers of the ability to take risk and supply valuable legal services in a free market. I will not stand by and allow this economic tide to erode the protections that now exist for families and the financially unable.

    I refuse to participate in any scheme, regardless of the financial rewards, that will undermine the contingency contract system. I will never agree nor sanction any process whereby the client and the defendant agree to make a deal to the exclusion of the lawyers. Neither do I believe it appropriate to allow our legal fees to be held hostage for some overt political purpose. Instead, I prefer to rely on a written executed contract that specifically says how and when I will get paid.

    I would note that before freedom of speech, freedom of religion, freedom of the press, the right to bear arms, and the other constitutional rights we hold dear, the Continental Congress recognized the utmost importance in protecting contracts by embodying such protections in the Constitution itself. I also recognize that freedom of contract is at the foundation of our capitalist system.

    Rather than a focus for criticism of our tort system or contingent fee contracts, the result achieved in Florida is more correctly viewed as a paradigm for the tort system. At no taxpayer expense, an impervious corporate giant, killing four hundred-thousand Americans a year, was humbled. Instrumental in that result was a small and courageous group of trial lawyers who believed in the rightness of a cause, possessed the courage to take enormous risk, trusted in the integrity of the client, and were confident in the worth of their efforts. It is these very things which have given Americans an ability to propel our nation to greatness . . . both in the past, in the present, and, I pray, in the future. Given this reality, it is little wonder that corporate America now seeks to flatten the system and deprive the financially dispossessed of the opportunity to sue. Has so much changed since our profession drafted the United States Constitution?
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    Mr. COBLE. Dr. Harris.


    Dr. HARRIS. Mr. Chairman, thank you for inviting me to testify today. The views I express here are mine. They are not necessarily endorsed by MIT, the Massachusetts General Hospital or any other organization. I take no formal position on Mr. McInnis' bill, H.R. 2740. Instead my purpose is to help this committee determine whether and how to intervene in setting attorneys' fees.

    I have five main points. First, fees paid to private lawyers do not necessarily represent a cost to State governments. Tobacco manufacturers have the ability to pay attorneys' fees above and beyond the amounts to be paid to the States under the June 20, 1997, proposed nationwide settlement. In fact, the participating firms have already agreed to pay separately up to $500 million annually for attorneys' fees.

    In 1996, the parent companies of the participating tobacco manufacturers earned $15.9 billion before taxes. Moreover, tobacco manufacturers can and will raise prices to finance settlement payments. By my calculations, cigarette prices could rise by more than $2 per pack and continue to bring in substantial revenues, over $30 billion annually, that could be allocated to settlement payments, retained as profits, or paid out as attorneys' fees.
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    Second, a $150-per-hour ceiling on lawyers' fees as contemplated in H.R. 2740 may not adequately compensate private attorneys for having taken significant financial risks. To date, 40 States, as well as Puerto Rico and the cities of Los Angeles and San Francisco, have filed complaints against tobacco manufacturers. Among the filing States and Puerto Rico, my best information is that 33 have retained private counsel.

    In contracts between States and private lawyers, outside counsel have assumed most, if not all, costs of litigation but have agreed to be paid their costs and attorneys' fees only if the State recovers an award. These costs can be substantial. Responding to defendants' requests for production of documents, including the records of all transactions of all Medicaid recipients, by itself can cost hundreds of thousands, if not millions, of dollars. From a national sample of 98 large firms reported 2 days ago by the National Law Journal, I calculate that the median hourly rate for noncontingency work for partners and associates combined was $214.

    Third, a sound compensation system needs to reflect the fact that attorneys undertaking lawsuits filed 1 to 3 years prior to the settlement announcement on June 20, 1997, took substantially more risks than those who were retained later. This fact is clearly reflected in the prevailing contracts between States and private lawyers which I have examined individually. While the contingency fee was 25 percent in contracts with States that filed early, I compute that the median contingency rate was 12 percent for those States filing within 6 months of the settlement announcement and even lower for States filing after the announcement. Ten States' contracts, in fact, specify a sliding scale percentage based on the duration of the litigation. The rates of compensation written into these documents are the closest available approximations to the actual market values of the attorneys' services.
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    Fourth, I have computed each State's share of tobacco industry payments under a nationwide global settlement based upon three different criteria: The State's population, total State Medicaid expenditures, and State Medicaid expenditures due to illness caused by smoking.

    The States' shares vary substantially with the criterion used for apportioning payments. For example, the State of New York would receive approximately 7 percent under a population based rule and 16 percent under a Medicaid spending based rule. Based on each State's share of a nationwide settlement and contingency fee rates in the individual contracts with each State, I estimate that total private attorneys' fees would represent approximately 8 percent of total State receipts and 4 percent of total tobacco industry payments to all parties. The present discounted value of aggregate private plaintiff attorneys' fees under the proposed resolution of June 20, 1997, I compute would amount to approximately $8 billion over 25 years.

    Fifth, I computed attorney compensation based upon a uniformly applicable sliding scale contingency fee system in which I set the compensation rate at 25 percent for attorneys contracting at least 2 years before the settlement date going down to 1 percent for those contracting in the 6 months after the settlement announcement. Such a scheme would uniformly compensate all counsel for risk-taking and more closely adhere to the contracts negotiated by States and private counsel. For each $10 billion in industry payments to the States, I estimate under such an arrangement private counsel would receive approximately $700 million in the aggregate.

    I thank you again, Mr. Chairman, for allowing me to speak before the House Judiciary Committee. I would be pleased to answer questions.
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    [The prepared statement of Dr. Harris follows:]


    Mr. Chairman, I thank you for inviting me to testify today. I am a primary-care physician at the Massachusetts General Hospital in Boston and a tenured member of the economics faculty at the Massachusetts Institute of Technology. For your reference, I have attached a short biographical sketch to my testimony.

    Although I comment here on Mr. McInnis' bill (H.R. 2740 IH),(see footnote 5) I take no formal position on the method of payment of plaintiff attorneys in connection with pending tobacco litigation. Instead, my objective is to help Congress determine whether and how to intervene in the setting of attorneys' fees. My main conclusions are as follows.

 Fees paid to private counsel do not necessarily represent a cost to state governments. Tobacco manufacturers have the ability to pay attorneys' fees in addition to the amounts paid to states under the June 20, 1997, proposed global settlement.

 A compensation system based solely on a uniform hourly rate, as contemplated in H.R. 2740, may not adequately compensate attorneys for having taken risks. Nor would such a system adequately address cases of joint effort, or instances in which law firms have incurred substantial set-up costs in order to acquire special expertise.
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 If Congress chooses to intervene in the determination of attorneys fees, it needs to design a compensation scheme that reflects the wide differences in currently prevailing fee arrangements between states and private counsel.

 I have computed each state's share of tobacco industry payments under a nation-wide global settlement, based upon three different criteria: state population; total state Medicaid expenditures; and state Medicaid expenditures due to illness caused by smoking. State shares vary substantially with the criterion used for apportioning payments. For example, the state of New York would receive approximately 7 percent under a population-based rule and 16 percent under a Medicaid spending-based rule.

 I have further computed attorney compensation based upon a sliding-scale contingency fee system, in which counsel would receive a percentage of each state's recovery that depended on the date that the state contracted with counsel. For each $10 billion in industry payments to states, I compute that, under such a system, private counsel would receive $665 to $714 million in the aggregate.

 If Congress favors a system of attorney compensation based upon arbitration or judicial determination, then it needs to specify the standards that the arbitrators or courts will use. Provisions for review of initial fee determinations need to be made explicit.

Tobacco Manufacturers' Ability to Pay

    To date, 40 states as well as Puerto Rico and the cities of Los Angeles and San Francisco have filed complaints against tobacco manufacturers.(see footnote 6) Among the filing states and the territory of Puerto Rico, 33 have retained private counsel.(see footnote 7) Under these currently prevailing contracts, the states are expected to pay private attorneys' fees in the event of a recovery. However, under the June 20, 1997, nation-wide Proposed Resolution(see footnote 8) and the recent settlements with Mississippi(see footnote 9) and Florida,(see footnote 10) settling defendants in the tobacco industry agreed to make annual payments of up to $500 million per year to pay attorneys' fees.(see footnote 11)
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    In 1996, the total pre-tax domestic operating profits of the five major U.S. cigarette manufacturers and UST, Inc. (which sells primarily moist smokeless tobacco products) were $7.926 billion. The combined corporate-wide pre-tax profits of all major tobacco producers amounted to $15.781 billion.(see footnote 12) It might appear that these profit margins constitute an effective ceiling on the tobacco industry's ability to pay. Such a conclusion would be unwarranted, however, because it incorrectly assumes that tobacco manufacturers will not or cannot raise prices in order to finance settlement payments.

    In reality, the tobacco industry's ability to pay damages is bounded by the maximum amount of money it could extract from consumers if the price of tobacco products were set at its full, monopoly profit-maximizing level. In a recent article,(see footnote 13) I calculated that the full monopoly, profit-maximizing price of cigarettes in the United States in 1995 was approximately $4.08 per pack. By contrast, the nation-wide average price of cigarettes in 1995 was about $1.88 per pack. Accordingly, any increase in price up to $2.20 per pack would generate additional profits for manufacturers or revenues for governments. A $2.20-per-pack increase, I calculated, would generate over $32 billion annually, which could be divided between settlement payments and industry profits. That would mean, for example, that $27 billion could be allocated to a global industry-wide resolution, while the industry would retain $5 billion in pre-tax profits.

    Even if total industry payments were significantly increased beyond the amounts specified in the June 20, 1997, Proposed Resolution, the tobacco industry would still be in a position to pay $500 million annually in private plaintiff attorneys' fees. Congress need not frame the issue of paying private counsel as trading dollars for plaintiffs' lawyers against dollars for public health.
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H.R. 2740: Uniform Hourly Rates

    Under H.R. 2740, ''any attorneys' fees paid in connection with the settlement of an action maintained by a State against one or more tobacco companies to recover tobacco-related Medicaid expenditures or for other causes of action involved in the settlement agreement dated June 20, 1997, shall not exceed $150 per hour . . .'' The imposition of a ceiling on payment based upon a uniform wage, however, may run contrary to certain economic principles of compensation.

    The pricing of assets and the determination of compensation for services ordinarily entails a ''risk premium.'' A company with a mediocre credit rating and a higher risk of default must offer bonds at higher interest rate in order to finance its debt. A failing business must offer large bonuses to entice new managers to attempt a turnaround. The concept of ''risk premium'' applies equally to the payment of counsel in the state cases against the tobacco industry.

    Under prevailing contracts between states and private counsel, the outside lawyers have assumed most if not all costs of litigation, but have agreed to be paid their costs and attorneys' fees only if the state recovers an award. In the state cases against the tobacco industry, it is my understanding that defendants have requested the electronic and paper records of all transactions of Medicaid recipients. Responding to such requests has entailed the hiring of outside contractors and consultants, as well as the purchasing of a substantial amount of computer time. In the states for which I have direct knowledge, the total costs of responding to defendants' production requests have run in the hundreds of thousands, if not millions, of dollars.
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    A uniform hourly rate may not be appropriate in cases where many individuals work together. For a relatively small investment in time, a surgeon may enhance the productivity of the entire operating room team. It would thus be inappropriate to pay the surgeon the same hourly wage as those of the interns, residents, and nurses. My experience thus far in state tobacco cases suggests that private counsel can likewise enhance the effectiveness of local counsel and state-employed attorneys.

    Economics textbooks routinely cite examples where individuals are compensated beyond the standard market wage rate because they possess special skills or assets that are not easily acquired by others. Well-remunerated professional athletes are but one example. In tobacco litigation, the acquisition, storage, and cataloguing of millions of internal corporate documents may represent a similar case where some firms have made substantial up-front investments to acquire a special asset.

    In principle, an hourly compensation rate could be adjusted upward in order to accommodate the special cases of a risk premium, joint effort, and set-up costs. However, it is doubtful that the specific limit of $150 per hour, contained in H.R. 2740, accomplishes this objective. In a national sample of 98 large firms (median size, 166 attorneys) reported on December 8, 1997, by the National Law Journal, I calculate that the median hourly rates for partners and associates were, respectively, $275 and $161. The median hourly rate for partners and associates combined was $214.(see footnote 14) For Covington & Burling, a Washington, DC firm that has represented some parts of the tobacco industry, the hourly rate for partners ranged from $250 to $440, while that for associates ranged from $110 to $245.(see footnote 15)
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Prevailing Contracts Between States and Private Counsel

    Most contracts between states and private counsel specify a contingent fee as a percentage of the state's recovery, but the percentage varies according to the date the case was filed and the degree to which the state intends to share in the costs of litigation. Some states (e.g., Idaho, Indiana, Iowa, Ohio, Nevada, New York, Pennsylvania, Vermont, Washington, Wisconsin) specify a sliding-scale percentage based on the duration of the litigation. Other states' contracts (e.g., Alaska, Idaho, Maine, Montana, Nevada, Vermont) make specific reference to a global nation-wide settlement. Still others (e.g., Louisiana, Michigan, New Mexico, Ohio, Oregon) contemplate a modified Lodestar procedure based upon multiple criteria, as is used to determine fees in securities litigation. Some states (e.g., California, Colorado, Georgia, Missouri, New Hampshire, Rhode Island) have thus far elected not to retain counsel.

    Eight states (Connecticut, Florida, Massachusetts, Maryland, Minnesota, New Jersey, South Carolina, Utah) have engaged private counsel at a 25% compensation rate.(see footnote 16) With the exception of South Carolina, which retained counsel on 5/12/97, these high-percentage contracts were signed at least 9 months before the announcement of the Proposed Resolution of June 20, 1997. In fact, five of the eight high-percentage contracts were signed more than one year before the announcement of the global settlement. By contrast, among state contracts signed within six months of the announcement, the median contingency rate was 12%. Among states contracting after the announcement, the applicable contingency rates were 4% (New York), 10% (Nevada) and 12% (Alaska).

