The Tortellini

Here's real legalized extortion..

So the nation's third-largest natural gas company defrauds more than 8,000 West Virginia landowners, including a 90-year-old retired school teacher, out of more than $100 million in royalty payments on gas extracted from the land it leases from them. The landowners sue the company, and in January, win a $134 million verdict. The outraged jury, which learned that the company used Enron-like shell corporations to hide the deception and spent the money on huge golden parachute payments to top executives, then tacks on another $271 million in punitive damages (a completely defensible and constitutional 1:2 ratio of punitive to actual damages, I might add).

So what does the company do? Threaten to leave the state, or at least not to finish building its half-constructed new West Virgina headquarters until the verdict is either overturned, or the governor and the legislature pass new laws immunizing gas companies from lawsuits that occur when they rip off landowners. Naturally, the governor and many state legislators think this is a good idea and are on the case already...

Tobacco liability climate: best in years?

Sorry for the long absence, but I've been traveling, and am probably the only blogger in Washington without a Blackberry..(I also don't have cable TV, but that's another story...)

By now the U.S. Supreme Court decision on punitive damages in the recent Philip Morris case has been well chewed over, and I'm sure I don't have much to add on the subject except that it's unfortunate that Justice Stephen Breyer, with his cute little book on the Constitution, Active Liberty, doesn't feel the need to give more deference to juries. 

One thing that did jump out at me from the New York Times coverage of the decision was the aside that Altria stock has soared to record highs in the past few months because investors believe that the liability climate for tobacco companies has improved significantly. It seems that the money the tobacco companies have invested in tort reform, judicial elections and other lobbying has truly paid off.

Does Philip Morris Really Care?

Tobacco companies are famous for their scorched-earth litigation tactics. For more than half a century, the industry never paid out a dime in damages in smokers' lawsuits. That's largely because they spent ungodly amounts of money grinding down plaintiffs with deathbed depositions and nasty investigations into their personal lives. (Juries have also been rightly skeptical of smokers' claims that they really didn't know that smoking six packs a day could kill them.)

But yesterday, after watching the oral arguments in Philip Morris v. Williams at the U.S. Supreme Court, where the tobacco company's attorney gave a distinctly lackluster performance, I started to wonder whether Philip Morris actually cares that much about the $79 million punitive damage award at issue in the case. Obviously the business community cares greatly about it because a favorable ruling could essentially cap punitive damages nationally once and for all. The National Association of Manufacturers, the auto industry and insurance companies have all weighed in through amicus briefs.

For Philip Morris, though, this case is pretty small potatoes, especially compared to some of the billion-dollar punitive awards the company's been hit with lately. Most of those verdicts (mostly in class actions) have been overturned without the help of the U.S. Supreme Court. But over the long haul, as Williams' attorney Bob Peck argued yesterday (read the transcript here), the number of potential cases where Philip Morris could realistically face a big punitive award is dwindling, because once the tobacco companies came clean about the risks of smoking and nicotine addiction, their legal exposure started to diminish.

Another reason I think Philip Morris isn't all that concerned about punitive damages anymore is that that Victor Schwartz, the general counsel to the American Tort Reform Association and Philip Morris's longtime lawyer/lobbyist, told me yesterday that his camp is no longer pushing caps on awards. He said trial lawyers' obsession with caps is "so 1880s." Instead, he's pursuing other issues, like dismantling consumer protection laws that allow these cases to proceed (my words, not his).

Incidentally, because ATRA has worked hard to pretend it isn't a wholly owned subsidiary of the tobacco industry, I once asked Victor whether he represents cigarette companies. He quickly descended into his trademark imitations of various politicians--Arlen Specter is the current favorite--and wouldn't give me a straight answer. But the documents produced during the state tobacco litigation are full of memos written by him or to him from the company's big shots, often referring to him as the "PM Family" tort consultant.

My guess is that Philip Morris has better things to spend its money on these days than winning legal battles that mostly benefit the insurance, oil and auto industries---and it has a lot of money, despite its legal woes. Shares of Altria, its parent company, are up nearly 9 percent this year.

One interesting tidbit I picked up at the court yesterday: Philip Morris apparently believes that even if the Supreme Court ordered it to pay the $79 million punitive award, a big chunk of that money would revert to the company under the Master Settlement Agreement, which settled the states' attorneys general lawsuits against the tobacco industry in the mid-1990s. Don't ask me how this works exactly, but here's my rough understanding of the argument: The Williams case comes from Oregon, where state law requires 60 percent of all punitive damage awards to be paid to the public victims' compensation fund. Because the state already got a bunch of money from the tobacco companies in the earlier litigation, Philip Morris thinks taking the punitive award would be double dipping and thus, won't have to pay...

Oye Vey

The last time Andrew Frey argued a punitive damages case before the U.S. Supreme Court, the veteran litigator saved the State Farm insurance company $136 million. Today, though, his clients might not be so lucky in challenging the $79 million punitive damages award in Philip Morris v. Williams. Either Frey overslept or he simply thought the whole debate would be about math--i.e., whether the constitution has a "bright line" that limits how big punitive damages can be relative to compensatory damages.

Frey can be forgiven for making that mistake. In his 2003 case, State Farm v. Campbell, the court came close to spelling out a fixed ratio between compensatory and punitive damages--something in the single digits--as a constitutional limit on punitive awards. As a result, state courts have been slashing away at those rare, big awards to make sure they don't exceed something like nine times the compensatory damages. Except the Oregon supreme court, that is.

