[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
                    EXAMINATION OF LITIGATION ABUSES

=======================================================================



                                HEARING

                               BEFORE THE

                   SUBCOMMITTEE ON THE CONSTITUTION 

                           AND CIVIL JUSTICE

                                 OF THE

                       COMMITTEE ON THE JUDICIARY




                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 13, 2013

                               __________

                            Serial No. 113-8

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov





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                       COMMITTEE ON THE JUDICIARY

                   BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr.,         JOHN CONYERS, Jr., Michigan
    Wisconsin                        JERROLD NADLER, New York
HOWARD COBLE, North Carolina         ROBERT C. ``BOBBY'' SCOTT, 
LAMAR SMITH, Texas                       Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
SPENCER BACHUS, Alabama              ZOE LOFGREN, California
DARRELL E. ISSA, California          SHEILA JACKSON LEE, Texas
J. RANDY FORBES, Virginia            STEVE COHEN, Tennessee
STEVE KING, Iowa                     HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona                  Georgia
LOUIE GOHMERT, Texas                 PEDRO R. PIERLUISI, Puerto Rico
JIM JORDAN, Ohio                     JUDY CHU, California
TED POE, Texas                       TED DEUTCH, Florida
JASON CHAFFETZ, Utah                 LUIS V. GUTIERREZ, Illinois
TOM MARINO, Pennsylvania             KAREN BASS, California
TREY GOWDY, South Carolina           CEDRIC RICHMOND, Louisiana
MARK AMODEI, Nevada                  SUZAN DelBENE, Washington
RAUL LABRADOR, Idaho                 JOE GARCIA, Florida
BLAKE FARENTHOLD, Texas              HAKEEM JEFFRIES, New York
GEORGE HOLDING, North Carolina
DOUG COLLINS, Georgia
RON DeSANTIS, Florida
KEITH ROTHFUS, Pennsylvania

           Shelley Husband, Chief of Staff & General Counsel
        Perry Apelbaum, Minority Staff Director & Chief Counsel
                                 ------                                

           Subcommittee on the Constitution and Civil Justice

                    TRENT FRANKS, Arizona, Chairman

                    JIM JORDAN, Ohio, Vice-Chairman

STEVE CHABOT, Ohio                   JERROLD NADLER, New York
J. RANDY FORBES, Virginia            JOHN CONYERS, Jr., Michigan
STEVE KING, Iowa                     ROBERT C. ``BOBBY'' SCOTT, 
LOUIE GOHMERT, Texas                 Virginia
RON DeSANTIS, Florida                STEVE COHEN, Tennessee
KEITH ROTHFUS, Pennsylvania          TED DEUTCH, Florida

                     Paul B. Taylor, Chief Counsel

                David Lachmann, Minority Staff Director


                            C O N T E N T S

                              ----------                              

                             MARCH 13, 2013

                                                                   Page

                           OPENING STATEMENTS

The Honorable Trent Franks, a Representative in Congress from the 
  State of Arizona, and Chairman, Subcommittee on the 
  Constitution and Civil Justice.................................     1
The Honorable Jerrold Nadler, a Representative in Congress from 
  the State of New York, and Ranking Member, Subcommittee on the 
  Constitution and Civil Justice.................................     2
The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, Ranking Member, Committee on the 
  Judiciary, and Member, Subcommittee on the Constitution and 
  Civil Justice..................................................     4

                               WITNESSES

Elizabeth Milito, Senior Executive Counsel, National Federation 
  of Independent Business (NFIB) Small Business Legal Center
  Oral Testimony.................................................     6
  Prepared Statement.............................................     9
Theodore H. Frank, Adjunct Fellow, Manhattan Institute for Legal 
  Policy, President, Center for Class Action Fairness
  Oral Testimony.................................................    21
  Prepared Statement.............................................    23
Joanne Doroshow, Executive Director, Center for Justice and 
  Democracy at New York Law School
  Oral Testimony.................................................    65
  Prepared Statement.............................................    68
John H. Beisner, on behalf of the U.S. Chamber Institute for 
  Legal Reform, Skadden, Arps, Slate, Meagher & Flom LLP
  Oral Testimony.................................................    78
  Prepared Statement.............................................    80

                    EXAMINATION OF LITIGATION ABUSES

                              ----------                              


                       WEDNESDAY, MARCH 13, 2013

                        House of Representatives

                   Subcommittee on the Constitution 
                           and Civil Justice

                       Committee on the Judiciary

                            Washington, DC.