    Among the 33 state contracts that I have examined, the law firm of Ness, Motley, Loadholt, Richardson & Poole, P.A. (Charleston, SC) was retained in 19; Scruggs, Millette, Lawson, Bozeman & Dent (Pascagoula, MS) was retained in 12; while Hagens & Berman, P.S. (Seattle, WA) was retained in 12. In some states (e.g., New York), all three firms were retained concurrently. Norton Frickey & Associates (Colorado Springs, CO) was retained in 3 states; the Law Offices of Don Barrett (Lexington, MS) in 3 states; Lieff, Cabraser, Heimann & Bernstein (San Francisco, CA) in 2; and Steven C. Mitchell, either acting as an individual proprietor or on behalf of Van O'Steen and Partners (Phoenix, AZ) in 4.(see footnote 17) In nearly all state contracts, private counsel other than the above-mentioned firms were retained. Some state attorneys general (e.g., Connecticut, Maine, Maryland, Minnesota, New Mexico, Pennsylvania, Wisconsin) contracted exclusively with local firms rather than national counsel. These patterns suggest that no single law firm or group of firms had a monopoly over the market for plaintiff attorneys' services in tobacco litigation. Nor does the contractual record suggest that state attorneys general acted in concert to exercise monopsony buying power. Taken as a whole, the contracts appear to represent the outcome of a competitive market process. The rates of compensation written into such contracts are the closest available approximations to the actual market values of the attorneys' services.
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State Shares Under a Nation-Wide Settlement

    Table 1 shows my computations of each state's share of tobacco industry payments under a nation-wide global settlement, based upon three different criteria: state population; total state Medicaid expenditures; and state Medicaid expenditures due to illness caused by smoking. State shares vary substantially with the criterion used for apportioning payments. For example, the state of New York would receive approximately 6.8 percent under a population-based rule, 15.9 percent under a Medicaid spending-based rule, and 15.1 percent based on smoking-attributable Medicaid spending. By contrast, California's share would be higher under a population-based rule (11.9%), but lower under a Medicaid spending-based rule (11.7%) or an allocation scheme based upon smoking-attributable costs (7.0%).

    These differences are not trivial; they could reflect billions of dollars in states' recoveries over a 25-year-period. Under the Proposed Resolution of June 20, 1997, I have estimated that the states will receive total payments whose face value equals $162.8 billion over 25 years.(see footnote 18) For the state of Massachusetts, the population-based formula would yield payments with a face value of $3.7 billion, while the Medicaid spending-based formula would yield $5.1 billion and the smoking-attributable spending formula would yield $5.8 billion. For Texas, by contrast, the corresponding payments would be $11.6 billion, $9.6 billion, and $7.8 billion, respectively.

    Having estimated each state's share of a nation-wide settlement, I then computed private attorneys' receipts under the Proposed Resolution based upon the terms of the individual contracts with each state. For the five states (Louisiana, Michigan, New Mexico, Ohio, Oregon) where a modified Lodestar procedure was contemplated, I could not estimate lawyers' fees directly from the available data. For those states with specified percentage compensation rates, however, I estimated that total private attorneys' fees would represent 7.6 to 7.9 percent of total state receipts and 4.1 to 4.2 percent of total tobacco industry payments to all parties. Among only those states that paid private counsel on a percentage basis, the average rate ranged from 12.9 percent (under a Medicaid spending-based rule) to 14.6 percent (under a population-based rule). At a 7% annual discount rate, the present discounted value of attorneys' fees under the Proposed Resolution of June 20, 1997, would amount to $7.9 to $8.2 billion over 25 years.
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A Sliding-Scale System of Compensation

    The evidence suggests that attorneys who contracted with states early during tobacco litigation incurred substantially more risks than those retained near the time of the Proposed Resolution. Accordingly, I devised a uniform compensation scheme that reflected this basic principle. Private counsel would be paid a percentage of the state's recovery based upon the date of contract as follows:

Table 1

    I applied this sliding-scale contingency fee schedule to the estimated state shares of tobacco industry payments. Table 2 provides the results of my calculations. The table shows private attorney fees by state, in millions of dollars, for each $10 billion paid to states.

    For private attorneys contacting with the Attorney General of Minnesota, which filed suit on 8/17/94, the compensation rate ranges from $43.3 to $55.2 million for each $10 recovered by all states taken together. For New York, which filed suit on 1/27/97 and contracted with private counsel on 9/8/97, the corresponding compensation rate ranges from $6.8 to $15.9 million per $10 billion in aggregate state payments. Overall, total attorneys' fees would amount to $665–$714 million for each $10 billion in industry payments to the states.

    The results in Table 2 might form the basis of an alternative scheme that would compensate counsel for risk-taking and more closely adhere to the contracts negotiated by states and private counsel. For example, if Congress determined that private attorneys be paid sliding-scale percentages based on the first $10 billion in state recovery, then the estimates in Table 2 show the attorneys fees to be paid. If fees were to be paid on the first $20 billion in state recovery, then attorneys' fees would be twice the values shown in the table. Such payments would fall well within the caps set by defendant tobacco manufacturers.(see footnote 19)
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Table 2

    Mr. COBLE. Gentlemen, we are appreciative to each of you. Now let's start some questions, Q and A as we say.

    Mr. Moore, were the attorneys general parties to the side agreement whereby the defendants have agreed to compensate plaintiffs' counsel through an arbitration panel, A, and, B, were the attorneys general in a position to influence the structure of that agreement? And did you in fact influence the structure of it?

    Mr. MOORE. I think the answer to both of those questions is yes, Mr. Chairman. The only thing I would say to limit that is that all attorneys general were obviously not at the table at the time but the five of us that were the negotiators were indeed a part of this. As a matter of fact, we recommended it because we thought it was a much better and fairer way to do it than, for example, in Florida if the 25 percent contingency fee comes out, that 25 percent comes out of their money. It would come out of their coffers, so if they got $11 billion, $2.5 billion is going to come out of their money. The way we did it is above and beyond. We figured, frankly, it was another penalty on top of what we had already extracted from the tobacco companies.

    Mr. COBLE. I got you.

    Mr. Rice, on September 8 of this year, you sent a memorandum to the Florida trial team in which you called to everyone's attention the paragraph dealing with the choice to participate in this process, that is, the arbitration process in lieu of any other fee or request for fees. Your memorandum was referring to a section of a letter from Arthur Golden, the counsel for the defendants, addressed to you in which the details of the understanding on fees was set forth.
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    That letter expressly states that any of Florida's private counsel may choose to participate in this process in lieu of any fees or request for fees for services provided to the State of Florida from any other source. I read that provision, Mr. Rice, as preserving outside counsel's right to enforce the contingency fee contract. Do you read it in that light?

    Mr. RICE. Mr. Chairman, that letter from Mr. Golden is, I think, it is August 29, was the date of the letter, was his understanding and he and Mr. Koplow and myself were involved in the negotiations of the Florida settlement with Attorney General Butterworth and Governor Chiles. That letter was then circulated to the members of the trial team and we disagreed with his interpretation.

    The August 29 letter has not formed the basis of an agreement in Florida. In fact, in further discussion with Mr. Golden, who is Mr. Wise's partner, who testified earlier, the understanding has been clarified that should one or more of the attorneys representing the State of Florida seek to collect their fees from the State of Florida, then the State of Florida could stand in their place at the arbitration board. That was the final understanding.

    Certainly when we entered the settlement in Florida, it was my personal belief, and I believe the majority of the attorneys representing the State, that we had all agreed to go to the arbitration board. As Mr. Yerrid points out, he was one of my colleagues and I have great respect for Steve, we have a difference of opinion on that. The State of Florida had a contract with the private counsel. That was the first contract.

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    There is a second agreement, and that is the agreement among the trial lawyers themselves, the 11 law firms. In that context, Mr. Scruggs and his firm and my firm are designated as organizing counsel. We were responsible for liability in the case. The local attorneys were responsible for the local work in the case. The attorneys' fees split between the local attorneys and Mr. Scruggs and myself was the 54-46 split that you asked Mr. Scruggs about. When we entered the agreement with the industry, the night that we had the settlement, I believe the majority of members both in number and the vast majority in fee interest agreed to go to the arbitration panel. But that is being disputed now in Florida.

    Mr. COBLE. Let me ask it more clearly perhaps. Can you explain why the State of Florida has taken the position that the contingency fee contract should not be enforced?

    Mr. RICE. Governor Chiles, it is my understanding, believes when he went forward with the settlement and announced it in open court, it was based on his understanding that his attorneys had agreed to not take any of the money that the State of Florida was getting but to seek their attorneys' fee through the mutual process of the arbitration process from the tobacco industry.

    Mr. COBLE. I got you. All right, Mr. Yerrid, sort of extending that, give me a brief answer, if you can, because that red light is going to light up in a minute.

    Describe the process under which the settlement provision relating to attorneys' fees was reached? And were you given the option to continue to operate under your contingency agreement rather than accept the arbitration panel process?
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    Mr. YERRID. The answer to that first aspect of your question is very clear. I was never given the opportunity. I did not know any settlement discussions were under way. I would never have negotiated with the cigarette cartel or the tobacco industry for my fees. I felt the State of Florida was an honorable client.

    When these settlement decisions purportedly were being made I was in Tampa, Florida, with my son. I was not at this barbecue that was held out to me to be a social event. I do not have any conception how two lawyers, the attorney general, and the Governor of the State of Florida could somehow unilaterally seek novation of a legal document and extinguish my legal fees. Because I didn't agree to operate as a League of Nations or the United Nations. No one held my proxy. And my law firm's fortunes rose and fell on my judgment.

    Mr. COBLE. Mr. Yerrid, thank you for your brief answer.

    Mr. YERRID. Yes, sir. I apologize. But beyond that, Mr. Chairman, one thing that is very clear——

    Mr. COBLE. I was just kidding with you.

    Mr. YERRID. That is okay. One thing that is very clear, when that Davis Polk letter went out, I have got a copy of it right here, it was very clear that there was some understanding, with all respect to Mr. Rice, his understanding that there was an election. Some of the members of the trial team elected to go into this arbitration process. But we, the five lienholders, only represent one client, the State of Florida. We don't represent 29 or 30 States.
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    Mr. COBLE. I understand that.

    Dr. Harris, I am going to come back to you subsequently but now I am going to recognize the gentleman from Massachusetts.

    Mr. FRANK. Mr. Yerrid and Mr. Rice, I am still focused on the question of what happens in the original settlements and how that is affected later on. Mr. Yerrid, you were saying that there is a small amount of money, you said something like $715 million.

    Mr. YERRID. It was $750, Congressman.

    Mr. FRANK. What does that represent? That is a quarter of 2.8. Or 2.7.

    Mr. YERRID. That represents the first payment, the 1997 payment. That was paid.

    Mr. FRANK. Are you telling me that the way the Florida thing works, the money that Florida has already gotten will be Florida's no matter what happens in a global settlement, but that if there is a global settlement, the rest gets folded in?

    Mr. YERRID. The best part about my limited knowledge, I wasn't invited to participate——
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    Mr. FRANK. Mr. Yerrid, I don't care whether you were invited or not invited. I am not interested in social events. Let's get to the facts of the settlement.

    Mr. YERRID. The only thing I know is they paid $750 million in the settlement.

    Mr. FRANK. If you don't know, Mr. Moore or Mr. Rice, can you tell me?

    Mr. RICE. Mr. Frank, let me try to answer. The Florida settlement provides that Florida would get 5.5 percent as their allocation, of the overall national allocation. That 5.5 percent was applied to the up-front $10 billion payment that was $550 million. That was the first payment.

    Mr. FRANK. What is the up-front $10 billion payment? You have to remember you guys know more about this than I ever hope to have to know.

    Mr. RICE. In the June 1997 proposed resolution, the industry is required to pay $10 billion upon effective date——

    Mr. FRANK. That was the Florida settlement?

    Mr. RICE. That is in the global. The $10 billion. Florida's share of that would be 5.5 percent. So they paid Florida in September, I believe, $550 million.
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    Mr. FRANK. What is the $750, then?

    Mr. RICE. In addition, in negotiating the Florida settlement, we negotiated a $200 million fund to be used to fight teenage smoking in Florida. That $200 million was also deposited into an escrow account to be used over 2 years.

    Mr. FRANK. What was Florida's overall settlement, forgetting about the——

    Mr. RICE. Florida has received $750 million.

    Mr. FRANK. What was the settlement? Because you said 5.5 percent of the overall but there must be some assumption in case there isn't an overall settlement.

    Mr. RICE. It is $11.7 billion if you use the same flow of money that is projected in the June 20, 1997, settlement and you add the 3 percent to the——

    Mr. FRANK. Don't add anything yet. I just want to get a general sense of this. Florida on its own got 11.7 and that is superseded by the agreement of 5.5 percent of the overall amount? What is the relationship of the 11.7 to the 5.5 of the overall amount?

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    Mr. RICE. Only the payments that occur after 1999 can be superseded, the first billion dollars——

    Mr. FRANK. Mr. Yerrid, you have remembered now more?

    Mr. YERRID. Yes. Of significance and you should know this, Congressman Frank, one of the things that we have in Florida, we had a statute that enabled us to bring this lawsuit.

    Mr. FRANK. I still need to know what the dollars are.

    Mr. YERRID. What the dollars were based on——

    Mr. FRANK. No, I didn't ask you what they were based on. First I just need to know—my view is that from my standpoint at this point, and it is early on, but both constitutionally and as a policy matter, I think there is a difference between money that was brought about as a result of actions within the State, in court and elsewhere, and money that is a result of the overall settlement. They are not separate universes, but there is a difference. I am trying to understand only the dollars. So Florida got $11.7 billion. That is if there was no Federal settlement, Florida would get $11.7 billion?

    Mr. YERRID. That is correct.

    Mr. FRANK. The agreement was that if and when there is a Federal settlement, from then on, the Federal settlement will kick in, Florida will keep whatever it was paid of the 11.7 and from then on, it will get whatever is needed to bring it up to the 5.5 percent of the overall; is that correct?
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    Mr. RICE. Or whatever Congress allocates to Florida.

    Mr. FRANK. Right.

    Mr. RICE. Agreed.

    Mr. FRANK. Mr. Yerrid.

