Project: Corporate Counsel Part I (Unintended Consequences) - Law Firms Curbing Abuses And Overreactions - There Are Answers

Friday, July 1, 2005 - 01:00
Victor E. Schwartz

Editor: The use of contingency fee lawyers by state attorneys general can lead to serious abuses. What is being done by organizations you represent to curb these abuses?

Schwartz: The American Legislative Exchange Counsel (ALEC,, an organization of approximately 2,500 state legislators, developed the Private Attorney Retention Sunshine Act to help address these abuses. Legislation based on the model act has now become law in Colorado, Kansas, North Dakota, Texas, and Virginia. To protect the public, the model act specifies conditions applicable to the retention by the state's attorney general of private lawyers, including those paid on a contingency fee basis. First, the AG proposes their retention in the open with true competitive bidding. The goal is to secure the best person or law firm. With tobacco, many situations occurred where an attorney general hired a friend or political supporter. In one situation, the AG used the offices of the plaintiffs' law firm hired to represent the state to house her campaign. Having this type of "hiring" in the open is good policy. Second, when the fee is expected to be over $1 million, the model act provides for legislative oversight to ensure that negotiations take place at arms length and that responsible lawyers are hired.

Interestingly, no state attorney general has hired any contingency fee lawyers in any state where the model Act has become law. What explains this? It suggests that the motivation for hiring contingency fee lawyers was not for the public good, but rather that it was wrapped in a private political interest that would have been exposed by the Sunshine Act.

The general idea of an attorney general turning over total control to a private interest is against public policy and this bill provides for legislative oversight to prevent the total abdication of a state's responsibility. Recently, briefs were filed in a Rhode Island case that raised the issue of the constitutionality of a complete delegation of authority by a state official to a private contingency fee lawyer. The briefs argued that such a delegation was contrary to good public policy, because, unlike a state official, plaintiffs' lawyers take no oath to serve the best interests of citizens.

Editor: There is great concern that juries may award excessive punitive damages where the judge fails to instruct the jury as to the standards to be applied in determining such damages.

Schwartz: Juries frequently are given little or no guidance about punitive damages, either in determining whether they should be awarded or the amount of the award. One time when I was in Texas, I saw an advertisement paid for by Texas trial lawyers. It stated that "punitive damages were necessary to punish corporate criminals." I thought about that sign and about the fact that the criminal law requires the judge to articulate a clear standard that should govern the jury in determining if someone has committed a crime. There are specific sentences for each offense. A judge cannot tell a jury in a criminal case to do what they please.

The standards that are used in criminal law should also apply in determining punitive damages. The rules should be precise regarding when someone is to be punished whether in a criminal or civil proceeding. The State of Maryland has an excellent standard that looks to whether a person intended to harm another. Some states do provide some measure to juries as to the maximum amount of punitive damages, but much more work has to be done to infuse more rationality and consistency into the process. The Texas trial lawyers may have suggested more than they intended, with the analogy so graphically set forth in their advertisements.

Editor: Are any of the organizations that you are involved with working on this issue?

Schwartz: Yes. The American Tort Reform Association (ATRA, and ALEC have a model bill that captures the principles of State Farm v. Campbell and other United States Supreme Court cases. It limits punitive damages to not more than an amount equal to compensatory damages in cases where compensatory damages, which include pain and suffering awards, are substantial. It sets a maximum award ratio of nine dollars in punitive damages to one dollar of compensatory damages, and permits a ratio as high as 15 to 1 in the rare situation in which a very small amount of compensatory damages is awarded but the outrageous conduct of the defendant merits a larger punitive award. It provides for de novo appellate review of the reasonableness of punitive damages. It bars out of state evidence from being used to punish someone for something they did in another state. The model act is needed because a number of lower courts have not understood State Farm or have ignored it. The model act increases the likelihood that courts will comply with the Supreme Court's guidelines.

Editor: What is being done to limit abuses of bonding requirements?

Schwartz: When bonding laws were put in place in the 1930s, they had a very legitimate purpose. They were introduced at a time when a landlord could move funds around during appeal and a poor tenant would be left with a meaningless verdict. Legislatures at that time did not consider that multimillion-dollar verdicts might be rendered against corporations where there is an absolute need for appeal. Bonding laws need to be reviewed to avoid having them used to pressure a defendant into an unfair settlement.

