Project: Corporate Counsel Part I (Unintended Consequences) - Law Firms The Deck Is Stacked

Friday, July 1, 2005 - 00:00

Editor: What are your general reactions to the hypothetical on page 3?

Smith: It is an example of "the perfect storm," a scenario we have seen play out several times in recent years. The Ford Motor Company-Bridgestone/Firestone tire recall situation - in which I was involved - was a similar multifront crisis, and the diet drug litigation raised some of the same issues. Today we have Vioxx litigation and defibrillator recalls, and companies are faced with potential disaster far in excess of anything that an individual lawsuit may entail. This is a consequence of the involvement of the media, regulatory agencies, state attorneys general, even Congress. With the press as a catalyst, the storm comes to a head much more quickly than anyone could have imagined and, indeed, more quickly than almost any company can react. Decisions must be made immediately, and very often those decisions have countervailing and irreconcilable tradeoffs. Something that might minimize a risk on one front, such as public relations, might increase it on another, such as litigation. Unless companies have crisis management plans in place, together with the resources to deal with these situations, they can be overwhelmed before they realize what is happening.

Editor: To what extent are discovery costs and risks driving settlement?

Smith: In certain situations discovery costs and risks can force settlement. Despite some positive changes in the Federal Rules of Civil Procedure, discovery is practiced in an unlimited fashion in many courts. Rather than exercise some form of control over discovery, most courts take the default position of permitting any requested discovery. While there has been some discovery cost shifting entertained recently, particularly in e-discovery, I think it is still the exception rather than the rule. At this point, it is incumbent on corporate defendants to be creative and develop their own defense strategies and economies. They are not likely to get much help from the courts.

Editor: Have discovery sanctions been a fertile ground for what could be termed as "blackmail?"

Smith: Absolutely. There are many plaintiffs' lawyers who have become specialists in tactical sanctions litigation. This kind of thing requires defendants to be on the lookout for these tactics from the beginning of any significant litigation. With careful planning, the defendant can be ready for this line of attack and, indeed, reveal it for what it is. Once the defendant falls behind, however, these tactics can drive the entire litigation and eventually the result. This is the reality today.

Editor: Do you agree with the proposition that an instruction that allows the jury to presume who was at fault will have significant importance for the defendant?

Smith: Certainly that can amount to the equivalent of the death penalty, but it is not a common risk. Bad inference jury instructions are far down the line with respect to sanctions that are commonly considered and awarded by courts. There are other sanctions that loom larger as potential risks, such as default, large monetary sanctions or evidence preclusion sanctions.

Editor: Why are punitive damages such a concern?

Smith: They are less of a concern since State Farm v. Campbell, which should eliminate some of the wildest aberrations. The problem lies in the unpredictability of punitive damages, and that is what drives settlement values. A number of studies, such as those conducted by the Rand Corporation, show that punitive damages are not much of an issue and that awards are commonly reduced or even reversed. But, any in-house litigation manager will tell you that those studies do not reflect the real decision-making process when a company faces a legitimate potential for a multiplier above compensatory damages. There is a significant risk premium and an attendant desire to settle and avoid that risk. Plaintiffs' lawyers know that and will continue to seek punitive damages whenever possible.

Editor: What about the hiring of plaintiffs' attorneys by regulators and prosecutors?

Smith: In my opinion, the trend towards empowering plaintiffs' lawyers to seek tort damages on behalf of government is the worst public policy mistake made in America over the last 30 years. Our government has unleashed the plaintiffs' bar to do through the tort system what our legislatures have declined to do. Most of us watched it happen in tobacco litigation without complaint because tobacco companies have been pretty unpopular in the public eye. This development, however, has created a monster. Today we see these law firms, fueled with the tobacco settlement money, looking for new targets. One of the problems is that the plaintiffs' bar is its own constituency and has little accountability. Their goal is to maximize monetary recovery regardless of collateral damage. In time, I believe we will recognize that this represents a foolish abdication of governmental responsibility. There is no single mechanism to address this situation, although clearly increasing the resources and staff of the law enforcement authorities is a necessary first step. This is beginning to happen. The increasing use of coordinated multistate attorneys general initiatives is certainly a better alternative than the plaintiffs' bar, and it is one with some accountability.

Editor: What concerns arise in the civil litigation context when the same events are the subject of a criminal investigation or grand jury investigation?

Smith: The biggest problem is that anyone who faces such a situation has to recognize that there may be no attorney-client privilege. Under the Department of Justice guidelines in the Thompson Memorandum, it is practically a requirement that a corporation facing a criminal investigation waive the attorney-client privilege to first obtain the possibility that a prosecution will not proceed or to achieve any practical relief in the sentencing phase of a prosecution. The result is that a corporation has to waive the privilege and thereby effectively deliver its most sensitive documents to opposing lawyers in the civil litigation. This is counter to the traditional notions of the sanctity of the attorney-client privilege and worse, can leave the corporation with a Hobson's choice between a crippling prosecution or crippling civil liability.

Please email the interviewee at colin.smith@hklaw.com with questions about this interview.