    Mr. YERRID. Just from a superficial view, it seems to me that the numbers, and they are easy to look at, the numbers are lower in Florida under the settlement we achieved than they would be obtained under national resolution. The reason being that Florida is being encouraged to opt out of its contingent fee contract and go into the national settlement. But that is not in our State's best interest.

    Mr. FRANK. Mr. Yerrid, I have got to be honest here. I am not a jury. You can do that on your own time elsewhere. I am trying to get some information. The rhetoric every time I ask you a question doesn't help advance my understanding of this. The 11.7 is if there is no settlement. If there is a settlement, the amount that Florida already got will be in the pot and then the new money will come from the Federal settlement?

    Mr. RICE. If there is a congressional settlement and that congressional settlement results in Florida getting less money than they negotiated for, the first billion dollars is guaranteed to Florida by the industry independent of any——

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    Mr. FRANK. The industry would do that. Okay.

    Mr. RICE. Independent.

    Mr. FRANK. Would that be an add-on to what they paid to the overall settlement?

    Mr. RICE. The 750 is part of that billion. So it would be an additional $250 million.

    Mr. FRANK. Florida would get an additional billion not out of the Federal settlement?

    Mr. RICE. That is correct. Part of it would be offset but not all of it.

    Mr. FRANK. So the 750 that you were talking about, Mr. Yerrid, you were saying that unlike what that judge said, you are not getting a share of 11.8 or 2.8, you are only getting a share of 750, but that is only now. Your understanding is that ultimately you would get the share of the larger amount, correct?

    Mr. YERRID. The figures are according to the judge in the paper, 11.3 billion, so I am unfamiliar with the 11.7.

    Mr. FRANK. Eleven point three is fine. Whatever.
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    Mr. YERRID. My understanding is that is contingent upon them making certain payments.

    Mr. FRANK. I understand that. But when you said you were only getting a share of 750.

    Mr. YERRID. Right now.

    Mr. FRANK. Yes. That is only right now. If your contract is honored, you would get a share of how much?

    Mr. YERRID. I assume we would get a share of whatever dollars were paid in the future.

    Mr. FRANK. So it would be the 11.3? From what you tell me it would have to be at least 11.3 because you are saying that if the global settlement gave Florida less than 11.3, it would be brought up to that. When you said you were only getting a share of 750, I didn't know that you meant only right now. Your assumption is if everybody lives up to this deal, you would get the share of the 11.3?

    Mr. YERRID. Right. And may I just elaborate, one thing I assume is that not only would everyone live up to it, but the courts are never precluded in year three or year four from coming back and saying, okay, you have collected X, now that fee may be getting excessive.
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    Mr. FRANK. Except I think if we are, not precluded, I think it would be highly unlikely and it would also be affected by what was the amount in the legislation.

    The last point you said, you are not sure you want to depend on the tobacco companies in the future. What do you mean? If we have a global settlement legislated by Congress, they may get it amended and stop paying? What is your fear about the future?

    Mr. YERRID. What I am talking about is first of all my personal views with regard to the global settlement are not favorable and I don't wish to go into all those reasons.

    Mr. FRANK. Good. Then let's not.

    Mr. YERRID. What I want to be clear in, I don't think that the past has given me any indication——

    Mr. FRANK. Mr. Yerrid, please stop with all the rhetoric and answer my specific question. The question is, what is it that you are skeptical that the tobacco companies will continue to do? Not why you are skeptical but what is it. You have suggested to me that there might be some risk to you because the tobacco companies might stop doing something. What is it that they will stop doing? If they are ordered to make some payments, I assume they will keep paying them. What is it you are skeptical of them doing?

    Mr. YERRID. I am skeptical they will keep their word.
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    Mr. FRANK. But what word? The word to do what? To pay what they have been ordered to pay?

    Mr. YERRID. Any of the words that they have——

    Mr. FRANK. Mr. Yerrid, that is not good enough. You are suggesting that you are at risk because they may break their word. But we are not talking about taking their word, I thought. We are talking about either a court ordering them as part of a settlement or Congress legislating it. In either of those contingencies, what does it mean for them to break their word?

    Mr. YERRID. Congressman, with all respect to you, I think the sanctity of our contract with the State of Florida——

    Mr. FRANK. I just need you to answer my question. When you said you were afraid of what the tobacco companies might do, what is it that they might stop doing if they are either ordered by a court or if Congress votes it? Where is the risk there that they will stop paying the money?

    Mr. YERRID. I don't know where the risk is. I can't answer that question. It is not a risk I——

    Mr. FRANK. But you had in mind, Mr. Yerrid, you have said that there was a risk to you; you didn't know if they would keep their word over 25 years. It is not my understanding that either under the settlement that was arrived at that I assume a court is supervising or a congressionally legislated operation that anyone is asking you to take their word. It is not a case of them making a promise, it is a case of them having a legal obligation.
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    Mr. YERRID. I don't know what receivership and bankruptcy affects that alleged legal obligation. What if a tobacco subsidiary spins off assets from a domestic company to an overseas company. I don't know what those words mean of alleged ''Payment Protection'' under Title VI(B)(6) of the proposed resolution. But yes, sir, your Honor, or excuse me, Mr. Congressman, if you are telling me that their word is inviolate——

    Mr. FRANK. Mr. Yerrid, I didn't tell you the word was inviolate. I have got to tell you, maybe this kind of approach helps your case in certain fora. It doesn't here, this kind of rhetoric. I am not talking about their word being involved when I am talking about legal obligations. I have got to say, you leave me more sympathetic to your case than to your testimony. Thank you, Mr. Chairman.

    Mr. COBLE. Let me get to the gentleman from Utah in just a minute, but, gentlemen, when you compare $11 billion with $368 billion, it pales by comparison.

    Mr. Rice, it was my belief that Mr. Yerrid's 11.3 billion, that was the figure I had in mind, 11.3 as opposed to 11.7.

    Mr. RICE. Mr. Chairman, that may be the correct number. I was thinking 11.7. It may be 11.3. You may be right.

    Mr. COBLE. The gentleman from Utah.

    Mr. CANNON. Let me just try and ask a simple question, Mr. Yerrid. Without the other arbitration agreement, how much would your firm expect to make based upon its work in Florida on this case?
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    Mr. YERRID. Okay. I think it would probably be over 25 years somewhere in the neighborhood of $60 to $70 million.

    Mr. CANNON. Sixty to 70?

    Mr. YERRID. Paid out over 25 years, yes, sir.

    Mr. CANNON. That is not discounted, right, that is in payments over 25 years?

    Mr. YERRID. Yes, sir, as received.

    Mr. CANNON. Mr. Moore, let me, I think I understand this but let me just be clear. Essentially you brought lawyers into your office and you had a handshake agreement, and you believed that you discharged whatever that obligation was through this arbitration process?

    Mr. MOORE. Two things. The handshake agreement is to entitle the lawyers to represent the State. As far as attorneys' fees, what I did specifically was in the pleadings in my case when I filed my cause of action, I asked the court, should Mississippi win its case, to award attorneys' fees at a reasonable amount. That is the only way we handled attorneys' fees.

    Frankly, what we did on the national settlement was really mirror what we did in the Mississippi settlement, to ask an independent party to set the attorneys' fees so it wouldn't look like and it wouldn't be any inside game, it would be open to public scrutiny and that they would get what they were entitled to based on ABA standards and the like and that is the way we set it up.
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    Mr. CANNON. In Mississippi, do you have a law that allows for attorneys' fees in tort cases?

    Mr. MOORE. Absolutely. And so you understand it, Congressman, we didn't file a tort case, we filed our case in equity and we asked the court to award attorneys' fees.

    Mr. CANNON. So Mississippi, you have a distinction between equity and law?

    Mr. MOORE. We do. We have a court of law and a court of equity.

    Mr. CANNON. Florida does not have the distinction between equity and law, I take it, Mr. Yerrid?

    Mr. YERRID. No, sir, we were in a jury trial, in the third week of jury selection when our case settled. We also had a RICO count, racketeering, and a negligence count.

    Mr. CANNON. In Mississippi, in an equity case, you have by law a right or by precedent, a right to attorneys' fees in that kind of an action, right?

    Mr. MOORE. That is what we asked for and we think we had a sound basis for it. I hope the lawyers wouldn't enter into that agreement if they didn't think they could collect any money.
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    Mr. CANNON. That did leave me wondering because we don't have that distinction in my jurisdiction.

    Mr. Rice, you referred to several articles. I didn't have your testimony. Could you just make a copy of those available?

    Mr. RICE. Absolutely. I will give you the citations. If you will give me a couple of days, I have some more. I can give you the copies of the articles themselves, I believe.

    Mr. CANNON. I would very much appreciate that. I will give you a card afterward.

    I haven't gotten any broken ankles yet or anything like that. Mr. Chairman, I yield back the balance of my time.

    Mr. COBLE. Mr. Cannon, you and Mr. Frank have been very patient. We are doing okay time wise here. No, Dr. Harris, you are not going to be ignored. I am going to get to you in just a minute. I am going to digress a little bit from attorneys' fees. I admonished Mr. Scruggs after he did, but I am going to violate it a little bit, too. This has nothing to do per se with attorneys' fees but it may play into this prior to the conclusion.

    Gentlemen, here is my problem. Mr. Yerrid, I am going to try not to have my objectivity hat tilt too far on my head. Here is the problem I have, gentlemen. States warmly embrace tax receipts that they receive from the sale of tobacco products. All those moneys go into the coffers. You can extend services here, there, and yonder. Then on the other hand these same States can hardly wait to get down to the courthouse to file their complaints naming as parties defendant tobacco companies to attempt to gain judgments, or win judgments, to realize moneys to defray medical costs that have been incurred by—now get this, gentlemen—by consumers who voluntarily consumed a lawful product. I hope I am not being too subjective, Mr. Yerrid, but, fellows, I have trouble with that. I want to try to work through it. You gentlemen appear to be affable guys. We may do this under a cold drink, wet cargo as sailors call it one night, but you all think about that. That plagues me. When my head hits the pillow at night, that plagues me. Granted, I am not suggesting that everybody go out here and light up, certainly not until you are 21 years old, then it becomes your option, but that is a problem with me.
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    Now having said that, Dr. Harris, in reaching your conclusions about the levels of attorney compensation payable under various formulas, you touched on it to some extent in your testimony, you use as a basis the amount of the settlement which will flow directly to the States, $162.8 billion, rather than the total amount, $368.5 billion. There is a 3 percent inflation rider floating around out there somewhere. I see Mr. Rice is nodding, as is Mr. Moore. That is going to bring the total amount probably in excess of $500 billion. Given those three different numbers, Dr. Harris, tell me why you believe this is appropriate methodology that you have shared. I am not suggesting it is not, but talk to me about that.

    Dr. HARRIS. In making an estimate of the amount of money that would be received under prevailing contracts, without arbitration, I used my best estimate of the present discounted value of the money that would be received by States under the proposed settlement. That would include three different features within the settlement.

    First, something called the volume adjustment clause, in which payments overall go down in proportion to the rate of smoking. I have projected that smoking rates will go down and therefore payments will go down. Second, that there is an inflation adjustment clause which would bring payments up, but third of all, that payments should be discounted because money paid in the future is not worth money paid presently. In making that discounting, I used the long-term rate on treasury notes. Those factors together led me to conclude that the overall present value of attorneys' receipts computed from prevailing contracts would be $8 billion.

    Mr. COBLE. Eight billion dollars?

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    Dr. HARRIS. That is correct. About half as much as I understand was projected by Professor Brickman.

    Mr. COBLE. Gentlemen, this has been, pardon my modesty, but I think this has been a very fine hearing. Mr. Rice, I thank you for filling in. I think you were a substitute witness and I thank you for your flexibility. This has been good. This is a first step, the first step of many. I know I am assuming a real risk when I do this, I have three lawyers and a physician-economist sitting before me.

    Gentlemen, do you want to be heard to close out? I will be glad to do that. But keep it brief, if you will, because we do not need another sermon, but do you all wish to be heard additionally, either of the four?

    Mr. MOORE. Mr. Chairman, I think you have given us plenty of time.

    Mr. COBLE. Thank you, Mr. Moore. Mr. Rice?

    Mr. RICE. Mr. Chairman, I don't have anything else to say today. I will be glad to come back at your request.

    Mr. COBLE. Thank you, sir. Mr. Yerrid.

    Mr. YERRID. Mr. Chairman, one thing, it seems like to me that it comes down to basic fundamental fairness. That a deal is a deal. We did the deal, now we seek to get paid and we are being labeled everything but monkey's uncles. But thank you for not calling us any names. I appreciate it. I will take you up on your invitation.
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    Mr. COBLE. Dr. Harris.

    Dr. HARRIS. Thank you very much for inviting me. I have no more comments.

    Mr. COBLE. It has been a good hearing. I want to thank you all. I want to thank the witnesses of the first panel as well. The subcommittee appreciates this contribution.

    This concludes the oversight hearing on attorneys' fees and the tobacco settlement. The record will remain open, gentlemen, for 1 week. Scott, I told you 5 days. The record will remain open for 1 week. Thank you for your cooperation. The subcommittee stands adjourned.

    [Whereupon, at 3:35 p.m., the subcommittee adjourned.]


Material Submitted for the Hearing Record

Public Citizen's Involvement in Class Action Settlements

1. Bowling v. Pfizer Heart Valve

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A. Cites

    Bowling v. Pfizer, 143 F.R.D. 141 (S.D. Ohio 1992) (approving merits of settlement); Bowling v. Pfizer, 922 F. Supp. 1261 (S.D. Ohio 1996)(opinion regarding attorney's fees), on reconsideration, 927 F. Supp. 1036 (S.D. Ohio 1996), aff'd, 102 F.3d 777 (6th Cir. 1996).

B. Description

    This class action involves the 40,000 living patients implanted with the Shiley C/C heart valve. That valve has a tendency to fracture (resulting in death two-thirds of the time) because of design and manufacturing defects. The settlement provided for $80 million in cash for class members to settle their ''fear'' claims that the valve might break, money for research to try to develop a non-invasive diagnostic tool that might detect problem valves, money to pay for the removal of risky valves, and a compensation scheme (ranging from $500,000 to $2 million) for U.S. class members whose valves fracture. Foreign claimants will usually get less. Class members can reject the automatic fracture compensation and go to court.

