Here Come The Regulators: The Aftermath Of The 2010 Elections

Monday, December 6, 2010 - 01:00

The midterm elections on November 2, 2010 produced some of the most dramatic results in American political history. Republicans regained control of the House of Representatives by picking up over 60 seats in that chamber, the largest gain of seats by either party in over 60 years. Republicans also picked up six Senate seats, won multiple governorships and gained control of an additional 19 state legislative chambers.

Obviously, these historic electoral shifts have consequences for a wide variety of issues, including legal reform. For instance, the newly elected Congress will likely be much less sympathetic to the plaintiffs' bar agenda than the current Congress. Yet despite positive changes in Congress and the state houses, it is crucial that advocates for legal reform remain vigilant, as the plaintiffs' bar will likely seek to advance its agenda through friendlier venues, such as the federal regulatory agencies.

First the good news. The plaintiffs' bar will have a much more difficult time pushing its legislative agenda through Congress. This agenda includes bills that would erode federal preemption, eviscerate pleading standards for federal court cases, bar many forms of binding arbitration, and increase the number of costly securities class action lawsuits. While there is always the danger that litigation- expanding measures could be inserted into large comprehensive bills, the chances of that happening will be much diminished in the new Congress.

The elections also produced a more favorable climate for advancing proactive legal reform legislation, particularly at the state level. Several states are considering legislation modeled on Florida's Transparency in Private Attorney Contracting Act, which limits the troubling practice of state attorneys general contracting with outside contingency fee counsel for state enforcement actions. And while opposition in the Senate will make it difficult to enact legal reform legislation at the federal level, there is a chance that Congress will agree on much-needed reforms to America's broken medical malpractice system.

Despite these positive developments for the legal reform community, the plaintiffs' bar is not giving up. Faced with a more hostile Congress, plaintiffs' lawyers are exploring new ways to bypass our elected representatives and advance their litigation-expanding agenda through rulemakings and other actions by federal agencies.

Two recent federal actions are emblematic of the plaintiffs' bar's regulatory strategy. First, the Treasury Department reportedly considered taking action to provide a $1.6 billion tax deduction for lawyers taking cases on a contingency fee basis. As I discussed in a previous column for The Metropolitan Corporate Counsel , this deduction would effectively provide contingency fee lawyers with a federal subsidy to increase litigation against businesses. Plaintiffs' lawyers have been lobbying Congress to enact this deduction for several years. But with dim prospects for passage, they are now seeking to bypass Congress and have the Treasury Department impose the deduction by regulatory fiat.

The second action of concern is the Financial Accounting Standards Board's proposed changes to FAS 5 dealing with disclosure of loss contingencies. This accounting rule would require publicly traded companies to disclose details about ongoing and even potential litigation and to provide their legal assessment of litigation. While greater disclosure may sound innocuous to some, the effect of this change would be to provide the plaintiffs' bar with sensitive information that could be used to bring litigation against public companies. Strong opposition from numerous companies and associations caused FASB to delay consideration of the proposed rule, though it may be considered again in the future.

These recent actions by executive branch agencies are likely examples of what could happen in the next two years, as the plaintiffs' bar shifts its attention from Congress to the regulatory agencies. And the plaintiffs' bar will be especially focused on trying to influence the numerous rulemakings required by major recent legislation, particularly the Dodd-Frank financial regulatory bill and the health care reform bill.

The Dodd-Frank bill authorized 355 potential new rulemakings, 47 studies and 74 reports, an unprecedented volume of regulatory activity that will require several years to fully implement. Included among the law's provisions are over a dozen new private rights of action as well as several provisions authorizing increased enforcement activity by state attorneys general. The law also commissions several studies that could be used by the plaintiffs' bar to push for expanded litigation opportunities.

Corporate counsel should pay special attention to the activities of the Consumer Financial Protection Bureau (CFPB), a new agency created by Dodd-Frank with broad authority to regulate consumer financial products from a variety of industries. Unfortunately, the law allows state attorneys general to enforce the CFPB's regulations, which could lead to more litigation as well as inconsistent, duplicative and politically motivated enforcement of key provisions in Dodd-Frank. The law also authorizes the CFPB to restrict arbitration clauses in consumer financial contracts, which would push more disputes into the court system and increase the litigation burden on many companies.

Finally, all companies should be concerned about the Securities and Exchange Commission's new whistleblower program, which would provide monetary awards to whistleblowers who report securities law violations. The size of these awards (as much as 30 percent of a successful enforcement action) could encourage potential whistleblowers to bypass companies' internal compliance systems and go straight to the SEC.

These developments show that the threat of new litigation-expanding measures has not abated with the recent elections, but simply shifted from elected branches of government to the unelected regulatory agencies. At a time of high unemployment and sluggish economic growth, it is crucial that the business community and legal reform advocates stand together and fight regulatory measures that will lead to more costly, economically destructive litigation.