McGraw has taken outside counsel idea to new heights

Legal News Line Aug. 1, 2008, 2:13pm


CHARLESTON, W.Va. (Legal Newsline) -- New York's Eliot Spitzer made may have made the practice fashionable, but West Virginia Attorney General Darrell McGraw has a lengthy and enduring pattern of hiring outside counsel and appointing special assistants to help bring sizable financial settlements to the state coffers.

The practice, once all the rage among attorneys general across the country, is now under scrutiny by legal reform groups, state legislators and business organizations. McGraw is chief among those drawing criticism.

"McGraw is probably one of, if not the most, aggressive state attorneys general in this regard," said Amber Taylor, a Washington-based lawyer who has written articles about the need for reform.

Spitzer earned acclaim and criticism for his high-profile lawsuits, which helped vault him to the New York governor's mansion. McGraw's track record -- one many of his critics say he continues to build with infuriating regularity -- is far more extensive and enduring, if not as flashy.

Also, the attorney general regularly teams with lawyers who are also his faithful campaign contributors. These appointments, most often made without an open and public process, have helped earn outside legal firms huge sums of money in partnership with the powerful office of Attorney General.

Despite public pressure building for several years and a serious Republican challenger making the issue a central part of his campaign to oust McGraw come November, the Attorney General continues the practice.

McGraw's critics, of which there are many, sing in harmony, though fail to force him to in any way to change his tune. Recommendations to curb the use of appointing special assistant attorneys general or hiring outside counsel on lucrative fee-based contracts were offered by a Joint Committee on Government Operations in 2002. Most were ignored by the state Legislature.

Similarly, the state Supreme Court refused to hear a legal challenge against McGraw in 2006. While many states have restricted and controlled the use of outside counsel, West Virginia is not among them.

Republican state Sen. Vic Sprouse, who served on the Joint Committee on Government Operations, called the issue the largest concern facing the West Virginia Legislature in regards to the Attorney General's office.

Sprouse admits that, to date, the Legislature has been ineffective. Looking back to the recommendations of the joint committee, Sprouse says they went unheeded.

"I don't know that any of them have been enacted," he said. "It's a case where Darrell McGraw is going to do what he wants to do. He thumbs his nose at the Democratic leadership in the Legislature, and they curl up and let him do what he's going to do."

Sprouse is not alone in his criticism of McGraw. Editorials of newspapers around the state have been sharply critical, as have tort reform lawyers and legal Web sites. None have made much of an impact yet. With another election on the horizon, voters, who to date have re-elected McGraw are left to decide if a change is needed.

All of which makes the job of Dan Greear, the Republican candidate for attorney general, more difficult. Trying to explain the complexities of tort reform and the legal machinations of outside counsel relationships to voters in a race that rarely holds top billing is not an easy task. Indeed, some would call it an insurmountable one.

"It would take a lot to get McGraw out of office at this point," said Taylor.

Tobacco settlements

State attorneys general have used private lawyers, called outside counsel, for a variety of reasons and for a very long time.

Before his scandal as governor last year, Spitzer first made headlines as New York's attorney general. Shortly after winning office in 1998, Spitzer aggressively worked with outside counsel to pursue lawsuits of securities and Internet fraud and a 2003 mutual fund scandal, resulting in large settlements for the plaintiffs.

"Spitzer kind of perfected this in New York," Sprouse said, "taking on these industries, getting money for the state and becoming a hero. He was a leader, but other AGs are catching up fast."

While Spitzer's suits grabbed the spotlight, legal eagles who follow trends in the American courts, point to lawsuits against large tobacco companies in the 1990s as the place where the use of outside counsel truly took root.

"I don't think I blame it on Spitzer," said Theodore H. Frank, resident fellow of the American Enterprise Institute for public policy research. "The practice predates Spitzer, most notoriously in the tobacco litigation context."

Previously unheard of plaintiff settlements against tobacco caught the attention of Attorneys Generals everywhere, and charted a new path of teaming with outside law firms to help bring victory. Among the big winners: West Virginia and Darrell McGraw.

During his tenure as West Virginia's attorney general, McGraw has won nearly $1.8 billion in tobacco settlements, a point his campaign Web site does not fail to highlight.

"It is undisputed that Attorney General Darrell McGraw's office has collected more money in restitutions for the citizens of West Virginia that all previous attorneys general combined," the Web site states.

Deputy Attorney General Fran Hughes said outside counsel relationships were essential to these large settlements.

"Without outside counsel," Hughes said in 2006, "the state would not have received the $1.6 billion from the tobacco litigation, because we did not have the money to try the case."

Former Virginia Attorney General Jerry Kilgore said specialization among lawyers makes it practical to hire outside counsel in some instances. Kilgore offered a securities attorney paid by the hour to advise on a state retirement system as an example.

"Many states couldn't afford to simply keep this expertise on staff," he said.

States differ widely on how much they contract with outside counsel and on what issues. Some states also appoint private lawyers as special assistant attorneys generals for specific task, a move which gives them greater clout but is basically the same as hiring an outside counsel, according to Taylor.