C. Public Citizen Involvement

    We participated in the briefing and fairness hearing. The district court approved the settlement, which we appealed but later settled after obtaining a few additional improvements. We were responsible for greatly enhancing the reoperation benefits and helped (along with other objectors) on numerous other issues. We were also responsible for having the patients' spouses compensated (the settlement gave them zero). The defendants came up with $10 million for the spouses.
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    We were the only objectors that challenged the huge $33 million fee request made by class counsel. We took discovery on that issue (which several plaintiffs' counsel resisted). The principal problem is that the various counsel have refused to divulge their fee sharing arrangements, and thus the court, the class members, and the public have no way of knowing whether these agreements—under which, we believe, class counsel has agreed to pay large sums to other lawyers—were employed to buy off opposition or are, in reality, reasonable payments for work performed. The fee hearing was held in Cincinnati on September 14, 1995, before a visiting judge from another district appointed by Chief Justice Rehnquist. (The original district judge had recused himself on the fee request because class counsel's wife's nomination to be a federal judge in that district was pending before the U.S. Senate). On March 1, 1996, the court handed down a 61-page opinion, cutting the fee for class counsel and his associated counsel to a total of $10.25 million, thus saving the class members about $20 million. Among other things, the judge credited many of the arguments we made about the excessive fee request. Class counsel could also apply annually for fees for future work to implement the settlement, under strict guidelines similar to those we suggested. Our request to get access to counsels' secret fee sharing agreements was denied, however, on the ground that counsel has complete discretion on how to divide fees once they are awarded.

    Class counsel appealed the fee award to the Sixth Circuit, arguing that his $33 million request should have been granted. Meanwhile, we appealed the district court's decision permitting the fee-sharing agreements to remain secret. The Sixth Circuit affirmed all around, indicating that the fee award was well within the district court's discretion (and implying that, if anything, the award was too generous), and also holding that there was no obligation to disclose the fee-sharing arrangements now that the settlement was final on its merits. The court of appeals indicated, however, that the fee arrangements might have to be disclosed at the settlement approval stage, where there would be a concern that lead counsel might ''buy off'' objectors' counsel by cutting the latter counsel in on the fee.
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    After the Sixth Circuit affirmed the fee award, the original district judge, who had originally recused himself on fee issues, re-entered the picture and ruled on class counsel's first annual fee request for work performed to implement the settlement. The court awarded more than we recommended, but less than class counsel requested. Unfortunately, the court also stated that, over the next nine years, the court would award a set amount rather than scrutinize the work performed each year. In our view, this is contrary to sound fee principles and the Sixth Circuit's earlier decision. We have appealed.

    Meanwhile, we have been involved in an important aspect of the settlement's implementation. Under the settlement, patients carrying certain high-risk Shiley heart valves are entitled to have valve replacement surgery paid for by the settlement fund (which includes payment for miscellaneous expenses, lost wages, and other items, as well as all reasonable medical expenses). The types of valves that qualify for these benefits are to be set by a panel of medical experts. Draft guidelines were issued by the panel and we have submitted comments, arguing that the guidelines are too restrictive based on existing data comparing risk of fracture with re-operative mortality and morbidity risk. We are participating in mediation with the parties and the expert panel to try to liberalize the reoperation guidelines. The district court will hold a hearing on this issue in June 1997.

D. Status

    As a result of our success in the fee appeal, additional cash payments to class members will be made. As indicated above, we have appealed the district court's decision automatically to award fees on an annual basis for class counsel's future work. And our work assisting in implementing the settlement continues.
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E. PCLG Contacts

    Brian Wolfman, Alan Morrison, David Vladeck.

2. Georgine/CCR Asbestos

A. Cite

    Georgine v. Amchem, 157 F.R.D. 246 (E.D. Pa. 1994), rev'd, 83 F.3d 610 (3d Cir. 1996), cert. granted sub nom. Amchem v. Windsor, 117 S. Ct. 379 (1997), and numerous other reported decisions on related issues in both the district court and the court of appeals on preliminary matters.

B. Description

    In this case, the Center for Claims Resolution (CCR), a consortium of 20 asbestos defendants, approached two prominent plaintiffs' lawyers and literally asked to be sued by a class of all persons (and their household members and relatives) who had been exposed to CCR asbestos products in their workplaces. The class, since it is defined to include persons who are exposed but not yet injured, may involve as many as 20 million people. The complaint, answer, and settlement were filed on the same day in early 1993. The settlement provides a worker's comp-type system of payment ranges for future victims of certain asbestos-related diseases. Although statutes of limitations are waived, certain diseases compensable in the tort system are not compensable under the settlement and other diseases (e.g., lung cancer) are much more difficult to prove. There is no inflation adjustment, even though the settlement binds class members in perpetuity. Loss of consortium claims are ''settled'' for zero. The settlement amounts are too low, especially for claimants in certain jurisdictions, and, in a first for any settlement of which we are aware, the decisionmakers on most individual claims are the defendant companies!
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    There are serious questions of collusion and conflict of interest, most of which center around the fact that class counsel settled, for $215 million, 14,000 of their pending cases against CCR as, in our view, a quid pro quo for doing the futures class action. The 14,000 cases include many claimants whose injuries would not entitle them to cash under the settlement. Moreover, we argue that the $215 million represents a premium over what will be paid for like cases that are compensable under the settlement. Thirty-seven prominent law teachers in the legal ethics field filed an amicus brief arguing that the deal was rife with conflicts. The district court rejected the brief, although it had accepted more than a dozen other amici briefs.

    Thanks largely to lawyers at Baron & Budd, a firm representing some of the objectors, there were more than 30 depositions, other discovery, and an 18-day fairness hearing, plus lots of other hearings on other issues. The district court approved the settlement, and issued a preliminary injunction barring the class members from suing any CCR defendant for asbestos-related injuries in state or federal court. (The court could not issue a final decision or permanent injunction because a massive third party complaint by the CCR against its insurers was still pending). About 260,000 class members opted out, but the district court invalidated them all on the ground that many thousands of the opt outs had been misled or coerced into opting out by unscrupulous lawyers (a ruling with which we largely disagree). A new opt-out period was ordered under court supervision in which ''only'' about 80,000 people opted out.

    After the district court approved the settlement, the objectors appealed the preliminary injunction, raising purely threshold issues that implicated the district court's power to issue its injunction (case or controversy, amount in controversy, due process rights of ''futures'' and the like). After the initial briefs were filed, the Third Circuit's decision in General Motors, discussed below, came down. That case held that a settlement class action must meet the same standards for Rule 23 certification as does a case certified for litigation. General Motors enhanced our position because it is hard to imagine that Georgine—which was never intended to be litigated at all—could be litigated as a class action.
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C. Public Citizen Involvement

    Over the past three years, we have briefed all of the major legal issues (e.g., whether this trumped-up suit presents a ''case'' or ''controversy'' under the constitution, whether it comports with due process to bind people who are currently uninjured, the ethical issues, etc.), participated in discovery, and questioned witnesses at the fairness hearing, etc. We were also responsible for organizing the ethics professors' amicus brief, which was written mainly by John Leubsdorf, a Rutgers law professor. We worked in tandem with Baron & Budd, but also raised a few issues that they did not (and we chose not to join in a few of theirs). We filed opening, reply, and supplemental briefs in the Third Circuit appeal from the district court's preliminary injunction. A six-hour oral argument was held on November 21, 1995, in which we participated.

    On May 10, 1996, the Third Circuit handed down a smashing victory, holding that the class should not have been certified under Rule 23 because the claims of the class were too disparate to meet either the Rule's subsection (a) or subsection (b)(3) criteria. The Court noted that it was impossible for the class representatives to adequately represent those who had not yet suffered injuries and therefore could not know their injury-related circumstances. The unanimous panel acknowledged the strength of our due process and justiciability concerns, but did not reach those issues. Judge Wellford (a visiting judge from the Sixth Circuit) concurred in the main opinion, and also held that the complaint, as buttressed by the named plaintiffs' testimony, did not state an Article III case or controversy.

    The Supreme Court granted CCR's petition for a writ of certiorari on the Rule 23 question that formed the basis for the Third Circuit's decision. We briefed the case before the Supreme Court on that issue, but also raised our justiciability arguments. Two other groups of objectors also participated actively in the Supreme Court.
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D. Status

    The case was argued in the Supreme Court on February 18, 1997, and we are awaiting a decision. All of the objectors were represented at argument by Laurence Tribe.

E. PCLG Contacts

    Brian Wolfman, Alan Morrison.

3. AcroMed Pedicle Screw Class Action Settlement

A. Cite

    In re Orthopedic Bone Screw Products Liability Litigation, MDL No. 1014 (E.D. Pa.).

B. Case Description

    Since the early 1990's, there have been a large number of personal-injury actions against makers of bone screws and the surgeons who surgically implanted them. The plaintiffs alleged that the bone screws were improperly marketed for use in the spine (pedicle), although they are only medically appropriate for use in long bones (arms, legs). The plaintiffs suffer from severe and debilitating back injuries. Among other proof, plaintiffs point to the fact that the FDA generally refused to approve these devices for use in the spine.
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    The federal cases were consolidated by the Judicial Panel on Multidistrict Litigation and sent to Senior Judge Louis Bechtel in Philadelphia. The lead MDL plaintiffs' counsel believed that one of the defendants, AcroMed Corporation, a closely-held corporation, was financially at risk because of the onslaught of litigation. In January 1997, AcroMed and the lead plaintiffs' counsel entered into a ''limited fund'' class action settlement, seeking to certify the case on a non-opt-out basis. Without getting into all the details, the settlement basically provides that the class members will split $100 million cash, plus the value of AcroMed's liability insurance policies (probably worth another $10 million, but currently in dispute). Class members will submit proof of their injuries and other information and individual cash awards by a neutral administrator. AcroMed has already escrowed $10 million and promises to raise the bulk of the remainder of the $100 million by unsecured borrowing on its cash flow (i.e., its future business prospects).

    As noted above, some plaintiffs also allege claims against their surgeons on the ground that the surgeons should have warned of the bone screw's FDA regulatory status. Plaintiffs also claim that surgeons took money or stock from AcroMed and put those financial interests ahead of their patients, and had similar conflicts of interest. The class action settlement purports to bar such claims. The settlement release goes so far as to bar claims against doctors who told their patients that the device was FDA approved when they knew it was not. The release also bars certain claims against hospitals where the surgeries took place. Neither the doctors nor the hospitals are defendants in the class action or in the multi-district proceedings, nor did they make any financial contribution to the settlement. AcroMed defends the release of the surgeons and hospitals on the ground that it needs to maintain good relations with its customers to insure future profitability.
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C. Public Citizen Involvement

    We represent 33 objectors, mostly from Tennessee, who have substantial claims against their doctor and the hospital at which the surgery took place. We take no position on the settlement against AcroMed, but argue that the release of the health care providers, especially on a non-opt-out basis, is unfair and violates Rule 23 and due process.

    We participated in the first stage of the district court fairness hearing on April 23 and 24, 1997, briefly cross-examining some of the settling parties' witnesses and commenting on the settling parties' arguments. The fairness hearing will reconvene on June 3, 1997, at which time the objectors will present their arguments.

D. Status

    As indicated above, the fairness of the settlement is pending before the district court.

E. PCLG Contacts

    Allison Zieve, Brian Wolfman.

4. Fibreboard Asbestos

A. Cite
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    Ahearn v. Fibreboard, 1995 U.S. Dist. Lexis 11062 (E.D. Tex. July 27, 1995), aff'd, In re Asbestos Litig., 90 F.3d 963 (5th Cir. 1996), cert pending, No. 96–1394 (U.S. docketed Mar. 4, 1997).

B. Description

    In this case, a deal was struck to resolve present and future cases against Fibreboard, a prominent asbestos manufacturer. The funds for the deal come almost entirely from a massive insurance settlement Fibreboard struck with two of its insurers. This case, filed in federal court in Texas, presents some of the same legal issues as Georgine—there were side deals with the plaintiffs' lawyers and the complaint and settlement were filed simultaneously. In addition, this is a non-opt-out case, which presents a very important issue not unlike what we faced in the late 1980's in the Dalkon Shield case (discussed below). The question is whether, in a money damages case such as this one, it comports with Rule 23 and due process to bar opt-out rights. On the other hand, the substance of the deal is fairer than Georgine: payments are likely to be consistent with the tort system, all diseases are compensable, and the decision maker is a neutral body.

C. Public Citizen Involvement

    We filed an amicus brief, drafted along with other lawyers, in which we asked the Fifth Circuit to recuse the trial judge who had, in our view, pre-judged the case and had played a significant role in the settlement negotiations themselves. Our appeal was rejected. We did not play any further role in the trial court, convinced that the trial judge would approve the settlement, which he did.
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    In the court of appeals, we assisted the Dallas law firm of Baron & Budd, which represented the principal objectors. We commented on draft briefs and conducted a moot court for the Fifth Circuit oral argument, which was held in March 1996. The Fifth Circuit affirmed the district court decision over a strenuous dissent. The majority claimed that the settlement was an equitable limited fund in light of the insurance settlement and Fibreboard's allegedly finite assets. The dissent agreed with virtually all of the objectors' arguments on justiciability and the illegality of using Rule 23 on a non-opt-out basis. The objectors sought en banc review, which was denied over 5 dissents. In March 1997, the objectors sought Supreme Court review.

D. Status

    The objectors' petition for a writ of certiorari is pending. It is apparently being held pending the outcome in Georgine (see number #2 above).

E. PCLG Contacts

    Brian Wolfman, Alan Morrison.

