Government by contingent fee is something we’ve consistently criticized on this blog. See our posts, here, here, and here.
Well, we’ve been remiss in keeping our readers informed of the progress of the Pennsylvania action. That changes today.
The big news we didn’t mention was that the Pennsylvania Supreme Court, by a 5-2 vote, issued the extraordinary writ, and agreed to hear the following issues:
A. Whether 71 P.S. § 732-103 dictates that Petitioner lacks standing to seek disqualification of Bailey Perrin Bailey, LLP on the basis of alleged violations of constitutional law.
B. Whether the Attorneys Act, 71 P.S. § 732-101 et seq. , authorizes the Office of General Counsel's contingent fee arrangement with Bailey Perrin Bailey, LLP.
C. Whether Bailey Perrin Bailey, LLP, should be disqualified because the General Assembly did not authorize the contingent fee arrangement between the Office of General Counsel and the law firm, such that the agreement violates Article III, § 24 and the separation of powers mandate of the Pennsylvania Constitution.
D. Whether Bailey Perrin Bailey, LLP should be disqualified because the due process guarantees of the United States and Pennsylvania Constitutions prohibit the Commonwealth from delegating the exercise of its sovereign powers to private counsel with a direct contingent financial interest in the outcome of the litigation.
Commonwealth v. Janssen Pharmaceutical, Inc., ___ A.2d ___, 2009 WL 1857395 (Pa. June 30, 2009). The Court’s online calendar has scheduled oral argument for October 21, 2009.
And if oral argument’s been scheduled, that means there’s got to be briefing, right?
Absolutely, and that’s what this post is about. Defense side briefing (Janssen is considered an “appellant” since it filed the petition for extraordinary relief) was due on August 11, 2009. One of us (Bexis) worked on one of the amicus briefs and was able to get a complete set of the briefing. Because whether state executive officers can, without legislative appropriation or approval, hire contingent fee counsel to sue drug and device (and lots of other) manufacturers is an important cutting edge issue, we’re posting the briefs and describing what they say. We hope they’ll be a resource to others on our side of the “v.” faced with similarly dodgy “prosecutions.”
We’ll start with the brief filed by the petitioner, Janssen. It has the most information about the case, which is ostensibly filed on behalf of Pennsylvania’s Medicaid and Pharmaceutical Assistance for the Elderly (“PACE”) funds. The complaint alleges that the defendant promoted Risperdal for off-label uses (also called “not medically necessary” uses), that the Commonwealth paid for such uses, and that, as a consequence the defendant should have to pay back every cent Pennsylvania ever paid for the drug (in essence giving it to the state for free). The state sues in its “sovereign” and “parens patriae” powers. Janssen br. at 9-10.
Janssen alleges, regarding the history of this suit, that:
- This suit was the brainchild of a prominent Texas plaintiff’s firm, Bailey Perrin, and one of its founding partners, F. Kenneth Bailey.
- Bailey unsuccessfully pitched the suit to Pennsylvania’s Attorney General in 2005.
- Starting in February, 2006, Bailey reportedly gave the first of what would eventually be more than $91,000 in political contributions to the re-election campaign of Pennsylvania's Governor – and another $25,000 to the Democratic Governors Ass’n, of which the Governor was an officer.
- The Governor’s Office of General Counsel (“OGC”) decided to bring the suit that the Attorney General had declined to bring.
- In May, 2006, the OGC prevailed on the Attorney General to delegate the case to it.
- In August, 2006, the OGC signed a contingent fee agreement with Bailey Perrin for the Risperdal action.
- There was no competitive bidding for this contingent fee agreement.
- The contingent fee agreement gives Bailey Perrin the right to as much as 15% of everything that Pennsylvania might recover – allegedly many millions of dollars.
- In the contingent fee agreement, Pennsylvania gave up its right to settle, except on terms that assure Bailey Perrin is “reasonably” compensated.
- In the contingent fee agreement, contrary to usual practice, Pennsylvania waived Bailey Perrin’s conflicts of interest in simultaneously bringing the same suits against the same defendant on behalf of several other states (at least Louisiana, South Carolina, Arkansas, Mississippi, and New Mexico).
- In the contingent fee agreement, contrary to usual practice, Pennsylvania gave up its usual “control” of litigation brought in its name, retaining only a right to be “consulted.”
- Bailey’s last $25,000 contribution to the Governor's campaign came one week after the executed contingent fee agreement was mailed by the OGC.
- The complaint, filed in February, 2007, wasn’t verified for truthfulness by any member of the state government, but only by a Bailey Perrin lawyer.
- No OGC attorney has ever entered an appearance in the case.
Janssen br. at 5-9, 11.
The defendant first addressed a peculiar, and rather weak, argument by the Commonwealth that a targeted defendant lacks standing to seek disqualification of opposing state counsel. This was based on the Pennsylvania statute that originally created the Attorney General’s office when the state went to an elective system. The statute prohibits third-party challenges to the state's “authority” to appoint attorneys. The defendant took the eminently sensible position that no statute can immunize the government from constitutional challenges to its conduct. Janssen br. at 14-16.