    The Subcommittee met, pursuant to call, at 10:06 a.m., in 
room 2141, Rayburn Office Building, the Honorable Trent Franks 
(Chairman of the Subcommittee) presiding.
    Present: Representatives Franks, Jordan, Chabot, King, 
DeSantis, Nadler, Conyers, and Deutch.
    Staff Present: (Majority) Paul Taylor, Majority Counsel; 
Sarah Vance, Clerk; (Minority) David Lachmann, Subcommittee 
Staff Director; and Veronica Eligan, Professional Staff Member.
    Mr. Franks. The Subcommittee on the Constitution and Civil 
Justice will come to order. Without objection, the Chair is 
authorized to declare a recess of the Committee at any time. 
Thank you all for being here.
    The Subcommittee on the Constitution and Civil Justice 
meets today for a general oversight hearing to examine some 
current abuses in our civil justice system. It is appropriate 
that we hold such a hearing early in this Congress, so Members 
and the public can begin to understand the scope and nature of 
some of the more glaring dysfunctions in our litigation system 
before the Committee considers any potential legislation.
    We have assembled a panel of witnesses here today who are 
particularly capable of surveying America's lawsuit landscape 
and identifying some of the biggest hills and gullies that 
threaten to make it even more difficult for hardworking 
Americans to get ahead.
    Forum shopping, the practice by which lawyers can choose 
the judge that is most likely to side in their favor, remains a 
problem in America.
    While the Class Action Fairness Act closed many loopholes 
that allowed abusive forum shopping, some courts have allowed 
trial lawyers to divide up their larger mass tort claims, so 
the smaller cases can continue to be tried in State courts, 
even when a Federal court remains the fairest forum for 
lawsuits involving citizens of different States.
    Further, too many class actions are litigated today such 
that the victims of unlawful conduct often receive only pennies 
on the dollar, if anything at all, when their trial lawyer 
representatives amass millions of dollars in compensation.
    Many times, the damages in class action lawsuits are so 
tiny that it is impossible to even identify the victims. In 
many such cases, awards are given to entities that are no part 
of the lawsuit whatsoever. Such awards called cy pres awards 
are often given to charities that support the trial lawyers' 
goals, but have no other connection to any victims. This is so 
even though nothing in Rule 23 of the Federal Rules of Civil 
Procedure, which allow class-action lawsuits, authorizes such 
awards.
    Courts are then left to bypass the legislature and enrich 
third-party organizations of the trial lawyers choosing. This 
trend threatens both the Constitution's separation of powers 
requirements and its case and controversy requirement, which 
only allow courts jurisdiction over cases involving actual 
litigants.
    Another problem that is becoming apparent is the increasing 
practice by which third parties fund litigation between others 
when such third parties have no other no connection to the 
substantive law of the case. When financial speculators with no 
substantive connection to a lawsuit fund litigation like they 
would any other speculative venture, existing problems in the 
American legal system are made much worse.
    For example, as it is currently written, Rule 11 of the 
Federal Rules of Civil Procedure does not mandate that lawyers 
who file frivolous lawsuits be made to pay their victims for 
the cost of the frivolous litigation. Consequently, lawyers can 
file frivolous cases with virtual impunity.
    That being the case, third-party litigation financiers can 
spread their risk, funding meritless cases as well as deserving 
cases in the hopes that one or more of the frivolous cases will 
yield a jackpot settlement so large it can potentially fund all 
the other cases as well.
    On the other hand, the practice of third-party litigation 
financing can also deter the settlement of cases. This could 
happen when settlement offers are large enough to pay the 
lawyers and the victims they represent, but not large enough to 
also pay the lawsuit lenders the interest they charge on their 
loan.
    These are just some of the issues our witnesses will 
explore today as the Subcommittee on the Constitution and Civil 
Justice begins its examination of lawsuit abuse.
    And now with that, I will yield to the Ranking Member of 
the Subcommittee, Mr. Nadler from New York, for 5 minutes.
    Mr. Nadler. Thank you, Mr. Chairman.
    Mr. Chairman, we are back looking at the tort system again, 
and I see that the majority has again prejudged the issue with 
the title of this hearing. I know that we have long disagreed 
on issues affecting the tort system, but I had hoped that we 
could at least agree that a realistic understanding of how that 
system is functioning would entail a balanced look at both the 
costs and benefits of the system, and a more balanced look at 
the role that business defendants play in undermining the 
integrity of that system.
    The fact is that tort law exists for several reasons, and 
perhaps this is as good a time as any to reflect on those 
reasons. First and foremost, it exists to compensate people for 
the harm inflicted on them by the negligence or intentional 
wrongdoing of someone else. That is especially important in a 
society where people still need to sue to get the medical care 
or to make up for the lost income or assets someone else's 
wrongdoing has necessitated.
    Perhaps if we lived in a country where these matters were 
taken care of as a matter of national policy, we would not need 
to rely so heavily on the courts. But people who are harmed 
often have no recourse but to turn to the courts.
    This is not malicious or predatory. It is, rather, a 
necessity and one that remains a pressing need as long as some 
in this country oppose universal health care coverage and a 
robust social safety net.
    Second, the tort system exists to provide economic 
incentives to take the proper care not to harm others. Clearly, 
there are plenty of incentives to be reckless in ways that 
could cause serious harm. It costs money to make products safe 
or to make workplaces and public accommodations safe. There is 
the possibility of making big money by dealing dishonestly with 
investors who are selling defective goods.
    The tort system balances the scales at least to some 
extent. It imposes a countervailing cost on misconduct. No one 
likes being sued, and that can have a beneficial effect on how 
people conduct themselves. Avoiding liability is often a matter 
of making a better product or conducting your business in a 
more open and honest manner.
    Unless those who want to limit access to justice are 
prepared to have a truly strong regulatory and criminal 
framework for dealing with these problems, and I have seen 
little evidence of that, we must rely on the tort system to 
play a significant role in protecting the public interest.
    The testimony we will hear today contains a great many 
complaints, and I will allow the witnesses to outline them. But 
I would note that there is no recognition in any of that 
testimony that, perhaps, the defendants in many of these cases 
actually were guilty of wrongdoing, that they may have had some 
obligation to compensate the victims of their wrongdoing, or 
that the public interest is served in requiring them to do so.
    I would also note that missing from much of the testimony 
we will hear today is any recognition that defendants and their 
counsel sometimes engage in tactics to conceal facts from 
plaintiffs, to bury the plaintiffs in paper and expenses, and 
stretch out litigation in order to exhaust plaintiffs and their 
resources to keep up the fight.
    There is almost no recognition that defendants may even 
have engaged in wrongdoing. Even where, as Ms. Milito does in 
her testimony, a defendant has admittedly broken the law, that 
defendant is cast still as a victim of lawsuit abuse.
    In this case, the complaint has to do with admitted 
violations of the American with Disabilities Act. Congress 
specifically provided a private cause of action to ensure 
enforcement of that act. I suppose we could have sent an army 
of inspectors armed with tickets books to enforce the law, but 
I am not sure how Ms. Milito's organization would feel about 
that.
    Many of the recommendations we will hear will have the 
effect of placing additional roadblocks in the path of people 
who have been genuinely harmed. By limiting fees, or 
eliminating contingency fees, or cutting off other sources of 
funding to allow individuals to hold their own in a case 
against corporations with seemingly endless resources, many of 
the proposals we will hear will, in effect, allow corporate 
malefactors to commit wrongdoing with impunity.
    Not content with developments in the law, both 
legislatively and at the hands of the Supreme Court, we are 
hearing renewed calls to further limit access to the courts and 
to remedies like class actions.
    In addition to congressional actions to limit access to 
justice, such as the Class Action Fairness Act, the Supreme 
Court's recent decisions have also greatly narrowed access to 
justice. In Walmart v. Dukes, the Court greatly limited class 
certification. In AT&T Mobility v. Concepcion, the Supreme 
Court held that the Federal Arbitration Act preempts State law 
on the unconscionability of class arbitration waivers in 
consumer contracts.
    Finally, in Ashcroft v. Iqbal, the Court made it easier to 
dismiss cases based on a judge's own notions of plausibility 
prior to discovery.
    Taken together, plaintiffs have really lost many of the 
rights they used to have to relief. I suppose the defense bar 
is entitled to demand still more, but the scales have already 
tipped radically in their favor.
    I want to join the Chairman in welcoming our witnesses, and 
I look forward to their testimony.
    I yield back the balance of my time.
    Mr. Franks. And I thank the gentleman, and I will now yield 
to the Ranking Member of the full Committee, Mr. Conyers from 
Michigan.
    Mr. Conyers. Thank you, Mr. Chairman.
    First of all, I want to welcome the witnesses, especially 
the director for the Center for Justice and Democracy at the 
New York Law School, attorney Doroshow.
    I also commend and align myself with the remarks of the 
Ranking Member of the Subcommittee, Mr. Nadler.
    I think that, in some respects, the title of this hearing 
is not as accurate as I would have made it, but one critical 
issue is the suggestion that we limit the ability of victims to 
pay for their cases. The proposal would eliminate or limit 
contingency fees, prevent attorneys general from retaining 
outside counsel, and prevent plaintiffs from seeking outside 
funding to sustain what are often long and costly cases.
    Of course, the large corporate defendants realize this, and 
if they can limit the ability of their victims to fund the 
case, they can win through attrition and not on the merits.
    And so here, with the sequester kicking in, and we are 
finding out now that there is talk of delaying jury trials, 
court security is being reduced, and now there is talk of 
federalizing everything, it sends a shiver down the spines of 
the judiciary, generally.
    Now, we are supposed to be dealing with forum shopping, the 
cy pres doctrine, third-party financing. And the fact of the 
matter is, we have 33 vacancies that are being blocked by 
conservatives, in terms of making the Federal system work 
better than it is now.
    Contingency fees, from my point of view, is the way the 99 
percent are able to enforce their legal rights, even against 
the 1 percent.
    And so, despite limits on class actions through legislation 
and Supreme Court decisions over the years, we still hear 
complaints that the plaintiffs still have an ability to bring 
their cases in State court. I realize that some consider the 
Federal courts a more favorable forum for corporate defendants, 
and will insist that Congress further trample on State rights 
and continue the Federal takeover of State tort law, which may 
be a direction we may be going in.
    When you get past the rhetoric, it is clear that what is 
going on here is forum shopping through legislation.
    While Members may not like State laws, the causes of 
action, the discretion exercised by State officials on the way 
to State courts and juries carry out their duties, and Congress 
should limit their interference in this kind of activity.
    And finally, when we hear complaints about the victims and 
their attorneys, we hear little acknowledgment that many of 
these cases are, in fact, meritorious and that the individuals 
are entitled to compensation for their harm.
    What are the victims in these cases supposed to do? They do 
not have money. Many of them aren't even going to be able to 
work anymore. And there is too little concern expressed about 
the extent to which large corporations, banks, and, may I 
mention, the Wall Street financial crowd--so far, there may be 
one person that has been sentenced to imprisonment that caused 
this tremendous economic destabilization. And here we find 
those who bankrupted pension funds, and the polluters destroyed 
the lives of millions of homeowners--are at the mercy of those 
who have caused some of the pollution and are now victims of 
discrimination.
    And so I look forward to the testimony. I have no concern 
in which large corporations abuse legal process to conceal the 
truth and obstruct justice.
    And this is a service. This is a goal that I will be 
listening carefully for.
    And we may have to have another hearing, I say to the 
Chairman, to look at the other side of the issue.
    And I yield back my time, and thank the Chair.
    Mr. Franks. And I thank the gentleman.
    Without objection, other Members' opening statements will 
be made part of the record.
    And I will now introduce our witnesses.
    Elizabeth Milito is a senior executive counsel for the 
National Federation of Independent Businesses' Small Business 
Legal Center. Ms. Milito has previously worked at the U.S. 
Department of Veterans Affairs, and as a trial attorney in 
Maryland, practicing in the fields of tort, medical 
malpractice, employment, and labor law. She has also clerked 
for the Honorable Alan Wilner on the highest State court in 
Maryland.
    Welcome.
    Ted Frank is this founder of the Center for Class Action 
Fairness. Mr. Frank has won several landmark cases and millions 
of dollars for consumers and other plaintiffs through the 
center, the nonprofit project he founded in 2009. He is also an 
adjunct fellow at the Manhattan Institute. Mr. Frank was a 
resident fellow with the American Enterprise Institute from 
2005 to 2009, a litigator from 1999 to 2005, and he has clerked 
for the Honorable Frank H. Easterbrook on the Seventh Circuit 
Court of Appeals.
    Thank you, sir.
    Joanne Doroshow is the executive director of the Center for 
Justice and Democracy at New York Law School. Ms. Doroshow has 
worked on civil justice issues since 1986, when she directed an 
insurance industry and liability project for Ralph Nader. She 
has testified before the U.S. Congress many times and appeared 
before numerous State legislatures around the country.
    Welcome, Ms. Doroshow.
    John Beisner is the cochair of the mass torts and insurance 
litigation group at Skadden, Arps, Slate, Meagher & Flom LLP, 
based in its Washington, D.C., office. Among other things, that 
Mr. Beisner represents defendants in a wide range of aggregate 
litigation matters, including mass tort controversies, class 
actions, and False Claims Act suits.
    Thank you for being here, sir.
    So each of the witnesses' written statements will be 
entered into the record in its entirety. And I would ask that 
each witness summarize his or her testimony in 5 minutes or 
less. To help you stay within that time, there is a timing 
light in front of you. The light will switch from green to 
yellow, indicating that you have 1 minute to conclude your 
testimony. When the light turns red, it indicates that the 
witness's 5 minutes have expired.
    So before I recognize the witness, it is the tradition of 
the Subcommittee that they be sworn, so if you will please 
stand to be sworn?
    [Witnesses sworn.]
    Mr. Franks. And I now recognize our first witness, Ms. 
Milito.
    Ms. Milito, is that microphone on? Ms. Milito, would you 
pull that microphone a little closer to you?