ALEC has created a model appeal bond fairness act that is now law, in some form, in almost forty states. ATRA has lobbied for its adoption. It places a cap on an appeal bond. The cap varies it from $50,000 to $20 million among the states that have adopted it. The cap does not apply if a plaintiff can show that there is a likelihood that a defendant will try to hide money to prevent enforcement of the verdict.

Bonding caps that have been enacted also vary with respect to who obtains protection. Some, for example, cover only the tobacco industry. What is fair to a tobacco defendant should be extended to defendants in other industries. Some of the appeal bond legislation only covers punitive damages, but in today's legal environment, pain and suffering damages can also be very high. Proper appeal bond legislation should cover all industries and apply to all damages. ALEC's model act does that.

Editor: Is anyone working on the discovery issues?

Schwartz: Lawyers For Civil Justice Reform (Barry Bauman is its executive director) and others are trying to address flaws in procedural rules. LCJ has done a very good job in addressing problems dealing with discovery, e-discovery and abuses that can occur in the discovery process. The Product Liability Advisory Council is also involved in this key issue.

Editor: What about interlocutory appeals?

Schwartz: Interlocutory appeals are favored in the federal Class Action Fairness Act. One has to define where and when an issue is so important that there should be an interlocutory appeal. Judges through the rule making process have usually done the work. LCJ has been involved in these issues as well.

Editor: What about judges who place tremendous pressure on defendants to settle?

Schwartz: When I graduated from law school, I clerked for Judge Charles M. Metzner, a very distinguished jurist who had a procedure for settlement discussions. He would privately meet with both parties and show them all the weaknesses in their cases. He would then try to get the parties to settle. That was fair. However, it is unfair for a judge to use his or her power to threaten a defendant to settle. It is difficult to articulate a rule that distinguishes between putting proper pressure on the parties to settle a case and what goes over the line. Certainly, no judge should insinuate that his or her rulings would be adverse to a party that resists settlement or that his or her instructions will steer a jury to find for the plaintiff or the defendant.

We have recently heard that judges in Madison County are being more professional and fair in how they handle cases - they are no longer trying to force settlement in every major case.

Editor: What about selection of competent judges to the bench?

Schwartz: There is a huge debate on whether judges should be appointed or elected. The American Tort Reform Association and others have focused on both encouraging qualified people to run for election and the selection of judges who are fair and even in their decision making. More work needs to be done regarding whether states should switch to an appointment system and if that is the best system. The debate on whether judges should be elected or appointed, however, misses a key point. An unfair judge can sit on the bench under either system. Appointment does not guarantee good judges. Voters in states where judges are elected should see that good people run and then support them. Where there are appointed judges, businesses should encourage good men and women to seek those positions and help assure that the process is fair.

A justice sitting on a state supreme court once told me an interesting story. He had a fundraiser and invited defense attorneys. His opponent was meeting with plaintiffs' lawyers at the same time. At his fundraiser, it cost him more for the food than the amount he received in donations. Plaintiffs' counsel at the other fundraiser made five figure donations to his opponent. That attitude does not help assure a fair result. It appears that in-house counsel carry the primary burden of ensuring that elected judges are fair. We have seen company counsel work together to bring about a good result in judicial elections - a fair, unbiased judge. A good example occurred in Illinois with the election of Judge Karmeier, a jurist who will listen to both sides.

Editor: One of the complaints about elections is that there is too much money involved.

Schwartz: Organizations like the American Judicature Society and American Law Institute may come in and get the principals together in a particular state to set up a system that insures that those elected or appointed are fair and competent. There is a need for that, but to my knowledge no organization is doing that on an organized state-by-state basis.

Editor: What about educating prosecutors and regulators about industry practices or the good things that companies are doing?

Schwartz: My experience has been with state attorneys general. When a new theory of liability looms on the horizon or where it appears that the AG has been given false information about pursuing a tort or liability claim, I encourage clients to meet with the state attorney general and provide him or her with relevant and honest information. I have met with clients where that was done and everyone went away happy. Mistakes and very unfair publicity was avoided. The old view that you should wait for the lawsuit is not true in 2005. If an attorney general only hears from one side, he or she can make a mistake.

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