Project: Corporate Counsel Part II (Unintended Consequences and Compliance Readiness) Factors Accelerating Flight From The Civil Justice System

Monday, August 1, 2005 - 00:00

Michael D. Fricklas, Viacom, Inc and
Charles W. Matthews, Jr., Exxon Mobil Corporation

Michael D. Fricklas

Editor: Michael, what is your general reaction to the hypothetical you posed on page 3?

Fricklas: The hypothetical demonstrates why more cases are not tried. When you are confronted with a fact pattern like the one in the hypothetical, you may be forced to settle because the damage to your corporation from not settling can be so great.

The scenario depicted in the hypothetical is discouraging investment not only by U.S. companies, but also by international companies. Before I came to Viacom, I worked for a multinational corporation based outside the United States as general counsel of their U.S. business.

We never had a significant litigation while I was there, but I remember sitting in on a board meeting where the board was trying to figure out where to allocate capital around the world. It was eye opening to sit in the boardroom and hear people talk about our litigation system as a reason why they should not allocate any additional capital to the United States and should begin to withdraw it. In fact, they allocated capital to places like South America, Australia, Asia, and pulled money out of the United States. A principal reason was fear of our litigation system.

Editor: How has the plaintiffs' bar responded to the Supreme Court decision putting caps on punitive damages?

Fricklas: Plaintiffs have changed their tactics to focus on actual damages, which are now a jury issue and much tougher to overturn on due process grounds. This adds immensely to the unpredictability of outcomes in trials - particularly since plaintiffs have successfully redefined actual damages.

The kinds of things for which you can recover damages have dramatically expanded in the last few years. A Supreme Court case (Norfolk & Western Railroad v. Freeman Ayers, 538 U.S. 135 (2002)) involved the "fear of getting cancer," and allowed an asbestos case to proceed in West Virginia that sought damages on that basis. People got half a million dollars to over a million dollars each to compensate them for fear of developing mesothelioma. The dissent in that case pointed out that exposure to asbestos resulted in a very small increase in the risk of getting this rare cancer - and that the plaintiffs in that case should have much greater fears about things like dying of heart attacks and smokingrelated disease.

Medical monitoring is another theory being pursued by plaintiffs to increase actual damages. Although there are still a great number of states that have refused to recognize medical monitoring as a distinct cause of action, many jurisdictions, especially those seen as historically plaintiff friendly, have started to recognize the possibility of such actions. In some instances, there is an effort to couple these causes of action with exceptions to the workers' compensation tort immunity, such that large numbers of employee claims can be taken out of a predictable administrative system and placed in a system where there is the possibility of punitive damages and unpredictable compensatory damages.

Large damages are also being awarded for such things as loss of enjoyment of life as well as conventional pain and suffering. Some of the tort reform proposals that have been out there in the pain and suffering area talk about specific limits and specific dollar amounts. It's hard to convince people of the merits of these proposals, because there's always a case where the actual injury is so large that a particular limit seems unfair. At the same time, I don't know if any of your readers have taken a look at jury instructions that are given to people. It is remarkable how little guidance we give juries in the area of pain and suffering.

In our system, juries do not set policy, judges do. But this rule is often not observed. I'll give you an example from Georgia. The Georgia instruction on pain and suffering is pretty typical; it states: "Pain and suffering is a legal item of damages. The measure is the enlightened conscience of fair and impartial jurors. Questions of whether, how much, and how long the plaintiff has suffered or will suffer are for you to decide." That's the guidance we give jurors on how to decide what kind of damages to award. If the goal here is to enable defendants to get into court and get the trial that they're entitled to, jurors need some standards that will provide them with guidance in deciding how much damages to award.

Editor: Your hypothetical indicates concern about the insistence by prosecutors on waiver of the privilege. Are you equally concerned about the waiver of privilege in connection with providing to the auditors the more detailed information they now require in connection with their Section 404 reviews?

Fricklas: In most jurisdictions in the country, it remains the law that disclosure of privileged information or workproduct information to the auditors waives the privilege. Under the PCAOB's auditing standards - at least as interpreted by many auditors - the auditors want to see everything that might conceivably be material even if it doesn't relate to a reserve or a financial statement matter. If it implicates the corporation's compliance with law, if it's a legal opinion or if it relates to a tax matter, they may want to see it. This then opens the door to the plaintiffs' bar.