   TESTIMONY OF ELIZABETH MILITO, SENIOR EXECUTIVE COUNSEL, 
   NATIONAL FEDERATION OF INDEPENDENT BUSINESS (NFIB) SMALL 
                     BUSINESS LEGAL CENTER

    Ms. Milito. Thank you, Mr. Chairman, and distinguished 
Subcommittee Members.
    NFIB's mission is to promote and protect the right of its 
members to own, operate, and grow their businesses, and 
represents 350,000 member businesses nationwide. The typical 
NFIB member employs 10 people and reports gross sales of about 
$500,000 a year.
    I applaud the Subcommittee for holding this hearing on the 
problem of lawsuit abuses. Although our country's judicial 
system has much to be lauded, small-business owners staring 
down a lawsuit find it hard to appreciate praise of the courts.
    Of course, it is important to give victims of injustice 
their day in court. But lawsuit abuse victimizes those who are 
sued.
    By lawsuit abuse, I am referring to those cases where a 
plaintiff's attorney asserts a flimsy claim to get some money, 
to get more money than is fair, or sues a business that had 
little or no involvement, but might have money. In all of those 
instances, small businesses must expend substantial resources 
to defend their business.
    Lawsuits threatened or filed impact small-business owners. 
Small-business owners do not have in-house counsel to inform 
them of their rights, write letters responding to allegations 
made against them, or provide legal advice.
    Today, I want to briefly discuss two areas that drive 
abusive litigation practices: one, financial incentives that 
encourage frivolous litigation; and two, fraudulent joinder.
    The story of Doug Volpi, an NFIB member who owns a paint 
store in Southern California, provides a vivid example of 
litigation abuse and demonstrates how financial incentives 
encourage frivolous litigation. And I would like to say, too, 
Mr. Volpi was eager to have me share his story here today.
    He received a summons in the mail notifying him that his 
business, Frontier Paint, was a defendant in an asbestos 
lawsuit. Mind you, the allegations in the claim stated that the 
plaintiff had been exposed to asbestos in the 1960's and 1970's 
from use of a product called Fixall. The manufacturer of Fixall 
has long since gone bankrupt.
    Mr. Volpi bought his Southern California business in 1997. 
That was over 20 years after the plaintiff's alleged exposure. 
Moreover, the plaintiff lived in San Francisco, nowhere near 
the location of Mr. Volpi's Southern California store.
    Upon receipt of the summons, Mr. Volpi said to his wife, we 
are going to need to hire a lawyer, and they did. Then Mr. 
Volpi himself spent hours online researching the plaintiff's 
claims and discovered that the plaintiff's attorney's law firm 
had a known reputation for trolling for defendant.
    In Mr. Volpi's words, this attorney, ``dropped a net, 
dragged it around, and pulled it up to see if there was any 
halibut.''
    Thanks to the work of Mr. Volpi's attorney, Frontier Paint 
did not become halibut. But dismissal of Mr. Volpi's business 
came at a significant cost to Frontier Paint.
    Mr. Volpi and his wife paid significant legal fees out of 
pocket just to get their business removed from a complaint in 
which it should never been named as a defendant in the first 
place.
    Mr. Volpi's story, unfortunately, is not unique. Class-
action cases are rife with stories like Frontier Paint. In 
these cases, plaintiffs' attorneys use a shotgun approach. 
Hundreds of defendants are named in a lawsuit, and it is the 
defendant's responsibility to prove that they are not culpable.
    Public policy should encourage plaintiffs' attorneys to 
prudently assess the viability of their clients' potential 
claims before they initiate a lawsuit and discourage plaintiffs 
from taking unfounded or improvidently cavalier positions.
    Along these lines, we should aim to create strong 
disincentives against naming a small business as a defendant in 
a case where the claim against the business is particularly 
weak, especially where the plaintiff's apparent motive is to 
use the defendant as a body shield against invocation of 
Federal jurisdiction, or what is also referred to as fraudulent 
joinder.
    But unfortunately, as the law currently stands, plaintiffs 
actually have perverse incentive to bring weak or attenuated 
claims against small business defendants for the sake of 
defeating Federal jurisdiction.
    NFIB believes that we need to change the incentives driving 
our litigious culture. This may be accomplished, to some 
extent, through substantive reforms limiting tort liabilities 
or setting evidentiary or recovery standards.
    But we should remember that the fundamental problem facing 
small-business owners in these cases is a lack of financial 
resources necessary to successfully fend off frivolous claims.
    The cost of lawsuits for small businesses can prove 
disastrous and threaten the growth of our Nation's economy. We 
must work together to find and implement solutions that will 
stop this wasteful trend.
    On behalf of America's small-business owners, I thank the 
Subcommittee for holding this hearing and for inviting me to 
testify here today.
    Thank you.
    [The prepared statement of Ms. Milito follows:]
   Prepared Statement of Elizabeth Milito, Senior Executive Counsel, 
National Federation of Independent Business (NFIB) Small Business Legal 
                                 Center



























                               __________
    Mr. Franks. Thank you, Ms. Milito
    And I will now recognize our second witness, Mr. Frank. And 
please turn on your microphone, sir.

