Lead paint lawyers' potential payout comes with questions

SAN JOSE, Calif. (Legal Newsline) -- Consumer Attorneys of California President Brian Kabateck considers the lead-based paint case that recently concluded in Santa Clara County indicative of a larger trend to hire contingency-fee counsel instead of traditional hourly fee lawyers.

He describes this as a positive move for government officials who are called out for spending too much money on outside lawyer fees. He argues that it also protects the public, particularly since government attorneys and contingency-fee counsel can work together to circumvent U.S. Supreme Court decisions that made it more difficult to bring individual class actions.

"You're going to see more of the firms like the Cotchett firm, my firm, the Girardi firm in Los Angeles that have relationships with the public officials, who have the reputation, being retained to pursue cases," said Kabateck, founding partner of Kabateck Brown Kellner LLP in Los Angeles. "And I think you're going to see those firms thrive."

Not everyone who has watched The People of California v. Atlantic Richfield Co., et.al., agrees that contingency-fee agreements reached between plaintiffs -- Santa Clara County, San Francisco City, Alameda County, Los Angeles County, Monterey County, Oakland City, San Diego City, San Mateo County, Solano County and Ventura County -- and their outside counsel -- Cotchett Pitre & McCarthy LLP and Motley Rice LLC -- will actually benefit the government or the public.

In fact, as the legal community waits for Santa Clara County Superior Court Judge James Kleinberg to decide whether pre-1978 built, private residences with interior lead paint constitute a public nuisance and whether five paint manufacturers -- The Sherwin-Williams Co., NL Industries, ConAgra Grocery Products, DuPont and Atlantic Richfield Co. -- should pay at least $1.6 billion to abate the lead, it also waits to see how the contingency-fee agreements will work should plaintiffs succeed in the case.

As reported in the California Supreme Court's 2010 decision in Santa Clara v. Superior Court, Santa Clara County offered $150,000 to cover initial costs, but outside counsel agreed to incur all other proceeding costs. If plaintiffs won their case, outside counsel would recover all unreimbursed costs and 17 percent of the net recovery.

Neither Cotchett Pitre & McCarthy nor Motley Rice responded to requests for comment for this article.

Lisa Perrochet, a partner with Horvitz & Levy LLP in Encino, Calif., represented Millennium Inorganic Chemicals Inc., an early defendant who is now out of the litigation, when the issue over contingency-fee counsel went before the California Supreme Court.

From her perspective, tensions could arise between government lawyers who represent the general public and its best interest, and contingency-fee lawyers who steer cases to win as much money as they can for their clients.

"If you were just a public prosecutor, a DA or the attorney general, you want to get the best, most appropriate relief possible, and you're going to get your salary paycheck no matter what you do - win, lose or draw," Perrochet said. "You're free from any kind of conflict of interest. But the private contingency-fee lawyers aren't."

In its decision, the California Supreme Court agreed that contingency-fee counsel encounter a conflict of interest in public nuisance cases, but also contended that the conflict doesn't always require disqualification of those counsel.

"Instead, retention of private counsel on a contingent-fee basis is permissible in such cases if neutral, conflict-free government attorneys retain the power to control and supervise litigation," the court said. "Because public counsel are themselves neutral, and because these neutral attorneys retain control over critical discretionary decisions involved in the litigation, the heightened standard of neutrality is maintained and the integrity of the government's position is safeguarded."

The court further outlined new requirements for contingency-fee agreements, holding that government attorneys must retain complete control over the case and a veto power over private counsel's decisions. The court also mandated that a government attorney with supervisory authority must oversee the litigation.

James Copland, the director of the Manhattan Institute's Center for Legal Policy, points out that the 17-percent fee in the California lead-based paint case follows the standard set in other large government actions.

This includes the first lead-based paint public nuisance case brought by Rhode Island in 1999. The state's Supreme Court eventually ruled that government attorneys and their contingency-fee counsel failed to identify the location of the nuisance, show interferences with a public right or establish that defendants caused any nuisance.

Copland contends that even though Motley Rice, the outside counsel in the Rhode Island case, walked away with nothing, it didn't stop them from entering into another contingency-fee agreement in the California case.

"If you get 17 percent of one billion, you do the math - that's $170 million," he said. "Even if the lawyers think there's a 10 percent chance of winning, they'd be willing to spend up to $17 million for a $170 million payday."

Perrochet points out that attorney-client privilege prevents the public from discovering the details of contingency-fee agreements. However, she explains, the outside counsel could structure their payout in several ways, including as a portion of the abatement fund. They may also request alternative-fee arrangements, such as receiving a reimbursement for their costs plus $100 an hour for their time, in case the judge fails to order the monetary recovery.

Copland agrees that both the legal and business communities will be interested in the net recovery amount if the judge sides with plaintiffs in the case. He adds that they also want to know when the contingency-fee counsel will be paid, especially if defendants appeal the decision.

"My guess is, from what we've seen in the other states, the companies would appeal it all the way up," Copland said. "It would take some time before that ultimately shakes out."

He contends that even more questions will arise if plaintiffs take the case all the way to the California Supreme Court, and win.

"At the end of the day, do the lawyers have to wait until the money has actually been spent on the remediation and then take the cash out, or do they get their 17 percent out of some sort of estimate?" Copland said. "How's that done? It may be done over time."