CHARLESTON, W.Va. (Legal Newsline) -- Oxycontin could be the Kryptonite to the power built by West Virginia Attorney General Darrell McGraw during this decade and a half in office.
The 2004 settlement is nowhere near the largest won by McGraw. Its $10 million pales compared to the estimated $1.8 billion awarded to the state from settlements with tobacco companies during the 1990s. And the settlement with Purdue Pharma, makers of the OxyContin, is just another in a sea of lawsuits against companies with names such as Visa, Microsoft and other pharmaceutical companies.
But the state of West Virginia vs. Purdue Pharma, L.P., is the fault line in what critics and opponents hope is a coming earthquake that will crumble McGraw's influence and control. Likewise, the case is Exhibit A for McGraw's supporters that the popular attorney general is under attack from billion-dollar companies upset with his legal successes against them.
Nobody could have imagined what McGraw called a "courthouse steps settlement" moments before the trial began, to have such far reaching ramifications. This is particularly true now as lawsuits over the payout pile up and the state Legislature frets over potential budget fallout.
In 2001, the attorney general's office appointed four private law firms to represent the state in a suit over the controversial drug OxyContin.
According to an overview just released in July by the West Virginia Departmental Appeals Board, the case centered on a marketing campaign by Purdue Pharma, manufacturers of OxyContin, that misrepresented the risks of taking the powerful pain medication.
The original suit filed didn't name any state agencies as plaintiffs. The circuit court ruled that the injuries cited in the case were specific to certain state agencies, according to court documents. McGraw had the case refiled, this time listing damages to the state's workers' compensation program, the Department of Health and Human Resources and the West Virginia Public Employees' Insurance agency. Each agency was named as a plaintiff.
Among the agencies, the DHHR played a central role. The case alleged that the DHHR spent millions on the drug. The attorney general's office and its private attorneys sought "restitution and reimbursement" for substance abuse treatment and services for West Virginians who had become addicted to the drug.
On the night before the trial, Purdue Pharma agreed to settle the case for $10 million paid to the Consumer Protection Fund of the Office of the West Virginia Attorney General.
And therein lies the rub. Once the $10 million was fully distributed, the four private law firms on the case split one-third - the maximum amount allowed by an agreement with the attorney general's office - of the money. McGraw then decided what charities and agencies would receive the rest of the money. McGraw used the money on substance abuse programs around the state. He gave $500,000 to the University of Charleston for a pharmacy school.
The state Legislature did not receive the money, nor did any of the three state agencies named as plaintiffs in the case.
As can be expected, seeing a $10 million settlement doled out and not receiving any of the money has left many hopping mad, including members of the state Legislature.
"The greater concern of mine," Delegate John Doyle said, "is the tendency of attorneys general to persuade judges that the proceeds go to certain ends that the attorneys general decide should get them. This turns the principle of the separation of powers on its heads."
Case in point is the OxyContin payout, according to Doyle, who like McGraw is a Democrat.
"Only the Legislature, not even the governor, has the power to allocate funds," Doyle said, "unless it is given in a specific instance by the Legislature."
Republican state Sen. Vic Sprouse is even more outspoken in his criticism of McGraw and the OxyContin payout.
"Imagine the scenario where you are wronged," Sprouse said. "You hire a lawyer. The lawyer settles your case, and then decides to give your money to charities that he deems appropriate. That's what Darrell did here."
Fast forward to 2007.
The problem became even more confounded when the federal government decided to withhold $4.1 million to West Virginia's DHHR. As the federally funded Medicaid program was among the plaintiffs in the case, the federal government believed it deserved part of the settlement.
McGraw, according to his campaign Web site, disagreed.
"The Center for Medical Services, the Medicaid funding arm of the federal government waited three years after the recovery," the Web site states, "before contacting the State of West Virginia. We are confident that, in fact, Attorney General McGraw's actions and methods of distributing the funds will allow West Virginians to retain the settlement funds."
Chief Deputy Assistant Attorney General Fran Hughes asserted such confidence in a meeting with the finance committee of the state Legislature, telling the lawmakers that the way the settlement was finalized would in effect create a loophole allowing West Virginia to keep the money and not pay anything to the federal government.
Caught in the middle is the DHHR, having received no funds from the settlement, and now having more than $4 million in federal funding withheld. The agency appealed the federal government's decision.
In a ruling issued on July 14, the Department of Health And Human Services Appeals Board concluded that "CMA was authorized to disallow FFP (funds to West Virginia's DHHR) in order to recoup the federal government's share of the OxyContin settlement proceeds."
The ruling said CMS's decision to withhold more than $4 million was too much, considering the settlement was just $10 million, and ordered the agency to recalculate the amount.
A press release issued by the attorney general's office called the decision "favorable."