   TESTIMONY OF THEODORE H. FRANK, ADJUNCT FELLOW, MANHATTAN 
INSTITUTE FOR LEGAL POLICY, PRESIDENT, CENTER FOR CLASS ACTION 
                            FAIRNESS

    Mr. Frank. Thank you, Mr. Chairman, and distinguished 
Committee Members, for inviting me to provide testimony about 
class-action settlement abuse and, in particular, cy pres.
    My nonprofit public interest law firm, the Center for Class 
Action Fairness, has won millions of dollars for what the 
Ranking Member called the victims--consumers and shareholder 
plaintiffs--by representing objectors to unfair class-action 
settlements.
    And while I am affiliated with the center and with the 
Manhattan Institute, I am not speaking on their behalf today, 
but only on behalf of myself.
    The class-action procedure is one of many ways consumers 
can vindicate their rights, but, all too often, class actions 
are abused to benefit attorneys at the expense of the consumers 
they purport to represent, a wealth transfer from the 99 
percent to the 1 percent.
    In the class-action settlement process, the class counsel 
is trying to maximize their profits while the defendant is 
trying to minimize the expense of the litigation and the 
settlement. But when courts fail to follow the Federal rules 
and the Class Action Fairness Act requirements of scrutinizing 
the fairness of a settlement, the parties all too often tacitly 
agree to freeze out the absent party at the table--the consumer 
class members that the settlement is supposed to be benefiting.
    Cy pres distributions, which are money given to third-party 
charities instead of to the class, are one of the leading ways 
to abuse the settlement process to create the illusion of class 
recovery while diverting the true bulk of the settlement to the 
attorneys.
    When plaintiffs' attorneys are paid based on the size of 
funds rather than based upon what the class actually recovers, 
they have a perverse incentive to make it harder for their own 
clients to get access to justice and recover.
    In the Third Circuit case I argued and won last month, the 
District Court did not even try to make findings to learn about 
whether class members would benefit, and rubberstamped a $14 
million attorney payment. It took the appellate court scrutiny 
to determine that because the claims process required a 
burdensome five-page claim reform to request recovery as low as 
$5, less than $3 million would have gone to the class, less 
than a fifth of what the attorneys were going to receive.
    The attorneys were perfectly happy with this because they 
were being paid based on the size of the total settlement fund, 
and they would have gotten to steer $17 million to their 
favorite charity in addition to their $14 million fee.
    So, all too often, the cy pres is a way for the attorneys 
to double dip. Money goes to the attorney's alma mater or, in 
one case, a charity run by the ex-wife of the class counsel.
    Now, while the Third Circuit in my baby products case asked 
for more scrutiny of such settlements, other courts have been 
more lenient. In the case of Lane v. Facebook, the Ninth 
Circuit, in a 2-to-1 opinion, affirmed the settlement approved 
by the District Court, where $3.2 million went to the 
attorneys, zero dollars to the class, and Facebook's only other 
burden was to create a new charity run by Facebook and give it 
$6 million.
    So that is like a settlement against Microsoft settling for 
Microsoft giving money to the Gates Foundation.
    In effect, the class got zero dollars, the attorneys got 
$3.2 million, and the defendant got a waiver of whatever claims 
were against it.
    Worse still are the cases where a judge treats cy pres as 
his or her own plaything. In the Google Plus class-action 
settlement--again, a zero dollar class-action settlement for 
the class where the only money was going to charity--Judge 
Ware, without notice to the class, decided that a substantial 
part of the cy pres be diverted to a local university where he 
teaches.
    Again, the class got zero dollars. The attorneys got 
millions. Google got to give money to charities that, in large 
part, it was giving to anyway.
    In many cases, sunlight or transparency is a great 
disinfectant to this problem. For example, in the Apple 
backdating settlement, where one of my clients objected, the 
parties planned to divert $2.5 million from shareholders to a 
dozen schools, some of whom were affiliated with class counsel, 
where the class counsel sat on the board. When I blew the 
whistle, the parties quickly amended the settlement so that the 
money went to the class, to the supposedly injured 
shareholders, rather than to the friends of the class counsel.
    In the Bayer aspirin case currently pending in Federal 
District Court in Brooklyn, I objected that the attorneys 
planned to pay $5 million to themselves, $8 million to 
charities affiliated with the class counsel, and less than 
$100,000 to the class. In response to the scrutiny and to press 
coverage of my objection, the parties suddenly discovered that, 
yes, they did have a list of class members to whom they could 
pay $5 million.
    But the cases I mentioned are just the tip of the iceberg. 
The center has limited resources and cannot possibly object to 
every bad settlement. And when we do not object, and sometimes 
even when we do, these bad settlements are rubberstamped.
    Attorneys and judges face no consequences for failing to 
disclose their conflicts of interest to the court or to the 
class, and so there are certainly many more egregious cases of 
self-dealing than we know about.
    If courts fail to act here, there is a role for Congress to 
protect consumers from this class-action abuse.
    I welcome your questions.
    [The prepared statement of Mr. Frank follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
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                               __________

    Mr. Franks. Thank you, Mr. Frank.
    And I would now recognize our third witness, Ms. Doroshow.

 TESTIMONY OF JOANNE DOROSHOW, EXECUTIVE DIRECTOR, CENTER FOR 
          JUSTICE AND DEMOCRACY AT NEW YORK LAW SCHOOL

    Ms. Doroshow. Thank you, Mr. Chairman, and Members of the 
Subcommittee.
    This oversight hearing is to examine litigation abuses. 
When I heard of this hearing topic, I was thrilled, of course, 
because, thanks to countless and ever-increasing kinds of 
litigation abuses that affect 99 percent of Americans, I 
thought this is a real opportunity to discuss a very serious 
issue.
    As a result of hundreds if not thousands of so-called tort 
reform laws that have passed around the country in the last 30 
years; a series of recent Supreme Court decisions that have 
stripped people of their legal rights, including providing 
corporations the ability to ban class actions; and other action 
and inaction by Congress; the sick, injured, and violated 
struggle to get into civil court today.
    Indeed, tort cases now represent only 6 percent of all 
civil cases while monetary disputes, like debt collections, 
represent 72 percent.
    While calling consumer lawyers insensitive to the 
importance of keeping companies ``litigation-free,'' corporate 
lawyers run to court at the smallest provocation. The U.S. 
Chamber of Commerce itself sues the U.S. Government, on 
average, three times a week.
    There are many ways to define litigation abuse, of course. 
There is discovery abuse by corporate defendants who try to 
avoid disclosure of critical information they would prefer to 
keep secret, not only from the plaintiff, but from the public.
    I believe budget cuts are abusive. Indeed, it is now being 
reported that, due to the sequester, Federal civil jury trials 
may be completely suspended beginning this fall.
    As to class actions, these cases are now in freefall. It 
seems my copanelists may be the only ones who have not gotten 
the memo on that. Just since AT&T v. Concepcion was decided in 
2011, allowing corporations to immunize themselves with forced 
arbitration clauses containing class-action bans, at least 100 
class actions--this is according to recent work from Public 
Citizen--and likely many more have been dismissed.
    The claims have not gone into arbitration. They have simply 
disappeared.
    Then there is the Walmart v. Dukes case, which, as one 
corporate lawyer put it, has aided employers to defeat, 
fracture, and/or devalue employment discrimination class 
actions.
    Employers have not even taken full advantage of 
Concepcion's forced arbitration and class action bans, but they 
will.
    Other cases have resulted in the widespread dismissal of 
drug and device cases--Riegel v. Medtronic, the Mensing case.
    Lawsuits by the sick and injured are now so nonthreatening 
to the business world that NFIB's own members ranked the issue, 
which they call ``cost and frequency of lawsuits/threatened 
lawsuits'' at number 71 out of 75 issues that small businesses 
care about. That is a lower rank than how to use Twitter, 
according to their own survey.
    In sum, there is much to discuss when it comes to 
litigation abuse. I did learn late Monday that, I guess since 
corporate litigation lobbies have seemingly gotten most 
everything they have asked for from Congress and the Supreme 
Court, pending a couple more decisions this term, they have 
only a few things left to complain about.
    One, they do not like it when plaintiff lawyers try to keep 
truly State cases based on State laws involving few residents 
in State court where it belongs, or that these attorneys file 
cases in too few judicial jurisdictions, which they call forum 
shopping.
    Of course, as Mr. Conyers alluded to, one answer to this 
problem is for the Senate to confirm the 33 nominees currently 
pending who would love to be hearing cases right now.
    And of course, the irony here is that CAFA provides the 
ultimate in forum shopping to defendants who can decide which 
court will hear a case that accuses them of wrongdoing.
    Another thing they do not like are cy pres awards. When a 
company steals or cheats people out of millions of dollars, 
they would like this company never to be held accountable for 
this if its customers are dead or cannot be found. We do not 
agree.
    As to alternative litigation financing, when someone or 
their child suffers brain injury, amputation, blindness, 
quadriplegia, cancer, or another devastating injury at the hand 
of a corporate wrongdoer, and cannot work, they deserve to be 
able to bring their case and not be forced into accepting 
lowball offers from insurance companies simply because they 
cannot put for food on the table.
    Regulation by State bar associations of alternative 
litigation financing is fine. Banning it or placing control of 
litigation in the hands of the Federal Government, where the 
U.S. Chamber of Commerce has outsize influence, is not fine.
    There are many steps that Congress can take, such as to 
prohibit arbitration, class-action bans. I would be happy to 
discuss some of those laws and bills, if time permits.
    And I thank you very much, and would be happy to answer 
questions.
    [The prepared statement of Ms. Doroshow follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    


