September 3, 2013

Privatizing Public Enforcement: The Legal, Ethical and Due-Process Implications of Contingency-Fee Arrangements in the Public Sector

The proliferation of contingency-fee arrangements between state attorneys general (“AGs”) and private plaintiffs’ lawyers threatens significant abuse to our judicial system.  In the typical arrangement, the AG agrees to pay outside counsel a percentage of any judgment or settlement achieved in the case as compensation for the representation.  Many AGs like to trumpet these arrangements as win-win for their constituents because they enable the state to bring litigation against companies without using their own funds for litigation, but contingency-fee arrangements between AGs and outside counsel engender a multitude of ethical and conflict-of-interest problems.  Most notably, they pose a substantial risk that outside counsel will inflate the amounts sought in lawsuits in order to maximize their own potential take in litigation – rather than acting for the public good.

Recognizing the potential for unfairness and abuse in such arrangements, several state legislatures and attorneys general have attempted to reform the process of retaining private counsel.  Such reforms include added public transparency, mandatory bidding processes, and caps on fees.  In addition, some states restrict donations to political campaigns by lawyers who wish to be considered for AG representations.  These reforms have helped to reduce some of the risks posed by state AG-private lawyer alliances, but have not entirely solved the problem.

A recent report, Privatizing Public Enforcement:  The Legal, Ethical and Due-Process Implications of Contingency-Fee Arrangements in the Public Sector, highlights another important option for fighting back against these abuses:  challenge the arrangements in court under federal and state due process clauses.  Several defendants, particularly in the pharmaceutical industry, have mounted legal challenges against contingency-fee agreements between AGs and private lawyers on the ground that they violate the defendant’s right to due process under the Fourteenth Amendment to the U.S. Constitution and analogous state constitutional provisions.  These defendants have argued that because contingency-fee arrangements give outside counsel a direct and personal financial stake in the outcome of the underlying enforcement action, the attorneys will be disinclined to exercise restraint by, for example, limiting the scope of the enforcement action if it would advance the public interest to do so.  Instead, contingency-fee attorneys are likely to focus single-mindedly on maximizing the amount recovered from the defendant.  This is directly contrary to the Constitutional guarantee of due process, which promises defendants fair, neutral and impartial judicial proceedings. 

The due process threat posed by private AG contingency-fee arrangements is greatest in the case of actions seeking “penalties” (as opposed to actions that only seek damages because penalties cases are quasi-criminal matters in which neutrality is most critical).  Private lawyers pursuing penalties actions on behalf of a state AG will inevitably seek maximum penalties to increase their “take” in the lawsuit, whereas a public prosecutor would be more likely to balance the pros and cons of aggressive enforcement, depending on the extent of the defendant’s alleged misconduct and mitigating circumstances.

In addition to raising due process concerns, litigants may be able to mount other challenges to such arrangements.  In some states, separation-of-powers principles may restrict the ability of the AG to pay a share of state recoveries to private counsel because such payments may impinge on the legislature’s authority over the use of state funds.  In others, defendants may have standing to insist on the enforcement of state procurement requirements or other legislative or regulatory reforms.  These theories offer defendants additional avenues for challenging contingency-fee arrangements between AGs and outside counsel.  

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