House panel examines ‘Litigation Abuses,’ CAFA, contingency fee agreements

WASHINGTON (Legal Newsline) – Third-party financing. Contingency-fee counsel. Forum shopping. Fraudulent joinder.

These were just a few of the topics addressed during a House subcommittee hearing Wednesday afternoon.

The hearing, convened by the Subcommittee on the Constitution and Civil Justice and titled “Examination of Litigation Abuses,” dealt with the country’s tort system and what some contend is the need to even the playing field for all parties involved.

Elizabeth Milito, an attorney with the National Federation of Independent Business, took the floor first, testifying about the detriment often faced by small business owners when it comes to civil litigation.

“Although federal policy makers often view the business community as a monolithic enterprise, it is not,” Milito told the congressional panel. “Small business owners have many priorities and often limited resources.”

Milito told the lawmakers that oftentimes, even the threat of litigation could mean significant time away from their business, “time that could be better spent growing their enterprise and employing more people.”

Milito talked about how lawsuit abuse “victimizes those who are sued,” and how many small business proprietors who are named as defendants in civil suits expend “substantial resources to defend their businesses.”

“When a business is facing an abusive lawsuit, it is often far less expensive simply to settle the lawsuit rather than incur steep legal fees fighting it in court,” Milito said.

Very often, it’s a simply cost-benefit analysis that drives the decision to settle a lawsuit rather than fight the merits of the claim in court, she said.

Another witness, however, testified that the situation isn’t as dire as tort reform advocates and groups representing business interests make it out to be.

Joanne Doroshow, executive director of the Center for Justice & Democracy at New York Law School, said that torts today really only represent about 6 percent of all civil cases.

Doroshow said that while calling consumers’ lawyers insensitive to the importance of keeping companies “litigation-free,” corporate lawyers often “run to court at the smallest provocation.”

The U.S. Chamber of Commerce, for example, sues the U.S. government on average three times per week, Doroshow claims. Legal Newsline and the Southeast Texas Record are owned by the U.S. Chamber’s Institute for Legal Reform.

In her testimony to the panel, Doroshow stated that while the rights of individuals “continue to be limited, major corporations enjoy unfettered access to the courts to recoup their commercial losses resulting from a host of troubles.”

John H. Beisner, who testified on behalf of the Chamber’s Institute for Legal Reform, however, made the point that the country still experiences far too much litigation abuse, something that is “undermining our economy and sullying the reputation of our legal system.”

Beisner, who is with the firm Skadden, Arps, Slate, Meagher & Flom,  talked about the Class Action Fairness Act of 2005, a federal law designed to assure fair and prompt recoveries for class plaintiffs with legitimate claims, and how despite its positive intentions to create a more “equitable civil justice landscape, the law continues to threaten the nation’s economy by failing to put a stop to abusive class action practices.

“This is due in large part to the fact that some federal courts have not been entirely faithful to Congress’s overarching intent that CAFA would expand federal jurisdiction over interstate class actions,” Beisner said in his testimony. “In addition, federal courts have not uniformly embraced the Supreme Court’s mandate that lawsuits be subjected to a ‘rigorous analysis’ before class certification is granted.”

Beisner also touched on the practice of state attorneys general retaining outside private counsel on a contingency fee basis in cases of government-initiated civil litigation.

Contingency fee contracts between state attorneys general and private lawyers, which became popular during the Big Tobacco litigation of the 1990s, can be problematic because they create an “opportunity for unseemly liaisons between public enforcement officials and private, profit-motivated lawyers,” Beisner testified.

One of the subcommittee’s members, Jerrold Nadler, a Democratic congressman from New York State, expressed skepticism about the allegedly problematic nature of contingency fee agreements.

The representative said if a state attorney general wins a case, that inherently means the lawsuit was not frivolous, hence the issue is moot in his mind.

Doroshow, the second witness to testify, noted that the contingency fees are not paid by the taxpayers, but rather by the companies who engaged in wrongdoing.

Doroshow further asserted that because the contingency fee issue is a state issue, “the federal government should stay out of this.”

The fourth witness to testify was Ted Frank, an adjunct fellow with the Manhattan Institute Center for Legal Policy and the president of the Center for Class Action Fairness.

Frank talked about the legal concept of cy pres, which is when money in class action cases are given to third-party charities and not the individual class members themselves.

In his testimony, Frank stated that cy pres is problematic because it “exacerbates existing conflicts of interest in the class action settlement context.”

“When a class attorney settles a class action, he or she is not only negotiating class recovery, but is also negotiating his or her own fee,” Frank said. “A defendant may be willing to spend a certain amount of money to settle a class action to avoid the expense and risk of litigation, but that money must be divided between the class and their attorneys. Every dollar going to the attorneys does not go to the class, and vice versa.”

Frank further stated that a class action settlement must also be approved by the courts, and attorneys who do not adhere to their fiduciary responsibility to the class have an “incentive to exaggerate class recovery to a court to maximize their fees.”

“If courts permit unfettered cy pres, then attorneys have an incentive to make it difficult for their own putative clients to recover, because then they can maximize the amount of money that goes to charity in the attorneys’ names,” Frank said in his testimony.