Briefing Report: Contingency Attorneys in Public Entities' Litigation

Thursday, August 12, 2010

Introduction

Many public entities have hired contingent fees attorneys (legal counsel whose fee is based on the amount a plaintiff may win in a case) to represent them in litigating novel causes of action to hold tobacco, lead paint and gun manufacturers liable for damages caused by using those products.

Lead Paint Litigation

One particular case symptomatic of this government-trial lawyer alliance is the 10-year old lead paint litigation in Santa Clara County. That county and other local governments sued Atlantic Richfield and eight other companies in 2000 over the past sale of lead-based paints that have since been banned by the federal government. Mimicking the tobacco litigation, they seek to recover medical costs and the costs of inspections, educational programs and other remedies to the past use of lead-based paints. They make this claim despite the fact that paint manufacturers have been paying a fee to ameliorate these effects. The governmental entities alleged that the manufacturers are liable on theories of strict product liability, negligence and fraud for damages caused by lead paint, should be required to abate the public nuisance created by lead paint, and should be enjoined and ordered to pay restitution, disgorge profits and pay civil penalties due to their unfair business practices regarding lead paint. The Santa Clara County judge supervising that case dismissed that suit in 2003. However, his decision was reversed by the Sixth District Court of Appeal.

Contingency Fees

Upon losing the appeal on the merits of the case, the defendants filed motions to remove the contingency fee lawyers that the county and the other local governments had hired. The trial court told several cities and the county that they may not contract with private lawyers on a contingency basis in their nuisance suit against lead paint manufacturers. He stated that lawyers for the government are supposed to be neutral. As a matter of law, he concluded that neutrality is impossible when a contingency fee is the reward for their efforts. The judge stated "[t]he fact remains ...that outside counsel are co-counsel in the case. Oversight by the government attorneys does not eliminate the need for or requirement that outside counsel adheres to the standard of neutrality."

Court of Appeals Decision

The Sixth District Court of Appeal has reversed the superior court judge's decisions in a mandate proceeding brought by the governments, who had hired the contingent fees attorneys. The court stated that private counsel has been engaged to play a limited, subordinate role in this litigation. All of the public entities are represented by in-house counsel in addition to their private counsel. The fee agreements between five of the public entities and their private counsel explicitly provide that the public entities' in-house counsel "retain final authority" over all aspects of the litigation.

The court invited the California Supreme Court to review this issue and provide guidance to the courts and public entities on it. Subsequently, the defendants sought, and the Supreme Court accepted, review of the Sixth Circuit Court of Appeals decision of County of Santa Clara v. The Superior Court of Santa Clara County. On July 26, 2010, the Supreme Court issued its opinion on the standards for review of contingent fees. As expected, the court did not preclude the use of contingent fees counsel by government entities in nuisance cases. Their conclusions follow.

Supreme Court Opinion

The Supreme Court decided that specific contractual provisions in the representation agreements between contingent fees counsel and a public entity would ensure adequately that the public entity's attorneys, not the outside counsel, would control the litigation.

They observed that "These contractual provisions reinforce the principle that the financial assistance provided by contingent-fee counsel is conditioned on the understanding that public counsel will retain full control over the litigation and, in exercising that control, must and will place their duty to serve the public interest in ensuring a fair and just proceeding above their sense of any obligation to maximize a monetary recovery for the private attorneys."

Defendants argue that the contract provisions will fail in their application because the outside lawyers have more experience and expertise and will assume a primary role. The Supreme Court dismissed this concern with a hand wave, "we decline to assume that private counsel intentionally or negligently will violate the terms of their retention agreements by acting independently and without consultation with the public-entity attorneys or that public attorneys will delegate their fundamental obligations."

This seems a bit much to believe readily considering the outside attorneys were engaged for their expertise, the public entity's attorneys or principals wanted to litigate the claims and needed or wanted the outside lawyers' financial backing for the litigation.

The Supreme Court listed their minimum requirements for the contractual protection of the public entity's attorneys control over the litigation in these kinds of cases. "Specifically, contingent-fee agreements between public entities and private counsel must provide: (1) that the public-entity attorneys will retain complete control over the course and conduct of the case; (2) that government attorneys retain a veto power over any decisions made by outside counsel; and (3) that a government attorney with supervisory authority must be personally involved in overseeing the litigation." They admitted that these requirements are by no means exhaustive because the unique circumstances of each case and the entity may specify other provisions to maintain ultimate control of the litigations and not to cede it to the outside counsel.

In the case at issue there were ten contingency fees agreements. They chose to send the case back to the Superior Court of Santa Clara County to determine whether the agreements meet the standards of the Supreme Court's opinion. Of course, the public entities have the freedom to modify their agreements with outside counsel to satisfy the new criteria prior to the superior court making a further determination of the appropriateness of these agreements.

Impact of the Opinion

At best, the California Supreme Court clarified how a contingent fee representation agreement may withstand the scrutiny of a court considering a challenge to that attorney engagement contract. That said, the court's standards seem to present no real obstacle to the continuing of privately-financed public entity litigation of tort claims that presumably, the public agency would not have authorized without the outside financial support for it. How do these cases come to be brought? Does the public agency decide to file the case and then engage outside counsel? That is unlikely. It is quite possible that law firms with expertise in certain kinds of cases present the argument for bringing the cases to the public agency or its staff. In a time of dire finances one can see how the potential for a windfall for the agency financed by an outside party may seem appealing to the agency. Does an agency's precarious financial situation make it more probable that it will pursue such a case? Without much reflection that possibility seems likely to encourage bringing more contingency fees cases.

Although the Supreme Court has set some rules, it is difficult to foresee that those rules will rein in the use of contingent fees counsel by governmental entities in this state. There are too many powerful interests that support the use of contingent fees counsel by public entities for that to happen.

 

For more information on this report or other Judiciary issues, contact Mike Petersen, Senate Republican Office of Policy at 916/651-1501.