"We are pleased by the Appeal's Board decision," Hughes said in the release, "because it removes the long shadow cast by the original $4,143,075.00 and reaffirms most of the arguments we made with respect to the allocation of OxyContin proceeds."
Lawmakers were less than favorable over the ruling, said Sprouse.
"One thing is certain after this last legislative session," Sprouse said, "Democrats, as well as Republicans, have had it with Darrell McGraw. At least a dozen Democratic lawmakers I spoke with during this interim session have had it up to their ears with Darrell McGraw."
Sprouse called the ruling "McGraw's Budget Hole," one the Legislature must fill for the DHHR.
But Hughes said the attorney general's office is prepared to handle the problem.
"The attorney general's office has a sum of money set aside for this purpose and will be in contact with the CMS today to begin discussions," it said in a press release issued on July 18.
Still, the West Virginia Citizens Against Lawsuit Abuse said the case has jeopardized federal Medicaid funds as a result of ethical abuses.
The agency issued its own report that documents how the four private law firms earned more than $3 million in fees while the state agencies received nothing, a report McGraw's campaign Web site and other contributors called a "bogus" paper paid for by big businesses seeking to bring down the attorney general.
The law firms - who have collectively contributed $47,500 to McGraw's re-lection campaigns-defended their fees in a documents issued in the court, saying the firms took on the risk of the case with no guarantee of success.
A petition for reasonable attorney fees and costs filed by the private law firms stated, "Had the end result in this case been like every other OxyContin based lawsuit filed against the defendants, the three and half years of work and expenses of litigation advanced would have gone uncompensated, but the State would have been out nothing."
Doyle said both federal and state lawmakers will consider ways to restrict attorneys general from having settlement paid into specific accounts under their control. Amber Taylor, a tort reform lawyer based in Washington, D.C., said legal challenges to such settlements continue in the courts.
"This particular arrangement has been challenged in court where the money is not going to the Legislature," Taylor said. "This just highlights the separation of powers problem, particularly in the allocation of funds and how those funds are going to be spent."
Taylor called the OxyContin case and its settlement very uncommon, which contributes to the scrutiny it continues to receive.
Come November, the controversial legal fallout from the OxyContin case will take a backseat to the political ramifications. McGraw's Republican opponent Dan Greear has already made the OxyContin case a central part of his campaign to unseat McGraw.
When asked how he hoped to educate voters on the need to reform the attorney general's office, Greear cites the OxyContin case as the clearest example.
"It's like being in a car accident," Greear says, using an example voters can relate to. "You hire a lawyer who gets a settlement, but you get stuck with all the health insurance bills and never see the money."
Greear says politically the case has put McGraw on thin ice.
"The private attorneys made $3.3 million," he said. "And $6.7 million is distributed to the attorney general. None of it goes back to the Legislature. He passed it all out as he saw fit and none of it came back to the state."
A sketch of McGraw illustrated a recent Wall Street Journal opinion piece about cronyism in state attorneys general offices. On the other side of the coin is Greear, the poster boy for needed change, according to the story.
"Mr. Greear is the 40-year-old Republican lawyer working to unseat West Virginia's entrenched top prosecutor, Darrell McGraw.," the WSJ author wrote. "His quest has become a case study in the opportunities, and pitfalls, of an upstart reformer challenging an incumbent attorney general who, like New York's Eliot Spitzer, has cemented his position through populism and political patronage."
The story suggests Greear's candidacy is on the leading edge of reform candidates across the country seeking to curb the brazen and powerful authority of state attorneys general like McGraw.
But back in West Virginia, the argument is a tougher sell. McGraw's alliances throughout the state are strong, and supporters insist that the humble attorney general is simply a target of well-financed political campaigns backed by big business smarting over legal defeats.
"Regardless of who was nominated by the Republican party," said McGraw's campaign treasurer John Mitchell, "even if it was Bozo the Clown, he would receive a tremendous amount of money from big business."
Mitchell said the attacks are not confined to the attorney general. He mentioned Warren McGraw, the AG's brother who lost a seat on the state Supreme Court in 2004 to Brent Benjamin. Warren McGraw was the target of a well-financed successful political campaign to unseat him.
Outside businesses and business leaders, most notably Massey Energy CEO Don Blankenship, contributed millions to a campaign against Warren McGraw. Mitchell said similar tactics now are being used against the attorney general.
While Mitchell said the tactics and the money could threaten McGraw in November, he remains convinced that voters will see through the tactics.
"The reason why McGraw has done so well," Mitchell said, "is he's always been willing to fight for the little people up in the hollers of this state -- sincerely, consistently fighting for them. He doesn't drive a big Cadillac and live in a big mansion. He is one of them."
But such loyalties hurt the state, according to Taylor.
"I think the general reputation of West Virginia as being a business unfriendly state continues to grow," Taylor said. "The fact that Darrell McGraw is pursuing lawsuits so aggressively is a continuation of the state's aggression to corporations."