                               __________
    Mr. Franks. Thank you, Ms. Doroshow.
    I will now recognize our fourth witness, Mr. Beisner.

  TESTIMONY OF JOHN H. BEISNER, ON BEHALF OF THE U.S. CHAMBER 
  INSTITUTE FOR LEGAL REFORM, SKADDEN, ARPS, SLATE, MEAGHER & 
                            FLOM LLP

    Mr. Beisner. Thank you, Mr. Chairman, and Members of the 
Subcommittee, for inviting me to appear here today.
    I am appearing on behalf of the U.S. Chamber Institute for 
Legal Reform, which is the only national legal reform advocate 
to approach reform comprehensively by working to improve not 
only the law, but also the legal climate.
    Over the last several years, significant progress has been 
made in addressing certain forms of litigation abuse in the 
United States, both at the Federal and State court level. The 
most significant of these is the Class Action Fairness Act of 
2005, or CAFA, which has virtually eliminated so-called magnet 
State courts that were once a haven for meritless and abusive 
class-action lawsuits.
    But more work is needed. The United States is experiencing 
far too much litigation abuse. It is undermining our economy 
and sullying the reputation of our legal system.
    I would like to focus on three areas ripe for abuse: class 
actions, State attorney general enforcement of Federal law, and 
third-party litigation financing.
    Let me start with class actions. Although CAFA has vastly 
improved the civil justice landscape, the threat of abusive 
class actions has not been completely extinguished, for several 
reasons.
    First, some Federal courts have undermined the 
effectiveness of CAFA by making it far more difficult to remove 
cases to Federal court than Congress had intended. At least one 
of the issues I am referencing has worked its way up to the 
Supreme Court in the Standard Fire Insurance Company v. Knowles 
case. The Supreme Court will be deciding whether a named 
plaintiff can avoid removal under CAFA by stipulating that she 
does not seek to recover more than $5 million on behalf of the 
absent class members. If in Knowles, the Supreme Court condones 
the practice of using stipulations to defeat CAFA jurisdiction, 
that ruling would be a blow for civil justice.
    The second problem is that some Federal courts have ignored 
the Supreme Court's ruling in the Walmart Stores v. Dukes case, 
which permits certification of classes only after a rigorous 
analysis to ensure that plaintiffs' claims are really 
susceptible to being proved on a classwide basis.
    As a result, even in some Federal courts, frivolous class 
actions are proceeding.
    Another problem affecting Federal class-action litigation 
is increasing reliance on cy pres settlements, which were 
mentioned earlier. Now these may seem like a good deal by 
ensuring that some money in a settlement goes to a good cause. 
But in reality, cy pres is a way for class lawyers to justify 
big fees without providing any real benefits to class members.
    Another area that warrants scrutiny is the proliferation of 
arrangements under which State attorneys general hire outside 
counsel on a contingency fee basis to represent the State in 
civil litigation. This problem threatens to worsen as more 
Federal statutes give State attorneys general authority to 
enforce Federal laws. And I am talking about statutes such as 
the Truth in Lending Act, HIPAA, the Dodd-Frank statute, and 
the Consumer Products Safety Improvement Act of 2008.
    Contingency fee contracts between AGs and private counsel 
can create unseemly liaisons between public enforcement 
officials and private profit-motivated lawyers. They also 
threaten to violate the constitutional rights of defendants who 
find themselves the targets of lawsuits that combine the 
political power of the State and the financial power of the 
plaintiffs' bar.
    To avoid these results, Congress should consider enacting 
legislation that prohibits State AGs from retaining contingency 
fee counsel to enforce Federal law. Such legislation would 
promote the integrity of enforcement proceedings and safeguard 
the constitutional rights of defendants.
    Finally, I want to address one more looming litigation 
abuse: third-party litigation financing. For those unfamiliar 
with this practice, TPLF is the practice of investing in 
lawsuits. And if that concept makes you uncomfortable, your 
instincts are right.
    This has the potential to dramatically adversely affect our 
civil justice system by increasing the filing of questionable 
claims, diminishing the ability of individuals to have a say in 
their own lawsuits, to prolong litigation, to drive up the 
return on investments for the investors in such litigation, and 
to compromise the critical attorney-client relationship.
    In my written testimony, I outline a number of proposals 
for addressing this issue.
    Again, I appreciate the opportunity to speak this morning 
and would be happy to answer any questions.
    [The prepared statement of Mr. Beisner follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                               __________

