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Why Attorneys General Need Plaintiff Financing

December 30, 2014
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5min read

The New York Times in December 2014 published a stunning investigation of a disturbing arrangementbetween state attorneys general and private plaintiffs’ lawyers, many of whom are former state AGs. The Times follows this relationship, via a trove of emails and interviews, into a deep rabbit hole of power, politics, and money. The article is worth the time it takes to read, but the story in essence is such:

Private lawyers, who scour the news media and public records looking for potential cases in which a state or its consumers have been harmed, approach attorneys general. The attorneys general hire the private firms to do the necessary work, with the understanding that the firms will front most of the cost of the investigation and the litigation. The firms take a fee, typically 20 percent, and the state takes the rest of any money won from the defendants.

The private lawyers in question parrot their efforts as crusades on behalf of the consumer – typically the purview of securities fraud and mass tort claims. By acting with state power, the Times suggests, private lawyers “substantially increase their chance for success.”

The defendants in question are generally large corporations: credit agencies, the oil industry, and pharmaceutical industries are all examples cited in the piece. Another is a group of elder care facilities which a plaintiffs’ lawyers suspected – citing staffing numbers – of malpractice.

These lawsuits reap sizable settlements. In the last two years, lawyers contracted by Mississippi AG Jim Hood have brought in $57.5 million in fees; in the last ten years, Hood has collected $400 million from outsourced lawsuits. He has also accepted $395,000 in campaign contributions from outside firms.

Attorneys general defend this practice with reasoning that should be familiar to any LFC360 reader: because they lack the means of their corporate opponents, outsourcing the case gives them a fighting chance.

[New Mexico AG Gary] King and other attorneys general say lawsuits against major corporations or industry sectors can require the hiring of expert witnesses and produce hundreds of thousands of pages of documents that must be reviewed. All of this comes at a high cost, and outside lawyers can foot the bills upfront.

“It’s one of the only tools I have to level the playing field on behalf of consumers, given the significant financial firepower that big pharma, big banking and any number of other industries have,” Mr. King said. “The attorney general is virtually the only protection the consumer has against abuse by those industries.”

If this seems like extreme logic, that’s because it is extreme logic. Here’s one other source of protection the consumer enjoys – just, you know, offhand: the civil justice system, which has been around many centuries longer (one hopes) than this quid pro quo.

But let’s indulge the argument.

Suppose this arrangement was the consumer’s last line of defense against predatory industries. Suppose all that was stopping Big Pharma and Big Oil from unchecked abuse was a cozy little relationship between the state and private contingency attorneys. Maybe this isn’t just a (wildly lucrative!) financial arrangement; maybe this truly is the consumer’s last bastion against dark looming powers.

Should it be?

Here’s some concerning insight from legal scholar Michael Greve over at the Library of Law and Liberty:

Here’s the larger problem, though: if the billion-dollar “recoveries” in state AG-led litigation don’t go to plaintiffs’ lawyers, where do they go? State practices vary, and little is known about this netherworld. But only a few options exist, and none of them are attractive. Let AGs “eat what they kill,” and let them fund their offices through “settlements”? That creates alarming incentives (and may in some circumstances produce due process problems). Give the money to the purported victims? The glitch is that in most of these cases there are no victims. Even when they do exist they often can’t be found or identified, and the process of distributing the funds to a heterogeneous mass of people would be near-random and absurdly expensive. In these situations, AGs increasingly make so-called cy pres distributions to outfits that, supposedly, protect and promote the alleged victims’ interests. In practice, it means that the money goes to the AG’s friends—various hangers-on in the “fair housing” or “teen smoking” industry, or the AG’s law school alma materfor yet another law school clinic. Why not provide that all recoveries are to be deposited in the state treasury (technically, the arrangement at the federal level)? Also not good: you’d be turning AGs into profit centers for cash-strapped legislatures, and litigation into tax substitution.

These are valid questions, amplified by the sheer size of the recoveries in question. Remember that this is a self-perpetuating system. Plaintiffs’ firms have contributed millions of dollars since 2004 to AG candidates, the organizations backing them, party committees, and AGs running for governor. This money buys power, and we all know what power does.

But here’s the important thing: attorneys general are not the consumer’s last or only line of defense against abusive corporate powers. That particular brand of paternalistic federalism – The People Can’t Protect Themselves! – hasn’t been fashionable since John Adams lost the election of 1800. The fact is, the people have multiple lines of defense: the legislature, the courts, consumer protection agencies, and the free market are just a few. Plaintiff financing is another.

Many are skeptical of plaintiff financing because they think it will create frivolous litigation, a claim that multiple studies debunk. The simple fact is this: plaintiff financing is an incredibly mighty tool that literally erases the years plaintiffs spend waiting for settlement. Yet public officials are reluctant to arm consumers with the same power.

One can point out that state attorneys general could potentially ease their burdens – while reducing litigation– by helping to educate consumers about the options available to them. Instead of simply acting on behalf of the people, they could give people the power to act for themselves.

If AGs are worried that this would put them out of the job, they possibly might be better off looking into plaintiff financing themselves.

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