Lawyers’ Fees in Tobacco Case Should Be Capped

Should a new law be passed under which Americans making $30,000 or less give as much as $58 billion to a small number of lawyers?

It could happen if Congress does not approve a bi-partisan bill, H.R. 2740, in some form.

H.R. 2740, sponsored by Rep. Scott McInnis (R-CO), Rep. Paul McHale (D-PA), Rep. Chris Cox (R-CA), Rep. Ralph Hall (R-TX) and others, mandates that if Congress settles the lawsuits against the tobacco companies, trial attorneys should bill no more than $150 per hour, plus expenses, or $312,000 per year, not including overtime.

Is a Fee Cap Fair?H.R. 2740 has come under harsh criticism from trial attorneys, many of whom have lobbied hard against it. But the bill is fair.

All the money to be disbursed in a tobacco deal ultimately comes from smokers. According to the Congress’ Joint Committee on Taxation, 53% of tobacco revenues come from people making under $30,000 and a whopping 97% come from people making under $75,000. The bill’s prime sponsor, Rep. Scott McInnis, estimates that trial lawyers could receive as much as $111 billion from a tobacco settlement. Other estimates are less but none, in the absence of a congressional fee cap, are lower than tens of billions of dollars. If Representative McInnis is correct, smokers making under $30,000 will pay 53% of $111 billion, or over $58 billion. Smokers making less than $75,000 will pay over $107 billion. Rich smokers, defined as those making over $75,000 per year, will pay only a little over $3 billion.

Lawyers suing tobacco companies argue that smokers are the victims of tobacco companies, which, they say, hooked them on an addictive drug. If one accepts this argument it makes little sense to for Congress to allow trial lawyers to victimize smokers again by forcing them to pay tens of billions so a handful of lawyers can become billionaires.

Furthermore, by settling many tobacco lawsuits at once, Congress takes the risk out of tobacco litigation. Lawyers say they deserve massive fees -­ as high as $100,000 an hour -­ when they succeed because they risk being paid nothing if they lose. Congressional action, however, takes out all the risks. So, according to their own argument, lawyers will deserve less money if Congress approves a settlement, since there will then be no risk that the lawyers could lose in court.

Lawyers argue that tobacco use harms people and takes away funds from government low-income medical programs. If Congress approves a deal forcing tobacco firms to pay hundreds of billions of dollars based on this argument, it would be illogical if Congress did not require that these funds be used on health programs (or on tax cuts for lower income Americans, to help them pay their own medical bills), except for reasonable attorneys’ fees. $312,000 a year, plus expenses and more for overtime, is reasonable.

The Arguments Against a Fee CapTrial lawyers make a number of arguments against a fee cap.

First, the trial lawyers argue that Congress has no business setting their fees. Ordinarily, it doesn’t. But the lawyers, joined by the other parties to the proposed tobacco settlement, both plaintiffs and defendants, specifically asked Congress to get involved in the tobacco case. In fact, the trial lawyers and the other partners to this deal specifically crafted a deal that requires congressional approval and one which cannot legally be adopted without express congressional consent. For the trial lawyers to request congressional oversight and formal approval of the tobacco settlement and then complain that Congress is doing exactly that is disingenuous.

A second argument made by trial lawyers against fee caps is that high-percentage contingency fee payment arrangements are the only way states can afford to hire top-notch lawyers. This is false. Tobacco litigation pits 40 states with extensive revenues against tobacco companies who pay their lawyers by salary or by the hour. The Texas state government alone, for example, collected $40.4 billion in revenues in 1996, which is about $4 billion more than the domestic and international tobacco revenues of the largest tobacco company, Philip Morris, for the same year. If tobacco companies can pay attorneys by the hour, so can the states. Some have: Maine has capped the fees for its lawyers at $150 per hour and Vermont’s lawyers, in the case of a national deal, will be paid no more than $200,000.

A third argument made by trial lawyers is that it is not fair to ask taxpayers to bear the risk of state lawsuits to recover Medicaid and other state funds allegedly lost due to tobacco use by citizens of the state. This argument says that the only way to avoid exposing taxpayers to financial risk (defined, by the trial lawyers, as paying legal fees and court costs for a losing case) while still recovering money from the tobacco companies is by setting up contingency fee payment arrangements for legal services that reward lawyers well if they win in court but cost taxpayers nothing if the lawyers lose.

This argument rests on the assumption that the only way for a state to obtain money from a corporation is through a lawsuit. This is a false assumption. States can and frequently do raise taxes. Raising taxes requires no risky lawsuits, no expensive lawyers and is extremely unlikely to be challenged successfully in court. In the case of tobacco, which is presently taxed by every state, raising tobacco taxes also has negligible tax-collection costs since a structure for collecting tobacco taxes is already in place. Thus, an increase in tobacco taxes would, unlike any lawsuit, raise revenues of which 100% of the proceeds could go directly into state services.

Another advantage for states in raising taxes over filing a contingency-fee lawsuit to raise revenue is that, as no private individuals get a percentage of the take from taxation, a decision to raise taxes (or not) is more likely to be based on the merits of the issue than is a decision to file a lawsuit in which private individuals (some of whom may be campaign contributors) have a good chance of receiving billion-dollar-plus paydays.