5. Adkins/George Fleming Polybutylene Litigation

A. Cite

    Adkins, et al. v. Hoechst Celanese Corp., et al., No. 92–024674 (Harris County, Tex., Dist. Court), appeal pending, No. 01–96–01528–CV (Tex. Ct. App., 1st Dist—Houston). The mandamus action, discussed below, was styled Ciminello v. Hon. Russell Lloyd, No. 14–96–604–CV (Tex. Ct. App., 1st Dist.—Houston).
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B. Case Description

    This case involves the settlement of about 60,000 claims by homeowners that the polybutylene (''PB'') pipes in their homes are prone to leaks causing considerable property damage. Although not technically a class action, this matter affects the rights of a large group of similarly situated individuals, which is the reason we became involved.

    The plaintiffs are represented by a Houston law firm headed by George Fleming, a major player in PB litigation for years. On the heels of huge class action settlements, Fleming settled approximately 60,000 claims. The settlement agreement provided a cash fund of up to $150 million to be divided among the clients and their lawyers, and another $20 million denominated as ''expenses,'' and thus solely for the lawyers. Because some of these cases had previously been consolidated before Judge Russell Lloyd, a trial judge in Houston, the parties submitted the settlement to Judge Lloyd and asked him to appoint a Special Master, who in turn would approve ''allocation formulae,'' i.e. the formulae by which the attorney's fees and expenses would be separated out from the clients' recoveries.

    Fleming's allocation formulae showed that he was seeking a whopping $108.8 million of the $170 million total settlement fund. First, he claimed 40% of the $150 million cash component ($60 million). Then, he claimed that he was entitled to another $28.8 million on the ground that (i) class members were entitled under the settlement to have their homes replumbed by the defendants, (ii) each replumb was worth $1200, and (iii) 40% of the $72 million aggregate replumb value ($1200 × 60,000 = $72 million). Among the many problems with this analysis was that the defendants had been providing free replumbs to homeowners for years prior to the settlement. Finally, Fleming claimed the right to $20 million in expenses, although he provided no evidence that he had incurred that (or any other) amount.
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    Judge Lloyd made clear his displeasure with the proposed allocation and decided to hold a ''fairness hearing'' on the propriety of the fees and expenses. Fleming filed papers arguing that because this wasn't a class action, his client retainer agreements calling for 40% fees were controlling, and that the Court had no jurisdiction to review the allocation. Fleming did not explain why he was entitled to $20 million in expenses and made no effort to prove up his actual outlays.

C. Public Citizen Involvement

    We appeared as an amicus before the lower court, seeking to protect the interests of Fleming's clients who knew little or nothing of what was occurring with respect to fees. We filed a brief arguing that Judge Lloyd had jurisdiction on three independent grounds: (1) the Settlement Agreement itself granted him jurisdiction, inasmuch as it called for appointment of a Special Master to approve the fee allocation; (2) under Texas law, courts have inherent authority to supervise fees in cases before them; and (3) large consolidated actions involving common funds are akin to class actions, where fees are regularly scrutinized for fairness.

    When it became clear that Judge Lloyd was not accepting Fleming's arguments, Fleming asked the Texas Court of Appeals for a writ of mandamus. The Court of Appeals granted Fleming leave to file the petition and asked the defendants to respond. The Court of Appeals also directed Judge Lloyd not to hold any hearing regarding fees until further Order. We made the same arguments in the Court of Appeals, plus the additional point that mandamus is not the proper remedy because Fleming has an adequate remedy on appeal from any order Judge Lloyd might issue. In addition to appearing as an amicus, we represented a Fleming PB client who asked for our help in challenging the fees.
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    The mandamus was fully briefed and we presented argument in the Court of Appeals on June 26, 1996. Shortly after argument, the Court of Appeals dismissed the writ of mandamus as improvidently granted without comment. The case therefore went back to the trial court for a fairness hearing on fees.

    Prior to the hearing some informal discovery was taken, Fleming made various submissions, and a master was appointed to look into Fleming's expenses. After a two-day evidentiary hearing, at which we participated extensively, the district court found that it had jurisdiction to review Fleming's fees and awarded $33 million. The court also reviewed Fleming's actual expenses and awarded about $10.5 million.

    Fleming appealed, arguing that the district court did not have jurisdiction to review his fee arrangements or the expense allocation and that the fee awarded by the district court was unreasonably low. The defendant filed a brief in opposition to Fleming's position. We did as well, representing Public Citizen as amicus and one of Fleming's clients.

D. Status

    The case has been briefed in the Texas Court of Appeals. We are awaiting a date for oral argument in which we will participate.

E. PCLG Contacts

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    Alan Morrison and Brian Wolfman.

6. Hayden Arsenic Settlement

A. Cite

    Hayden v. Atochem North America, Inc., et al., C.A. No. H–92–1054 (S.D. Tex.)

B. Case Description

    Class counsel has settled with a group of companies that caused arsenic, a known carcinogen, to be spewed from a factory in Texas, polluting the surrounding community. This caused economic damage to homes and increased risk of future diseases. The settlement provides for medical monitoring for people living in the area and some property damage relief. In addition, the settlement cuts off all future personal-injury claims in court and forces everyone to file administrative claims on a relatively small fund. Moreover, any class member who suffers an injury more than 7 years after the settlement is finalized is forever precluded from any relief, even though the settling parties concede that the latency periods for arsenic-related diseases can be up to 40 years! The settlement provides no opt-out right, so if this settlement is approved the class members rights to go to court are simply taken away.

C. Public Citizen Involvement

    We are representing objectors who once lived in the area and were exposed to the arsenic, but moved away and did not get notice of the action. They object to having their future rights sold down the river with no right to litigate their claims if they become injured. We have filed discovery to ascertain what the settling parties know about the value of past personal injury claims and a few other issues.
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D. Status

    The federal magistrate handling the case approved the settlement and denied our clients the right to take discovery. We appealed to the federal district judge in September 1995, claiming that the magistrate was wrong in approving this non-opt-out personal-injury settlement. The district judge has not ruled on our arguments, probably because on the pendency of the Fibreboard settlement (case #4 above) which also involves the propriety of non-opt-out damages class actions. If the district judge agrees with the magistrate, we will take our arguments to the court of appeals for the Fifth Circuit in New Orleans.

E. PCLG Contacts

    Lucinda Sikes, Brian Wolfman.

7. Chrysler Minivan Settlement

A. Cite

    Hanlon v. Chrysler Corp., No. C–95–2010–CAL (N.D. Cal.).

B. Case Description

    Plaintiffs filed class action suits all over the country against Chrysler because the rear latch on its minivan is defective and has a tendency to disengage. The problem has resulted in numerous serious personal injuries. The class actions asked for damages and retrofit relief. A case was ultimately filed in federal court in San Francisco and settled on a nationwide basis shortly thereafter. The settlement provides that Chrysler will offer class members a new improved latch if the owner presents the van to a dealer. In addition, Chrysler agreed to spend $14 million to advertise the service campaign (monies which, we believe, may have already been spent). The problem is that Chrysler had already agreed to do all this in an informal agreement with NHTSA, which had launched an investigation into the latch problem. Moreover, at the time the settlement was reached, the retrofit was not yet ready. So, class counsel apparently agreed to something it could not have properly assessed and which the government had already obtained. The agreement provided for up to $5 million in attorney's fees for class counsel.
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C. Public Citizen Involvement

    We are representing various class members and the Center for Auto Safety in opposing the settlement. We filed discovery on class counsel and Chrysler to determine what, if anything, in addition to the NHTSA action has been achieved and how much Chrysler had spent toward the $14 million prior to entering the settlement. We challenged the fee request as well on the ground that it was excessive and that it was unsupported by any fee and expense records.

D. Status

    The district court approved the settlement on the ground, among others, that the settlement is enforceable in court, while Chrysler's promises to NHTSA are not. The judge also approved the full $5 million fee, despite the lack of any evidentiary support for it, on the ground that the fee had been negotiated with the help of a mediator (a retired judge). We appealed the district court's decision. Thereafter, the settling parties discovered that they had failed to notify a sizeable segment of the class (e.g., Californians). Therefore, additional notification was provided and a supplemental fairness hearing was held at which we presented further objections (e.g., evidence concerning Chrysler's snail-like progress in repairing the faulty latches). The district court again approved the settlement, and we appealed again. Our Ninth Circuit appeals were fully briefed in the Fall of 1996, and we await an oral argument date.

E. PCLG Contacts

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    Colette Matzzie, Con Hitchcock, Brian Wolfman.

8. Ford Mustang Settlement

A. Cites

    Dunk v. Ford Motor Co., 48 Cal. App. 4th 1794 (1996), review denied, 1996 Cal. Lexis 7005 (Dec. 11, 1996). Trial court citation: Dale v. Ford Motor Co., No. 661492 (Orange Cty., Cal., Sup. Ct.).

B. Case Description

    The plaintiffs alleged that certain Ford Mustang convertibles had faulty door assemblies and a weak side frame causing wind noise, water leakage, and possible personal injuries (because of weakness in the side frame of the vehicle). The settlement involves a non-transferrable $400 coupon usable toward the purchase of another new Ford vehicle, good for only 12 months. In addition, a provision in the settlement agreement will make it impossible to get the certificates into the hands of more than about 40–50% of the class members. The plaintiffs' lawyers put in no evidence at all about the likely redemption rate of the coupons. They employed no experts, took no discovery, and put in no affidavits about the value of the settlement. The plaintiffs' lawyers asked for about $1.5 million in fees. They drew opposition from Ford on the fees issue, which obviously had learned something from the Bronco II fiasco (discussed elsewhere in this memo), but the court awarded just under $1 million anyway. The fee application was wholly inadequate—no time records, no expense records, and much of the work for which compensation was sought was from another case, not the class action.
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C. Public Citizen's Involvement

    Other than a few pro se objectors, we were the only objectors to file an opposition and appear in court opposing this outrageous settlement. We put in affidavits, consisting of materials culled during our work on the GM and Bronco cases, and showed that only 2–5% of the class could be expected to get any value from the coupons, and that the rest of the class would get nothing. We also spotted a provision of the settlement agreement that would have allowed a judgment approving the settlement to be used to preclude any future personal injury case involving the Mustang convertible!

    The judge was not hospitable to our objections at the fairness hearing, which lasted less than 30 minutes. He indicated his desire to approve the settlement, but he agreed with us on the provision regarding personal injuries and, thus, ordered the settling parties to include a provision specifically preserving personal injury cases. The settling parties complied and eliminated the offending language.

    The trial court approved the settlement and the fee award. We also moved for a fee award for ourselves of about $4,000 for making the personal-injury provision improvement (probably of more value than the settlement itself), which was granted over the objections of the settling parties. We appealed, challenging both the valueless settlement and the improper fee award. We argued the appeal in May 1996.

    The California Court of Appeal affirmed the settlement approval in August 1996, and further review was denied by the California Supreme Court in December 1996. The decision was a major disappointment. It ignored the fact that most class members will get nothing from the deal. The appellate court reversed the fee award, holding that in coupon settlements, where the value of the ''fund'' is impossible to ascertain, the trial court must use the lodestar (hourly rate) method of fee calculation. The court thus remanded the case for a redetermination of the fee.
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D. Case Status

    The trial court is currently considering plaintiffs' counsel request for fees. We are actively seeking to represent objectors who wish to oppose similar no-value coupon settlements.

E. PCLG Contacts

    Brian Wolfman, Allison Zieve.

9. Epstein Collateral Attack

A. Cite

    Epstein v. MCA, Inc., 50 F.3d 644 (9th Cir. 1995), rev'd and remanded, 116 S. Ct. 873 (1986), on remand, No. 92–55675 (9th Cir.).

B. Case Description

    A full description of the facts of this case is too involved for this memo. The reader can refer to the opinion at 50 F.3d 644 for a full rendition. Briefly, this case involves two securities class actions concerning the giant merger of MCA and Matsushita—one in Delaware state court, relying on state law, and one in federal court in California, relying on federal securities law. The common allegation was that two MCA insiders had taken advantage of their positions and were granted very favorable treatment by Matsushita compared to other MCA stockholders. Ultimately, a Delaware class action settlement was approved. Under that settlement, MCA shareholders got pennies and the class' claims—including all federal securities claims—were released against all defendants, including Matsushita. The federal securities claims could not be brought in Delaware state court (since federal jurisdiction is exclusive in federal securities matters) and there was no plausible theory for liability under Delaware law against Matsushita, which was not even a defendant in the Delaware action until a settlement had been reached.
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    The Delaware settlement was approved at a point in time where the California district court had rejected the federal claims on their merits (and had also denied class certification). Thereafter, however, the Ninth Circuit reversed the district court on the merits (holding that the MCA insiders had been given preferential treatment in violation of federal law), and instructed the district court to certify the class. Moreover, the court of appeals refused to give the Delaware class action judgment preclusive effect on the ground that, because the Delaware plaintiffs could not plead the federal securities claims, they should not be able to release them either.

    The Supreme Court reversed. The Court framed the issue as whether a federal court can refuse to give full faith and credit to a state court judgment simply because it releases claims within the federal court's exclusive jurisdiction. Under its prior precedents, the Court said, if Delaware law would give preclusive effect to the judgment, the federal court must also do so. The Court construed Delaware law to give preclusive effect to the judgment releasing federal claims and thus reversed the Ninth Circuit on that question. Nonetheless, a concurring opinion specifically, and, we believe, the whole Court implicitly, left open the question whether the federal court could refuse to give effect to the Delaware judgment on the ground that the class had not received adequate representation under Hansberry v. Lee. Thereafter, the Ninth Circuit granted the plaintiffs' motion to submit additional briefing on the adequacy issue.

C. Public Citizen Involvement

    At the Supreme Court level, we provided brief-writing assistance and advice regarding oral argument to the plaintiffs. On remand in the Ninth Circuit, we wrote an amicus brief arguing that the Delaware plaintiffs inadequately represented the class by settling the state court claims for essentially zero while releasing the federal claims which are probably worth hundreds of millions of dollars. Despite the Supreme Court's full faith and credit ruling, the fact that the Delaware plaintiffs could not plausibly leverage the federal claim in their negotiations (because they could not be tried in Delaware), we argued, should be seriously considered in the adequacy of representation analysis. We concluded that, on the facts of this case, the Delaware plaintiffs' representation was inadequate and that, therefore, the federal action was not precluded.
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D. Status

    The adequacy of representation issue is pending in the Ninth Circuit. Oral argument was held in September 1996 and a decision is pending.