Frank said these appointments or the hiring of outside counsel can be helpful to a state.

"If the attorneys are being paid by the hour in a competitive bidding process, I have no concerns," said Frank, widely regarded as one of the country's leading voices in tort reform.

But McGraw's outside counsel rarely are paid by the hour, and the attorney general's office has dismissed the viability of a competitive bidding process. But on the heels of the tobacco victories, McGraw's office continued to appoint special assistant attorneys general and hiring outside counsel in lawsuits against pharmaceutical companies and software giant Microsoft to name a few.

The combination of large law firms and the power of the state attorney general's office, Sprouse said, "scares the lights of these companies into getting settlements."

McGraw's office is not alone in securing enormous settlements. Many state attorneys general teamed up both together and with outside counsel to take on the largest companies. Several attorneys generals, including those in Florida and California, drew criticism for their tactics.

In 1997, Florida announced $11 billion settlement against the tobacco companies, bringing this rebuke from Robert A. Levy, a senior fellow of the Cato Institute: "For those concerned about the rule of law and due process, the Florida settlement is shameful -- not least because it strips a currently unfashionable industry of basic protections the rest of us take for granted."

Contributors and fees

Billion-dollar settlements are sure to earn the favor of many voters, which speaks to the previous popularity of Spitzer, and McGraw, who has easily won re-election each campaign since first elected in 1992.

But time has tempered the initial enthusiasm. Concerns about legal ethics, conflict of interest, disbursement of funds and, particularly in the case of McGraw, over the lawyers hired as outside counsel or given special assistant attorneys general appointments, have grown.

The problems, legal experts insist, start when outside counsel is paid on a contingency, rather than hourly, basis.

"Taxpayers should be concerned about the contingency cases," said Kilgore, "as the money sought in such a suit must allege harm to taxpayers. Realistically, outside counsel's goal can be different from the goal of the attorney general.

"The attorney general may want to stop a particular practice and recover fines or penalties. The outside counsel's goal is to litigate and recover the largest amount possible to increase the dollars they will take from the litigation."

Frank agreed, saying a contingency-fee arrangement creates "a conflict of interest between the state's law-enforcement interests and the financial interest of outside attorneys."

The West Virginia Attorney General's office vigorously defends the benefit of working with outside counsel. Simply put, Hughes said in 2006, the enormous settlements would not be possible without them.

"Attorney General McGraw's office uses outside counsel because otherwise the office would be unable to hold huge corporations accountable for violations of law," Hughes said. "The Legislature is unwilling to provide the attorney general's office with money to try significant cases."

This is particularly irksome for Sprouse.

"The Attorney General's office is one of the largest law firms in the state with about 200 employees. They can't handle these cases?" he asked.

As for the contingency fees, McGraw's office contends, according to Taylor, that they don't hire on a contingency-fee basis. Taylor sent a records request to McGraw's office asking for all contingency-fee contracts, which was denied, because the office does not have these type of contracts. Taylor suspects legal nitpicking.

"My impression is the contracts do not contain a set rate or percentage basis for compensation," Taylor said.

Critics point to the paydays after a settlement to prove the contingency relationship. Greear said the $10 million settlement with Purdue Pharma over the drug Oxycotin is a perfect example.

"The outside counsel is this case was paid $3.3 million," Greear said, or roughly one-third of the settlement. Two drug companies eventually filed suit against the attorney general, claiming it could not legally hire outside counsel with contingency-fee agreements.

In legal documents, McGraw's office admitted that there is a "contingent element in the sense that the issue of determining a reasonable, customary fee will not arise unless there is a disposition in favor of the state."

The judge ruled in favor of McGraw's right to hire outside counsel, and the state Supreme Court refused to hear the appeal.

"I think its legalized extortion that state attorneys general are using their office to secure these settlements," said Sprouse, who is helping Greear's campaign in the upcoming election. "Darrell McGraw does it as much as anyone and for those who contribute to his campaign. I think people are sick of it."

McGraw's drawn the sharpest public criticism not so much for fee arrangements, but for the attorneys given the contracts. Greear's campaign has focused on McGraw's pattern of appointing campaign contributors as special assistant attorneys general, a pattern highlighted in a detailed report by West Virginia Citizens Against Lawsuit Abuse, issued in June 2007.

"If you review McGraw's campaign finance reports," Greear said, "and the corresponding appointments he has made during his tenure, you will easily spot the parallel."

The WV CALA report documents a total of $47,500 in campaign contributions from the four legal firms appointed as special assistant attorneys general in the case against Purdue Pharma -- the same firms that earned $3.3 million when the case was settled.

"Tell me where I can sign up for that type of return on investment," Greear said.

McGraw's pattern of awarding campaign contributors with the role as outside counsel drew the attention of a 2007 Wall Street Journal article. Taylor and Frank believe the pattern is among the most serious concerns, particularly when the law firms are hired without an open bidding process.

