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Wall Street Journal

The State Lawsuit Racket

A case study in the politician-trial lawyer partnership.

Updated April 8, 2009 12:01 am ET
State Attorneys General regularly hire private plaintiffs lawyers on a contingency-fee basis to prosecute cases. The trial bar returns the favor with campaign donations to state office holders. And despite the inherent conflicts of interest and questionable ethics of the practice, corporate defendants have rarely challenged such arrangements. Which is why a motion pending before the Pennsylvania Supreme Court is so remarkable -- and deserves more public attention.

Ed Rendell Ed Rendell. GETTY IMAGES

Janssen Pharmaceuticals, a subsidiary of Johnson & Johnson, is a defendant in a lawsuit filed by the state of Pennsylvania over Janssen's antipsychotic drug Risperdal. The state alleges that Janssen has improperly marketed the drug for off-label uses not approved by the Food and Drug Administration. Janssen denies the accusation, but the merits of the case -- which hasn't gone to trial yet -- are not what's at issue in the motion before the court.

Rather, what's at issue is the fact that the civil action against Janssen is being prosecuted on behalf of the state by Bailey, Perrin & Bailey, a Houston law firm. And it turns out that Pennsylvania Governor Ed Rendell's Office of General Counsel was negotiating this potentially lucrative no-bid contingency fee contract with Bailey Perrin at the same time that the firm's founding partner, F. Kenneth Bailey, was making repeated campaign contributions totaling more than $90,000 to the Democratic Governor's 2006 re-election bid.

Janssen's motion seeks to invalidate the contingency-fee arrangement and lays out a detailed timeline of Mr. Bailey's political contributions and the subsequent actions of the Governor's office. Here it is in part:

- On February 23, 2006, Mr. Bailey contributed airplane travel valued at $9,200 to Governor Rendell's re-election campaign.

- On March 3, 2006, Mr. Bailey contributed $50,000 to the Rendell campaign.

- On May 12, 2006, Mr. Rendell's office submitted a "request of delegation" to the state Attorney General, a Republican, that would allow the Governor's office to handle the case against Janssen.

- On May 24, 2006, the request was granted.

 - On June 30, 2006, Mr. Bailey contributed $25,000 to the Democratic Governors Association (which gave Mr. Rendell more than $1 million for his campaign in 2006).

- On August 14, 2006, Mr. Bailey signed a no-bid contingency-fee contract with the state.

- On September 15, 2006, Mr. Bailey contributed airplane travel valued at $6,900 to Mr. Rendell's campaign.

- On October 23, 2006, the Governor's Office of General Counsel mailed the contingency fee contract to Mr. Bailey.

- On October 30, Mr. Bailey contributed another $25,000 to Mr. Rendell's campaign.

- On February 26, 2007, Bailey Perrin filed the initial complaint against Janssen on behalf of the state.

Asked about the timing of Mr. Bailey's political donations, Rendell spokesman Chuck Ardo says Bailey Perrin was selected because of "their experience in these kinds of legal matters." Mr. Ardo says the Governor was aware of the campaign contributions but "had nothing to do with the selection." Asked why the Governor thought the case should be handled by his office rather than by the state AG, Mr. Ardo says, "the suit involves agencies directly under the Governor's control, and the General Counsel's Office believed it could eliminate a lot of unnecessary work by dealing with those agencies directly." Readers can decide if they buy that one.

Under terms of the contingency-fee contract, Bailey Perrin receives up to 15% of any settlement or judgment. Even better for the lawyers, the state is barred from settling for nonmonetary relief "unless the settlement also provides reasonably for the compensation of [Bailey Perrin] by [Janssen] for the services provided by the law firm under this contract."

In court papers, the drug firm argues that the contingency fee contract is invalid because it wasn't approved by the legislature, as the state constitution requires, and because it "violates Janssen's rights to due process under the United States and Pennsylvania Constitutions, which guarantee that attorneys representing the Commonwealth, acting in its capacity as sovereign, not have direct financial interest in the outcome."

The state Supreme Court is expected to decide soon on Janssen's motion, but whatever the outcome, the episode is another example of why more states should reform the process for retaining outside counsel. It's true that private firms are sometimes needed to help states that lack the resources or expertise to bring certain lawsuits. But it's also true that these outside firms could be paid on an hourly basis. And if contingency-fee contracts are used, open bidding would add transparency and ensure that taxpayers are getting the best deal. Mr. Rendell's office insists that "we have nothing to hide in this matter," but details of the contingency-fee arrangement were obtained by Janssen though a freedom of information request.

State prosecutors are supposed to be motivated by a sense of public responsibility for the interests of justice. Law firms have other motivations, and no-bid contingency-fee deals encourage lawyers with a financial stake in a case to try meritless claims or ask for exorbitant awards. That serves neither taxpayers nor justice, though in this case it sure did help Mr. Rendell's re-election campaign.