E. PCLG Contacts

    Alan Morrison, Brian Wolfman.

10. Food Stamp/Home Utility Allowance Litigation

A. Cite

    Hannah, et al. v. Glickman, et al., No. 94–3004 (D.S.D.).

Related cases

    South Dakota v. Madigan, 824 F. Supp. 1469 (D.S.D. 1993), appeals dismissed, Nos. 93–2869, et al.; Larry v. Yamauchi, 753 F. Supp. 784 (E.D. Ark. 1990).

B. Case Description

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    This case differs from the other class action settlements described in this memo in that Public Citizen attorneys are representing the class representatives and support the class settlement. In Hannah and the related cases, food stamp recipients challenged a policy of the United States Department of Agriculture (''USDA'') that required that federal housing subsidies used by tenants solely to defray their home utility bills be counted as ''income'' for the purpose of calculating food stamp allotments. In effect, this policy treated monies dedicated for payment of heating and electric bills as available for the purchase of food, thereby dramatically reducing the purchasing power of some of the poorest Americans. The plaintiffs argued that the USDA policy violated several provisions of the Food Stamp Act.

C. Public Citizen Involvement

    Plaintiffs—represented by a soon-to-be Public Citizen attorney—lost the Larry case in early 1990. Shortly thereafter, we brought the South Dakota case as co-plaintiffs with the State of South Dakota, which also believed that the USDA policy violated federal law. The case was not a class action, and we won in a wonderful opinion issued in mid-1993. USDA appealed its loss in South Dakota to the Eighth Circuit, and we argued the case in St. Louis in May 1994. Although we believe that the statute requires class-wide retroactive relief even in non-class actions, USDA informed us that it did not plan to implement the South Dakota decision retroactively for all South Dakotans, even if it lost the appeal. Therefore, we filed the Hannah case, seeking wrongfully denied retroactive benefits for a class of all affected South Dakotans.

    Thereafter, with our Eighth Circuit appeal still pending, we participated in discussions to work toward the repeal of the USDA policy nationwide. This was successful and the policy was repealed as of August 1, 1994. In the Federal Register notice announcing the new policy—which provides $160 million in benefits per year nationwide—USDA adopted many of the legal arguments we had been making over the years and cited our litigation. The announcement of the new policy effectively mooted most of the South Dakota litigation, but not the class action litigation concerning retroactive benefits.
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    The prospective change in USDA policy set the table for months of negotiations with USDA, which, in January, 1996, culminated in settlement of the class action, subject to court approval. Under the terms of the settlement, up to $300,000 in retroactive benefits will be divided among the class members, based on individual damages calculations. Public Citizen will receive about $60,000 in attorney's fees. The settlement also includes a comprehensive notice program to inform class members about the settlement, instruct them on how to file claims, and permit them to object to the proposed settlement and attorney's fees.

    The class action notice and claims forms were sent to class members, resulting in approximately a 25% return rate. The district court held a hearing in July 1996, and approved the settlement. At about that time, we made additional notice efforts beyond those required by the settlement. These efforts included sending a very short notice and claim form to class members who had not already filed a claim form, and using the internet and a CD–ROM address locator to find class members for whom we did not have accurate addresses. Over half the class members filed claims and obtained their back food stamps, skewed toward class members' with larger claims. In the end, approximately $245,000 of the maximum $300,000 retroactive award was obtained. During the distribution process, we answered many class members' questions and obtained benefits for class members whose claims had run into bureaucratic snafus.

D. Status

    May 28, 1997 is the last date to challenge any errors in the distribution process. Although we believe that all (or virtually all) valid claims have been paid, we will continue to assist class members through that date.
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E. PCLG Contacts

    Allison Zieve, Brian Wolfman.

11. GM Truck Case (Philadelphia)

A. Cite

    In re General Motors Corp. Pickup Truck Fuel Tank Prod. Liab. Litig., 55 F.3d 768 (3d Cir. 1995), cert denied, 116 S. Ct. 88 (1995).

B. Case Description

    In settlement of a nationwide class action to obtain repair damages or retrofit of the 5–6 million side-saddle fuel tank GM Trucks, class members were to receive a $1,000 coupon, good for 15 months, toward the purchase of a new GM Truck or minivan. The class included truck owners in all states but Texas. Additionally, class members could transfer the coupon to third parties, but then the coupon was worth only $500 and could not be used in conjunction with the ubiquitous GM rebates and credit deals. There were other restrictions on the $500 coupon which made it virtually worthless. The settling parties' expert himself conceded that 54% of the class members would get nothing at all from the settlement; that expert, however, made statements that were demonstrably wrong and our experts (Jack Gillis, Dr. Paul Bloom of Univ. of N. Carolina, and Clarence Ditlow) had the better of the arguments. We believed that no more than 10% of the class members would get any value.
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    The district court awarded $9.5 million in fees and $500,000 in expenses.

C. Public Citizen Involvement

    We were the principal objectors—representing ourself, the Center for Auto Safety, and numerous class members—in the district court (although there were about one-half dozen other objector groups, including various governments (e.g., New York, New York City, Pennsylvania)). We especially took the lead in providing evidence concerning retrofit options and the valuelessness of the settlement to the vast majority of the class.

    We were never even served with the fee application, as class counsel decided only to serve GM! There was no hearing on fees and we were, thus, shocked when the court approved the mammoth request. In addition to this problem (and the size of the fee award), there are other peculiarities with the fees that should have been addressed. One example will suffice: After the settlement was struck, several plaintiffs' attorneys who had similar pending state court class actions had their cases magically transferred to the federal action, and they joined in the fee application. They apparently did nothing to improve the settlement or advance their clients' cause. Why did the settling parties do this?

    We were the principal appellant in the court of appeals. We asked that the settlement be rejected and that the fee request be thrown out on the ground that no notice of the fee request was given to the class members. At the least, we argued that we should be given the opportunity to oppose the fee request in the district court (which did not occur, since there was no hearing on fees and we were never served with the fee application).
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D. Status

    This settlement was approved by the district court in Philadelphia and was argued on August 11, 1994 before a Third Circuit panel which asked questions for over four hours. A smashing victory was handed down on April 17, 1995. The court rejected the settling parties' claims about the value of the settlement (using many of the arguments we had advanced), questioned a settlement that did nothing to fix the trucks (again using our evidence about retrofit), and severely questioned the fee arrangements. The court also, for more than 60 pages, tightened the standards applicable to settlement class actions. GM (but not class counsel) petitioned the Supreme Court to review the Third Circuit's decision. We drafted the opposition to GM's Supreme Court brief (in which the other non-governmental objectors joined). The petition was denied on October 3, 1995. After that, we continued our efforts to participate in the ongoing litigation and are working toward a favorable resolution. See discussion of GM Truck Case (Louisiana), #13 below.

E. PCLG Contacts

    Brian Wolfman, David Vladeck.

12. GM Truck Case (Texas)

A. Cite

    Bloyed v. General Motors, 881 S.W.2d 422 (Tex. Ct. App. 1994), aff'd and remanded, 916 S.W.2d 949 (Tex. 1996).
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B. Case Description

    This is the same case as the Philadelphia GM settlement, except the settlement was to apply only to truck owners in Texas. Thus, the settlement was identical to the one struck in Philadelphia for the other 49 states. One might ask: why did this settlement exist? The only reason we could come up with that made any sense was that the two law firms in the Texas case simply did not want to share the mere $10 million fee in the Philadelphia case. Why did GM agree to this when it could have wrapped up the whole nation, including Texas, in Philadelphia. The only plausible explanation that we can think of is that, by settling separately with the folks in Texas, GM was able to buy off potential opposition in the nationwide case. The two Texas law firms asked for $9 million in fees and about $500,000 in expenses; in other words, almost as much as 25 law firms and dozens of lawyers asked for in the Philadelphia action. Astoundingly, GM did not oppose this extraordinary fee request, and the class counsel did not notify the class of the amount (or even an approximate amount) of the fee that they were seeking.

C. Public Citizen Involvement

    When we became aware of the GM case in Philadelphia, we were working on very short notice and, with the Center for Auto Safety, wrote objections and developed some nice expert affidavits. Rather than formally enter the Texas case, we simply shipped our brief and evidence down to a consumer lawyer in Texas who used much of our stuff. We lost in the trial court, won in a wonderful opinion in the Texas Court of Appeals, and the settling parties' discretionary appeal to the Texas Supreme Court was accepted after being urged to do so in amicus briefs by both the Texas Trial Lawyers' Association and the Texas Association of Defense Counsel. During the merits briefing, we wrote an amicus brief for Public Citizen, Consumers Union, and Consumer Federation of America (we actually did two substantive sections on the settlement and fees, and Steve Baughman of Baron & Budd did an introductory section on class action jurisprudence, which we helped to edit). Our brief was referred to repeatedly in the Texas Supreme Court argument (which we have on tape).
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    The Texas Supreme Court affirmed and remanded. The Court first held that the Court of Appeals should not have held the settlement to be unfair on the ground that it was a marketing bonanza for GM. The Court believed that the plaintiffs may have gotten nothing in the case if it had gone to trial. The Supreme Court scrapped the settlement nonetheless, holding that counsel has a responsibility to notify the class members of the amount sought in fees, because the clients have an important interest in knowing how the settlement is divided between the relief and fee components. The settlement was thrown out on this ground alone. The Court went on to hold that procedures different from those used by the trial court initially had to be used on remand. First, the Court stated that the class can only be certified for settlement purposes if it can be certified for trial, adopting the Third Circuit's General Motors holding. Second, the settling parties must sustain their burden of proving the fairness of the settlement through live testimony, not simply affidavits. Finally, the Court criticized the fees in the case. It questioned the amount of the fee—which it noted amounted to $1,500 per hour—and demanded an explanation as to why a separate settlement and fee was necessary in addition to the nationwide settlement in Philadelphia.

D. Status

    This case was subsumed by the Louisiana GM Truck class action, #13 discussed below.

E. PCLG Contacts

    Brian Wolfman, David Vladeck.
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13. GM Truck Case (Louisiana)

A. Cite

    White v. General Motors Corp., No. 42,865, 1st Jud. Dist. (Iberville Parish, La.), appeals pending, No. 97/CA/1028, La. Ct. App. (1st Cir.)

B. Case Description

    This is a nationwide class action involving the same GM truck defects as in the Philadelphia and Texas class actions, described fully in #11 and #12 above.

C. Public Citizen Involvement

    After the Third Circuit rejected the Philadelphia GM settlement (see #11 above) and talks to resolve the federal MDL case broke down, plaintiffs' counsel turned to a dormant Louisiana action, led by attorney Mike Crow of New Orleans. We met with Crow and other plaintiffs' lawyers, at their request, to express our concerns. A settlement was crafted which, although not entirely to our liking, we decided to support.

    On the safety side, the settlement provides $4 million to study vehicle fuel system safety funded by a trustee, wholly independent of GM. Our client, the Center for Auto Safety, was concerned that this fund would provide little value to the class members because, under the terms of the settlement, the money could not be used to study vehicles more than five years old (including, therefore, the trucks at issue here). Therefore, the Center, with our assistance, negotiated a companion settlement with class counsel in which $1 million of counsel's attorney's fees will fund safety studies intended to lead to develop a fix for to GM trucks.
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    In terms of economic value, the settlement provides coupons of up to $1,000 toward the purchase of almost any new GM vehicle. (In the prior settlements, the coupons could only be used to buy trucks and vans.) The principal difference from the Philadelphia and Texas settlements is that steps have been taken to provide a secondary market in the coupons. In fact, two companies have shown considerable interest in participating in the notice efforts and helping to create that market. The certificate is good for 33 months (more than twice as long as the certificate in the prior settlements). During the first 15 months the coupon is transferable through a process that requires endorsement (but not the naming of a specific transferee in advance nor notarization). During the final 18 months the coupon's value is discounted but it becomes a bearer coupon which could easily be sold on a secondary market.

    As to attorney's fees, counsel for plaintiffs in all the prior actions and the Louisiana action sought approximately $24 million. We worked out a separate written agreement with class counsel to tie the payment of fees to the class recovery. Thus, as soon as the fee is paid, class counsel will deposit $10 million of that fee in escrow, which can only be withdrawn in full if the plaintiffs can prove that 100,000 class members have transferred their coupons on the secondary market for at least $100 each.

    Public Citizen also moved separately for attorney's fees of approximately $215,000 for our work in the Philadelphia and Louisiana cases.

    The trial court approved the settlement and the fee request on December 20, 1996. The trial judge asked at that time for briefs from objectors' attorneys on how a $1.2 million fund for payment of objectors' fees should be allocated. The court has yet to rule on that issue.
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D. Status

    Several objectors appealed the settlement approval and a briefing schedule was set in May 1997. No argument date has been set.

E. PCLG Contacts

    Brian Wolfman, David Vladeck.

14. Ford Bronco II

A. Cites

    The decision overturning the settlement is reported as In re Ford Motor Co. Bronco II Prod. Liab. Litig., 1995 U.S. Dist. Lexis 3507 (E.D. La. Mar. 20, 1995); there are several other interim decisions on discovery and other issues as well. The district court also rejected another proposed settlement in January 1997 and explained its reasoning in a March 1997 opinion. In re Ford Motor Co. Bronco II Prod. Liab. Litig., 1997 U.S. Dist. Lexis 104971 (E.D. La. Mar. 7, 1997).

