Tuesday, July 27, 2010

California on Governmental Contingent Fees - It Depends Upon Damage to Existing Business

We've been following the torturous path of the dispute over whether governmental entities can hire attorneys on contingent fee for quite some time.  Our first post on the City of Santa Clara lead paint case was in April 2007.  Anyway, the California Supreme Court has finally ruled.  Here's a link to the opinion.

We're interested - of course - because our pharmaceutical and medical device clients sometimes find themselves on the receiving end of governmental actions farmed out to private counsel.

California had a "bright line" rule forbidding such fee contracts arising out of a public nuisance case involving a dirty book store.  See People ex rel. Clancy v. Superior Court, 705 P.2d 347 (Cal. 1985).  Well, no longer.  In Santa Clara the court distinguished Clancy:
Yet, neither are the interests affected in this case similar in character to those invoked by a criminal prosecution or the nuisance action in Clancy.  Although the remedy for the successful prosecution of the present case is unclear, we can confidently deduce what the remedy will not be.  This case will not result in an injunction that prevents the defendants from continuing their current business operations.  The challenged conduct (the production and distribution of lead paint) has been illegal since 1978.
Santa Clara, slip op. at 18 (emphasis added).  Where "neither a liberty interest nor the right of an existing business to continued operation is threatened by the present prosecution, this case is closer on the spectrum to an ordinary civil case."  Id. at 19.

That being the case, the California Supreme Court held that the " heightened standard of ethical conduct applicable to public officials acting in the name of the public" could be satisfied where governmental officials remain in control of their contingent fee lawyers:
Because private counsel who are remunerated on a contingent-fee basis have a direct pecuniary interest in the outcome of the case, they have a conflict of interest that potentially places their personal interests at odds with the interests of the public and of defendants in ensuring that a public prosecution is pursued in a manner that serves the public, rather than serving a private interest.  This conflict, however, does not necessarily mandate disqualification in public-nuisance cases when fundamental constitutional rights and the right to continue operation of an existing business are not implicated.  Instead, retention of private counsel on a contingent-fee basis is permissible in such cases if neutral, conflict-free government attorneys retain the power to control and supervise the litigation.
Id. at 21.

So where does this leave us?  Well, we'd be lying if we didn't say we prefer a bright line Clancy-like rule forbidding such contingent fees.  But unlike the lead paint situation in Santa Clara, our clients are usually still in the business of selling the drug inplicated in the litigation.  Thus, in our cases, the relief sought would destroy or at minimum seriously interfere with the "current business operations" of our clients.

Thus, we would argue, under Santa Clara - as under Clancy - the bright line prohibition against government by contingent fee should continue to apply.

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