LEGAL FEES: JAMES GANG RIDES AGAIN

NEW YORK -- If Jesse James and his gang were alive today, they would not be plundering banks. They would be fleecing Missouri taxpayers. Being a tort lawyer representing Missouri in its suit against tobacco companies is far more lucrative and devoid of risk.

Missouri lawyer Thomas Strong and his merry band of politically connected tort lawyers, with the help of Attorney General Jay Nixon and others, plan to raid Missouri's taxpayers to the tune of hundreds of millions of dollars -- unless a posse of legislators can head them off at the pass.

The issue before the legislature is whether the politically connected trial lawyers should be allowed to collect as much as $200 million for joining the state's suit against the tobacco companies after the matter was no longer in doubt, or whether the elected representatives of the client -- the citizens of Missouri -- should decide how much these attorneys are to be paid.

Here are the facts.

In May 1997, just before the first of two global settlements of states' tobacco suits was announced, Missouri became the 27th state to file suit. By the time Missouri brought its copycat case, the level of risk in the litigation was virtually zero.

Indeed, it became quickly clear that a second global settlement of the remaining states' suits was eminent. All Nixon needed to have done was await the announcement of the master settlement agreement.

Why did Nixon, in June 1998, enter into an agreement with Strong and the other tort lawyers to take over Missouri's suit, paying hourly rates for most of the lawyers of $250 if the case was settled by Jan. 1, 1999, a 6.15 percent contingency if the matter was resolved by Jan. 1, 2000, and 7.15 percent thereafter?

Was Nixon's decision influenced by the more than $70,000 contributed by the lawyers to Nixon's political campaigns in the previous five years?

On Nov. 24, 1998, a mere five months after the attorney general signed his favored few lawyers to the most lucrative retainer agreement in Missouri history, Nixon announced the state's case was settled. He did not announce, however, that the lawyers were to be paid an hourly fee under the terms of the original agreement. Instead, he said he would allow the private lawyers to collect a percentage fee, thus providing them with a potential windfall of hundreds of millions of dollars.

This new arrangement came about because the parties to the master settlement agreement needed to divert public attention from the billions of dollars in fees to be paid to private lawyers. So they set up a corrupt process to replace the contingency-fee contracts. The so-called arbitration left the selection of two of the three arbitrators effectively controlled by the lawyers. And deliberations were to take place in the strictest secrecy, despite the fact that, as the Missouri Supreme Court later concluded, the fees to the lawyers constituted an expenditure of public funds.

Nixon's chosen few waived their contract rights and await their turn at the arbitration trough. By modifying their fee contracts to provide for direct payment to themselves by the tobacco companies, they sought to insulate their fees from Missouri's ethics code, which mandates that attorney fees be reasonable. Even though they breached their fiduciary obligation to their client -- the citizens of Missouri -- the scheme would have worked if it had not been for the determined efforts of state Sen. Peter Kinder and taxpayer Rickey Jamerson, who contested the fees.

In a historic decision, the Missouri Supreme Court on Dec. 12 held that the people, through their legislature, could still play a defining role in determining how employees of the state are to be paid.

The court said Missouri and its citizens "are the attorney general's clients, and through their duly elected representatives in the General Assembly, they may control the payment arrangement" provided in the tobacco settlement "regardless of whether the funds come from the state treasury" or the tobacco companies.

The court went on to say that the General Assembly can enact legislation that "forbids the attorney general" from entering into the fee arrangement and can "provide an alternative mechanism" for compensating the private lawyers.

Senate Bill 454, making its way through the legislature, responds to the court's ruling. It would allow taxpayers to capture the fees to be awarded an estimated $150 million to $200 million -- while allowing payment of reasonable fees to the private lawyers. The private lawyers would be required to go through the arbitration process but pay the arbitrated fees into a state trust fund for distribution. A panel of lawmakers would then determine the actual fee payments. The measure would cap the fees at $500 an hour.

Critics of the proposal have advanced four arguments:

1. The proposed legislation is unconstitutional because states are prohibited by the U.S. Constitution from "impairing the obligation of contract."

2. Even if not unconstitutional, the proposal is retroactive legislation, which interferes with the "right to contract."

3. The Missouri Supreme Court held that, while the legislature can reject the fee arrangement by which the tobacco companies pay fees directly to the lawyers, it cannot modify the arrangement.

4. If the legislature either rejects or attempts to modify the fee arrangement in ways unacceptable to the private lawyers, then the lawyers can reject the arbitration process and instead assert their rights to payment under the agreement of June 1998.,

The first two arguments would apply to business contracts, but fee agreements between lawyers and clients are not ordinary commercial contracts. Lawyers' fees are subject to a reasonableness standard. All lawyers are subject to post-contractural review of their fee arrangements.

As for the third argument, the Missouri Supreme Court stated that the legislature can control the payment arrangement and can provide an alternative mechanism for compensating the lawyers. Obviously, the legislature can modify the fee arrangement.

Finally, in the event SB 454 is enacted, Nixon's band of lawyers are not free to reject the arbitration process and set a contingency fee under their original contract. Doing so would cause financial injury to Missouri, and the lawyers would be violating their duty of loyalty, committing malpractice and breaching their fiduciary obligation.

Even if Missouri were to suspend its ethical rules and lawyers' fiduciary obligations, the lawyers' claims would be limited to hourly rates set forth in the original contract, since the settlement occurred prior to Jan. 1, 1999.

In the struggle in other states between legal ethics and big money, big money talked, and ethics walked. Now it's Missouri's turn to confront this issue.

Lester Brickman is a law professor at the Benjamin N. Cardozo School of Law at Yeshiva University. He teaches contracts and legal ethics.