Life Science Compliance Update

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October 31, 2013

States Hiring Private Law Firms on Contingent Basis for Civil Actions Can Potentially Effect Life Science Companies

Earlier this year we reported that in addition to the federal government's aggressive enforcement and oversight of healthcare entities and life science companies, State governments were also increasing their prosecution. In fact, in some cases, we reported that Attorney Generals in some states were hiring private counsel to assist them with cases.

Consequently, a recent case out of West Virginia may make this practice even more concerning for healthcare stakeholders. Specifically, as reported by the American Bar Association's Litigation News, the Supreme Court of Appeals of West Virginia concluded that the "state's attorney general had the authority to engage private counsel and to compensate them on a contingent basis."

Specifically, the court found that there was "no conflict of interest … where private attorneys prosecuting civil actions are compensated solely through a fee contingent upon the attorneys' success in the case. State ex rel. Discover Fin. Servs., Inc. v. Nibert.

The cases arose when the West Virginia attorney general appointed private attorneys in several consumer protection actions to prosecute cases on behalf of the state as "special assistant attorneys general." The complaints sought up to $5,000 in civil penalties per violation of the West Virginia Consumer Credit and Protection Act based on allegations of unfair and deceptive practices.

The private attorneys were required to pay all upfront expenses necessary to prosecute the action. If they lost, they would receive nothing. If they prevailed, they would receive reasonable and customary fees, subject to the trial court's approval. Like a typical contingency fee case, this "chance" to receive such fees likely incentivized the private attorneys to enter into this arrangement as fees in at least one other case amounted to one-third of the ultimate recovery, the ABA article noted.

Several defendants in these actions, including large financial institutions and GlaxoSmithKline, challenged the fee arrangement under "the conflict of interest provision of Rule 1.7(b) of the West Virginia Rules of Professional Conduct." Specifically, they argued the contingency fee arrangement materially limited the private attorneys' ability to represent the state of West Virginia's interests and "would irrevocably taint the [underlying] proceedings." The trial court rejected their challenge.

At the West Virginia high court, "these corporate defendants raised three main arguments."

First, "they argued that due to the civil penalties at stake, their cases should be treated like criminal cases where prosecuting attorneys are generally prohibited from maintaining a financial stake in the outcome." The court rejected this argument because even if the actions were "quasi-criminal," the private attorneys only recommended penalties, which the attorney general could ignore.

Second, the court rejected the defendants' argument that the private attorneys would "seek[] penalties based on their own financial interests, rather than . . . on an impartial sense of justice or the public's interest." The court reasoned that there was nothing to suggest that potential fees were "inextricably tied to the nature of the relief obtained." Moreover, the court emphasized that the private attorneys were monitored by the attorney general, did not have absolute control over the case, and would only be awarded fees subject to the trial court's discretion.

Lastly, the court found support in County of Santa Clara v. Superior Court, a California case that upheld a similar arrangement. "In that case, no conflict existed because both private and public counsel represented the governmental entity and the private attorneys were subject to supervision by government attorneys. The court found that situation analogous." Accordingly, the court determined there was no basis on which to find the fee agreement violated Rule 1.7(b), and suggested the conflict only existed in "the imagination of opposing counsel."

In analyzing the outcome of this case, Robert T. Denny, author of the article, noted that public concerns are "a matter of debate." Those who are against the practice of states appointing "special assistant attorneys general" believe this situation creates an inherent conflict of interest.

When a lawyer "agrees to advance costs and have no recovery whatsoever unless a court ultimately orders it, that puts a significant incentive in the works to make sure that there is a recovery for a court to review, because otherwise . . . there is no money going to the lawyers," states Gregory Hanthorn, Atlanta, cochair of the ABA Section of Litigation's Ethics and Professionalism Committee.

Conversely, there are those who assert this fee arrangement should not be viewed any differently than any other contingency fee agreement in civil litigation. "I would certainly argue that the public benefit is just as important as the private interest in a situation like this, and I don't think that the possibility of a large verdict potential will negatively impact the representation at all," concludes Oran F. Whiting, Chicago, co-chair of the Section of Litigation's Ethics and Professionalism Committee. "I think the argument places too much emphasis on money when it's convenient for the argument, and then puts too much emphasis on ethics" when ethics are not at issue.

Whiting also pointed out that while private attorneys' representing the state might be incentivized to seek large verdicts, this practice would be managed by oversight of the state. Specifically, he noted that the "attorney general is maintaining or retaining control over the matter anyway."

In response to that theory, Hanthorn questions whether "in practice, this will end up shifting far too much authority to the specially appointed assistants." He notes that while the attorney general is often still involved in these situations, as a practical matter, "the playing field looks fundamentally different once somebody representing the government will only get paid if certain things occur." Attorneys are "incentivized to do the appropriate thing by the rules and by their professionalism" and they should be treated like professionals and given the benefit of the doubt, responds Whiting.


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