    Mr. Franks. Thank you. And I thank you all for your 
testimony.
    We will now proceed under the 5-minute rule with questions. 
And I will begin by recognizing myself for 5 minutes.
    And I will start with you, Ms. Milito.
    Ms. Milito, you stated in your written testimony that we 
``must also address the reality that small business defendants 
are rationally discouraged from vindicating their rights in 
court under the current legal rules.''
    Now, it seems to me that you are essentially saying that an 
innocent small business may have to pay money to trial lawyers 
to avoid paying an even more significant amount by litigating 
their cases to victory.
    Is that true? Or can you elaborate?
    Ms. Milito. Yes, certainly. And that is true. And I think, 
actually, the point was made in part by Mr. Conyers' statement, 
too, who I think referred to large, costly cases. Hearing about 
these large, costly cases that you read about in the news, 
these class-action, that feeds into the fear that I hear from 
small business members who oftentimes, when they are threatened 
with a lawsuit or they receive that demand letter in the mail, 
their first thought is, my goodness, what do I do and how much 
is this going to cost me, because there is an immediate 
recognition that, like with Mr. Volpi, I am going to need to 
get an attorney and attorneys are expensive.
    And in this respect, I am a kind of aligned with my 
members. I have been out of private practice for nearly 20 
years, so I get sticker shock, too, when I hear about what 
attorneys cost, as do our members. And our members have an 
appreciation that attorneys, whether they are plaintiff's 
attorneys or defense attorneys, are entitled to get paid. They 
have an expertise, like Mr. Beisner. But it is expensive, and 
it is costly to defend these cases.
    So I spoke with a member, ironically, just yesterday, who 
has been threatened with a wage and hour issue. And she has 
already paid her attorney nearly 5 hours, and she said, you 
know, this is $260 an hour. As of right now, we don't even have 
the complaint. I just do not know what to do. I am at the point 
where I kind of want to pay off this individual, even though I 
do not think I did anything wrong. I do not think I violated 
any wage and hour law, but I just want this to end, because I 
do not know how long this is going to go on. They just want to 
get out.
    So it is very often--they are not going to go and engage in 
long, costly discovery, my members. They may not even ever see 
a complaint, like this member I spoke to yesterday. They want 
to kind of, as much as they hate to throw up their hands in 
defeat, they want to pay, get out and just kind of make this go 
away so they can get back to running their business.
    Mr. Franks. Mr. Frank, you stated in your written 
testimony, ``At a minimum, the parties should be required to 
give notice to the class of who the cy pres recipients are and 
whether there are relationships between the recipients and the 
parties, attorneys, and judge.'' Though this information seems 
obviously material to the fairness of the settlement, courts 
have generally refused to establish bright line rules that 
penalize parties that hide this information from class members.
    Could you please elaborate on why some courts are reluctant 
to make the cy pres system more transparent and what Congress 
might do to rectify that?
    Mr. Frank. I do not understand why the courts are not 
creating the bright light rules here. To me, it seems an 
obvious solution, and one answer is that I am litigating 
against millionaire attorneys who have a lot of money at stake, 
and if I win on that point, they might not get their money, so 
they throw as much mud into the litigation process as possible 
to protect themselves on that issue.
    Congress can certainly require notice to have these things. 
In the Class Action Fairness Act, for example, defendants are 
required to give notice to State attorneys general about a 
pending settlement, so that the State attorney general can come 
in and intervene on behalf of class members who are treated 
unfairly. Unfortunately, that provision has not had very much 
effect, because most State attorneys general have just sort of 
ignored it.
    But similar provisions to the existing 1715 in requirements 
and notice, and holding that a defendant does not get the 
benefit of waiver, if the notice does not have these 
provisions, or that attorneys will be punished if they fail to 
make the appropriate disclosures, will create the right 
incentives so that class members know went attorneys are 
diverting money to their alma mater or to their ex-wife's 
charity.
    Mr. Franks. Thank you, sir.
    Mr. Beisner, has President Obama withdrawn the previous 
Administration's executive order that bans the Justice 
Department from hiring contingency fee lawyers, unless required 
by law? And if not, what would that say about the President's 
policy?
    Mr. Beisner. To my knowledge, that executive order is still 
on the books. And to be clear what it means is it precludes the 
Federal Government, when it is going to enforce laws, from 
getting contingency fee counsel involved in the litigation. And 
to me, it is a policy saying that is something the Federal 
Government should not do in enforcing its laws, and that should 
apply when State AGs are enforcing Federal law as well.
    Mr. Franks. Thank you. And I would now recognize the 
Ranking Member for 5 minutes, Mr. Nadler.
    Mr. Nadler. Well, thank you. I want to say, if anything 
useful has come out of this hearing so far it is that I have 
found out about that executive order from the President saying 
that the AGs shall not hire contingency fee lawyers, and I will 
do my best to get that revoked as soon as possible.
    Ms. Doroshow, Mr. Beisner claims that contingency fee 
agreements between State AGs and private counsel are somehow 
problematic. Can you explain how these agreements really 
operate and the risk that taking a case on a contingency fee 
entails?
    Before you do that, let me read something that will set the 
stage for this question. Very often, the State AG will find 
himself outclassed by very large law firms hired by very rich 
litigants. So for example, in the tobacco litigation, the 
strategy of the tobacco companies with bury everybody in paper 
and make it too expensive to fight. A memo written by counsel 
for R.J. Reynolds Tobacco made it clear that outspending 
litigants and forcing them to abandon their claims was the core 
staple of the tobacco industry's litigation strategy. I quote 
from the memo, ``The aggressive posture we have taken regarding 
depositions and discovery in general continues to make these 
cases extremely burdensome and expensive for plaintiffs' 
lawyers. The way we won these cases was not by spending all of 
RJR's money but by making that other SOB spend all of his.''
    Could you comment on some of the proposals you have heard 
in the context of this kind of memo about prohibiting State AGs 
from hiring contingency fee lawyers?
    Ms. Doroshow. Sure. The State AGs make rare use of 
contingency fee lawyers, but they do so if they are in a 
situation where the office is underresourced and understaffed, 
and they need to enforce State law and protect their consumers, 
and they do not have the staff to do that. So they bring on 
contingency fee lawyers who, by the way, like all contingency 
fee lawyers, are paid nothing until and unless the case is won.
    And in this case, the payments, the fees, are paid from the 
company that has been determined to have broken the law. 
Taxpayers do not pay these fees. Not only that, taxpayers in 
many cases--the tobacco cases being a good example of that, but 
there are many, many others--have recovered millions and 
millions of dollars as a result of these State AG cases.
    Mr. Nadler. So, Mr. Beisner, why is that not a great public 
service?
    Mr. Beisner. Well, I am not sure I agree with the factual 
premise on that.
    Mr. Nadler. Well, let us put it this way: By definition, if 
you win the case, it is not a frivolous case. You won. The 
courts have determined it is not.
    Mr. Beisner. Oh, yes.
    Mr. Nadler. If an AG, through a contingency fee lawyer, 
wins millions of dollars in damages for the taxpayers or for 
some injured class in the State, what is wrong with that?
    Mr. Beisner. Because there is a huge cost to the State to 
do that, because the lawyers involved keep 40 percent of the 
money that came in.
    Mr. Nadler. But if that had not happened, the State would 
have gotten zero and the State could not have afforded to bring 
the case in the first place.
    Mr. Beisner. If the State had decided that it was a 
priority, it could have paid those attorneys by the hour, as 
many States do. Many States do not have----
    Mr. Nadler. But that might cost a fortune. And then you run 
into the problem that you are up against the tobacco companies, 
some other big company that is just trying to run up your 
costs. Isn't this a good way around that?
    Mr. Beisner. No, it is not. And I think it also ignores the 
fact that through NAAG, and other resources, the attorneys----
    Mr. Nadler. Through what?
    Mr. Beisner. The National Association of Attorneys General. 
Sorry. They are able to pool resources and be very effective.
    Mr. Nadler. Ms. Doroshow, would you comment on that? And on 
the 40 percent figure?
    Ms. Doroshow. Well, I mean, yes, they are not charging 40 
percent. You know, I think in these cases, they usually are 
charging far, far less than the normal one-third fee.
    But in any event, this is not money that the taxpayer is 
paying. This is money that the defendant is paying. The company 
that broke the law is paying these fees, not the taxpayer.
    Mr. Nadler. Let me ask you one other question, Ms. 
Doroshow, and then Mr. Beisner.
    The Attorney General is an elected official in most States. 
Shouldn't he make that judgment? Why should the Federal 
Government, as I gather Mr. Beisner would have us do, prohibit 
the exercise of judgment by an elected official as how to 
allocate resources and protect his constituents?
    Ms. Doroshow, first.
    Ms. Doroshow. You know, this is something that is obviously 
a State issue. Congress should have no involvement in it. There 
are some State laws, 20-some, that provide Federal and State 
concurrent authority to enforce the law. In our organization, 
and there was testimony actually last year by Amy Widman, a law 
professor at Northern Illinois University, about the research 
that they did to show that that concurrent enforcement 
authority with AGs----
    Mr. Nadler. But I mean, Mr. Beisner would say that the 
Federal Government should prohibit the attorney general, who is 
an elected State official, from using his or her judgment as to 
whether to hire a contingency fee lawyer to vindicate or try to 
vindicate the rights of the consumers or the taxpayers or 
whoever in the case. We should interpose our judgment and say 
you may not do that.