We are advocating, and the Board of the Association of Corporate Counsel has adopted a resolution in support of, federal legislation that overrules a myriad of state decisions that say that it is a waiver if you provide information to your auditors in the context of a financial audit. This rule would eliminate the damage that can be done where the full access an audit requires conflicts with the need to retain the privilege. Other things are also happening. There are a couple of rulings recently - one in the Southern District of New York last year and one in California at the intermediate State Court of Appeals level - that disclosure to auditors in the context of a financial audit did not waive the privilege. We'd love to see the PCAOB adopt a rule that provides that auditors have to keep information confidential. This would help the argument to a judge that there's no waiver. And, the PCAOB could make clearer that entering into a confidentiality agreement or a common interest agreement with your auditors would be permitted. We would also like to see legislation adopted.

In the meantime, there's a helpful white paper, issued by the Committee on Corporate Law Departments of the Association of the Bar of the City of New York. We attended a meeting recently with the National Center for State Courts at which we were encouraged to prepare a model rule of evidence that states could adopt. We will be encouraging the chief justices of as many states as possible to adopt a rule that would make clear that disclosure to auditors was not a waiver.

Editor: We have been talking about the negative things that are happening. Do you see any bright spots? Take tort reform for example?

Fricklas: Tort reform on the state level has had a lot of notable successes over the last few years. For example, in Mississippi, voter education in regard to local judicial elections has long been dominated by the plaintiffs' bar. The willingness of the U.S. Chamber to commit the resources to provide campaign financing and voter education from the perspective of business has made a dramatic difference in a state legal system which had been considered horribly tilted. Tens of thousands of Mississippi asbestos cases are being dismissed. Corporations have also had remarkable success in California dealing with Section 17200, which allowed plaintiff's lawyers to proceed without a client. Reform was taken to the public of the state of California by referendum and passed. You're starting to see notable successes like that around the country.

We should not relax in our reform efforts. It is a continuing struggle. Whenever one jurisdiction improves, there will be another jurisdiction that moves toward the bottom. However, it is comforting to see that there has been a dramatic difference in the climate as a result of efforts to enact real reforms.

Editor: What about efforts to curb abuses by plaintiffs' counsel?

Fricklas: I'd like to see a lot more people using existing law to go after abusive practices that undermine our system. The U.S. Attorneys' Offices are ferreting out abuses in a more aggressive way. There are grand jury investigations going on now in southern Mississippi and New York. There have been indictments of corrupt judges. I think people need to bring these abuses to the attention of the authorities when they do occur. I think judges need to be educated that they exist and that sanctions should be imposed. Back in February, Judge Jack in the Silica cases engaged in a probing interrogation of witnesses for the plaintiffs after a doctor recanted his diagnosis of silicosis. Doctors were signing hundreds of diagnoses that purported to have been made in a single day.

Editor: What do you feel were the most important initiatives discussed by your panel?

Fricklas: People expressed a lot of concern that corporations need to be able to try cases in a fair forum. We felt that judicial education and better resources for state courts are worth our time and attention. We also felt that appeals should be easier and that interlocutory appeals should be more available. We agreed that there should be better PR, both with respect to particular cases and with respect to business in general, to counter adverse public perceptions of business. The public should understand that wrongdoing by corporations is the exception rather than the rule.

Editor: Do you have suggestions for activities that should be high on our readers' lists?

Fricklas: Support efforts of your state bar to recruit better jurors and to make jury service more attractive. Support proposals to weed out juror bias by limiting opportunities to condition jurors. Make it easier to bond cases. Make discovery more balanced - defendants often bear the brunt of discovery disputes. There shouldn't be draconian sanctions for good faith efforts to comply with discovery of documents contained in complex electronic systems. Judicial elections and other methods of selecting judges should be fairer. Improve the education of judges. Encourage courts to discipline lawyers and others that abuse the system. Try to eliminate forum shopping. Deal with joinder abuses and lack of access to federal courts by out-of-state defendants. Support a standards-based approach to damages - both punitives and actuals. Encourage studies of the collateral economic effect of legal proceedings and public misconceptions about corporate behavior. Counter the side effects of plaintiffs' tactics by developing appropriate PR campaigns.

