On December 11, arbitrators awarded $8.2 billion to contingency-fee lawyers representing Florida, Mississippi, and Texas for obtaining settlements from tobacco companies totaling $34.4 billion over 25 years. And there is more to come. Settlements with the remaining states have also been announced totaling $206 billion over the next 25 years. Moreover, both sets of settlements, though announced in 25-year totals, will actually be paid in perpetuity.
The settlements are a good deal for each of the parties: the tobacco companies earn Wall Street plaudits by containing a potentially huge liability; the states' attorneys general garner political capital in the form of headlines; and the plaintiffs' lawyers get rich beyond comprehension.
How rich? The $206 billion settlement has 153 pages of incredibly dense and detailed legalese, yet it is silent on the total amount to be paid to the lawyers. Indeed, the agreement omits publications of a critical document listing the names of the 250 to 450 attorneys who will join Texas, Florida and Mississippi lawyers in the Sultan-of-Brunei Club. Yet the recent settlement suggest that attorneys fees nationwide will total at least $25 billion over the next 50 years, plus interest, with the lawyers in the leading states getting a lion's share of the takings.
That agreement provides for two types of fees. Those lawyers who have done little work, and would like to take their windfalls and run, can collect up to $1.25 billion at the rate of $250 million per year. Mere chump change.
The rest of the attorneys can elect to go before arbitrators to determine their due. But this is not your usual arbitration process. The three-person arbitration board includes a representative from the tobacco industry, the trial lawyers, and a third selected by a supposedly neutral panel that is in fact dominated by the trial lawyers, giving them two of the three votes in the arbitration process.
Lawyers are arguing that given the fact that there is a cap of $500 million on annual pay-outs, their share of yearly disbursements will be a paltry few million dollars unless their total awards are well up into the billions. And with friendly arbitration boards, that is undoubtedly what will occur--just as it has already happened for Florida, Mississippi and Texas lawyers.
Thus, it is not out of the question that some states will award trial lawyers total fees that exceed the amount that their state client has been awarded for a 25-year period. In this feeding frenzy, the sky is not the limit. Fifty or more years from now, as mankind travels to the outer reaches of the solar system, lawyers will still be clipping their $500 million tobacco coupons.
It is important to note that these fees are not being paid by the states out of their share of the recoveries; this is not your typical contingency-fee situation. Instead the trial lawyers are to be paid by the tobacco companies in addition to the overall settlement. Thus, for the tobacco companies, the real amount on the bargaining table was not $206 billion but a larger sum that included the amount to be paid to the attorneys. Tobacco lawyers claim this is an advantage: Their fees don't "cost" the states anything. But had the attorneys general bargained with their own trial lawyer representatives over the entire sum, they could have obtained larger recoveries for their state. An additional $25 billion for the states would have left perhaps a paltry $5 billion for the trial lawyers. Instead, the states, are essentially relinquishing the money being paid by the tobacco companies to the trial lawyers.
But where are the tobacco companies? Actually, they are on the sidelines. As part of the settlement, they agreed not to contest any fees. The tobacco companies do not much care whether the attorney fees amount to $50 billion or $500 billion. Mostly, they care about their annual cash outlay, which they have succeeded in limiting. Just as their payments to the states are in perpetuity, so too, for all they care, are their payments to the lawyers.
And who is paying these vast sums? Cigarette smokers, who will be shelling out approximately 80 cents a pack more to finance the settlement. Presumably, states could have avoided the settlement simply by raising tobacco taxes by a like amount, but then the trial lawyers would not have gotten their billions, and the attorneys general would not have been able to take credit for their great moral victory against big tobacco.
Given the fact that the arbitration process is simply a fig leaf to hide the fee-setting process from public view, it is no surprise that there is virtually no acknowledgment in the agreement of the role of legal ethics rules. Lawyers are not simply businessmen; they are fiduciaries and hold a public trust. Under the rules of legal ethics promulgated partly as justification for the legal profession's self-governance, fees cannot be "clearly excessive." Indeed that standard has now been superseded by an even more rigorous one; Under the American Bar Association's code of ethics, fees have to be "reasonable." Fees that reach or exceed $100,000 per hour are clearly not reasonable.
By having the tobacco companies pay fees directly to the attorneys instead of having the states do so out of their recoveries, the plaintiffs' attorneys were seeking to circumvent the kind of legislation enacted by the Senate earlier this year--an amendment to the tobacco bill limiting these lawyers' recoveries to a rate of $4,000, $2,000, $1,000 and $500 per hour depending upon when they brought the suit. Direct payment from the tobacco companies, by contrast, was all but immune from a potential fee cap, as no one would wish to be seen helping big tobacco by limiting its liability.
Congress, however, can defeat this strategy. Lawmakers can impose an excess-profits tax on lawyers' fees in the tobacco litigation that exceed designated hourly rates such as the $4,000-an-hour cap approved by the Senate, and further provide that these monies go to the states to be used for public health purposes.
The choice is stark. Either Congress exercises oversight over the fees so that states get a larger share of the settlement funds, or a handful of lawyers pocket more than $25 billion over the next 50 years and continue thereafter to rake in hundreds of millions of dollars a year until well into the 22nd century, if not beyond.
Mr. Brickman is a professor at the Cardozo School of Law of Yeshiva University.