    He is an elected official. He is not risking State money. 
Why shouldn't he be allowed to do that?
    Ms. Doroshow. The Federal Government should stay out of 
this.
    Mr. Nadler. And if I could ask----
    Mr. Franks. The gentleman's time has expired.
    Mr. Nadler. Could we let Mr. Beisner answer the question?
    Mr. Franks. Please finish the question.
    Mr. Beisner. Let's be clear that what we are talking about 
is when that judgment is being made about enforcing Federal 
law. What we are talking about is not State AG enforcement of 
State laws.
    Mr. Nadler. I thought we were talking about State AGs?
    Mr. Beisner. We are talking about State AGs enforcing 
Federal law under those statutes that permit it. And there we 
are saying there is a distinct Federal interest in saying, 
since the Federal Government, by executive order, does not use 
contingency fee counsel, that policy judgment has been made. 
And where that authority for enforcement has been delegated to 
the State, that shouldn't be used there either.
    Mr. Franks. The gentleman's time has expired.
    I would now recognize Mr. DeSantis for 5 minutes.
    Mr. DeSantis. Thank you, Mr. Chairman. Thank you for 
conducting this hearing. Thank you to the witnesses.
    You know, I think that litigation abuse in an important 
issue. It is interesting the Founding Fathers, if you look 
back, they thought attorneys would be very trustworthy and the 
type of people who would really be able to be leaders. And 
obviously, I think we have seen a change in how the profession 
is viewed by the public, and I think this is one of the reasons 
why.
    Ms. Milito, you talked about in your testimony that many of 
your members receive cases brought against them, sometimes 
threatened, but sometimes actual cases. They look at it and 
they are pretty convinced that they would be able to win on the 
merits, if they did not do anything wrong, but then they face 
the calculation of, okay, how much is it going to cost me to 
defend the case?
    And so, even if they win, oftentimes they are better off 
just cutting a check to somebody to be able to go away, not 
just purely based on economics, although that is obviously a 
calculation, but the time and effort that they would have to 
invest in the case.
    Is that a pretty standard thing that you hear from your 
members? Having to make that type of choice?
    Ms. Milito. Definitely, yes. It is a simple cost-benefit 
analysis. And you are right to hit on, too, the anxiety, the 
stress, the time away from the business, kind of the 
incalculable financial costs that go into the decision to 
settle a case where they do feel that, hey, I did nothing wrong 
here.
    And you know, even the situation going back to Mr. Volpi, 
the frustration he expressed to me was my attorney told me that 
I could file a motion to recoup my attorneys' fees, but filing 
the motion and the fight to recover that would probably cost 
$4,000. And he said, so to pay $4,000 to get $1,000 back and 
the end of the day makes absolutely no sense.
    So it is just a cost-benefit analysis, and that is why they 
try to get out.
    Mr. DeSantis. In your testimony, you mentioned how the 
incentives in our system are structured to kind of lead to this 
outcome over and over again. Would your members be receptive--
many of these cases may be done under State law, so it wouldn't 
be for us to get involved, if that is the case.
    But would they be open to reform where they would be able 
to recover attorneys' fees? Like in Britain, the loser will 
just pay the fees. It seems to me that would change the 
incentives for some of these cases being brought.
    Ms. Milito. Certainly, we have some members that I think I 
have heard from that would support that. But I think it is more 
disincentivizing attorneys and, certainly, a lot of attorneys--
most attorneys, I think, comply with the highest ethical 
standards. I do want to say that at the outset, and I think our 
members would say that, too.
    It is kind of these bottom feeders, if you will, that are 
going after the low dollar cases with small businesses. And so 
disincentivizing the frivolous claims by maybe strengthening 
Rule 11 sanctions, making it easier to recover sanctions. And 
this does get into, as you pointed out, some State law issues, 
too, with consumer statutes not allowing recovery of fees when 
you bring those claims. Those sorts of things.
    I think there are other areas that you could look at, too.
    Mr. DeSantis. Okay, great.
    Mr. Beisner, in terms of the contingency fees with these 
State AGs, just in your experience, is there ever a time when 
you just absolutely need to do a contingency fee? Or could 
these cases be dealt with without that?
    Mr. Beisner. I think, for the most part, they can be dealt 
with without attorneys' fees. You know, I think there are some 
instances where States have tax collection operations and so 
on, where that may be the only approach that is available to 
them.
    I think what is of most concern, though, is the idea that 
when you hire contingency fee counsel and basically pin the 
attorney general's badge on them, there are really worries 
about handing over control of litigation to somebody who has a 
financial interest in the outcome.
    It is like saying to traffic officers, go out and give 
tickets and you can keep half of the money you collect. You 
worry about the public perception that the judgment, the 
prosecutorial judgment that ought to be exercised when you are 
using the authority of the State, when you have that badge 
pinned on, it is not being properly used. And that is the 
concern in these larger cases, that are really prosecutions of 
a sort, about the use of contingency fee counsel.
    Mr. DeSantis. And do you know, from your experience, how 
are these contingency fee attorneys selected by the State AG? 
Is there a system, or is it just kind of ad hoc?
    Mr. Beisner. It varies from State to State. I should start 
by saying there are some States and some State attorneys 
general who say we are having nothing to do with this. We do 
not want this at all, and have made that judgment.
    Other jurisdictions in recent years have enacted 
legislation, in large part because of the abuses that were 
recognized coming out of the tobacco litigation of how counsel 
were selected and how much they were paid, that requires all of 
this to be done in the sunshine.
    And then there are other States where there is a little bit 
of an anything-goes situation. And I think there are concerns 
that in some of those jurisdictions, you do have a little bit 
of a pay-to-play sort of situation, where there does seem to be 
some correlation between campaign contributions and which 
counsel gets selected to carry on these activities on behalf of 
the State.
    Mr. DeSantis. That was going to be my next question.
    So with that, thank you, Mr. Chairman. I yield back.
    Mr. Franks. Thank you, Mr. DeSantis.
    I will now recognize Mr. Conyers for 5 minutes.
    Mr. Conyers. Thank you, Mr. Chairman.
    There seems to be two schools of thought here demonstrated 
by three of the witnesses.
    Attorney Doroshow, is that the correct pronunciation?
    Ms. Doroshow. Doroshow, actually. But that's fine.
    Mr. Conyers. Doroshow.
    How do we deal with the question of, for example, 
supposedly frivolous cases that would otherwise be flooding 
courts?
    The Iqbal v. Ashcroft decision by the Supreme Court said 
that the court should dismiss claims if they are not plausible. 
And what I am hearing here is a number of criticisms that these 
claims are not being dismissed, even though they are frivolous.
    That seems like we might want to hold a hearing to 
determine the accuracy of that among the different courts, the 
Federal and State court itself.
    Ms. Doroshow. Well, I do think Iqbal, those cases have made 
it very difficult for many cases to proceed. And I think it 
would be worthwhile to take a look at the impact that that has 
had on the dismissal of legitimate cases that should be in 
court.
    I mean, the reality is that tort cases are dropping, and 
they have been dropping substantially in this country for 
years. They have been down 25 percent in the last 10 years, 
while business cases, including contract cases, have gone up 62 
percent.
    So I think the proof is this in the statistics. There are 
plenty of mechanisms. Rule 11 is certainly another one that 
provides judges enough tools to dismiss frivolous cases, and 
they are being dismissed.
    But also legitimate cases are being dismissed, and that is, 
in my view, a more serious problem.
    Mr. Conyers. Well, let's look at class actions. For many 
with relatively small claims, there is no other way for a 
victim to get into court. And what I am hearing now is that the 
poor corporate defendants need some help.
    And this hearing seems to be designed to create sympathy 
for the corporate lawyers, who are clearly more affluent than 
the consumer class of lawyers. And it seems to be just 
backward, as far as I am concerned.
    The corporations, through tobacco suits and others, can 
keep you in court. As a matter of fact, now an appeal can take 
a victory away from a plaintiff, and we are here worrying about 
the corporations and how terrible it is that they are subject 
to class-action suits. And it seems to me that it is just the 
reverse.
    Where do you come out in evaluating this part of it?
    Ms. Doroshow. It is pretty clear that the Concepcion case 
has resulted in the dismissal of class actions, because of the 
class-action ban that now has been legitimized by the Supreme 
Court.
    I mean, these cases are not being brought, basically at 
all, because if you do not have the class-action tool, then 
small claims cannot be brought it all. And I think that is a 
result of that, the primary result of that case.
    Mr. Conyers. The last question is on the contingency fee 
contracts. They have been, more or less, demonized in this 
discussion. Can we justify them under certain conditions?
    Ms. Doroshow. Well, contingency fees are the only way that 
individuals can get access to the courts and, in many cases, 
State attorneys general, as well, who are underfunded and 
understaffed.
    It is a critical part of the civil justice system. And 
conservative groups agree. The American Enterprise Institute 
even published a study called, ``Two Cheers for the Contingent 
Fee.''
    Mr. Conyers. Amazing. And I thank you very much.
    I yield back, Mr. Chairman.
    Mr. Franks. Thank the gentlemen.
    And I now recognize the gentleman from Iowa, Mr. King.
    Mr. King. Thank you, Mr. Chairman.
    And I thank the witnesses.
    As I listen to the testimony and review it, just for me, I 
always like to get to: How do we fix this in a big way? And 
then, if we cannot get there, how do we back up to what we can 
get done?
    I did not hear the proposals for those solutions, but I 
first wanted to ask, and I think I will go first to Ms. Milito, 
do you know of a country that has more rampant litigation than 
the United States? Anyplace on the planet?
