Publicity-seeking politicians and contingency-fee lawyers corrupt the law

The corps of 50 attorneys general around the nation – those wannabe governors -- is at it again. Often in league with trial lawyers, they have gone after tobacco, guns, Microsoft and other high tech firms. Lately, their target has been oil companies.

The pattern for the AGs is the same: Pick an unsympathetic target with deep pockets. Generate lots of publicity. Change the laws, if need be. Enlist other AGs in the battle. Get the target to capitulate or a willing jury (it's not their money) to render a huge punitive judgment. Distribute a big chunk of the settlement to the lawyers. Make sure a big chunk of that gets recycled back into your campaign for re-election, for governor or for senator.

This process has resulted not merely in the redistribution of assets from productive firms to lawyers and politicians, but also in the making of public policy. Our tobacco, gun and antitrust laws have essentially been rewritten by state AGs and their trial-lawyer allies. The result, as former Labor Secretary Robert Reich wrote in USA Today , has been "regulation by litigation" – a sorry state of affairs that has cut elected representatives out of the system.

How bad is it?

Well, even John Cornyn, the Texas attorney general, has gotten into the act. Cornyn -- a Republican, who, to his credit, has been fighting to deny $3.3 billion in legal fees to private trial attorneys hired in a dubious deal by his predecessor – appears to have joined the ranks of his grandstanding brethren.

In a remarkable press conference earlier this month, Cornyn claimed that ExxonMobil Corp. owed the state "tens of millions of dollars" in an arcane contract dispute involving the extraction of oil from beneath a highway right-of-way. The Texas highway department obtained mineral rights when it acquired 50 acres of land near the town of Hawkins in 1933. In the early 1940s, Exxon began drilling oil and gas wells. "According to the state's suit," wrote Gas Daily, "Exxon ignored the state's royalty rights." ExxonMobil vigorously denies the charges.

As I said, it's an arcane matter – one typically settled by the two parties working things out in a business-like setting, not at the courthouse. Cornyn may have been inspired by a similar case involving a contract dispute over royalty payments from ExxonMobil to the state of Alabama for natural gas operations in Mobile Bay. The case was litigated by hired guns, a law firm working for a 14% contingency fee. And the judgment – in a state famous for absurd ones – required ExxonMobil to fork over $87.7 million for back payments and damages and $3.42 billion in punitive damages.

ExxonMobil, of course, is appealing. Kenneth Cohen, the company's vice president of Public Affairs, pointed out, "Exxon was working with the state to resolve this contract dispute until these personal injury contract lawyers, whose financial windfall stands to be 10 times more than the original $40 million in dispute, managed to turn the matter into a lottery on how much Exxon could pay the state."

But Alabama is Alabama. Its governor, Don Siegelman, is a former attorney general, and, as Walter Olson wrote recently on his website, overlawyered.com: "Alabama hasn't lived down the reputation for jackpot justice it earned in cases like BMW and Whirlpool. A jury…deliberated just two hours before tagging the oil company with the mega-verdict." (Just to explain: In one Alabama case, a jury hit BMW with a $4 million punitive charge because the company sold a new car without disclosing a touch-up to its paint job; in another, a jury socked Whirlpool with a $581 million judgment over a $1,200 satellite dish.)

My point here is not to take sides in these contract disputes involving ExxonMobil, but to show how destructive to the New Economy state politicians have become. Jonathan Rauch, in an excellent cover story in The Atlantic Monthly in January, showed how the oil industry has become a supremely productive high-technology sector. Yes, high tech. "Knowledge, not petroleum, is becoming the critical resource in the oil business," he wrote. What's needed (as the blackouts in California and the rise in gasoline prices remind us) is more exploration, more supply, a more rational energy policy. Yet the AGs are working to undermine those goals.

The trouble began with Michael Moore, attorney general of Mississippi, lining up trial lawyers to take on big tobacco companies in the name of recovering state Medicaid money supposedly spent on ill smokers. Let me be clear, I don't like smoking and am not a fan of tobacco companies. Lead paint, asbestos, breast implants, handguns … the trial lawyers, along with their AG colleagues, have gotten more and more out of hand.

And on to Cornyn, who came into office proclaiming that his goal was to "elevate professionalism over politics," and now is calling his state's largest corporation a thief: "We are accusing them of stealing oil and gas owned by the state of Texas."

Such headline grabbing is rampant among state attorneys general. At the Democratic National Conventions this summer, I challenged Michigan Attorney General Jennifer Granholm for going off half-cocked by saying she wanted to do "a Smith & Wesson-type thing" on DoubleClick, the Internet marketing firm.

Perhaps DoubleClick deserved disapproval for considering combining its own database of personal information that could not identify individuals with that of a failing company, whose database could. But the threat by attorneys general to gang up on a company to force it to capitulate just to avoid ruinous defense costs, as the cities and trial lawyers did against Smith & Wesson, is pure legal blackmail – a misuse of the courts to coerce companies to do what some attorneys general want but their legislatures do not.

Perhaps the most egregious activity of the AGs so far is their ganging-up against Microsoft. New books on the antitrust case show that a reasonable settlement foundered after attempts by Judge Richard Posner to get the approval of 19 state attorneys general who had piggy-backed on the federal suit. (State suits, by the way, have been laughed out of court.) A Microsoft official recalls Posner describing his negotiation with the states was "like herding cats."

Alabama's Republican attorney general, Bill Pryor exposed the dangers contingency-fee arrangements between government officials and trial attorneys, as in the tobacco suit, posed to the law. Pryor as Alabama's AG is obligated to defend the state's suit against ExxonMobil, but he has publicly criticized the governor's paying a contingency fee to the law firm hired to handle it.

As Pryor said in a speech last November, "The use of contingent-fee contracts allows government lawyers to avoid the appropriation process; it creates the illusion that the lawsuits are being pursued at no cost to the taxpayers. These contracts also create the potential for outrageous windfalls or even outright corruption for political supporters of the officials who negotiated the contracts."

Strange that one of the best of the attorneys general comes from a state with a reputation for ridiculous verdicts. In the latest case against ExxonMobil, the contingency fee law firm hired by Alabama stands to earn $490 million if the verdict holds. Was ExxonMobil wrong about the lease? I don't know. But the verdict has had a "Smith & Wesson-type" effect with one of four other oil firms that have lease disputes with the states. That firm, it is reported, offered to surrender to the state's terms without a fight.

What really makes this case obnoxious (and too typical) is that Siegelman had one of his biggest campaign donors do the litigating. According to triallawyermoney.org, a database of campaign contributions available over the Internet, attorneys in the firm that was chosen gave $69,600 to Siegelman's campaign in the last election cycle and $235,000 to the State Democratic Executive Committee of Alabama. In all, Siegelman received $850,000 from Alabama's trial lawyers and their political action committees.

As Reich wrote two years ago: "In the old days, state legislatures or Congress would enact laws, which would be administered by regulatory agencies." Now, instead, we are "regulating U.S. industry through lawsuits." Why? One big reason is the alliance between attorneys general, ex-AGs (like Siegelman) and trial lawyers. It's an old story of a lust for publicity, for money, for votes at any price, but it is fast making the nation's system of justice into a tool for government extortion – placing the New Economy at further risk.