Turning to the more interesting stuff, the defendant asserted several grounds on which the contingent fee agreement should be rejected and Bailey Perrin disqualified. The first argument is based entirely on Pennsylvania state constitutional grounds, but we have to believe that most states operate under broadly similar constitutional structures. In Pennsylvania, the legislature controls the purse strings. Thus the governor’s office cannot expend unappropriated funds – unknown future legal recoveries belonging to the Commonwealth – for any purpose whatsoever. In essence, the defendant asserts a rather fundamental separation of powers principle: that the executive branch cannot arrogate to itself the power of the purse. Janssen br. at 17-18, 20-23.
Given Pennsylvania's current budget crisis, we can certainly see why the Governor would want to do that - but he can't. Not constitutionally, anyway.
Further, any funds to be “recovered” by the Commonwealth belong to it, and are for the legislature, not the executive, to decide how to spend. Id. at 18-19, 24-25.
While this is a Pennsylvania-specific argument, the Commonwealth is not particularly unusual in how its government is structured. It seems to us that similar constitutional power of the purse limits, and similar cases and statutes not allowing the executive branch to unilaterally spend money it receives, are likely to exist in most, if not all, states. Apparently this argument has already won in Louisiana.
The second defense argument was also based upon Pennsylvania law, and seems to be more state specific. It turned on the statute creating the OGC not having any provisions authorizing contingent fees. Janssen br. at 25-27. Apparently a couple of other states have statutes allowing such retentions, id. at 26-27, so this is a useful basis for distinguishing those states.
The third argument was the biggie – constitutional due process. The basic propositions (all accompanied by supporting precedent) are these: (1) Due process requires that sovereign powers be wielded impartially, Janssen br. at 28-29; (2) Exercise of governmental powers under the influence of private pecuniary considerations violates due process, id. at 29-31; (3) government attorneys are, like judges, bound to exercise their powers to seek justice, and not to pursue personal gain, id. at 31-33; (4) contingency arrangements create the sort of pecuniary influence that due process forbids, id. at 34-36; and (5) public policy should not be made through litigation influenced by private pecuniary considerations. Id. at 36-38.
These public policy concerns were quite interesting in and of themselves. If the state seeks to avoid paying for the drugs that the program participants are prescribed, the participants won’t be getting those drugs any longer. The litigation was directly contrary to the actions of the Commonwealth’s own plan administrators, who continue to list Risperdal as a “preferred” drug. The action sought to penalize all off-label use, despite the legally and medically recognized status of this practice. Id.
The defendant followed the discussion of public policy with a couple of arguments that flow from the proposition that a contingent fee creates a private pecuniary interest. Janssen br. at 38-39. The first was that appearance of impropriety is enough – actual influence on state decision-making need not be proven (although just reading the complaint is proof enough for us). Id. at 39-40. The next was that it would be a clear ethical violation for a lawyer drawing a government salary to take on this sort of contingency, and the Commonwealth cannot do indirectly what it is otherwise prohibited from doing. Id. at 40-41.
The defendant’s next major argument was directed to who exercises actual “control” over the litigation. This became a critical issue in similar litigation in California, because of how that state’s prohibition on contingent fees in state litigation is phrased. Janssen br. at 42 n.24. Janssen contended that Pennsylvania precedents are not dependent upon control, id. at 41-44, and in any event the terms of the contingency agreement in this case and the manner in which it has been litigated demonstrated that the Commonwealth in fact has not exercised control (and isn't allowed to) over the legal positions that have been asserted in its name. Id. at 44-45.
Finally, the defense debunked any claim the Commonwealth might make that it “lacks resources” to proceed except on contingent fee. The defendant points out that the OGC alone employs 500 attorneys. Further, nothing, apart from reluctance to submit this politically motivated deal to legislative oversight, prevented the OGC from seeking an appropriation of some of the billions in tax revenue the Commonwealth receives every year for payment of hourly rates. Janssen br. at 45-47.
We’ll review the amicus brief filed by the Washington Legal Foundation (“WLF”) next. That’s because Bexis wrote most of it - and to that extent we will play favorites. The WLF brief first delves into how any “pay-to-play political culture, and the attendant appearance of impropriety, is at odds with several legal standards imposed by either the state’s constitution or by statute – most notably requirements concerning competitive bidding. WLF br. at 4-6. Presumably, most states have similar provisions.
WLF next examined the Pennsylvania campaign contribution reports for 2006 and describes that these public reports indicate that if 2006 contributions made by Bailey’s former firm (still apparently allowed to use his name) and law partners are added into the mix, the total amount of political contributions would actually top out at over $210,000. WLF br. at 7-8. WLF then provides to the Court the reaction of the press to the disclosure of the temporal proximity between all these contributions and the award of a non-bid contract to one of the contributors. Id. at 8-10. WLF recommended that the Court to “consider the source” of arguments that this deal actually benefits the Commonwealth, id. at 10, and urged the Court to exercise its supervisory power over attorneys practicing in the state’s courts to set this agreement aside. Id. at 10-11.