Charles W. Matthews, Jr.

Editor: Charles, what is your general reaction to the hypothetical posed by Michael Fricklas on page 3?

Matthews: The hypothetical captures today's reality and provides the reason that many people are becoming disillusioned with the system. When businessmen gathered together in the old days, they used to tell lawyer jokes. Now they joke about the legal system itself. Business leaders have indeed lost confidence that the system is really working in a fair and just manner. Cases are fleeing the system. Apublication by the National Center for State Courts observes that "jury and bench trials are disappearing in state and federal courts." We know that increased use of ADR and settlement initiatives have contributed, but there are other obstacles that are appearing within the system that result in a disincentive to go to trial and a bias toward settlement. As a result, not enough cases are going to trial and not enough case law is being developed on appeal.

Businesses understand that there are a number of cases that should be settled, but far too often, businesses are coerced into paying claims that are completely unjustified. And, if there is an outrageous punitive damage verdict, even if everyone agrees that it will one day be reversed on appeal, the verdict alone can wreak havoc on a company and its shareholders. And with each staggering result and each time somebody's company gets sued in some hostile jurisdiction with skyrocketing costs and each time there is a denial of due process and each time you have a waiver issue with the Justice Department, it erodes confi- dence in the system. Business people are reluctant to invest in a system that produces Michael's scenario, where, assuming the company is blameless, there is no practical way for vindication and they will be forced to pay people they did not injure.

Editor: Why do so few cases go to trial?

Matthews: Going to trial has become too risky for too many companies because so many aspects are stacked against defendants as illustrated by Michael's hypothetical.

Editor: Let's talk about some of these risks.

Matthews: The breach of contract suit has now become a tort case. We, in Texas, joke about freshmen law students learning contracts 101 in the torts class because so many cases are converted from a contracts to a tort suit so the plaintiff can get punitive damages. Punitive damages are no longer reserved for the most egregious conduct. When I started practicing, it was rare for a complaint to claim punitive damages. Today, essentially every tort case has a claim for punitive damages. The line between what is negligence and what is gross negligence has, in many jurisdictions, become quite blurred. The effect has been to turn lawsuits into a lottery with the payoff being to hit the punitive damages jackpot.

State attorneys general now meet as a group to explore ways to hire private contingent lawyers to act as private attorneys general. Public policy and the collateral economic effect are ignored. The focus is entirely on the big payday and the headlines.

Plaintiffs' lawyers have a much greater personal interest in the outcome of cases than they had in the past. Once the injured plaintiff had a lawyer looking out for his or her interest and there was actual causal connection between the injury and the compensation that resulted - with the injured plaintiff recovering the lion's share of the damages. Today, individual cases get lost in a big class action and - as the Rand study on asbestos showed - 60 percent of the money goes to the lawyers and for costs.

Discovery was once about gathering information that was relevant to the case. Increasingly, it is used as a trap for seeking more fees through sanctions, even in cases where people did not act with malice and forethought. There are now cases that stand for the proposition that simple mistakes can lead to sanctions.

Editor: What can be done to level the playing field?

Matthews: Let me suggest seven important areas for reform, much of it coming from the courts.

I would start with punitive damages. The punitive damage problem has not been cured. Punitive claims have become the ultimate leverage for settlement. The legislatures need to provide some workable and understandable guidelines for imposing punitive damages, including parameters for determining the amount of such damages. Courts should be urged to rule that punitive damages are not available until a framework is established and policies set by lawmakers. Jury instructions now in use provide no rational guidance and too often lead to uneven results. Lack of notice of punishable conduct and unpredictability have become unwelcomed hallmarks of our system.

There needs to be greater access to appellate courts through more interlocutory appeals, notwithstanding an anticipated cry of outrage from judges. There has to be some way to get the basic legal issues moved up the line for quick determination before staggering transaction costs are incurred in cases that ought to be disposed of as a matter of law. Another major abuse that needs to be corrected is requiring bonds, for example, on appeals - there are too many cases where companies just can't afford the bonds, and thus, cannot be afforded the right to appeal.