Yet another argument made by the lawyers against a cap is that $150 per hour, plus expenses, is an arbitrary and insufficient rate of pay.

Trial lawyers argue that the $150 per hour, plus expenses, rate is arbitrary because the bill’s sponsors, in the words of trial lawyer advocate Charles Silver (a consultant to the trial lawyers in the Texas case), “plucked [it] out of thin air.” The lawyers and their advocates argue that any rate not set by the free market is arbitrary. This would be a reasonably compelling point if it had not been negated by the trial lawyers’ own actions: by submitting the court case to Congress for resolution, the lawyers themselves took the tobacco deal out of the realm of the free market and voluntarily entered the realm of government.

Is $150 per hour, plus expenses, a fair rate? Anyone’s opinion is subjective, but a good argument can be made that this rate is not too low. As noted, $150 per hour comes to $312,000 annually for a standard 40-hour workweek (and many of the lawyers can be expected to claim overtime). By contrast, the Members of Congress who will approve any tobacco settlement and any fee caps make $136,700 annually. Moreover, according to the American Medical Association, doctors in the United States had an average income of $199,000 in 1997, substantially less than the amount of the fee cap being proposed for trial lawyers. Doctors, of course, must complete more formal professional training than do lawyers.

It should also be noted that H.R. 2740 sets a cap on the per hour rate individual trial lawyers can bill, but it does not mandate how lawyers within a single firm split the billing receipts. Individual firms retain the fexibility to, for example, bill 100 lawyers working at $150 per hour each, and then pay 50 of the least experienced of these 100 lawyers $50 per hour ($104,000 annually) and 50 of their most experienced lawyers $250 per hour ($520,000 annually). Firms with a few lawyers of superlative skill earning a million-plus dollars per year can actually pay their top lawyers at that rate, as long as other lawyers within the same firm make correspondingly less.

The fee cap proposed for trial lawyers in the tobacco settlement seems quite generous, in fact, except in comparison to what the lawyers actually want. In Florida, for instance, lawyers are seeking a $2.8 billion payment out of the $11.3 billion tobacco settlement, an amount the Florida Attorney General’s office likens to $100,000 per hour. Lawyers in the Texas case want $2.3 billion. Estimates for the amount of money trial lawyers will receive should a settlement be approved without caps vary. The sponsors of H.R. 2740 believe the amount could reach $111 billion. In testimony before the House Judiciary Committee, Lester Brickman, a professor at Yeshiva University’s Cardozo School of Law, estimated trial lawyers would receive $18.6 billion from the state cases and an additional $37 billion from individual tort settlements.

To put the amount of pay the trial lawyers want in the context of what top lawyers receive in other cases, Representative McInnis estimates that a 30% contingency fee would yield an average of approximately $925 million in fees, not including expenses, per law firm involved. By contrast, according to Rep. McInnis, the average annual gross receipts for the 100 top-grossing law firms in America in 1996 was $18 million.

Are Fee Caps in the Public Interest?Fee caps are in the public interest, because, if some private lawyers reap tens of billions from tobacco settlements, it is inevitable that these same lawyers or other trial attorneys will be unable to resist lobbying state officials to sue other industries. The lure of billion-dollar-plus paydays is simply too great for all lawyers to resist. If trial lawyers can make billions arguing that states are due dollars for the adverse health effects of tobacco, they’ll press states to file suits against other legal industries as well. The public policy of many states and much of the nation will be determined not so much by what individual state legislatures, elected by the people and accountable to them, decide is proper, but by a handful of Americans who want to become billionaires, and whose recommendations will be heavily influenced by that fact.

Will H.R. 2740, or some variation of it, pass? It’s hard to say. Only 21 Members of the House’s Republican majority have sponsored H.R. 2740 since the bill was introduced in October of 1997. The bill’s chances, however, have received a boost from a strong endorsement from Speaker Newt Gingrich, who is likely to have a powerful influence on the provisions of any tobacco bill approved by the House. In the Senate, the tobacco bill most swiftly advancing through the Congress, the Senate Commerce Committee’s massive “McCain Bill,” contains no provisions capping attorneys’ fees. But many Senators have privately expressed strong reservations about numerous provisions of the McCain bill.

ConclusionAny suggestion that a congressional tobacco settlement contain fee caps for trial attorneys is likely to be controversial because a few well-heeled trial lawyers, with excellent connections on Capitol Hill, will fight hard against a bill that prevents them from receiving billions of dollars for their legal work in cases against tobacco companies. But if Congress settles the tobacco cases, it is appropriate for it to address the issue of fees.

Amy Moritz Ridenour is president of The National Center for Public Policy Research. Comments may be sent to her at [email protected].

The National Center for Public Policy Research is a communications and research foundation supportive of a strong national defense and dedicated to providing free market solutions to today’s public policy problems. We believe that the principles of a free market, individual liberty and personal responsibility provide the greatest hope for meeting the challenges facing America in the 21st century.