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Wall Street Journal

APRIL 16, 2009

The Pay-to-Sue Business

Write a check, get a no-bid contract to litigate for the state.

Our editorial last week on the state lawsuit racket has created a stir in Pennsylvania, where Governor Ed Rendell has finally had to defend his "pay-to-play" relationship with Houston plaintiffs lawyer F. Kenneth Bailey. That's the good news. The rest of this underreported story is that Mr. Bailey has been running a nationwide "pay-to-sue" operation with Democratic state Attorneys General.

Ed Rendell Ed Rendell.

As we reported, Mr. Bailey made repeated donations to Mr. Rendell's 2006 re-election campaign in the months before his law firm was given a no-bid, contingency-fee contract to sue Janssen Pharmaceuticals on the state's behalf. Mr. Rendell told the Philadelphia Inquirer -- whose reporters have roused from their slumbers -- that "there wasn't the slightest bit of pay-to-play here." But the Governor was obliged to acknowledge that Mr. Bailey had approached the state about suing Janssen. Normally, the state Attorney General would handle such legal matters, but the AG rebuffed Mr. Bailey. Mr. Rendell's office then decided to hire the law firm that was also his major campaign donor. Smile if you think the two were related.

The episode speaks volumes about Mr. Rendell's political ethics, but more important is what it reveals about the plaintiffs bar's latest "business" model. Mr. Bailey's Janssen suit is part of a national pay-to-sue operation, as he and his Bailey, Perrin & Bailey law firm have taken their pre-packaged lawsuit to many states. Janssen's complaint asking the Pennsylvania Supreme Court to dismiss Bailey Perrin from the suit notes that the firm has "taken on numerous engagements similar to this action, including representation in the states of Louisiana, South Carolina, Arkansas, Mississippi and New Mexico."

It's some racket. The plaintiffs attorneys come up with novel legal theories under which to sue companies or entire industries. They then solicit state AGs (or cash-hungry Governors like Mr. Rendell) to retain them to bring cases on behalf of the government on a contingency-fee basis. Motley Rice and Lieff Cabraser are among the firms that have targeted drug companies as well as makers of cigarettes, paint and guns.

Campaign records show that, in addition to the Rendell contributions, Mr. Bailey or his law firm donated $75,000 to Mississippi AG Jim Hood; $50,000 to New Mexico AG Gary King; and $20,000 to a political action committee in Louisiana that ran ads for Attorney General Buddy Caldwell.

The Arkansas Democratic Party received $60,000 from Mr. Bailey in November 2006, in two $30,000 installments. The first one was made the day before Attorney General Dustin McDaniel was elected; the second one came two weeks later.

In September 2007, Mr. McDaniel announced that Bailey Perrin had been chosen to represent the state on a contingency-fee basis in a lawsuit against Janssen and two other drug firms. The Arkansas Democrat Gazette reported that he began selecting a firm "in the days before being sworn in in January," even as Mr. McDaniel assured voters that Bailey Perrin "has never contributed to my campaigns." (Mr. Bailey didn't return our phone call.)

The generous Mr. Bailey also donated $85,000 to the Democratic Attorneys General Association, which gave $1.15 million to Mississippi's General Hood; $63,000 to New Mexico's General King; and $635,000 to the Louisiana Justice Fund, which ran campaign ads for General Caldwell. Mr. Bailey gave another $100,000 to the Democratic Governor's Association, which gave more than $1 million to Mr. Rendell and $198,000 to the Arkansas Democratic Party.

We are supposed to believe that these donations had nothing to do with being retained by the states. And we are also supposed to believe that these are no-risk propositions for states. The lawyers are paid with a portion -- 15% to 25% -- of any judgment or settlement and get nothing if the state loses. The private law firms fund the litigation costs up front, and they sue for hundreds of millions or even billions of dollars in damages.

However, the plaintiffs firms know that by bringing suits in multiple states, they increase the likelihood that companies will settle rather than endure the expense of multiple trials. Both the lawyers and the state politicians get a windfall, albeit at the expense of a private business that may have done nothing wrong.

Such a result is all the more likely because suing on behalf of the state can help a private firm get around statutes of limitations and problems of standing, and class-action hurdles can be lower. When Motley Rice sued lead-paint companies on behalf of Rhode Island, it didn't have to prove an actual injury to any one person. A private law firm acting on its own would have to meet a tougher standard.

The biggest losers here are the cause of justice and the principle of prosecutorial neutrality. When outside lawyers are hired to do the government's business, and then given a financial stake in the outcome, it creates irreconcilable conflicts of interest. The state delegates key decisions -- about whether and whom to sue, what legal theory to pursue, whether to settle and what remedy to propose -- to private lawyers motivated by profit rather than the public interest.

Meanwhile, the pay-to-sue nature of the transaction means that politicians have an incentive to promote frivolous litigation that makes it even harder for American business to prosper and create jobs. If Governors like Ed Rendell won't stop this legal-political collusion, state legislators should.