Texas-Size Lawyers' Fees Rankle in State Tobacco Suit

Two years ago, when Texas Attorney General Dan Morales hired a posse of lawyers to fight the tobacco industry, few balked about his payment plan: 15 percent of the cut if they won, nothing if they lost.

Then in January, the industry agreed to pay Texas $15.3 billion. It was the largest court settlement in US history.

Now, about that 15 percent. It adds up to $2.3 billion. Some Texans, including Gov. George W. Bush (R), think that figure is excessive, and they worry that the fees will significantly erode taxpayers' windfall and whittle at their right to decide how it is spent. Others say Texas wouldn't be having this debate if Mr. Morales's lawyers hadn't won the settlement in the first place, at their own financial risk.

But beyond the parochial politics of Texas is a larger question of legal ethics - one that is certain to crop up in the dozens of states that plan to take the tobacco industry to court. What is an appropriate fee for lawyers who invest their time and, in some cases, millions of dollars to prepare state lawsuits?

"If you think that the market system works, then you can let people bid for the services that they want," says Jeffrey Harris, an economist at the Massachusetts Institute of Technology in Cambridge. Alternative schemes, such as arbitration or pay-by-the-hour, may be attractive now that states seem to have a chance of beating beleaguered Big Tobacco, "but they don't reward lawyers according to the risk they incur."

To be sure, a lawyer's investment of time and money can be costly. In Texas, the state's private lawyers spent a reported $40 million gathering evidence and expert testimony. If they had lost, the money would be lost too.

"You have to remember, at the time these cases were filed, the tobacco industry hadn't lost a case, and they're still doing pretty well," says Gregory Joseph, chairman of the litigation section of the American Bar Association. "The amounts of money we're talking about are staggering, but it's up to the judge to decide what's reasonable."

Judge calls fees 'reasonable'

In the case of the Texas settlement, federal Judge David Folsom has already ruled that the 15 percent fee was reasonable. (In personal-injury cases, for instance, contingency fees are much higher, often 33 percent.)

But Governor Bush and a group of legal experts acting on his behalf are asking the judge to reconsider his decision. Judge Folsom is expected to rule on the matter in coming weeks.

"The standard contingency fee itself, in some cases, is a form of fraud," says Lester Brickman, law professor at the Cordozo School of Law in New York and an expert witness on Bush's behalf. "Texas was the seventh state to file suit against the tobacco industry, two years after Florida." As such, Texas had the advantage of watching what worked in other states, and "the risk to the attorneys was much less than they had described to the state."

But more troubling than the fees themselves, Mr. Brickman adds, is the question of how the $15.3 billion will be spent. Under the settlement, Attorney General Morales and his legal team decided how much would go toward Medicaid, how much to education - all without input from the state legislature. "The legislature was bypassed by a group of contingency-fee lawyers and the state's attorney general. That's bad news for representative democracy."

Elsewhere, fees are chopped

Texas is not alone in seeking to reduce its legal bills. In Florida, a county judge has rejected the 25 percent fee of the state's legal team, sending the issue to an independent panel. And in Maryland, the state Senate voted this month to cut the legal fee of Peter Angelos from 25 percent to 12.8 percent. A spokesman for Mr. Angelos said he was just about to offer to cut his fee anyway.

In Seattle, lawyer Steven Berman acknowledges that the risk of losing a case against Big Tobacco diminishes every time the industry settles out of court. As such, he stands to receive a much lower contingency fee if he wins the tobacco cases he is preparing in Washington and 12 other states.

Even so, "the risks are enormous," says Mr. Berman. People may think that $2.3 billion "is a lot of money," he says, "but on the other hand, no one had ever beaten the tobacco industry before."

But no matter how heated the political squabble gets in Texas, the tobacco companies have no intention of paying Texas anything above their $15.3 billion settlement.

"The industry will pay reasonable attorneys' fees as defined by an independent panel," says Scott Williams, a Washington-based spokesman for the industry. "Whatever the difference is, assuming it's less than what the contract is with the state, that is an issue to be settled by the state and their counsel," Mr. Morales.