"If the contracts are not subject to an open, public bidding process, the state is potentially getting a poor price for legal services," said Taylor. "In cases in which the attorneys are paid on a non-competitive contingent fee basis, less money ends up in the state treasury."

Hughes flatly denied the assertion that campaign contributors are being awarded the contracts, while saying a typical government request for proposal process is "untenable."

"Attorney General McGraw does not appoint special assistant attorneys general based on campaign contributions," Hughes said. "Not many attorneys have the expertise to engage in antitrust litigation."

Hughes said the nature of the work, with uncertain number of hours, uncertain case fees and expenditure make an open bidding process impossible.

Finally, there's the issue of the money. Nobody in West Virginia is contesting that McGraw's lawsuits have been highly profitable for the state. But many, including McGraw's fellow Democrats in the state Legislature are concerned that the settlement dollars don't make their way into the state's coffers for the Legislature to disperse.

An editorial from the Wheeling Intelligencer called it a "disturbing philosophy."

"If he wins, his office keeps the money - millions of dollars," the editorial stated. "He ought to turn the windfalls over to the state treasurer, of course ... But McGraw seems to view the money as his own personal hole card in the popularity contest that politics can be."

Sprouse said that on this issue, even Democrats are concerned.

"The Legislature gets the most heartburn over not receiving the settlement dollars," Sprouse said. "McGraw doles them out as he sees fit. This is the number one legislative issue in regards to the AGs office. It cuts across party lines."

Democrat John Doyle said he is concerned about McGraw's overuse of special counsel, but is most concerned about failure of the funds to reach the Legislature. Doyle said McGraw's settlements often ask the judge to award the funds to certain projects or recipients rather than be paid directly to the Legislature.

"This turns the principle of the separation of powers on its heads," Doyle said.

Doyle said McGraw isn't the only attorney general to work out these types of arrangements.

"I think Spitzer invented it," Doyle said, "but Darrell and maybe three or four other attorneys general said 'oh what a wonderful idea, I'm going to jump on the bandwagon.'"

But McGraw's popularity is due in large part to this exact issue. His campaign Web site touts projects he has used settlement money to fund.

"When the state was facing the threat of doctors fleeing the state because of high malpractice premiums, a physicians' mutual fund was created to address the problem with funding provided by money obtained by Attorney General McGraw." The Web site boasts. "Additionally, hundreds of millions of dollars have been used to pay down the teachers' retirement debt."

Several requests to interview McGraw or Hughes for this article were not returned.

Plans for change

Increasing attention has begun to turn the tide in many states.

Kilgore, who supported legislation to control the use of outside counsel while serving as Virginia's Attorney General believes needed change is in the works.

"Because of the news articles and problems associated with outside counsel retention," Kilgore said, "the practice of appointing outside counsel has been given increased scrutiny both inside and outside of an attorney general's office. While one size doesn't fit all many states are adopting policies and procedures to deal with the appointment of outside counsel."

Virginia now requires its attorney general to competitively bid contingency-fee litigation. Attorneys general in Ohio and New Jersey have instituted similar policies as has California's Attorney General Jerry Brown, who replaced Lockyer, according to the National Law Journal.

Kilgore, a Republican, is supporting the American Tort Reform Association's "Transparency Code" released in 2007. The code proposes voluntary standards in regard to outside counsel relationships.

The ATRA's statement said "Noting that many attorneys generals are transparent in hiring outside counsel, there are a few states where attorneys generals have awarded these multi-million dollar contracts to generous campaign contributors with little or no competitive bidding."

Hughes has called organizations like ATRA and West Virginia CALA pawns of big business reeling from the sting of legal action.

"The companies we have sued," Hughes said, "big tobacco, big pharma, are the ones complaining. They are complaining because we have been effective."

In a previous news article, Teresa Toriseva, head of the West Virginia Association for Justice, called the ATRA "a front for billion-dollar organizations that issue bogus reports that attack our West Virginia courts."

Toriseva is both a contributor to McGraw's campaign, and a lawyer who has been appointed special assistant attorney general by McGraw.

Kilgore defended the ATRA against claims it is a front for big business.

"ATRA is a front for open government and has gained a lot of support from state AGs and candidates for its openness agenda," he said. "The agenda is viable because it is the right agenda for taxpayers and transparent government."

While Sprouse continues to hope the state legislator will take action to rein in its attorney general, he knows voters can make the biggest impact by electing Greear. But, Doyle said politics has hurt the Legislature's ability to pass meaningful legislation that could restrict McGraw's actions.

"A number of Republicans," Doyle said, "have chosen to attempt to get some partisan advantage out of it. This has driven a number of intellectually alert Democrats to back off in joining the effort to try to bring some sense of this. I think whoever is AG must stop doing this. It's fine by me if it's Darrell."

For his part Greear knows the challenge of defeating McGraw remains a large one, as does explaining to voters why McGraw's use of outside counsel is a problem.

"It's a complicated legal thing," McGraw's opponent said, "and when you try to explain it people's eyes glaze over and you lose them."

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