    Ms. Milito. I mean, from the reports I have read, there is 
a litigation problem, and certainly our members perceive that 
our country is too litigious. I mean, I have not compared, 
myself, data, but, I mean, it is kind of sue first and think 
later, is what I heard from a member recently.
    Mr. King. Do you believe that it affects our culture and 
our quality of life?
    Ms. Milito. I think it affects the culture for a small-
business owner. This kind of this climate of fear pervades. One 
issue that was brought up was about NFIB's problems and 
priorities poll and how a lawsuit is lower on our problems and 
priorities. But I point out that, in 2011, NFIB's research 
foundation polled small employers--not just NFIB members, but 
small employers nationwide--and 40 percent identified 
regulation and legal issues as an impediment to growth.
    So it is this regulatory and legal combined together that 
is an impediment to growth. So it does impact business owners.
    Mr. King. I would just give you a cultural narrative, a 
short one, and that would be a small town that was on a 
lakeshore that had one lot that belonged to the city. And they 
always put a dock out there for public use. And it was nice 
that there was open access to the public along an otherwise 
private shoreline. And someone went out there and put one of 
those steel fishing rod holders on the dock post, and a little 
kid jumped in, cut his arm on that.
    It turned into litigation. The result of the litigation was 
no dock, no public access. The beach is shut down.
    That is an example of how our lives aren't as rich as they 
might be if it weren't for this litigation.
    I would ask if there is anyone on the panel that knows of a 
country that has more rampant litigation than the United 
States. Signal to me, and I will recognize you.
    Mr. Beisner.
    Mr. Beisner. Yes, I certainly do not. And I think that part 
of the reason for that is, if you look at our legal system 
versus virtually every other country's legal system, first of 
all, they do have a principle in most other countries with more 
sophisticated legal systems that if you file a lawsuit and you 
do not win, there are consequences. You pay all or part of what 
the other side had to invest in defending itself.
    Also, most other countries do not have contingency fees.
    Now, I am not necessarily saying we should move away from 
that, but in answer to your question----
    Mr. King. You are starting to convince me, however.
    Mr. Beisner. The reason we have a lot more litigation and 
part of the reason I worry about this third-party litigation 
funding I was referencing is because now you have what are 
basically hedge funds coming in and saying, ``We have a new 
stock market. We have a new place to invest,'' which is going 
to cause the amount of litigation to increase even further.
    Mr. King. But your recommendation, when you get to that 
point of no contingency fees and loser pays, those two 
components of your discussion, what would be your 
recommendation on how we fix this?
    Mr. Beisner. I am not sure that we necessarily should back 
away from the contingency fee system. I think we need to have 
some restrictions on when it is used.
    And I wouldn't necessarily advocate a full loser pays 
system, but to think about whether there should be allocation 
of costs of discovery, which is a huge expense in many of these 
cases, when one side wins or loses, may be an area to look at.
    But there needs to be some consequences there to the 
decision to file litigation. And that is part of the problem 
now. You can just file a lawsuit. And if it does not work, no 
harm, no foul.
    Mr. King. Ms. Doroshow, can you give us an example of an 
incident where an American citizen could have something 
calamitous happen to them and there would be no one liable but 
themselves?
    Ms. Doroshow. Yes, as a result of the Riegel v. Medtronics 
Supreme Court case, currently, victims of defective class III 
medical devices--that is like heart defibrillators and 
pacemakers--have no remedy. And there are thousands of these 
cases that have been dismissed, of people with these kinds of 
very serious and defective medical devices.
    Mr. King. And, Mr. Frank, what do you have to say about the 
question?
    Mr. Frank. That characterization, I think, mischaracterizes 
the real decision, and confuses product design with defective 
products.
    A product that does not meet the FDA's standard still 
provides some remedy. It is only when the FDA has approved the 
product design that the Supreme Court has held that juries do 
not get to second-guess the FDA's decision.
    Mr. King. I thank all the witnesses. I see I have run out 
of time. I appreciate your testimony, and I yield back the 
balance.
    Mr. Franks. I thank the gentleman. And I now yield to Mr. 
Deutch for 5 minutes.
    Mr. Deutch. Thank you, Mr. Chairman.
    Mr. Beisner, you raised a couple points that I found pretty 
interesting.
    You started to explain that there are occasions where it is 
appropriate for States to engage outside counsel. You talked 
about tax collection cases. You said those are really the only 
ones, and those are really like prosecutions. Can you explain 
that?
    Mr. Beisner. I think what I am getting at is where you 
have--you may find some room for it where you have a liquidated 
amount that is owed to the State, so that when you give this to 
an outside counsel, there is not this notion of discretion that 
is being exercised in what is being----
    Mr. Deutch. A liquidating amount owed to the State based on 
what?
    Mr. Beisner. If I am a taxpayer and I owe $1,000 to the 
State, for the State to get some assistance in collecting that 
liquidated amount does not involve a lot of prosecutorial 
discretion.
    I think it is where you get into the ``I want to prosecute 
for wrongdoing'' sort of category where this gets to be more of 
an issue.
    Mr. Deutch. So in that case, if the purpose is to go after 
someone who owes money to the State, then I would suggest that 
it is worth taking a look, as some my colleagues have, at the 
tobacco litigation.
    The tobacco litigation, I do not need to remind you, was 
not litigation brought by States in order to punish tobacco 
companies. The tobacco litigation was brought by States because 
of the billions and billions of dollars in health care costs 
that the taxpayers in those States had to pay as a result of 
the products that tobacco companies were making.
    So when those cases were brought, in 46 States that settled 
in '98, the tobacco industry paid more than $200 billion.
    And without the outside counsel, to think that there could 
have been some reliance on the small attorneys general offices 
in every State to bring that litigation is outrageous.
    In fact, and I think Mr. Nadler touched on this, you do not 
have to take our word for it. When R.J. Reynolds' lawyer 
explained, and I quote, ``The aggressive posture that we have 
taken regarding depositions and discovery in general continues 
to make these cases extremely burdensome and expensive for 
plaintiffs' lawyers, particularly sole practitioners. To 
paraphrase General Patton,'' he said, ``the way we won these 
cases was not by spending all of Reynolds' money but by making 
that other son of a bitch spend all his.''
    If I as a taxpayer in the State of Florida know that the 
only way that we are going to be able to be compensated for the 
harm done to the taxpayers--because, really, that is what this 
whole hearing is about, the cost to our society--then I want to 
be sure that we do everything we can to make sure that the 
State will be fully compensated.
    And if I am up against someone who has made it his sole 
purpose to drag out--and with all due respect to Mr. Frank and 
his crusade against millionaire attorneys, when the tobacco 
companies' own lawyers say that the whole point of this is to 
drag it out, to make it impossible for the States and, 
ultimately, in the class-action suits, to make it impossible 
for those who have been injured by that product that kills 
people, then how is it possible that the only time we could 
possibly permit class actions is when taxes are involved?
    Mr. Beisner. Well, I will make two points on this.
    First of all, in the tobacco litigation, it is not the sort 
of situation I was talking about, because it was not at all 
liquidated. There were huge debates about what the causation is 
there, with a huge amount of discretion----
    Mr. Deutch. I am sorry, I am sorry. Mr. Beisner, hold on a 
second.
    I do not want to relitigate the tobacco litigation. It is 
not my practice. I was a real estate lawyer.
    There is a huge amount of debate about what the causation 
was for what?
    Mr. Beisner. What the relationship was----
    Mr. Deutch. Between smoking and cancer?
    Mr. Beisner [continuing]. With smoking and what the health 
effects were.
    Mr. Deutch. Between smoking and cancer. That is still 
debatable?
    Mr. Beisner. Well, between the costs that----
    Mr. Deutch. No, are we still debating that point?
    Mr. Beisner. No, I am not debating. What I am saying is 
that between the actual costs that were incurred by the State 
on that issue.
    And let me just note, in terms of--the States weren't made 
whole by that litigation, because many of the States then 
legislated to shut down that sort of contingency.
    Mr. Deutch. Mr. Beisner, I only have another minute. I want 
to touch one other thing you said.
    You said that you are worried about the sullying of the 
reputation of our legal system. You talked about, in response 
to a question from one of my colleagues, this idea of pay-to-
play and the correlation between contributions made to 
attorneys and who is hired as lawyers by the State.
    I am just curious, if you know the figure, the amount of 
money that the U.S. Chamber contributed in judicial races 
across the country? Do you know that figure?
    Mr. Beisner. I don't.
    Mr. Deutch. And can you tell me why the Chamber would 
contribute to judicial races? Because again, my focus is, 
again, on ensuring that the reputation of the legal system is 
not sullied.
    Mr. Beisner. I am not aware of any circumstance in which 
the Chamber has been asked or retained by a State to----
    Mr. Deutch. No, I am not either. I am not either.
    Mr. Beisner [continuing]. Obtain money from lawsuits.
    Mr. Deutch. Okay, I yield back. I yield back, Mr. Chairman.
    Mr. Franks. I thank the gentleman.
    And this, actually, concludes today's hearing, so thanks to 
all of our witnesses for attending. And without objection, all 
Members will have 5 legislative days to submit additional 
written questions for witnesses or additional materials for the 
record.
    And, again, I thank the witnesses. I thank the Members. I 
thank the audience for their attendance. And this hearing is 
adjourned.
    [Whereupon, at 11:20 a.m., the Subcommittee was adjourned.]

                                 
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