After State Farm, the U.S. Supreme Court sent the Williams case back to Oregon for reconsideration because the compensatory award was only $821,000, compared with the $79 million punitive award, a 97 to 1 ratio. On a second take, the Oregon justices decided that the ratio was just fine, because what Philip Morris did was really, really awful.

Naturally, Philip Morris appealed, arguing among other things, that the ratio violated the company's due process rights. But the math question barely came up this morning. Instead, Frey barely got through his opening remarks before Justice Ruth Bader Ginsburg dug in to him about jury instructions. Much of Frey's time was tied up answering questions about whether the jury was properly instructed that they couldn't use punitive damages to punish a defendant for harm to, in this case, other Oregon smokers who weren't plaintiffs even though they were allowed to consider the potential harm to all those people in deciding how reprehensible Philip Morris's conduct was. The confusion over State Farm led Justice Souter to remark at one point that "Maybe it's a good thing we weren't instructing a jury" when they wrote the decision.

In any event, Frey, who was reportedly prepping for his argument right up through the swearing in of some new bar members, never got to the ratio question. Beleaguered, he sounded a little whiny when he complained at one point that Philip Morris gets sued a lot, even though it wins all its cases. "When do we get credit?" he asked. Given who his client is, I don't think I would have gone there.

In fact, if the court were only deciding the case on the oral arguments, I'd put my money on Bob Peck and the Williams team. Far more prepared, Peck, the president of the Center for Constitutional Litigation, even managed to get in a few states' rights points for Alito and Roberts about the thoughtful guidelines Oregon state legislators and courts had created for constraining punitive damages on their own. The consensus in the peanut gallery, from everyone from ATRA's Victor Schwartz to the grande dame of the defense bar, Sheila Birnbaum, to the folks at Peck's firm, is that the court won't use the case to make any global pronouncements but is basically going to punt the case back to Oregon on the jury instruction issue. In the end, though, Philip Morris is going to have to pay something..

Maybe it's just reading too much into the tea leaves, but the tobacco company couldn't have been too pleased with today's performance. Neither Frey nor any reps from the tobacco company appeared on the steps of the courthouse for press comments, leaving the plaza to Peck, some guy dressed up in a  Ghostbusters Halloween costume, and later, to Mayola Williams, the widow of the plaintiff, who arrived in a wheelchair for the arguments.

I would love to tell you what Mrs. Williams had to say, but in perhaps a cigarette company conspiracy, a bulldozer was driving back and forth across the road next to the press mob, blasting its back-up horn at key moments so that virtually no one could hear her speak...

A HUGE CORRECTION AND APOLOGY:  I inadvertenly credited Andrew Frey here with arguing the State Farm case before the court. Frey actually argued the other big punitive damages case, BWM v. Gore, and was not the lead attorney on State Farm, but did represent the U.S. Chamber of Commerce on its amicus brief in the case. Sheila Birmbaum argued State Farm. Ouch! Sorry Sheila.

Tomorrow at SCOTUS

Big day tomorrow at the U.S. Supreme Court, where court watchers will be closely monitoring Justices Alito and Roberts' every word and gesture in Philip Morris v. Williams, the court's latest look at punitive damages. The case promises to clear up, if not the law on punitive damages, at least some of the uncertainty about whether the new justices' states' rights philosophy will ever trump their sympathies for corporate America. The oral arguments promise to be lively.

Andrew Frey, the lawyer representing Philip Morris, is a powerhouse, with a long string of successes in this area. On the other side is Robert Peck, the president of the Center for Constitutional Litigation (which in typical trial lawyer fashion, has no website). The center was spun off from ATLA in 2002 to challenge tort reform in court on constitutional grounds, and Peck, a former ACLU guy, has been the genius behind many of those wins.

The American Constitution Society blog is running a series of posts on the case, from a variety of viewpoints, including the latest by Sherman "Tiger" Joyce, the president of the American Tort Reform Association....

When Rhetoric Meets Reality

California governor Arnold Schwarzenegger was clearly drinking the Kook-Aid when in 2004, he proposed filling a $450 million budget gap by allowing the state to take 75 percent of all punitive damage awards in civil lawsuits. Perhaps we can forgive the Terminator for believing the rhetoric about skyrocketing punitive damage awards. Smarter people before him have fallen for it (think Sandra Day O'Connor). Few have been so bold, though, to try to run a state government on those mythical numbers.

When the so-called "split-recovery" law lapsed in July, it had generated exactly zero dollars for the state coffers. No surprise there. Punitive damages are really rare. The Bureau of Justice Statistics found that of the 356 civil trials that resulted in punitive damages in 2001 in the nation's biggest counties, only nine resulted in an award larger than $10 million, and that's before they were appealed. The median award was a mere $50,000. There weren't enough punitive damage awards in the whole country to fill California's budget gap.

The interesting thing about the California law is that the state legislators who wrote the bill knew all this. According to the Capital Weekly, legislators simply thought it would play well with voters. That explains why Democrats recently moved to extend the law for five more years. It's the kind of measure that allows liberals to say they're not in the pocket of the trial bar while actually doing nothing to change the status quo. (Former senator John Edwards has become the master of these sorts of proposals.) In any event, Schwarzenegger vetoed the bill on Oct. 10, as business groups decided jurors might give even bigger awards if they thought most of the money would go to the state and not the plaintiff.