The Weekly Standard, March 19, 2001
SOMEONE STICKS A LOADED GUN to your head and asks for your wallet. Do you resist if you know the bullets are cheap and likely (but not certain) to be duds?
Today, mass tort litigation creates similar bet-your-life scenarios for increasing numbers of industries. Federal circuit court judge Richard Posner has noted that when a jury can "hold the fate of an industry in the palm of its hand . . .and hurl [it] into bankruptcy . . . the industry is likely to settle -- whether or not it really is liable." Law increasingly counts for little in mass tort cases; fixing the size of payoffs to make the cases go away has become its primary function.
Think otherwise? Then imagine yourself general counsel of McDonald's, faced with a nationwide class action brought on behalf of millions of Happy Meal customers who claim that their diabetes, obesity, and heart attacks were caused by your products, and with a companion series of suits brought by government agencies that paid for their medical care.
Your first reaction would be fury and incredulity. You know -- or think you do -- that french fries aren't cigarettes. You know that McDonald's tried and failed to sell low-fat hamburgers, that it gainfully employs vast numbers of young people, that millions of customers enjoy its products every day. That's when reality intrudes.
The first dose would come when you noted that the damages claimed in the combined suits vastly exceed the entire net worth of McDonald's -- that it will be out of business if the cases are tried and lost. You then realize that the company's files almost certainly contain memos discussing the health effects of your products. You also note that the public is less aware of the risks of eating Big Macs than of smoking Camels, that you've done little to advise your customers of those risks, that many of those patrons are young and unschooled, that you've made it hard for them to know the fat and calorie content of what you sell, that armies of expert witnesses and government officials are prepared to second-guess your menu and recipe decisions and to allege that "junk foods" are killing America. Your government relations vice president then describes the price the company will pay for waging sustained public war on political officials eager for massive lawsuit wind-falls they can spend without having to pass tax increases. Your media people also warn that document leaks and angry politicians orchestrated by media-savvy lawyers can metastasize the company's happy face image into a skull and crossbones faster than you can say asbestos or Bill Gates.
Finally, you note that 8 or 9 state supreme courts -- or has it now become 19 or 20? -- are, like the Florida Supreme Court, dominated by tort lawyers implacably eager to redistribute your assets without regard to fault. And, if that isn't enough, the value of the company's stock has dropped precipitously since the law-suits were filed. As a prudent lawyer and company officer, you'll soon come to understand what you need to do.
First, make sure all your competitors -- Popeyes and Taco Bell, as well as Wendy's and Burger King -- are also named in the suit. Then, after learning from your marketing people that the bottom won't drop out of sales as long as you (and your competitors) don't add more than 30 cents to the price of Big Macs, conduct a kabuki ritual of discovery proceedings whose singular objective is a settlement that will increase burger prices by no more than a quarter (with comparable increases for chicken wings and burritos).
Settling will be easy, for all you'll need to do is pay a nickel a burger for the next 25 years to the 300 or so lawyers who brought and control the cases. To be sure, this tort tax on your products will hurt business, and you'll be squeezed some by the nutrition education programs and modest salt and calorie reductions you'll be required to implement as part of the settlement. But offering a nickel rather than a penny a burger for legal fees (and offering government health care programs more lucrative settlements than individual plaintiffs) will do wonders in getting a settlement you can live with. Among other things, it will convert the lawyers who sued you into self-interested guarantors of the health of the fast food industry; and it will immediately return your stock price to where it was when the cases were brought.
The settlement will of course add eight or ten new tort lawyer billionaires to the Forbes 400 and will give the tort bar more disposable income to "invest" in the political process than all parties now spend in all U.S. elections in any given year. But that will be the next industry's worry, not yours.