In class actions, the focus of courts has been on trying to move cases through the system. Look how much has been written about the efficiency of judicial administration in moving cases and how little has been said about the due process rights of the defendants. Concern for due process trumps judicial efficiency every time. Every time a person that was not harmed or damaged gets money, every time a defendant is denied the right to present a meritorious defense against a specific claimant, con- fidence in the system is eroded and due process takes a hit. Class actions have become coercive tools for settlement, and the courts need to acknowledge and address this problem.

Courts must monitor discovery more closely, and place limitations on the scope early in the process unless broader discovery is clearly warranted, and shift costs more readily to those seeking broad discovery. Start with Rule 1 of the Federal Rules, which mandates that the Rules are to be "construed and administered to secure the just, speedy, and inexpensive determination of every action." The Rule applies to defendants as well as plaintiffs.

As to sanctions, we need to get more balance so that we don't wind up with a fertile ground for blackmail. If I am a plaintiff's lawyer and have a weak case on liability, I am going to spend a lot of time trying to catch you in discovery abuses so I could hopefully get an instruction like that in Zubalake that basically tells a jury you can just infer these guys are bad guys. Discovery abuses need to be taken seriously, but courts must be careful not to allow abuse in the use of discovery.

More cases need to be tried, but many cases should be dismissed or limited at an early stage based on the law. Judges must judge, and take more ownership in both the development and restraints of common law. Surely, not everything is a jury question. It is not appropriate for 12 people to decide public policy. Twelve people ought not to be telling me what medication I can take or what I can eat.

Finally, we need judges who are able and willing to judge. This requires a greater investment in the system. Part of this investment should be in more judicial training based on adequate minimum standards. Greater amounts must be allocated to judicial salaries and to providing judges with the facilities, research, and administrative staffs they need. We need to get the money out of judicial elections. Only in this way can the severe abuses be eliminated in states where judges are elected.

Not one of the above suggestions would keep a truly injured plaintiff from recovering damages for his or her injuries. We need to work together to find ways to take the internal dissatisfaction that you see within corporations about what is going on and focus it on fixing the system.

Editor: How can the suggestions you made be implemented?

Matthews: Continue to attempt to influence reform not only through legislation, but also with litigation. Also, the internal dissatisfaction that general counsel encounter among their clients needs to be refocused on external activities. We need to stop talking just to ourselves. We need to be more participatory in so many areas. Not many inhouse counsel ever get involved in rule making in the various states or in bar activities. We've internalized ourselves too long. More of us need to get out and become participants in this system. I have found that if you sit down in structured venues to discuss issues with judges and legislators that they are very receptive to considering our views and to understanding the collateral effects of their decisions.

There are many opportunities for us to be involved with various organizations. It is particularly important for us to be involved at a local level, whether it's with a local chamber of commerce or other groups of local people, to try to reform the system. But it all takes a little bit more time and a lot more money than has been invested in the past. If we're going to reform the system, it's going to take a concentrated effort by a host of people, not just a few, to get out and make a difference.

This is not just a "big business" problem. If you look at the tort reform initiatives that have been achieved in the state of Texas, you will find that it is the small business guys who were responsible. They were energized to get out and fight for reform. It can be done; it's just a matter of mobilizing the effort, and educating the public. We can all help. I invite your readers to join the effort.

[Editor's Note] On May 10 and 11, The National Legal Center For The Public Interest sponsored a General Counsel Conference that focused on the unintended consequences of governmental reactions to the corporate scandals. One of the most interesting panels was that conducted by Michael D. Fricklas, Executive Vice President, General Counsel and Secretary, Viacom, Inc.

Mr. Fricklas posed the hypothetical set forth on page 3 to his panel, which portrays the plight of corporate counsel beset by the piling on of prosecutors, the plaintiffs' bar and regulators. The distinguished panel included, among others, Charles W. Matthews, Jr., Vice President and General Counsel, Exxon Mobil Corporation. The responses of Messrs. Fricklas and Matthews to the Editor's questions are set forth below. For other comments about the hypothetical, see the articles listed in Highlights on this page as well as the Special Section beginning on page 35 of our July issue.