B. Case Description

    The Bronco II's defect is that it rolls over in avoidance maneuvers and other sharp steering situations because its center of gravity is too high, its wheel base is too short, and its suspension system is too rigid. In various class actions, the plaintiffs sought retrofit and damages for repair and diminution in value because of the roll over problem. The class actions that were in federal court were sent to the district court in New Orleans by the Judicial Panel on Multidistrict Litigation. There, the plaintiffs' lawyers settled for a warning sticker, and other ''safety'' information that was already required by NHTSA about how to drive utility vehicles more safely. By lumping together all utility vehicles with the Bronco II, the plaintiffs' lawyers essentially adopted the defendants' view of the case—that all utility vehicles are alike and that roll over is the drivers' fault. The settlement also provided an ''inspection'' to determine whether the vehicle met Ford's specifications for tire size and vehicle height, the very specifications that the plaintiffs had originally said were defective! The inspection was, in our view, a ploy by Ford to get the 700,000 class members into their showrooms and to buy Ford's cellular phone service (a ''free'' phone came with the inspection if you were willing to buy a subscription to a cellular phone service owned by Ford). In a one-page fee request, class counsel asked for a $4 million fee to be paid by Ford! No time records or expense records were submitted—and yet, Ford did not object to the fee request.
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C. Public Citizen Involvement

    We were the principal objectors. We took the discovery, moved to compel Ford's settlement history in Bronco II roll over personal-injury cases, and filed the briefs upon which the court relied in rejecting the settlement. We also played the lead role at the fairness hearing on November 8, 1994, in New Orleans. We were the only objectors to submit evidentiary materials from experts, with tremendous assistance from the Center for Auto Safety, including affidavits from marketing experts, engineers, and a brilliant videotape from an expert who had run side-by-side tests with the Ford Bronco II and the expert's retrofitted vehicle (the former rolled over; the latter did not). Through discovery and our evidence, we were able to show that the settlement was worthless, and that the class counsel had misrepresented the settlement and the evidence, and had made statements in their briefs that were not accurate.

    We were the only objectors to challenge the fees. The judge was bothered a good deal by the fee request. We had asked for all the underlying information with respect to fees and expenses (time records, expense receipts). This material undermined counsel's claim that they had done serious work on the case or had contacted experts as of time they had previously alleged. Further, we were able to show that the amount of the fees was totally out of line.

    The settlement was rejected in a blunt opinion, saying that the value of the settlement was ''effectively zero.'' The court also called the fee request exorbitant and suggested that Ford's failure to oppose the fee request was evidence of collusion. We were also successful in obtaining a ruling that counsel are obligated to disclose to the class in the class notice the amount of the fees that will be sought.
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    Another settlement was presented to the federal court in late January 1997 which bore a close resemblance to the original settlement. The court refused to give that proposal preliminary approval for essentially the same reasons that it rejected the initial settlement. The court again indicated that the fee request (now up to $6 million) was ''unconscionable and suggestive of collusion.''

D. Status

    We continue to monitor the case and work toward a more favorable resolution. Class litigation involving the Bronco II is proceeding rapidly in state court in Alabama.

E. PCLG Contacts

    Brian Wolfman, David Vladeck. (Robert Graham at the Center for Auto Safety also did significant work on the case, especially in obtaining expert evidence).

15. In re Computer Monitor Cases

A. Cite

    In re Computer Monitor Cases, San Francisco Superior Court Judicial Council Coordination Proceeding No. 3158

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B. Description

    This case arises out of the computer industry practice of misrepresenting computer monitor screen size. In 1995, the California Attorney General and a coalition of District Attorneys negotiated a successful settlement under which the computer companies agreed to disclose actual viewable screen size and to desist from misleading advertizing. Meanwhile, a number of state court class actions had been filed and were consolidated by the California Judicial Council. When the proposed nationwide class action settlement was announced, however, it caused quite a furor in the popular press. In exchange for giving up their rights under state law, the nationwide class (an estimated 40 million consumers, businesses and governmental entities) will receive a $13 rebate off their next purchase of a computer monitor or system while plaintiffs' counsel will receive $6.1 million in fees and costs. If the class member wishes not to purchase a new monitor or computer system, the consumer members of the class may hold on to their rebate forms and submit them for $6 in the year 2000.

C. Public Citizen Involvement

    Representing individual objectors, Public Citizen has submitted detailed objections criticizing the lack of value to class members and the appallingly high fees for the plaintiffs' lawyers.

D. Status

    A fairness hearing is scheduled for June 30, 1997, in San Francisco.

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E. PCLG Contacts

    Colette G. Matzzie, Brian Wolfman.

16. Vehicle Leasing Class Action

A. Cite

    Laughman v. Wells Fargo Leasing Corp., No. 96 C 0925 (N.D. Ill.)

B. Case Description

    This class action challenges the legality, under the federal Consumer Leasing Act and state consumer protection laws, of the language in certain form contracts used by Wells Fargo to lease cars to consumers. Among other things, the forms allegedly misled consumers about early termination charges, which could cause consumers to pay substantial penalties to Wells Fargo.

    The case settled for a $75 non-transferable coupon toward a new car lease with Wells Fargo. In other words, the settlement provides no value for the class members unless they lease a new vehicle with Wells Fargo. The coupon is good for one year or until 90 days after the expiration of the class member's current lease, whichever is longer. Moreover, in order to get the coupon, class members had to have filed a claim form with Wells Fargo within 90 days of the distribution of the class notice.
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    The only class member to get any cash recovery is the named plaintiff Mark Laughman, who is to get $2,000. The record contains no evidence suggesting why Mr. Laughman is entitled to this substantial cash payment.

    Finally, class counsel sought $75,000 in fees, which is equal to about triple his lodestar.

C. Public Citizen Involvement

    We assisted Robert Graham, a Center for Auto Safety attorney and former Litigation Group summer intern, in preparing the objections on behalf of several class members. The objectors argued at the January 31, 1997, fairness hearing that the settlement provided no value to the class, released valuable claims under state law, and forced class members unfairly to give up potential counterclaims and defenses in Wells Fargo lease foreclosure actions. The objectors also opposed the payment to Mr. Laughman and the attorney's fee request.

D. Status

    The fairness decision is pending before the district court in Chicago.

E. PCLG Contacts

    Brian Wolfman, Allison Zieve.

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17. Breast Implants

A. Cite

    In re Silicone Gel Breast Implant Prods. Liability Litig., 1994 U.S. Dist. Lexis 12521 (N.D. Ala. Sept. 1, 1994), appeals pending, Nos. 94–6853 et al. (11th Cir.).

B. Description

    In this case, the major breast implant manufacturers have agreed with a committee of plaintiffs' lawyers, led by Stanley Chesley, Elizabeth Cabraser, and Ralph Knowles, to a very complex system of adjudicating present and future cases of personal injuries from the implants. In addition to personal injury relief, known as the disease compensation program, for injuries ranging from scleroderma to various neurological syndromes, the settlement provides medical monitoring, money to pay for explantation of implants, and other relief. About one-quarter of the $4.22 billion settlement is set aside for attorneys' fees and administrative expenses. This includes fees for the class counsel and, more significantly, fees for counsel who represent claimants in individual cases.

    A significant number of class members opted out during the notice period. Nominally, the disease compensation amounts are quite generous, but that assumed only a relatively small number of eligible claimants. As it turned out, estimates of the number of eligible claimants with current injuries show that the numbers will be quite high, causing the nominal amounts to be ratcheted down very significantly. The ratchet down process would, under the settlement, trigger another right to opt out. If there are many opt outs, this would cause the whole deal to fall through and/or the principal defendant, Dow Corning, to seek relief in a non-opt-out class action or through bankruptcy, as it eventually did in bankruptcy court in Bay City, Michigan. In short, this case is very much in limbo, even though the district judge has formally approved it, and it is quite likely that something very different will come out of the bankruptcy reorganization. A similar scaled-down settlement with defendants other than Dow Corning has been agreed to.
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C. Public Citizen Involvement

    We have had considerable involvement from the start of the process because of Public Citizen Health Research Group's work alerting the public to health problems with the implants. We filed numerous objections in the litigation in Alabama. Many were on fairness grounds (e.g., the settlement lasts 30 years, but the compensation amounts are not adjusted for inflation; the spousal claims for loss of consortium are discharged by the settlement for zero dollars). As to fees, since class counsel had not yet requested fees, we did not file formal objections. However, on the question of fees for counsel representing individual claimants, we made numerous suggestions, including that individual counsel be forced to justify their fees in an adversary process run by a court master in which an institutional adversary represents the interest of the class in protecting the settlement fund from excessive requests. These ideas are fleshed out in more detail in a law review article written by two Public Citizen Litigation Group lawyers. See Brian Wolfman and Alan B. Morrison, Representing the Unrepresented in Class Actions Seeking Monetary Relief, 70 N.Y.U. Law Rev. 439 (1996).

D. Status

    The district court approved the settlement in the summer of 1994, and several appeals were taken which we believe were premature, given the chance that a ratcheting down of the settlement amounts will take place, changing the deal substantially. We have filed an appellate amicus brief, asking that the appeals be dismissed. As noted above, greatly complicating the matter is the fact that, in May 1995, Dow Corning, the defendant with the greatest liability share, filed for bankruptcy in Michigan. This will cause enormous delay and the need to coordinate between the class action court in Birmingham and the bankruptcy judge. Alan Morrison moved in the bankruptcy action to be appointed representative for future claimants, but that was denied.
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E. PCLG Contacts

    Alan Morrison, Brian Wolfman.

18. Adams v. Robertson Non-Opt-Out Consumer Class Action

A. Cite

    Adams v. Robertson, 117 S. Ct. 1028 (1997).

B. Case Description

    This is a class action against the Liberty National Insurance Company, which sold cancer insurance policies in Alabama and in other states in the South and Southwest. The plaintiffs alleged that Liberty National, recognizing that its cancer policies were costly to the company, began an organized campaign to defraud its insureds by getting them to switch to new ''improved'' policies that actually had considerably higher premiums and provided less coverage. Several individual actions preceded the class action; in one case, a jury returned a verdict of $1 million, mainly for pain and suffering and punitive damages, which was affirmed by the Alabama Supreme Court.

    The class action settled. The settlement provided class members with coverage under either the terms of the new or old policies (assuming that they got cancer), but no reimbursement for years of inflated premiums, no damages for pain and suffering or any other item of damage, and no punitive damages. Of particular legal importance, the case was settled on a non-opt-out basis. The settling parties justified the non-opt-out provision on the ground that the settlement was for injunctive relief, not money damages (which usually requires opt-out rights). In characterizing the case as one involving injunctive relief, the settling parties ignored the fact that the complaint stated claims for money damages and that the settlement releases all of the class members' claims for money damages.
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    The settlement was approved by the trial court, and objectors appealed to the Alabama Supreme Court. The objectors' arguments concerning the no-opt-out provision relied principally on the Alabama constitution, not the Fourteenth Amendment's due process clause under which there is a strong argument that an opt-out right is constitutionally required in class actions for money damages. The Alabama Supreme Court affirmed, without mentioning the federal due process argument. Nonetheless, the objectors sought certiorari on the due process question and the Supreme Court granted review.

C. Public Citizen Involvement

    We worked closely with the attorneys for the objectors at the Supreme Court stage, writing and editing significant portions of their briefs and extensively helping their counsel prepare for oral argument.

D. Case Status

    After oral argument, the Supreme Court dismissed the case as improvidently granted on the ground that the petitioners had not adequately preserved the federal due process question. We continue to look for cases that present the issue we hoped had been preserved in Adams—whether constitutional and Rule 23 opt-out rights can be circumvented where the settling parties recharacterize a damages case as injunctive or equitable. See, e.g., Crehan v. DeBoer, discussed in #18 immediately below.

E. PCLG Contact
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    Brian Wolfman (Steve Baughman, of the Dallas law firm of Baron & Budd, did substantial work with us on this case.)

19. Crehan Mortgage Escrow Case

A. Cite

    DeBoer v. Mellon Mortgage Co., 64 F.3d 1171 (8th Cir. 1995), cert. denied sub nom. Crehan v. DeBoer, 116 S. Ct. 1544 (1996).

B. Case Description

    This case presents a stark illustration of what can go wrong in a small-claims class action where individual class members do not have the wherewithal to challenge the settlement and there is therefore little organized opposition.

    The plaintiffs challenged defendant's practice of withholding more money in mortgage escrow accounts (for taxes, insurance, and the like) than that permitted by federal law or the plaintiffs' individual mortgage contracts. Without a single pleading or motion filed (other than a state court complaint and a removal petition), the case was settled on a nationwide basis. First, the class got monetary damages for past improper withholding of about $105,000 (approximately 35 cents per class member!) and automatic rebating of future overages. Second, class counsel got $290,000 in fees, or almost three times the monetary relief for the class. Finally, the class got so-called injunctive relief: a promise that defendant would withhold no more than 2 months in escrow as required by federal statute. In addition, each class member's mortgage contract was conformed to allow defendant to withhold the maximum escrow permitted under federal law! For a significant proportion of the class (probably about 40%), this permitted the defendants to withhold more in escrow than they were contractually permitted to withhold at the inception of the suit.
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    Finally, the settlement explicitly denied class members the right to opt out. The district court approved the settlement over the objections of several pro se objectors, including Michael and Suzanne Crehan, attorneys with an understanding of real estate transactions. Among other objections, the Crehans argued that this was principally, if not entirely, a money damages case, in which an opt out was required under Rule 23 and the due process clause. Opting out was especially important to the Crehans because they had been pursuing their own litigation in Virginia against Mellon which would be effectively ended by a judgment approving the class action settlement. The district court overruled all objections and approved the settlement.

    The Crehans appealed to the Eighth Circuit which similarly overruled the objections. The court held that this was a proper injunctive relief class action under Rule 23(b)(2) and that, therefore, no opt-out right was required.

C. Public Citizen Involvement

    The Crehans then asked Public Citizen to take their case to Supreme Court. We agreed to do so on the opt-out issue. We presented a split among the circuits on whether opt-out rights must be afforded under Rule 23 in hybrid damages/injunctive relief cases. Moreover, we noted that, with respect to former Mellon customers (like the Crehans), the case was only one for money damages, in which Rule 23(b)(3) required a right to opt out.

    We also argued that, aside from Rule 23, the due process clause requires that class members be afforded opt-out rights where substantial monetary damages are involved. See Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 812–13 (1985). We noted a split in the circuits on this issue. We also pointed out that the Supreme Court had granted cert on the same due process issue in the recent past, only to dismiss the writ as improvidently granted because the Rule 23 issue was not also presented. This all apparently fell on deaf ears, as the Supreme Court denied cert.
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D. Status

    The case is over. We are anxious, however, to press the opt-out issue if a new case presents itself. See Adams v. Robertson, discussed immediately above.