The above scenario is, precisely, the story of the great asbestos and tobacco lawsuits of the 1990s. It explains why, in order to save itself, Dow threw its Dow Corning division to the wolves in the junk science breast-implant cases. As former Washington Post business editor David Ignatius has written, it will one day be the story of an oil industry that sits with global warming risk memos in its files if droughts or floods depreciate property values in different regions of the country. And consider this recent Department of Agriculture report: Carbonated soda provides more sugar in a typical 2-year-old's diet than cookies, candies, and ice cream combined, while more than half of 8-year-olds drink a can of soda per day and a third of all teenage boys drink at least three cans per day. Do you think for a second that creative tort lawyers won't try to link this "soda addiction" to any number of present and future health and social ills? Are you ready, Coke? Will you be ready when the tort bar dominates 30 state supreme courts? Cheer up, for you'll be able to get out of it all without too much damage if you pay the tort lawyers a penny a can for 25 years or so. On second thought, maybe you'll need a penny and a half to make them go away.
Under every canon of legal ethics, these blackmail scenarios should be proscribed. The central premise of legal ethics -- that lawyers are fiduciaries restricted to reasonable and risk-based fees -- is shattered when, as in the tobacco cases, lawyers are scheduled to receive $200,000 per hour fees for late-filed, copycat cases. Fee ethics mandates are said to be particularly critical in contingency fee cases where, as courts and scholars have noted, $100-million cases seldom require ten times as much risk and effort as $10-million cases. In fact, the relationship of case size to attorney risk is reversed in mass tort cases, where survival threats to defendants make $245-billion cases easier, rather than a thousand times harder, to win than "mere" $245-million cases.
President Bush proposed during the campaign to apply to lawyers in mass tort cases the Internal Revenue Code provisions that govern fiduciary breaches of duty by pension fund trustees, foundation executives, and employees of 501(c)(3) non-profits. Under this so-called Jim and Tammy Faye Bakker provision of the 1996 Taxpayer Bill of Rights, overreaching fiduciaries have the "choice" of refunding their excess payments or paying a federal tax of $2 for every dollar they keep. Under the president's proposed reform, attorneys in successful mass tort cases would be handsomely but not obscenely compensated. Based on a developed body of law governing the compensation of lawyers in shareholder suits, mass tort fees would be based on high hourly "lodestar" fees multiplied by a factor as high as six to cover the risks the lawyers assumed when they brought their cases.
Acting as if President Bush's reform proposal never had been made, a group of tobacco attorneys recently sold a 12-year strip of about $1 billion in future fees for $308.1 million in immediate cash -- thereby transferring the risk of non-payment of their fees to banks and investors. That cash-out was reported to be the first step in a planned two-year securitization of all future fees from the tobacco lawsuits, estimated to provide a payout of no less than $3 billion and as much as $10 billion.
Perhaps the lawyers and their bankers believed that the Bush proposal was not meant to be applicable to the tobacco settlement fees, and early comments from unnamed Bush spokesmen may have given them grounds to believe that this was so. If so, the lawyers and their bankers are in for a rude surprise. Page 80 of the president's budget contains this terse and, to taxpayers, cheering sentence: "The budget also assumes additional public health resources for the States from the President's proposal to extend fiduciary responsibilities to the representatives of States in tobacco lawsuits."
The Bush budget thus ensures that members of Maryland's congressional delegation will soon be asked to decide whether sick Maryland smokers (and the government agencies that pay for their care) or tobacco attorney Peter Angelos will receive the over-whelming bulk of the $1.1 billion fee now sought by Angelos. They will do so knowing that Angelos's services were rendered under a statute which, in the words of the state senate president, Mike Miller, "changed centuries of precedent to ensure a win." They will do so with the country's leading ethics scholars arguing that almost all of the money must go to Maryland rather than Angelos if codes of ethics are to have any meaning at all. Ted Kennedy, meanwhile, will get to vote on whether the bulk of the $775 million awarded to the Massachusetts tobacco lawyers should go to them or that state's health authorities. This comes in the face of sworn testimony by tort lawyers from other states that the Massachusetts attorneys added little or nothing to the settlement received by Massachusetts. Other members of Congress will have similar opportunities to decide whether fiduciary standards that still allow tobacco lawyers to be paid as much as $3,000 per hour are too ungenerous to those lawyers.
The Bush proposal will chill the plans of the tobacco lawyers to take a $3-$10 billion payoff and run. It sets up what will be a defining national debate on the role and rule of lawyers. Finally, it offers the tort bar the lesson that many Americans are now also learning: Don't underestimate George W. Bush.