Next WLF made the due process argument, relying heavily on the Court’s prior cases requiring disqualification of financially interested prosecutors. WLF br. at 11-12. Again, it is likely that similar cases exist for this proposition in most states. WLF then shifted its focus to the disqualification of financially interested counsel representing the state in civil cases. This argument collected cases from around the country. Id. at 13-15. WLF finished its constitutional argument with a discussion of control and appearance of impropriety. Id. at 15-17.
WLF’s last argument emphasized the detrimental effects that extreme allegations motivated by a desire to maximize potential recovery at all costs has on public policy. WLF pointed out: (1) for good reason, off-label use is a widely accepted medical practice, br. at 18-19; (2) Risperdal remains a “preferred” drug on the Pennsylvania formulary, in accordance with medication guidelines adopted by the National Association of State Mental Health Program Directors, id. at 19-20; (3) contrary to the complaint’s allegations, off-label use is not medically unnecessary, id. at 21-22; (4) contrary to the complaint’s allegations, off-label use is not illegal, id. at 22-23; (5) contrary to the complaint’s allegations, off-label use was not “experimental,” id. at 23; (6) contrary to the complaint’s allegations, off-label use is not ineffective, id. at 24; (7) contrary to the complaint’s allegations, the cost of beneficial off-label uses has never been recoverable, id. at 24-25; and (8) contrary to the complaint’s allegations, off-label use does not make the product so used defective. Id. at 25-26. These policy arguments, which relied upon nationwide precedent, are WLF's unique contribution to the cause.
The Product Liability Advisory Council, Inc. (“PLAC”) also filed a brief. PLAC’s brief is uniquely useful because of the thoroughness with it laid out the nationwide criticism that government resort to contingency counsel to sue product manufacturers has received – both in the case law, PLAC br. at 12-18; and more specifically the adverse influence that such contracts have had upon the governmental officials issuing them, to the extent that several were prosecuted on corruption charges. Id. at 19-24. PLAC also detailed the proven record of exorbitant fees at state expense that has followed in the wake of state contingent fee litigation. Id. at 24-27. PLAC also made public policy and due process arguments, id. at 8-11, but it’s the nationwide scope of its critique of the contingency process that makes that brief useful to any other attorney considering a similar challenge.
There’s also an amicus brief from the Chamber of Commerce. The Chamber’s initial argument was that the state’s sovereign powers cannot be constitutionally delegated to private, financially interested parties. Id. at 3-5. It then analyzed the neutrality requirements attaching to litigation involving the state in its sovereign capacity. Id. at 5-7. The Chamber next linked the neutrality requirement to constitutional due process. Id. at 7-9. To us, the Chamber’s unique contribution is its survey of the scholarly literature on due process and financial conflicts of interests. Id. at 10-14. These are articles that others faced with the similar litigation should be familiar with. Another useful feature of the Chamber’s brief is its detailed description of other circumstances in which public policy prohibits contingency agreements. Id. at 15-16. These are lobbying, criminal prosecution, divorce, and expert witnesses. Id. There’s also a useful discussion of the attitudes of other state officers towards contingent fee arrangements. Id. at 18-19. The Chamber closed with the separation of powers argument, detailed above. Id. at 19-23.
Undoubtedly motivated by the effect of similar contingency arrangements used against their members in the long-running and largely unsuccessful lead pigment litigation, the National Paint & Coatings Ass’n (“NPCA”) also filed an amicus brief. It took on another issue – how contingent fees bias, not private contingency counsel (although they certainly do that), but also the state governmental officials who hire them. See NPCA br. at 4-6. This kind of bias is called “moral hazard” (something we’ve heard a lot about in terms of the financial industry lately). Id. at 6-7. The contingent fee holds out a prospect of “money for nothing” that leads the state to do things it otherwise would never think of doing. This includes the pursuit of litigation that costs far more than any benefit it could create. Id. at 11-12, 14-16. “Moral hazard” also includes the pursuit of dubious and far-fetched legal theories. Id. at 12. The pursuit of questionable litigation reduces the deterrent value of all state prosecutions, especially where the legal theories cast a net that extends far beyond objectively wrongful conduct. Id. at 12-13. And there is an inherent bias towards damages rather than injunctive remedies. Id. at 13, 16-20-24. NPCA discusses at some length a particularly egregious example of this final bias in New Mexico. Id. at 20-24.
As we’ve said before, there are far more of these government by contingent fee cases now than there used to be. The current recession only intensifies the pressure on states to look for sources of revenue beyond traditional taxes. And this case demonstrates that contingent fee lawyers care little, if at all, whether the programs they are purportedly representing get wrecked as a consequence of ill-conceived litigation. We hope these briefs can be a resource for fighting the good fight and stopping these egregious abuses of power.