E. PCLG Contacts

    Brian Wolfman, Colette Matzzie.

20. Oat Cereal Products Litigation

A. Cite

    In re General Mills Oat Cereal Litigation, No. 94 CH 06208, 94 CH 06244 (Cook Cty Cir. Ct, Chancery Div.).

B. Case Description

    This case was brought to recover damages ''suffered'' by all purchasers of General Mills oat-containing cereals because the oats were sprayed with a trace amount of a pesticide not approved by FDA for use on oats. The settlement gives coupons to the general public to buy more oat-containing General Mills cereals, including such favorites as Cheerios and Kix and less well known (but no doubt nutritious!) brands such as Frankenberry and Kaboom. Class members can get these coupons only if they mail in UPC labels to General Mills; i.e., only if they buy more cereal. The class members can get a cash refund for one box of cereal per household only if they saved the box tops from boxes of cereal purchased more than a year before the settlement! The defendants have agreed to pay the plaintiffs lawyers $1.75 million in attorney's fees, subject to court approval. The plaintiffs' fee application revealed that counsel was seeking in excess of $1200 per hour—assuming that all hours claimed were accurate, reasonably spent, and non-duplicative—for each partner, associate, law clerk, and paralegal.
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C. Public Citizen Involvement

    We filed extensive objections to the settlement and the fee. We also moved the court to amend the judgment approving the settlement to state that if the fees are less than the $1.75 million requested that the amount saved go to the class members, not General Mills.

D. Status

    A fairness hearing was held in state court in Cook County, Illinois on May 22, 1995. The court approved the settlement (thus, implicitly rejecting all our arguments concerning the lack of fairness of the settlement), but ordered the plaintiffs' counsel to provide additional evidence that their fee is appropriate. After additional materials were submitted, the court also approved the fee request in its entirety. Although we disagreed with the decisions on the merits and fees, we decided not to appeal.

E. PCLG Contacts

    Con Hitchcock, Brian Wolfman, David Vladeck.

21. Airline Antitrust

A. Cite

    In re Domestic Air Transp. Antitrust Litig., 148 F.R.D. 257 (N.D.Ga. 1993).
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B. Description

    This was an antitrust class action against all the major domestic airlines alleging price fixing through signalling of price increases/decreases. The settlement gave class members—people who had travelled by plane through certain hubs during the class period—coupons for money off on future air travel.

C. Public Citizen Involvement

    We filed objections on behalf of Public Citizen, Ralph Nader, the Center for the Study of Responsive Law, and others. We were helpful in changing certain terms of the settlement (e.g., making the coupons redeemable by travel agents) and were the principal objector to class counsel's $24 million fee request, which was cut to about $16 million. We were awarded about $19,000 in fees ourselves.

D. Status

    The settlement was approved by the district court. No appeal was taken and the case is now over.

E. PCLG Contact

    Con Hitchcock.

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22. Dalkon Shield

A. Cite

    In re A.H. Robins Co., 880 F.2d 709 (4th Cir.), cert. denied, 493 U.S. 959 (1989).

B. Description

    This was a class action filed alongside a bankruptcy proceeding filed by A.H. Robins, maker of the Dalkon Shield IUD, which was the subject of thousands of personal injury cases. The IUD caused many problems including infertility and spontaneous abortions, and the allegation was that the company knew of the problems and hid them. The bankruptcy filing came after numerous substantial verdicts.

    The class action was filed against Robins and its insurer, Aetna. One theory for including Aetna as a party in the lawsuit was that Aetna was liable to the plaintiffs under its liability insurance contracts with Robins. In that sense, Aetna was a limited fund, as Robins arguably was in light of its bankruptcy. However, Aetna was also sued as a co-conspirator in the cover-up of the Dalkon Shield's problems and, in that sense, it clearly was not a limited fund since the claims were not limited by the insurance proceeds.

    The non-opt-out class settlement provided several billion dollars for victims who would file claims against the Dalkon Shield Trust. The Trustees would make ''offers'' to claimants based on their injuries. If the claimant wanted to reject the offer, they could go to arbitration or court, but could not recover punitive damages. After the settlement was approved, the judge decided that a claimant who opted to go to court would be subject to a hold back which, in effect, provided that the claimant could only recover $10,000 of any jury verdict up front, with the rest paid only after all (non-court) claimants were paid. Of course, this hold back had the effect of discouraging claimants from going to court. It appears that the Fund will have lots of money left over, which will be distributed to the claimants.
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C. Public Citizen Involvement

    We represented claimants in opposition to the settlement and were the principal objectors in the court of appeals, where, in addition to some difficult bankruptcy issues, we argued that the claims against Aetna could not be settled on a non-opt-out basis since Aetna was not a limited fund. These arguments are not dissimilar from the arguments that will be raised in Fibreboard discussed above. We made the same arguments to the Supreme Court where review was denied. We later represented claimants who challenged the holdback in the district court and the court of appeals.

D. Status

    The case is over. We lost the original appeal in the Fourth Circuit in a lengthy opinion in which the court held, erroneously in our view, that this was an appropriate non-opt-out case. The Supreme Court denied our petition for review even though there was a split in authority on the relevant issues. We also lost the holdback appeal in the Fourth Circuit.

E. PCLG Contact

    Alan Morrison.


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DECEMBER 10, 1997

Serial No. 73
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Printed for the use of the Committee on the Judiciary

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

HENRY J. HYDE, Illinois, Chairman
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
BOB INGLIS, South Carolina
SONNY BONO, California
ED BRYANT, Tennessee
BOB BARR, Georgia
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JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
HOWARD L. BERMAN, California
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts

THOMAS E. MOONEY, Chief of Staff-General Counsel
JULIAN EPSTEIN, Minority Staff Director

Subcommittee on Courts and Intellectual Property
HOWARD COBLE, North Carolina, Chairman
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SONNY BONO, California

BARNEY FRANK, Massachusetts
JOHN CONYERS, Jr., Michigan
HOWARD L. BERMAN, California
ZOE LOFGREN, California
WILLIAM D. DELAHUNT, Massachusetts

MITCH GLAZIER, Chief Counsel
ROBERT RABEN, Minority Counsel
EUNICE GOLDRING, Staff Assistant

    December 10, 1997
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    H.R. 2740


    Coble, Hon. Howard, a Representative in Congress from the State of North Carolina, and chairman, Subcommittee on Courts and Intellectual Property


    Brickman, Lester, Professor, Benjamin N. Cardozo School of Law

    Harris, Jeffrey E., M.D., Ph.D, Associate Professor of Economics, Massachusetts Institute of Technology

    McHale, Hon. Paul, a Representative in Congress from the State of Pennsylvania

    McInnis, Hon. Scott, a Representative in Congress from the State of Colorado

    Moore, Michael, Attorney General, State of Mississippi

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    Morrison, Alan B., Staff Attorney, Public Citizen

    Rice, Joseph F., Esq., Ness, Motley, Loadholt, Richardson & Poole

    Scruggs, Richard F., Esq., Scruggs, Millette, Lawson, Bozeman & Dent

    Wise, D. Scott, Esq., Davis Polk & Wardwell, on behalf of the Tobacco Industry

    Yerrid, C. Steven, Esq., Moore, Michael, Attorney General, State of Mississippi


    Brickman, Lester, Professor, Benjamin N. Cardozo School of Law: Prepared statement

    Cannon, Hon. Christopher B. a Representative in Congress from the State of Utah: Prepared statement

    Frank, Hon. Barney, a Representative in Congress from the State of Massachusetts: Congressional Research Service memorandum, ''Table 1: Proposed Tobacco Settlement (June 20, 1997)

    Harris, Jeffrey E., M.D., Ph.D, Associate Professor of Economics, Massachusetts Institute of Technology: Prepared statement
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    McHale, Hon. Paul, a Representative in Congress from the State of Pennsylvania: Prepared statement

    McInnis, Hon. Scott, a Representative in Congress from the State of Colorado: Prepared statement

    Moore, Michael, Attorney General, State of Mississippi: Prepared statement

Morrison, Alan B., Staff Attorney, Public Citizen:

Article, ''A Bad Deal for Smokers,'' from Legal Times magazine, November 10, 1997

Prepared statement

    Rice, Joseph F., Esq., Ness, Motley, Loadholt, Richardson & Poole: Prepared statement

    Scruggs, Richard F., Esq., Scruggs, Millette, Lawson, Bozeman & Dent: Prepared statement

    Wise, D. Scott, Esq., Davis Polk & Wardwell, on behalf of the Tobacco Industry: Prepared statement

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    Yerrid, C. Steven, Esq., Moore, Michael, Attorney General, State of Mississippi: Prepared statement


    Material submitted for the record

(Footnote 1 return)
450 Lexington Avenue, New York, NY 10017 (212–450–4464).

(Footnote 2 return)
I am grateful to my colleagues, Professors John Duffy and John McGinnis, for providing me with a most helpful constitutional law tutorial. In addition, my research assistants, Gabriella Davi and Orlee Goldfeld, provided invaluable assistance. Ms. Goldfeld is primarily responsible for preparing the Appendix to this testimony. Finally, I have profited from reading a memorandum on the constitutional issues, dated October 15, 1997, prepared by Henry Cohen, Robert Meltz and Johnny H. Killian for the Congressional Research Service of the Library of Congress.

(Footnote 3 return)
State of Florida Contract—addendum 1, page 10.

(Footnote 4 return)
I have been retained as a expert witness and consultant by plaintiffs' counsel and by some state attorneys general in connection with tobacco litigation. My compensation is not contingent on the outcome of any pending law suit. I gratefully acknowledge the assistance of the staff of the House Judiciary Committee, including Diana Schacht, Deputy Staff Director-Counsel, for providing me with copies of individual contracts between states and private counsel, and other documents. The opinions expressed in my testimony today do not necessarily represent those of any law firm, any government entity, the Massachusetts General Hospital, the Massachusetts Institute of Technology, or any other organization.

(Footnote 5 return)
H.R. 2740 IH. 105th Congress, 1st Session. To limit attorneys' fees in the tobacco settlement. In the House of Representatives, October 24, 1997. Introduced by Mr. McInnis (for himself, Mr. Cox of California, and Mr. McHale). Internet: ftp://ftp.loc.gov/pub/thomas/c105/h2740.in.txt.

(Footnote 6 return)
State Tobacco Information Center, State Suit Summary. Boston MA: Tobacco Control Resource Center, Northeastern University, 1997. (Internet) http://stic.neu.edu/summary.htm.

(Footnote 7 return)
Contrubis J. Attorneys' Fees in the State Tobacco Litigation Cases. Washington DC: Congressional Research Service, September 23, 1997. As part of my analysis, I reviewed the specific contracts between private counsel and all plaintiffs except the states of New Jersey and Oregon and the territory of Puerto Rico. The attorney compensation provisions for Oregon are outlined at (Internet) http://www.doj.state.or.us/Rel6T9.htm.

(Footnote 8 return)
''Proposed Resolution: For Settlement Discussion Purposes Only. 6/20/97, 3:00 p.m. DRAFT.'' 68pp.

(Footnote 9 return)
Memorandum of Understanding. In Re Mike Moore, Attorney General ex rel, State of Mississippi Tobacco Litigation. Cause No. 94–1429. In the Chancery Court of Jackson County, Mississippi. Washington, D.C., July 2, 1997. See (Internet): http://www.ago.state.ms.us/mssetdoc.htm.

(Footnote 10 return)
Settlement Agreement. The State of Florida, et al. v. The American Tobacco Company, et al. Civil Action No. 95–1466 AH. Circuit Court of the Fifteenth Judicial Circuit, In and For Palm Beach County, Florida. August 25, 1997, 11:20. See (Internet): http://stic.neu.edu/Fl/flsettle.htm.

(Footnote 11 return)
Arthur F. Golden (Davis Polk & Wardwell) to Joseph F. Rice (Ness, Motley, Loadholt, Richardson & Poole), Re: State of Florida v. The American Tobacco Company et al., Civ. Action No. 95–1466 AH. Letter dated August 29, 1997. ''In each year the annual payment would be used to pay, or be allocated proportionately among, all unpaid approved legal fees (and certain other similar fees).''

(Footnote 12 return)
Harris JE. Written Testimony Before the Senate Committee on Agriculture, Nutrition, and Forestry Hearings on the Tobacco Settlement and the Future of the Tobacco Industry, September 11, 1997.

(Footnote 13 return)
Harris JE. American cigarette manufacturers' ability to pay damages: overview and a rough calculation. Tobacco Control, Winter 1996, Vol. 5, pp. 292–294.

(Footnote 14 return)
National Law Journal, A Firm-by-Firm Sampling of Billing Rates Nationwide, December 8, 1997, p. B08. See (Internet): http://www.ljextra.com/cgi-bin/f_cat?prod/ljextra/data/texts/1997_1201_101.html.

(Footnote 15 return)
Exhibit B of the 5/27/97 contract between the Attorney General of Vermont and private counsel shows the hourly rates of senior lawyers at Berman & Hagens and Scruggs, Millette, Lawson, Bozeman & Dent to be $350. Other partners' rates are shown as $250 per hour, while associates' rates vary from $140 to $175 per hour and paralegals' rates are quoted at $65 per hour. In a list of 16 attorneys assigned to tobacco cases (including lawyers from Ness, Motley, Loadholt, Richardson & Poole), the median hourly rate was $205.

(Footnote 16 return)
Information on the percentage rate in New Jersey (complaint filed 9/10/96) is preliminary.

(Footnote 17 return)
Lieff, Cabrasser, Heimann & Bernstein was also retained by the City Attorney of San Francisco.

(Footnote 18 return)
My computation reflects the ''volume adjustment'' provision in the Proposed Resolution, in which industry payments decline in proportion to the drop in cigarette sales. See Harris, JE. Written Testimony Before the Senate Committee on Agriculture, Nutrition, and Forestry Hearings on the Tobacco Settlement and the Future of the Tobacco Industry, September 11, 1997.

(Footnote 19 return)
See Golden to Rice, August 29, 1997, footnote 8 supra.